G.R. No.

L-14938 January 28, 1961
MAGDALENA C. DE BARRETO, ET AL., plaintiffs-appellants,
vs.
JOSE G. VILLANUEVA, ET AL., defendants-appellees.
Bausa, Ampil & Suarez for plaintiffs-appellants.
Esteban Ocampo for defendants-appellees.
GUTIERREZ DAVID, J.:
On May 10, 1948, Rosario Cruzado, for herself and as administratix of the intestate estate of her
deceased husband Pedro Cruzado in Special Proceedings No. 4959 of the Court of First Instance of
Manila, obtained from the defunct Rehabilitation Finance Corporation (hereinafter referred to as the
RFC a loan in the amount of P11,000.00. To secure payment thereof, she mortgaged the land then
covered by Transfer Certificate of Title No. 61358 issued in her name and that of her deceased.
husband. As she failed to pay certain installments on the loan, the mortgage was foreclosed and
the RFC acquired the property for P11,000.00, subject to her rights as mortgagor to re-purchase
the same. On July 26, 1951, upon her application, the land was sold back to her conditionally for
the amount of P14,269.03, payable in seven years.
About two years thereafter, or on February 13, 1953 Rosario Cruzado, as guardian of her minor
children in Special Proceedings No. 14198 of the Court of First Instance of Manila, was authorized
by the court, to sell with the previous consent of the RFC the land in question together with the
improvements thereon for a sum not less than P19,000. Pursuant to such authority and with the
consent of the RFC, she sold to Pura L. Villanueva for P19,000.00 "all their rights, interest,' title and
dominion and over the herein described parcel of land together with the existing improvements
thereon, including one use and an annex thereon; free from all charges and encumbrances, , with
the exception of the sum of P11,009.52, is stipulated interest thereon, which the vendor, is still
presently obligated to the RFC and which the vendee herein now assumes to pay to the RFC under
the same terms and conditions specified in that deed of sale dated July 26, 1951." Having paid in
advance the sum of P500.00, Pura L. Villanueva, the vendee, in consideration of the aforesaid sale,
executed in favor of the vendor Rosario Cruzado a promissory note dated March 9, 1953,
undertaking to pay the balance of P17,500.00 in monthly installments. On April 22, 1953, she made
an additional payment of P5,500.00 on the promissory note. She was, subsequently, able to secure
in her name Transfer Certificate of Title No. 32526 covering the house and lot above referred to,
and on July 10, 1953, she mortgaged the said property to Magdalena C. Barretto as security for a
loan the amount of P30,000.00.
18, 1958 ordered the same annotated in Transfer Certificate of Title No. 32526 of the Registry of
Deeds of Manila, decreeing that should the realty in question be sold at public auction in the
foreclosure proceedings, the Cruzados shall be credited with their pro-rata share in the proceeds
thereof, "pursuant to the provision of articles 2248 and 2249 of the new Civil Code in relation to
Article 2242, paragraph 2 of the same Code." The Barrettos filed a motion for reconsideration on
September 12, 1958, but on that same date, the sheriff of Manila, acting in pursuance of the order
of the court granting the writ of execution, sold at public auction the property in question. As highest
bidder, the Barrettos themselves acquired the properties for the sum of P49,000.00.
On October 4, 1958, 'the Court of First Instance issued an order confirming the aforesaid sale and
directing the Register of Deeds of the City of Manila to issue to the Barrettos the corresponding
certificate of title, subject, however, to the order of August 18, 1958 concerning,. the vendor's lien.
On the same date, the motion of the Barettos seeking reconsideration of the order of the court
giving due course to the said vendor's lien was denied. From this last order, the Barretto spouses
interposed the present appeal.
The appeal is devoid of merit.
In claiming that the decision of the Court, of First Instance of Manila in Civil Case No. 20075 .
awarding the amount of P12,000.00 in favor of Rosario Cruzado and her minor children . cannot
constitute a basis for the vendor's lien filed by the appellee Rosario Cruzado, appellants allege that
the action in said civil case was merely to recover the balance of a promissory note. But while,
apparently, the action was to recover the remaining obligation of promissor Pura Villanueva on the
note, the fact remains that Rosario P. Cruzado as guardian of her minor children, was an unpaid
vendor., of the realty in question, and the promissory note, was, precisely, for the unpaid balance
of the price of the property bought by, said Pura Villanueva.
Article 2242 of the new Civil, Code enumerates the claims, mortgage and liens that constitute an
encumbrance on specific immovable property, and among them are: .
(2) For the unpaid price of real property sold, upon the immovable sold; and
(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or more credits with respect to the
same specific real property or real rights, they shall be satisfied pro-rata after the payment of the
taxes and assessment upon the immovable property or real rights.

As said Pura L. Villanueva had failed to pay the remaining installments on the unpaid balance of
P12,000.00 her promissory note for the sale of the property in question, a complaint for the recovery
of the same from her and her husband was filed on September 21, 1963 by Rosario Cruzado in her
own right and in her capacity as judicial guardian of her minor children. Pending trial of the case, a
lien was constituted upon the property in the nature of a levy in attachment in favor of the Cruzados
said lien being annotated at the back of Transfer Certificate of Title No. 32526. After trial, decision
was rendered ordering Pura Villanueva and her husband, jointly and severally, to pay Rosario
Cruzado the sum of P12,000.00, with legal interest thereon from the date of the filing of the
complaint until fully paid plus the sum of P1,500.00 as attorney's fees.
Pura Villanueva having, likewise, failed to pay her indebtedness of P30,000.00 to Magdalena C.
Barretto, the latter, jointly with her husband, instituted against the Villanueva spouses an action for
foreclosure of mortgage, impleading Rosario Cruzado and her children as parties defendants. On
November 11, 1956, decision was rendered in the case absolving the Cruzados from the complaint
and sentencing the Villanuevas to pay the Barrettos, jointly and severally, the sum of P30,000.00,
with interest thereon at the rate of 12% per annum from January 11, 1954 plus the sum of
P4,000.00 as attorney's fees. Upon the finality of this decision, the Barrettos filed a motion for the
issuance of a writ of execution which was granted by the lower court on July 31, 1958. On August
14, 1958, the Cruzados filed their "Vendor's Lien" in the amount of P12,000.00, plus legal interest,
over the real property subject of the foreclosure suit, the said amount representing the unpaid
balance of the purchase price of the said property. Giving due course to the line, the court on August
Application of the above-quoted provisions to the case at bar would mean that the herein appellee
Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata
with the appellants the proceeds of the foreclosure sale.
The appellants, however, argue that inasmuch as the unpaid vendor's lien in this case was not
registered, it should not prejudice the said appellants' registered rights over the property. There is
nothing to this argument. Note must be taken of the fact that article 2242 of the new Civil Code
enumerating the preferred claims, mortgages and liens on immovables, specifically requires that .
unlike the unpaid price of real property sold . mortgage credits, in order to be given preference,
should be recorded in the Registry of Property. If the legislative intent was to impose the same
requirement in the case of the vendor's lien, or the unpaid price of real property sold, the lawmakers
could have easily inserted the same qualification which now modifies the mortgage credits. The law,
however, does not make any distinction between registered and unregistered vendor's lien, which
only goes to show that any lien of that kind enjoys the preferred credit status.
Appellants also argue that to give the unrecorded vendor's lien the same standing as the registered
mortgage credit would be to nullify the principle in land registration system that prior unrecorded
interests cannot prejudice persons who subsequently acquire interests over the same property. The
Land Registration Act itself, however, respects without reserve or qualification the paramount rights
of lien holders on real property. Thus, section 70 of that Act provides that .
 Registered land, and ownership therein shall in all respects be subject to the same
burdens and incidents attached by law to unregistered land. Nothing contained in this Act
shall in any way be construed to relieve registered land or the owners thereof from any
rights incident to the relation of husband and wife, or from liability to attachment on
mesne process or levy, on execution, or from liability to any lien of any description
established by law on land and the buildings thereon, or the interest of the owners of
such land or buildings, or to change the laws of descent, or the rights of partition between
co-owners, joint tenants and other co-tenants or the right to take the same by eminent
domain, or to relieve such land from liability to be appropriated in any lawful manner for
the payment of debts, or to change or affect in any other way any other rights or liabilities
created by law and applicable to unregistered land, except as otherwise expressly
provided in this Act or in the amendments thereof, (Emphasis supplied)
As to the point made that the articles of the Civil Code on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such
limitation. If we are to interpret this portion of the Code as intended only for insolvency cases, then
other creditor-debtor relationships where there are concurrence of credits would be left without any
rules to govern them, and it would render purposeless the special laws an insolvency.
Premises considered, the order appealed from is hereby affirmed. Costs against the appellants.
Bengzon, Padilla, Bautista Angelo, Labrador, Paredes and Dizon, JJ., concur.
Concepcion, Reyes, J.B.L. and Barrera, JJ., concur in the result.
RESOLUTION ON MOTION TO RECONSIDER
December 29, 1962
REYES, J.B.L., J.:
Appellants, spouses Barretto, have filed a motion vigorously urging, for reason to be discussed in
the course of this resolution, that our decision of 28 January 1961 be reconsidered and set aside,
and a new one entered declaring that their right as mortgagees remain superior to the unrecorded
claim of herein appellee for the balance of the purchase price of her rights, title, and interests in
the mortgaged property.
It will be recalled that, with Court authority, Rosario Cruzado sold all her right, title, and interest
and that of her children in the house and lot herein involved to Pura I. Villanueva for P19,000.00.
The purchaser paid Pl,500 in advance, and executed a promissory note for the balance of
P17,506.00. However, the buyer could only pay P5,500 On account of the note, for which reason
the vendor obtained judgment for the unpaid balance. In the meantime, the buyer Villanueva was
able to secure a clean certificate of title (No. 32626), and mortgaged the property to appellant
Magdalena C. Barretto, married to Jose C. Barretto, to secure a loan of P30,000.03, said mortgage
having been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the
mortgage in her favor, obtained judgment, and upon its becoming final asked for execution on 31
July 1958. On 14 August 1958, Cruzado filed a motion for recognition for her "vendor's lien" in the
amount of Pl2,000.00, plus legal interest, invoking Articles 2242, 2243, and 2249 of the new Civil
Code. After hearing, the court below ordered the "lien" annotated on the back of Certificate of Title
No. 32526, with the proviso that in case of sale under the foreclosure decree the vendor's lien and
the mortgage credit of appellant Barretto should be paid pro rata from the proceeds. Our original
decision affirmed this order of the Court of First Instance of Manila.
Appellants insist that:
(1) The vendor's lien, under Articles 2242 and 2243 of the new, Civil Code of the Philippines, can
only become effective in the event of insolvency of the vendee, which has not been proved to exist
in the instant case; and .
(2) That the appellee Cruzado is not a true vendor of the foreclosed property. We have given
protracted and mature consideration to the facts and law of this case, and have reached the
conclusion that our original decision must be reconsidered and set aside, for the following reasons:
A. The previous decision failed to take fully into account the radical changes introduced by the Civil
Code of the Philippines into the system of priorities among creditors ordained by the Civil Code of
1889.
Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real
property under Article 1923 were to be resolved according to an order of priorities established by
Article 1927, whereby one class of creditors could exclude the creditors of lower order until the
claims of the former were fully satisfied out of the proceeds of the sale of the real property subject
of the preference, and could even exhaust proceeds if necessary.
Under the system of the Civil Code of the Philippines however, only taxes enjoy a similar absolute
preference. All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no
priority among themselves, but must be paid pro-rata i.e., in proportion to the amount of the
respective credits. Thus, Article 2249 provides:
If there are two or more credits with respect to the same specific real property or real
rights, they, shall be satisfied pro-rata after the payment of the taxes and assessments
upon the immovable property or real rights."
But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to
14 of Article 2242 (or such of their, as have credits outstanding) must necessarily be convened, and
the import of their claims ascertained. It is thus apparent that the full, application (of Articles 2249
and 2242 demands that there must be first some proceedings where the claims of all the preferred
creditors may be bindingly adjudicated, such as insolvency, the settlement of decedents estate
under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that
The claims or credits enumerated in the two preceding articles" shall be considered as
mortgages or pledges of real or personal property, or liens within the purview of legal
provisions governing insolvency . . . (Emphasis supplied),
And the rule is further clarified in he Report of the Code Commission, as follows:
The question as to whether the Civil Code and the insolvency Law can be harmonized is
settled by this Article (2243). The preferences named in Articles 2261 and 2262 (now
2241 and 2242) are to be enforced in accordance with the Insolvency Law." (Emphasis
supplied) .
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a
foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the
enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for taxes
that enjoy absolute priority. If none of the claims is for taxes, a dispute between two creditors will
not enable the Court to ascertain the pro-rata dividend corresponding to each, because the rights
of the other creditors likewise" enjoying preference under Article 2242 can not be ascertained.
Wherefore, the order of the Court of First Instance of Manila now appealed from, decreeing that the
proceeds of the foreclosure sale be apportioned only between appellant and appellee, is incorrect,
and must be reversed.
In the absence of insolvency proceedings (or other equivalent general liquidation of the debtor's
estate), the conflict between the parties now before us must be decided pursuant to the well
established principle concerning registered lands; that a purchaser in good faith and for value (as
the appellant concededly is) takes registered property free from liens and encumbrances other than
statutory liens and those recorded in the certificate of title. There being no insolvency or liquidation,
the claim of the appellee, as unpaid vendor, did not require the character and rank of a statutory
lien co-equal to the mortgagee's recorded encumbrance, and must remain subordinate to the latter.
We are understandably loathed (absent a clear precept of law so commanding) to adopt a rule that
would undermine the faith and credit to be accorded to registered Torrens titles and nullify the
beneficient objectives sought to be obtained by the Land Registration Act. No argument is needed
to stress that if a person dealing with registered land were to be held to take it in every instance
subject to all the fourteen preferred claims enumerate in Article 2242 of the new Civil Code, even if
the existence and import thereof can not be ascertained from the records, all confidence in Torrens
titles would be destroyed, and credit transactions on the faith of such titles would be hampered, if
not prevented, with incalculable results. Loans on real estate security would become aleatory and
risky transactions, for no, prospective lender could accurately estimate the hidden liens on the
property offered as security, unless he indulged in complicated, tedious investigations, . The logical
result might well be a contraction of credit unforeseeable proportions that could lead to economic
disaster.
It is clear from the facts above-stated that ownership of the property had passed to the
Rehabilitation Finance Corporation since 1950, when it consolidated its purchase at the foreclosure
sale and obtained a certificate of title in its corporate name. The subsequent contract of resale in
favor of the Cruzados did not revest ownership in them, since they failed to comply with its terms
and conditions, and the contract itself provided that the title should remain in the name of the RFC
until the price was fully paid.
Therefore, when after defaulting in their payments due under the resale contract with the RFC the
appellants Cruzados sold to Villanueva "their rights, title, interest and dominion" to the property,
they merely assigned whatever rights or claims they might still have thereto; the ownership of the
property rested with the RFC. The sale from Cruzado to Villanueva, therefore, was not so much a
sale of the land and its improvements as it was a quit-claim deed in favor of Villanueva. In law, the
operative sale was that from the RFC to the latter, and it was the RFC that should be regarded as
the true vendor of the property. At the most, the Cruzados transferred to Villanueva an option to
acquire the property, but not the property itself, and their credit, therefore, can not legally constitute
a vendor's lien on the corpus of that property that should stand on an equal footing with the
mortgaged credit held by appellant Barretto.
In view of the foregoing, the previous decision of this Court, promulgated on 28 January 1961, is
hereby reconsidered and set aside, and a new one entered reversing the judgment appealed from
and declaring the appellants Barretto entitled to full satisfaction of their mortgaged credit out of the
proceeds of the foreclosure sale in the hands of the Sheriff of the City of Manila. No costs.

Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Regala and Makalintal, JJ., concur.
Upon the other hand, it does not appear excessively burdensome to require the privileged creditors Bengzon, Labrador and Dizon, JJ., took no part.
to cause their claims to be recorded in the books of the Register of deeds should they desire to
protect their rights even outside of insolvency or liquidation proceedings.

B. The close study of the facts disclosed by the records lasts strong doubt on the proposition that
appellees Cruzados should be regarded as unpaid vendors of the property( land, buildings, and
improvements ) involved in the case at bar so as to be entitled to preference under Article 2242.
The record on appeal, specially the final decision of the Court of First Instance of Manila in the suit
of the ,Cruzados against Villanueva, clearly establishes that after her husband's death, and with due
court authority, Rosario Cruzado, for herself and as administratrix of her husband's state,
mortgaged the property to the Rehabilitation Finance Corporation (RFC) to secure payment of a
loan of P11,000, installments, but that the debtor failed to pay some of the installments; wherefore
the RFC, on 24 August 1949, foreclosed the mortgage, and acquired the property, subject to the
debtor's right to redeem or repurchase the said property; and that on 25 September 1950, the RFC
consolidated its ownership, and the certificate of title of the Cruzados was cancelled and a new
certificate issued in the name of the RFC.

While on 26 July 1951 the RFC did execute a deed selling back the property to the erstwhile
mortgagors and former owners Cruzados in installments, subject to the condition (among others)
that the title to the property and its improvements "shall remain in the name of Corporation (RFC)
until after said purchase price, advances and interests shall have been fully paid", as of 27
September 1952, Cruzado had only paid a total of P1,360, and had defaulted on six monthly
amortizations; for which reason the RFC rescinded the sale, and forfeited the payments made, in
accordance with the terms of the contract of 26 July 1951.

It was only on 10 March 1953 that the Cruzados sold to Pura L. Villanueva all "their rights, title,
interest and dominion on and over" the property, lot, house, and improvements for P19,000.00, the
buyer undertaking to assume payment of the obligation to the RFC, and by resolution of 30 April
1953, the RFC approved "the transfer of the rights and interest of Rosario P. Cruzado and her
children in their property herein above-described in favor of Pura L. Villanueva"; and on 7 May 1953
the RFC executed a deed of absolute sale of the property to said party, who had fully paid the price
of P14,269.03. Thereupon, the spouses Villanueva obtained a new Transfer Certificate of Title No.
32526 in their name.

On 10 July 1953, the Villanuevas mortgaged the property to the spouses Barretto, appellants herein.
[G.R. No. 105827. January 31, 2000]
J.L. BERNARDO CONSTRUCTION, represented by attorneys-in-fact Santiago R. Sugay,
Edwin A. Sugay and Fernando S.A. Erana, SANTIAGO R. SUGAY, EDWIN A. SUGAY and
FERNANDO S. A. ERANA, petitioners, vs. COURT OF APPEALS and MAYOR JOSE L.
SALONGA, respondents.
DECISION
GONZAGA-REYES, J.:
This petition for certiorari under Rule 65 seeks to annul and set aside the following:
1. Decision dated February 6, 1992 issued by the Eleventh Division of the Court of Appeals in CA-
G.R. No. 26336 which nullified the order of the Regional Trial Court of Cabanatuan City in Civil Case
No. 1016-AF granting plaintiffs (petitioners herein) a writ of attachment and a contractors lien upon
the San Antonio Public Market; and
2. Resolution dated June 10, 1992 issued by the former Eleventh Division of the Court of Appeals
in CA-G.R. No. 26336 denying the motions for reconsideration filed by both parties.
The factual antecedents of this case, as culled from the pleadings, are as follows:
Sometime in 1990, the municipal government of San Antonio, Nueva Ecija approved the
construction of the San Antonio Public Market. The construction of the market was to be funded by
the Economic Support Fund Secretariat (ESFS), a government agency working with the USAID.
Under ESFS "grant-loan-equity" financing program, the funding for the market would be composed
of a (a) grant from ESFS, (b) loan extended by ESFS to the Municipality of San Antonio, and (c)
equity or counterpart funds from the Municipality.
It is claimed by petitioners Santiago R. Sugay, Edwin A. Sugay, Fernando S.A. Erana and J.L.
Bernardo Construction, a single proprietorship owned by Juanito L. Bernardo, that they entered into
a business venture for the purpose of participating in the bidding for the public market. It was
agreed by petitioners that Santiago Sugay would take the lead role and be responsible for the
preparation and submission of the bid documents, financing the entire project, providing and
utilizing his own equipment, providing the necessary labor, supplies and materials and making the
necessary representations and doing the liaison work with the concerned government agencies.
On April 20, 1990, J.L. Bernardo Construction, thru petitioner Santiago Sugay, submitted its bid
together with other qualified bidders. After evaluating the bids, the municipal pre-qualification bids
and awards committee, headed by respondent Jose L. Salonga (then incumbent municipal mayor of
San Antonio) as Chairman, awarded the contract to petitioners. On June 8, 1990, a Construction
Agreement was entered into by the Municipality of San Antonio thru respondent Salonga and
petitioner J.L. Bernardo Construction.
It is claimed by petitioners that under this Construction Agreement, the Municipality agreed to
assume the expenses for the demolition, clearing and site filling of the construction site in the
amount of P1,150,000 and, in addition, to provide cash equity of P767,305.99 to be remitted directly
to petitioners.
Petitioners allege that, although the whole amount of the cash equity became due, the Municipality
refused to pay the same, despite repeated demands and notwithstanding that the public market
was more than ninety-eight percent (98%) complete as of July 20, 1991. Furthermore, petitioners
maintain that Salonga induced them to advance the expenses for the demolition, clearing and site
filling work by making representations that the Municipality had the financial capability to reimburse
them later on. However, petitioners claim that they have not been reimbursed for their expenses. [1]
On July 31, 1991, J.L. Bernardo Construction, Santiago Sugay, Edwin Sugay and Fernando Erana,
with the latter three bringing the case in their own personal capacities and also in representation of
J.L. Bernardo Construction, filed a complaint for breach of contract, specific performance, and
collection of a sum of money, with prayer for preliminary attachment and enforcement of contractors
lien against the Municipality of San Antonio, Nueva Ecija and Salonga, in his personal and official
capacity as municipal mayor. After defendants filed their answer, the Regional Trial Court held
hearings on the ancillary remedies prayed for by plaintiffs. [2]
On September 5, 1991, the Regional Trial Court issued the writ of preliminary attachment prayed
for by plaintiffs. It also granted J.L. Bernardo Construction the right to maintain possession of the
public market and to operate the same. The dispositive portion of the decision provides:
IN VIEW OF THE FOREGOING DISQUISITION, the Court finds the auxiliary reliefs of attachment
prayed for by the plaintiffs to be well-taken and the same is hereby GRANTED. Conformably thereto,
let a writ of preliminary attachment be issued upon the filing by the plaintiffs of a bond in the amount
of P2,653,576.84 to answer for costs and damages which the defendants may suffer should the
Court finally adjudged (sic) that the plaintiffs are not entitled to the said attachment, and thereafter,
the Deputy Sheriff of this court is hereby ordered to attach the properties of the defendants JOSE
LAPUZ SALONGA and the MUNICIPALITY OF SAN ANTONIO, NUEVA ECIJA which are not exempt
from execution.
CORROLARILY, the Court grants the plaintiffs J.L. BERNARDO CONSTRUCTION, represented by
SANTIAGO R. SUGAY, EDWIN A. SUGAY and FERNANDO S.A. ERANA, the authority to hold on to
the possession of the public market in question and to open and operate the same based on fair
and reasonable guidelines and other mechanics of operation to be submitted by plaintiffs within
fifteen (15) days from their receipt of this Order which shall be subject to Courts approval and to
deposit the income they may derive therefrom to the Provincial Treasurer of Nueva Ecija after
deducting the necessary expenses for the operation and management of said market, subject to
further orders from this Court.
SO ORDERED.
The trial court gave credence to plaintiffs claims that defendants were guilty of fraud in incurring
their contractual obligations as evidenced by the complaint and the affidavits of plaintiffs Santiago
Sugay and Erana. The court ruled that defendants acts of "obtaining property, credit or services by
false representations as to material facts made by the defendant to the plaintiff with intent to
deceive constitutes fraud warranting attachment" and that " a debt is considered fradulently
contracted if at the time of contracting it, the debtor entertained an intention not to pay."
With regards to the contractors lien, the trial court held that since plaintiffs have not been
reimbursed for the cash equity and for the demolition, clearing and site filling expenses, they stand
in the position of an unpaid contractor and as such are entitled, pursuant to articles 2242 and 2243
of the Civil Code, to a lien in the amount of P2,653,576.84 (as of August 1, 1991), excluding the
other claimed damages, attorneys fees and litigation expenses, upon the public market which they
constructed. It was explained that, although the usual way of enforcing a lien is by a decree for the
sale of the property and the application of the proceeds to the payment of the debt secured by it, it
is more practical and reasonable to permit plaintiffs to operate the public market and to apply to
their claims the income derived therefrom, in the form of rentals and goodwill from the prospective
stallholders of the market, as prayed for by plaintiffs.
The trial court made short shrift of defendants argument that the case was not instituted in the
name of the real parties-in-interest. It explained that the plaintiff in the cause of action for money
claims for unpaid cash equity and demolition and site filling expenses is J.L. Bernardo Construction,
while the plaintiffs in the claim for damages for violation of their rights under the Civil Code
provisions on human relations are plaintiffs Santiago Sugay, Edwin Sugay and Erana. [3]
The defendants moved for reconsideration of the trial courts order, to which the plaintiffs filed an
opposition. On October 10, 1991 the motion was denied. The following day, the trial court approved
the guidelines for the operation of the San Antonio Public Market filed by plaintiffs.
Respondent Salonga filed a motion for the approval of his counterbond which was treated by the
trial court in its October 29, 1991 order as a motion to fix counterbond and for which it scheduled
a hearing on November 19, 1991.
On October 21, 1991, during the pendency of his motion, respondent Salonga filed with the Court
of Appeals a petition for certiorari under Rule 65 with prayer for a writ of preliminary injunction and
temporary restraining order which case was docketed as CA-G.R. SP No. 26336.[4] Petitioners
opposed the petition, claming that respondent had in fact a plain, speedy and adequate remedy as
evidenced by the filing of a motion to approve counter-bond with the trial court.[5]
On February 6, 1992, the Court of Appeals reversed the trial courts decision and ruled in favor of
Salonga. The dispositive portion of its decision states
FOR ALL THE FOREGOING, the petition is hereby granted as follows:
1. The respondent judges ORDER dated September 5, 1991 for the issuance of a writ of attachment
and for the enforcement of a contractors lien, is hereby NULLIFIED and SET ASIDE; the writ of
attachment issued pursuant thereto and the proceedings conducted by the Sheriffs assigned to
implement the same are, as a consequence, also hereby NULLIFIED and SET ASIDE;
2. The respondent judges ORDER dated October 11, 1991 further enforcing the contractors lien and
approving the guidelines for the operation of the San Antonio Public Market is also NULLIFIED and
SET ASIDE.
Petitioners prayers for the dismissal of Civil Case No. 1016 (now pending before respondent judge)
and for his deletion from said case as defendant in his private capacity are, however, DENIED.
The respondent judge may now proceed to hearing of Civil Case No. 1016 on the merits.
SO ORDERED.
The appellate court reasoned that since the Construction Agreement was only between Juanito
Bernardo and the Municipality of San Antonio, and since there is no sworn statement by Juanito
Bernardo alleging that he had been deceived or misled by Mayor Salonga or the Municipality of San
Antonio, it is apparent that the applicant has not proven that the defendants are guilty of inceptive
fraud in contracting the debt or incurring the obligation, pursuant to Rule 57 of the Rules of Court,
and therefore, the writ of attachment should be struck down for having been improvidently and
irregularly issued.
The filing of a motion for the approval of counter-bond by defendants did not, according to the Court
of Appeals, render the petition for certiorari premature. The appellate court held that such motion
could not cure the defect in the issuance of the writ of attachment and that, moreover, the
defendants motion was filed by them "without prejudice to the petition for certiorari."
As to the contractors lien, the appellate court ruled that Articles 2242 of the Civil Code finds
application only in the context of insolvency proceedings, as expressly stated in Article 2243. Even
if it is conceded that plaintiffs are entitled to retain possession of the market under its contractors
lien, the appellate court held that the same right cannot be expanded to include the right to use the
building. Therefore, the trial courts grant of authority to plaintiffs to operate the San Antonio Public
Market amounts to a grave abuse of discretion.
With regard to the allegations of defendants that plaintiffs are not the proper parties, the Court of
Appeals ruled that such issue should be assigned as an error by defendants later on should the
outcome of the case be adverse to the latter.[6]
Petitioners are now before this Court assailing the appellate courts decision. In their petition, they
make the following assignment of errors:
1. THE DECISION IS CONTRARY TO LAW IN THAT THE COURT OF APPEALS OVERLOOKED AND/OR
DISREGARDED THE FUNDAMENTAL REQUIREMENT AND ESTABLISHED SUPREME COURT
DECISIONS IN ACTIONS FOR CERTIORARI CONSIDERING THAT THE FILING OF THE PETITION BY
RESPONDENT SALONGA WITH THE COURT OF APPEALS IS OBVIOUSLY PREMATURE AND IMPROPER
SINCE THERE ADMITTEDLY EXISTS A PLAIN, SPEEDY AND ADEQUATE REMEDY AVAILABLE TO
RESPONDENT SALONGA WHICH IS HIS UNRESOLVED "MOTION TO APPROVE COUNTERBOND"
PENDING WITH THE TRIAL COURT.
2. IN COMPLETE DISREGARD OF ESTABLISHED JURISPRUDENCE, THE COURT OF APPEALS HAS
SKIRTED AND/OR FAILED TO CONSIDER/DISREGARDED THE EQUALLY CRUCIAL ISSUE THAT THE
QUESTIONED ORDERS ARE CLEARLY AND ADMITTEDLY INTERLOCUTORY IN NATURE AND
THEREFORE THEY CANNOT BE THE PROPER SUBJECT OF AN ACTION FOR CERTIORARI; PROOF
THAT THE ORDERS ASSAILED BY RESPONDENT SALONGA ARE INTERLOCUTORY IN CHARACTER IS
THE DISPOSITIVE PORTION OF THE DECISION WHEN THE COURT OF APPEALS SAID "THE
RESPONDENT JUDGE MAY NOW PROCEED TO HEARING OF SAID CIVIL CASE NO. 1016 ON THE
MERITS"; PETITION FILED BY RESPONDENT SALONGA WITH THE COURT OF APPEALS SHOULD
HAVE BEEN DISMISSED OUTRIGHTLY AS SOUGHT BY HEREIN PETITIONERS IN THEIR VARIOUS
UNACTED PLEADINGS.
3. THE DECISION IS BASED ON FINDINGS OF FACTS AND CONCLUSIONS WHICH ARE NOT ONLY
GROSSLY ERRONEOUS BUT ARE SQUARELY CONTRADICTED BY THE EVIDENCE ON RECORD.
4. THE COURT OF APPEALS HAS CLEARLY MISAPPRECIATED, MISREAD AND DISREGARDED HEREIN
PETITIONERS CAUSES OF ACTION AGAINST RESPONDENT SALONGA AND HIS CO-RESPONDENT
MUNICIPALITY OF SAN ANTONIO, NUEVA ECIJA.
5. THE COURT OF APPEALS HAS MADE ERRONEOUS AND CONTRADICTORY CONCLUSIONS AND
FINDINGS ON THE ISSUE OF "REAL PARTY IN INTEREST" IN COMPLETE DISREGARD OF THE
POWERS AND AUTHORITY GRANTED BY JUANITO L. BERNARDO CONSTRUCTION TO HEREIN
PETITIONERS.
6. THE COURT OF APPEALS HAS SKIRTED THE IMPORTANT ISSUE OF "AGENCY COUPLED WITH AN
INTEREST."
7. THE COURT OF APPEALS WENT BEYOND THE ISSUES OF THE CERTIORARI CASE AND ITS
FINDINGS AND CONCLUSIONS ON ISSUES NOT RELATED TO THE CASE FOR CERTIORARI ARE
CONTRARY TO THE PLEADINGS AND DO NOT CONFORM TO THE EVIDENCE ON RECORD.
8. THE COURT OF APPEALS HAS LIKEWISE DISREGARDED THE PRECEPT THAT CONCLUSIONS AND
FINDINGS OF FACT OF THE TRIAL COURT ARE ENTITLED TO GREAT WEIGHT ON APPEAL AND
SHOULD NOT BE DISTURBED SINCE THERE IS NO STRONG AND COGENT REASON WHATSOVER TO
OVERCOME THE WELL-WRITTEN AND DETAILED AND ESTABLISHED FACTUAL FINDINGS OF THE
TRIAL COURT.
9. PETITIONERS HAVE STRONG REASONS TO BELIEVE THAT THE DECISION OF THE COURT OF
APPEALS WAS ISSUED WITH SERIOUS INJUSTICE AND AGAINST THE TENETS OF FAIR PLAY SINCE
THE DECISION HAD BEEN KNOWN TO AS IT WAS OPENLY AND PUBLICLY ANNOUNCED BY
RESPONDENT SALONGA LONG BEFORE IT WAS "PROMULGATED" BY THE COURT OF APPEALS.
The various issues raised by petitioners may be restated in a more summary manner as -
1. Whether or not the Court of Appeals correctly assumed jurisdiction over the petition for certiorari
filed by respondents herein assailing the trial courts interlocutory orders granting the writ of
attachment and the contractors lien?
2. Whether or not the Court of Appeals committed reversible errors of law in its decision? claims have been filed in the trial court will not bar other creditors from subsequently bringing
actions and claiming that they also have preferred liens against the property involved. [18]

A petition for certiorari may be filed in case a tribunal, board or officer exercising judicial or quasi-
judicial functions has acted without or in excess of jurisdiction, or with grave abuse of discretion Our decision herein is consistent with our ruling in Philippine Savings Bank v. Lantin,[19] wherein we
amounting to lack or excess of jurisdiction, and there is no appeal, or any plain, speedy, and also disallowed the contractor from enforcing his lien pursuant to Article 2242 of the Civil Code in
adequate remedy in the ordinary course of law.[7] an action filed by him for the collection of unpaid construction costs.

The office of a writ of certiorari is restricted to truly extraordinary cases wherein the act of the lower
court or quasi-judicial body is wholly void.[8] We held in a recent case that certiorari may be issued
"only where it is clearly shown that there is a patent and gross abuse of discretion as to amount to
an evasion of positive duty or to virtual refusal to perform a duty enjoined by law, or to act at all in
contemplation of law, as where the power is exercised in an arbitrary and despotic manner by reason
of passion or personal hostility."[9]
As a general rule, an interlocutory order is not appealable until after the rendition of the judgment
on the merits for a contrary rule would delay the administration of justice and unduly burden the
courts.[10]However, we have held that certiorari is an appropriate remedy to assail an interlocutory
order (1) when the tribunal issued such order without or in excess of jurisdiction or with grave abuse
of discretion and (2) when the assailed interlocutory order is patently erroneous and the remedy of
appeal would not afford adequate and expeditious relief.[11]
We hold that the petition for certiorari filed by Salonga and the Municipality with the Court of
Appeals questioning the writ of attachment issued by the trial court should not have been given due
course for they still had recourse to a plain, speedy and adequate remedy - the filing of a motion to
fix the counter-bond, which they in fact filed with the trial court, the grant of which would effectively
prevent the issuance of the writ of attachment. Moreover, they could also have filed a motion to
discharge the attachment for having been improperly or irregularly issued or enforced, or that the
bond is insufficient, or that the attachment is excessive.[12] With such remedies still available to the
Municipality and Salonga, the filing of a petition for certiorari with the Court of Appeals insofar as it
questions the order of attachment was clearly premature.
However, with regards to the contractors lien, we uphold the appellate courts ruling reversing the
trial courts grant of a contractors lien in favor of petitioners.
It not having been alleged in their pleadings that they have any rights as a mortgagee under the
contracts, petitioners may only obtain possession and use of the public market by means of a
preliminary attachment upon such property, in the event that they obtain a favorable judgment in
the trial court. Under our rules of procedure, a writ of attachment over registered real property is
enforced by the sheriff by filing with the registry of deeds a copy of the order of attachment, together
with a description of the property attached, and a notice that it is attached, and by leaving a copy
of such order, description, and notice with the occupant of the property, if any. [20] If judgment be
recovered by the attaching party and execution issue thereon, the sheriff may cause the judgment
to be satisfied by selling so much of the property as may be necessary to satisfy the
judgment.[21] Only in the event that petitioners are able to purchase the property will they then
acquire possession and use of the same.
Clearly, the trial courts order of September 5, 1991 granting possession and use of the public market
to petitioners does not adhere to the procedure for attachment laid out in the Rules of Court. In
issuing such an order, the trial court gravely abused its discretion and the appellate courts
nullification of the same should be sustained.
At this stage of the case, there is no need to pass upon the question of whether or not petitioners
herein are the real parties-in-interest. In the event that judgment is rendered against Salonga and
the Municipality, this issue may be assigned as an error in their appeal from such judgment.
WHEREFORE, we UPHOLD the Court of Appeals Decision dated February 6, 1992 in CA-G.R. SP No.
26336 insofar as it nullifies the contractors lien granted by the trial court in favor of petitioners in
its September 5, 1991 Order. Consequently, we also UPHOLD the appellate courts nullification of
the trial courts October 11, 1991 Order approving the guidelines for the operation of the San Antonio
Public Market. However, we REVERSE the appellate courts order nullifying the writ of attachment
granted by the trial court.

Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy preference with
respect to specific personal or real property of the debtor. Specifically, the contractors lien claimed No pronouncement as to costs.
by petitioners is granted under the third paragraph of Article 2242 which provides that the claims
of contractors engaged in the construction, reconstruction or repair of buildings or other works shall
be preferred with respect to the specific building or other immovable property constructed.[13] SO ORDERED.

However, Article 2242 only finds application when there is a concurrence of credits, i.e. when the Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.
same specific property of the debtor is subjected to the claims of several creditors and the value of
such property of the debtor is insufficient to pay in full all the creditors. In such a situation, the
question of preference will arise, that is, there will be a need to determine which of the creditors
will be paid ahead of the others.[14] Fundamental tenets of due process will dictate that this statutory
lien should then only be enforced in the context of some kind of a proceeding where the claims of
all the preferred creditors may be bindingly adjudicated, such as insolvency proceedings. [15]

This is made explicit by Article 2243 which states that the claims and liens enumerated in articles
2241 and 2242 shall be considered as mortgages or pledges of real or personal property, or liens
within the purview of legal provisions governing insolvency.[16]

The action filed by petitioners in the trial court does not partake of the nature of an insolvency
proceeding. It is basically for specific performance and damages. [17] Thus, even if it is finally
adjudicated that petitioners herein actually stand in the position of unpaid contractors and are
entitled to invoke the contractors lien granted under Article 2242, such lien cannot be enforced in
the present action for there is no way of determining whether or not there exist other preferred
creditors with claims over the San Antonio Public Market. The records do not contain any allegation
that petitioners are the only creditors with respect to such property. The fact that no third party
[G.R. No. 126200. August 16, 2001]
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. HONORABLE COURT OF
APPEALS and REMINGTON INDUSTRIAL SALES CORPORATION, respondents.
DECISION
KAPUNAN, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, seeking a
review of the Decision of the Court of Appeals dated October 6, 1995 and the Resolution of the
same court dated August 29, 1996.
The facts are as follows:
Marinduque Mining Industrial Corporation (Marinduque Mining), a corporation engaged in the
manufacture of pure and refined nickel, nickel and cobalt in mixed sulfides, copper ore/concentrates,
cement and pyrite conc., obtained from the Philippine National Bank (PNB) various loan
accommodations. To secure the loans, Marinduque Mining executed on October 9, 1978 a Deed of
Real Estate Mortgage and Chattel Mortgage in favor of PNB. The mortgage covered all of Marinduque
Minings real properties, located at Surigao del Norte, Sipalay, Negros Occidental, and at Antipolo,
Rizal, including the improvements thereon. As of November 20, 1980, the loans extended by PNB
amounted to P4 Billion, exclusive of interest and charges. [1]
On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank of the
Philippines (DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque Mining
mortgaged to PNB and DBP all its real properties located at Surigao del Norte, Sipalay, Negros
Occidental, and Antipolo, Rizal, including the improvements thereon. The mortgage also covered all
of Marinduque Minings chattels, as well as assets of whatever kind, nature and description which
Marinduque Mining may subsequently acquire in substitution or replenishment or in addition to the
properties covered by the previous Deed of Real and Chattel Mortgage dated October 7,
1978. Apparently, Marinduque Mining had also obtained loans totaling P2 Billion from DBP, exclusive
of interest and charges.[2]
On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an Amendment to Mortgage
Trust Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB and DBP all other
real and personal properties and other real rights subsequently acquired by Marinduque Mining. [3]
For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted sometime on
July and August 1984 extrajudicial foreclosure proceedings over the mortgaged properties.
The events following the foreclosure are narrated by DBP in its petition, as follows:
In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP emerged and were
declared the highest bidders over the foreclosed real properties, buildings, mining claims, leasehold
rights together with the improvements thereon as well as machineries [sic] and equipments [sic] of
MMIC located at Nonoc Nickel Refinery Plant at Surigao del Norte for a bid price of
P14,238,048,150.00 [and] [o]ver the foreclosed chattels of MMIC located at Nonoc Refinery Plant
at Surigao del Norte, PNB and DBP as highest bidders, bidded for P170,577,610.00 (Exhs. 5 to 5-
A, 6, 7 to 7-AA- PNB/DBP). For the foreclosed real properties together with all the buildings, major
machineries & equipment and other improvements of MMIC located at Antipolo, Rizal, likewise held
on August 31, 1984, were sold to PNB and DBP as highest bidders in the sum
of P1,107,167,950.00 (Exhs. 10 to 10-X- PNB/ DBP).
At the auction sale conducted on September 7, 1984[,] over the foreclosed real properties,
buildings, & machineries/equipment of MMIC located at Sipalay, Negros Occidental were sold to PNB
and DBP, as highest bidders, in the amount of P2,383,534,000.00 and P543,040,000.00 respectively
(Exhs. 8 to 8-BB, 9 to 90-GGGGGGPNB/DBP).
Finally, at the public auction sale conducted on September 18, 1984 on the foreclosed personal
properties of MMIC, the same were sold to PNB and DBP as the highest bidder in the sum of
P678,772,000.00 (Exhs. 11 and12-QQQQQPNB).
PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely, in order to
ensure the continued operation of the Nickel refinery plant and to prevent the deterioration of the
assets foreclosed, assigned and transferred to Nonoc Mining and Industrial Corporation all their
rights, interest and participation over the foreclosed properties of MMIC located at Nonoc Island,
Surigao del Norte for an initial consideration of P14,361,000,000.00 (Exh. 13-PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP assigned and transferred
in favor of Maricalum Mining Corp. all its rights, interest and participation over the foreclosed
properties of MMIC at Sipalay, Negros Occidental for an initial consideration of P325,800,000.00
(Exh. 14PNB/DBP).
On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as amended, again assigned,
transferred and conveyed to the National Government thru [sic] the Asset Privatization Trust (APT)
all its existing rights and interest over the assets of MMIC, earlier assigned to Nonoc Mining and
Industrial Corporation, Maricalum Mining Corporation and Island Cement Corporation (Exh. 15 &
15-APNB/DBP).[4]
In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and
caused to be delivered construction materials and other merchandise from Remington Industrial
Sales Corporation (Remington) worth P921,755.95. The purchases remained unpaid as of August
1, 1984 when Remington filed a complaint for a sum of money and damages against Marinduque
Mining for the value of the unpaid construction materials and other merchandise purchased by
Marinduque Mining, as well as interest, attorneys fees and the costs of suit.
On September 7, 1984, Remingtons original complaint was amended to include PNB and DBP as co-
defendants in view of the foreclosure by the latter of the real and chattel mortgages on the real and
personal properties, chattels, mining claims, machinery, equipment and other assets of Marinduque
Mining.[5]
On September 13, 1984, Remington filed a second amended complaint to include as additional
defendant, the Nonoc Mining and Industrial Corporation (Nonoc Mining). Nonoc Mining is the
assignee of all real and personal properties, chattels, machinery, equipment and all other assets of
Marinduque Mining at its Nonoc Nickel Factory in Surigao del Norte.[6]
On March 26, 1986, Remington filed a third amended complaint including the Maricalum Mining
Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as co-
defendants.Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum
Mining and Island Cement must be treated in law as one and the same entity by disregarding the
veil of corporate fiction since:
1. Co-defendants NMIC, Maricalum and Island Cement which are newly created entities are
practically owned wholly by defendants PNB and DBP, and managed by their officers, aside from
the fact that the aforesaid co-defendants NMIC, Maricalum and Island Cement were organized in
such a hurry and in such suspicious circumstances by co-defendants PNB and DBP after the
supposed extra-judicial foreclosure of MMICs assets as to make their supposed projects assets,
machineries and equipment which were originally owned by co-defendant MMIC beyond the reach
of creditors of the latter.
2. The personnel, key officers and rank-and-file workers and employees of co-defendants NMIC,
Maricalum and Island Cement creations of co-defendants PNB and DBP were the personnel of co-
defendant MMIC such that x x x practically there has only been a change of name for all legal
purpose and intents.
3. The places of business not to mention the mining claims and project premises of co-defendants
NMIC, Maricalum and Island Cement likewise used to be the places of business, mining claims and
project premises of co-defendant MMIC as to make the aforesaid co-defendants NMIC, Maricalum
and Island Cement mere adjuncts and subsidiaries of co-defendants PNB and DBP, and subject to
their control and management.
On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island Cement being all
corporations created by the government in the pursuit of business ventures should not be allowed
to ignore, x x x or obliterate with impunity nay illegally, the financial obligations of x x x MMIC
whose operations co-defendants PNB and DBP had highly financed before the alleged extrajudicial
foreclosure of defendant MMICs assets, machineries and equipment to the extent that major policies
of co-defendant MMIC were being decided upon by co-defendants PNB and DBP as major financiers
who were represented in its board of directors forming part of the majority thereof which through
the alleged extrajudicial foreclosure culminated in a complete take-over by co-defendants PNB and
DBP bringing about the organization of their co-defendants NMIC, Maricalum and Island Cement to
which were transferred all the assets, machineries and pieces of equipment of co-defendant MMIC
used in its nickel mining project in Surigao del Norte, copper mining operation in Sipalay, Negros
Occidental and cement factory in Antipolo, Rizal to the prejudice of creditors of co-defendant MMIC
such as plaintiff Remington Industrial Sales Corporation whose stockholders, officers and rank-and-
file workers in the legitimate pursuit of its business activities, invested considerable time, sweat and
private money to supply, among others, co-defendant MMIC with some of its vital needs for its
operation, which co-defendant MMIC during the time of the transactions material to this case
became x x x co-defendants PNB and DBPs instrumentality, business conduit, alter ego, agency
(sic), subsidiary or auxiliary corporation, by virtue of which it becomes doubly necessary to
disregard the corporation fiction that co-defendants PNB, DBP, MMIC, NMIC, Maricalum and Island
Cement, six (6) distinct and separate entities, when in fact and in law, they should be treated as
one and the same at least as far as plaintiffs transactions with co-defendant MMIC are concerned,
so as not to defeat public convenience, justify wrong, subvert justice, protect fraud or confuse
legitimate issues involving creditors such as plaintiff, a fact which all defendants were as (sic) still
are aware of during all the time material to the transactions subject of this case.[7]
On April 3, 1989, Remington filed a motion for leave to file a fourth amended complaint impleading
the Asset Privatization Trust (APT) as co-defendant. Said fourth amended complaint was admitted
by the lower court in its Order dated April 29, 1989.
On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor of Remington, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendants
Marinduque Mining & Industrial Corporation, Philippine National Bank, Development Bank of the
Philippines, Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation, Island Cement
Corporation and Asset Privatization Trust to pay, jointly and severally, the sum of P920,755.95,
representing the principal obligation, including the stipulated interest as of June 22, 1984, plus ten
percent (10%) surcharge per annum by way of penalty, until the amount is fully paid; the sum
equivalent to 10% of the amount due as and for attorneys fees; and to pay the costs. [8]
Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and APT, the Court of
Appeals, in its Decision dated October 6, 1995, affirmed the decision of the RTC. Petitioner filed a
Motion for Reconsideration, which was denied in the Resolution dated August 29, 1996.
Hence, this petition, DBP maintaining that Remington has no cause of action against it or PNB, nor
against their transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the APT.
On the other hand, private respondent Remington submits that the transfer of the properties was
made in fraud of creditors. The presence of fraud, according to Remington, warrants the piercing of
the corporate veil such that Marinduque Mining and its transferees could be considered as one and
the same corporation. The transferees, therefore, are also liable for the value of Marinduque Minings
purchases.
In Yutivo Sons Hardware vs. Court of Tax Appeals,[9] cited by the Court of Appeals in its
decision,[10] this Court declared:
It is an elementary and fundamental principle of corporation law that a corporation is an entity
separate and distinct from its stockholders and from other corporations to which it may be
connected. However, when the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an association of
persons or in case of two corporations, merge them into one. (Koppel [Phils.], Inc., vs. Yatco, 71
Phil. 496, citing 1 Fletcher Encyclopedia of Corporation, Permanent Ed., pp. 135-136; U.S. vs.
Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.) xxx
In accordance with the foregoing rule, this Court has disregarded the separate personality of the
corporation where the corporate entity was used to escape liability to third parties.[11] In this case,
however, we do not find any fraud on the part of Marinduque Mining and its transferees to warrant
the piercing of the corporate veil.
It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the past due
account had incurred arrearages of more than 20% of the total outstanding obligation. Section 1 of
Presidential Decree No. 385 (The Law on Mandatory Foreclosure) provides:
It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from
the issuance of this decree, to foreclose the collateral and/or securities for any loan, credit
accommodation, and/or guarantees granted by them whenever the arrearages on such account,
including accrued interest and other charges, amount to at least twenty percent (20%) of the total
outstanding obligations, including interest and other charges, as appearing in the books of account
and/or related records of the financial institution concerned. This shall be without prejudice to the
exercise by the government financial institution of such rights and/or remedies available to them
under their respective contracts with their debtors, including the right to foreclose on loans, credits,
accomodations and/or guarantees on which the arrearages are less than twenty (20%) percent.
Thus, PNB and DBP did not only have a right, but the duty under said law, to foreclose upon the
subject properties. The banks had no choice but to obey the statutory command.
The import of this mandate was lost on the Court of Appeals, which reasoned that under Article 19
of the Civil Code, Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith. The appellate
court, however, did not point to any fact evidencing bad faith on the part of the Marinduque Mining
and its transferees. Indeed, it skirted the issue entirely by holding that the question of actual
fraudulent intent on the part of the interlocking directors of DBP and Marinduque Mining was
irrelevant because:
As aptly stated by the appellee in its brief, x x x where the corporations have directors and officers
in common, there may be circumstances under which their interest as officers in one company may
disqualify them in equity from representing both corporations in transactions between the
two. Thus, where one corporation was insolvent and indebted to another, it has been held that the
directors of the creditor corporation were disqualified, by reason of self-interest, from acting as
directors of the debtor corporation in the authorization of a mortgage or deed of trust to the former
to secure such indebtedness x x x (page 105 of the Appellees Brief). In the same manner that x x
x when the corporation is insolvent, its directors who are its creditors can not secure to themselves
any advantage or preference over other creditors. They can not thus take advantage of their
fiduciary relation and deal directly with themselves, to the injury of others in equal right. If they do,
equity will set aside the transaction at the suit of creditors of the corporation or their
representatives, without reference to the question of any actual fraudulent intent on the part of the
directors, for the right of the creditors does not depend upon fraud in fact, but upon the violation of
the fiduciary relation to the directors. xxx. (page 106 of the Appellees Brief.)
We also concede that x x x directors of insolvent corporation, who are creditors of the company,
can not secure to themselves any preference or advantage over other creditors in the payment of
their claims. It is not good morals or good law. The governing body of officers thereof are charged
with the duty of conducting its affairs strictly in the interest of its existing creditors, and it would be
a breach of such trust for them to undertake to give any one of its members any advantage over
any other creditors in securing the payment of his debts in preference to all others. When validity
of these mortgages, to secure debts upon which the directors were indorsers, was questioned by
other creditors of the corporation, they should have been classed as instruments rendered void by
the legal principle which prevents directors of an insolvent corporation from giving themselves a
preference over outside creditors. x x x (page 106-107 of the Appellees Brief.)[12]
The Court of Appeals made reference to two principles in corporation law. The first pertains to
transactions between corporations with interlocking directors resulting in the prejudice to one of the
corporations. This rule does not apply in this case, however, since the corporation allegedly
prejudiced (Remington) is a third party, not one of the corporations with interlocking directors
(Marinduque Mining and DBP).
The second principle invoked by respondent court involves directors who are creditors which is also
inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the directors of Marinduque
Mining.
Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining, Maricalum
and Island Cement. As Remington itself concedes, DBP is not authorized by its charter to engage in
the mining business.[13] The creation of the three corporations was necessary to manage and
operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their
value. In the absence of any entity willing to purchase these assets from the bank, what else would
it do with these properties in the meantime? Sound business practice required that they be utilized
for the purposes for which they were intended.
Remington also asserted in its third amended complaint that the use of Nonoc Mining, Maricalum
and Island Cement of the premises of Marinduque Mining and the hiring of the latters officers and
personnel also constitute badges of bad faith.
Assuming that the premises of Marinduque Mining were not among those acquired by DBP in the
foreclosure sale, convenience and practicality dictated that the corporations so created occupy the
premises where these assets were found instead of relocating them. No doubt, many of these assets
are heavy equipment and it may have been impossible to move them. The same reasons of
convenience and practicality, not to mention efficiency, justified the hiring by Nonoc Mining,
Maricalum and Island Cement of Marinduque Minings personnel to manage and operate the
properties and to maintain the continuity of the mining operations.
To reiterate, the doctrine of piercing the veil of corporate fiction applies only when such corporate
fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. [14] To
disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.[15] In this case, the Court finds that Remington
failed to discharge its burden of proving bad faith on the part of Marinduque Mining and its
transferees in the mortgage and foreclosure of the subject properties to justify the piercing of the
corporate veil.
The Court of Appeals also held that there exists in Remingtons favor a lien on the unpaid purchases
of Marinduque Mining, and as transferee of these purchases, DBP should be held liable for the value
thereof.
In the absence of liquidation proceedings, however, the claim of Remington cannot be enforced
against DBP. Article 2241 of the Civil Code provides:
Article 2241. With reference to specific movable property of the debtor, the following claims or liens
shall be preferred:
xxx
(3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the
possession of the debtor, up to the value of the same; and if the movable has been resold by the
debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by
the immobilization of the thing by destination, provided it has not lost its form, substance and
identity, neither is the right lost by the sale of the thing together with other property for a lump
sum, when the price thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor,
or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value
thereof;
xxx
In Barretto vs. Villanueva,[16] the Court had occasion to construe Article 2242, governing claims or
liens over specific immovable property. The facts that gave rise to the case were summarized by
this Court in its resolution as follows:
x x x Rosario Cruzado sold all her right, title, and interest and that of her children in the house and
lot herein involved to Pura L. Villanueva for P19,000.00. The purchaser paid P1,500 in advance, and
executed a promissory note for the balance of P17,500.00. However, the buyer could only pay
P5,500 on account of the note, for which reason the vendor obtained judgment for the unpaid
balance. In the meantime, the buyer Villanueva was able to secure a clean certificate of title (No.
32626), and mortgaged the property to appellant Magdalena C. Barretto, married to Jose C. Baretto,
to secure a loan of P30,000.03, said mortgage having been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the
mortgage in her favor, obtained judgment, and upon its becoming final asked for execution on 31
July 1958. On 14 August 1958, Cruzado filed a motion for recognition for her "vendor's lien" in the
amount of P12,000.00, plus legal interest, invoking Articles 2242, 2243, and 2249 of the new Civil
Code. After hearing, the court below ordered the "lien" annotated on the back of Certificate of Title
No. 32526, with the proviso that in case of sale under the foreclousre decree the vendor's lien and
the mortgage credit of appellant Barretto should be paid pro ratafrom the proceeds. Our original
decision affirmed this order of the Court of First Instance of Manila.
In its decision upholding the order of the lower court, the Court ratiocinated thus:
Article 2242 of the new Civil Code enumerates the claims, mortgages and liens that constitute an
encumbrance on specific immovable property, and among them are:
"(2) For the unpaid price of real property sold, upon the immovable sold"; and
"(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or more credits with respect to the
same specific real property or real rights, they shall be satisfied pro-rata, after the payment of the
taxes and assessments upon the immovable property or real rights."
Application of the above-quoted provisions to the case at bar would mean that the herein appellee
Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata
with the appellants the proceeds of the foreclosure sale.
xxx
As to the point made that the articles of the Civil Code on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such
limitation. If we are to interpret this portion of the Code as intended only for insolvency cases, then
other creditor-debtor relationships where there are concurrence of credits would be left without any
rules to govern them, and it would render purposeless the special laws on insolvency.[17]
Upon motion by appellants, however, the Court reconsidered its decision. Justice J.B.L. Reyes,
speaking for the Court, explained the reasons for the reversal:
The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr., etc., et al., [18] and in
two cases both entitled Development Bank of the Philippines vs. NLRC.[19]
Although Barretto involved specific immovable property, the ruling therein should apply equally in
this case where specific movable property is involved. As the extra-judicial foreclosure instituted by
PNB and DBP is not the liquidation proceeding contemplated by the Civil Code, Remington cannot
claim its pro rata share from DBP.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated October 6, 1995
A. The previous decision failed to take fully into account the radical changes introduced by the Civil and its Resolution promulgated on August 29, 1996 is REVERSED and SET ASIDE. The original
Code of the Philippines into the system of priorities among creditors ordained by the Civil Code of complaint filed in the Regional Trial Court in CV Case No. 84-25858 is hereby DISMISSED.
1889.

SO ORDERED.
Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real
property under Article 1923 were to be resolved according to an order of priorities established by
Article 1927, whereby one class of creditors could exclude the creditors of lower order until the Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.
claims of the former were fully satisfied out of the proceeds of the sale of the real property subject
of the preference, and could even exhaust proceeds if necessary.

Under the system of the Civil Code of the Philippines, however, only taxes enjoy a similar absolute
preference. All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no
priority among themselves, but must be paid pro rata, i.e., in proportion to the amount of the
respective credits. Thus, Article 2249 provides:

"If there are two or more credits with respect to the same specific real property or real rights, they
shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable
property or real rights."

But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to
14 of Article 2242 (or such of them as have credits outstanding) must necessarily be convened, and
the import of their claims ascertained. It is thus apparent that the full application of Articles 2249
and 2242 demands that there must be first some proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, such as insolvency, the settlement of decedent's estate
under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import.

This explains the rule of Article 2243 of the new Civil Code that -

"The claims or credits enumerated in the two preceding articles shall be considered as mortgages
or pledges of real or personal property, or liens within the purview of legal provisions governing
insolvency xxx (Italics supplied).

And the rule is further clarified in the Report of the Code Commission, as follows:

"The question as to whether the Civil Code and the Insolvency Law can be harmonized is settled by
this Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to
be enforced in accordance with the Insolvency Law." (Italics supplied)

Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a
foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the
enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for taxes
that enjoy absolute priority. If none of the claims is for taxes, a dispute between two creditors will
not enable the Court to ascertain the pro rata dividend corresponding to each, because the rights
of the other creditors likewise enjoying preference under Article 2242 can not be
ascertained. Wherefore, the order of the Court of First Instance of Manila now appealed from,
decreeing that the proceeds of the foreclosure sale be apportioned only between appellant and
appellee, is incorrect, and must be reversed. [Underscoring supplied]
JOSE C. CORDOVA, G.R. No. 146555
Petitioner,
Present:
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,*
- v e r s u s - CORONA,
AZCUNA and
GARCIA, JJ. **
REYES DAWAY LIM BERNARDO LINDO ROSALES LAW OFFICES,
ATTY. WENDELL CORONEL and
the SECURITIES AND EXCHANGE
COMMISSION,***
Respondents.
Promulgated:
July 3, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
DECISION
CORONA, J.:
This is a petition for review on certiorari[1] of a decision[2] and resolution[3] of the Court
of Appeals (CA) dated July 31, 2000 and December 27, 2000, respectively, in CA-G.R.
SP No. 55311.
Sometime in 1977 and 1978, petitioner Jose C. Cordova bought from Philippine
Underwriters Finance Corporation (Philfinance) certificates of stock of Celebrity Sports
Plaza Incorporated (CSPI) and shares of stock of various other corporations. He was
issued a confirmation of sale.[4] The CSPI shares were physically delivered by
Philfinance to the former Filmanbank[5] and Philtrust Bank, as custodian banks, to hold
these shares in behalf of and for the benefit of petitioner.[6]
On June 18, 1981, Philfinance was placed under receivership by public respondent
Securities and Exchange Commission (SEC). Thereafter, private respondents Reyes
Daway Lim Bernardo Lindo Rosales Law Offices and Atty. Wendell Coronel (private
respondents) were appointed as liquidators.[7] Sometime in 1991, without the
knowledge and consent of petitioner and without authority from the SEC, private
respondents withdrew the CSPI shares from the custodian banks.[8] On May 27, 1996,
they sold the shares to Northeast Corporation and included the proceeds thereof in the
funds of Philfinance. Petitioner learned about the unauthorized sale of his shares only
on September 10, 1996.[9] He lodged a complaint with private respondents but the
latter ignored it[10] prompting him to file, on May 6, 1997,[11] a formal complaint against
private respondents in the receivership proceedings with the SEC, for the return of the
shares.
Meanwhile, on April 18, 1997, the SEC approved a 15% rate of recovery for Philfinances
creditors and investors.[12] On May 13, 1997, the liquidators began the process of
settling the claims against Philfinance, from its assets.[13]
On April 14, 1998, the SEC rendered judgment dismissing the petition. However, it
reconsidered this decision in a resolution dated September 24, 1999 and granted the
claims of petitioner. It held that petitioner was the owner of the CSPI shares by virtue
of a confirmation of sale (which was considered as a deed of assignment) issued to him
by Philfinance. But since the shares had already been sold and the proceeds
commingled with the other assets of Philfinance, petitioners status was converted into
that of an ordinary creditor for the value of such shares. Thus, it ordered private
respondents to pay petitioner the amount of P5,062,500 representing 15% of the
monetary value of his CSPI shares plus interest at the legal rate from the time of their
unauthorized sale.
On October 27, 1999, the SEC issued an order clarifying its September 24, 1999
resolution. While it reiterated its earlier order to pay petitioner the amount
of P5,062,500, it deleted the award of legal interest. It clarified that it never meant to
award interest since this would be unfair to the other claimants.
On appeal, the CA affirmed the SEC. It agreed that petitioner was indeed the owner of
the CSPI shares but the recovery of such shares had become impossible. It also
declared that the clarificatory order merely harmonized the dispositive portion with the
body of the resolution. Petitioners motion for reconsideration was denied.
Hence this petition raising the following issues:
1) whether petitioner should be considered as a preferred (and secured)
creditor of Philfinance;
2) whether petitioner can recover the full value of his CSPI shares or merely
15% thereof like all other ordinary creditors of Philfinance and
3) whether petitioner is entitled to legal interest.[14]
To resolve these issues, we first have to determine if petitioner was indeed a creditor
of Philfinance.
There is no dispute that petitioner was the owner of the CSPI shares. However, private
respondents, as liquidators of Philfinance, illegally withdrew said certificates of stock
without the knowledge and consent of petitioner and authority of the SEC.[15] After
selling the CSPI shares, private respondents added the proceeds of the sale to the
assets of Philfinance.[16] Under these circumstances, did the petitioner become a
creditor of Philfinance? We rule in the affirmative.
The SEC, after holding that petitioner was the owner of the shares, stated:
Petitioner is seeking the return of his CSPI shares which, for the present, is no longer
possible, considering that the same had already been sold by the respondents, the
proceeds of which are ADMITTEDLY commingled with the assets of PHILFINANCE.
This being the case, [petitioner] is now but a claimant for the value of those shares. As
a claimant, he shall be treated as an ordinary creditor in so far as the value of those
certificates is concerned.[17]
The CA agreed with this and elaborated:
Much as we find both detestable and reprehensible the grossly abusive and illicit
contrivance employed by private respondents against petitioner, we, nevertheless,
concur with public respondent that the return of petitioners CSPI shares is well-nigh
impossible, if not already an utter impossibility, inasmuch as the certificates of stocks
have already been alienated or transferred in favor of Northeast Corporation, as early
as May 27, 1996, in consequence whereof the proceeds of the sale have been
transmuted into corporate assets of Philfinance, under custodia legis, ready for
distribution to its creditors and/or investors. Case law holds that the assets of an
institution under receivership or liquidation shall be deemed in custodia legis in the
hands of the receiver or liquidator, and shall from the moment of such receivership or
liquidation, be exempt from any order, garnishment, levy, attachment, or execution.
Concomitantly, petitioners filing of his claim over the subject CSPI shares before the
SEC in the liquidation proceedings bound him to the terms and conditions thereof. He
cannot demand any special treatment [from] the liquidator, for this flies in the face of,
and will contravene, the Supreme Court dictum that when a corporation threatened by
bankruptcy is taken over by a receiver, all the creditors shall stand on equal footing.
Not one of them should be given preference by paying one or some [of] them ahead of
the others. This is precisely the philosophy underlying the suspension of all pending
claims against the corporation under receivership. The rule of thumb is equality in
equity.[18]
We agree with both the SEC and the CA that petitioner had become an ordinary creditor
of Philfinance.
Certainly, petitioner had the right to demand the return of his CSPI shares.[19] He in
fact filed a complaint in the liquidation proceedings in the SEC to get them back but
was confronted by an impossible situation as they had already been sold. Consequently,
he sought instead to recover their monetary value.
Petitioners CSPI shares were specific or determinate movable properties.[20] But after
they were sold, the money raised from the sale became generic[21] and were
commingled with the cash and other assets of Philfinance. Unlike shares of stock,
money is a generic thing. It is designated merely by its class or genus without any
particular designation or physical segregation from all others of the same class.[22] This
means that once a certain amount is added to the cash balance, one can no longer
pinpoint the specific amount included which then becomes part of a whole mass of
money.
It thus became impossible to identify the exact proceeds of the sale of the CSPI shares
since they could no longer be particularly designated nor distinctly segregated from the
assets of Philfinance. Petitioners only remedy was to file a claim on the whole mass of
these assets, to which unfortunately all of the other creditors and investors of
Philfinance also had a claim.
Petitioners right of action against Philfinance was a claim properly to be litigated in the
liquidation proceedings.[23] In Finasia Investments and Finance Corporation v.
CA,[24] we discussed the definition of claims in the context of liquidation proceedings:
We agree with the public respondent that the word claim as used in Sec. 6(c) of P.D.
902-A,[25] as amended, refers to debts or demands of a pecuniary nature. It means "the
assertion of a right to have money paid. It is used in special proceedings like those
before [the administrative court] on insolvency."
The word "claim" is also defined as:
Right to payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured; or right to an equitable remedy for breach of
performance if such breach gives rise to a right to payment, whether or not such right
to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured,
disputed, undisputed, secured, unsecured.[26]
Undoubtedly, petitioner had a right to the payment of the value of his shares. His
demand was of a pecuniary nature since he was claiming the monetary value of his
shares.It was in this sense (i.e. as a claimant) that he was a creditor of Philfinance.
The Civil Code provisions on concurrence and preference of credits are applicable to the
liquidation proceedings.[27] The next question is, was petitioner a preferred or ordinary
creditor under these provisions?
Petitioner argues that he was a preferred creditor because private respondents illegally
withdrew his CSPI shares from the custodian banks and sold them without his
knowledge and consent and without authority from the SEC. He quotes Article 2241 (2)
of the Civil Code:
With reference to specific movable property of the debtor, the following claims or
liens shall be preferred:
xxx xxx xxx
(2) Claims arising from misappropriation, breach of trust, or malfeasance by public
officials committed in the performance of their duties, on the movables, money or
securities obtained by them;
xxx xxx xxx
(Emphasis supplied)
He asserts that, as a preferred creditor, he was entitled to the entire monetary value
of his shares.
Petitioners argument is incorrect. Article 2241 refers only to specific movable
property. His claim was for the payment of money, which, as already discussed, is
generic property and not specific or determinate.
Considering that petitioner did not fall under any of the provisions applicable to
preferred creditors, he was deemed an ordinary creditor under Article 2245:
Credits of any other kind or class, or by any other right or title not comprised in the
four preceding articles, shall enjoy no preference.
This being so, Article 2251 (2) states that: this interim period being deemed to be by then an equivalent to a forbearance of
credit.[30] (Emphasis supplied)
Common credits referred to in Article 2245 shall be paid pro rata regardless of dates.
Under this ruling, petitioner was not entitled to legal interest of 12% per annum (from
demand) because the amount owing to him was not a loan[31] or forbearance of
Like all the other ordinary creditors or claimants against Philfinance, he was entitled to
money.[32]
a rate of recovery of only 15% of his money claim.

Neither was he entitled to legal interest of 6% per annum under Article 2209 of the
One final issue: was petitioner entitled to interest?
Civil Code[33] since this provision applies only when there is a delay in the payment of
a sum of money.[34] This was not the case here. In fact, petitioner himself manifested
The SEC argues that awarding interest to petitioner would have given petitioner an before the CA that the SEC (as liquidator) had already paid him P5,062,500
unfair advantage or preference over the other creditors.[28] Petitioner counters that he representing 15% of P33,750,000.[35]
was entitled to 12% legal interest per annum under Article 2209 of the Civil Code from
the time he was deprived of the shares until fully paid.
Accordingly, petitioner was not entitled to interest under the law and current
jurisprudence.
The guidelines for awarding interest were laid down in Eastern Shipping Lines, Inc. v.
CA:[29]
Considering that petitioner had already received the amount of P5,062,500, the
obligation of the SEC as liquidator of Philfinance was totally extinguished.[36]
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The
We note that there is an undisputed finding by the SEC and CA that private respondents
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
sold the subject shares without authority from the SEC. Petitioner evidently has a cause
measure of recoverable damages.
of action against private respondents for their bad faith and unauthorized acts, and the
resulting damage caused to him.[37]
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
WHEREFORE, the petition is hereby DENIED.
as follows:

SO ORDERED.
1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due shall itself earn legal RENATO C. CORONA
interest from the time it is judicially demanded. In the absence of stipulation, the rate Associate Justice
of interest shall be 12% per annum to be computed from default, i.e., from judicial
or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until
the demand can be established with reasonable certainty.

Accordingly, where the demand is established with reasonable certainty, the interest
shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date of the judgment
of the court is made (at which time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount of finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
G.R. No. 173610 October 1, 2012 CONSIDERING THE FOREGOING, the Court hereby approves the Rehabilitation Plan of [TCEI]
thereby granting [TCEI] a moratorium of five (5) years from today in the payment of all its
obligations, together with the corresponding interests, to its creditor banks, subject to the
TOWN AND COUNTRY ENTERPRISES, INC., Petitioner, modification that the interest charges shall be reduced from 36% to 24% per annum. After the five-
vs. year grace period, [TCEI] shall commence to pay its existing obligations with its creditor banks
HONORABLE NORBERTO J. QUISUMBING, JR., ET. AL, Respondents. monthly within a period of three (3) years.

x---------------x TCEI is enjoined to comply strictly with the provisions of the Rehabilitation Plan, perform its
obligations thereunder and take all actions necessary to carry out the Plan, failing which, the Court
G.R. No. 174132 shall either, upon motion, motu proprio or upon the recommendation of the Rehabilitation Receiver,
terminate the proceeding pursuant to SECTION 27, Rule 4 of the Interim Rules of Procedure on
Corporate Rehabilitation.
TOWN AND COUNTRY ENTERPRISES, INC., Petitioner,
vs.
METROPOLITAN BANK AND TRUST CO., Respondent. The Rehabilitation Receiver is directed to strictly monitor the implementation of the Plan and submit
a quarterly report on the progress thereof.

