Foreign banks can hold foreclosed property for only 5 years, SC rules

Supreme Court. INQUIRER FILE PHOTO

MANILA, Philippines — Foreign banks may not own land, but may — subject to limitations — possess mortgaged properties, the Supreme Court said in a recent ruling.

In a decision written by Associate Justice Jhosep Lopez, the high court’s Second Division reiterated that under the Republic Act No. 10641, the law allowing full entry of foreign banks in the Philippines that was enacted in 2014, possession of foreclosed property was valid for only five years and the right over such properties should be transferred to a qualified Filipino within the period.

In its ruling, the Supreme Court denied the consolidated petitions for review on certiorari filed by 4E Steel Builders Corp., spouses Filomeno and Virginia Ecraela, and Maybank Philippines Inc., a foreign bank operating in the Philippines.

The petitions assailed the issuances of the Court of Appeals (CA) annulling the foreclosure sale, canceling the registration of parcels of land in favor of Maybank, and ordering the Ecraelas to pay Maybank their total loan obligation.

According to a Supreme Court statement summarizing the decision, Maybank executed in 1999 a credit agreement in favor of 4E Steel, represented by Filomeno as company president and his wife as corporate secretary.

To secure the payment of drawdowns on the credit line, the couple mortgaged five parcels of land.

In 2003, when the drawdowns on the credit line became due and demandable, Maybank sent a letter to 4E Steel and the couple, reminding them to settle their outstanding obligation.

While 4E Steel acknowledged the company’s outstanding loan, it requested for a reconciliation of its account records and restructuring of its loan.In response, Maybank issued a statement of account, breaking down the computation of the total outstanding obligation.

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Protracted litigation

However, the company did not agree with the computation and filed before the trial court a complaint for accounting and reapplication of payments.

Maybank, for its part, filed a petition for extrajudicial foreclosure of the mortgaged properties, which the Ecraelas and 4E Steel asked the court to stop.

The trial court did not issue an injunction that led to a foreclosure sale on Nov. 21, 2003, with Maybank as the highest bidder.

Thereafter, a certificate of sale was issued in the name of the bank.

The case reached the CA, which in 2016 ruled that Maybank was disqualified to participate in the foreclosure sale since Republic Act No. 4882, the law in effect at the time of the sale, prohibited foreign banks from owning properties in the country.

In its decision, the high tribunal noted that under the Constitution, the right to acquire lands of the public domain was reserved only to Filipino citizens or corporations at least 60 percent of the capital of which is owned by Filipinos.

It added that jurisprudence has also held that corporations which are disqualified from acquiring public domain were also disqualified from acquiring private lands.

“However, RA 4882, which took effect in 1967 amending RA 133, provides that a mortgagee who is prohibited from acquiring lands may nevertheless possess the property for five years after default and for the purpose of foreclosure. Such mortgagee though may not bid or take part in any foreclosure sale of the real property,” the Supreme Court noted.

According to the Supreme Court, in 2014, RA 10641 took effect, amending RA 7721 such that foreign banks could now foreclose and acquire mortgaged properties, but subject to the following conditions: (1) the possession is limited to five years; (2) the title of the property shall not be transferred to the foreign bank, and (3) the foreign bank must transfer its right to a qualified Philippine national within the five-year period.

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Void sale to Maybank

Failure to comply with the last condition would make the foreign bank liable to pay half of 1 percent a year of the foreclosure price until it transfers the property to a qualified Philippine national, the high court said.

As RA 10641 did not contain a retroactivity clause, the Supreme Court ruled that the law applied prospectively.

“In the instant case, the assailed foreclosure took place in 2003. Hence, the applicable law is RA 4882, not RA 10641. Thus, while Maybank may possess mortgaged property for five years after default, it may not bid or take part in any foreclosure sale of the real property under RA 4882, the applicable law at the time of the foreclosure proceedings. The sale to Maybank was therefore void,” the high court said.