The Supreme Court ruled that the shortened redemption period for juridical entities under the General Banking Law of 2000 (R.A. No. 8791) is constitutional and applicable even to mortgages executed before the law’s effectivity. This decision means that corporations have a limited time, specifically until the registration of the foreclosure sale or three months after foreclosure (whichever is earlier), to redeem their foreclosed properties. This differs from the one-year redemption period granted to individuals, reflecting the law’s intent to expedite the disposal of commercial properties by banks and maintain the stability of the banking system. The ruling underscores the State’s power to regulate contracts in the interest of public welfare.

Foreclosure Showdown: Can New Banking Laws Alter Old Mortgage Deals?

In 1985, Goldenway Merchandising Corporation secured a loan from Equitable PCI Bank, using its properties in Valenzuela as collateral. The agreement, memorialized in a Real Estate Mortgage, stipulated that in case of default, the bank could foreclose on the properties judicially or extrajudicially, in line with Act No. 3135. Fast forward to 2000, Goldenway defaulted, and the bank initiated foreclosure proceedings. However, a new law, R.A. No. 8791, had come into effect, shortening the redemption period for juridical entities. Goldenway argued that the old law (Act No. 3135) should apply, granting them a one-year redemption period, and that applying the new law would unconstitutionally impair their contractual rights. The central question before the Supreme Court was: Can a subsequent law validly alter the redemption period stipulated in a mortgage contract executed before the law’s enactment?

The Supreme Court affirmed the Court of Appeals’ decision, siding with Equitable PCI Bank. The Court anchored its reasoning on the constitutionality of Section 47 of R.A. No. 8791, which provides a shorter redemption period for juridical persons. The Court emphasized the principle that every statute is presumed valid, and any doubt should be resolved in favor of its constitutionality. To invalidate a law, a clear and unequivocal breach of the Constitution must be demonstrated. Goldenway failed to convincingly prove such a breach.

The petitioner argued that applying Section 47 of R.A. No. 8791 impairs the obligation of contracts, violating the constitutional proscription against such impairment. The non-impairment clause is designed to protect the integrity of contracts from unwarranted state interference. Impairment occurs when a subsequent law diminishes the efficacy of a contract by changing its terms, imposing new conditions, or withdrawing remedies. However, the Court clarified that Section 47 does not eliminate the right of redemption for juridical persons. It merely modifies the period within which that right can be exercised. The new redemption period commences from the foreclosure sale date and expires upon registration of the certificate of sale, or three months post-foreclosure, whichever transpires earlier.

Moreover, the Court pointed out that there is no retroactive application of the new redemption period. Section 47 specifically exempts properties foreclosed before its effectivity, ensuring that owners retain their original redemption rights under Act No. 3135. Thus, the Court found no basis to support the claim that Section 47 impairs the obligation of contracts.

Goldenway also contended that Section 47 violates the equal protection clause by discriminating against mortgagors who are juridical persons. The equal protection clause aims to prevent undue favor and arbitrary class privileges. It does not mandate absolute equality but requires that all persons be treated alike under similar conditions. Reasonable classification is permissible, and differential treatment is justified when based on substantial distinctions.

The Court agreed with the Court of Appeals, emphasizing the legislature’s intent to shorten the redemption period for juridical persons whose properties are foreclosed under Act No. 3135. This distinction is based on the nature of the properties: residential properties retain the one-year redemption period, while industrial or commercial properties are subject to a shorter term. This distinction seeks to reduce uncertainty in property ownership and enable mortgagee-banks to promptly dispose of acquired assets.

It is noteworthy that the General Banking Law of 2000 emerged from the 1997 Southeast Asian financial crisis, aiming to create a legal framework for a stable banking system. Section 47 reflects safe and sound banking practices aimed at ensuring bank solvency and liquidity. The amendment to the redemption period in Act 3135 is therefore a reasonable classification germane to the law’s purpose. The Supreme Court cited records from the Eleventh Congress, specifically the recommendation of Senator Franklin Drilon, during the Second Reading of SB 1519, that differentiated between properties used for residence and those used for business purposes.