DECISION
SO ORDERED.16

PEREZ, J.:
On 11 January 2005, the RTC issued in LRC Case No. 2128-02 an order granting Metrobanks petition
for issuance of a writ of possession and directing the Clerk of Court to issue the writ therein
These consolidated Rule 45 Petitions for Review on Certiorari primarily assail the 30 November 2005 sought.17 Aggrieved, TCEI and the Spouses Campos perfected the appeal which was docketed before
Decision rendered by the Fourth Division of the Court of Appeals (CA) in CA-G.R. CV No. 844641 and the CA as CA-G.R. CV No. 84464, on the ground that it had been denied due process a quo and that
the 24 May 2006 Decision rendered by said Courts Sixteenth Division in CAG. R. SP No. 90311. 2 the writ of possession issued is contrary to the rules on corporate rehabilitation. 18 On 30 November
2005, the CAs then Fourth Division rendered the first assailed Decision, affirming the RTCs
appealed 11 January 2005 Order. In denying the appeal, the CA ruled that, as purchaser of the
There is no dispute regarding the fact that petitioner Town & Country Enterprises, Inc. (TCEI)
foreclosed properties, Metrobank was entitled to the writ of possession without delay since, under
obtained loans in the aggregate sum of 12,000,000.00 from respondent Metropolitan Bank & Trust
Section 8 of Act No. 3135, the remedy of the mortgagor is to set aside the sale and the writ of
Co. (Metrobank).3 To secure the prompt payment of the loan, TCEI executed in favor of Metrobank possession within 30 days after the purchaser was placed in possession and, if aggrieved from the
a thrice amended Deed of Real Estate Mortgage 4over twenty parcels of land registered in its name
resolution thereof, to appeal in accordance with Section 14 of Act No. 496, otherwise known as
and/or its corporate officers, petitioners Spouses Reynaldo and Lydia Campos (Spouses Campos),
the Land Registration Act. Likewise finding that the proceedings before the RTC were ex parte by
under Transfer Certificates of Title (TCT) Nos. T-361540, T-361541, T-361542, T-361543, T-
nature, the CA decreed that TCEI and the Spouses Campos were not denied due process and that
361544, T-261545, T-361546, T-361547, T-361548, T-361565, T-361566, T-361567, T-361568,
the appealed order is not reviewable since only one party sought relief a quo.19 Dissatisfied with the
T-361569, T-361570, T0361571, T-361572, T-361573, T-361574 and T-743815, all of the Cavite
denial of the motion for reconsideration of the foregoing decision in the CAs Resolution dated 26
Provincial Registry of Deeds.5 For failure of TCEI to heed its demands for the payment of the loan,
July 2006,20TCEI and the Spouses Campos filed the Rule 45 petition for review now docketed before
Metrobank caused the real estate mortgage to be extrajudicially foreclosed and the subject realties us as G.R. No. 173610.21
to be sold at public auction on 7 November 2001 in accordance with Act No. 3135. As highest bidder,
Metrobank was issued the corresponding Certificate of Sale6which was registered with the Cavite
Provincial Registry of Deeds on 10 April 2002.7 In the meantime, TCEI discovered that its certificates of titles were already cancelled as of 26 June
2003, with the issuance of TCT Nos. T-1046369, T-1046370, T-1046371, T-1046372, T1046373, T-
1046374, T-1046375, T-1046376, T-1046377, T-1046378, T-1046379, T-1046380, T-1046381, T-
In view of TCEIs further refusal to heed its demands to turn over actual possession of the properties,
1046382, T-1046383, T-1046384, T-1046385, T-1046386, T-1046387 and T-104638822 in the
Metrobank filed on 23 September 2002 the petition for issuance of a writ of possession docketed as
name of Metrobank which had consolidated its ownership over the subject properties on 25 April
LRC Case No. 2128-02 before the Regional Trial Court (RTC), Branch 21, in Imus, Cavite, presided
2003.23 Maintaining that the transfers of title were invalid and ineffective, TCEI filed its 4 November
over by public respondent judge, the Hon. Norberto J. Quisumbing, Jr. 8 Metrobank invoked its right 2004 motion which was styled as one to direct the Register of Deeds to "bring back the titles in [its]
to said writ of possession under Section 7 of Act No. 3135. Claiming difficulty in servicing its name." TCEI argued that Metrobanks act of transferring said titles to the latters name amounted
obligations as a consequence of the Asian financial crisis, on the other hand, TCEI filed on 1 October
to contempt absent modification of the 8 October 2002 Stay Order and approval by the
2002 the petition for declaration of a state of suspension of payments, with approval of a proposed
Rehabilitation Court.24 The motion was, however, denied in the Rehabilitation Courts 2 June 2005
rehabilitation plan, which was docketed as SEC Case No. 023-02 before the same court, sitting as
Order, on the ground that Metrobanks right to exercise any act of dominion over the foreclosed
a Special Commercial Court (Rehabilitation Court).9 With the issuance of a Stay Order on 8
properties had already been recognized in the CAs 30 January 2004 Decision in CA-G.R. SP No.
October 2002 in the corporate rehabilitation case, 10 TCEI filed on 21 October 2002 a motion to
76147.25
suspend the proceedings in LRC Case No. 2128-02 which was granted by respondent judge in the
Order dated 2 December 2002.11 Aggrieved by the denial of its motion for reconsideration of the
same order, Metrobank filed the Rule 65 petition for certiorari which was docketed before the CA as Insisting that the transfers of title in Metrobanks name was violative of the Stay Order issued in
CA-G.R. SP No. 76147.12 SEC Case No. 023-02, TCEI filed the 17 June 2005 Rule 43 petition for review which was docketed
before the CA as CAG. R. SP No. 90311.26 On 24 May 2006, said courts Sixteenth Division rendered
the second assailed decision, dismissing TCEIs petition for lack of merit on the ground that
On 30 January 2004, the CAs then Fifth Division rendered the Decision 13 in CA-G.R. SP No. 76147,
Metrobank was already the owner of the foreclosed properties by the time the Stay Order was issued
directing respondent judge "to continue with the proceedings in [LRC Case No. 2128-02 and
on 8 October 2002. For this purpose, the CA took appropriate note of the fact that, in the 30 January
eventually to issue the required writ of possession in favor of [Metrobank] over the foreclosed
2004 Decision in CA-G.R. SP No. 76147, Metrobanks ownership of the foreclosed properties was
properties." The foregoing directive was anchored on the second paragraph of Section 47 of Republic
considered consolidated for failure of TCEI to exercise its right of redemption within three months
Act (RA) No. 8741.14 Finding the Rehabilitation Plan submitted by TCEI feasible, on the other hand,
from the foreclosure sale or the registration of the certificate of sale in accordance with Sec. 47 of
the rehabilitation court issued the Order dated 29 March 2004 in SEC Case No. 023-02,15 the decretal
Republic Act (RA) No. 8791.27 Considering that said 30 January 2004 Decision had already attained
portion of which states:
finality, the CA also ruled that the determinations therein made already amounted to res
judicata and that, as a consequence, TCEIs petition for review was equivalent to forum
shopping.28 TCEIs motion for reconsideration was likewise denied for lack of merit in the CAs
Resolution dated 14 August 2006,29 hence its Rule 45 petition for review now docketed before us as
G.R. No. 174132.30
In G.R. No. 173610, petitioners TCEI and the Spouses Campos seek the reversal of the CAs 30
November 2005 Decision in CA-G.R. CV No. 84464 on the following grounds:
1. The Order granting the Writ of Possession in favor of Metrobank is invalid and
unenforceable considering that the properties of TCEI are now in the possession of the
rehabilitation receiver in view of the earlier judgment of approval of the Petition for
Corporate Rehabilitation in SEC Case No. 023-02.
2. The Rehabilitation Receiver is considered a Third-Party in possession of the properties
adversely against Metrobank for the benefit of the creditors and the debtor.
3. Possession of the Rehabilitation Receiver by virtue of a final judgment in a
Rehabilitation Proceeding must be respected as among the exemptions why the Petition
for Writ of Possession must be denied or must not be implemented.
4. TCEI, Spouses Campos and Metrobank agreed that Act 3135 will be applicable in case
of foreclosure sale. Section 47 of the General Banking Act, Republic Act 8791, is not
applicable. While the Certificate of Sale was issued in 10 April 2002 there was no transfer
until 26 June 2003 when the Stay Order was already effective.
In G.R. No. 174132, on the other hand, the setting aside of the CAs 24 May 2006 Decision in CA-
G.R. SP No. 90311 is urged by TCEI on the following grounds:
1. The Register of Deeds cannot legally transfer the titles subject matter of the Petition
for Rehabilitation in favor of Metrobank on 26 June 2003 in view of the existence of the
Stay Order on 8 October 2002 prohibiting the enforcement of claims and the subsequent
judgment approving the Rehabilitation Plan in favor of Petitioner.
2. The Register of Deeds should cancel the titles issued to Metrobank on 26 June 2003
and re-issue titles in favor of TCEI as the same was made in violation of the Stay Order
and the Rehabilitation Proceedings as the Decision therein binds the whole world being
a proceeding in rem.
3. The Decision of the CA failed to take into consideration the far reaching effects of a
Petition for Rehabilitation as against a Motion for Issuance of a Writ of Possession which
is ex-parte and not a judicial proceeding.
We find both petitions bereft of merit.
Corporate rehabilitation contemplates a continuance of corporate life and activities in an effort to
restore and reinstate the corporation to its former position of successful operation and solvency,
the purpose being to enable the company to gain a new lease on life and allow its creditors to be
paid their claims out of its earnings.31 A principal feature of corporate rehabilitation is the Stay Order
which defers all actions or claims against the corporation seeking corporate rehabilitation from the
date of its issuance until the dismissal of the petition or termination of the rehabilitation
proceedings.32 Under Section 24, Rule 4 of the Interim Rules of Procedure on Corporate
Rehabilitation which was in force at the time TCEI filed its petition for rehabilitation a quo, the
approval of the rehabilitation plan also produces the following results:
a. The plan and its provisions shall be binding upon the debtor and all persons who may be affected
by it, including the creditors, whether or not such persons have participated in the proceedings or
opposed the plan or whether or not their claims have been scheduled;
b. The debtor shall comply with the provisions of the plan and shall take all actions necessary to
carry out the plan;
c. Payments shall be made to the creditors in accordance with the provisions of the plan;
d. Contracts and other arrangements between the debtor and its creditors shall be interpreted as
continuing to apply to the extent that they do not conflict with the provisions of the plan; and
e. Any compromises on amounts or rescheduling of timing of payments by the debtor shall be
binding on creditors regardless of whether or not the plan is successfully implemented.
In addition to the issuance of the Stay Order in SEC Case No. 023-02 on 8 October 2002, petitioners
call attention to the fact that the Rehabilitation Court approved TCEIs rehabilitation plan in the
Order dated 29 March 2004. Considering that orders issued by the Rehabilitation Court are
immediately executory under Section 5, Rule 3 of the Interim Rules,33 petitioners argue that the
subject properties were placed in custodia legis upon approval of TCEIs rehabilitation plan and that
the grant of the writ of possession in favor of Metrobank was tantamount to taking said properties
away from the rehabilitation receiver. Petitioners maintain that the rehabilitation receiver, as an
officer of the court empowered to take possession, control and custody of the debtors
assets,34 should have been considered a third person whose possession of the foreclosed properties
was an exception to the rule that the grant of a writ of possession is ministerial. For these reasons,
petitioners claim that the writ of possession issued in favor of Metrobank is invalid and
unenforceable.35
The dearth of merit in petitioners position is, however, evident from the fact that, Metrobank had
already acquired ownership over the subject realties when TCEI commenced its petition for
corporate rehabilitation on 1 October 2002. Although Metrobank concededly invoked Act No. 3135
in seeking the extrajudicial foreclosure of the mortgages executed by TCEI, the second paragraph
of Section 47 of RA 8791 the law in force at said time specifically provides as follows:
Section 47. Foreclosure of Real Estate Mortgage. x x x x
Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the right to redeem the property in accordance with this
provision until, but not after, the registration of the certificate of foreclosure sale with the applicable
Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever
is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this
Act shall retain their redemption rights until their expiration.
Having purchased the subject realties at public auction on 7 November 2001, Metrobank
undoubtedly acquired ownership over the same when TCEI failed to exercise its right of redemption
within the three-month period prescribed under the foregoing provision. With ownership already
vested in its favor as of 6 February 2002, it matters little that Metrobank caused the certificate of
sale to be registered with the Cavite Provincial Registry only on 10 April 2002 and/or executed an
affidavit consolidating its ownership over the same properties only on 25 April 2003. The rule is
settled that the mortgagor loses all interest over the foreclosed property after the expiration of the
redemption period and the purchaser becomes the absolute owner thereof when no redemption is
made.36 By the time that the Rehabilitation Court issued the 8 October 2002 Stay Order in SEC Case
No. 023-02, it cannot, therefore, be gainsaid that Metrobank had long acquired ownership over the
subject realties.
Viewed in the foregoing light, the CA cannot be faulted for upholding the RTCs grant of a writ of
possession in favor of Metrobank on 11 January 2005. If the purchaser at the foreclosure sale, upon
posting of the requisite bond, is entitled to a writ of possession even during the redemption period
under Section 7 of Act 3135,37 as amended, it has been consistently ruled that there is no reason to
withhold said writ after the expiration of the redemption period when no redemption is effected by
the mortgagor. Indeed, the rule is settled that the right of the purchaser to the possession of the
foreclosed property becomes absolute after the redemption period, without a redemption being
effected by the property owner. Since the basis of this right to possession is the purchaser's
ownership of the property, the mere filing of an ex parte motion for the issuance of the writ of
possession would suffice, and no bond is required.38
Considering that Metrobank acquired ownership over the mortgaged properties upon the expiration
of the redemption period on 6 February 2002, TCEI is also out on a limb in invoking the Stay Order
issued by the Rehabilitation Court on 8 October 2002 and the approval of its rehabilitation plan on
29 March 2004. An essential function of corporate rehabilitation is, admittedly, the Stay Order which
is a mechanism of suspension of all actions and claims against the distressed corporation upon the
due appointment of a management committee or rehabilitation receiver. 39 The Stay Order issued by
the Rehabilitation Court in SEC Case No. 023-02 cannot, however, apply to the mortgage obligations
owing to Metrobank which had already been enforced even before TCEIs filing of its petition for
corporate rehabilitation on 1 October 2002.
In Equitable PCI Bank, Inc v. DNG Realty and Development Corporation,40 the Court upheld the
validity of the writ of possession procured by the creditor despite the subsequent issuance of a stay
order in the rehabilitation proceedings instituted by the debtor. In said case, Equitable PCI Bank
(Equitable) foreclosed on 30 June 2003 the mortgage executed in its favor by DNG Realty and
Development Corporation (DNG) and was declared the highest bidder at the 4 September 2003
public auction of the property. On 21 October 2003, DNG also instituted a petition for corporate
rehabilitation which resulted in the issuance of a Stay Order on 27 October 2003. Having caused
the recording of the Certificate of Sale on 3 December 2003, on the other hand, Equitable executed
an affidavit of consolidation of its ownership which served as basis for the issuance of a new title in
its favor on 10 December 2003. Equitable subsequently filed an action for the issuance of a writ of
possession on 17 March 2004 which was eventually granted on 6 September 2004. In affirming the
validity of the certificate of sale, certificate of title and writ of possession issued in favor of Equitable,
the Court ruled as follows:
In RCBC, we upheld the extrajudicial foreclosure sale of the mortgage properties of BF Homes
wherein RCBC emerged as the highest bidder as it was done before the appointment of the
management committee. Noteworthy to mention was the fact that the issuance of the certificate of
sale in RCBCs favor, the consolidation of title, and the issuance of the new titles in RCBCs name
had also been upheld notwithstanding that the same were all done after the management committee
had already been appointed and there was already a suspension of claims. Thus, applying RCBC v.
IAC in this case, since the foreclosure of respondent DNG's mortgage and the issuance of the
certificate of sale in petitioner EPCIB's favor were done prior to the appointment of a Rehabilitation
Receiver and the Stay Order, all the actions taken with respect to the foreclosed mortgage property
which were subsequent to the issuance of the Stay Order were not affected by the Stay Order.
Thus, after the redemption period expired without respondent redeeming the foreclosed property,
petitioner becomes the absolute owner of the property and it was within its right to ask for the
consolidation of title and the issuance of new title in its name as a consequence of ownership; thus,
it is entitled to the possession and enjoyment of the property. (Italics supplied)
A similar dearth of merit may be said of TCEIs claim that the subject properties were in custodia
legis upon the issuance of the Stay Order and the approval of the rehabilitation plan fails to
persuade. As early as 7 February 2002 or three months after the foreclosure sale on 7 November
2001, Metrobank acted well-within its rights in applying for a writ of possession, the issuance of
which has consistently been held to be a ministerial function which cannot be hindered by an
injunction or an action for the annulment of the mortgage or the foreclosure itself. 41 While it is true
that the function ceases to be ministerial where the property is in the possession of a third party
claiming a right adverse to that of the judgment debtor,42 the rehabilitation receivers power to take
possession, control and custody of TCEIs assets is far from adverse to the latter. A rehabilitation
receiver is an officer of the court who is appointed for the protection of the interests of the corporate
investors and creditors.43 It has been ruled that there is nothing in the concept of corporate
rehabilitation that would ipso facto deprive the officers of a debtor corporation of control over its
business or properties.44
Neither are we inclined to hospitably entertain TCEIs harping on the supposed primacy of the one-
year redemption period provided under Act 3135 over the three-month redemption period provided
under the second paragraph of Section 47 of RA 8791 where the property being sold pursuant to
an extrajudicial foreclosure is owned by a juridical person. As may be gleaned from the record,
Metrobanks acquisition of the subject properties would still pass muster even if tested alongside
the longer redemption period provided under Act 3135. Having purchased the same properties at
public auction on 7 November 2001, Metrobank was issued a 13 December 2001 certificate of sale
which it caused to be registered on 10 April 2002. Despite the shorter redemption period provided
under RA 8791, Metrobank also executed an affidavit of consolidation of ownership over the subject
realties on 25 April 2003 or after the lapse of the one-year redemption period provided under Act
3135.
Not having exercised its right of redemption in the intervening period, TCEI cannot be heard to
complain about the cancellation of its titles and the issuance of new ones in favor of Metrobank on
26 June 2003. In Union Bank of the Philippines v. Court of Appeals,45 the Court ruled that, after the
purchasers consolidation of title over foreclosed property, the issuance of a certificate of title in his
favor is ministerial upon the Register of Deeds, thus:
In real estate mortgage, when the principal obligation is not paid when due, the mortgage has the
right to foreclose the mortgage and to have the property seized and sold with a view to applying
the proceeds to the payment of the principal obligation. Foreclosure may be effected either judicially
or extrajudicially. In a public bidding during extra-judicial foreclosure, the creditor-mortgagee,
trustee, or other person authorized to act for the creditor may participate and purchase the
mortgaged property as any other bidder. Thereafter the mortgagor has one year within which to
redeem the property from and after registration of sale with the Register of Deeds. In case of non-
redemption, the purchaser at foreclosure sale shall file with the Register of Deeds, either a final
deed of sale executed by the person authorized by virtue of the power of attorney embodied in the
deed or mortgage, or his sworn statement attesting to the fact of nonredemption; whereupon, the
Register of Deeds shall issue a new certificate of title in favor of the purchaser after the owner's
duplicate of the certificate has been previously delivered and cancelled. Thus, upon failure to redeem
foreclosed realty, consolidation of title becomes a matter of right on the part of the auction buyer,
and the issuance of a certificate of title in favor of the purchaser becomes ministerial upon the
Register of Deeds.
In upholding the RTCs denial of its motion for the cancellation of the certificates of title issued in
favor of Metrobank, TCEI, finally, argues that the CA erroneously gave more premium to the ex-
parte proceedings for the issuance of a writ of possession over those in the corporate rehabilitation
case which, being in rem, binds the whole world. Aside from the fact that this matter had already
been addressed in the 30 January 2004 Decision earlier rendered in CA-G.R. SP No. 76147, TCEI
loses sight of the fact, that the proceedings in corporate rehabilitation cases are also summary and
nonadversarial46 and do not impair the debtors contracts47 or diminish the status of preferred
creditors.48 Concededly, the issuance of the Stay Order suspends the enforcement of all claims
against the debtor, whether for money or otherwise, and whether such enforcement is by court
action or otherwise, effective from the date of its issuance until the dismissal of the petition or the
termination of the rehabilitation proceedings.49 This does not, however, apply to Metrobank which
already acquired ownership over the subject realties even before TCEI filed its petition for
rehabilitation a quo.
WHEREFORE, premises considered, both petitions for review on certiorari are DENIED for lack of
merit.
SO ORDERED.
JOSE PORTUGAL PEREZ
Associate Justice
[G.R. No. 160732. June 21, 2004]
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs. HON. REYNALDO
B. DAWAY, IN HIS CAPACITY AS PRESIDING JUDGE OF THE REGIONAL TRIAL COURT OF
QUEZON CITY, BRANCH 90 AND MAYNILAD WATER SERVICES, INC., respondents.
DECISION
AZCUNA, J.:
On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a
determination that the Petition for Rehabilitation with Prayer for Suspension of Actions and
Proceedings filed by Maynilad Water Services, Inc. (Maynilad) conformed substantially to the
provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation (Interim
Rules). It forthwith issued a Stay Order[1] which states, in part, that the court was thereby:
xxxxxxxxx
2. Staying enforcement of all claims, whether for money or otherwise and whether such enforcement
is by court action or otherwise, against the petitioner, its guarantors and sureties not solidarily liable
with the petitioner;
3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in any manner any
of its properties except in the ordinary course of business;
4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as at the date
of the filing of the petition;
xxxxxxxxx
Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex
Parte motions[2] filed by respondent Maynilad, issued the herein questioned Order [3] which stated
that it thereby:
1. DECLARES that the act of MWSS in commencing on November 24, 2003 the process for the
payment by the banks of US$98 million out of the US$120 million standby letter of credit so the
banks have to make good such call/drawing of payment of US$98 million by MWSS not later than
November 27, 2003 at 10:00 P. M. or any similar act for that matter, is violative of the above-
quoted sub-paragraph 2.) of the dispositive portion of this Courts Stay Order dated November 17,
2003.
2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt the written
certification/notice of draw to Citicorp International Limited dated November 24, 2003 and
DECLARES void any payment by the banks to MWSS in the event such written certification/notice
of draw is not withdrawn by MWSS and/or MWSS receives payment by virtue of the aforesaid
standby letter of credit.
Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this
petition for review by way of certiorari under Rule 65 of the Rules of Court questioning the legality
of said order as having been issued without or in excess of the lower courts jurisdiction or that the
court a quo acted with grave abuse of discretion amounting to lack or excess of jurisdiction.[4]
Antecedents of the Case
On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year
period to manage, operate, repair, decommission and refurbish the existing MWSS water delivery
and sewerage services in the West Zone Service Area, for which Maynilad undertook to pay the
corresponding concession fees on the dates agreed upon in said agreement [5] which, among other
things, consisted of payments of petitioners mostly foreign loans.
To secure the concessionaires performance of its obligations under the Concession Agreement,
Maynilad was required under Section 6.9 of said contract to put up a bond, bank guarantee or other
security acceptable to MWSS.
In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year facility
with a number of foreign banks, led by Citicorp International Limited, for the issuance of an
Irrevocable Standby Letter of Credit[6] in the amount of US$120,000,000 in favor of MWSS for the
full and prompt performance of Maynilads obligations to MWSS as aforestated.
Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by which it
hoped to recover the losses it had allegedly incurred and would be incurring as a result of the
depreciation of the Philippine Peso against the US Dollar. Failing to get what it desired, Maynilad
issued a Force Majeure Notice on March 8, 2001 and unilaterally suspended the payment of the
concession fees. In an effort to salvage the Concession Agreement, the parties entered into a
Memorandum of Agreement (MOA)[7] on June 8, 2001 wherein Maynilad was allowed to recover
foreign exchange losses under a formula agreed upon between them. Sometime in August 2001
Maynilad again filed another Force Majeure Notice and, since MWSS could not agree with the terms
of said Notice, the matter was referred on August 30, 2001 to the Appeals Panel for arbitration. This
resulted in the parties agreeing to resolve the issues through an amendment of the Concession
Agreement on October 5, 2001, known as Amendment No. 1,[8] which was based on the terms set
down in MWSS Board of Trustees Resolution No. 457-2001, as amended by MWSS Board of Trustees
Resolution No. 487-2001,[9] which provided inter alia for a formula that would allow Maynilad to
recover foreign exchange losses it had incurred or would incur under the terms of the Concession
Agreement.
As part of this agreement, Maynilad committed, among other things, to:
a) infuse the amount of UD$80.0 million as additional funding support from its stockholders;
b) resume payment of the concession fees; and
c) mutually seek the dismissal of the cases pending before the Court of Appeals and with Minor
Dispute Appeals Panel.
However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination,
claiming that MWSS failed to comply with its obligations under the Concession Agreement and
Amendment No. 1 regarding the adjustment mechanism that would cover Maynilads foreign
exchange losses. On December 9, 2002, Maynilad filed a Notice of Early Termination of the
concession, which was challenged by MWSS. This matter was eventually brought before the Appeals
Panel on January 7, 2003 by MWSS.[10] On November 7, 2003, the Appeals Panel ruled that there
was no Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement
and that, therefore, Maynilad should pay the concession fees that had fallen due.
The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter, submitted
a written notice[11] on November 24, 2003, to Citicorp International Limited, as agent for the
participating banks, that by virtue of Maynilads failure to perform its obligations under the
Concession Agreement, it was drawing on the Irrevocable Standby Letter of Credit and thereby
demanded payment in the amount of US$98,923,640.15.
Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation before
the court a quo which resulted in the issuance of the Stay Order of November 17, 2003 and the
disputed Order of November 27, 2003.[12]
Petitioners Case
Petitioner hereby raises the following issues:
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT PATENTLY WITHOUT
JURISDICTION OR IN EXCESS OF JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN CONSIDERING THE PERFORMANCE BOND
OR ASSETS OF THE ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE OF THE PRIVATE
RESPONDENT MAYNILAD SUBJECT TO REHABILITATION.
2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF JURISDICTION OR
COMMIT A GRAVE ERROR OF LAW IN HOLDING THAT THE PERFORMANCE BOND OBLIGATIONS OF
THE BANKS WERE NOT SOLIDARY IN NATURE.
3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING MAYNILAD TO IN EFFECT
SEEK A REVIEW OR APPEAL OF THE FINAL AND BINDING DECISION OF THE APPEALS PANEL.
In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million Standby
Letter of Credit and Performance Bond are not property of the estate of the debtor Maynilad and,
therefore, not subject to the in rem rehabilitation jurisdiction of the trial court.
Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset of
Maynilad but only assets of the banks. Furthermore, a call on the Standby Letter of Credit cannot
also be considered a claim falling under the purview of the stay order as alleged by respondent as
it is not directed against the assets of respondent Maynilad.
Petitioner concludes that the public respondent erred in declaring and holding that the
commencement of the process for the payment of US$98 million is a violation of the order issued
on November 17, 2003.
Respondent Maynilads Case
Respondent Maynilad seeks to refute this argument by alleging that:
a) the order objected to was strictly and precisely worded and issued after carefully
considering/evaluating the import of the arguments and documents referred to by Maynilad, MWSS
and/or creditors Chinatrust Commercial Bank and Suez in relation to admissions, pleadings and/or
pertinent records[13] and that public respondent had the authority to issue the same;
b) public respondent never considered nor held that the Performance bond or assets of the issuing
banks are part or property of the estate of respondent Maynilad subject to rehabilitation and which
respondent Maynilad has not and has never claimed to be;[14]
c) what is relevant is not whether the performance bond or assets of the issuing banks are part of
the estate of respondent Maynilad but whether the act of petitioner in commencing the process for
the payment by the banks of US$98 million out of the US$120 million performance bond is covered
and/or prohibited under sub-paragraphs 2.) and 4.) of the stay order dated November 17, 2003;
d) the jurisdiction of public respondent extends not only to the assets of respondent Maynilad but
also over persons and assets of all those affected by the proceedings x x x upon publication of the
notice of commencement;[15] and
e) the obligations under the Standby Letter of Credit are not solidary and are not exempt from the
coverage of the stay order.
Our Ruling
We will discuss the first two issues raised by petitioner as these are interrelated and make up the
main issue of the petition before us which is, did the rehabilitation court sitting as such, act in excess
of its authority or jurisdiction when it enjoined herein petitioner from seeking the payment of the
concession fees from the banks that issued the Irrevocable Standby Letter of Credit in its favor and
for the account of respondent Maynilad?
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate Rehabilitation to
support its jurisdiction over the Irrevocable Standby Letter of Credit and the banks that issued it.
The section reads in part that jurisdiction over those affected by the proceedings is considered
acquired upon the publication of the notice of commencement of proceedings in a newspaper of
general circulation and goes further to define rehabilitation as an in rem proceeding. This provision
is a logical consequence of the in rem nature of the proceedings, where jurisdiction is acquired by
publication and where it is necessary that the assets of the debtor come within the courts jurisdiction
to secure the same for the benefit of creditors. The reference to all those affected by the proceedings
covers creditors or such other persons or entities holding assets belonging to the debtor under
rehabilitation which should be reflected in its audited financial statements. The banks do not hold
any assets of respondent Maynilad that would be material to the rehabilitation proceedings nor is
Maynilad liable to the banks at this point.
Respondent Maynilads Financial Statement as of December 31, 2001 and 2002 do not show the
Irrevocable Standby Letter of Credit as part of its assets or liabilities, and by respondent Maynilads
own admission it is not. In issuing the clarificatory order of November 27, 2003, enjoining petitioner
from claiming from an asset that did not belong to the debtor and over which it did not acquire
jurisdiction, the rehabilitation court acted in excess of its jurisdiction.
Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that supports
its claim that the commencement of the process to draw on the Standby Letter of Credit is an
enforcement of claim prohibited by and under the Interim Rules and the order of public respondent.
Respondent Maynilad would persuade us that the above provision justifies a leap to the conclusion
that such an enforcement is prohibited by said section because it is a claim against the debtor, its
guarantors and sureties not solidarily liable with the debtor and that there is nothing in the Standby
Letter of Credit nor in law nor in the nature of the obligation that would show or require the obligation
of the banks to be solidary with the respondent Maynilad.
We disagree.
First, the claim is not one against the debtor but against an entity that respondent Maynilad has
procured to answer for its non-performance of certain terms and conditions of the Concession
Agreement, particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims
against guarantors and sureties, but only those claims against guarantors and sureties who
are not solidarily liable with the debtor. Respondent Maynilads claim that the banks are not
solidarily liable with the debtor does not find support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals[16] that the concept of guarantee vis--
vis the concept of an irrevocable letter of credit are inconsistent with each other. The guarantee
theory destroys the independence of the banks responsibility from the contract upon which it was
opened and the nature of both contracts is mutually in conflict with each other. In contracts of
guarantee, the guarantors obligation is merely collateral and it arises only upon the default of the
person primarily liable. On the other hand, in an irrevocable letter of credit, the bank undertakes a
primary obligation. We have also defined a letter of credit as an engagement by a bank or other
person made at the request of a customer that the issuer shall honor drafts or other demands of
payment upon compliance with the conditions specified in the credit. [17]
Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount
upon the presentation of documents[18] and is thus a commitment by the issuer that the party in
whose favor it is issued and who can collect upon it will have his credit against the applicant of the
letter, duly paid in the amount specified in the letter.[19] They are in effect absolute undertakings to
pay the money advanced or the amount for which credit is given on the faith of the instrument.
They are primary obligations and not accessory contracts and while they are security arrangements,
they are not converted thereby into contracts of guaranty. [20] What distinguishes letters of credit
from other accessory contracts, is the engagement of the issuing bank to pay the seller once the
draft and other required shipping documents are presented to it.[21] They are definite undertakings
to pay at sight once the documents stipulated therein are presented.
Letters of Credits have long been and are still governed by the provisions of the Uniform Customs
and Practice for Documentary Credits of the International Chamber of Commerce. In the 1993
Revision it provides in Art. 2 that the expressions Documentary Credit(s) and Standby Letter(s) of
Credit mean any arrangement, however made or described, whereby a bank acting at the request
and on instructions of a customer or on its own behalf is to make payment against stipulated
document(s) and Art. 9 thereof defines the liability of the issuing banks on an irrevocable letter of
credit as a definite undertaking of the issuing bank, provided that the stipulated documents are
presented to the nominated bank or the issuing bank and the terms and conditions of the Credit are
complied with, to pay at sight if the Credit provides for sight payment.[22]
We have accepted, in Feati Bank and Trust Company v. Court of Appeals[23] and Bank of America
NT & SA v. Court of Appeals,[24] to the extent that they are pertinent, the application in our
jurisdiction of the international credit regulatory set of rules known as the Uniform Customs and
Practice for Documentary Credits (U.C.P) issued by the International Chamber of Commerce, which
we said in Bank of the Philippine Islands v. Nery[25] was justified under Art. 2 of the Code of
Commerce, which states:
Acts of commerce, whether those who execute them be merchants or not, and whether specified in
this Code or not should be governed by the provisions contained in it; in their absence, by the
usages of commerce generally observed in each place; and in the absence of both rules, by those
of the civil law.
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner as
the prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose
obligations are not solidary with the debtor. The participating banks obligation are solidary with
respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and
is not conditioned on the prior exhaustion of the debtors assets. These are the same characteristics
of a surety or solidary obligor.
Being solidary, the claims against them can be pursued separately from and independently of the
rehabilitation case, as held in Traders Royal Bank v. Court of Appeals [26] and reiterated in Philippine
Blooming Mills, Inc. v. Court of Appeals,[27] where we said that property of the surety cannot be
taken into custody by the rehabilitation receiver (SEC) and said surety can be sued separately to
enforce his liability as surety for the debts or obligations of the debtor. The debts or obligations for
which a surety may be liable include future debts, an amount which may not be known at the time
the surety is given.
The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks
are not solidary with those of respondent Maynilad. On the contrary, it is issued at the request of
and for the account of Maynilad Water Services, Inc., in favor of the Metropolitan Waterworks and
Sewerage System, as a bond for the full and prompt performance of the obligations by the
concessionaire under the Concession Agreement[28] and herein petitioner is authorized by the banks
to draw on it by the simple act of delivering to the agent a written certification substantially in the
form Annex B of the Letter of Credit. It provides further in Sec. 6, that for as long as the Standby
Letter of Credit is valid and subsisting, the Banks shall honor any written Certification made by
MWSS in accordance with Sec. 2, of the Standby Letter of Credit regardless of the date on which
the event giving rise to such Written Certification arose. [29]
In Silvestre v. Torres and Oben,[33] we said that it is not enough that a remedy is available to prevent
a party from making use of the extraordinary remedy of certiorari but that such remedy be an
adequate remedy which is equally beneficial, speedy and sufficient, not only a remedy which at
some time in the future may offer relief but a remedy which will promptly relieve the petitioner from
the injurious acts of the lower tribunal. It is the inadequacy -- not the mere absence -- of all other
legal remedies and the danger of failure of justice without the writ, that must usually determine the
propriety of certiorari.[34]
2. Respondent Maynilad argues that by commencing the process for payment under the Standby
Letter of Credit, petitioner violated an immediately executory order of the court and, therefore,
comes to Court with unclean hands and should therefore be denied any relief.
It is true that the stay order is immediately executory. It is also true, however, that the Standby
Letter of Credit and the banks that issued it were not within the jurisdiction of the rehabilitation
court. The call on the Standby Letter of Credit, therefore, could not be considered a violation of the
Stay Order.
3. Respondents claim that the filing of the petition pre-empts the original jurisdiction of the lower
court is without merit. The purpose of the initial hearing is to determine whether the petition for
rehabilitation has merit or not. The propriety of the stay order as well as the clarificatory order had
already been passed upon in the hearing previously had for that purpose. The determination of
whether the public respondent was correct in enjoining the petitioner from drawing on the Standby
Letter of Credit will have no bearing on the determination to be made by public respondent whether
the petition for rehabilitation has merit or not. Our decision on the instant petition does not pre-
empt the original jurisdiction of the rehabilitation court.

Taking into consideration our own rulings on the nature of letters of credit and the customs and
usage developed over the years in the banking and commercial practice of letters of credit, we hold
that except when a letter of credit specifically stipulates otherwise, the obligation of the banks
issuing letters of credit are solidary with that of the person or entity requesting for its issuance, the
same being a direct, primary, absolute and definite undertaking to pay the beneficiary upon the
presentation of the set of documents required therein.
WHEREFORE, the petition for certiorari is GRANTED. The Order of November 27, 2003 of the
Regional Trial Court of Quezon City, Branch 90, is hereby declared NULL AND VOID andSET
ASIDE. The status quo Order herein previously issued is hereby LIFTED. In view of the urgency
attending this case, this decision is immediately executory.
No costs.

The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act SO ORDERED.
on the obligation of the banks under the Letter of Credit under the argument that this was not a
solidary obligation with that of the debtor. Being a solidary obligation, the letter of credit is excluded Davide, Jr., C.J., (Chairman), Panganiban, and Carpio, JJ., concur.
from the jurisdiction of the rehabilitation court and therefore in enjoining petitioner from proceeding
against the Standby Letters of Credit to which it had a clear right under the law and the terms of Ynares-Santiago, J., on leave.
said Standby Letter of Credit, public respondent acted in excess of his jurisdiction.

Additional Issues

We proceed to consider the other issues raised in the oral arguments and included in the parties
memoranda:

1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy under the
Interim Rules itself which provides in Sec. 12, Rule 4 that the court may on motion or motu proprio,
terminate, modify or set conditions for the continuance of the stay order or relieve a claim from
coverage thereof. We find, however, that the public respondent had already accomplished this
during the hearing set for the two Urgent Ex Parte motions filed by respondent Maynilad on
November 21 and 24, 2003,[30] where the parties including the creditors, Suez and Chinatrust
Commercial presented their respective arguments. [31] The public respondent then ruled, after
carefully considering/evaluating the import of the arguments and documents referred to by
Maynilad, MWSS and/or the creditors Chinatrust Commercial Bank and Suez in relation to the
admissions, the pleadings, and/or pertinent portions of the records, this court is of the considered
and humble view that the issue must perforce be resolved in favor of Maynilad. [32] Hence to pursue
their opposition before the same court would result in the presentation of the same arguments and
issues passed upon by public respondent.

Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective remedy
questioning the orders of the rehabilitation court since they are immediately executory and a petition
for review or an appeal therefrom shall not stay the execution of the order unless restrained or
enjoined by the appellate court. In this situation, it had no other remedy but to seek recourse to us
through this petition for certiorari.
 JOSE MARCEL PANLILIO, ERLINDA PANLILIO, NICOLE G.R. No. 173846 At the time, however, of the filing of the petition for rehabilitation, there were a number of criminal
MORRIS and MARIO T. CRISTOBAL, charges[7] pending against petitioners in Branch 51 of the RTC of Manila. These criminal charges
were initiated by respondent Social Security System (SSS) and involved charges of violations of
Petitioners, Section 28 (h)[8] of Republic Act 8282, or the Social Security Act of 1997 (SSS law), in relation to
Present: Article 315 (1) (b)[9] of the Revised Penal Code, or Estafa. Consequently, petitioners filed with the
-versus- RTC of Manila, Branch 51, a Manifestation and Motion to Suspend Proceedings. [10] Petitioners argued
that the stay order issued by Branch 24 should also apply to the criminal charges pending in Branch
51. Petitioners, thus, prayed that Branch 51 suspend its proceedings until the petition for
rehabilitation was finally resolved.
REGIONAL TRIAL COURT, BRANCH 51, CITY OF
MANILA, represented by HON. PRESIDING JUDGE CORONA,* C.J., On December 13, 2004, Branch 51 issued an Order [11] denying petitioners motion to suspend the
ANTONIO M. ROSALES; PEOPLE OF THE PHILIPPINES; and proceedings. It ruled that the stay order issued by Branch 24 did not cover criminal proceedings, to
the SOCIAL SECURITY SYSTEM, CARPIO, J., Chairperson, wit:

Respondents. PERALTA, xxxx

PEREZ,** and Clearly then, the issue is, whether the stay order issued by the RTC commercial court, Branch 24
includes the above-captioned criminal cases.
MENDOZA, JJ.
The Court shares the view of the private complainants and the SSS that the said stay order does
not include the prosecution of criminal offenses. Precisely, the law criminalizes the non-remittance
of SSS contributions by an employer to protect the employees from unscrupulous employers.
Clearly, in these cases, public interest requires that the said criminal acts be immediately
investigated and prosecuted for the protection of society.
Promulgated:
From the foregoing, the inescapable conclusion is that the stay order issued by RTC Branch 24 does
not include the above-captioned cases which are criminal in nature.[12]
February 2, 2011
Branch 51 denied the motion for reconsideration filed by petitioners.

