Can foreign banks acquire mortgaged land?

ALIENS are prohibited from owning lands of the public domain or private land under the Constitution, and as consistently affirmed by jurisprudence. This right is reserved only to Filipino citizens or corporations whose capital is at least 60 percent owned by Filipinos.

Whether alien banks may acquire mortgaged properties under the Philippine banking system is what the Supreme Court addresses in 4E Steel Builders Corporation, et al. v. Maybank Philippines, Inc.

In this case, respondent Maybank Philippines, Inc., a foreign bank operating in the Philippines, executed a credit agreement in favor of petitioner 4E Steel Corporation, represented by co-petitioners and spouses Filomeno and Virginia Ecraela. To secure the payment of their loan obligation, spouses Ecraela mortgaged five parcels of land, some of which were registered in their names and others under the names of 4E and their accommodation mortgagors.

When the obligation became due and demandable, Maybank notified 4E and spouses Ecraela to settle the same. While the latter acknowledged this obligation, 4E alleged that, among others, it had only partly received funds from the credit line. Thus, it requested Maybank to reconcile its account records and restructure its loan for immediate settlement and payment.

Maybank issued a statement of account providing for the amount due from 4E, including interest and penalties thereon. 4E then was constrained to file a complaint for accounting and reapplication of payments before the Regional Trial Court (RTC).

In the meantime, Maybank filed its petition for extrajudicial foreclosure of the mortgaged properties against 4E and spouses Ecraela. This moved 4E to amend its complaint to include spouses Ecraela as plaintiffs and seek the enjoinment of the extrajudicial foreclosure through a writ of preliminary injunction (WPI).

The RTC denied 4E and spouses Ecraela’s WPI application, thus allowing the foreclosure sale of the mortgaged properties to proceed, with Maybank as the highest bidder. 4E and spouses Ecraela then filed their supplemental complaint, arguing, among others, that Maybank is disqualified from acquiring lands in the Philippines since it is owned and controlled by foreign nationals.

Maybank countered that it had lawfully participated in the foreclosure sale since it remained to be a domestic corporation incorporated under Philippine law. Meanwhile, Act No. 3135, which regulates extrajudicial foreclosure proceedings, authorizes the creditor bank to participate therein.

Moreover, the issuance of a certificate of sale in Maybank’s favor as the highest bidder does not absolutely vest itself with ownership of the foreclosed properties since 4E and spouses Ecraela have a right to redeem the same.

The RTC ruled in favor of Maybank, holding that the foreclosure sale was lawfully conducted. Upon appeal, the Court of Appeals held that with its majority stock owned and controlled by foreign nationals, Maybank was disqualified from participating in the foreclosure sale. Nevertheless, it did not order the reconveyance of the mortgaged properties since the title thereto supposedly in Maybank’s name was not presented in court.

The Supreme Court affirmed with modification the Court of Appeals’ ruling. It held that, pursuant to the Foreign Bank Liberalization Act (FBLA), as amended, foreign banks, such as Maybank, are authorized to bid and take part in foreclosure sales of real property mortgaged to them.

They may also avail themselves of enforcement and other proceedings and possess the mortgaged property for a period of not more than five years from actual possession. Title thereto, however, shall not be transferred to the foreign bank.

If the foreign bank would emerge as the winning bidder, it shall transfer its rights to a qualified Filipino national within the said five-year period, subject to the borrower’s rights under applicable laws. Failure to do so shall subject the bank to the applicable penalties.

In this case, Maybank cannot invoke this authority since the FBLA has not been amended as such when it entered into the credit agreement with 4E and spouses Ecraela. Notably, pursuant to the applicable laws during this time, Maybank, as a mortgagee prohibited from acquiring public lands, may possess the foreclosed lands for five years after default and for the purpose of foreclosure. It may not, however, bid or take part in any foreclosure sale of the real property. Thus, the sale to Maybank in this case is void.