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Point of Law

Is approval of the insolvency court needed to foreclose a mortgage?

/ 12:16 AM December 01, 2016

Sometime in 2015, the Supreme Court ruled that a secured creditor must obtain the approval of the insolvency court before he can foreclose a mortgage.

Briefly, sometime in 1997, Spouses Rommel Naguiat and Celestina Naguiat and S.F. Naguiat Enterprises, Inc. executed several real estate mortgages  in favor of the Metropolitan Bank and Trust Company (Metrobank) to secure certain credit accommodations obtained from the latter.

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Subsequently, S.F. Naguiat petitioned for insolvency.  Then on July 12, 2005, the  insolvency court issued an order declaring S.F. Naguiat insolvent.

Thereafter, S.F. Naguiat defaulted in paying its loan. As a consequence, Metrobank foreclosed one of the mortgages but the insolvency court refused to issue the certificate of sale  in favor of the buyer because of its July 12, 2005 order.

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The issue before the Supreme Court was whether Metrobank could foreclose the mortgage without first getting court approval.

The Supreme Court held that several provisions of the old Insolvency Act (Act No. 1956)  “reveal the necessity for leave of the insolvency court.”  In the words of the Court, “With the declaration of insolvency of the debtor, insolvency courts ’obtain full and complete jurisdiction over all property of the insolvent and of all claims by and against [it.]’ It follows that the insolvency court has exclusive jurisdiction to deal with the property of the insolvent. Consequently, after the mortgagor-debtor has been declared insolvent and the insolvency court has acquired control of his estate, a mortgagee may not, without the permission of the insolvency court, institute proceedings to enforce its lien. In so doing, it would interfere with the insolvency court’s possession and orderly administration of the insolvent’s properties.”

(Metropolitan Bank and Trust Company vs. S.F. Naguiat Enterprises, Inc., G.R. No. 178407, March 18, 2015)

Obviously, there are questions relating to this decision. For example, what if the court refuses  to approve the foreclosure for whatever reason? Will it not violate a secured creditor’s statutory right to foreclose the mortgage in its favor? What is the effect of the new Financial Rehabilitation and Insolvency Act (FRIA), which became law  after the Metrobank case?  What is the effect of the Financial Liquidation and Suspension of Payments Rules of Procedure which, among others, prescribes for the issuance of a liquidation order at the start of the proceedings and merely prohibits foreclosure proceedings for a period of 180 days from the date of the liquidation order?

So there you are, ladies and gentlemen. Despite the relatively recent Metrobank case, the matter does not appear as simple as it appears to be. Don’t take the case hook, line, and sinker. Let your lawyers do their homework!

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