On August 19, 2005, petitioners filed a petition for certiorari[13] with the CA assailing the Order of
x -------------------------------------------------------------------------------x
Branch 51.

DECISION
PERALTA, J.:
Before this Court is a petition for review on certiorari[1] under Rule 45 of the Rules of Court, seeking
to set aside the April 27, 2006 Decision [2] and August 2, 2006 Resolution[3] of the Court of the
Appeals (CA) in CA-G.R. SP No. 90947.
The facts of the case are as follows:
On October 15, 2004, Jose Marcel Panlilio, Erlinda Panlilio, Nicole Morris and Marlo Cristobal
(petitioners), as corporate officers of Silahis International Hotel, Inc. (SIHI), filed with the Regional
Trial Court (RTC) of Manila, Branch 24, a petition for Suspension of Payments and Rehabilitation[4] in
SEC Corp. Case No. 04-111180.
On October 18, 2004, the RTC of Manila, Branch 24, issued an Order [5] staying all claims against
SIHI upon finding the petition sufficient in form and substance. The pertinent portions of the Order
read:
Finding the petition, together with its annexes, sufficient in form and substance and pursuant to
Section 6, Rule 4 of the Interim Rules on Corporate Rehabilitation, the Court hereby:
xxxx
2) Stays the enforcement of all claims, whether for money or otherwise and whether such
enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not
solidarily liable with the debtor.[6]
On April 27, 2006, the CA issued a Decision denying the petition, the dispositive portion of which
reads:
WHEREFORE, premises considered, the Petition is hereby DENIED and is accordingly DISMISSED.
No costs.[14]
The CA discussed that violation of the provisions of the SSS law was a criminal liability and was,
thus, personal to the offender. As such, the CA held that the criminal proceedings against the
petitioners should not be considered a claim against the corporation and, consequently, not covered
by the stay order issued by Branch 24.
Petitioners filed a Motion for Reconsideration,[15] which was, however, denied by the CA in a
Resolution dated August 2, 2006.
Hence, herein petition, with petitioners raising a lone issue for this Courts resolution, to wit:
x x x WHETHER OR NOT THE STAY ORDER ISSUED BY BRANCH 24, REGIONAL TRIAL COURT OF
MANILA, IN SEC CORP. CASE NO. 04-111180 COVERS ALSO VIOLATION OF SSS LAW FOR NON-
REMITTANCE OF PREMIUMS AND VIOLATION OF [ARTICLE] [3] 515 OF THE REVISED PENAL
CODE.[16]
The petition is not meritorious.
To begin with, corporate rehabilitation connotes the restoration of the debtor to a position of
successful operation and solvency, if it is shown that its continued operation is economically feasible
and its creditors can recover more, by way of the present value of payments projected in the
rehabilitation plan, if the corporation continues as a going concern than if it is immediately
liquidated.[17] It contemplates a continuance of corporate life and activities in an effort to restore
and reinstate the corporation to its former position of successful operation and solvency, the purpose
being to enable the company to gain a new lease on life and allow its creditors to be paid their
claims out of its earnings.[18]
A principal feature of corporate rehabilitation is the suspension of claims against the distressed
corporation. Section 6 (c) of Presidential Decree No. 902-A, as amended, provides for suspension
of claims against corporations undergoing rehabilitation, to wit:
Section 6 (c). x x x
x x x Provided, finally, that upon appointment of a management committee, rehabilitation receiver,
board or body, pursuant to this Decree, all actions for claims against corporations, partnerships
or associations under management or receivership pending before any court, tribunal, board or
body, shall be suspended accordingly.[19]
In November 21, 2000, this Court En Banc promulgated the Interim Rules of Procedure on
Corporate Rehabilitation,[20] Section 6, Rule 4 of which provides a stay order on all claims against
the corporation, thus:
Stay Order. - If the court finds the petition to be sufficient in form and substance, it shall, not later
than five (5) days from the filing of the petition, issue an Order x x x; (b) staying enforcement
of all claims, whether for money or otherwise and whether such enforcement is by court action or
otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor; x x
x[21]
In Finasia Investments and Finance Corporation v. Court of Appeals, [22] the term "claim" has been
construed to refer to debts or demands of a pecuniary nature, or the assertion to have money paid.
The purpose for suspending actions for claims against the corporation in a rehabilitation proceeding
is to enable the management committee or rehabilitation receiver to effectively exercise its/his
powers free from any judicial or extrajudicial interference that might unduly hinder or prevent the
rescue of the debtor company.[23]
The issue to be resolved then is: does the suspension of all claims as an incident to a corporate
rehabilitation also contemplate the suspension of criminal charges filed against the corporate officers
of the distressed corporation?
This Court rules in the negative.
In Rosario v. Co[24] (Rosario), a case of recent vintage, the issue resolved by this Court was whether
or not during the pendency of rehabilitation proceedings, criminal charges for violation of Batas
Pambansa Bilang 22 should be suspended, was disposed of as follows:
x x x the gravamen of the offense punished by B.P. Blg. 22 is the act of making and issuing a
worthless check; that is, a check that is dishonored upon its presentation for payment. It is designed
to prevent damage to trade, commerce, and banking caused by worthless checks. In Lozano v.
Martinez, this Court declared that it is not the nonpayment of an obligation which the law punishes.
The law is not intended or designed to coerce a debtor to pay his debt. The thrust of the law is to
prohibit, under pain of penal sanctions, the making and circulation of worthless checks. Because of
its deleterious effects on the public interest, the practice is proscribed by the law. The law punishes
the act not as an offense against property, but an offense against public order. The prime purpose
of the criminal action is to punish the offender in order to deter him and others from committing
the same or similar offense, to isolate him from society, to reform and rehabilitate him or, in general,
to maintain social order. Hence, the criminal prosecution is designed to promote the public welfare
by punishing offenders and deterring others.
Consequently, the filing of the case for violation of B.P. Blg. 22 is not a "claim" that can
be enjoined within the purview of P.D. No. 902-A. True, although conviction of the
accused for the alleged crime could result in the restitution, reparation or indemnification
of the private offended party for the damage or injury he sustained by reason of the
felonious act of the accused, nevertheless, prosecution for violation of B.P. Blg. 22 is a
criminal action.
A criminal action has a dual purpose, namely, the punishment of the offender and indemnity to the
offended party. The dominant and primordial objective of the criminal action is the punishment of
the offender. The civil action is merely incidental to and consequent to the conviction of the accused.
The reason for this is that criminal actions are primarily intended to vindicate an outrage against
the sovereignty of the state and to impose the appropriate penalty for the vindication of the
disturbance to the social order caused by the offender. On the other hand, the action between the
private complainant and the accused is intended solely to indemnify the former. [25]
Rosario is at fours with the case at bar. Petitioners are charged with violations of Section 28 (h) of
the SSS law, in relation to Article 315 (1) (b) of the Revised Penal Code, or Estafa. The SSS law
clearly criminalizes the non-remittance of SSS contributions by an employer to protect the
employees from unscrupulous employers. Therefore, public interest requires that the said criminal
acts be immediately investigated and prosecuted for the protection of society.
The rehabilitation of SIHI and the settlement of claims against the corporation is not a legal ground
for the extinction of petitioners criminal liabilities. There is no reason why criminal proceedings
should be suspended during corporate rehabilitation, more so, since the prime purpose of the
criminal action is to punish the offender in order to deter him and others from committing the same
or similar offense, to isolate him from society, reform and rehabilitate him or, in general, to maintain
social order.[26] As correctly observed in Rosario,[27] it would be absurd for one who has engaged in
criminal conduct could escape punishment by the mere filing of a petition for rehabilitation by the
corporation of which he is an officer.
The prosecution of the officers of the corporation has no bearing on the pending rehabilitation of
the corporation, especially since they are charged in their individual capacities. Such being the case,
the purpose of the law for the issuance of the stay order is not compromised, since the appointed
rehabilitation receiver can still fully discharge his functions as mandated by law. It bears to stress
that the rehabilitation receiver is not charged to defend the officers of the corporation. If there is
anything that the rehabilitation receiver might be remotely interested in is whether the court also
rules that petitioners are civilly liable. Such a scenario, however, is not a reason to suspend the
criminal proceedings, because as aptly discussed in Rosario, should the court prosecuting the
officers of the corporation find that an award or indemnification is warranted, such award would fall
under the category of claims, the execution of which would be subject to the stay order issued by
the rehabilitation court.[28] The penal sanctions as a consequence of violation of the SSS law, in
relation to the revised penal code can therefore be implemented if petitioners are found guilty after
trial. However, any civil indemnity awarded as a result of their conviction would be subject to the
stay order issued by the rehabilitation court. Only to this extent can the order of suspension be
considered obligatory upon any court, tribunal, branch or body where there are pending actions for
claims against the distressed corporation.[29]
On a final note, this Court would like to point out that Congress has recently enacted Republic Act
No. 10142, or the Financial Rehabilitation and Insolvency Act of 2010. [30] Section 18
thereof explicitly provides that criminal actions against the individual officer of a corporation are
not subject to the Stay or Suspension Order in rehabilitation proceedings, to wit:
The Stay or Suspension Order shall not apply:
xxxx
(g) any criminal action against individual debtor or owner, partner, director or officer of a debtor
shall not be affected by any proceeding commenced under this Act.
Withal, based on the foregoing discussion, this Court rules that there is no legal impediment for
Branch 51 to proceed with the cases filed against petitioners.
WHEREFORE, premises considered, the petition is DENIED. The April 27, 2006 Decision
and August 2, 2006 Resolution of the Court of Appeals in CA-G.R. SP No. 90947 are AFFIRMED.
The Regional Trial Court of Manila, Branch 51, is ORDERED to proceed with the criminal cases
filed against petitioners.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
EN BANC bank. In return, ASB requests the release of the #27 Annapolis property which will be
BANK OF THE PHILIPPINE G.R. No. 164641 placed in the ASB creditors asset pool. [8]
ISLANDS, as successor of Far
East Bank and Trust Company, The dacion would constitute full payment of the entire obligation due to BPI because
Petitioner, Present: the balance was then to be considered waived, as per the Rehabilitation Plan.[9]
PUNO, C.J.,
QUISUMBING, BPI opposed the Rehabilitation Plan and moved for the dismissal of the ASB Groups
YNARES-SANTIAGO, petition for rehabilitation.[10] However, on 26 April 2001, the SEC hearing panel issued
SANDOVAL-GUTIERREZ, an order[11] approving ASB Groups proposed rehabilitation plan and appointed Mr.
- versus - CARPIO, Fortunato Cruz as rehabilitation receiver.
AUSTRIA-MARTINEZ,
BPI filed a petition for review[12] of the 26 April 2001 order before the SEC en banc,
CORONA,
imputing grave abuse of discretion on the part of the hearing panel. It argued that
CARPIO-MORALES,
the Orderconstituted an arbitrary violation of BPIs freedom and right to contract since
AZCUNA,
the Rehabilitation Plan compelled BPI to enter into a dacion en pago agreement with
SECURITIES AND EXCHANGE TINGA,
the ASB Group.[13] The SEC en banc denied the petition.[14]
COMMISSION, REHABILITATION CHICO-NAZARIO, RECEIVER, ASB HOLDINGS,
INC., VELASCO, JR., BPI then filed a petition for review[15] before the Court of Appeals (CA), claiming that
ASB DEVELOPMENT CORPORATION, NACHURA, the SEC en banc erred in affirming the approval of the Rehabilitation Plan despite being
ASB LAND, INC., ASB FINANCE, REYES, and violative of BPIs contractual rights. BPI contended that the terms of the Rehabilitation
INC., MAKATI HOPE CHRISTIAN LEONARDO DE CASTRO, JJ. Plan would impair its freedom to contract, and alleged that the dacion en pago was a
SCHOOL, INC., BEL-AIR HOLDINGS mode of payment beneficial to the ASB Group only.[16]
CORP., WINCHESTER TRADING, Promulgated:
INC., VYL DEVELOPMENT CORP., The CA dismissed the petition for lack of merit. It held that considering that the dacion
GERRICK HOLDINGS CORP., December 20, 2007 en pago transaction could proceed only proceed upon the mutual agreement of the
NEIGHBORHOOD HOLDINGS, INC., parties, BPIs assertion that it is being coerced could not be sustained. At no point would
and THE COURT OF APPEALS, the Rehabilitation Plan compel secured creditors such as BPI to agree to a settlement
Respondents. agreement against their will, the CA added. Moreover, BPI could refuse to accept any
x--------------------------------------------------------------------------- x arrangement contemplated by the receiver and just assert its preferred right in the
liquidation and distribution of the assets of the ASB Group.[17] BPI filed a motion for
DECISION reconsideration, but the same was denied for lack of merit.[18]
TINGA, J.: Before this Court, BPI asserts that the CA erred in ruling that the approval by the SEC
of the ASB Groups Rehabilitation Plan did not violate BPIs rights as a creditor.[19] It
For resolution is a petition seeking to nullify the 30 January 2004 Decision of the
[1]
maintains its position that the dacion en pago is a form of coercion or compulsion, and
Court of Appeals in CA-G.R. SP No. 77309[2] upholding the Securities and Exchange
violative of the rights of secured creditors.[20] It asserts that in order for the
Commissions (SEC) approval of the rehabilitation of the ASB Group of Companies (ASB
Rehabilitation Plan to be feasible and legally tenable, it must reflect the express and
Group) in SEC En Banc Case No. EB-726.[3]
free consent of the parties; i.e, that the conditions should not be imposed but agreed
The antecedent facts are as follows: upon by the parties. By approving the Rehabilitation Plan, the SEC hearing panel totally
disregarded the efficacy of the mortgage agreements between the parties, and
The Bank of the Philippine Islands (BPI), through its predecessor-in- interest, Far East sanctioned a mode of payment which is solely for the unilateral benefit of the ASB
Bank and Trust Company Group.[21] This is so because in the event that the secured creditors such as itself would
(FEBTC), extended credit accommodations to the ASB Group[4] with an outstanding ag not agree to dacion en pago, the ASB Groups obligations would be settled at the selling
gregate principal amount of P86,800,000.00, secured by a real estate mortgage over prices of the mortgaged properties to be dictated by the ASB Group,[22] rendering BPIs
two (2) properties located in Greenhills, San Juan.[5] On 2 May 2000, the ASB Group status as a preferred creditor illusory.[23]
filed a petition for rehabilitation and suspension of payments before the SEC, docketed
as SEC Case No. 05-00-6609.[6] Thereafter, on 18 August 2000, the interim receiver BPI further claims that despite its rejection of the Rehabilitation Plan, no effort was
submitted its Proposed Rehabilitation Plan (Rehabilitation Plan)[7] for the ASB Group. made to resolve the impasse on the valuation of the mortgaged properties. With no
The Rehabilitation Plan provides, among others, a dacion en pago by the ASB Group to repayment scheme for secured creditors not accepting the Rehabilitation Plan, the
BPI of one of the properties mortgaged to the latter at the ASB Group as selling value same has become discriminatory.[24] Moreover, any interference on the rights of the
of P84,000,000.00 against the total amount of the ASB Groups exposure to the bank. In secured creditors must not be so indefinite and open-ended as to effectively
turn, ASB Group would require the release of the other property mortgaged to BPI, to deprive secured creditors of their right to their security,[25] BPI adds.
be thereafter placed in the asset pool. Specifically, the pertinent portion of the plan
In its Comment,[26] the SEC, through the Office of the Solicitor General, claims that the
reads:
terms and conditions of the Rehabilitation Plan do not violate BPIs right as a creditor
x x x ASB plans to invoke a dacion en pago for its #35 Eisenhower property at ASBs because the dacion en pago transaction contemplated in the plan can only proceed
selling value of P84 million against the total amount of the ASBs exposure to the upon mutual agreement of the parties. Moreover, being a secured creditor, BPI enjoys
preference over unsecured creditors, thus there is no reason for BPI to fear the non-
payment of the loan, or the inability to assert its preferred right over the mortgaged
property.[27]
On the other hand, private respondents maintain that the non-impairment clause of the
Constitution relied on by BPI is a limit on the exercise of legislative power and not of
judicial or quasi-judicial power. The SECs approval of the Rehabilitation Plan was an
exercise of adjudicatory power by an administrative agency and thus the non-
impairment clause does not apply.[28] In addition, they stress that there is no coercion
or compulsion that would be employed under the Rehabilitation Plan. If dacion en
pago fails to materialize, the Rehabilitation Plan contemplates to settle the obligations
to secured creditors with mortgaged properties at selling prices.[29] Finally, they claim
that BPI failed to submit any valuation of the mortgage properties to substantiate its
objection to the Rehabilitation Plan, making its objection thereto totally
unreasonable.[30]
The petition must be denied.
The very same issues confronted the Court in the case of Metropolitan Bank & Trust
Company v. ASB Holdings, et al.[31] In this case, Metropolitan Bank & Trust Company
(MBTC) refused to enter into a dacion en pago arrangement contained in
ASBs proposed Rehabilitation Plan.[32] MBTC argued, among others, that the forced
transfer of properties and the diminution of its right to enforce its lien on the mortgaged
properties violate its constitutional right against impairment of contracts and right to
due process.The Court ruled that there is no impairment of contracts because the
approval of the Rehabilitation Plan and the appointment of a rehabilitation receiver
merely suspends the action for claims against the ASB Group, and MBTC may still
enforce its preference when the assets of the ASB Group will be liquidated. But if the
rehabilitation is found to be no longer feasible, then the claims against the distressed
corporation would have to be settled eventually and the secured creditors shall enjoy
preference over the unsecured ones.Moreover, the Court stated that there is no
compulsion to enter into a dacion en pago agreement, nor to waive the interests,
penalties and related charges, since these are merely proposals to creditors such as
MBTC, such that in the event the secured creditors refuse the dacion, the Rehabilitation
Plan proposes to settle the obligations to secured creditors with mortgaged properties
at selling prices.
undertaking really partakes in a sense of the nature of sale, that is, the creditor is really
buying the thing or property of the debtor, the payment for which is to be charged
against the debtors debt. As such, the essential elements of a contract of sale, namely;
consent, object certain, and cause or consideration must be present.[38] Being a form
of contract, the dacion en pago agreement cannot be perfected without the consent of
the parties involved.
We find no element of compulsion in the dacion en pago provision of the Rehabilitation
Plan. It was not the only solution presented by the ASB to pay its creditors. In fact, it
was stated in the Rehabilitation Plan that:
x x x. If the dacion en pago herein contemplated does not materialize for failure of the
secured creditors to agree thereto, the rehabilitation plan contemplates to settle the
obligations (without interest, penalties and other related charges accruing after the
date of the initial suspension order) to secured creditors with mortgaged properties at
ASB selling prices for the general interest of the employees, creditors, unit buyers,
government, general public and the economy.[39]
Thus, if BPI does not find the dacion en pago modality acceptable, the ASB Group can
propose to settle its debts at such amount as is equivalent to the selling price of the
mortgaged properties. If BPI still refuses this option, it can assert its rights in the
liquidation and distribution of the ASB Groups assets. It will not lose its status as a
secured creditor, retaining its preference over unsecured creditors when the assets of
the corporation are finally liquidated.[40]
WHEREFORE, in view of the foregoing, the petition is
DENIED and the Decision dated 30 January 2004 of the Court of Appeals in CA-G.R. SP
No. 77309 is AFFIRMED.Costs against petitioner.
SO ORDERED.
DANTE O. TINGA
Associate Justice

Rehabilitation proceedings in our jurisdiction, much like the bankruptcy laws of

the United States, have equitable and rehabilitative purposes. On the one hand, they
attempt to provide for the efficient and equitable distribution of an insolvent debtors
remaining assets to its creditors; and on the other, to provide debtors with a fresh start
by relieving them of the weight of their outstanding debts and permitting them to
reorganize their affairs.[33] The rationale of P.D. No. 902-A, as amended, is to effect a
feasible and viable rehabilitation,[34] by preserving a foundering business as going
concern, because the assets of a business are often more valuable when so maintained
than they would be when liquidated.[35]

The Court reiterates that the SECs approval of the Rehabilitation Plan did not impair
BPIs right to contract. As correctly contended by private respondents, the non-
impairment clause is a limit on the exercise of legislative power and not of judicial or
quasi-judicial power.[36] The SEC, through the hearing panel that heard the petition for
approval of the Rehabilitation Plan, was acting as a quasi-judicial body and thus, its
order approving the plan cannot constitute an impairment of the right and the freedom
to contract.

