Goldenway Merchandising Corporation vs. Equitable PCI Bank

Section 47 of R.A. No. 8791, which establishes a shortened redemption period for juridical persons in extrajudicial foreclosure sales (until registration of the certificate of foreclosure sale or three months after foreclosure, whichever is earlier), is constitutional and does not violate the non-impairment clause or equal protection clause; it applies to real estate mortgages executed prior to its effectivity but foreclosed after its effectivity, as the right of redemption is statutory and subject to the State's police power to regulate banking institutions imbued with public interest.

Goldenway Merchandising Corporation executed a Real Estate Mortgage on November 29, 1985, in favor of Equitable PCI Bank to secure a Two Million Pesos (P2,000,000.00) loan, covering real properties situated in Valenzuela, Bulacan (now Valenzuela City) and duly registered with the Registry of Deeds. The mortgage contract expressly provided that upon default, the bank could foreclose either judicially under the Rules of Court or extrajudicially in accordance with Act No. 3135. When the petitioner failed to settle its loan obligation, the respondent bank extrajudicially foreclosed the mortgage and acquired the properties at public auction, subsequently consolidating title in its name and issuing new certificates of title on March 9, 2001.

• On November 29, 1985, petitioner executed a Real Estate Mortgage in favor of respondent over three parcels of land covered by Transfer Certificate of Title (TCT) Nos. T-152630, T-151655, and T-214528 to secure a P2,000,000.00 loan, which was duly registered with the Registry of Deeds.
• The mortgage contract provided that upon default, respondent could foreclose judicially under the Rules of Court or extrajudicially in accordance with Act No. 3135.
• Petitioner failed to settle its loan obligation, prompting respondent to extrajudicially foreclose the mortgage on December 13, 2000.
• During the public auction held pursuant to the foreclosure, the mortgaged properties were sold for P3,500,000.00 to respondent as the highest bidder.
• A Certificate of Sale was issued to respondent on January 26, 2001, and registered on February 16, 2001, with the inscription made on the respective TCTs.
• On March 8, 2001, petitioner's counsel sent a letter offering to redeem the foreclosed properties by tendering a check for P3,500,000.00.
• On March 12, 2001, petitioner's counsel met with respondent's counsel to reiterate the intention to exercise the right of redemption, but was informed that redemption was no longer possible because the certificate of sale had already been registered.
• Petitioner verified with the Registry of Deeds and discovered that new certificates of title had already been issued in respondent's name on March 9, 2001, consolidating ownership in favor of the bank.
• Petitioner alleged that respondent failed to furnish it and the Office of the Clerk of Court with a Statement of Account as required in the Certificate of Sale, thereby depriving it of the opportunity to redeem prior to registration.

• The one-year redemption period under Act No. 3135 should apply, not the shorter period under Section 47 of R.A. No. 8791, because the parties expressly agreed in the 1985 mortgage contract that foreclosure would be conducted in accordance with Act No. 3135.
• Applying Section 47 of R.A. No. 8791 to the 1985 mortgage contract constitutes an impairment of the obligation of contracts under Article III, Section 10 of the Constitution, as it substantially alters the vested right of redemption that attached upon execution of the mortgage.
• Section 47 violates the equal protection clause because it discriminates against mortgagors who are juridical persons by imposing a shorter redemption period compared to natural persons.
• R.A. No. 8791 does not provide for retroactive application and therefore cannot apply to contracts executed and consummated before its effectivity on June 13, 2000.
• Act No. 3135, being a special law governing real estate mortgage and foreclosure, should prevail over R.A. No. 8791, which is a general law on banking, under the principle that special laws prevail over general laws.
• The right of redemption is part and parcel of the Deed of Real Estate Mortgage itself, attaching upon its execution as a vested right dependent on the law governing the contract, not on the mortgagee's act of foreclosure, citing Co v. Philippine National Bank.
• Courts should adopt a policy of aiding rather than defeating the mortgagor's right to redeem, citing Rural Bank of Davao City, Inc. v. Court of Appeals and Sulit v. Court of Appeals.
• Respondent's failure to provide a Statement of Account deprived petitioner of the opportunity to exercise its right of redemption prior to the registration of the certificate of sale.

• Petitioner cannot claim ignorance of the redemption price because Section 47 of R.A. No. 8791 clearly provides the basis for computing the same.
• Petitioner had ample opportunity to redeem the foreclosed properties from the time it received the letter of demand and notice of sale prior to the registration of the certificate of sale.
• Even assuming the redemption was timely made, the check tendered was not for the amount required by law.
• Section 47 of R.A. No. 8791 is constitutional and applicable to the foreclosure proceedings conducted after its effectivity, regardless of when the mortgage was executed.

• Procedural Issues:
  • Whether the constitutional challenge to Section 47 of R.A. No. 8791 was properly raised before the trial and appellate courts to warrant judicial review by the Supreme Court.
• Substantive Issues:
  • Whether Section 47 of R.A. No. 8791 applies to real estate mortgages executed prior to its effectivity but foreclosed after its effectivity.
  • Whether Section 47 of R.A. No. 8791 violates the constitutional prohibition against impairment of the obligation of contracts.
  • Whether Section 47 of R.A. No. 8791 violates the equal protection clause of the Constitution.
  • Whether petitioner can still exercise the right of redemption over the foreclosed properties.