Senator Drilon. x x x

Maybe, the sponsor can consider, at the appropriate time, a provision which would allow this one-year redemption period by whatever liberal provisions and which may be incorporated in cases of properties used for residence. But for properties for commercial or industrial purposes, we may wish to review even the one-year redemption period because such inability to generate economic activity out of the foreclosed property for a period of one year can tie up a lot of assets. Maybe, the committee can consider making distinctions between foreclosure of properties used for residence and properties used for business.” (Record of the Senate, Vol. I, No. 22, p. 569)

The right of redemption, being statutory, must be exercised as prescribed and within the specified time limit. This right, like other individual rights, is subject to the State’s police power exercised for public welfare. The police power allows the state to enact legislation that interferes with personal liberty or property to promote general welfare. The freedom to contract is not absolute and is subject to the state’s regulatory power, which can change over time to meet the community’s needs. The non-impairment clause must yield to the government’s loftier purposes.

The authority to regulate businesses, including the banking industry, is undeniable, as banking is imbued with public interest. As the Supreme Court has emphasized, the banking industry’s stability and soundness are paramount concerns that justify state regulation. Given the constitutionality of Section 47 of R.A. No. 8791, the Court found no reversible error in the Court of Appeals’ decision, affirming that Goldenway could no longer exercise its right of redemption after the certificate of sale was registered in favor of Equitable PCI Bank. Thus, the petition was denied.

FAQs

What was the key issue in this case?	The central issue was whether Section 47 of R.A. No. 8791, which shortens the redemption period for juridical persons, could be applied to a mortgage contract executed before the law’s effectivity. The petitioner argued that the application would violate the constitutional prohibition against impairment of contracts.
What is the redemption period for juridical persons under R.A. No. 8791?	Juridical persons have the right to redeem foreclosed properties until the registration of the certificate of foreclosure sale with the Registry of Deeds, which in no case shall be more than three months after foreclosure, whichever is earlier. This is a shorter period compared to the one-year redemption period for natural persons.
Does R.A. No. 8791 apply retroactively?	No, R.A. No. 8791 does not apply retroactively. The law specifically exempts properties foreclosed before its effectivity, allowing their owners to retain their redemption rights under Act No. 3135.
Why is there a distinction in the redemption period between juridical and natural persons?	The distinction is based on the nature of the properties. Properties used for residence retain the longer one-year period, while those used for industrial or commercial purposes have a shorter redemption period to reduce uncertainty and allow banks to dispose of acquired assets sooner.
What is the basis for the shorter redemption period for commercial properties?	The shorter redemption period is based on the legislative intent to stabilize the banking system and promote economic activity. By reducing the time banks must hold foreclosed commercial properties, they can more quickly redeploy those assets.
What is the non-impairment clause of the Constitution?	The non-impairment clause safeguards the integrity of contracts against unwarranted interference by the State. It generally prohibits laws that change the terms of a contract, impose new conditions, or withdraw remedies for enforcing rights.
What is the equal protection clause?	The equal protection clause prevents undue favor and arbitrary class privileges. It requires that all persons be treated alike under similar conditions, both in terms of privileges and liabilities.
How does the State’s police power relate to this case?	The State’s police power allows it to enact legislation that may interfere with personal liberty or property to promote general welfare. The Supreme Court determined that R.A. No. 8791 was a valid exercise of police power to ensure a stable banking system, thus justifying the modification of contractual rights.
What was Goldenway’s main argument against applying R.A. No. 8791?	Goldenway argued that applying R.A. No. 8791 impaired its vested right of redemption under the real estate mortgage contract, violating the constitutional proscription against impairment of obligations of contract.

This case clarifies the application of banking laws to existing mortgage contracts, particularly regarding redemption rights for corporations. The decision reinforces the State’s power to regulate contracts in the interest of public welfare and highlights the importance of understanding how new legislation can affect established agreements.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Goldenway Merchandising Corporation v. Equitable PCI Bank, G.R. No. 195540, March 13, 2013