Besides, the mere fact that the Rehabilitation Plan proposes a dacion en pago approach
does not render it defective on the ground of impairment of the right to contract.Dacion
en pago is a special mode of payment where the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an outstanding debt.[37] The
CONSUELO METAL G.R. No. 152580
CORPORATION,
Petitioner,
Present:
PUNO, C.J., Chairperson,
- versus - CARPIO,
CORONA,
AZCUNA, and
LEONARDO-DE CASTRO, JJ.
PLANTERS DEVELOPMENT
BANK and ATTY. JESUSA PRADO- Promulgated:
MANINGAS, in her capacity as
Ex-officio Sheriff of Manila,
Respondents. June 26, 2008
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CARPIO, J.:
The Case
This is a petition for review[1] seeking to reverse the 14 December 2001 Decision[2] and the 6
March 2002 Resolution[3] of the Court of Appeals in CA-G.R. SP No. 65069. In its 14
December 2001 Decision, the Court of Appeals dismissed petitioner Consuelo Metal
Corporations (CMC) petition for certiorari and affirmed the 25 April 2001 Order[4] of the
Regional Trial Court, Branch 46, Manila (trial court). In its 6 March 2002 Resolution, the Court
of Appeals partially granted CMCs motion for reconsideration and remanded the case to the
Securities and Exchange Commission (SEC) for further proceedings.
The Facts
On 1 April 1996, CMC filed before the SEC a petition to be declared in a state of suspension
of payment, for rehabilitation, and for the appointment of a rehabilitation receiver or
management committee under Section 5(d) of Presidential Decree No. 902-A.[5] On 2 April
1996, the SEC, finding the petition sufficient in form and substance, declared that all actions
for claims against CMC pending before any court, tribunal, office, board, body and/or
commission are deemed suspended immediately until further order from the SEC.[6]
In an Order dated 13 September 1999, the SEC directed the creation of a management
committee to undertake CMCs rehabilitation and reiterated the suspension of all actions for
claims against CMC.[7]
On 29 November 2000, upon the management committees recommendation,[8] the SEC
issued an Omnibus Order directing the dissolution and liquidation of CMC.[9] The SEC also
directed that the proceedings on and implementation of the order of liquidation be
commenced at the Regional Trial Court to which this case shall be transferred.[10]
Thereafter, respondent Planters Development Bank (Planters Bank), one of CMCs creditors,
commenced the extra-judicial foreclosure of CMCs real estate mortgage. Public auctions were
scheduled on 30 January 2001 and 6 February 2001.
CMC filed a motion for the issuance of a temporary restraining order and a writ of preliminary
injunction with the SEC to enjoin the foreclosure of the real estate mortgage. On 29 January
2001, the SEC issued a temporary restraining order to maintain the status quo and ordered
the immediate transfer of the case records to the trial court.[11]
The case was then transferred to the trial court. In its 25 April 2001 Order, the trial court
denied CMCs motion for issuance of a temporary restraining order. The trial court ruled that
since the SEC had already terminated and decided on the merits CMCs petition for suspension
of payment, the trial court no longer had legal basis to act on CMCs motion.
On 28 May 2001, the trial court denied CMCs motion for reconsideration.[12] The trial court
ruled that CMCs petition for suspension of payment could not be converted into a petition for
dissolution and liquidation because they covered different subject matters and were governed
by different rules. The trial court stated that CMCs remedy was to file a new petition for
dissolution and liquidation either with the SEC or the trial court.
CMC filed a petition for certiorari with the Court of Appeals. CMC alleged that the trial court
acted with grave abuse of discretion amounting to lack of jurisdiction when it required CMC
to file a new petition for dissolution and liquidation with either the SEC or the trial court when
the SEC clearly retained jurisdiction over the case.
On 13 June 2001, Planters Bank extra-judicially foreclosed the real estate mortgage.[13]
The Ruling of the Court of Appeals
On 14 December 2001, the Court of Appeals dismissed the petition and upheld the 25 April
2001 Order of the trial court. The Court of Appeals held that the trial court correctly denied
CMCs motion for the issuance of a temporary restraining order because it was only an
ancillary remedy to the petition for suspension of payment which was already terminated. The
Court of Appeals added that, under Section 121 of the Corporation Code,[14] the SEC has
jurisdiction to hear CMCs petition for dissolution and liquidation.
CMC filed a motion for reconsideration. CMC argued that it does not have to file a new petition
for dissolution and liquidation with the SEC but that the case should just be remanded to the
SEC as a continuation of its jurisdiction over the petition for suspension of payment. CMC
also asked that Planters Banks foreclosure of the real estate mortgage be declared void.
In its 6 March 2002 Resolution, the Court of Appeals partially granted CMCs motion for
reconsideration and ordered that the case be remanded to the SEC under Section 121 of the
Corporation Code. The Court of Appeals also ruled that since the SEC already ordered CMCs
dissolution and liquidation, Planters Banks foreclosure of the real estate mortgage was in
order.
Planters Bank filed a motion for reconsideration questioning the remand of the case to the
SEC. In a resolution dated 19 July 2002, the Court of Appeals denied the motion for
reconsideration.
Not satisfied with the 6 March 2002 Resolution, CMC filed this petition for review on certiorari.
The Issues
CMC raises the following issues:
1. Whether the present case falls under Section 121 of the Corporation Code,
which refers to the SECs jurisdiction over CMCs dissolution and liquidation, or
is only a continuation of the SECs jurisdiction over CMCs petition for suspension
of payment; and
2. Whether Planters Banks foreclosure of the real estate mortgage is valid.
The Courts Ruling
The petition has no merit.
 The SEC has jurisdiction to order CMCs dissolution
but the trial court has jurisdiction over CMCs liquidation.
While CMC agrees with the ruling of the Court of Appeals that the SEC has jurisdiction over
CMCs dissolution and liquidation, CMC argues that the Court of Appeals remanded the case
to the SEC on the wrong premise that the applicable law is Section 121 of the Corporation
Code. CMC maintains that the SEC retained jurisdiction over its dissolution and liquidation
because it is only a continuation of the SECs jurisdiction over CMCs original petition for
suspension of payment which had not been finally disposed of as of 30 June 2000.
On the other hand, Planters Bank insists that the trial court has jurisdiction over CMCs
dissolution and liquidation. Planters Bank argues that dissolution and liquidation are entirely
new proceedings for the termination of the existence of the corporation which are
incompatible with a petition for suspension of payment which seeks to preserve corporate
existence.
Republic Act No. 8799 (RA 8799)[15] transferred to the appropriate regional trial courts the
SECs jurisdiction defined under Section 5(d) of Presidential Decree No. 902-A. Section 5.2 of
RA 8799 provides:
The Commissions jurisdiction over all cases enumerated under Sec. 5 of
Presidential Decree No. 902-A is hereby transferred to the Courts of
general jurisdiction or the appropriate Regional Trial Court: Provided,
That the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise
jurisdiction over these cases. The Commission shall retain jurisdiction
over pending cases involving intra-corporate disputes submitted for final
resolution which should be resolved within one (1) year from the
enactment of this Code. The Commission shall retain jurisdiction
over pending suspension of payments/rehabilitation cases filed
as of 30 June 2000 until finally disposed. (Emphasis supplied)
The SEC assumed jurisdiction over CMCs petition for suspension of payment and issued a
suspension order on 2 April 1996 after it found CMCs petition to be sufficient in form and
substance. While CMCs petition was still pending with the SEC as of 30 June 2000, it was
finally disposed of on 29 November 2000 when the SEC issued its Omnibus Order directing
the dissolution of CMC and the transfer of the liquidation proceedings before the appropriate
trial court. The SEC finally disposed of CMCs petition for suspension of payment when it
determined that CMC could no longer be successfully rehabilitated.
However, the SECs jurisdiction does not extend to the liquidation of a corporation. While the
SEC has jurisdiction to order the dissolution of a corporation,[16] jurisdiction over the
liquidation of the corporation now pertains to the appropriate regional trial courts. This is the
reason why the SEC, in its 29 November 2000 Omnibus Order, directed that the proceedings
on and implementation of the order of liquidation be commenced at the Regional Trial Court
to which this case shall be transferred. This is the correct procedure because the liquidation
of a corporation requires the settlement of claims for and against the corporation, which
clearly falls under the jurisdiction of the regular courts. The trial court is in the best position
to convene all the creditors of the corporation, ascertain their claims, and determine their
preferences.
Foreclosure of real estate mortgage is valid.
CMC maintains that the foreclosure is void because it was undertaken without the knowledge
and previous consent of the liquidator and other lien holders. CMC adds that the rules on
concurrence and preference of credits should apply in foreclosure proceedings. Assuming that
Planters Bank can foreclose the mortgage, CMC argues that the foreclosure is still void
because it was conducted in violation of Section 15, Rule 39 of the Rules of Court which states
that the sale should not be earlier than nine oclock in the morning and not later than two
oclock in the afternoon.
On the other hand, Planters Bank argues that it has the right to foreclose the real estate
mortgage because of non-payment of the loan obligation. Planters Bank adds that the rules
on concurrence and preference of credits and the rules on insolvency are not applicable in
this case because CMC has been not been declared insolvent and there are no insolvency
proceedings against CMC.
In Rizal Commercial Banking Corporation v. Intermediate Appellate Court,[17] we held that if
rehabilitation is no longer feasible and the assets of the corporation are finally liquidated,
secured creditors shall enjoy preference over unsecured creditors, subject only to the
provisions of the Civil Code on concurrence and preference of credits.Creditors of secured
obligations may pursue their security interest or lien, or they may choose to abandon the
preference and prove their credits as ordinary claims.[18]
Moreover, Section 2248 of the Civil Code provides:
Those credits which enjoy preference in relation to specific real property or real rights,
exclude all others to the extent of the value of the immovable or real right to which the
preference refers.
In this case, Planters Bank, as a secured creditor, enjoys preference over a specific
mortgaged property and has a right to foreclose the mortgage under Section 2248 of the Civil
Code. The creditor-mortgagee has the right to foreclose the mortgage over a specific real
property whether or not the debtor-mortgagor is under insolvency or liquidation
proceedings. The right to foreclose such mortgage is merely suspended upon the
appointment of a management committee or rehabilitation receiver[19] or upon the issuance
of a stay order by the trial court.[20] However, the creditor-mortgagee may exercise his right
to foreclose the mortgage upon the termination of the rehabilitation proceedings or
upon the lifting of the stay order.[21]
Foreclosure proceedings have in their favor the presumption of regularity and the burden of
evidence to rebut the same is on the party that seeks to challenge the proceedings.[22]CMCs
challenge to the foreclosure proceedings has no merit. The notice of sale clearly specified
that the auction sale will be held at 10:00 oclock in the morning or soon thereafter, but not
later than 2:00 oclock in the afternoon.[23] The Sheriffs Minutes of the Sale stated that the
foreclosure sale was actually opened at 10:00 A.M. and commenced at 2:30 P.M.[24] There
was nothing irregular about the foreclosure proceedings.
WHEREFORE, we DENY the petition. We REINSTATE the 29 November 2000 Omnibus
Order of the Securities and Exchange Commission directing the Regional Trial Court, Branch
46, Manila to immediately undertake the liquidation of Consuelo Metal
Corporation. We AFFIRM the ruling of the Court of Appeals that Planters Development Banks
extra-judicial foreclosure of the real estate mortgage is valid.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
G.R. No. 171132 August 15, 2012
MANUEL D. YNGSON, JR. (in his capacity as the Liquidator of ARCAM & COMPANY,
INC.), Petitioner,
vs.
PHILIPPINE NATIONAL BANK, Respondent.
DECISION
VILLARAMA, JR., J.:
On appeal are the Resolutions dated April 14, 2005 1 and January 24, 20062 of the Court of Appeals
(CA) in CA-G.R. SP No. 88735. The CA dismissed petitioner's petition for review of the January 4,
2005 Resolution3 and February 9, 2000 Order4 of the Securities and Exchange Commission (SEC)
for failure of petitioner to attach to the petition copies of material portions of the records and other
relevant or pertinent documents.
The facts follow:
ARCAM & Company, Inc. (ARCAM) is engaged in the operation of a sugar mill in Pampanga. 5 Between
1991 and 1993, ARCAM applied for and was granted a loan by respondent Philippine National Bank
(PNB).6 To secure the loan, ARCAM executed a Real Estate Mortgage over a 350,004-square meter
parcel of land covered by TCT No. 340592-R and a Chattel Mortgage over various personal properties
consisting of machinery, generators, field transportation and heavy equipment.
ARCAM, however, defaulted on its obligations to PNB. Thus, on November 25, 1993, pursuant to
the provisions of the Real Estate Mortgage and Chattel Mortgage, PNB initiated extrajudicial
foreclosure proceedings in the Office of the Clerk of Court/Ex Officio Sheriff of the Regional Trial
Court (RTC) of Guagua, Pampanga.7 The public auction was scheduled on December 29, 1993 for
the mortgaged real properties and December 8, 1993 for the mortgaged personal properties.
On December 7, 1993, ARCAM filed before the SEC a Petition for Suspension of Payments,
Appointment of a Management or Rehabilitation Committee, and Approval of Rehabilitation Plan,
with application for issuance of a temporary restraining order (TRO) and writ of preliminary
injunction. The SEC issued a TRO and subsequently a writ of preliminary injunction, enjoining PNB
and the Sheriff of the RTC of Guagua, Pampanga from proceeding with the foreclosure sale of the
mortgaged properties.8 An interim management committee was also created.
On February 9, 2000, the SEC ruled that ARCAM can no longer be rehabilitated. The SEC noted that
the petition for suspension of payment was filed in December 1993 and six years had passed but
the potential white knight" investor had not infused the much needed capital to bail out ARCAM
from its financial difficulties.9 Thus, the SEC decreed that ARCAM be dissolved and placed under
liquidation.10 The SEC Hearing Panel also granted PNBs motion to dissolve the preliminary injunction
and appointed Atty. Manuel D. Yngson, Jr. & Associates as Liquidator for
ARCAM.11 With this development, PNB revived the foreclosure case and requested the RTC Clerk of
Court to re-schedule the sale at public auction of the mortgaged properties.
Contending that foreclosure during liquidation was improper, petitioner filed with the SEC a Motion
for the Issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction to enjoin
the foreclosure sale of ARCAMs assets. The SEC en banc issued a TRO effective for seventy-two
(72) hours, but said TRO lapsed without any writ of preliminary injunction being issued by the SEC.
Consequently, on July 28, 2000, PNB resumed the proceedings for the extrajudicial foreclosure sale
of the mortgaged properties.12 PNB emerged as the highest winning bidder in the auction sale, and
certificates of sale were issued in its favor.
On November 16, 2000, petitioner filed with the SEC a motion to nullify the auction sale. 13 Petitioner
posited that all actions against companies which are under liquidation, like ARCAM, are suspended
because liquidation is a continuation of the petition for suspension proceedings. Petitioner argued
that the prohibition against foreclosure subsisted during liquidation because payment of all of
ARCAMs obligations was proscribed except those authorized by the Commission. Moreover,
petitioner asserted that the mortgaged assets should be included in the liquidation and the proceeds
shared with the unsecured creditors.
In its Opposition, PNB asserted that neither Presidential Decree (P.D.) No. 902-A nor the SEC rules
prohibits secured creditors from foreclosing on their mortgages to satisfy the mortgagors debt after
the termination of the rehabilitation proceedings and during liquidation proceedings.14
On January 4, 2005, the SEC issued a Resolution 15 denying petitioners motion to nullify the auction
sale. It held that PNB was not legally barred from foreclosing on the mortgages. Aggrieved,
petitioner filed on February 28, 2005, a petition for review in the CA questioning the January 4,
2005 Resolution of the SEC.16
By Resolution dated April 14, 2005, the CA dismissed the petition on the ground that petitioner
failed to attach material portions of the record and other documents relevant to the petition as
required in Rule 46, Section 3 of the 1997 Rules of Civil Procedure, as amended. The CA likewise
denied ARCAMs motion for reconsideration in its Resolution dated January 24, 2006.
Hence this petition under Rule 45 arguing that:
4.1. THE SEC ERRED IN FAILING TO APPLY THE RULES OF CONCURRENCE AND PREFERENCE OF
CREDITS UNDER THE CIVIL CODE AND JURISPRUDENCE WHEN PD 902-A PROVIDES THAT THE
SAME BE APPLIED IN INSTANCES WHEREBY AN ENTITY IS ORDERED DISSOLVED AND PLACED
UNDER LIQUIDATION ON ACCOUNT OF FAILURE TO REHABILITATE DUE TO INSOLVENCY. 17
4.2. IT WAS GROSSLY ERRONEOUS FOR THE SEC TO HAVE ALLOWED PNB TO FORECLOSE THE
MORTGAGE WITHOUT FIRST ALLOWING THE ARCAM LIQUIDATOR TO
MAKE A DETERMINATION OF THE LIENS OVER THE ARCAM REAL PROPERTIES, SINCE THE
LIQUIDATOR HAD INITIALLY DETERMINED THAT ASIDE FROM PNB, SOME ARCAM WORKERS MAY
ALSO HAVE A LEGAL LIEN OVER THE SAID PROPERTY AS REGARDS THEIR CLAIMS FOR UNPAID
WAGES. THESE LIENS OVER THE SAME MOVABLE OR REAL PROPERTY ARE TO BE SATISFIED PRO-
RATA WITH THE CONTRACTUAL LIENS PURSUANT TO 2247 AND 2249 OF THE CIVIL CODE, IN
RELATION TO 2241 TO 2242 RESPECTIVELY. ALSO, THERE MAY BE SOME TAX ASSESSMENTS THAT
THE LIQUIDATOR DOES NOT KNOW ABOUT, AND IF THERE WERE, THESE COULD COMPRISE TAX
LIENS, WHICH UNDER ARTICLE 2243 OF THE CIVIL CODE ARE CLEARLY GIVEN PRIORITY OVER
OTHER PREFERRED CLAIMS SINCE SUCH ARE TO BE SATISFIED FIRST, OVER OTHER LIENS
PROVIDED UNDER ARTICLES 2241 AND 2242 OF THE CIVIL CODE, SUCH AS MORTGAGE LIENS. 18
4.3. THE SEC LABORED UNDER THE MISTAKEN IMPRESSION THAT AFTER AN ENTITY IS DISSOLVED
AND PLACED UNDER LIQUIDATION DUE TO INSOLVENCY, SECURED CREDITORS ARE
AUTOMATICALLY ALLOWED TO FORECLOSE OR EXECUTE OR OTHERWISE MAKE GOOD ON THEIR
CREDITS AGAINST THE DEBTOR.19
4.4. JURISPRUDENCE ON THE MATTER ALSO NEGATES THE SECS HOLDING THAT THE
FORECLOSURE BY PNB WAS LEGAL. EVEN ASSUMING FOR THE SAKE OF ARGUMENT THAT PNB IS
THE SOLE AND ONLY LIEN HOLDER, IT STILL CANNOT FORECLOSE UNLESS THE LIQUIDATOR
AGREES TO SUCH OR THAT THE SEC GAVE PNB PRIOR PERMISSION TO INSTITUTE THE SEPARATE
FORECLOSURE PROCEEDINGS.20
4.5. RESPONDENT PNB SHOULD BE MADE TO PAY DAMAGES FOR THE REASON THAT THE
FORECLOSURE PROCEEDINGS WERE ATTENDED WITH BAD FAITH.21
The issues to be resolved are: (1) whether the CA correctly dismissed the petition for failure to
attach material documents referred to in the petition; and (2) whether PNB, as a secured creditor,
can foreclose on the mortgaged properties of a corporation under liquidation without the knowledge
and prior approval of the liquidator or the SEC.
On the procedural issue, the Court finds that the CA erred in dismissing the petition for review
before it on the ground of failure to attach material portions of the record and other documents
relevant to the petition. A perusal of the petition for review filed with the CA, and as admitted by
PNB,22 reveals that certified true copies of the assailed January 4, 2005 SEC Resolution and the
February 9, 2000 SEC Order appointing petitioner Atty. Manuel D. Yngson, Jr. as liquidator were
annexed therein.
We find the foregoing attached documents sufficient for the appellate court to decide the case at
bar considering that the SEC resolution contains statements of the factual antecedents material to
the case. The Resolution also contains the SECs findings on the legality of PNBs foreclosure of the
mortgages. The SEC held that when the rehabilitation proceeding was terminated and the
suspensive effect of the order staying the enforcement of claims was lifted, PNB could already assert
its preference over unsecured creditors, and the secured asset and the proceeds need not be
included in the liquidation and shared with the unsecured creditors. 23 Before the CA, petitioner raised
only the same legal questions as there was no controversy involving factual matters. Petitioner
claimed that the SEC erred in not applying the rules on concurrence and preference of credits, and
in denying its motion to nullify the auction sale of the secured properties. 24 Therefore, the assailed
SEC Resolution is the only material portion of the record that should be annexed with the petition
for the CA to decide on the correctness of the SECs interpretation of the law and jurisprudence on
the matter before it.
Having so ruled, this Court would normally order the remand of the case to the CA for resolution of
the substantive issues. However, we find it more appropriate to decide the merits of the case in the
interest of speedy justice considering that the parties have adequately argued all points and issues
raised. It is the policy of the Court to strive to settle an entire controversy in a single proceeding,
and to leave no root or branch to bear the seeds of future litigation. 25 The ends of speedy justice
would not be served by a remand of this case to the CA especially since any ruling of the CA on the
matter could end up being appealed to this Court.
Did the SEC then err in ruling that PNB was not barred from foreclosing on the mortgages? We
answer in the negative.
In the case of Consuelo Metal Corporation v. Planters Development Bank,26 which involved factual
antecedents similar to the present case, the court has already settled the above question and upheld
the right of the secured creditor to foreclose the mortgages in its favor during the liquidation of a
debtor corporation. In that case, Consuelo Metal Corporation (CMC) filed with the SEC a petition to
be declared in a state of suspension of payment, for rehabilitation, and for the appointment of a
rehabilitation receiver or management committee under Section 5(d) of P.D. No. 902-A. On April 2,
1996, the SEC, finding the petition sufficient in form and substance, declared that "all actions for
claims against CMC pending before any court, tribunal, office, board, body and/or commission are
deemed suspended immediately until further orders" from the SEC. Then on November 29, 2000,
upon the management committees recommendation, the SEC issued an Omnibus Order directing
the dissolution and liquidation of CMC. Thereafter, respondent Planters Development Bank (Planters
Bank), one of CMCs creditors, commenced the extrajudicial foreclosure of CMCs real estate
mortgage. Planters Bank extrajudicially foreclosed on the real estate mortgage as CMC failed to
secure a TRO. CMC questioned the validity of the foreclosure because it was done without the
knowledge and approval of the liquidator. The Court ruled in favor of the respondent bank, as
follows:
In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, we held that if
rehabilitation is no longer feasible and the assets of the corporation are finally liquidated, secured
creditors shall enjoy preference over unsecured creditors, subject only to the provisions of the Civil
Code on concurrence and preference of credits. Creditors of secured obligations may pursue their
security interest or lien, or they may choose to abandon the preference and prove their credits as
ordinary claims.
Moreover, Section 2248 of the Civil Code provides:
"Those credits which enjoy preference in relation to specific real property or real rights, exclude all
others to the extent of the value of the immovable or real right to which the preference refers."
In this case, Planters Bank, as a secured creditor, enjoys preference over a specific mortgaged
property and has a right to foreclose the mortgage under Section 2248 of the Civil Code. The
creditor-mortgagee has the right to foreclose the mortgage over a specific real property whether or
not the debtor-mortgagor is under insolvency or liquidation proceedings. The right to foreclose such
mortgage is merely suspended upon the appointment of a management committee or rehabilitation
receiver or upon the issuance of a stay order by the trial court. However, the creditor-mortgagee
may exercise his right to foreclose the mortgage upon the termination of the rehabilitation
proceedings or upon the lifting of the stay order.27 (Emphasis supplied)
It is worth mentioning that under Republic Act No. 10142, otherwise known as the Financial
Rehabilitation and Insolvency Act (FRIA) of 2010, the right of a secured creditor to enforce his lien
during liquidation proceedings is retained. Section 114 of said law thus provides:
SEC. 114. Rights of Secured Creditors. The Liquidation Order shall not affect the right of a secured
creditor to enforce his lien in accordance with the applicable contract or law. A secured creditor
may:
(a) waive his rights under the security or lien, prove his claim in the liquidation proceedings and
share in the distribution of the assets of the debtor; or
(b) maintain his rights under his security or lien;
If the secured creditor maintains his rights under the security or lien:
(1) the value of the property may be fixed in a manner agreed upon by the creditor and the
liquidator.1wphi1When the value of the property is less than the claim it secures, the liquidator
may convey the property to the secured creditor and the latter will be admitted in the liquidation
proceedings as a creditor for the balance; if its value exceeds the claim secured, the liquidator may
convey the property to the creditor and waive the debtors right of redemption upon receiving the
excess from the creditor;
(2) the liquidator may sell the property and satisfy the secured creditors entire claim from the
proceeds of the sale; or
(3) the secured creditor may enforce the lien or foreclose on the property pursuant to applicable
laws. (Emphasis supplied)
In this case, PNB elected to maintain its rights under the security or lien; hence, its right to foreclose
the mortgaged properties should be respected, in line with our pronouncement in Consuelo Metal
Corporation.
As to petitioner's argument on the right of first preference as regards unpaid wages, the Court has
elucidated in the case of Development Bank of the Philippines v. NLRC28 that a distinction should be
made between a preference of credit and a lien. A preference applies only to claims which do not
attach to specific properties. A lien creates a charge on a particular property. The right of first
preference as regards unpaid wages recognized by Article 110 of the Labor Code, does not constitute
a lien on the property of the insolvent debtor in favor of workers. It is but a preference of credit in
their favor, a preference in application. It is a method adopted to determine and specify the order
in which credits should be paid in the final distribution of the proceeds of the insolvent's assets. It
is a right to a first preference in the discharge of the funds of the judgment debtor. Consequently,
the right of first preference for unpaid wages may not be invoked in this case to nullify the
foreclosure sales conducted pursuant to PNB 's right as a secured creditor to enforce its lien on
specific properties of its debtor, ARCAM.
WHEREFORE, the petition for review on certiorari is DENIED.
With costs against the petitioner.
SO ORDERED.
MARTIN S. VILLARAMA, JR.
Associate justice
[G.R. No. 124185-87. January 20, 1998]
RUBY INDUSTRIAL CORPORATION and BENHAR INTERNATIONAL, INC. petitioners,
vs. COURT OF APPEALS, MIGUEL LIM, ALLIED LEASING and FINANCE CORPORATION,
and THE MANAGEMENT COMMITTEE OF RUBY INDUSTRIAL CORPORATION, respondents.
DECISION
PUNO, J.:
[1]
Petitioners seek the reversal of the Court of Appeals Decision, setting aside the Orders of the
Securities and Exchange Commission (SEC), dated July 30, 1993 and October 15,
1993, which approved the Revised Rehabilitation Plan of Ruby Industrial Corporation
(RUBY) and appointed Benhar International, Inc. (BENHAR) as member of RUBY's
Management Committee.
The facts: Petitioner Ruby Industrial Corporation (RUBY) is a domestic corporation
engaged in glass manufacturing, while petitioner Benhar International, Inc. (BENHAR)
is a domestic corporation engaged in importation and sale of vehicle spare
parts. BENHAR is wholly-owned by the Yu family and headed by Henry Yu who is also
a director and majority stockholder of RUBY.
In 1983, RUBY suffered severe liquidity problems. Thus, on December 13, 1983, it filed
a Petition for Suspension of Payments with the Securities and Exchange Commission
(SEC). [2]
On December 20, 1983, the SEC issued an Order[3] declaring RUBY under suspension
of payments. Pending hearing of its petition, the SEC enjoined RUBY from disposing its
property,except insofar as necessary in its ordinary operations. It also enjoined RUBY
from making payments outside of the necessary or legitimate expenses of its business.
On August 10, 1984, the SEC Hearing Panel[4] created a management committee[5] for
RUBY to: (1) undertake the management of RUBY; (2) take custody of and control over
all existing assets and liabilities of RUBY; (3) evaluate RUBY's existing assets and
liabilities, earnings and operations; (4) determine the best way to salvage and protect
the interest of its investors and creditors; and (5) study, review and evaluate the
proposed rehabilitation plan for RUBY.[6]
Subsequently, at RUBY's special stockholders meeting, its majority stockholders led
by Yu Kim Giang presented the BENHAR/RUBY Rehabilitation Plan to be
submitted to SEC.Under the plan, BENHAR shall lend its P60 million credit line in China
Bank to RUBY, payable within ten (10) years. Moreover, BENHAR shall purchase the
credits of RUBY's creditors and mortgage RUBY's properties to obtain credit facilities for
RUBY.[7] Upon approval of the rehabilitation plan, BENHAR shall control and manage
RUBY'S operations. For its service, BENHAR shall receive a management fee equivalent
to 7.5% of RUBY's net sales.[8]
Some 40% of the stockholders opposed the BENHAR/RUBY Plan, including private
respondent MIGUEL LIM, a minority shareholder of RUBY. Private respondent Allied
Leasing and Finance Corporation, the biggest unsecured creditor of RUBY and chairman
of the management committee, also objected to the plan as it would transfer RUBY's
assets beyond the reach and to the prejudice of its unsecured creditors. Despite the
oppositions, the majority stockholders still submitted the BENHAR/RUBY Plan to the
SEC for approval.
Upon the other hand, RUBY's minority stockholders, represented by private respondent
Lim, submitted their own rehabilitation plan (the ALTERNATIVE PLAN) to the SEC where
they proposed to: (1) pay all RUBY'S creditors without securing any bank loan; (2) run
and operate RUBY without charging management fees; (3) buy-out the majority shares
or sell their shares to the majority stockholders; (4) rehabilitate RUBY's two plants; and
(5) secure a loan at 25% interest, as against the 28% interest charged in the loan
under the BENHAR/RUBY Plan.[9]
Both plans were endorsed by the SEC to RUBY's management committee for evaluation.
On October 28, 1988, the SEC Hearing Panel approved the BENHAR/RUBY Plan.[10] The
minority stockholders, thru private respondent Lim, appealed the approval to the
SEC enbanc. On November 15, 1988, the SEC en banc temporarily enjoined the
implementation of the BENHAR/RUBY Plan. On December 20, 1988, after the expiration
of the TRO, the SEC enbanc granted the writ of preliminary injunction against the
enforcement of the BENHAR/RUBY Plan.[11]
Thereafter, BENHAR and Henry Yu, later joined by RUBY and Yu Kim Giang, appealed
to the Court of Appeals (CA-G.R. SP No. 16798) questioning the issuance of the
writ. Their appeal was denied.[12]
BENHAR and company elevated the matter to this Court. In a minute
Resolution,[13] dated February 28, 1990, we denied the petition and upheld the
injunction against the implementation of the BENHAR/RUBY Plan.
However, it appears that before the SEC Hearing Panel approved the BENHAR/RUBY
Plan on October 28, 1988, BENHAR had already implemented part of the plan by paying
off Far East Bank & Trust Company (FEBTC), one of RUBY's secured creditors. Thus, by
May 30, 1988, FEBTC had already executed a deed of assignment of credit and
mortgage rights in favor of BENHAR. Moreover, despite the SEC en banc's TRO and
injunction, BENHAR still paid RUBY's other secured creditors who, in turn, assigned their
credits in favor of BENHAR.
Hence, RUBY's biggest unsecured creditor, Allied Leasing and Finance Corporation, and
private respondent Lim moved to nullify the deeds of assignment executed in favor of
BENHAR and cite the parties thereto in contempt for willful violation of the December
20, 1983 SEC Order enjoining RUBY from disposing its properties and making payments
pending the hearing of its petition for suspension of payments. Private respondents Lim
and Allied Leasing charged that in paying off FEBTC's credits, FEBTC was given undue
preference over the other creditors of RUBY.
Acting on private respondents' motions, the SEC Hearing Panel nullified the deeds of
assignment executed by RUBY's creditors in favor of BENHAR and declared the parties
thereto guilty of indirect contempt.[14]
Petitioners appealed to the SEC en banc. Their appeal was denied.[15] It was ruled that,
pending approval of the BENHAR/RUBY plan, BENHAR had no authority to pay off
FEBTC, one of RUBY's creditors. In prematurely implementing the BENHAR/RUBY plan,
BENHAR defied the SEC Order declaring RUBY under suspension of payments and
directing the management committee to preserve its assets.
Petitioners RUBY and BENHAR, joined by Henry Yu and Yu Kim Giang, appealed to the
Court of Appeals (CA-G.R. SP No. 18310). On August 29, 1990, the Court of Appeals
affirmed the SEC ruling nullifying the deeds of assignment.[16] It also declared that its
decision is final and executory as to RUBY and Yu Kim Giang for their failure to file their
pleadings within the reglementary period. This Court affirmed the Court of Appeals'
decision in G.R. No. 96675.[17]
Earlier, on May 29, 1990, after the SEC en banc enjoined the implementation of
BENHAR/RUBY Plan, RUBY filed with the SEC en banc an ex-parte petition to create a
new management committee and to approve its revised rehabilitation plan (Revised
BENHAR/RUBY Plan). Under the revised plan, BENHAR shall receive P34.068 Million of
the P60.437 Million credit facility to be extended to RUBY, as reimbursement for
BENHAR's payment to some of RUBY's creditors.
The SEC en banc directed RUBY to submit the Revised BENHAR/RUBY Plan to its
creditors for comment and approval. The petition for the creation of a new management
committee was remanded for further proceedings to the SEC Hearing Panel. The
Alternative Plan of RUBY's minority stockholders was also forwarded to the hearing
panel for evaluation.
On April 26, 1991, over ninety (90%) percent of RUBY's creditors objected to the
Revised BENHAR/RUBY Plan and the creation of a new management
committee. Instead, they endorsed the minority stockholders' Alternative Plan.
At the hearing of the petition for the creation of a new management committee, three
(3) members of the original management committee[18] opposed the Revised
BENHAR/RUBY Plan on the following grounds:
(1) the Revised BENHAR/RUBY Plan would legitimize the entry of BENHAR, a total
stranger, to RUBY as BENHAR would become the biggest creditor of RUBY;
(2) the revised plan would put RUBY's assets beyond the reach of the unsecured
creditors and the minority stockholders; and,
(3) the revised plan was not approved by RUBY's stockholders in a meeting called for
the purpose.
However, on September 18, 1991, despite the objections of over 90% of RUBY's
creditors and three (3) members of the management committee, the SEC Hearing Panel
approved the revised plan and dissolved the existing management committee. It also
created a new management committee and appointed BENHAR as one of its
members.[19] In addition to the powers originally conferred to the management
committee under P.D. No. 902-A, the new management committee was tasked to
oversee the implementation by the Board of Directors of the revised rehabilitation plan
for RUBY.
Consequently, the original management committee, Lim, and the Allied Leasing
Corporation appealed to the SEC en banc. On July 30, 1993, the SEC En Banc affirmed
the approval of the Revised BENHAR/RUBY Plan and the creation of a new management
committee.[20] To avoid any group from controlling the management of RUBY, the SEC
appointed SEC lawyers Ruben C. Ladia and Teresita R. Siao as additional members of
the new management committee. Further, it declared that BENHAR's membership in
the new management committee is subject to the condition that BENHAR will extend
its credit facilities to RUBY without using the latter's assets as security or collateral.
Private respondents Lim, Allied Leasing Corporation and the original management
committee moved for reconsideration. Petitioners, on the other hand, asked the SEC to
reconsider the portion of its Order prohibiting BENHAR from utilizing RUBY's assets as
collateral.
On October 15, 1993, the SEC denied private respondents' motions for reconsideration.
However, it granted petitioners' motion and allowed BENHAR to use RUBY's assets as
collateral for loans, subject to the approval of the majority of all the members of the
new management committee.[21]
On appeal by private respondents, the Court of Appeals set aside [22] SEC's approval of
the Revised BENHAR/RUBY plan and remanded the case to the SEC for further
proceedings. It ruled that the revised plan circumvented its earlier decision (CA-G.R.
SP No. 18310) nullifying the deeds of assignment executed by RUBY's creditors in favor
of BENHAR. Under the revised plan, BENHAR was to receive P34.068 Million of
the P60.437 Million credit facility to be extended to RUBY, as settlement for its advance
payment to RUBY's seven (7) secured creditors. In effect, the payments made by
BENHAR under the void Deeds of Assignment were recognized as payable to BENHAR
under the revised plan. Petitioners' motion for reconsideration was denied.[23]
Hence, this petition where petitioners aver that:
"I. THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR, GRAVELY ABUSED ITS
DISCRETION AND EXCEEDED ITS JURISDICTION WHEN IT WENT AGAINST THE FACTS
AS FOUND BY THE SEC AND, THEREAFTER, SUBSTITUTED ITS JUDGMENT FOR THAT
OF THE SEC.
"II. THE COURT OF APPEALS COMMITTED AN ERROR REVIEWABLE ON APPEAL AND
ALSO A PROPER SUBJECT OF CERTIORARI WHEN IT ALLOWED PRIVATE RESPONDENTS
TO FILE SEPARATE PETITIONS PREPARED BY LAWYERS REPRESENTING THEMSELVES
AS BELONGING TO DIFFERENT LAW FIRMS."
We find no merit in the petition.
Petitioners first contend that, in reversing the SEC's approval of the Revised
BENHAR/RUBY Plan, the Court of Appeals exceeded its jurisdiction and disregarded the
SEC's expertise in resolving corporate controversies.
The settled doctrine is that factual findings of an administrative agency are accorded
respect and, at times, finality for they have acquired the expertise inasmuch as their
jurisdiction is confined to specific matters.[24] Nonetheless, these doctrines do not apply
when the board or official has gone beyond his statutory authority, exercised
unconstitutional powers or clearly acted arbitrarily and without regard to his duty or
with grave abuse of discretion.[25] In Leongson vs. Court of Appeals,[26] we held: "once
the actuation of the administrative official or administrative board or agency is tainted
by a failure to abide by the command of the law, then it is incumbent on the courts of
justice to set matters right, with this Tribunal having the last say on the matter."
We hold that the SEC acted arbitrarily when it approved the Revised BENHAR/RUBY
Plan. As found by the Court of Appeals, the plan contained provisions which
circumvented its final decision[27] in CA-G.R. SP No. 18310, nullifying the deeds of
assignment of credits and mortgages executed by RUBY's creditors in favor of
BENHAR, as well as this Court's resolution in G.R. No. 96675, affirming said Court of
Appeals' decision. Specifically, the Revised BENHAR/RUBY Plan considered as valid the
advance payments made by BENHAR in favor of some of RUBY'S creditors. The nullity
of BENHAR's unauthorized dealings with RUBY's creditors is settled. The deeds of
assignment between BENHAR and RUBY's creditors had been categorically declared void
by the SEC Hearing Panel in two (2) orders issued on January 12, 1989 and March 15,
1989.[28] The dispositive portion of the Order, dated January 12, 1989, held:
"WHEREFORE, the motion for reconsideration of the Order dated October 7, 1988,
insofar as it relates to the motion of Allied Leasing and Finance Corporation to cite for
contempt and to annul deed of assignment is hereby GRANTED. ... The Deed of
Assignment of Receivables and Mortgages, Rights, Credits and Interest Without
Recourse having been executed in violation of the Order dated December 20, 1988 is
hereby declared NULL and VOID.
"SO ORDERED."
The dispositive portion of the Order dated March 15, 1989, similarly provided:
"WHEREFORE, Mr. Yu Kim Giang and others are hereby found guilty of indirect contempt
and a penalty of P500.00 each is hereby imposed on them.The Deed of Assignment of
Receivables and Mortgages, Rights, Credits and Interest Without Recourse, in favor of
Benhar International, Inc., by Florence Danon, Philippine Bank of Communication,
Philippine Commercial International Bank, Philippine Trust Company and PCI Leasing
and Finance Incorporated, having been executed in violation of the Order dated
December 20, 1988 are hereby declared NULL and VOID.
These orders were upheld by the SEC en banc[29] and the Court of Appeals.[30] In CA-
GR SP No. 18310, the Court of Appeals ruled as follows:
"xxx xxx xxx
"1) x x x when the Deed of Assignment was executed on May 30, 1988 by and between
Ruby Industrial Corp., Benhar International Inc., and FEBTC, the Rehabilitation Plan
proposed by petitioner Ruby Industrial Corp. for Benhar International Inc. to assume
all petitioner's obligation has not been approved by the SEC. The Rehabilitation Plan
was not approved until October 28, 1988. There was a willful and blatant violation of
the SEC order dated December 20, 1983 on the part of petitioner Ruby Industrial Corp.,
represented by Yu Kim Giang, by Benhar International Inc., represented by Henry Yu
and by FEBTC ... .
"2) The magnitude and coverage of the transactions involved were such that Yu Kim
Giang and the other signatories cannot feign ignorance or pretend lack of knowledge
thereto in view of the fact that they were all signatories to the transaction and privy to
all the negotiations leading to the questioned transactions. In executing the Deeds of
Assignments, the petitioners totally disregarded the mandate contained in the SEC
order not to dispose the properties of Ruby Industrial Corp. in any manner whatsoever
pending the approval of the Rehabilitation Plan and rendered illusory the SEC efforts to
rehabilitate the petitioner corporation to the best interests of all the creditors.
"3) The assignments were made without prior approval of the Management Committee
created by the SEC in an Order dated August 10, 1984. Under Section 6, par. d, sub.
par. (2) of P.D. 902-A as amended by P.D. 1799, the Management Committee,
rehabilitation receiver, board or body shall have the power to take custody and control
over all existing assets of such entities under management notwithstanding any
provision of law, articles of incorporation or by-law to the contrary. The SEC therefore
has the power and authority, through a Management Committee composed of
petitioner's creditors or through itself directly, to declare all assignment of assets of the
petitioner Corporation declared under suspension of payments, null and void, and to
conserve the same in order to effect a fair, equitable and meaningful rehabilitation of
the insolvent corporation."
"4) x x x. The acts for which petitioners were held in indirect contempt by the SEC arose
from the failure or willful refusal by petitioners to obey the lawful order of the SEC not
to dispose of any of its properties in any manner whatsoever without authority or
approval of the SEC. The execution of the Deeds of Assignment tend to defeat or
obstruct the administration of justice. Such acts are offenses against the SEC because
they are calculated to embarrass, hinder and obstruct the tribunal in the administration
of justice or lessen its authority.
"In view of the foregoing conclusion which has now been reached, it is not necessary
to discuss at length or to determine other questions which are presented on record. It
is sufficient to say that the facts as established by the evidence on records warrant a
finding that petitioners are guilty of indirect contempt. The Order of the SEC is hereby
AFFIRMED. This petition is DISMISSED with costs against the petitioners.
"SO ORDERED." (emphasis ours)
Petitioners insist that the Court of Appeals did not make a categorical statement in the
dispositive portion of its decision in CA-G.R. SP No. 18310 that it was nullifying the
deeds of assignment in favor of BENHAR. Allegedly, it merely stated that it is affirming
the decision of the SEC. Petitioners cite Olac vs. Court of Appeals[31] where we held that
the dispositive portion or the fallo constitutes the court's resolution in a given case,
while the discussion in the body of the decision merely expresses the court's opinion.
The contention has no merit. The principle laid down in Olac applies only when there is
a conflict between the dispositive part (fallo) and the opinion of the court contained in
the decision. Hence, in the execution of the court's judgment, the fallo should be
considered as the final disposition of the case before it. Such conflict does not exist in
the Court of Appeals' decision in CA-G.R. SP No. 18310. It is crystal clear that what the
Court of Appeals affirmed in CA-GR SP No. 18310 was the nullity of the deeds of
assignment in favor of BENHAR. In a minute resolution in G.R. No. 96675, we even
sustained the Court of Appeals' decision in CA-GR SP No. 18310.[32]
In any event, petitioners actively participated in the proceedings before the SEC and
the Court of Appeals when private respondents sought the nullification of the subject
deeds.Petitioners are, therefore, estopped from questioning anew the validity of the
deeds of assignment executed by RUBY's creditors in favor of BENHAR. Petitioners
should know that it is not for a party to participate in the proceedings, submit his case
for decision, accept the judgment if it is favorable to him but attack it for any reason
when it is adverse.[33]
Even the SEC en banc, in its July 30, 1993 Order affirming the approval of the Revised
BENHAR/RUBY Plan, has acknowledged the invalidity of the subject deeds of
assignment.However, to justify its approval of the plan and the appointment of BENHAR
to the new management committee, it gave the lame excuse that BENHAR became
RUBY's creditor for having paid RUBY's debts. We quote the relevant portion of the
SEC's ruling, thus:
"Anent the contention that BENHAR should not take an active participation in the
management of petitioner corporation, the same deserves scant consideration.
"While the Deeds of Assignment executed by creditors of Ruby in favor of Benhar were
all declared null and void, the Revised Rehabilitation Plan, as herein approved by the
Commission, shows that Benhar will assign its credit lines/loan proceeds or will act
as financier whereby it re-lends the contracted loan to Ruby thereby converting Benhar
as a creditor of the petitioner corporation once the Rehabilitation Plan is
implemented. In fact, as of March 31, 1990, it appears that Benhar had made some
advance payments to some creditors of Ruby further strengthening its status as a
creditor. We cannot, therefore, see any reason why Benhar should not sit in the
management team to oversee the implementation of the Plan."
For its part, the Court of Appeals noted that the approved Revised BENHAR/RUBY Plan
gave undue preference to BENHAR. The records, indeed, show that BENHAR's offer to
lend its credit facility in favor of RUBY is conditioned upon the payment of the amount
it advanced to RUBY's creditors, thus:
"FUND SOURCING
xxx
1.1. Deed of Assignment of Credit Facility (or Loan Proceeds) to be executed by Benhar
in favor of Ruby, under pre-arrangement with China Banking Corporation or by any
other creditor-banks, and upon payment by Ruby of such amount already advanced by
Benhar."
In fact, BENHAR shall receive P34.068 Million out of the P60.437 Million credit facility
to be extended to RUBY for the latter's rehabilitation.
Rehabilitation contemplates a continuance of corporate life and activities in an effort to
restore and reinstate the corporation to its former position of successful operation and
solvency.[34] When a distressed company is placed under rehabilitation, the
appointment of a management committee follows to avoid collusion between the
previous management and creditors it might favor, to the prejudice of the other
creditors. All assets of a corporation under rehabilitation receivership are held in trust
for the equal benefit of all creditors to preclude one from obtaining an advantage or
preference over another by the expediency of attachment, execution or otherwise. As
between the creditors, the key phrase is equality in equity. Once the corporation
threatened by bankruptcy is taken over by a receiver, all the creditors ought to stand
on equal footing. Not any one of them should be paid ahead of the others. This is
precisely the reason for suspending all pending claims against the corporation under
receivership.[35]
Parenthetically, BENHAR is a domestic corporation engaged in importing and selling
vehicle spare parts with an authorized capital stock of thirty million pesos. Yet, it offered
to lend its credit facility in the amount of sixty to eighty millions pesos to RUBY. It is to
be noted that BENHAR is not a lending or financing corporation and lending its credit
facilities, worth more than double its authorized capitalization, is not one of the powers
granted to it under its Articles of Incorporation. Significantly, Henry Yu, a director and
a majority stockholder of RUBY is, at the same time, a stockholder of BENHAR, a
corporation owned and controlled by his family. These circumstances render the deals
between BENHAR and RUBY highly irregular.
To justify its appointment in the new management committee and to dispute that it will
become a creditor of RUBY only on account of the proposed assignment of its credit
facility to RUBY, BENHAR avers that as early as December 27, 1988, it already lent one
million pesos (P1,000,000.00) to RUBY for the latter's working capital.
The submission deserves scant consideration. To start with, this argument was raised
by BENHAR for the first time in its motion for reconsideration before the Court of
Appeals. The settled rule is that issues not raised in the court a quo cannot be raised
for the first time on appeal -- in this case, in a motion for reconsideration -- for being
offensive to the basic rules of fair play, justice and due process.[36]
Moreover, when RUBY initiated its petition for suspension of payments with the SEC,
BENHAR was not listed as one of RUBY's creditors. BENHAR is a total stranger to
RUBY. If at all, BENHAR only served as a conduit of RUBY. As aptly stated in the
challenged Court of Appeals decision:[37]
"Benhar's role in the Revised Benhar/Ruby Plan, as envisioned by the majority
stockholders, is to contract the loan for Ruby and, serving the role of a financier, relend
the same to Ruby. Benhar is merely extending its credit line facility with China Bank,
under which the bank agrees to advance funds to the company should the need
arise. This is unlikely a loan in which the entire amount is made available to the
borrower so that it can be used and programmed for the benefit of the company's
financial and operational needs. Thus, it is actually China Bank which will be the source
of the funds to be relent to Ruby. Benhar will not shell out a single centavo of its own
funds. It is the assets of Ruby which will be mortgaged in favor of Benhar.Benhar's
participation will only make the rehabilitation plan more costly and, because of the
mortgage of its (Ruby's) assets to a new creditor, will create a situation which is worse
than the present. x x x."
We need not say more.
On the second issue, petitioners charge that private respondents are guilty of forum-
shopping. It appears that the three (3) private respondents filed separate petitions
before the Court of Appeals upon receipt of the adverse ruling of the SEC en
banc. Private respondent Miguel Lim commenced CA-G.R. SP No. 32404, thru its
counsel Romulo Mabanta Beunaventura Sayoc and De los Angeles. For their
part, private respondent Allied Leasing and the original management committee of
RUBY, represented by Attorney Walter T. Young, commenced CA-G.R. SP No. 32483
and CA-G.R. SP No. 32469, respectively. In CA-G.R. SP No. 32483, Atty. Young signed
for and in behalf of the law firm Ocampo Quiroz Pesayco and Associates, while in CA-
G.R. SP No. 32469, Atty. Young signed for the law firm Quiroz and Young. In both
petitions, he used the same business address-- Allied Bank Center, 6754 Ayala Avenue,
Makati City.
We hold that private respondents are not guilty of forum-shopping. In Ramos, Sr. vs.
Court of Appeals, [38] we ruled:
"The private respondents can be considered to have engaged in forum shopping if all
of them, acting as one group, filed identical special civil actions in the Court of Appeals
and in this Court. There must be identity of parties or interests represented, rights
asserted and relief sought in different tribunals. In the case at bar, two groups of private
respondents appear to have acted independently of each other when they sought relief
from the appellate court. Both group sought relief from the same tribunal.
"It would not matter even if there are several divisions in the Court of Appeals. The
adverse party can always ask for the consolidation of the two cases. x x x"
In the case at bar, private respondents represent different groups with different
interests-- the minority stockholders' group, represented by private respondent Lim;
the unsecured creditors group, Allied Leasing & Finance Corporation; and the old
management group. Each group has distinct rights to protect. In line with our ruling in
Ramos, the cases filed by private respondents should be consolidated. In fact, BENHAR
and RUBY did just that-- in their urgent motions filed on December 1, 1993 and
December 6, 1993, respectively, they prayed for the consolidation of the cases before
the Court of Appeals.
IN VIEW OF THE FOREGOING, the instant petition is DISMISSED for lack of
merit. The Court of Appeals' Decision, dated March 31, 1995, and its Resolution, dated
March 12, 1996, in CA-G.R. SP Nos. 32404, 42469 and 32483 are AFFIRMED. The case
is remanded to the Securities and Exchange Commission for further proceedings. Costs
against petitioners.
SO ORDERED.
Regalado, (Chairman), and Mendoza, JJ., concur.
Martinez, J., no part.
[G.R. No. 128003. July 26, 2000]
RUBBERWORLD [PHILS.], INC., and JULIE YAO ONG, petitioner, vs. NATIONAL
LABOR RELATIONS COMMISSION, AQUINO MAGSALIN, PEDRO MAIBO, RICARDO
BORJA, ALICIA M. SAN PEDRO AND FELOMENA B. TOLIN, respondents.
DECISION
PARDO, J.:
What is before the Court for resolution is a petition to annul the resolution of the National
Labor Relations Commission (NLRC),[1] affirming the labor-arbiter's award but deleting the
moral and exemplary damages.
The facts are as follows:
Petitioner Rubberworld (Phils.), Inc. [hereinafter Rubberworld], a corporation established in
1965, was engaged in manufacturing footwear, bags and garments.
Aquilino Magsalin, Pedro Manibo, Ricardo Borja, Benjamin Camitan, Alicia M. San Pedro, and
Felomena Tolin were employed as dispatcher, warehouseman, issue monitor, foreman, jacks
cementer and outer sole attacher, respectively.
On August 26, 1994, Rubberworld filed with the Department of Labor and Employment a
notice of temporary shutdown of operations to take effect on September 26, 1994. Before
the effectivity date, however, Rubberworld was forced to prematurely shutdown its
operations.
On November 11, 1994, private respondents filed with the National Labor Relations
Commission a complaint[2] against petitioner for illegal dismissal and non-payment of
separation pay.
On November 22, 1994, Rubberworld filed with the Securities and Exchange Commission
(SEC) a petition for declaration of suspension of payments with a proposed rehabilitation
plan.[3]
On December 28, 1994, SEC issued the following order:
"Accordingly, with the creation of the Management Committee, all actions for claims against
Rubberworld Philippines, Inc. pending before any court, tribunal, office, board, body,
Commission or sheriff are hereby deemed SUSPENDED.
"Consequently, all pending incidents for preliminary injunctions, writ or attachments,
foreclosures and the like are hereby rendered moot and academic.
"SO ORDERED."[4]
On January 24, 1995, petitioners submitted to the labor arbiter a motion to suspend the
proceedings invoking the SEC order dated December 28, 1994. The labor arbiter did not act
on the motion and ordered the parties to submit their respective position papers.
On December 10, 1995, the labor arbiter rendered a decision, which provides:
"In the light of the foregoing, respondents are hereby declared guilty of ILLEGAL SHUTDOWN
and that respondents are ordered to pay complainants their separation pay equivalent to one
(1) month pay for every year of service.
Considering the malicious act of closing the business precipitately without due regard to the
rights of complainants, moral damages and exemplary damage in the sum of P 50,000.00
and P 30,000.00 respectively is hereby awarded for each of the complainants.
Finally 10 % of all sums owing to complainants is hereby adjudged as attorney's fees.
SO ORDERED."[5]
On February 5, 1996, petitioners appealed to the National Labor Relations Commission
(NLRC) alleging abuse of discretion and serious errors in the findings of facts of the labor
arbiter.
On August 30, 1996, NLRC issued a resolution, the dispositive portion of which reads:
"PREMISES CONSIDERED, the decision appealed from is hereby, AFFIRMED with
MODIFICATION in that the award of moral and exemplary damages is hereby, DELETED.
SO ORDERED."[6]
On November 20, 1996, NLRC denied petitioners' motion for reconsideration.
Hence, this petition.[7]
The issue is whether or not the Department of Labor and Employment, the Labor Arbiter and
the National Labor Relations Commission may legally act on the claims of respondents despite
the order of the Securities and Exchange Commission suspending all actions against a
company under rehabilitation by a management committee created by the Securities and
Exchange Commission.
Presidential Decree No. 902-A is clear that "all actions for claims against corporations,
partnerships or associations under management or receivership pending before any court,
tribunal, board or body shall be suspended accordingly." The law did not make any exception
in favor of labor claims.[8]
"The justification for the automatic stay of all pending actions for claims is to enable the
management committee or the rehabilitation receiver to effectively exercise its/his powers
free from any judicial or extra judicial interference that might unduly hinder or prevent the
'rescue' of the debtor company. To allow such other actions to continue would only add to
the burden of the management committee or rehabilitation receiver, whose time, effort and
resources would be wasted in defending claims against the corporation instead of being
directed toward its restructuring and rehabilitation."[9]
Thus, the labor case would defeat the purpose of an automatic stay. To rule otherwise would
open the floodgates to numerous claims and would defeat the rescue efforts of the
management committee.
Besides, even if an award is given to private respondents, the ruling could not be enforced
as long as petitioner is under management committee.[10]
This finds ratiocination in that the power to hear and decide labor disputes is deemed
suspended when the Securities and Exchange Commission puts the corporation under
rehabilitation.
Thus, when NLRC proceeded to decide the case despite the SEC suspension order, the NLRC
acted without or in excess of its jurisdiction to hear and decide cases. As a consequence, any
resolution, decision or order that it rendered or issued without jurisdiction is a nullity.
WHEREFORE, the petition is hereby GRANTED. The decision of the labor arbiter dated
December 10, 1995 and the NLRC resolution dated August 30, 1996, are SET ASIDE.
No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Ynares-Santiago, JJ., concur.
 LECA REALTY CORPORATION, G.R. No. 166800
Petitioner, On January 31, 2002, respondent filed with the Regional Trial Court (RTC), Branch 253,
Las Pias City, a Petition for Rehabilitation, docketed as Civil Case No. LP-02-0028.

The petition alleges inter alia that respondent is a corporation duly organized and existing
- versus - under the laws of the Republic of the Philippines, primarily engaged in the business of leasing to
retailers commercial spaces in shopping malls. Its principal office address is Alabang-
Zapote Road, Pamplona, Las Pias City.

MANUELA CORPORATION and MS. MARILOU O. ADEA, Respondent is the owner and operator of the following malls strategically located in Metro
as REHABILITATION RECEIVER for MANUELA Manila:
CORPORATION,
Respondents. a) M Star One
x ------------------------------------------- x G.R. No. 168924 b) M Star
LECA REALTY CORPORATION, c) Starmall
Petitioner, Present: d) Metropolis Star
e) Pacific Mall
PUNO, C.J., Chairperson,
- versus - SANDOVAL-GUTIERREZ, Respondent has assets valued at P12.43 billion and total liabilities of P4.87 billion as
CORONA, of December 31, 2001.
AZCUNA, and
GARCIA, JJ. However, due to reasons that shall be discussed below, respondent is now having severe
MANUELA CORPORATION and MS. MARILOU O. ADEA, cash flow problems which prevent it from paying its debts as they fall due.
as REHABILITATION RECEIVER for MANUELA Promulgated:
CORPORATION, In order to finance the costs of building the Metropolis Star and the Pacific Mall,
Respondents. September 25, 2007 respondent obtained several loans from two syndicates of lenders. The first syndicate is composed
of Bank of Philippine Islands, BPI Family Bank, Metropolitan Bank and Trust Company, Allied Bank,
x -----------------------------------------------------------------------------------------x and Bank of Commerce; the second syndicate is composed of Allied Bank, Bank of Commerce,
Philippine National Bank, and Equitable PCI Bank. Respondents loans are governed by the Loan
Agreement dated July 5, 1995 and the Syndicated Loan Agreement dated December 16, 1996.

Respondents total outstanding loan from the syndicates (e.g., principal plus interest)
is P2.174 billion as of December 31, 2001. These loans are secured by a mortgage over M Star One
and M Star, both located in Las Pias City.
DECISION
Respondent also has liabilities to the Hero Holdings, Inc. and its trade suppliers and other
SANDOVAL-GUTIERREZ, J.: parties in the sum of P1.476 billion as of December 31, 2001.

These are consolidated petitions for review on certiorari filed by Leca Realty Corporation At the onset of the Asian financial crisis in 1997, the banks stopped their lending activities
(LECA), petitioner, assailing the separate related Decisions of the Court of Appeals in CA-G.R. SP to borrowers, including respondent. This event took its toll upon respondent since its malls failed to
No. 87185 and CA-G.R. SP No. 80861. operate sufficiently resulting in heavy losses.

G.R. No. 168924
In a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended,
petitioner LECA assails the Decision of the Court of Appeals (Special 8 thDivision) dated April 28,
2005 and its Resolution of July 15, 2005 in CA-G.R. SP No. 87185.
In its Decision, the Court of Appeals sustained the Rehabilitation Plan of Manuela Corporation
(Manuela), respondent. Petitioner now contends that the Rehabilitation Plan has impaired its
contract of lease with respondent over a tract of land consisting of almost three (3)
hectares. Petitioner is the owner of the property situated on Shaw Boulevard, Mandaluyong City.
G.R. No. 166800
This is a petition for review on certiorari under the same Rule questioning the Decision
dated September 30, 2004 of the Court of Appeals (17th Division) and its Resolution dated January
25, 2005 in CA-G.R. SP No. 80861.
In its Decision, the Court of Appeals affirmed the trial courts Order denying petitioners motion for
extension of time to file its Record on Appeal in Civil Case No. LP-02-0028, entitled In the Matter of
the Petition for Rehabilitation of Manuela Corporation.
As found by the Court of Appeals in CA-G.R. SP No. 87185, the antecedent facts, common
to both petitions, are:
Matters finally came to a head in 1997 when respondent could no longer pay its trade
suppliers for maturing obligations. Neither could it pay its creditor banks. The adjusted interest rates
on its outstanding loans, as a result of the Asian financial crisis, were between 18% to 30% which
added to respondents liquidity problems.
Nonetheless, respondent has been acting in good faith and has exerted earnest efforts to
avert its worsening financial problems. It closed down non-income generating businesses,
concentrated on its business of leasing commercial spaces, intensified collection efforts, reduced
personnel, negotiated for restructuring of loans with creditors, and worked out a viable payment
scheme without giving undue preference to any creditor. Despite its efforts, respondent could no
longer pay its suppliers and the maturing interests on its loans.
The petition further alleges that respondent can only be brought back to its financial
viability if its proposed Rehabilitation Plan is approved and that it is given a respite from its creditors
demands through the issuance of a Stay Order. The successful implementation of the proposed
Rehabilitation Plan will enable it to settle its remaining obligations in an orderly manner, restore its
financial viability, and allow it to resume its normal operations.
On February 5, 2002, the trial court issued a Stay Order,[1] thus:
xxx
a) a stay in the enforcement of all claims, whether for money or
otherwise and whether such enforcement is by court action or otherwise,
 against petitioner MANUELA, its guarantors and sureties not solidarily liable
with it;
b) prohibiting MANUELA from selling, encumbering, transferring or
disposing in any manner any of its properties except in the ordinary course of
business;
c) prohibiting MANUELA from making any payment of its liabilities
outstanding as of the filing of the instant petition;
d) prohibiting MANUELAs suppliers of goods and services from
withholding supply of goods and services in the ordinary course of business as
long as MANUELA makes payments for the goods and services supplied after
the issuance of this Stay Order; and
e) directing the payment in full of all administrative expenses
incurred after the issuance of this Stay Order.[2]
In the same Stay Order, the trial court appointed Marilou Adea, also a respondent, as
Rehabilitation Receiver. On February 12, 2002, respondent Adea accepted her appointment.
In its Order dated May 21, 2002, the trial court referred the petition to
respondent Adea for evaluation and recommendation. On September 28, 2002, she submitted to
the trial court her Report and Recommendation finding respondent Manuelas Rehabilitation Plan
viable and feasible and recommending its approval.
Respondent Adea then held several consultative meetings with respondent Manuelas
creditors to discuss their respective concerns and suggestions relative to its rehabilitation. For their
part, the creditors filed their various comments/oppositions to respondent Manuelas Petition for
Rehabilitation and Rehabilitation Plan.
On July 31, 2002, petitioner filed with the trial court its Comment and/or Formal Claim
with Leave of Court against respondent Manuela amounting to P193,724,262.34 as of February 28,
2002, representing unpaid rentals, security deposits, interests, and penalty charges.
On September 30, 2002, respondent Adea issued a Notice informing all creditors,
claimants, suppliers, lot and/or house buyers, counsels, oppositors, and other parties that copies of
her Report and Recommendation on respondent Manuelas Petition for Rehabilitation are available
and on file with the trial court for distribution to all parties concerned.
On October 22, 2002, petitioner filed its comment on respondent Adeas Report and
Recommendation. Petitioner opposed her recommendation to reduce respondent Manuelas liability,
considering its contractual nature which cannot be impaired during the process of rehabilitation.
On July 28, 2003, the trial court issued an Order approving the Rehabilitation Plan, the dispositive
portion of which reads:
WHEREFORE, the Rehabilitation Plan submitted by the Rehabilitation Receiver,
pp. 120 to 165 of the Report and Recommendation on Manuela Corporation
(Manuela)s Petition for Rehabilitation revised June 9, 2003, is
APPROVED. Petitioner is strictly enjoined to abide by its terms and conditions
and the Rehabilitation Receiver shall, unless directed otherwise, submit a
quarterly report on the progress of the implementation of the Rehabilitation
Plan.[3]
Aggrieved, petitioner filed with the trial court its Notice of Appeal with Motion for Extension of Time
to File Record on Appeal.[4]
However, the trial court issued an Order denying the Motion for Extension of Time to File
Record on Appeal, thus:
Before the Court is a Notice of Appeal with Motion forExtension of Time filed by
creditor Leca Realty Corporation praying for a period of thirty (30) days from August 21,
2003 to September 20, 2003 to file its intended record on appeal.
However, under Rule 3, Section 1 of the Interim Rules of Procedure on
Corporate Rehabilitation, a motion for extension is a prohibited pleading.
WHEREFORE, the subject motion is DENIED.
SO ORDERED.
Petitioner then elevated the case to the Court of Appeals through a Petition
for Certiorari and Mandamus, docketed as CA-G.R. SP No. 80861 and assigned to the 17thDivision.
On September 30, 2004, the Court of Appeals rendered a Decision dismissing the petition
for lack of merit.[5]
Petitioner then filed a motion for reconsideration but it was denied by the appellate court
in its Resolution dated January 25, 2005.[6]
Hence, the instant petition for review on certiorari, docketed as G.R. No. 166800.
G.R. No. 168924
In the meantime, petitioner seasonably filed with the Court of Appeals a petition for review
under Rule 43 of the 1997 Rules of Civil Procedure, as amended, alleging that the RTC erred in
approving respondent Manuelas Rehabilitation Plan as it violates its (petitioners) constitutional right
to non-impairment of contract and the Interim Rules of Procedure on Corporate Rehabilitation.
On April 28, 2005, the Court of Appeals (Special 8th Division) promulgated its Decision
denying the petition, holding that:
x x x The pendency of the rehabilitation proceedings cannot be
interpreted to impair the contractual obligations previously entered into by the
contracting parties because the automatic stay of all actions is sanctioned by
P.D. 902-A which provides that all actions for claims against corporations,
partnerships or associations under management or receivership pending before
any court, tribunal, board or body shall be suspended accordingly
[Rubberworld (Phils.), Inc. v. NLRC, 391 Phil. 318 (2000)].
On May 20, 2005, petitioner filed with the Court of Appeals a motion for reconsideration
but it was denied in its Resolution dated July 15, 2005.
Hence, petitioner filed with this Court a Petition for Review on Certiorari, docketed as G.R.
No. 168924.
In view of the identity of parties and the inter-relationship of the issues involved in G.R.
No. 166800 and G.R. No. 168924, we resolved to consolidate the two petitions.
The issue posed before us in G.R. No. 166800 for certiorari and mandamus is whether
the trial court erred in ruling that a motion for extension of time to file record on appeal is a
prohibited pleading under Section 1 of the Interim Rules of Procedure on Corporate Rehabilitation
which provides:
Section 1. Nature of Proceedings. Any proceeding initiated under
these Rules shall be considered in rem. Jurisdiction over all those affected by
the proceedings shall be considered as acquired upon publication of the notice
of the commencement of the proceedings in any newspaper of general
circulation in the Philippines in the manner prescribed by these Rules.
The proceedings shall also be summary and non-adversarial in
nature. The following pleadings are prohibited:
a. Motion to Dismiss;
b. Motion for Bill of Particulars;
c. Motion for New Trial or For Reconsideration;
d. Petition for Relief;
e. Motion for Extension;
f. Memorandum;
g. Motion for Postponement;
h. Reply or Rejoinder;
i. Third Party Complaint;
j. Intervention;
 xxx xxx xxx 7 89.08 2,386,453.20 28,637,438.40
8 95.23 2,552,211.70 30,614,540.40
The prohibited pleadings enumerated above are those filed in the rehabilitation proceedings. Once 9 101.37 2,715,702.30 32,588,427.60
the trial court decides the case and an aggrieved party appeals, the procedure to be followed is that 10 107.52 2,880,460.80 34,565,529.60
prescribed by the Rules of Court as mandated by Section 5, Rule 3, of the same Interim Rules, thus:
11 117.19 3,139,520.10 37,674,241.20
12 126.87 3,398,847.30 40,786,167.60
The review of any order or decision of the court or on appeal therefrom shall
be in accordance with the Rules of Court. 13 136.54 3,657,906.60 43,894,879.20
14 146.22 3,917,233.80 47,006,805.60
In this connection, Section 11, Rule 11, of the Rules of Court (now the 1997 Rules of Civil Procedure, 15 155.90 4,176,561.00 50,118,732.00
as amended), states: 16 174.60 4,677,534.00 56,130,408.00
17 193.30 5,178,507.00 62,142,084.00
Extension of time to plead. Upon motion and on such terms as may be just, the 18 212.00 5,679,480.00 68,153,760.00
court may extend the time to plead provided in these Rules. 19 230.70 6,180,453.00 74,165,436.00
The court may also, upon like terms, allow an answer or other pleading to be
20 260.69 6,983,885.10 83,806,621.20
filed after the time fixed by these Rules.
21 290.68 7,787,317.20 93,447,806.40
Verily, the trial court erred in denying petitioners motion for extension of time to file record on 22 320.67 8,590,749.30 103,088,991.60
appeal. At any rate, this petition has become moot considering that the Court of Appeals gave 23 365.56 9,793,352.40 117,520,288.80
due course to LECAs petition for review (CA-G.R. SP No. 80861) which eventually reached this Court 24 410.45 10,995,955.50 131,951,466.00
via a petition for review on certiorari, docketed as G.R. No. 168924. 25 455.34 12,198,558.60 146,382,703.20

In G.R. No. 168924, petitioner ascribes to the Court of Appeals the following assignment of errors: On the other hand, the Rehabilitation Plan prescribes the following rental rates:

1. THE COURT OF APPEALS GRIEVOUSLY ERRED IN RULING THAT THE Year Yearly Rent
PENDENCY OF THE REHABILITATION PROCEEDINGS CANNOT BE 1st year 2003-2004 RENT FREE
INTERPRETED TO IMPAIR THE CONTRACTUAL OBLIGATIONS
2nd year 2004-2005 P 5,000,000.00
PREVIOUSLY ENTERED INTO BY THE CONTRACTING PARTIES
3rd year 2005-2006 5,000,000.00
BECAUSE THE AUTOMATIC STAY OF ALL ACTIONS IS SANCTIONED
BY P.D. 902-A WHICH PROVIDES THAT ALL ACTIONS FOR CLAIMS 4th year 2006-2007 5,000,000.00
AGAINST CORPORATIONS, PARTNERSHIPS OR ASSOCIATIONS 5th year 2007-2008 19,288,800.00
UNDER MANAGEMENT OR RECEIVERSHIP PENDING BEFORE ANY 6th year 2008-2009 20,639,016.00
COURT, TRIBUNAL, BOARD OR BODY SHALL BE SUSPENDED 7th year 2009-2010 21,639,016.00
ACCORDINGLY, CITING RUBBERWORLD (PHILS.), INC. V. NLRC, G.R. 8th year 2010-2011 23,339,445.00
NO. 128003, JULY 26, 2000, 336 SCRA 433. 9th year 2011-2012 24,689,664.00
10th year 2012-2013 26,663,544.00
2. THE COURT OF APPEALS ERRED IN SUSTAINING THE LOWER COURTS
APPROVAL OF RESPONDENT MANUELAS REHABILITATION PLAN
EVEN IF SUCH PLAN IS NOT VIABLE OR FEASIBLE BECAUSE
RESPONDENT MANUELA CORPORATION COULD NOT EVEN COMPLY
Clearly, there is a gross discrepancy between the amounts of rent agreed upon by the
WITH THE TERMS AND PROVISIONS OF THE COURT-APPROVED
parties and those provided in the Rehabilitation Plan.
REHABILITATION PLAN.
In its Decision, the Court of Appeals rejected petitioners contention that the approved
3. THE COURT OF APPEALS ALSO ERRED IN NOT ADDRESSING THE ISSUE OF
Rehabilitation Plan impairs the obligation of contract, ratiocinating that the automatic stay of all
THE LOWER COURTS FAILURE TO ACT, THAT IS, APPROVE OR
actions is sanctioned by Section 5 (c) of Presidential Decree (P.D.) No. 902-A which provides that
DISAPPROVE, THE REHABILITATION PLAN OF MANUELA
all actions for claims against corporations, partnerships or associations under management or
CORPORATION WITHIN EIGHTEEN MONTHS AFTER THE FILING OF
receivership pending before any court, tribunal, board or body shall be suspended accordingly.
THE PETITION FOR REHABILITATION.
Petitioner, in support of its contention, cites in its Memorandum the treatises
of Ateneo Law Dean Cesar L. Villanueva and former SEC Commissioner Danilo L. Concepcion, both
Petitioner contends that the approved Rehabilitation Plan drastically altered the terms of
known authorities on Corporation Law. In his Article which appeared in the Ateneo Law Journal,
its lease contract with respondent Manuela, hence, should be declared void.
Dean Villanueva said:
The contract of lease between petitioner and respondent Manuela [7] for twenty-five years,
The nature and extent of the power of the SEC to approve and
from August 1, 1995 to July 31, 2020, stipulates that the rates of rental on the leased parcel of land
enforce a rehabilitation plan is certainly an important issue. Often, a
are as follows:
rehabilitation plan would require a diminution, if not destruction, of contractual
and property rights of some, if not most of the various stakeholders in the
Year Rent/Sq. M. Monthly Rent Yearly Rent
petitioning corporation. In the absence of clear coercive legal provisions, the
1 60.00 1,607,400.00 19,288,800.00 courts of justice and much less the SEC would have no power to amend or
2 64.20 1,719,918.00 20,639,016.00 destroy the property and contractual rights of private parties, much less relieve
3 68.40 1,832,436.00 21,989,232.00 a petitioning corporation from its contractual commitments.[8]
4 72.60 1.944,954.00 23,339,448.00
5 76.80 2,057,472.00 24,689,664.00
6 82.94 2,221,962.00 26,663,551.20
On the other hand, Professor Concepcion stated that what is allowed in rehabilitation proceedings
is only the suspension of payments, or the stay of all actions for claims of distressed
corporations, and upon its successful rehabilitation, the claims must be settled in full. [9]
We agree with petitioner.
In The Insular Life Assurance Company, Ltd., v. Court of Appeals, et al., we held:
base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.[12]

When the language of the contract is explicit leaving no doubt as to the

intention of the drafters thereof, the courts may not read into it any other
intention that would contradict its plain import.The Court would be rewriting
the contract of lease between Insular and Sun Brothers under the guise of
construction were we to interpret the option to renew clause as Sun Brothers
propounds it, despite the express provision in the original contract of lease and
the contracting parties subsequent acts. As the Court has held in Riviera
Filipina, Inc. vs. Court of Appeals, a court, even the Supreme Court, has no
right to make new contracts for the parties or ignore those already made by
them, simply to avoid seeming hardships. Neither abstract justice nor the rule
of liberal construction justifies the creation of a contract for the parties which
they did not make themselves or the imposition upon one party to a contract
of an obligation not assumed.[10]
The amount of rental is an essential condition of any lease contract. Needless to state,
the change of its rate in the Rehabilitation Plan is not justified as it impairs the stipulation between
the parties. We thus rule that the Rehabilitation Plan is void insofar as it amends the rental rates
agreed upon by the parties.
WHEREFORE, we GRANT the Petition for Review in G.R. No. 168924. The assailed
Decision of the Court of Appeals in CA-G.R. SP No. 87185 is AFFIRMED with MODIFICATION. The
Rehabilitation Plan, insofar as it modifies the rental rates agreed upon by petitioner LECA and
respondent Manuela, is declared VOID.
Respondent Manuela is ordered to pay the rentals and all arrearages at the rates
stipulated in the lease contract with interest at 6% per annum. Upon the finality of this Decision,
the interest shall be 12% per annum until fully paid.
The Petition for Review on Certiorari in G.R. No. 166800 is DENIED for being moot. It
has been overtaken by events. No costs.
SO ORDERED.
ANGELINA SANDOVAL-GUTIERREZ
Associate Justice

It must be emphasized that there is nothing in Section 5 (c) of P.D. No. 902-A authorizing
the change or modification of contracts entered into by the distressed corporation and its creditors.

Moreover, the Stay Order issued by the trial court directed respondent Manuela to pay in
full, after the issuance of such Order, all administrative expenses incurred.Administrative expenses
are costs associated with the general administration of an organization and include such items as
utilities, rents, salaries, postages, furniture, and housekeeping charges.[11]

Inasmuch as rents are considered administrative expenses and considering that the Stay
Order directed respondent Manuela to pay the rents in full, then it must comply at the rates agreed
upon.

Respondent Manuela, therefore, must update its payment of rental arrears and continue
to pay current rentals at the rate stipulated in the lease contract. The rentals shall incur interest at
the legal rate of 6% per annum. Upon finality of this Decision, the legal rate shall be 12% per
annum, pursuant to the following rulings of this Court:

1. When the obligation is breached, and it consists in the

payment of a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of

money, is breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty.Accordingly,
where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty cannot be so reasonably established
at the time the demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual
[G.R. No. 151925. February 6, 2003]
CHAS REALTY AND DEVELOPMENT CORPORATION, petitioner, vs. HON.
TOMAS B. TALAVERA, in his capacity as Presiding Judge of the Regional Trial
Court of Cabanatuan City, Branch 28, and ANGEL D. CONCEPCION,
SR., respondents.
DECISION
VITUG, J.:
Petitioner Chas Realty and Development Corporation (CRDC) is a domestic corporation
engaged in property development and management. It is the owner and developer of
a three-hectare shopping complex, also known as the Megacenter Mall (Megacenter),
in Cabanatuan City.
The construction of Megacenter commenced in January 1996, but by the time of its so-
called soft opening in July 1998, it was only partly completed due to lack of funds, said
to have been brought about by construction overages due to the massive devaluation
of the peso during the economic crisis in 1997, low occupancy, and rental arrearages
of tenants. The opening of the upper ground floor and the second floor of the building
followed, respectively, in August 1998 and towards the end of 1998. Eventually,
Megacenter opened its third floor in 1999.
Purportedly on account of factors beyond the control of CRDC, such as high interest
rates on its loans, unpaid rentals of tenants, low occupancy rate, sluggishness of the
economy and the freezing of its bank account by its main creditor, the Land Bank of
the Philippines, CRDC encountered difficulty in paying its obligations as and when they
fell due and had to contend with collection suits and related cases.
On 04 June 2001, CRDC filed a petition for rehabilitation attaching thereto a proposed
rehabilitation plan, accompanied by a secretarys certificate, consonantly with
paragraph 2(k), Section 2, Rule 4, of the Interim Rules of Procedure on Corporate
Rehabilitation. CRDC claimed that it had sufficient assets and a workable rehabilitation
plan both of which showed that the continuance of its business was still feasible. It
alleged that, prior to the filing of the petition for rehabilitation, a special meeting of its
stockholders was held on 18 April 2001 during which the majority of the outstanding
capital stock of CRDC approved the resolution authorizing the filing of a petition for
rehabilitation.
On 08 June 2001, the Regional Trial Court, Branch 28, of Cabanatuan City, to which
the petition was assigned, issued an order staying all claims against CRDC and
prohibited it from making any payment on its outstanding obligations and selling, or
otherwise disposing or encumbering, its property. Forthwith, the court appointed a
rehabilitation receiver.
On 20 July 2001, Angel D. Concepcion, Sr., herein private respondent, filed a complaint
in intervention opposing the appointment of CRDCs nominee for the post of
rehabilitation receiver. He belied CRDCs factual allegations and claimed that the
predicament of the corporation was due to serious mismanagement, fraud,
embezzlement, misappropriation and gross/evident violation of the fiduciary duties of
CHAS officers. Concepcion moved to dismiss and/or to deny the petition for
rehabilitation on the ground that there was no approval by the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock which, according
to him, would be essential under paragraph 2(k), Section 2, Rule 4, of the Interim Rules
on Corporate Rehabilitation. Concepcion further asserted that the supposed approval of
the directors of the filing of the petition for rehabilitation was inaccurate considering
that the membership of petitioner CRDCs board of directors was still then being
contested and pending final resolution.
On 10 August 2001, CRDC submitted its opposition
ex abundante cautelam contending that the complaint in intervention was a prohibited
pleading and that there was no need for it to secure the irrevocable consent and
approval of its stockholders representing at least two-thirds (2/3) of its outstanding
capital stock because the petition did not include in its plan for rehabilitation acts that
would need any amendment of its articles of incorporation and/or by-laws, increase or
decrease in the authorized capital stock, issuance of bonded indebtedness, or the like,
where such two-thirds (2/3) vote would be required.
The trial court issued an order, dated 15 October 2001, the decretal portion of which
was to the following effect; viz:
WHEREFORE, premises considered, in the absence of any showing that the petitioner
has complied with the certification required under Section 2, Rule 4(K) of the Interim
Rules of Procedure on Corporate Rehabilitation, the petitioner is hereby given a period
of 15 days from receipt of a copy of this order to secure from its directors and
stockholders the desired certification and submit the same to this Court in accordance
with the above-mentioned provision of the Interim Rules of Procedure on Corporate
Rehabilitation.
With respect to the other oppositions to the petition for rehabilitation including the
opposition to the appointment of the rehabilitation receiver, opposition filed by the land
bank and the EEI, Inc., the resolution of the same is hereby held in abeyance till after
the period given to the petitioner to comply with this order as it may become moot and
academic after the expiration of the period given to the petitioner.[1]
On 29 October 2001, CRDC filed before the Court of Appeals a petition
for certiorari, with prayer for temporary restraining order and/or preliminary injunction,
which sought to have the 15th October 2001 order of the trial court set aside.
The Court of Appeals rendered a decision on 18 January 2002 and held:
WHEREFORE, the foregoing premises considered, the petition for certiorari, with prayer
for temporary restraining order and/or writ of preliminary injunction, is DENIED for lack
of merit.[2]
Hence, the instant petition on the following grounds:
I
Public respondent acted with grave abuse of discretion amounting to lack and/or excess
of jurisdiction in issuing the assailed order considering that:
A. The petition for rehabilitation and the proposed rehabilitation plan do not require
extraordinary corporate actions.
B. Since no extraordinary corporate actions are required or even contemplated as
necessary and desirable for the rehabilitation of CRDC, the requirements of the
corporation code for the approval of such actions cannot be complied with.
C. The rehab rules and the corporation code do not allow or intend blind blanket
approvals of extraordinary corporate actions.
D. To require 2/3 stockholders approval for corporate actions requiring only a majority
violates the right of the majority stockholders.
II
Public respondent acted with grave abuse of discretion amounting to lack and/or excess
of jurisdiction in requiring CRDCs compliance with paragraph 2(k), Section 2, Rule 4 of
the Rehab rules when CRDC already complied therewith.[3]
Rule 4, Section 2(k), of the Interim Rules on Corporate Rehabilitation provides:
Sec. 2. Contents of the Petition. The petition filed by the debtor must be verified and
must set forth with sufficient particularity all the following material facts: (a) the name
and business of the debtor; (b) the nature of the business of the debtor; (c) the history
of the debtor; (d) the cause of its inability to pay its debts; (e) all the pending actions
or proceedings known to the debtor and the courts or tribunals where they are pending;
(f) threats or demands to enforce claims or liens against the debtor; and (g) the manner
by which the debtor may be rehabilitated and how such rehabilitation may benefit the
general body of creditors, employees, and stockholders.
The petitioner shall be accompanied by the following documents:
x x x x x x x x x.
k. A Certificate attesting, under oath, that (a) the filing of the petition has been duly
authorized; and (b) the directors and stockholders have irrevocably approved and/or
consented to, in accordance with existing laws, all actions or matters necessary and
desirable to rehabilitate the debtor including, but not limited to, amendments to the
articles of incorporation and by-laws or articles of partnership; increase or decrease in
the authorized capital stock; issuance of bonded indebtedness; alienation, transfer, or
encumbrance of assets of the debtor; and modification of shareholders rights.[4]
Rule 4, Section 2(k), distinctly provides that, first, under letter (a), the filing of the
petition has been duly authorized; and, second, under letter (b), the directors and
stockholders have irrevocably approved and/or consented to, in accordance with
existing laws, all actions or matters necessary and desirable to rehabilitate the debtor
including, but not limited to, amendments to the articles of incorporation and by-laws
or articles of partnership; increase or decrease in the authorized capital stock; issuance
of bonded indebtedness, alienation, transfer, or encumbrance of assets of the debtor;
and modification of shareholders rights.
Observe that Rule 4, Section 2(k), prescribes the need for a certification; one, to state
that the filing of the petition has been duly authorized, and two, to confirm that the
directors and stockholders have irrevocably approved and/or consented to, in
accordance with existing laws, all actions or matters necessary and desirable to
rehabilitate the corporate debtor, including, as and when called for, such extraordinary
corporate actions as may be marked out. The phrase, in accordance with existing laws,
obviously would refer to that which is, or to those that are, intended to be done by the
corporation in the pursuit of its plan for rehabilitation. Thus, if any extraordinary
corporate action (mentioned in Rule 4, Section 2(k), of the Interim Rules on Corporate
Rehabilitation) are to be done under the proposed rehabilitation plan, the petitioner
would be bound to make it known that it has received the approval of a majority of the
directors and the affirmative votes of stockholders representing at least two-thirds
(2/3) of the outstanding capital stock of the corporation. Where no such extraordinary
corporate acts (or one that under the law would call for a two-thirds (2/3) vote) are
contemplated to be done in carrying out the proposed rehabilitation plan, then the
approval of stockholders would only be by a majority, not necessarily a two-thirds
(2/3), vote, as long as, of course, there is a quorum[5] a fact which is not here being
disputed.
The trial court and appellate court, unfortunately, have taken an inaccurate
understanding of the memorandum to the Supreme Court of Justice Reynato S. Puno,
the committee chair on the draft of the rules on corporate rehabilitation, still then being
proposed; the memorandum reads, in part, thusly:
3. Rule 4. Rehabilitation
The following are the principal deviation from the SEC Rules:
a) The proposed Rules now require, as an attachment to the petition, a Certificate
attesting, among others, that the governing body and owners of the petitioning debtor
have approved and consented to whatever is necessary or desirable (including but not
limited to increasing or decreasing the authorized capital stock of the company and
modification of stockholders right) to rehabilitate the debtor (Sec. 2, par. (k), Rule
4). This is to avoid a situation where a rehabilitation plan, after being developed for
years, cannot be implemented because of the refusal of shareholders to approve the
arrangements necessary for its implementation.[6]
Nowhere in the aforequoted paragraph can it be inferred that an affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding stock is invariably
necessary for the filing of a petition for rehabilitation regardless of the corporate action
that the plan envisions. Just to the contrary, it only requires in the filing of the petition
that the corporate actions therein proposed have been duly approved or consented to
by the directors and stockholders in consonance with existing laws. The requirement is
designed to avoid a situation where a rehabilitation plan, after being developed and
judicially sanctioned, cannot ultimately be seen through because of the refusal of
directors or stockholders to cooperate in the full implementation of the plan. In fine, a
certification on the approval of stockholders is required but the question, whether such
approval should be by a majority or by a two-thirds (2/3) vote of the outstanding capital
stock, would depend on the existing law vis--vis the corporate act or acts proposed to
be done in the rehabilitation of the distressed corporation.
The rehabilitation plan[7] submitted by petitioner merely consists of a repayment or re-
structuring scheme of CRDCs bank loans to Land Bank of the Philippines and Equitable-
PCI Bank and of leasing out most of the available spaces in the Megacenter, including
the completion of the construction of the fourth floor, to increase rental revenues. None
of the proposed corporate actions would require a vote of approval by the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock.
Relative to the contention that a motion for reconsideration is required prior to bringing
up the petition for certiorari (with the Court of Appeals), it should suffice to say that
the filing of a motion for reconsideration before availing of the remedy of certiorari is
not always sine qua non such as when the issue raised is one purely of law, or where
the error is patent or the questions raised on certiorari are exactly the same as those
already squarely presented to and passed upon by the court a quo.[8]
WHEREFORE, the instant petition is GRANTED and the questioned decision of the Court
of Appeals, dated 18 January 2002, and the order of the Regional Trial Court, Branch
28, Cabanatuan City, dated 15 October 2001, in Civil Case No. 4036-AF, are REVERSED
and SET ASIDE. The Regional Trial Court is directed to give due course to the Petition
for Rehabilitation and conduct with dispatch the necessary proceedings still required
thereon. No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
[G.R. No. 74851. December 9, 1999]
RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs. INTERMEDIATE
APPELLATE COURT AND BF HOMES, INC., respondents.
RESOLUTION
MELO, J.:
On September 14, 1992, the Court passed upon the case at bar and rendered its
decision, dismissing the petition of Rizal Commercial Banking Corporation (RCBC), thereby
affirming the decision of the Court of Appeals which canceled the transfer certificate of title
issued in favor of RCBC, and reinstating that of respondent BF Homes.
This will now resolve petitioners motion for reconsideration which, although filed in
1992 was not deemed submitted for resolution until in late 1998. The delay was occasioned
by exchange of pleadings, the submission of supplemental papers, withdrawal and change of
lawyers, not to speak of the case having been passed from one departing to another retiring
justice. It was not until May 3, 1999, when the case was re-raffled to herein ponente, but the
record was given to him only sometime in the late October 1999.
By way of review, the pertinent facts as stated in our decision are reproduced herein,
to wit:
On September 28, 1984, BF Homes filed a Petition for Rehabilitation and for Declaration of
Suspension of Payments (SEC Case No. 002693) with the Securities and Exchange
Commission (SEC).
One of the creditors listed in its inventory of creditors and liabilities was RCBC.
On October 26, 1984, RCBC requested the Provincial Sheriff of Rizal to extra-judicially
foreclose its real estate mortgage on some properties of BF Homes. A notice of extra-judicial
foreclosure sale was issued by the Sheriff on October 29, 1984, scheduled on November 29,
1984, copies furnished both BF Homes (mortgagor) and RCBC (mortgagee).
On motion of BF Homes, the SEC issued on November 28, 1984 in SEC Case No. 002693 a
temporary restraining order (TRO), effective for 20 days, enjoining RCBC and the sheriff from
proceeding with the public auction sale. The sale was rescheduled to January 29, 1985.
On January 25, 1985, the SEC ordered the issuance of a writ of preliminary injunction upon
petitioners filing of a bond. However, petitioner did not file a bond until January 29, 1985,
the very day of the auction sale, so no writ of preliminary injunction was issued by the
SEC. Presumably, unaware of the filing of the bond, the sheriffs proceeded with the public
auction sale on January 29, 1985, in which RCBC was the highest bidder for the properties
auctioned.
On February 5, 1985, BF Homes filed in the SEC a consolidated motion to annul the auction
sale and to cite RCBC and the sheriff for contempt. RCBC opposed the motion.
Because of the proceedings in the SEC, the sheriff withheld the delivery to RCBC of a
certificate of sale covering the auctioned properties.
On February 13, 1985, the SEC in Case No. 002693 belatedly issued a writ of preliminary
injunction stopping the auction sale which had been conducted by the sheriff two weeks
earlier.
On March 13, 1985, despite SEC Case No. 002693, RCBC filed with the Regional Trial Court,
Br. 140, Rizal (CC 10042) an action for mandamus against the provincial sheriff of Rizal and
his deputy to compel them to execute in its favor a certificate of sale of the auctioned
properties.
In answer, the sheriffs alleged that they proceeded with the auction sale on January 29, 1985
because no writ of preliminary injunction had been issued by SEC as of that date, but they
informed the SEC that they would suspend the issuance of a certificate of sale to RCBC.
On March 18, 1985, the SEC appointed a Management Committee for BF Homes.
On RCBCs motion in the mandamus case, the trial court issued on May 8, 1985 a judgment
on the pleadings, the dispositive portion of which states:
WHEREFORE, petitioners Motion for Judgment on the pleadings is granted and judgement is
hereby rendered ordering respondents to execute and deliver to petitioner the Certificate of
the Auction Sale of January 29, 1985, involving the properties sold therein, more particularly
those described in Annex C of their Answer. (p. 87, Rollo.)
On June 4, 1985, B.F. Homes filed an original complaint with the IAC pursuant to Section 9
of B.P. 129 praying for the annulment of the judgment, premised on the following:
x x x: (1) even before RCBC asked the sheriff to extra-judicially foreclose its mortgage on
petitioners properties, the SEC had already assumed exclusive jurisdiction over those assets,
and (2) that there was extrinsic fraud in procuring the judgment because the petitioner was
not impleaded as a party in the mandamus case, respondent court did not acquire jurisdiction
over it, and it was deprived of its right to be heard. (CA Decision, p. 88, Rollo).
On April 8, 1986, the IAC rendered a decision, setting aside the decision of the trial court,
dismissing the mandamus case and suspending issuance to RCBC of new land titles, until the
resolution of case by SEC in Case No. 002693, disposing as follows:
WHEREFORE, the judgment dated May 8, 1985 in Civil Case No. 10042 is hereby annulled
and set aside and the case is hereby dismissed. In view of the admission of respondent Rizal
Commercial Banking Corporation that the sheriffs certificate of sale has been registered on
BF Homes TCTs . . . (here the TCTs were enumerated) the Register of Deeds for Pasay City
is hereby ordered to suspend the issuance to the mortgagee-purchaser, Rizal Commercial
Banking Corporation, of the owners copies of the new land titles replacing them until the
matter shall have been resolved by the Securities and Exchange Commission in SEC Case
No. 002693.
(p. 257-260, Rollo; also pp. 832-834, 213 SCRA 830[1992]; Emphasis in the original.)
On June 18, 1986, RCBC appealed the decision of the then Intermediate Appellate Court
(now, back to its old revered name, the Court of Appeals) to this Court, arguing that:
1. Petitioner did not commit extrinsic fraud in excluding private respondent as party
defendant in Special Civil Case No. 10042 as private respondent was not indispensable party
thereto, its participation not being necessary for the full resolution of the issues raised in said
case.
2. SEC Case No. 2693 cannot be invoked to suspend Special Civil Case No. 10042, and for
that matter, the extra-judicial foreclosure of the real estate mortgage in petitioners favor, as
these do not constitute actions against private respondent contemplated under Section 6(c)
of Presidential Decree No. 902-A.
3. Even assuming arguendo that the extra-judicial sale constitute an action that may be
suspended under Section 6(c) of Presidential Decree No. 902-A, the basis for the suspension
thereof did not exist so as to adversely affect the validity and regularity thereof.
4. The Regional Trial court had jurisdiction to take cognizance of Special Civil Case No. 10042.
5. The Regional Trial court had jurisdiction over Special Civil Case No. 10042.
(
p. 5, Rollo.)
On November 12, 1986, the Court gave due course to the petition. During the pendency
of the case, RCBC brought to the attention of the Court an order issued by the SEC on October
16, 1986 in Case No.002693, denying the consolidated Motion to Annul the Auction Sale and
to cite RCBC and the Sheriff for Contempt, and ruling as follows:
WHEREFORE, the petitioners Consolidated Motion to Cite Sheriff and Rizal Commercial
Banking Corporation for Contempt and to Annul Proceedings and Sale, dated February 5,
1985, should be as is, hereby DENIED.
While we cannot direct the Register of Deeds to allow the consolidation of the titles subject
of the Omnibus Motion dated September 18, 1986 filed by the Rizal Commercial banking
Corporation, and therefore, denies said Motion, neither can this Commission restrain the said
bank and the Register of Deeds from effecting the said consolidation.
SO ORDERED.
(p. 143, Rollo.)
By virtue of the aforesaid order, the Register of Deeds of Pasay City effected the transfer
of title over subject pieces of property to petitioner RCBC, and the issuance of new titles in
its name. Thereafter, RCBC presented a motion for the dismissal of the petition, theorizing
that the issuance of said new transfer certificates of title in its name rendered the petition
moot and academic.
In the decision sought to be reconsidered, a greatly divided Court (Justices Gutierrez,
Nocon, and Melo concurred with the ponente, Justice Medialdea; Chief Justice Narvasa,
Justices Bidin, Regalado, and Bellosillo concurred only in the result; while Justice Feliciano
dissented and was joined by Justice Padilla, then Justice, now Chief Justice Davide, and
Justice Romero; Justices Grio-Aquino and Campos took no part) denied petitioners motion to
dismiss, finding basis for nullifying and setting aside the TCTs in the name of RCBC. Ruling
on the merits, the Court upheld the decision of the Intermediate Appellate Court which
dismissed the mandamus case filed by RCBC and suspended the issuance of new titles to
RCBC. Setting aside RCBCs acquisition of title and nullifying the TCTs issued to it, the Court
held that:
. . . whenever a distressed corporation asks the SEC for rehabilitation and suspension of
payments, preferred creditors may no longer assert such preference, but . . . stand on equal
footing with other creditors. Foreclosure shall be disallowed so as not to prejudice other
creditors, or cause discrimination among them. If foreclosure is undertaken despite the fact
that a petition for rehabilitation has been filed, the certificate of sale shall not be delivered
pending rehabilitation. Likewise, if this has also been done, no transfer of title shall be
effected also, within the period of rehabilitation. The rationale behind PD 902-A, as amended,
is to effect a feasible and viable rehabilitation. This cannot be achieved if one creditor is
preferred over the others.
In this connection, the prohibition against foreclosure attaches as soon as a petition for
rehabilitation is filed. Were it otherwise, what is to prevent the petitioner from delaying the
creation of a Management Committee and in the meantime dissipate all its assets. The sooner
the SEC takes over and imposes a freeze on all the assets, the better for all concerned.
(pp. 265-266, Rollo; also p. 838, 213 SCRA 830[1992].)
Then Justice Feliciano (joined by three other Justices), dissented and voted to grant the
petition. He opined that the SEC acted prematurely and without jurisdiction or legal authority
in enjoining RCBC and the sheriff from proceeding with the public auction sale. The dissent
maintain that Section 6 (c) of Presidential Decree 902-A is clear and unequivocal that, claims
against the corporations, partnerships, or associations shall be suspended only upon the
appointment of a management committee, rehabilitation receiver, board or body. Thus, in
the case under consideration, only upon the appointment of the Management Committee for
BF Homes on March 18, 1985, should the suspension of actions for claims against BF Homes
have taken effect and not earlier.
In support of its motion for reconsideration, RCBC contends:
The restraining order and the writ of preliminary injunction issued by the Securities and
Exchange Commission enjoining the foreclosure sale of the properties of respondent BF
Homes were issued without or in excess of its jurisdiction because it was violative of the clear
provision of Presidential Decree No. 902-A, and are therefore null and void; and
Petitioner, being a mortgage creditor, is entitled to rely solely on its security and to refrain
from joining the unsecured creditors in SEC Case No. 002693, the petition for rehabilitation
filed by private respondent.
We find the motion for reconsideration meritorious.
The issue of whether or not preferred creditors of distressed corporations stand on
equal footing with all other creditors gains relevance and materiality only upon the
appointment of a management committee, rehabilitation receiver, board, or body. Insofar as
petitioner RCBC is concerned, the provisions of Presidential Decree No. 902-A are not yet
applicable and it may still be allowed to assert its preferred status because it foreclosed on
the mortgage prior to the appointment of the management committee on March 18,
1985. The Court, therefore, grants the motion for reconsideration on this score.
The law on the matter, Paragraph (c), Section 6 of Presidential Decree 902-A, provides:
Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers:
c) To appoint one or more receivers of the property, real and personal, which is the subject
of the action pending before the Commission in accordance with the pertinent provisions of
the Rules of Court in such other cases whenever necessary to preserve the rights of the
parties-litigants to and/or protect the interest of the investing public and creditors; Provided,
however, that the Commission may, in appropriate cases, appoint a rehabilitation receiver of
corporations, partnerships or other associations not supervised or regulated by other
government agencies who shall have, in addition to the powers of a regular receiver under
the provisions of the Rules of Court, such functions and powers as are provided for in the
succeeding paragraph (d) hereof: Provided, finally, That upon appointment of a management
committee, rehabilitation receiver, board or body, pursuant to this Decree, all actions for
claims against corporations, partnerships or associations under management or receivership
pending before any court, tribunal, board or body shall be suspended accordingly. (As
amended by PDs No. 1673, 1758 and by PD No. 1799. Emphasis supplied.)
It is thus adequately clear that suspension of claims against a corporation under
rehabilitation is counted or figured up only upon the appointment of a management
committee or a rehabilitation receiver.The holding that suspension of actions for claims
against a corporation under rehabilitation takes effect as soon as the application or a petition
for rehabilitation is filed with the SEC may, to some, be more logical and wise but
unfortunately, such is incongruent with the clear language of the law. To insist on such ruling,
no matter how practical and noble, would be to encroach upon legislative prerogative to
define the wisdom of the law plainly judicial legislation.
It bears stressing that the first and fundamental duty of the Court is to apply the
law. When the law is clear and free from any doubt or ambiguity, there is no room for
construction or interpretation. As has been our consistent ruling, where the law speaks in
clear and categorical language, there is no occasion for interpretation; there is only room for
application (Cebu Portland Cement Co. vs. Municipality of Naga, 24 SCRA 708 [1968]).
Where the law is clear and unambiguous, it must be taken to mean exactly what it says and
the court has no choice but to see to it that its mandate is obeyed (Chartered Bank Employees
Association vs. Ople, 138 SCRA 273 [1985]; Luzon Surety Co., Inc. vs. De Garcia, 30 SCRA
111 [1969]; Quijano vs. Development Bank of the Philippines, 35 SCRA 270 [1970]).
Only when the law is ambiguous or of doubtful meaning may the court interpret or
construe its true intent. Ambiguity is a condition of admitting two or more meanings, of being
understood in more than one way, or of referring to two or more things at the same time. A
statute is ambiguous if it is admissible of two or more possible meanings, in which case, the
Court is called upon to exercise one of its judicial functions, which is to interpret the law
according to its true intent.
Furthermore, as relevantly pointed out in the dissenting opinion, a petition for
rehabilitation does not always result in the appointment of a receiver or the creation of a
management committee. The SEC has to initially determine whether such appointment is
appropriate and necessary under the circumstances. Under Paragraph (d), Section 6 of
Presidential Decree No. 902-A, certain situations must be shown to exist before a
management committee may be created or appointed, such as;
1. when there is imminent danger of dissipation, loss, wastage or destruction of
assets or other properties; or
2. when there is paralization of business operations of such corporations or
entities which may be prejudicial to the interest of minority stockholders,
parties-litigants or to the general public.
On the other hand, receivers may be appointed whenever:
1. necessary in order to preserve the rights of the parties-litigants; and/or
2. protect the interest of the investing public and creditors. (Section 6 (c), P.D.
902-A.)
These situations are rather serious in nature, requiring the appointment of a
management committee or a receiver to preserve the existing assets and property of the
corporation in order to protect the interests of its investors and creditors. Thus, in such
situations, suspension of actions for claims against a corporation as provided in Paragraph
(c) of Section 6, of Presidential Decree No. 902-A is necessary, and here we borrow the words
of the late Justice Medialdea, so as not to render the SEC management Committee irrelevant
and inutile and to give it unhampered rescue efforts over the distressed firm (Rollo, p. 265).
Otherwise, when such circumstances are not obtaining or when the SEC finds no such
imminent danger of losing the corporate assets, a management committee or rehabilitation
receiver need not be appointed and suspension of actions for claims may not be ordered by
the SEC. When the SEC does not deem it necessary to appoint a receiver or to create a
management committee, it may be assumed, that there are sufficient assets to sustain the
rehabilitation plan and, that the creditors and investors are amply protected.
Petitioner additionally argues in its motion for reconsideration that, being a mortgage
creditor, it is entitled to rely on its security and that it need not join the unsecured creditors
in filing their claims before the SEC-appointed receiver. To support its position, petitioner
cites the Courts ruling in the case of Philippine Commercial International Bank vs. Court of
Appeals, (172 SCRA 436 [1989]) that an order of suspension of payments as well as actions
for claims applies only to claims of unsecured creditors and cannot extend to creditors holding
a mortgage, pledge, or any lien on the property.
Ordinarily, the Court would refrain from discussing additional matters such as that
presented in RCBCs second ground, and would rather limit itself only to the relevant issues
by which the controversy may be settled with finality.
In view, however, of the significance of such issue, and the conflicting decisions of this
Court on the matter, coupled with the fact that our decision of September 14, 1992, if not
clarified, might mislead the Bench and the Bar, the Court resolved to discuss further.
It may be recalled that in the herein en banc majority opinion (pp. 256-275, Rollo, also
published as RCBC vs. IAC, 213 SCRA 830 [1992]), we held that:
. . . whenever a distressed corporation asks the SEC for rehabilitation and suspension of
payments, preferred creditors may no longer assert such preference, but . . . stand on equal
footing with other creditors. Foreclosure shall be disallowed so as not to prejudice other
creditors, or cause discrimination among them. If foreclosure is undertaken despite the fact
that a petition for rehabilitation has been filed, the certificate of sale shall not be delivered
pending rehabilitation. Likewise, if this has also been done, no transfer of title shall be
effected also, within the period of rehabilitation. The rationale behind PD 902-A, as amended,
is to effect a feasible and viable rehabilitation. This cannot be achieved if one creditor is
preferred over the others.
In this connection, the prohibition against foreclosure attaches as soon as a petition for
rehabilitation is filed. Were it otherwise, what is to prevent the petitioner from delaying the
creation of a Management Committee and in the meantime dissipate all its assets. The sooner
the SEC takes over and imposes a freeze on all the assets, the better for all concerned.
(pp. 265-266, Rollo; also p. 838, 213 SCRA 830[1992]. Emphasis supplied.)
The foregoing majority opinion relied upon BF Homes, Inc. vs. Court of Appeals (190
SCRA 262 [1990] per Cruz, J.: First Division) where it was held that when a corporation
threatened by bankruptcy is taken over by a receiver, all the creditors should stand on an
equal footing. Not anyone of them should be given preference by paying one or some of them
ahead of the others. This is precisely the reason for the suspension of all pending claims
against the corporation under receivership. Instead of creditors vexing the courts with suits
against the distressed firm, they are directed to file their claims with the receiver who is a
duly appointed officer of the SEC (pp. 269-270; emphasis in the original). This ruling is a
reiteration of Alemars Sibal & Sons, Inc. vs. Hon. Jesus M. Elbinias (pp. 99-100;186 SCRA
94 [1990] per Fernan, C.J.: Third Division).
Taking the lead from Alemars Sibal & Sons, the Court also applied this same ruling
in Araneta vs. Court of Appeals (211 SCRA 390 [1992] per Nocon, J.: Second Division).
 All the foregoing cases departed from the ruling of the Court in the much earlier case
of PCIB vs. Court of Appeals (172 SCRA 436 [1989] per Medialdea, J.: First Division) where
the Court categorically ruled that:
SECs order for suspension of payments of Philfinance as well as for all actions of claims
against Philfinance could only be applied to claims of unsecured creditors.Such order can not
extend to creditors holding a mortgage, pledge or any lien on the property unless they give
up the property, security or lien in favor of all the creditors of Philfinance. . .
(p. 440.
Emphasis supplied)
Thus, in BPI vs. Court of Appeals (229 SCRA 223 [1994] per Bellosillo, J.: First
Division) the Court explicitly stated that . . . the doctrine in the PCIB Case has since been
abrogated. In Alemars Sibal & Sons v. Elbinias, BF Homes, Inc. v. Court of Appeals, Araneta
v. Court of Appeals and RCBC v. Court of Appeals, we already ruled that whenever a
distressed corporation asks SEC for rehabilitation and suspension of payments, preferred
creditors may no longer assert such preference, but shall stand on equal footing with other
creditors. . . (pp. 227-228).
The majority ruling in our 1992 decision that preferred creditors of distressed
corporations shall, in a way, stand on equal footing with all other creditors, must be read and
understood in the light of the foregoing rulings. All claims of both a secured or unsecured
creditor, without distinction on this score, are suspended once a management committee is
appointed. Secured creditors, in the meantime, shall not be allowed to assert such preference
before the Securities and Exchange Commission. It may be stressed, however, that this shall
only take effect upon the appointment of a management committee, rehabilitation receiver,
board, or body, as opined in the dissent.
In fine, the Court grants the motion for reconsideration for the cogent reason that
suspension of actions for claims commences only from the time a management committee or
receiver is appointed by the SEC. Petitioner RCBC, therefore, could have rightfully, as it did,
move for the extrajudicial foreclosure of its mortgage on October 26, 1984 because a
management committee was not appointed by the SEC until March 18, 1985.
WHEREFORE, petitioners motion for reconsideration is hereby GRANTED. The decision
dated September 14, 1992 is vacated, the decision of Intermediate Appellate Court in AC-
G.R. No. SP-06313 REVERSED and SET ASIDE, and the judgment of the Regional Trial Court
National Capital Judicial Region, Branch 140, in Civil Case No. 10042 REINSTATED.
SO ORDERED.

It may be stressed, however, that of all the cases cited by Justice Bellosillo in BPI, which Davide, Jr., C.J., Bellosillo, Puno, Vitug, Kapunan, Mendoza, Quisumbing, Pardo, Buena,
abandoned the Courts ruling in PCIB, only the present case satisfies the constitutional Gonzaga-Reyes, Ynares-Santiago, and De Leon, Jr., JJ., concur.
requirement that no doctrine or principle of law laid down by the court in a decision Panganiban, J., see separate opinion.
rendered en banc or in division may be modified or reversed except by the court sitting en Purisima, J., no part.
banc (Sec 4, Article VIII, 1987 Constitution). The rest were division decisions.

It behooves the Court, therefore, to settle the issue in this present resolution once and
for all, and for the guidance of the Bench and the Bar, the following rules of thumb shall are
laid down:

1. All claims against corporations, partnerships, or associations that are pending before
any court, tribunal, or board, without distinction as to whether or not a creditor is secured or
unsecured, shall be suspended effective upon the appointment of a management committee,
rehabilitation receiver, board, or body in accordance with the provisions of Presidential Decree
No. 902-A.

2. Secured creditors retain their preference over unsecured creditors, but enforcement
of such preference is equally suspended upon the appointment of a management committee,
rehabilitation receiver, board, or body. In the event that the assets of the corporation,
partnership, or association are finally liquidated, however, secured and preferred credits
under the applicable provisions of the Civil Code will definitely have preference over
unsecured ones.

In other words, once a management committee, rehabilitation receiver, board or body

is appointed pursuant to P.D. 902-A, all actions for claims against a distressed corporation
pending before any court, tribunal, board or body shall be suspended accordingly.

This suspension shall not prejudice or render ineffective the status of a secured creditor
as compared to a totally unsecured creditor. P.D. 902-A does not state anything to this
effect. What it merely provides is that all actions for claims against the corporation,
partnership or association shall be suspended. This should give the receiver a chance to
rehabilitate the corporation if there should still be a possibility for doing so. (This will be in
consonance with Alemars, BF Homes, Araneta, and RCBC insofar as enforcing liens by
preferred creditors are concerned.)

However, in the event that rehabilitation is no longer feasible and claims against the
distressed corporation would eventually have to be settled, the secured creditors shall enjoy
preference over the unsecured creditors (still maintaining PCIB ruling), subject only to the
provisions of the Civil Code on Concurrence and Preferences of Credit (our ruling in State
Investment House, Inc. vs. Court of Appeals, 277 SCRA 209 [1997]).
SPOUSES EDUARDO G.R. No. 165675
SOBREJUANITE and
FIDELA SOBREJUANITE, Present:
Petitioners,
Davide, Jr., C.J. (Chairman),
Quisumbing,
- versus - Ynares-Santiago,
Carpio, and
Azcuna, JJ.
ASB DEVELOPMENT
CORPORATION, Promulgated:
Respondent.
September 30, 2005
x ---------------------------------------------------------------------------------------- x
DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari assails the June 29, 2004 Decision of the Court of
Appeals in CA-G.R. SP No. 79420 which reversed and set aside the Decision of the
Office of the President; and its October 18, 2004 Resolution denying reconsideration
thereof.
The antecedent facts show that on March 7, 2001, spouses Eduardo and Fidela
Sobrejuanite (Sobrejuanite) filed a Complaint[1] for rescission of contract, refund of
payments and damages, against ASB Development Corporation (ASBDC) before the
Housing and Land Use Regulatory Board (HLURB).
Sobrejuanite alleged that they entered into a Contract to Sell with ASBDC over a
condominium unit and a parking space in the BSA Twin Tower-B Condominum located
at Bank Drive, Ortigas Center, Mandaluyong City. They averred that despite full
payment and demands, ASBDC failed to deliver the property on or before December
1999 as agreed. They prayed for the rescission of the contract; refund of payments
amounting to P2,674,637.10; payment of moral and exemplary damages, attorneys
fees, litigation expenses, appearance fee and costs of the suit.
ASBDC filed a motion to dismiss or suspend proceedings in view of the approval by the
Securities and Exchange Commission (SEC) on April 26, 2001 of the rehabilitation plan
of ASB Group of Companies, which includes ASBDC, and the appointment of a
rehabilitation receiver. The HLURB arbiter however denied the motion and ordered the
continuation of the proceedings.
The arbiter found that under the Contract to Sell, ASBDC should have delivered the
property to Sobrejuanite in December 1999; that the latter had fully paid their
obligations except the P50,000.00 which should be paid upon completion of the
construction; and that rescission of the contract with damages is proper.
The dispositive portion of the Decision reads:
WHEREFORE, in view of the foregoing judgment is rendered ordering the rescission of
the contracts to sell between the parties, and further ordering the respondent [ASBDC]
to pay the complainants [Sobrejuanite] the following:
a) all amortization payments by the complainants amounting to P2,674,637.10 plus
12% interest from the date of actual payment of each amortization;
b) moral damages amounting to P200,000.00;
c) exemplary damages amounting to P100,000.00;
d) attorneys fees amounting to P100,000.00;
e) litigation expenses amounting to P50,000.00.
All other claims and all counter-claims are hereby dismissed.
IT IS SO ORDERED.[2]
The HLURB Board of Commissioners[3] affirmed the ruling of the arbiter that the
approval of the rehabilitation plan and the appointment of a rehabilitation receiver by
the SEC did not have the effect of suspending the proceedings before the HLURB. The
board held that the HLURB could properly take cognizance of the case since whatever
monetary award that may be granted by it will be ultimately filed as a claim before the
rehabilitation receiver. The board also found that ASBDC failed to deliver the property
to Sobrejuanite within the prescribed period. The dispositive portion of the Decision
reads:
Wherefore the petition for review is denied and the decision of the office below is
affirmed. It shall be understood that all monetary awards shall still be filed as claims
before the rehabilitation receiver.[4]
ASBDC filed an appeal[5] before the Office of the President which was dismissed[6] for
lack of merit. Hence, ASBDC filed a petition[7] under Section 1, Rule 43 of the Rules of
Court before the Court of Appeals, docketed as CA-G.R. SP No. 79420.
On June 29, 2004, the Court of Appeals rendered its assailed Decision,[8] the dispositive
portion of which reads:
WHEREFORE, premises considered, the instant petition is GRANTED. The impugned
decision dated June 27, 2003 of the Office of the President is hereby REVERSED AND
SET ASIDE. No pronouncement as to costs.
SO ORDERED.[9]
The Court of Appeals held that the approval by the SEC of the rehabilitation plan and
the appointment of the receiver caused the suspension of the HLURB proceedings. The
appellate court noted that Sobrejuanites complaint for rescission and damages is
a claim under the contemplation of Presidential Decree (PD) No. 902-A or the SEC
Reorganization Act and A.M. No. 00-8-10-SC or the Interim Rules of Procedure on
Corporate Rehabilitation, because it sought to enforce a pecuniary demand. Therefore,
jurisdiction lies with the SEC and not HLURB. It also ruled that ASBDC was obliged to
deliver the property in December 1999 but its financial reverses warranted the
extension of the period.
Sobrejuanites motion for reconsideration was denied[10] hence the instant petition which
raises the following issues:
1. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND GRAVELY ABUSED
ITS DISCRETION IN RULING THAT THE SEC, NOT THE HLURB, HAS JURISDICTION
OVER PETITIONERS COMPLAINT, IN CONTRAVENTION TO LAW AND THE RULING OF
THIS HONORABLE COURT IN THE ARRANZA CASE.
2. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND GRAVELY ABUSED
ITS DISCRETION WHEN IT RULED THAT THE APPROVAL OF THE CORPORATE
REHABILITATION PLAN AND THE APPOINTMENT OF A RECEIVER HAD THE EFFECT OF
SUSPENDING THE PROCEEDING IN THE HLURB, AND THAT THE MONETARY AWARD
GIVEN BY THE HLURB COULD NOT [BE] FILED IN THE SEC FOR PROPER DISPOSITION,
NOT BEING IN ACCORDANCE WITH LAW AND JURISPRUDENCE.
3. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND GRAVELY ABUSED
ITS DISCRETION IN RULING THAT RESPONDENT IS JUSTIFIED IN EXTENDING THE
AGREED DATE OF DELIVERY BY INVOKING AS GROUND THE FINANCIAL CONSTRAINTS
IT EXPERIENCED, BEING CONTRARY TO LAW AND IN EEFECT AN UNLAWFUL NOVATION
OF THE AGREEMENT OF THE DATE OF DELIVERY ENTERED INTO BY PETITIONERS AND
RESPONDENT.[11]
The petition lacks merit.
Section 6(c) of PD No. 902-A empowers the SEC:
c) To appoint one or more receivers of the property, real and personal, which is the
subject of the action pending before the Commission whenever necessary in order to
preserve the rights of the parties-litigants and/or protect the interest of the investing
public and creditors: Provided, finally, That upon appointment of a management
committee, rehabilitation receiver, board or body, pursuant to this Decree, all actions
for claims against corporations, partnerships or associations under
management or receivership pending before any court, tribunal, board or body
shall be suspended accordingly. [Emphasis added]
The purpose for the suspension of the proceedings is to prevent a creditor from
obtaining an advantage or preference over another and to protect and preserve the
rights of party litigants as well as the interest of the investing public or
creditors.[12] Such suspension is intended to give enough breathing space for the
management committee or rehabilitation receiver to make the business viable again,
without having to divert attention and resources to litigations in various fora.[13] The
suspension would enable the management committee or rehabilitation receiver to
effectively exercise its/his powers free from any judicial or extra-judicial interference
that might unduly hinder or prevent the rescue of the debtor company. To allow such
other action to continue would only add to the burden of the management committee
or rehabilitation receiver, whose time, effort and resources would be wasted in
defending claims against the corporation instead of being directed toward its
restructuring and rehabilitation.[14]
Thus, in order to resolve whether the proceedings before the HLURB should be
suspended, it is necessary to determine whether the complaint for rescission of contract
with damages is a claim within the contemplation of PD No. 902-A.
In Finasia Investments and Finance Corp. v. Court of Appeals,[15] we construed claim to
refer only to debts or demands pecuniary in nature. Thus:
[T]he word claim as used in Sec. 6(c) of P.D. 902-A refers to debts or demands of a
pecuniary nature. It means the assertion of a right to have money paid. It is used in
special proceedings like those before administrative court, on insolvency.
The word claim is also defined as:
Right to payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured; or right to an equitable remedy for breach of
performance if such breach gives rise to a right to payment, whether or not such right
to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured,
disputed, undisputed, secured, unsecured.
In conflicts of law, a receiver may be appointed in any state which has jurisdiction over
the defendant who owes a claim.
As used in statutes requiring the presentation of claims against a decedents estate,
claim is generally construed to mean debts or demands of a pecuniary nature which
could have been enforced against the deceased in his lifetime and could have been
reduced to simple money judgments; and among these are those founded upon
contract.
In Arranza v. B.F. Homes, Inc.,[16] claim is defined as referring to actions involving
monetary considerations.
Finasia Investments and Finance Corp. v. Court of Appeals and Arranza v. B.F. Homes,
Inc. were promulgated prior to the effectivity of the Interim Rules of Procedure on
Corporate Rehabilitation on December 15, 2000. The interim rules define a claim as
referring to all claims or demands, of whatever nature or character against a debtor or
its property, whether for money or otherwise. The definition is all-encompassing as it
refers to all actions whether for money or otherwise. There are no distinctions or
exemptions.
Incidentally, although the petition for rehabilitation with prayer for suspension of
actions and proceedings was filed before the SEC on May 2, 2000,[17] or prior to the
effectivity of the interim rules, the same would still apply pursuant to Section 1, Rule 1
thereof which provides:
Section 1. Scope These Rules shall apply to petitions for rehabilitation filed by
corporations, partnerships, and associations pursuant to Presidential Decree No. 902-
A, as amended.
Clearly then, the complaint filed by Sobrejuanite is a claim as defined under the Interim
Rules of Procedure on Corporate Rehabilitation. Even under our rulings in Finasia
Investments and Finance Corp. v. Court of Appeals and Arranza v. B.F. Homes,
Inc., the complaint for rescission with damages would fall under the category
of claim considering that it is for pecuniary considerations.
In their complaint, Sobrejuanite pray for the rescission of the contract and the refund
of P2,674,637.10 representing their total payments to ASBDC; P200,000.00 as moral
damages; P100,000.00 as exemplary damages; P100,000.00 as attorneys fees;
P50,000.00 as litigation expenses; P1,500.00 per hearing as appearance fees; and
costs of the suit.
In the decision of the HLURB arbiter, ASBDC was ordered to pay P2,674,637.10 plus
12% interest from the date of actual payment of each amortization, representing the
refund of all the amortization payments made by Sobrejuanite; P200,000.00 as moral
damages; P100,000.00 as exemplary damages; P100,000.00 as attorneys fees; and WHEREFORE, the petition is DENIED. The assailed Decision of the Court of Appeals
P50,000.00 as litigation expenses. dated June 29, 2004 in CA-G.R. SP No. 79420 and its Resolution dated October 18,
2004, are AFFIRMED.
As such, the HLURB arbiter should have suspended the proceedings upon the approval
by the SEC of the ASB Group of Companies rehabilitation plan and the appointment of SO ORDERED.
its rehabilitation receiver. By the suspension of the proceedings, the receiver is allowed
to fully devote his time and efforts to the rehabilitation and restructuring of the CONSUELO YNARES-SANTIAGO
distressed corporation.
Associate Justice
It is well to note that even the execution of final judgments may be held in abeyance
when a corporation is under rehabilitation.[18] Hence, there is more reason in the instant
case for the HLURB arbiter to order the suspension of the proceedings as the motion to
suspend was filed soon after the institution of the complaint. By allowing the
proceedings to proceed, the HLURB arbiter unwittingly gave undue preference to
Sobrejuanite over the other creditors and claimants of ASBDC, which is precisely the
vice sought to be prevented by Section 6(c) of PD 902-A. Thus:

As between creditors, the key phrase is equality is equity. When a corporation

threatened by bankruptcy is taken over by a receiver, all the creditors should stand on
equal footing. Not anyone of them should be given any preference by paying one or
some of them ahead of the others. This is precisely the reason for the suspension of all
pending claims against the corporation under receivership. Instead of creditors vexing
the courts with suits against the distressed firm, they are directed to file their claims
with the receiver who is a duly appointed officer of the SEC.[19]

Petitioners reliance on Arranza v. B.F. Homes, Inc.[20] is misplaced. In that case, we

held that the HLURB retained its jurisdiction despite the rehabilitation proceedings since
the claim filed by the homeowners did not involve pecuniary considerations. The claim
therein was for specific performance to enforce the homeowners rights as regards right
of way, open spaces, road and perimeter wall repairs, and security. However, it can
also be deduced therefrom that if the claim was for monetary awards, the proceedings
before the HLURB should be suspended during the rehabilitation. Thus:

No violation of the SEC order suspending payments to creditors would result as far as
petitioners complaint before the HLURB is concerned. To reiterate, what petitioners
seek to enforce are respondents obligations as a subdivision developer. Such claims
are basically not pecuniary in nature although it could incidentally involve monetary
considerations. All that petitioners claims entail is the exercise of proper subdivision
management on the part of the SEC-appointed Board of Receivers towards the end that
homeowners shall enjoy the ideal community living that respondent portrayed they
would have when they bought real estate from it.

Neither may petitioners be considered as having claims against respondent within the
context of the following proviso of Section 6 (c) of P.D. No. 902-A, to warrant
suspension of the HLURB proceedings.

