Is an agreement to postpone foreclosure proceedings without need of publication valid?

The regional economic crisis that started in 1997 has seen borrowers default in the payment of their bank loans. Such is the state of our economy that the total non-performing loans of our commercial banks stood at a whopping sum of more than P247 billion as of January 2003. The amount is likely to increase given the onset of the war in Iraq and the SARS epidemic.

Banks have taken a pragmatic attitude to the situation. They have been treating their debtors quite leniently. They enter into restructuring agreements with their borrowers. Even prior to a formal restructuring contract, banks agree to a standstill agreement where they agree that they will not file any collection or foreclosure case pending negotiations to restructure the loan. In the restructuring agreement, banks do not only extend the term of repayment but they also undergo a haircut by waiving penalties and interest in an effort to help their borrowers.

There are cases where banks are left with no alternative but to foreclose the property given as security for the loan. Even then, some banks do not foreclose the possibility of their borrower's paying the loan after the foreclosure proceedings had been commenced. In many cases, the borrower will scramble around to stave off the foreclosure. In the process, prospects of a take-out loan or selling the mortgaged property to a prospective buyer present themselves. The problem is that these prospects may present themselves only after the required posting and publication of the notice of sale had been made. So what do the borrowers do? They request for a postponement of the foreclosure proceedings. When this happens, chances are that the bank will agree to a postponement of the sale.

There are, however, costs resulting from the postponement of the foreclosure proceeding. The law requires publication of the notice of foreclosure sale once a week for three consecutive weeks in a newspaper of general publication. This, of course, means a substantial amount of money.

So what do the banks do? They agree to the borrower's request for postponement provided the borrower and the mortgagor waive republication. This agreement is often formalized in a written agreement.

But is a written agreement to waive publication valid? If the borrower is unable to raise the amount to pay the loan from the new prospects and the mortgaged property if foreclosed without complying with the publication requirement as agreed upon in writing, is the foreclosure of the property valid?

This issue squarely presented itself in the case of Philippine National Bank vs. Nepomuceno Productions, Inc., et al. (G.R. No. 139479, Dec. 27, 2002) recently decided by the Supreme Court. In this case, the Philippine National Bank (PNB) granted a P7.5 million loan to the Nepomucenos which was secured by properties belonging to them. The borrowers were unable to pay the loan. Accordingly, PNB scheduled the foreclosure sale of the mortgaged properties on Aug. 12, 1976. The auction sale was postponed several times upon request of the Nepomucenos to which PNB graciously agreed. The parties agreed in writing to dispense with the posting and publication of the notice of sale. After several postponements, the foreclosure sale was finally conducted on Dec. 12, 1976 without publication as earlier agreed upon in writing.

After the foreclosure, the Nepomucenos filed a case to nullify the foreclosure sale contending, among others, that there was no publication of the sale as required by law. PNB contended that the Nepomucenos waived the publication requirement in writing and were estopped from questioning the sale on that ground.

The Supreme Court held that the Nepomucenos and PNB "have absolutely no right to waive the posting and publication requirements of Act No. 3135." The waiver is void for being contrary to law and public policy. Explaining its decision, the Supreme Court said that the principal object of a notice of sale in a foreclosure of mortgage is not so much to notify the mortgagor as to inform the public generally of the nature and condition of the property to be sold, and of the time, place, and terms of the sale. Notices are given to secure bidders and prevent a sacrifice of the property. Clearly, the statutory requirements of posting and publication are mandated, not for the mortgagor's benefit, but for the public or third persons. In fact, personal notice to the mortgagor in extrajudicial foreclosure proceedings is not even necessary, unless stipulated. As such, it is imbued with public policy considerations and any waiver thereof would be inconsistent with the intent and letter of Act No. 3135.

On the question of estoppel, the Supreme Court observed that while the Nepomucenos requested for postponement of the foreclosure sale, "[n]owhere in the records was it shown that respondents purposely sought re-scheduling of the sale without need of republication and posting of the notice of sale." According to the Supreme Court, "[t]o request postponement of the sale is one thing, to request it without need of compliance with the statutory requirements is another thing." On this score, the Court observed that the "Agreement to Postpone Sale" signed by the Nepomucenos was a "ready-form" (a contract of adhesion) and their only participation was to affix or ‘adhere’ their signature thereto.

The decision is being questioned by legal scholars. They say that while the law requires posting and publication, these requirements are really meant to fetch the highest possible price so that the debtor's indebtedness is reduced to the fullest. In short, the legal requirements are really meant for the personal benefit of the borrower. Why can't personal rights be waived? Why is waiver of personal rights against public policy? Why can't borrowers/mortgagors not give up this right in exchange to concessions such as postponing the sale so that they can look for alternative sources to save the property from foreclosure?

Whatever the criticisms are, the Supreme Court has spoken on the matter. There are, however, some important issues and repercussions arising from the decision. For example, is the decision not bad for borrowers since banks will now hesitate to postpone foreclosure sales without republication? Does the decision mean more costs for the borrowers since the cost of publication will inevitably be passed on by the bank to them? Is the decision limited to cases (e.g., mortages in favor of banks and quasi-banks) where the debtor or mortgagor can redeem the property only by paying the amount of the loan and the interest agreed upon plus cost and expenses of the sale? Will the decision apply to other cases where a "sacrifice" sale benefits the property owner since it would be much cheaper and easier for him to redeem his property? What if the document signed by the debtor/mortgagor is not a "ready-form" contract prepared by the bank? What if the debtor/mortagor prepares the written waiver of the publication requirements and the only participation of the bank is to give its written conformity? Will it make any difference if the mortgage is an accommodation or third party mortgage?

These and other questions will, of course, require legal study of the decision and related laws and jurisprudence. In the meantime, banks are well advised to take the decision into account whenever they receive requests for postponements of scheduled foreclosure sales from their borrowers.

(The author is a senior partner and the co-managing partner of the Angara Abello Concepcion Regala & Cruz Law Offices or ACCRALAW. He can be contacted at 830-8000.)