Redemption Price in Foreclosure: The Importance of Adhering to Statutory Provisions

Development Bank of the Philippines v. West Negros College, Inc., G.R. No. 241981, December 02, 2020

Imagine you’ve invested everything in a property, only to face the daunting prospect of losing it due to financial difficulties. The story of Bacolod Medical Center (BMC) and its successors highlights the critical nature of understanding redemption rights in foreclosure. In this case, BMC’s failure to meet its loan obligations led to a prolonged legal battle over the redemption price of foreclosed properties. The central question was whether the redemption price should include the total indebtedness plus contractual interest, and how this should be calculated over time.

The case began with BMC obtaining a loan from the Development Bank of the Philippines (DBP) in 1967, secured by a mortgage on two parcels of land. When BMC defaulted, DBP foreclosed the mortgage in 1989. The subsequent struggle to determine the redemption price led to multiple appeals and Supreme Court decisions, culminating in a ruling that clarified the components and calculation of the redemption price under the DBP Charter.

Legal Context: Understanding Redemption Rights and the DBP Charter

Redemption rights in the context of foreclosure are crucial for borrowers seeking to reclaim their properties. In the Philippines, these rights are governed by various statutes, including the DBP Charter, which specifies that the redemption price for properties mortgaged to DBP includes the total indebtedness plus contractual interest. This principle is rooted in Section 16 of Executive Order No. 81, which states:

SEC. 16. Right of Redemption. – Any mortgagor of the Bank whose real property has been extrajudicially sold at public auction shall, within one (1) year counted from the date of registration of the certificate of sale, have the right to redeem the real property by paying to the Bank all of the latter’s claims against him, as determined by the Bank.

The term “total indebtedness” refers to the outstanding balance of the loan at the time of foreclosure, while “contractual interest” pertains to the interest accrued on this balance at the rate agreed upon in the loan agreement. This provision ensures that the bank’s investment is protected, even if the property is redeemed after foreclosure.

For example, if a borrower defaults on a loan secured by a property, the bank can foreclose and auction the property. If the borrower wishes to redeem it, they must pay not only the amount owed at the time of foreclosure but also any interest that has accrued since then, unless the bank has taken possession of the property and its fruits compensate for the interest.

Case Breakdown: The Journey of BMC and DBP

Bacolod Medical Center’s journey began with a loan of Php2.4 million from DBP in 1967, secured by two parcels of land. When BMC defaulted, DBP foreclosed the mortgage in 1989, bidding Php4,090,117.36 at the public auction. The redemption period was set to expire in July 1991, but before this, BMC and DBP’s Bacolod branch agreed on a provisional redemption price of Php21,500,000.00, subject to DBP’s head office approval.

However, DBP’s head office rejected this agreement, citing the re-appraised value of the properties at Php28,895,500.00. Meanwhile, BMC assigned its interests to West Negros College (WNC), which attempted to redeem the property by paying Php4,300,000.00, but this was deemed insufficient by the Sheriff. The dispute escalated to the courts, with WNC arguing for a lower redemption price based on the purchase price at the foreclosure sale plus interests and charges.

The Supreme Court initially ruled in favor of DBP in 2002, stating that the redemption price should be the total indebtedness plus contractual interest as of the date of the auction sale. The Court emphasized:

The right of redemption may be exercised only by paying to DBP “all the amount owed at the date of sale, with interest on the total indebtedness at the rate agreed upon in the obligation from the said date, unless the bidder has taken material possession of the property or unless this has been delivered to him, in which case the proceeds of the property shall compensate the interest.”

Subsequent appeals and remands led to further clarifications. In 2008, the Court affirmed that DBP could collect interest even after the foreclosure sale, as BMC and its successors had not surrendered possession of the property. The final ruling in 2020 established that the redemption price was Php32,526,133.62 as of the foreclosure date, with interest continuing to accrue until actual redemption.

Practical Implications: Navigating Redemption Rights in Foreclosure

This ruling underscores the importance of understanding and adhering to statutory provisions regarding redemption rights. For borrowers facing foreclosure, it is crucial to know that the redemption price includes not only the outstanding loan balance but also any accrued interest, unless the lender has taken possession of the property.

Businesses and property owners should ensure that any agreements on redemption prices are approved by all relevant parties to avoid disputes. Additionally, maintaining possession of the property without settling the full redemption amount can lead to continued accrual of interest, potentially increasing the financial burden.

Key Lessons:

• Understand the statutory basis for redemption prices, particularly in cases involving government banks like DBP.
• Ensure any provisional agreements on redemption prices are formally approved to avoid legal challenges.
• Be aware that interest may continue to accrue if the property remains in the borrower’s possession without full redemption.

Frequently Asked Questions

What is the redemption price in a foreclosure by DBP?

The redemption price for properties mortgaged to DBP includes the total indebtedness plus contractual interest, calculated from the date of the foreclosure sale until redemption or possession by DBP.

Can interest continue to accrue after a foreclosure sale?

Yes, interest can continue to accrue if the property remains in the borrower’s possession without full redemption, as per the DBP Charter.

What happens if a provisional agreement on the redemption price is not approved?

If a provisional agreement is not approved, the statutory redemption price, including the total indebtedness and contractual interest, will apply.

How can a borrower stop the accrual of interest after foreclosure?

A borrower can stop the accrual of interest by surrendering possession of the property to the lender or by fully redeeming the property.

What should borrowers do to protect their interests in foreclosure?

Borrowers should seek legal advice to understand their rights and obligations, ensure all agreements are formally approved, and consider surrendering possession if unable to redeem the property fully.

ASG Law specializes in property law and foreclosure cases. Contact us or email hello@asglawpartners.com to schedule a consultation.