Business Bayani PH

In a significant legal development, foreign banks in the Philippines are now permitted to foreclose on and acquire mortgaged properties. This ruling, driven by Republic Act No. 10641, marks a substantial shift in the nation’s banking landscape.

The Supreme Court’s (SC) Second Division made this ruling in response to a combined legal dispute involving 4E Steel Builders Corporation (4E Steel), Spouses Filomeno and Virginia Ecraela (Spouses Ecraela), and Maybank Philippines, Inc. (Maybank). 

At its core, this dispute revolved around a foreclosure sale and the cancellation of land registrations in favor of Maybank, with the Spouses Ecraela ordered to pay their total loan obligation.

The origins of this legal battle date back to 1999 when Maybank, a foreign banking corporation, engaged in a Credit Agreement with 4E Steel. To secure the loan, the Spouses Ecraela mortgaged five parcels of land. Trouble arose in 2003 when the loan became due and demandable. In response, Maybank sent a reminder to settle the outstanding obligation.

Disputes escalated when 4E Steel requested a reconciliation of their account records and a restructuring of the loan for immediate settlement and payment. Maybank issued a statement of account, but 4E Steel contested the figures. This led to the filing of a Complaint for Accounting and Reapplication of Payments before the Regional Trial Court (RTC).

Maybank’s move to file a Petition for Extrajudicial Foreclosure of the Mortgaged Properties prompted 4E Steel and the Spouses Ecraela to apply for a preliminary injunction and a temporary restraining order (TRO) to halt the extrajudicial foreclosure. They argued that Maybank, as a corporation owned and controlled by foreign nationals, was disqualified from acquiring lands in the Philippines.

The RTC denied the injunction and TRO request, eventually leading to the foreclosure sale of the mortgaged properties with Maybank as the highest bidder. A certificate of sale was subsequently issued in Maybank’s name.

Despite their efforts, 4E Steel and the Spouses Ecraela were unsuccessful in getting the sale of the foreclosed properties declared null and void. On appeal, the Court of Appeals (CA) ruled that Maybank was disqualified from participating in the extrajudicial foreclosure sale, citing Republic Act No. 133, as amended by Republic Act No. 4882, which prohibited corporations with a majority of capital stock owned and controlled by foreign nationals from taking part in such sales.

The SC’s Second Division had the pivotal task of determining whether a foreign bank, like Maybank, was allowed to foreclose and acquire mortgaged properties. To reach this decision, the court reviewed the laws governing foreign banks operating in the Philippines.

According to the Philippine Constitution, the right to acquire lands in the public domain is reserved for Filipino citizens or corporations with at least 60% Filipino ownership. This extends to private lands for corporations disqualified from acquiring public domains.

However, Republic Act No. 4882, which came into effect in 1967 amending Republic Act No. 133, allowed a mortgagee who was otherwise prohibited from acquiring land to possess it for five years after a default, for the purpose of foreclosure. Notably, the mortgagee could not bid or participate in any foreclosure sale of the real property.

The game-changing legislation came in 2014 with Republic Act No. 10641, amending Republic Act No. 7721. This act allowed foreign banks to foreclose and acquire mortgaged properties but with specific conditions. 

These conditions included a five-year possession limit, a prohibition on transferring the property’s title to the foreign bank, and a requirement for the foreign bank to transfer its rights to a qualified Philippine national within the five-year period. 

Failure to meet the last condition would result in the foreign bank being liable for half of 1% per annum of the foreclosure price until the property’s transfer to a qualified Philippine national.

It’s important to note that Republic Act No. 10641 lacks a retroactivity clause. As a result, the SC concluded that the law applies prospectively, meaning it does not apply to cases that occurred before its enactment.

In the case at hand, the foreclosure took place in 2003. Consequently, Republic Act No. 4882, not Republic Act No. 10641, was the applicable law. Therefore, Maybank’s ability to possess mortgaged property for five years after default did not permit them to participate in the foreclosure sale under Republic Act No. 4882, rendering the sale to Maybank void.

This landmark decision marks a significant shift in the Philippines’ banking sector. Foreign banks can now participate in the foreclosure and acquisition of mortgaged properties, provided they adhere to the conditions set by Republic Act No. 10641. 

This change paves the way for a more open and competitive banking landscape in the country, offering potential benefits to both foreign investors and local consumers. ◼