March 20, 1997

DAR OPINION NO. 31-97

Atty. Ciriaco V . Lapuz

Lapuz Apartment

Plaza Naning

Baliuag, Bulacan

Dear Atty. Lapuz:

This has reference to your letter seeking opinion on the queries posed therein, to wit:

a)         Can the mortgagee (Rural Bank of San Rafael, Inc.) foreclose the property mortgaged to it?

b)        Assuming that it can, who can participate in the bidding?

c)         If the mortgagee bank cannot foreclose, what is the remedy?

As gleaned from your letter, the subject landholding has an area of 1,639 square meters situated at Banca-Banca, San Rafael, Bulacan; that said property is covered by Certificate of Land Ownership Award (CLOA) No. T-4941 registered in the name of Tolentino Mendoza; that said awardee mortgaged the same in favor of the Rural Bank of San Rafael, Inc. as collateral; and that for failure of mortgagor to pay his loan obligation, the mortgagee is contemplating to foreclose the same.

Anent your first query, the answer is in the negative. While section 71 of R.A. No. 6657 (Comprehensive Agrarian Reform Law) expressly allows banks and other financial institutions to hold mortgage rights or security interests in agricultural lands used to secure loans and other obligations of borrowers, the same is not without limitations. Strictly speaking, one of the limitations provided by law and as expressly provided in the CLOA itself is that awarded lands under R.A. No. 6657 cannot be the subject of a contract of mortgage without the prior written consent of the Department of Agrarian Reform. Undeniably, this consent is intended to safeguard awarded agricultural lands from possible circumvention of the Comprehensive Agrarian Reform Program (CARP) by using it as collateral in a contract of mortgage.

Moreover, DAR Memorandum Circular No. 05, Series of 1996 allows private banks to foreclose assets mortgaged to them subject to existing laws on their compulsory transfer (that is, under the General Banking Act) and acquisition under Section 16 of R.A. No. 6657. This means that private banks may sell to third parties their foreclosed assets but still subject to acquisition under Section 16 of R.A. No. 6657. The aforecited provision clearly suggests that banks can foreclose properties mortgaged to it, provided that prior written consent of the DAR has been obtained. Absence of such consent taints the contract of mortgage and renders said contract null and void.

Anent your second query, as to who can bid, anybody can participate, however, the bidded land shall nonetheless be subjected to compulsory acquisition by the government through the DAR for distribution to qualified farmer-beneficiaries. In other words, whoever is adjudged as the highest bidder is mandated anyhow to turn over the same to the government subject of course to payment of just compensation.

Anent your last query, foreclosure is not the only remedy available under the law. The non-availability of foreclosure does not completely deprive the mortgagee from resorting to other remedies. By analogy and relative application, Section 7, Rule 86 of the Rules of Court prescribes various remedies available, to wit:

"a)        He may waive the mortgage, prosecute his claim in the estate proceeding of the deceased mortgagor and thus share in the general distribution of the assets of the estate; or

b)         He may foreclose the mortgage, making the executor or administrator party defendant, and if there is any deficiency, prosecute the same in the estate proceeding of the deceased mortgagor; or

c)         He may rely on his mortgage alone and foreclose it at any time within the period of limitation, in which case he shall not be admitted as a creditor and shall receive no share in the distribution of the assets of the estate of the deceased mortgagor."

We hope to have clarified matters with you.

Very truly yours,

(SGD.) ARTEMIO A. ADASA, JR.

Undersecretary for Legal Affairs, and Policy and Planning