Dear Atty. Gab,

Musta Atty! My name is Maria Hizon, and our family runs a small business, Hizon Supplies Inc., here in Quezon City. We’re facing a really tough situation and desperately need some guidance. Due to the economic downturn over the past couple of years, our business struggled significantly, and we unfortunately defaulted on a major loan from Maharlika Bank. The loan was secured by the small warehouse we own and operate from.

About four months ago, the bank proceeded with an extrajudicial foreclosure sale, and they were the highest bidder. We received notice that the Certificate of Sale was registered with the Register of Deeds about three and a half months ago. We were devastated and felt paralyzed, but now we’re trying to see if there’s anything we can do. Someone mentioned that filing for corporate rehabilitation might help us save the business and potentially keep the warehouse.

We’re very confused about the redemption period. I always thought we had one year to buy back the property after a foreclosure, but a friend mentioned something about a much shorter period, maybe only three months, for corporations like ours. Does this mean we’ve already lost the warehouse? If we file for rehabilitation now, can the Stay Order stop the bank from taking possession or getting the title transferred to their name, even if the sale already happened? We really need that warehouse to continue operating, even on a smaller scale. Any advice you could offer would be deeply appreciated.

Sincerely,
Maria Hizon

Dear Ms. Hizon,

Thank you for reaching out. I understand this is an incredibly stressful time for you and your family’s business. Facing foreclosure is daunting, and exploring options like corporate rehabilitation shows your commitment to finding a way forward.

The core issue here revolves around the specific redemption period applicable to corporations after an extrajudicial foreclosure and the effect of a corporate rehabilitation filing, particularly the Stay Order, on properties already foreclosed upon. Unfortunately, for juridical persons (like your corporation), the law provides a significantly shorter redemption period compared to individual borrowers. If this shorter period expired before you initiated rehabilitation proceedings, the bank likely already acquired ownership, and a subsequent Stay Order may not prevent them from consolidating title and seeking possession.

Navigating Foreclosure and Rehabilitation: Understanding Your Corporation’s Rights

When a borrower defaults on a loan secured by real estate mortgage, the lender can initiate foreclosure proceedings to recover the debt. In an extrajudicial foreclosure, like the one Maharlika Bank conducted, the property is sold at public auction. The borrower typically has a period within which they can ‘redeem’ or buy back the property. You are correct that the general rule under Act No. 3135 provides a one-year redemption period, usually counted from the date the certificate of sale is registered.

However, a crucial exception applies specifically to juridical persons (corporations, partnerships, etc.) under the General Banking Law of 2000 (Republic Act No. 8791). This law significantly shortens the redemption period for corporate borrowers whose properties are extrajudicially foreclosed.

Section 47. Foreclosure of Real Estate Mortgage. – x x x x

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration. (RA 8791, Sec. 47, par. 2)

This provision means that for your corporation, Hizon Supplies Inc., the right to redeem the warehouse likely expired either upon the registration of the certificate of sale (which you mentioned was 3.5 months ago) or three months after the foreclosure sale date (4 months ago), whichever came first. Based on your timeline, it appears this redemption period under RA 8791 has already lapsed.

Once the redemption period expires without the borrower redeeming the property, the purchaser (in this case, Maharlika Bank) becomes the absolute owner. The law is clear on this transition of ownership.

The rule is settled that the mortgagor loses all interest over the foreclosed property after the expiration of the redemption period and the purchaser becomes the absolute owner thereof when no redemption is made.

This consolidation of ownership in the bank’s favor happens by operation of law upon the expiry of the redemption period. The subsequent steps, like the formal transfer of the title to the bank’s name or the bank applying for a Writ of Possession, are consequences of this ownership. The issuance of a Writ of Possession, which directs the sheriff to place the purchaser in physical possession of the property, is generally considered a ministerial duty of the court after ownership has consolidated.

[…] the right of the purchaser to the possession of the foreclosed property becomes absolute after the redemption period, without a redemption being effected by the property owner. Since the basis of this right to possession is the purchaser’s ownership of the property, the mere filing of an ex parte motion for the issuance of the writ of possession would suffice, and no bond is required.

Now, let’s consider the effect of corporate rehabilitation. The primary goal of rehabilitation is to restore a struggling company to financial health. A key tool in this process is the Stay Order, which typically suspends all actions or claims against the debtor corporation while the rehabilitation plan is being developed or implemented. However, the timing is critical.

If the bank’s ownership over the warehouse had already consolidated before your corporation filed for rehabilitation and before a Stay Order was issued, that Stay Order generally cannot undo the ownership transfer or prevent the bank from exercising its rights as the owner, including seeking possession. The Stay Order suspends enforcement of claims, but the foreclosure and consolidation of ownership are viewed as steps that have already enforced the bank’s claim against that specific property.

The Stay Order issued by the Rehabilitation Court […] cannot […] apply to the mortgage obligations owing to [the bank] which had already been enforced even before [the debtor’s] filing of its petition for corporate rehabilitation […].

Essentially, because the redemption period under RA 8791 expired (likely around 3 months after the foreclosure sale, based on your information), Maharlika Bank became the owner of the warehouse before you could initiate rehabilitation proceedings. Therefore, the warehouse might no longer be considered part of your corporation’s assets subject to the rehabilitation court’s control or the protection of a Stay Order in the way you hoped. Filing for rehabilitation now is unlikely to reverse the foreclosure or prevent the bank from taking possession based on its consolidated ownership.

Practical Advice for Your Situation

• Confirm Exact Dates Immediately: Double-check the precise date of the foreclosure sale auction and the exact date the Certificate of Sale was registered with the Register of Deeds. This is crucial to confirm the expiry date of the redemption period under RA 8791.
• Accept the Ownership Status: Based on RA 8791 and the timeline you provided, legally, Maharlika Bank is likely already the owner of the warehouse property.
• Understand Stay Order Limitations: Realize that a Stay Order issued now will probably not prevent the bank from pursuing a Writ of Possession for the warehouse, as their ownership rights pre-date the potential rehabilitation filing.
• Consult Specialized Counsel Now: Engage a lawyer with expertise in both corporate rehabilitation and banking/foreclosure law immediately. They can verify the dates, confirm the legal status of the property, and provide tailored advice on the viability and scope of rehabilitation for Hizon Supplies Inc.’s remaining assets and debts.
• Prepare for Writ of Possession: Be aware that the bank can file an ex parte (one-sided) motion for a Writ of Possession anytime now, and courts typically grant this quickly once ownership consolidation is shown.
• Focus Rehabilitation Efforts: If you proceed with rehabilitation, focus the plan on restructuring debts related to other assets and operations, acknowledging that the warehouse may no longer be part of the estate under rehabilitation.
• Consider Negotiation (Limited Options): While unlikely to reverse ownership, you could try to negotiate with the bank to lease the property back, but this would be a separate commercial negotiation, not a right under rehabilitation.

I know this is difficult news, especially regarding the warehouse which is vital to your operations. However, understanding the legal realities, particularly the implications of RA 8791 for corporate borrowers, is essential for making informed decisions. Acting quickly with specialized legal counsel is your best next step to navigate this challenging situation and determine the most viable path for your business.

Hope this helps!

Sincerely,
Atty. Gabriel Ablola

For more specific legal assistance related to your situation, please contact me through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This correspondence is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please schedule a formal consultation.