SC: Foreign Banks May Not Own Land, But May Possess Mortgaged Properties, Subject to Conditions

Following the effectivity of Republic Act No. (RA) 10641, the law allowing full entry of foreign banks in the Philippines, foreign banks may now foreclose and acquire mortgaged properties, subject to limitations.

Thus reiterated the Supreme Court’s Second Division, in a Decision penned by Associate Justice Jhosep Y. Lopez, denying the consolidated petitions for review on certiorari filed by 4E Steel Builders Corporation (4E Steel) and Spouses Filomeno and Virginia Ecraela (Spouses Ecraela) and Maybank Philippines, Inc. (Maybank). The petitions assailed the issuances of the Court of Appeals (CA) which had annulled the foreclosure sale and cancelled the registration of parcels of land in favor of Maybank and ordered Spouses Ecraela to pay Maybank their total loan obligation.

In 1999, Maybank, a foreign banking corporation operating in the Philippines, executed a Credit Agreement in favor of 4E Steel, represented by Filomeno Ecraela as 4E Steel President and Virginia Ecraela as Corporate Secretary. To secure the payment of drawdowns on the credit line, Spouses Ecraela 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 Spouses Ecraela reminding them to settle their outstanding obligation. 4E Steel acknowledged the company’s outstanding loan, but requested for a reconciliation of its account records and restructuring of its loan for immediate settlement and payment.

In response, Maybank issued a statement of account, breaking down the computation of the total outstanding obligation. 4E Steel contested Maybank’s figures, prompting the company to file before the Regional Trial Court (RTC) a Complaint for Accounting and Reapplication of Payments.

Maybank then proceeded to file a Petition for Extrajudicial Foreclosure of the Mortgaged Properties, causing 4E Steel and Spouses Ecraela to apply for the issuance of a preliminary injunction and temporary restraining order (TRO) to enjoin the extrajudicial foreclosure. They claimed that Maybank, being a corporation owned and controlled by foreign nationals, is disqualified from acquiring lands in the Philippines.

The RTC denied the request for preliminary injunction and TRO, leading to the foreclosure sale of the mortgaged properties on November 21, 2003, with Maybank as the highest bidder. A certificate of sale was subsequently issued in Maybank’s name.

4E Steel and Spouses Ecraela prayed for the declaration of nullity of the sale of the foreclosed properties but was denied by the RTC.

On appeal, the CA ruled that Maybank is disqualified from taking part in the extrajudicial foreclosure sale of the properties under the law then in effect, RA 133, as amended by RA 4882, since majority of Maybank’s capital stock is owned and controlled by foreign nationals.

In resolving the issue of whether Maybank, a foreign bank prohibited from acquiring public lands, may foreclose and acquire mortgaged properties, the Court reviewed the laws governing foreign banks operating in the Philippines.

Under the Constitution, the right to acquire lands of the public domain is reserved only to Filipino citizens or corporations at least 60% of the capital of which is owned by Filipinos. Jurisprudence has also held that corporations which are disqualified from acquiring public domain are 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.

In 2014, RA 10641 took effect, amending RA 7721 such that foreign banks may 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.

Failure to comply with the last condition shall make the foreign bank liable to pay half of 1% per annum of the foreclosure price until it transfers the property to a qualified Philippine national.

As RA 10641 does not contain a retroactivity clause, the Court ruled that the law applies 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, held the Court. (Courtesy of the Supreme Court Public Information Office)

Full text of G.R. No. 230013 and 230100 (4E Steel Builders Corporation v. Maybank Philippines, Inc.) at: