Supreme Transliner, Inc. vs. BPI Family Savings Bank, Inc.

A mortgagor redeeming property foreclosed by a bank must pay the amount due under the mortgage deed with stipulated interest, attorney's fees, liquidated damages not included in the bid price, and foreclosure costs under Section 78 of Republic Act No. 337, but no capital gains tax is due where redemption is exercised within one year because no sale or transfer is realized until expiry of the redemption period.

Supreme Transliner, Inc., through Managing Director Moises C. Alvarez, together with Paulita S. Alvarez as owners-mortgagors, were borrowers of BPI Family Savings Bank under a mortgage loan agreement secured by Transfer Certificate of Title No. T-79193. Section 78 of Republic Act No. 337, the General Banking Act, governed redemption from foreclosure sales in favor of banks, allowing redemption within one year upon payment of the amount due under the mortgage deed with stipulated interest and all costs and expenses of execution, sale and custody less income.

On April 24, 1995, Supreme Transliner, Inc., represented by Managing Director Moises C. Alvarez, and Paulita S. Alvarez obtained a loan of ₱9,853,000 from BPI Family Savings Bank, secured by a mortgage on a 714-square meter lot covered by Transfer Certificate of Title No. T-79193 in the names of Moises C. Alvarez and Paulita S. Alvarez. For non-payment, the mortgage was extrajudicially foreclosed and the property sold to the bank as highest bidder at public auction conducted by the Office of the Provincial Sheriff of Lucena City. A Certificate of Sale was issued in favor of the bank on August 7, 1996 and registered on October 1, 1996.

Before expiration of the one-year redemption period, the mortgagors notified the bank of their intention to redeem. The bank prepared a Statement of Account showing a total amount due as of auction date August 7, 1996 of ₱10,372,711.35, comprising principal balance of ₱9,551,827.64, interest due, late payment charges and foreclosure expenses less unapplied payment, plus 15% attorney's fees of ₱1,555,906.70, 15% liquidated damages of ₱1,555,906.70, interest from August 7, 1996 to April 7, 1997 at 17.25% p.a., asset-acquired expenses of ₱906,142.79 for documentary stamps, capital gains tax, foreclosure fee and registration fees with interest, and cancellation fee, for a total of ₱15,704,249.12 as of April 7, 1997. The mortgagors requested elimination of liquidated damages and reduction of attorney's fees and interest, but the bank refused.

On May 14, 1997, the bank, Orient Development Banking Corporation which committed to finance the redemption, and the mortgagors signed a letter-agreement in which Orient Bank and the mortgagors conformed to full payment of ₱15,704,249.12 as outstanding balance including interest and other charges, with issuance of Certificate of Redemption after clearance. On May 21, 1997, the mortgagors redeemed by paying ₱15,704,249.12, and the bank issued a Certificate of Redemption on May 27, 1997. According to the mortgagors, payment was made under compulsion to beat expiry of the redemption period and despite repeated objections to attorney's fees, liquidated damages and asset-acquired charges; according to the bank, there was active negotiation with advice of counsel and voluntary conformity.

The trial court found the mortgagors bound by the mortgage loan documents providing 18% p.a. interest, 3% post-default penalty, 15% liquidated damages, 15% attorney's fees and collection and legal costs, rejected extreme pressure, and found estoppel from the freely signed letter-agreement. The Court of Appeals found instead that attorney's fees and liquidated damages were already included in the ₱10,372,711.35 bid price as "penalty charges" recited in the Certificate of Sale, and that no estoppel arose because objection had been persistent.

• Capital Gains and Documentary Stamp Taxes: Petitioners-mortgagors argued that the foreclosing mortgagee should bear capital gains tax upon execution of the certificate of sale, and if paid by the mortgagee, the same should not be shouldered by the redemptioner, praying for return of all asset-acquired expenses consisting of documentary stamps tax, capital gains tax, foreclosure fee, registration and filing fee, and additional registration and filing fee totaling ₱906,142.79 with 6% interest from May 21, 1997.
• Inclusion of Penalty Charges in Bid Price: Petitioners-mortgagors maintained that attorney's fees and liquidated damages were already included in the ₱10,372,711.35 bid price, making their second collection in the redemption price unlawful and excessive.

• Validity of Redemption Price: Respondent bank countered that the redemption price reflecting stipulated interest, charges and expenses is valid, legal and in accordance with documents duly signed by the mortgagors.
• Waiver and Estoppel: Respondent bank argued that claims are deemed waived and mortgagors are estopped from questioning contract terms, having freely and voluntarily signed the letter-agreement after active negotiation with counsel and financing bank.
• Entitlement to Penalty Charges: Respondent bank maintained that the bid price did not include 15% attorney's fees and 15% liquidated damages, the evidence showing otherwise, and that it was entitled thereto as law and contract expressly provide with mortgagors' agreement.
• Absence of Bad Faith: Respondent bank argued that no moral, exemplary damages, attorney's fees and costs should be imposed because it did not act in bad faith in imposing penalty charges.

• Attorney's Fees and Liquidated Damages: Whether the ₱10,372,711.35 bid price already includes 15% attorney's fees and 15% liquidated damages so that their addition to the redemption price is invalid.
• Estoppel: Whether mortgagors are estopped from questioning penalty charges after signing the May 14, 1997 letter-agreement fixing redemption at ₱15,704,249.12.
• Capital Gains and Documentary Stamp Taxes: Whether capital gains tax, documentary stamp tax and related asset-acquired expenses may be included in the redemption price where redemption was exercised within one year.
• Damages Against Bank: Whether the bank is liable for moral damages, exemplary damages, attorney's fees and costs for alleged bad faith collection.

• Attorney's Fees and Liquidated Damages: No. The bid price represented only outstanding loan balance with stipulated interest, while attorney's fees and liquidated damages were separate contractual charges shown in the Statement of Account and Mortgage Loan Agreement.
• Estoppel: Yes, in effect. Voluntary conformity to the letter-agreement after active negotiation with counsel negated compulsion, though timely redemption still permitted recovery of legally unwarranted tax charges.
• Capital Gains and Documentary Stamp Taxes: No. No capital gains tax is due upon timely redemption for lack of actual transfer, and only the ₱15 documentary stamp tax under RR No. 4-99 is retainable.
• Damages Against Bank: No. Bad faith was not established where collection of attorney's fees and liquidated damages was contractually and legally grounded, so monetary awards were deleted.

• Attorney's Fees and Liquidated Damages: Section 78 of Republic Act No. 337 requires payment of the amount due under the mortgage deed with stipulated interest plus costs and expenses of execution and sale. Paragraph 23 on application of foreclosure proceeds treats expenses and costs including attorney's fees, then interest and charges, then principal as distinct items, while paragraph 31 and the Disclosure Statement separately impose 15% attorney's fees and 15% liquidated damages. The Statement of Account as of April 4, 1997 showed the ₱10,372,711.35 bid price separately from subsequently added attorney's fees and liquidated damages, disproving double collection and contradicting reliance on generic "penalty charges" language in the Certificate of Sale.
• Estoppel: Active negotiation for the final redemption price between bank representatives and mortgagors assisted by counsel, together with Orient Development Banking Corporation, culminated in express written conformity to ₱15,704,249.12 as outstanding balance including interest and other charges. Such free and voluntary agreement precluded a claim of extreme pressure as to contractually due items, although it could not validate charges without legal basis such as capital gains tax on a redeemed property.
• Capital Gains and Documentary Stamp Taxes: Under Section 63 of Presidential Decree No. 1529, where a right of redemption exists title is not cancelled and only the certificate of sale is annotated; ownership transfers only upon consolidation after non-redemption. Revenue Regulations No. 13-85, Revenue Memorandum Order No. 29-86, and RR No. 4-99 confirm that no capital gains is derived and no sale is realized if redemption occurs within one year, with tax due only upon expiry based on bid price, and only ₱15 documentary stamp tax due upon redemption. Although foreclosure and redemption preceded RR No. 4-99, retroactive application was allowed as curative of an erroneous construction, consistent with aiding redemption and Section 246 of the National Internal Revenue Code, there being no deliberate misstatement, differing facts, or bad faith.
• Damages Against Bank: Because imposition of attorney's fees and liquidated damages was supported by the mortgage deed and Section 78, bad faith was absent. The awards of ₱100,000 moral damages, ₱100,000 exemplary damages, ₱100,000 attorney's fees and costs therefore lacked basis and were deleted, while only the tax portion of the redemption price was ordered returned.

• Redemption price from bank foreclosure — Under Section 78 of Republic Act No. 337, a mortgagor redeeming within one year from a foreclosure sale to a bank must pay the amount fixed by the court or due under the mortgage deed, with interest at the mortgage rate, plus all costs and judicial and other expenses incurred by the bank by reason of execution, sale and custody, less income from the property. Applied to sustain attorney's fees, liquidated damages, interest and foreclosure costs separately stipulated in the Mortgage Loan Agreement and Disclosure Statement.
• No transfer until expiry of redemption period — In extrajudicial foreclosure where a right of redemption exists, the certificate of sale alone does not transfer ownership; title is consolidated in the purchaser only after non-redemption, pursuant to Section 63 of Presidential Decree No. 1529 and Act No. 3135. Applied to hold that no taxable sale occurred because mortgagors redeemed before expiry.
• Capital gains and documentary stamp taxes on foreclosure vs. redemption — If the mortgagor redeems within one year from issuance of the certificate of sale, no capital gains tax is imposed and only ₱15 documentary stamp tax is due; upon non-redemption, capital gains tax on the bid price and corresponding documentary stamp tax become due after expiry of the one-year period under RR No. 4-99. Applied to order refund of capital gains and documentary stamp taxes included in the ₱15,704,249.12 redemption price, retaining only the ₱15 tax.
• Retroactivity of erroneous revenue regulation — While revenue rulings generally apply prospectively under Section 246 of the National Internal Revenue Code of 1997, a regulation correcting an erroneous or law-contrary construction may operate retroactively where the taxpayer did not misstate facts, present different facts, or act in bad faith, especially to aid redemption. Applied to give RR No. 4-99 retroactive effect to a 1996 foreclosure and 1997 redemption.

• "The issuance of the Certificate of Sale does not by itself transfer ownership." — States the pivotal property principle negating a taxable transfer at foreclosure where redemption remains available.
• "(1) In case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. x x x" — Provides the canonical RR No. 4-99 formulation applied retroactively to order refund of the tax component.
• "SEC. 78. x x x In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real property has been sold at public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution, within the purview of this Act shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, or the amount due under the mortgage deed, as the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the income received from the property. x x x x (Emphasis supplied.)" — Sets the controlling statutory measure of the redemption price for bank mortgages.

• Tecklo vs. Rural Bank of Pamplona, Inc., G.R. No. 171201, June 18, 2010 — Cited as authority that Section 78 of Republic Act No. 337 governs redemption price where the mortgagee is a bank.
• Heirs of Norberto J. Quisumbing vs. Philippine National Bank, G.R. No. 178242, January 20, 2009 — Cited through Tecklo as supporting Section 78 as controlling provision.
• Union Bank of the Philippines vs. Court of Appeals, G.R. No. 134068, June 25, 2001 — Cited through Tecklo, tracing the Section 78 rule to earlier foreclosure-redemption jurisprudence.
• Ponce de Leon vs. Rehabilitation Finance Corporation, No. L-24571, December 18, 1970; Sy vs. Court of Appeals, G.R. No. 83139, April 12, 1989 — Cited as original foundations for the bank-redemption rule reiterated in later cases.
• Spouses Alfredo & Imelda Diaz vs. BIR, C.T.A. Case No. 6244, March 5, 2003 — Cited as persuasive Tax Court conclusion that RR No. 4-99 curbed inequity of imposing capital gains tax before expiry of redemption.

• Section 78, Republic Act No. 337 (General Banking Act) — Governs one-year redemption from bank foreclosure upon payment of amount due under mortgage deed with stipulated interest plus costs and expenses of execution, sale and custody; applied to uphold attorney's fees, liquidated damages and foreclosure costs.
• Section 63, Presidential Decree No. 1529 (Property Registration Decree) — Provides that where redemption exists title is not cancelled but sale is merely annotated, with redemption memorandum upon redemption; applied to show no transfer occurred before expiry.
• Section 6, Act No. 3135 as amended by Act No. 4118 — Provides one-year redemption period; reckoning point for tax accrual under RR No. 4-99.
• Revenue Regulations No. 13-85; Revenue Memorandum Order No. 29-86 as amended — Treat mortgage foreclosure sales as conditional sales subject to capital gains and documentary stamp taxes; background to timing issue clarified by RR No. 4-99.
• Sections 3 and 4, Revenue Regulations No. 4-99 — Provide no capital gains tax and only ₱15 documentary stamp tax upon redemption within one year, taxes on bid price only upon non-redemption within 30 days after expiry; applied retroactively to order refund.
• Section 246, National Internal Revenue Code of 1997 — Bars retroactive rulings prejudicial to taxpayers except for misstatement, materially different facts, or bad faith; invoked to permit retroactive corrective application favoring redemption.
• Sections 24(D)(1) and 27(D)(5), 39(A), 188, Tax Code of 1997 — Identify capital gains tax on real property capital assets and documentary stamp tax; referenced as tax bases affected by redemption vs. non-redemption.

Associate Justice Arturo D. Brion (Acting Chairperson), Associate Justice Lucas P. Bersamin, Associate Justice Roberto A. Abad, and Associate Justice Maria Lourdes P. A. Sereno concurred. No separate concurring reasoning of significance appears in the text.