• Procedural:
  • The constitutional issue was squarely raised in the pleadings filed in both the trial and appellate courts, warranting resolution by the Supreme Court on the merits.
• Substantive:
  • Section 47 of R.A. No. 8791 applies to mortgages executed before its effectivity but foreclosed after its effectivity because the statutory right of redemption is governed by the law in force at the time of foreclosure, not at the time of contract execution; the provision expressly exempts only properties foreclosed prior to its effectivity, confirming its application to subsequent foreclosures.
  • Section 47 does not violate the non-impairment clause because it does not divest juridical persons of the right to redeem but merely modifies the procedural time limit for exercising such statutory right; the provision represents a valid exercise of police power to ensure safe and sound banking practices, and the non-impairment clause must yield to the State's regulatory authority over businesses imbued with public interest, such as banking.
  • Section 47 does not violate equal protection because the classification between natural persons (entitled to one-year redemption for residential properties) and juridical persons (subject to shorter redemption for commercial/industrial properties) is based on reasonable and real distinctions germane to the purpose of reducing uncertainty in ownership and enabling banks to dispose of acquired assets sooner, thereby maintaining solvency and liquidity.
  • Petitioner can no longer exercise the right of redemption because the certificate of sale had already been registered on February 16, 2001, and under Section 47, juridical persons have only until the registration of the certificate of foreclosure sale (or three months after foreclosure, whichever is earlier) to redeem.

• Impairment of Contracts — Defined as anything that diminishes the efficacy of a contract, such as changing terms, imposing new conditions, or withdrawing remedies; however, the constitutional prohibition against impairment must yield to the State's police power when exercised for public welfare, particularly in regulating businesses imbued with public interest like banking.
• Equal Protection and Reasonable Classification — The equal protection clause permits reasonable classification based on real and substantial distinctions that are germane to the purpose of the law, concern all members of the class, and apply equally to present and future conditions; it does not require absolute equality but merely similar treatment under similar conditions.
• Police Power — The State's authority to enact legislation interfering with personal liberty or property to promote general welfare, which is ever-expanding to meet exigencies of the times; freedom to contract is not absolute and is subject to this regulatory power.
• Statutory Right of Redemption — Being a statutory creation rather than a purely contractual right, redemption must be exercised strictly in the manner and within the time prescribed by the statute in force at the time of foreclosure.
• Retroactivity of Laws — Laws are generally prospective unless expressly made retroactive; Section 47 of R.A. No. 8791 is not retroactive because it explicitly preserves the redemption rights of owners whose properties were foreclosed prior to its effectivity, while applying the new period to foreclosures conducted after its effectivity.

• "The purpose of the non-impairment clause of the Constitution is to safeguard the integrity of contracts against unwarranted interference by the State."
• "Impairment is anything that diminishes the efficacy of the contract."
• "The equal protection clause is directed principally against undue favor and individual or class privilege. It is not intended to prohibit legislation which is limited to the object to which it is directed or by the territory in which it is to operate."
• "Equal protection permits of reasonable classification."
• "The right of redemption being statutory, it must be exercised in the manner prescribed by the statute, and within the prescribed time limit, to make it effective."
• "The freedom to contract is not absolute; all contracts and all rights are subject to the police power of the State."
• "Settled is the rule that the non-impairment clause of the Constitution must yield to the loftier purposes targeted by the Government."
• "Such authority to regulate businesses extends to the banking industry which, as this Court has time and again emphasized, is undeniably imbued with public interest."

• Co v. Philippine National Bank — Cited by petitioner for the principle that the right of redemption is part and parcel of the mortgage contract and attaches thereto upon execution; the Court distinguished this by noting that the statutory right of redemption remains subject to modification by the legislature under its police power.
• Rural Bank of Davao City, Inc. v. Court of Appeals — Cited by petitioner for the principle that courts should aid rather than defeat redemption rights; distinguished as it involved the application of the General Banking Act of 1949 and did not involve the constitutional validity of the shortened redemption period for juridical persons.
• Sulit v. Court of Appeals — Cited by petitioner for the policy favoring redemption rights; distinguished as it was decided prior to the enactment of R.A. No. 8791.
• People v. Siton — Cited for the presumption of constitutionality of statutes and the rule that every reasonable doubt must be resolved in favor of validity.
• Beltran v. Secretary of Health — Cited for the standard that a law must be shown to be a clear and unequivocal breach of the Constitution before it can be nullified.
• Siska Development Corporation v. Office of the President — Cited for the definition of impairment of contracts.
• JMM Promotion and Management, Inc. v. Court of Appeals — Cited for the principles governing reasonable classification and equal protection.
• Mateo v. Court of Appeals — Cited for the principle that statutory rights of redemption must be exercised in the manner prescribed by law.
• Asiatrust Development Bank v. First Aikka Development, Inc. — Cited for the principle that the banking industry is imbued with public interest and subject to extensive regulation.

• Section 47 of Republic Act No. 8791 (The General Banking Law of 2000) — Amends Act No. 3135 by providing that juridical persons whose property is sold pursuant to extrajudicial foreclosure have the right to redeem only 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 months after foreclosure, whichever is earlier.
• Section 6 of Act No. 3135 — Provides the original one-year redemption period from the date of registration of the certificate of sale for extrajudicial foreclosure of mortgages.
• Article III, Section 10 of the 1987 Constitution (Non-impairment Clause) — Provides that no law impairing the obligation of contracts shall be passed.
• Article III, Section 1 of the 1987 Constitution (Due Process and Equal Protection) — Provides that no person shall be deprived of life, liberty, or property without due process of law, nor denied equal protection of the laws.