The Supreme Court has affirmed that a bank can enforce its right to possess a foreclosed property, even after a compromise agreement, if the borrower defaults on the agreement’s terms. This decision reinforces the principle that failure to comply with a compromise agreement allows the aggrieved party to revert to their original demand, including seeking a writ of possession. This ruling provides clarity on the enforceability of rights in foreclosure scenarios, particularly when compromise agreements are involved, and underscores the importance of fulfilling obligations outlined in such agreements to avoid the loss of property.

Second Chances and Broken Promises: When ‘Buy Back’ Becomes ‘Back to Square One’

Consolacion Chavez and her family sought to nullify foreclosure proceedings on their property after defaulting on a loan with Maybank Philippines, Inc. (Maybank). During litigation, they entered into a Compromise Agreement, allowing them to “buy back” the property despite the expired redemption period. However, they again defaulted on the installment payments stipulated in the agreement. Maybank then entered into a Deed of Promise to Sell with J.E. TICO Realty Corporation and sought a writ of possession. Chavez and her family opposed, arguing that the Compromise Agreement constituted a sale, giving them ownership and preventing Maybank from summarily reclaiming the property. The Regional Trial Court (RTC) initially sided with the Chavez family, questioning the nature of the Compromise Agreement and the extent of their interest in the property. The Court of Appeals (CA) reversed this decision, ordering the RTC to issue a writ of possession in favor of Maybank, prompting the Chavez family to appeal to the Supreme Court. At the heart of the legal matter lies the interpretation of the Compromise Agreement: Did it create a new sale agreement that superseded the original mortgage, or did it merely provide a conditional opportunity for the Chavez family to regain ownership, subject to their compliance with the agreed-upon terms?

The Supreme Court turned to Article 2028 of the Civil Code, which defines a compromise agreement as a contract where parties make reciprocal concessions to avoid or end litigation. A judicially approved compromise agreement gains the force of a judgment. To be valid, it must meet all the requirements of a contract: consent, a definite object, and a valid cause. The Supreme Court emphasized that while compromise agreements are encouraged, they must be entered into voluntarily, freely, and with full knowledge of the judgment. Once approved, a compromise agreement acts as res judicata, preventing further litigation on the same matter, unless there are grounds such as vices of consent, forgery, fraud, misrepresentation, or coercion.

In this case, the Supreme Court acknowledged that the Compromise Agreement was an opportunity for the Chavez family to regain the property after foreclosure, despite the expired redemption period. The Court noted that the Chavez family did not deny defaulting on their obligations under the Compromise Agreement. Further, there were no indications of vices of consent, forgery, fraud, misrepresentation, or coercion in the agreement’s execution. The Court pointed to specific clauses in the Compromise Agreement, particularly paragraphs (5) and (6), which explicitly reserved Maybank’s right to rescind the agreement and seek immediate possession of the property if the Chavez family failed to meet their payment obligations. This was permissible under Article 2041 of the Civil Code.

Article 2041 of the Civil Code states: “If one of the parties fails or refuses to abide by the compromise, the other party may either enforce the compromise or regard it as rescinded and insist upon his original demand.”

The Court reiterated that Maybank had the right to either enforce the Compromise Agreement or rescind it and revert to its original demand, which included seeking a writ of possession. The Supreme Court clarified the implications of breaching a compromise agreement, emphasizing that the aggrieved party has options beyond merely enforcing the agreement. It can choose to treat the agreement as rescinded and pursue its original claim, as if no compromise had ever existed. This right to rescind arises directly from the breach committed by the defaulting party.

The petitioners, Chavez family, cited Philippine National Bank v. Spouses Pimentel to support their claim that the Compromise Agreement was a new sale. However, the Supreme Court distinguished that case, emphasizing that the PNB case involved a clear Deed of Conditional Sale, which explicitly indicated a repurchase agreement. In contrast, the Compromise Agreement in this case was conditional, and the relationship between the parties remained that of mortgagor and mortgagee. Since Chavez family were unable to fulfill the conditions of their agreement, the Court confirmed, they were not able to take ownership of the property.

The Court referenced Act No. 3135, which governs extrajudicial foreclosure proceedings. Under this law, the issuance of a writ of possession is a matter of course after the redemption period expires without the mortgagor redeeming the property. The Court has consistently held that the right to possession is tied to ownership. Once the title is consolidated in the buyer’s name (in this case, Maybank), the issuance of the writ becomes a ministerial function, meaning the court must issue it without exercising discretion.

Section 7 of Act No. 3135 provides the legal basis for the purchaser to petition the court for possession of the property:

“In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of the province or place where the property or any part thereof is situated, to give him possession thereof during the redemption period…”

The Court cited exceptions where the issuance of a writ of possession is not merely ministerial. These exceptions, as outlined in Nagtalon v. UCPB, include: gross inadequacy of the purchase price, a third party claiming a right adverse to the mortgagor/debtor, and failure to pay surplus proceeds of the sale to the mortgagor. Since none of these exceptions applied in this case, the Court concluded that the CA was correct in ordering the RTC to issue the writ of possession in favor of Maybank.

Ultimately, the Supreme Court’s decision reaffirms the bank’s right to reclaim possession of the foreclosed property. The right to possess, in this situation, is founded on the ownership of the property. After the title to the property has been consolidated in the buyer’s name once the mortgagor fails to redeem the property within the one-year redemption period, the writ of possession becomes the buyer’s right. Consequently, the buyer can demand possession of the property at any time. Its right to possession has then ripened into the right of a confirmed absolute owner and the issuance of the writ becomes a ministerial function that does not admit of the exercise of the court’s discretion.

FAQs

This case underscores the critical importance of adhering to the terms of compromise agreements, especially when dealing with foreclosed properties. The Supreme Court’s decision makes it clear that banks retain the right to reclaim possession through a writ of possession if borrowers fail to meet their obligations under such agreements.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Consolacion P. Chavez, et al. vs. Maybank Philippines, Inc., G.R. No. 242852, July 29, 2019