In Supreme Transliner, Inc. vs. BPI Family Savings Bank, Inc., the Supreme Court clarified the correct redemption price for a foreclosed property, specifically addressing whether a mortgagee bank can include capital gains tax in the redemption amount when the mortgagor exercises their right of redemption. The Court ruled that if the mortgagor redeems the property within the statutory period, the bank cannot charge capital gains tax, as no actual transfer of ownership has occurred. This decision protects the mortgagor’s right to redeem their property without bearing premature tax burdens.

Foreclosure Showdown: Who Pays When Redemption Rights and Taxes Collide?

This case originated from a loan obtained by Supreme Transliner, Inc. from BPI Family Savings Bank, secured by a mortgage on a property owned by Moises and Paulita Alvarez. Due to non-payment, the bank foreclosed the mortgage and purchased the property at a public auction. The Alvarezes then sought to redeem the property, leading to a dispute over the redemption price, particularly the inclusion of attorney’s fees, liquidated damages, and capital gains tax.

The central legal question revolved around interpreting Section 78 of Republic Act No. 337, the General Banking Act, which governs redemption rights when the mortgagee is a bank. This provision allows a mortgagor to redeem the property by paying the amount due under the mortgage deed, with interest, costs, and expenses incurred by the bank. However, the ambiguity lies in what constitutes allowable “costs and expenses,” especially concerning capital gains tax when the property is redeemed within the statutory period.

The mortgagors, Supreme Transliner, Inc., argued that the bank’s inclusion of liquidated damages, attorney’s fees, and capital gains tax in the redemption price was excessive and unlawful. They contended that the attorney’s fees and liquidated damages were already factored into the bid price during the foreclosure sale. Furthermore, they asserted that capital gains tax should not be included, as the redemption occurred before any actual transfer of ownership.

The bank, BPI Family Savings Bank, maintained that the redemption price, which included the stipulated interest, charges, and expenses, was valid and in accordance with the mortgage agreement. They argued that the mortgagors had agreed to these terms and were estopped from questioning the redemption price after signing an agreement with Orient Development Banking Corporation, which financed the redemption. The bank also insisted that the foreclosure expenses, including capital gains tax, were legitimate costs associated with the foreclosure process.

The Regional Trial Court (RTC) initially sided with the bank, holding the mortgagors bound by the terms of the mortgage loan documents. The RTC found that the mortgagors had freely and voluntarily agreed to the redemption price. However, the Court of Appeals (CA) reversed the RTC’s decision, ruling that the attorney’s fees and liquidated damages were already included in the bid price, and the bank should return the excess amount collected. The CA also stated that the mortgagors were not estopped from questioning the charges, as they had consistently disputed them.

Upon review, the Supreme Court addressed the proper computation of the redemption price and the inclusion of capital gains tax. The Court affirmed that, according to the mortgage loan agreement, attorney’s fees and costs of registration and foreclosure were separate from the bid price. The Court noted that the agreement explicitly stated that the proceeds from the foreclosure sale would first cover the expenses and costs of the foreclosure, including attorney’s fees, before satisfying the principal amount and other obligations.

However, the Supreme Court agreed with the mortgagors regarding the capital gains tax. The Court cited Revenue Regulations (RR) No. 4-99, which clarifies that if a mortgagor exercises the right of redemption within one year from the issuance of the certificate of sale, no capital gains tax should be imposed. This is because no actual transfer of ownership has occurred at this point.

SEC. 3. CAPITAL GAINS TAX. –
(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

The Court reasoned that the retroactive application of RR No. 4-99 was appropriate in this case, as it aligns with the policy of aiding the exercise of the right of redemption. The imposition of capital gains tax before the expiration of the redemption period was deemed inequitable, as there is no transfer of title or profit realized by the mortgagor at the time of the foreclosure sale.

The Supreme Court emphasized that in a foreclosure sale, the actual transfer of the mortgaged property only occurs after the expiration of the one-year redemption period, provided in Act No. 3135, and when title is consolidated in the name of the mortgagee in case of non-redemption. Until then, the mortgagor retains the option to redeem the property, and the issuance of the Certificate of Sale does not, by itself, transfer ownership.

Building on this principle, the Court determined that since Supreme Transliner, Inc. exercised their right of redemption within the statutory period, BPI Family Savings Bank was not liable to pay the capital gains tax. Therefore, the bank’s inclusion of this charge in the redemption price was unwarranted, and the corresponding amount paid by the mortgagors should be returned to them.

This decision underscores the importance of protecting the mortgagor’s right to redemption. It clarifies that banks cannot prematurely impose capital gains tax when the mortgagor exercises their right to reclaim their property within the prescribed period. This ruling ensures fairness and prevents undue financial burdens on mortgagors seeking to redeem their foreclosed properties.

FAQs

What was the key issue in this case?	The main issue was whether BPI Family Savings Bank could include capital gains tax in the redemption price when Supreme Transliner, Inc. redeemed their foreclosed property within the one-year statutory period. The mortgagor disputed the redemption price.
What did the Supreme Court decide?	The Supreme Court ruled that the bank could not include capital gains tax in the redemption price because the mortgagor exercised their right of redemption within the statutory period, and no actual transfer of ownership had occurred.
What is the significance of Revenue Regulations No. 4-99 in this case?	RR No. 4-99 clarifies that capital gains tax should not be imposed if the mortgagor exercises their right of redemption within one year from the issuance of the certificate of sale, as no transfer of real property has been realized. The Court retroactively applied it.
What is the redemption period in foreclosure cases in the Philippines?	Under Act No. 3135, the mortgagor generally has one year from the date of the foreclosure sale to redeem the property by paying the amount due under the mortgage deed, with interest, costs, and expenses.
What costs and expenses can a bank include in the redemption price?	A bank can include the amount due under the mortgage deed, interest, costs, and judicial and other expenses incurred by the bank due to the execution and sale and as a result of the custody of said property, less any income received from the property.
Are attorney’s fees and liquidated damages includable in the redemption price?	Yes, according to the Supreme Court, attorney’s fees and liquidated damages can be included in the redemption price if the mortgage agreement stipulates that these costs are separate from the bid price and are part of the expenses incurred by the bank.
What happens if the mortgagor does not redeem the property within the statutory period?	If the mortgagor does not redeem the property within the statutory period, the title to the property is consolidated in the name of the mortgagee, and the mortgagee becomes the absolute owner of the property.
Can a mortgagor question the redemption price even after paying it?	Yes, the Supreme Court noted that mortgagors can question the propriety of the charges included in the redemption price, especially if they have consistently disputed them from the beginning.
What is the impact of this ruling on banks in the Philippines?	This ruling clarifies that banks cannot prematurely impose capital gains tax when a mortgagor exercises their right to redeem a foreclosed property within the statutory period, ensuring that banks accurately calculate the redemption price.

In conclusion, the Supreme Court’s decision in Supreme Transliner, Inc. vs. BPI Family Savings Bank, Inc. provides important guidance on the computation of redemption prices in foreclosure cases, protecting the rights of mortgagors to redeem their properties without bearing undue financial burdens. The clarification regarding capital gains tax ensures fairness and consistency in the application of redemption laws in the Philippines.

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: Supreme Transliner, Inc. vs. BPI Family Savings Bank, Inc., G.R. No. 165837, February 25, 2011