Philippine Daily Inquirer

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

- FRANCIS LIM

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.

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.

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 oth- ers, 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! (The author is a senior partner in the Angara Concepcion Regala & Cruz Law Offices (ACCRALAW) and was actively involved in the enactment of the FRIA. The views in this column are exclusivel­y his and may not be attributed to any other person or entity. He may be contacted through francis.ed.lim@gmail.com)

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