In this case, under the complaint for specific performance before the HLURB, petitioners
do not aim to enforce a pecuniary demand. Their claim for reimbursement should be
viewed in the light of respondents alleged failure to observe its statutory and
contractual obligations to provide petitioners a decent human settlement and ample
opportunities for improving their quality of life. The HLURB, not the SEC, is equipped
with the expertise to deal with that matter.[21]

Finally, we agree with the Court of Appeals that under the Contract to Sell, ASBDC was
obliged to deliver the property to Sobrejuanite on or before December 1999.
Nonetheless, the same was deemed extended due to the financial reverses experienced
by the company. Section 7 of the Contract to Sell allows the developer to extend the
period of delivery on account of causes beyond its control, such as financial reverses.
G.R. Nos. 175181-82 September 14, 2007
METROPOLITAN BANK and TRUST COMPANY, INC., petitioner,
vs.
SLGT HOLDINGS, INC., DANILO A. DYLANCO and ASB DEVELOPMENT
CORPORATION, respondents.
x - - - - - - - - - - - - - - - - - - - - - - - -x
G.R. Nos. 175354 & 175387-88 September 14, 2007
UNITED COCONUT PLANTERS BANK, petitioner,
vs.
SLGT HOLDINGS, INC. and ASB DEVELOPMENT CORPORATION, respondents.
DECISION
GARCIA, J.:
It happened before; it will likely happen again. A developer embarks on an aggressive
marketing campaign and succeeds in selling units in a yet to-be completed condominium
project. Short of funds, the developer borrows money from a bank and, without apprising the
latter of the pre-selling transactions, mortgages the condominium complex, but also without
informing the buyers of the mortgage constitution. Saddled with debts, the developer fails to
meet its part of the bargain. The defaulting developer is soon sued by the fully-paid unit
buyers for specific performance or refund and is threatened at the same time with a
foreclosure of mortgage. Having his hands full parrying legal blows from different directions,
the developer seeks a declaration of suspension of payment, followed by a petition for
rehabilitation with suspension of action.
With a slight variation, the scenario thus depicted describes the instant case which features
respondent ASB Development Corporation (ASB, for short), as the defaulting developer of
the BSA Twin Towers Condominium Project (BSA Towers or Project, for short) situated at
Ortigas Center, Mandaluyong City, and respondents Danilo A. Dylanco and SLGT Holdings,
Inc. (Dylanco and SLGT, respectively, hereinafter) as the unit buyers. Petitioners Metropolitan
Bank and Trust Company, Inc. (Metrobank) and United Coconut Planters Bank (UCPB) are
the lending-mortgagee banks.
And now to the case:
Before the Court are these separate petitions for review under Rule 45 of the Rules of Court
separately interposed by Metrobank and UCPB to nullify and set aside the consolidated
Decision1 and Resolution2 dated June 29, 2006, and October 31, 2006, respectively, of the
Court of Appeals (CA) in CA-G.R. SP No. 92807, CA-G.R. SP No. 92808and CA-G.R. SP No.
92882.
The first assailed issuance affirmed the earlier Decision3 dated October 10, 2005 of the Office
of the President (OP, hereinafter), as modified in its Order4 of December 22, 2005, in
consolidated OP Case No. 05-F-212 and OP Case No. 05-G-215. The second assailed issuance,
on the other hand, denied reconsideration of the first.
Per its Resolution5 of March 26, 2007, the Court ordered the consolidation of these petitions.
From the petitions and the comments thereon, with their respective annexes, and other
pleadings, the Court gathers the following facts:
On October 25, 1995, Dylanco and SLGT each entered into a contract to sell with
ASB for the purchase of a unit (Unit 1106 for Dylanco and Unit 1211 for SLGT) at
BSA Towers then being developed by the latter. As stipulated, ASB will deliver the
units thus sold upon completion of the construction or before December 1999.
Relying on this and other undertakings, Dylanco and SLGT each paid in full the
contract price of their respective units. The promised completion date came and
went, but ASB failed to deliver, as the Project remained unfinished at that time. To
make matters worse, they learned that the lots on which the BSA Towers were to
be erected had been mortgaged6 to Metrobank, as the lead bank, and
UCPB7 without the prior written approval of the Housing and Land Use Regulatory
Board (HLURB).
Alarmed by this foregoing turn of events, Dylanco, on August 10, 2004, filed with
the HLURB a complaint8 for delivery of property and title and for the declaration of
nullity of mortgage. A similar complaint9 filed by SLGT followed three (3) days later.
At this time, it appears that the ASB Group of Companies, which included ASB, had
already filed with the Securities and Exchange Commission a petition for
rehabilitation and a rehabilitation receiver had in fact been appointed.
What happened next are laid out in the OP decision adverted to above, thus:
In response to the above complaints, ASB alleged that it encountered liquidity
problems sometime in 2000 after its creditors [UCPB and Metrobank]
simultaneously demanded payments of their loans; that on May 4, 2000, the
Commission (SEC) granted its petition for rehabilitation; that it negotiated with
UCPB and Metrobank but nothing came out positive from their negotiation .
On the other hand, Metrobank claims that complainants [Dylanco and SLGT] have
no personality to ask for the nullification of the mortgage because they are not
parties to the mortgage transaction ; that the complaints must be dismissed
because of the ongoing rehabilitation of ASB; xxx that its claim against ASB,
including the mortgage to the [Project] have already been transferred to Asia
Recovery Corporation; xxx.
UCPB, for its part, denies its liability to SLGT [for lack of privity of contract] [and]
questioned the personality of SLGT to challenge the validity of the mortgage
reasoning that the latter is not party to the mortgage contract [and] maintains
that the mortgage transaction was done in good faith. Finally, it prays for the
suspension of the proceedings because of the on-going rehabilitation of ASB.
In resolving the complaint in favor of Dylanco and SLGT, the Housing Arbiter ruled
that the mortgage constituted over the lots is invalid for lack of mortgage clearance
from the HLURB. He also rebuffed the banks request to suspend the proceedings
under Section 5 of Presidential Decree (PD) No. 902-A as the banks are parties
under receivership. xxx
The HLURB Board of Commissioners, [per its separate Decision both dated April 21,
2005] affirmed the above rulings with the modification that ASB should cause the
subdivision of the mother titles into condominium certificates of title of Dylanco and
SLGT free from all liens and encumbrances. [On June 28, 2005 the HLURB denied
the separate motions of Metrobank and UCPB for reconsideration. (Words in
brackets and emphasis added).
For perspective, the decretal portion of the HLURBs underlying decision10 with respect to
the Dylanco case, docketed thereat as REM-A-050208-0021, reads as follows:
WHEREFORE, the appeals are dismissed for lack of merit and the decision of the
office below is modified as follows:
1. Declaring the mortgage over the subject condominium unit in favor of
respondent [Metrobank] as null and void for violation of Section 18 of [PD]
No. 957;
the same is hereby GRANTED. Accordingly, the mortgage contract executed
between ASB Development Corporation and respondent banks (Metrobank
and UCPB) is hereby declared null and void in its entirety. Respondents-
appellants are hereby ordered to release to ASBDC [TCT] Nos. 9834 and 9835, and
for ASBDC to cause the subdivision of the mother titles into condominium
certificates of title, and thereafter deliver to complainants [SLGT and Dylanco] their
respective condominium certificates of title free of lien and encumbrances.
The records of the instant cases are hereby remanded to [HLURB] for its appropriate
disposition.

2. Directing respondent bank to cancel/release the mortgage on the

SO ORDERED. (Emphasis and words in brackets added)
subject condominium unit [Unit 1106]; and accordingly,
surrender/release the title thereof to the complainant;
In time, petitioner banks went to the CA on a petition for review under Rule 43 of the Rules
of Court whereat the appellate recourses were likewise consolidated and docketed as CA-G.R.
3. Directing respondent Bank to release to respondent ASB the transfer
SP No. 92807, CA-G.R. SP No. 92808and CA-G.R. SP No. 92882.
certificate of title of the lots covering the BSA Twin Towers Project;
directing ASB to cause the subdivision of the mother titles into
condominium certificates of tile within 90 days and to thereafter deliver As stated at the threshold hereof, the appellate court, in its assailed Decision14 of June 29,
title to complainant [Dylanco] free from all liens and encumbrances; [and] 2006, affirmed the OPs October 10, 2005 Decision as modified in its December 22, 2005
Order, the affirmance being predicated, in gist, on the following main premises:
4. Ordering respondent ASB to complete the subject condominium project
as per SEC Order dated 03 November 2004. (Words in brackets added) 1. A mortgage constituted on a condominium project without the approval of the
HLURB in violation of the prescription of Presidential Decree (PD) 957, like the ASB-
Metrobank-Trust Division mortgage contract, is void; a mortgage is indivisible and
On the other hand, the HLURB decision11 on the SLGT case, docketed as REM-A-050208-
cannot be divided into a valid and invalid parts.
0020, was, on all material points, of the same tenor as in the Dylanco case, albeit the unit
involved is different and the banks referred to in SLGT are UCPB and Metrobank.
2. The complaints of Dylanco and SLGT are not covered by the order issued by the
SEC suspending all actions and proceedings against ASB.
From the HLURB resolutions in REM-A-050208-0020 and REM-A-050208-0021, Metrobank
appealed to the OP, followed by UCPBs own appeal from the resolution in REM-A-050208-
0020. Owing to the obvious similarities in both cases, the OP had them consolidated, the Petitioner banks separate motions for reconsideration were later denied in the CAs equally
Dylanco case docketed as O.P. Case No. 05-F-212 and the SLGT case as O.P. Case No. 05- assailed resolution15dated October 31, 2006.
F-215.
Hence, these separate petitions.
On October 10, 2005, the OP rendered a decision12 against Metrobank and UCPB, disposing
as follows:
Although formulated a bit differently, the grounds and arguments advanced in support of the
petitions converge and focus on two issues, to wit:
WHEREFORE, premises considered, the appeals filed by Metropolitan Bank and
Trust Company and the United Coconut Planters Bank are hereby DISMISSED for
1. The declaration of nullity of the entire mortgage constituted on the project land
lack of merit.
site and the improvements thereon; and

SO ORDERED.
2. The applicability to this case of the suspension order granted by SEC to ASB.

From the October 10, 2005 OP Decision, petitioner banks and SLGT interposed their
We DENY.
respective motions for reconsideration, SLGT excepting to that portion of the decision
declaring the mortgage contract as void only insofar as it and Dylanco are concerned. To
SLGT, the indivisibility of a mortgage contract requires that a declaration of nullity or a As to the first issue, it is the petitioners posture that the CA, and, before it, the OP, erred
validity for that matter - should cover the entire mortgage. when it declared the subject mortgage contract void in its entirety and then directed both
petitioner banks to release the mortgage on the Project.
On December 22, 2005, the OP issued an Order13 acting favorably on SLGTs motion, but
denying those of Metrobank and UCPB. The fallo of the OPs Order reads: We are not persuaded.

"WHEREFORE, the Motions for Reconsideration of [Metrobank] and [UCPB] are

hereby DENIED. With respect to the partial motion for reconsideration of SLGT ,
Both petitioners do not dispute executing the mortgage in question without the HLURBs prior
written approval and notice to both individual respondents. Section 18 of Presidential Decree
No. (PD) 957 The Subdivision and Condominium Buyers Protective Decree provides:
SEC. 18. Mortgages. - No mortgage of any unit or lot shall be made by the
owner or developer without prior written approval of the [HLURB]. Such
approval shall not be granted unless it is shown that the proceeds of the mortgage
loan shall be used for the development of the condominium or subdivision project
. The loan value of each lot or unit covered by the mortgage shall be determined
and the buyer thereof, if any, shall be notified before the release of the
loan. The buyer may, at his option, pay his installment for the lot or unit directly
to the mortgagee who shall apply the payments to the corresponding mortgage
indebtedness secured by the particular lot or unit being paid for . (Emphasis and
word in bracket added)
There can thus be no quibbling that the project lot/s and the improvements introduced or be
introduced thereon were mortgaged in clear violation of the aforequoted provision of PD 957.
And to be sure, Dylanco and SLGT, as Project unit buyers, were not notified of the mortgage
before the release of the loan proceeds by petitioner banks.
As it were, PD 957 aims to protect innocent subdivision lot and condominium unit buyers
against fraudulent real estate practices. Its preambulatory clauses say so and the Court need
not belabor the matter presently. Section 18, supra, of the decree directly addresses the
problem of fraud and other manipulative practices perpetrated against buyers when the lot
or unit they have contracted to acquire, and which they religiously paid for, is mortgaged
without their knowledge, let alone their consent. The avowed purpose of PD 957 compels, as
the OP correctly stated, the reading of Section 18 as prohibitory and acts committed contrary
to it are void.16 Any less stringent construal would only accord unscrupulous developers and
their financiers unbridled discretion to follow or not to follow PD 957 and thus defeat the very
lofty purpose of that decree. It thus stands to reason that a mortgage contract executed in
breach of Section 18 of the decree is null and void.
In Philippine National Bank v. Office of the President,17 involving a defaulting mortgagor-
subdivision developer, a mortgagee-bank and a lot buyer, the Court expounded on the
rationale behind PD 957, as a tool to protect subdivision lot and/or condominium unit buyers
against developers and mortgaging banks, in the following wise:
xxx [T]he unmistakable intent of the law [is] to protect innocent lot buyers from
scheming subdivision developers. As between these small lot buyers and the
gigantic financial institutions which the developers deal with, it is obvious that the
law as an instrument of social justice must favor the weak. Indeed, the
petitioner bank had at its disposal vast resources with which it could adequately
protect its loan activities, and therefore is presumed to have conducted the usual
"due diligence" checking and ascertaining the actual status, condition, utilization
and occupancy of the property offered as collateral. xxx On the other hand, private
respondents obviously were powerless to discover the attempt of the land developer
to hypothecate the property being sold to them. It was precisely in order to deal
with this kind of situation that P.D. 957 was enacted, its very essence and
intendment being to provide a protective mantle over helpless citizens who may fall
prey to the razzmatazz of what P.D. 957 termed "unscrupulous subdivision and
condominium sellers."
The Court then quoted with approval the following instructive comments of the Solicitor
General:
Verily, if P.D. 957 were to exclude from its coverage the aforecited mortgage
contract, the vigorous regulation which P.D. 957 seeks to impose on
unconscientious subdivision sellers will be translated into a feeble exercise of police
power just because the iron hand of the state cannot particularly touch mortgage
contracts badged with the unfortunate accident of having been constituted prior to
the enactment of P.D. 957. Indeed, it would be illogical in the extreme if P.D. 957
is to be given full force and effect and yet, the fraudulent practices and
manipulations it seeks to curb. xxx
Given the foregoing perspective, the next question to be addressed turns on whether or not
the nullity extends to the entire mortgage contract.
The poser should be resolved, as the CA and OP did resolve it, in the affirmative. This
disposition stems from the basic postulate that a mortgage contract is, by nature,
indivisible.18 Consequent to this feature, a debtor cannot ask for the release of any portion
of the mortgaged property or of one or some of the several properties mortgaged unless and
until the loan thus secured has been fully paid, notwithstanding the fact that there has been
partial fulfillment of the obligation. Hence, it is provided that the debtor who has paid a part
of the debt cannot ask for the proportionate extinguishments of the mortgage as long as the
debt is not completely satisfied.
The situation obtaining in the case at bench is within the purview of the aforesaid rule on the
indivisibility of mortgage. It may be that Section 18 of PD 957 allows partial redemption of
the mortgage in the sense that the buyer is entitled to pay his installment for the lot or unit
directly to the mortgagee so as to enable him - the said buyer - to obtain title over the lot or
unit after full payment thereof. Such accommodation statutorily given to a unit/lot buyer does
not, however, render the mortgage contract also divisible. Generally, the divisibility of the
principal obligation is not affected by the indivisibility of the mortgage. The real estate
mortgage voluntarily constituted by the debtor (ASB) on the lots or units is one and
indivisible. In this case, the mortgage contract executed between ASB and the petitioner
banks is considered indivisible, that is, it cannot be divided among the different buildings or
units of the Project. Necessarily, partial extinguishment of the mortgage cannot be allowed.
In the same token, the annulment of the mortgage is an all or nothing proposition. It cannot
be divided into valid or invalid parts. The mortgage is either valid in its entirety or not valid
at all. In the present case, there is doubtless only one mortgage to speak of. Ergo, a
declaration of nullity for violation of Section 18 of PD 957 should result to the mortgage being
nullified wholly.
It will not avail the petitioners any to feign ignorance of PD 957 requiring prior written
approval of the HLURB, they being charged with knowledge of such requirement since
granting loans secured by a real estate mortgage is an ordinary part of their business.
Neither could they rightly claim to be mortgagees in good faith. We shall explain.
The unyielding rule is that persons dealing with property brought under the Torrens system
of land registration have the right to rely on what appears on the certificate of title without
inquiring further;19 that in the absence of anything to excite or arouse suspicion that should
impel a reasonably cautious person to make such further inquiry, a would-be mortgagee is
without obligation to look beyond the certificate and investigate the title of the mortgagor.
Such rule, however, does not apply to mortgagee-banks,20 their business being one affected
with public interest, holding as they do and keeping, in trust, money pertaining to the
depositing public which they should guard with earnest. Unlike private individuals, it behooves
banks to exercise greater care and prudence in their dealings, including those involving
registered lands.21 As we wrote in Cruz v. Bancom Finance Corporation,22 "a banking
institution is expected to exercise due diligence before entering into a mortgage contract.
The ascertainment of the status or condition of a property offered to it as a security must be
standard and indispensable part of its operations." A bank that failed to observe due diligence
cannot be accorded the status of a bona fide mortgagee.23
Surely, petitioner banks cannot plausibly assert compliance with the due diligence
requirement exacted contextually by the situation. For, have they done so, they could have
easily discovered that there is an on-going condominium project on the lots offered as
mortgage collateral and, as such, could have aroused their suspicion that the developer may
have engaged in pre-selling, or, with like effect, that there may be unit buyers therein, as
was the case here. Having been short in care and prudence, petitioners cannot be deemed
to be mortgagees in good faith entitled to the benefits arising from such status.
This thus brings us to the next issue of whether or not the HLURB, OP and, necessarily, the
CA reversibly erred in continuing with the resolution of this case notwithstanding the
rehabilitation proceedings before, and the appointment by, the SEC of a receiver for ASB
which, under Section 6 (c)24 of PD 902-A, as amended,25necessarily suspended "all actions
for claims" against distressed corporations.
Petitioners maintain that individual respondents demands initially filed with the HLURB
partake of the nature of "claim" within the contemplation of the aforesaid suspensive section
of PD 902-A. They cite Sobrejuanite v. ASB Development Corporation26 to drive home the
idea of the encompassing reach of the word "claim" which they deem to include any and all
claims or demands of whatever nature and character.
The Court is unable to accommodate the petitioners.
As we articulated in Arranza v. B.F. Homes, Inc.,27 the fact that respondent B.F. Homes is
under receivership does not preclude the continuance before the HLURB of the case for
specific performance of a real estate developers obligation under PD 957. For, "[E]"ven if
respondent is under receivership, its obligations as a real estate developer under P.D. 957
are not suspended. Section 6 (C) of P.D. No. 902-A, as amended , on suspension of all
actions for claims against corporations refers solely to monetary claims."28 Says the Court
further:
xxx The appointment of a receiver does not dissolve the corporation, nor does it
interfere with the exercise of corporate rights. In this case where there appears to
be no restraints imposed upon respondent as it undergoes rehabilitation
receivership, respondent continues or should continue to perform its contractual
and statutory responsibilities to petitioners as homeowners.
xxx xxx xxx
No violation of the SEC order suspending payments to creditors would result as far
as petitioners complaint before the HLURB is concerned. To reiterate, what
petitioners seek to enforce are respondents obligation as subdivision developer [for
which the HLURB, not the SEC, is equipped with the expertise to deal with the
matter]. Such claims are basically not pecuniary in nature.29
Arranza actually complemented the earlier case of Finasia Investments and Finance
Corporation v. CA30 where the Court defined and explained the term "claim" in the following
wise:
We agree that the word "claim" as used in Sec. 6 (c) of P.D. 902-A, as amended,
refers to debts or demands of a pecuniary nature. It means "the assertion of a right
to have money paid. It is used in special proceedings like those before
administrative court, on insolvency. Consequently, the word "claim"
Petitioners citation and undue reliance on Sobrejuanite is quite misplaced in view of differing
set of facts. In that case, the Court held that the HLURB is bereft of jurisdiction to proceed
with the case during the pendency of the rehabilitation proceedings since the spouses
Sobrejuanites claim involves pecuniary consideration, or a claim for refund of the purchase
price paid, with interest, to be precise. Unlike the spouses Sobrejuanite in Sobrejuanite,
SLGTs and Dylancos complaints in the instant case did not seek monetary recovery or to
touch the corporate coffers of ASB ahead of others. They did not even consider themselves
as money claimants. All they ask was for the enforcement of ASBs statutory and contractual
obligations as a condominium developer. In the concrete, they pressed for the delivery of
their units free from all liens and encumbrances and the declaration of nullity of the mortgage
in question arising from the breach of Section 18 of PD 957.
Significantly, in Sobrejuanite, the Court stated the observation, in reference to
the Arranza case, that "the proceedings before the HLURB [may] be suspended during the
rehabilitation [of the ailing corporation]" "if the claim was for monetary awards."31
The Court is very much aware of A.M. No. 00-8-10-SC or the Interim Rules on Corporate
Rehabilitation32 which defines the term "claim" as including all claims or demands of whatever
character against a debtor or its property, whether for money or otherwise. But as aptly
explained by the CA, Section 2433 of the interim rules limits the coverage of the Rules on
rehabilitation and consequently the rule of suspension of action to those who stand in the
category or debtors and creditors. The relationship between the petitioner banks, as
mortgagor of the ASB property, on one hand, and respondents SLGT and Dylanco, as unit
buyers, on the other, cannot be that of a debtor-creditor as to bring the case within the
purview of the rules on corporate recovery, let alone the Sobrejuanite case. Then, too, the
vinculum that binds SLGT/Dylanco, as unit buyers and as suitors before the HLURB, and ASB
is far from being akin to that of debtor-creditor. As it were, SLGT/Dylanco sued ASB for
having constituted, in breach of PD 957, a mortgage on the condominium project without
prior HLURB approval and so much as notifying them of the loan release for which reason
they prayed for the delivery of their units free from all liens and encumbrances. With the
view we take of the case, the complaint of individual respondents is not in the nature of
"claims" that should be covered by the suspensive effect of a rehabilitation proceeding.
Looking beyond the strictly legal issues involved in this case, however, the pendency of the
rehabilitation proceedings ought not, as stressed in the Order34 of the OP, be invoked to
defeat or deny the claim of individual respondents. Suspending the proceedings would only
perpetuate and compound the injustice committed by ASB on SLGT and Dylanco. It would
reduce to pure jargon the beneficent provisions and render illusory the purpose of PD 957
which, to repeat, is to protect innocent unit and lot buyers from scheming
subdivision/condominium owners/developers. As a matter of good conscience, the Court
cannot allow it under the factual and legal premises surrounding this case.
WHEREFORE, the instant petitions are DENIED and the assailed CA Decision and Resolution
are AFFIRMED.
Cost against the petitioners.
SO ORDERED.
Puno, C.J., Chairperson, Sandoval-Gutierrez, Corona, Azcuna, JJ., concur.
 PHILIPPINE AIRLINES, INCORPORATED, G.R. No. 123238 On 3 May 1980, Deanna and Nikolai arrived at the San Francisco Airport. However, the staff of
United Airways 996 refused to take aboard Deanna and Nikolai for their connecting flight to Los
Petitioner, Angeles because petitioners personnel in San Francisco could not produce the indemnity bond
accomplished and submitted by private respondents. The said indemnity bond was lost by
petitioners personnel during the previous stop-over of Flight 106 in Honolulu, Hawaii. Deanna and
Nikolai were then left stranded at the San Francisco Airport. Subsequently, Mr. Edwin Strigl (Strigl),
- versus Present: then the Lead Traffic Agent of petitioner in San Francisco, California, USA, took Deanna and Nikolai
to his residence in San Francisco where they stayed overnight.

Meanwhile, Mrs. Regalado and several relatives waited for the arrival of Deanna and Nikolai at
COURT OF APPEALS andSPOUSES YNARES-SANTIAGO, J., the Los Angeles Airport. When United Airways 996 landed at the Los Angeles Airport and its
MANUEL S. BUNCIO and AURORA R. passengers disembarked, Mrs. Regalado sought Deanna and Nikolai but she failed to find
BUNCIO, Minors DEANNA R. BUNCIO and Chairperson, them. Mrs. Regalado asked a stewardess of the United Airways 996 if Deanna and Nikolai were on
NIKOLAI R. BUNCIO, assisted by their board but the stewardess told her that they had no minor passengers. Mrs. Regalado called private
Father, MANUEL S. BUNCIO, and JOSEFA AUSTRIA-MARTINEZ, respondents and informed them that Deanna and Nikolai did not arrive at the Los
REGALADO, represented by her Attorney- Angeles Airport. Private respondents inquired about the location of Deanna and Nikolai from
in-Fact, MANUEL S. BUNCIO, CHICO-NAZARIO,
petitioners personnel, but the latter replied that they were still verifying their whereabouts.

Respondents. NACHURA, and

On the morning of 4 May 1980, Strigl took Deanna and Nikolai to San Francisco Airport where the
two boarded a Western Airlines plane bound for Los Angeles. Later that day, Deanna and Nikolai
REYES, JJ.
arrived at the Los Angeles Airport where they were met by Mrs. Regalado. Petitioners personnel had
previously informed Mrs. Regalado of the late arrival of Deanna and Nikolai on 4 May 1980.

On 17 July 1980, private respondents, through their lawyer, sent a letter [6] to petitioner demanding
payment of 1 million pesos as damages for the gross negligence and inefficiency of its employees
Promulgated: in transporting Deanna and Nikolai. Petitioner did not heed the demand.

September 22, 2008
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition for Review[1] on Certiorari under Rule 45 of the Rules of Court seeking to set
aside the Decision,[2] dated 20 December 1995, of the Court of Appeals in CA-G.R. CV No. 26921
which affirmed in toto the Decision,[3] dated 2 April 1990, of the Quezon City Regional Trial Court
(RTC), Branch 90, in Civil Case No. Q-33893.
The undisputed facts are as follows:
Sometime before 2 May 1980, private respondents spouses Manuel S. Buncio and Aurora
R. Buncio purchased from petitioner Philippine Airlines, Incorporated, two plane tickets [4] for their
two minor children, Deanna R. Buncio (Deanna), then 9 years of age, and Nikolai
R. Buncio (Nikolai), then 8 years old. Since Deanna and Nikolai will travel as unaccompanied minors,
petitioner required private respondents to accomplish, sign and submit to it an indemnity
bond.[5] Private respondents complied with this requirement.For the purchase of the said two plane
tickets, petitioner agreed to transport Deanna and Nikolai on 2 May 1980 from Manila to San
Francisco, California, United States of America (USA), through one of its planes, Flight
106. Petitioner also agreed that upon the arrival of Deanna and Nikolai in San Francisco Airport on 3
May 1980, it would again transport the two on that same day through a connecting flight from San
Francisco, California, USA, to Los Angeles, California, USA, via another airline, United Airways
996.Deanna and Nikolai then will be met by their grandmother,
Mrs. Josefa Regalado (Mrs. Regalado), at the Los Angeles Airport on their scheduled arrival on 3
May 1980.
On 2 May 1980, Deanna and Nikolai boarded Flight 106 in Manila.
On 20 November 1981, private respondents filed a complaint [7] for damages against petitioner
before the RTC. Private respondents impleaded Deanna, Nikolai and Mrs. Regalado as their co-
plaintiffs. Private respondents alleged that Deanna and Nikolai were not able to take their connecting
flight from San Francisco to Los Angeles as scheduled because the required indemnity bond was
lost on account of the gross negligence and malevolent conduct of petitioners personnel. As a
consequence thereof, Deanna and Nikolai were stranded in San Francisco overnight, thereby
exposing them to grave danger. This dilemma caused Deanna, Nikolai, Mrs. Regalado and private
respondents to suffer serious anxiety, mental anguish, wounded feelings, and sleepless
nights. Private respondents prayed the RTC to render judgment ordering petitioner: (1) to pay
Deanna and Nikolai P100,000.00 each, or a total of P200,000.00, as moral damages; (2) to pay
private respondents P500,000.00 each, or a total of P1,000,000,00, as moral damages; (3) to pay
Mrs. Regalado P100,000.00 as moral damages; (4) to pay Deanna, Nikolai, Mrs. Regalado and
private respondents P50,000.00 each, or a total of P250,000.00 as exemplary damages; and (5) to
pay attorneys fees equivalent to 25% of the total amount of damages mentioned plus costs of suit.
In its answer[8] to the complaint, petitioner admitted that Deanna and Nikolai were not allowed to
take their connecting flight to Los Angeles and that they were stranded in San Francisco. Petitioner,
however, denied that the loss of the indemnity bond was caused by the gross negligence and
malevolent conduct of its personnel. Petitioner averred that it always exercised the diligence of a
good father of the family in the selection, supervision and control of its employees. In addition,
Deanna and Nikolai were personally escorted by Strigl, and the latter exerted efforts to make the
connecting flight of Deanna and Nikolai to Los Angeles possible. Further, Deanna and Nikolai were
not left unattended from the time they were stranded in San Francisco until they boarded Western
Airlines for a connecting flight to Los Angeles. Petitioner asked the RTC to dismiss the complaint
based on the foregoing averments.
After trial, the RTC rendered a Decision on 2 April 1990 holding petitioner liable for damages for
breach of contract of carriage. It ruled that petitioner should pay moral damages for its inattention
and lack of care for the welfare of Deanna and Nikolai which, in effect, amounted to bad faith, and
for the agony brought by the incident to private respondents and Mrs. Regalado. It also held that
petitioner should pay exemplary damages by way of example or correction for the public good under
Article 2229 and 2232 of the Civil Code, plus attorneys fees and costs of suit. In sum, the RTC
ordered petitioner: (1) to pay Deanna and Nikolai P50,000.00 each as moral damages
and P25,000.00 each as exemplary damages; (2) to pay private respondent Aurora R. Buncio, as
mother of Deanna and Nikolai, P75,000.00 as moral damages; (3) to pay Mrs. Regalado, as
grandmother of Deanna and Nikolai, P30,000.00 as moral damages; and (4) to pay an amount
of P38,250.00 as attorneys fees and the costs of suit. Private respondent Manuel S. Buncio was not
awarded damages because his court testimony was disregarded, as he failed to appear during his from San Francisco to Los Angeles on the day of their arrival at San Francisco. The staff of United
scheduled cross-examination. The dispositive portion of the RTC Decision reads: Airways 996 refused to take aboard Deanna and Nikolai for their connecting flight to Los
Angeles because petitioners personnel in San Francisco could not produce the indemnity bond
ACCORDINGLY, judgment is hereby rendered: accomplished and submitted by private respondents. Thus, Deanna and Nikolai were stranded
in San Francisco and were forced to stay there overnight. It was only on the following day that
1. Ordering defendant Philippines Airlines, Inc. to pay Deanna R. Buncio and Nikolai R. Buncio the Deanna and Nikolai were able to leave San Francisco and arrive at Los Angeles via another airline,
amount of P50,000.00 each as moral damages; and the amount of P25,000.00 each as exemplary Western Airlines. Clearly then, petitioner breached its contract of carriage with private respondents.
damages;
In breach of contract of air carriage, moral damages may be recovered where (1) the mishap results
2. Ordering said defendant to pay the amount of P75,000.00 to Aurora R. Buncio, mother of Deanna in the death of a passenger; or (2) where the carrier is guilty of fraud or bad faith; or (3) where
and Nikolai, as moral damages; and the amount of P30,000.00 to Josefa Regalado, grandmother of the negligence of the carrier is so gross and reckless as to virtually amount to bad faith. [15]
Deanna and Nikolai, as moral damages; and
Gross negligence implies a want or absence of or failure to exercise even slight care or diligence, or
3. Ordering said defendant to pay P38,250.00 as attorneys fees and also the costs of the suit.[9] the entire absence of care. It evinces a thoughtless disregard of consequences without exerting any
effort to avoid them.[16]
Petitioner appealed to the Court of Appeals. On 20 December 1995, the appellate court promulgated
its Decision affirming in toto the RTC Decision, thus: In Singson v. Court of Appeals,[17] we ruled that a carriers utter lack of care for and sensitivity to
the needs of its passengers constitutes gross negligence and is no different from fraud, malice or
WHEREFORE, the decision appealed is hereby AFFIRMED in toto and the instant appeal bad faith. Likewise, in Philippine Airlines, Inc. v. Court of Appeals,[18] we held that a carriers
DISMISSED.[10] inattention to, and lack of care for, the interest of its passengers who are entitled to its utmost
consideration, particularly as to their convenience, amount to bad faith and entitles the passenger
Petitioner filed the instant petition before us assigning the following errors[11]: to an award of moral damages.

I. It was established in the instant case that since Deanna and Nikolai would travel as unaccompanied
minors, petitioner required private respondents to accomplish, sign and submit to it an indemnity
THE COURT OF APPEALS ERRED IN SUSTAINING THE RTC AWARD OF MORAL DAMAGES. bond. Private respondents complied with this requirement. Petitioner gave a copy of the indemnity
bond to one of its personnel on Flight 106, since it was required for the San Francisco-Los
II. Angeles connecting flight of Deanna and Nikolai. Petitioners personnel lost the indemnity bond
during the stop-over of Flight 106 in Honolulu, Hawaii. Thus, Deanna and Nikolai were not allowed
THE COURT OF APPEALS ERRED IN SUSTAINING THE RTC AWARD OF EXEMPLARY DAMAGES.
to take their connecting flight.
III.
Evidently, petitioner was fully aware that Deanna and Nikolai would travel as unaccompanied minors
and, therefore, should be specially taken care of considering their tender age and delicate
THE COURT OF APPEALS ERRED IN SUSTAINING THE RTC AWARD OF ATTORNEYS FEES AND ORDER
situation. Petitioner also knew well that the indemnity bond was required for Deanna and Nikolai to
FOR PAYMENT OF COSTS.
make a connecting flight from San Francisco to Los Angeles, and that it was its duty to produce the
indemnity bond to the staff of United Airways 996 so that Deanna and Nikolai could board the
Anent the first assigned error, petitioner maintains that moral damages may be awarded in a breach
connecting flight. Yet, despite knowledge of the foregoing, it did not exercise utmost care in handling
of contract of air carriage only if the mishap results in death of a passenger or if the carrier acted
the indemnity bond resulting in its loss in Honolulu, Hawaii. This was the proximate cause why
fraudulently or in bad faith, that is, by breach of a known duty through some motive of interest or
Deanna and Nikolai were not allowed to take the connecting flight and were thus stranded overnight
ill will, some dishonest purpose or conscious doing of wrong; if there was no finding of fraud or bad
in San Francisco. Further, petitioner discovered that the indemnity bond was lost only when Flight
faith on its part; if, although it lost the indemnity bond, there was no finding that such loss was
106 had already landed in San Francisco Airport and when the staff of United Airways 996
attended by ill will, or some motive of interest, or any dishonest purpose; and if there was no finding
demanded the indemnity bond. This only manifests that petitioner did not check or verify if the
that the loss was deliberate, intentional or consciously done.[12]
indemnity bond was in its custody before leaving Honolulu, Hawaii for San Francisco.
Petitioner also claims that it cannot be entirely blamed for the loss of the indemnity bond; that
The foregoing circumstances reflect petitioners utter lack of care for and inattention to the welfare
during the stop-over of Flight 106 in Honolulu, Hawaii, USA, it gave the indemnity bond to the
of Deanna and Nikolai as unaccompanied minor passengers. They also indicate petitioners failure to
immigration office therein as a matter of procedure; that the indemnity bond was in the custody of
exercise even slight care and diligence in handling the indemnity bond. Clearly, the negligence of
the said immigration office when Flight 106 left Honolulu, Hawaii, USA; that the said immigration
petitioner was so gross and reckless that it amounted to bad faith.
office failed to return the indemnity bond to petitioners personnel before Flight 106 left Honolulu,
Hawaii, USA; and that even though it was negligent in overlooking the indemnity bond, there was
It is worth emphasizing that petitioner, as a common carrier, is bound by law to exercise
still no liability on its part because mere carelessness of the carrier does not per se constitute or
extraordinary diligence and utmost care in ensuring for the safety and welfare of its passengers
justify an inference of malice or bad faith.[13]
with due regard for all the circumstances.[19] The negligent acts of petitioner signified more than
inadvertence or inattention and thus constituted a radical departure from the extraordinary standard
When an airline issues a ticket to a passenger, confirmed for a particular flight on a certain date, a
of care required of common carriers.
contract of carriage arises. The passenger has every right to expect that he be transported on that
flight and on that date, and it becomes the airlines obligation to carry him and his luggage safely to
Petitioners claim that it cannot be entirely blamed for the loss of the indemnity bond because it
the agreed destination without delay. If the passenger is not so transported or if in the process of
gave the indemnity bond to the immigration office of Honolulu, Hawaii, as a matter of procedure
transporting, he dies or is injured, the carrier may be held liable for a breach of contract of
during the stop-over, and the said immigration office failed to return the indemnity bond to
carriage.[14]
petitioners personnel before Flight 106 left Honolulu, Hawaii, deserves scant consideration. It was
petitioners obligation to ensure that it had the indemnity bond in its custody before
Private respondents and petitioner entered into a contract of air carriage when the former purchased
leaving Honolulu, Hawaii for San Francisco. Petitioner should have asked for the indemnity bond
two plane tickets from the latter. Under this contract, petitioner obliged itself (1) to transport
from the immigration office during the stop-over instead of partly blaming the said office later on
Deanna and Nikolai, as unaccompanied minors, on 2 May 1980 from Manila to San Francisco through
for the loss of the indemnity bond. Petitioners insensitivity on this matter indicates that it fell short
one of its planes, Flight 106; and (2) upon the arrival of Deanna and Nikolai in San Francisco Airport
of the extraordinary care that the law requires of common carriers.
on 3 May 1980, to transport them on that same day from San Francisco to Los Angeles via a
connecting flight on United Airways 996. As it was, petitioner failed to transport Deanna and Nikolai
Petitioner, nonetheless, insists that the following circumstances negate gross negligence on its part:
(1) Strigl requested the staff of United Airways 996 to allow Deanna and Nikolai to board the plane
even without the indemnity bond; (2) Strigl took care of the two and brought them to his house
upon refusal of the staff of the United Airways 996 to board Deanna and Nikolai; (3) private
respondent Aurora R. Buncio and Mrs. Regalado were duly informed of Deanna and Nikolais
predicament; and (4) Deanna and Nikolai were able to make a connecting flight via an alternative
airline, Western Airlines.[20] We do not agree. It was petitioners duty to provide assistance to
Deanna and Nikolai for the inconveniences of delay in their transportation. These actions are
deemed part of their obligation as a common carrier, and are hardly anything to rave about. [21]
Apropos the second and third assigned error, petitioner argues that it was not liable for exemplary
damages because there was no wanton, fraudulent, reckless, oppressive, or malevolent manner on
its part. Further, exemplary damages may be awarded only if it is proven that the plaintiff is entitled
to moral damages. Petitioner contends that since there was no proof that private respondents were
entitled to moral damages, then they are also not entitled to exemplary damages. [22]
Petitioner also contends that no premium should be placed on the right to litigate; that an award of
attorneys fees and order of payment of costs must be justified in the text of the decision; that such
award cannot be imposed by mere conclusion without supporting explanation; and that the RTC
decision does not provide any justification for the award of attorneys fees and order of payment of
costs.[23]
Article 2232 of the Civil Code provides that exemplary damages may be awarded in a breach of
contract if the defendant acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner. In addition, Article 2234 thereof states that the plaintiff must show that he is entitled to
moral damages before he can be awarded exemplary damages.
As we have earlier found, petitioner breached its contract of carriage with private respondents, and
it acted recklessly and malevolently in transporting Deanna and Nikolai as unaccompanied minors
and in handling their indemnity bond. We have also ascertained that private respondents are
entitled to moral damages because they have sufficiently established petitioners gross negligence
which amounted to bad faith. This being the case, the award of exemplary damages is warranted.
Current jurisprudence[24] instructs that in awarding attorneys fees, the trial court must state the
factual, legal, or equitable justification for awarding the same, bearing in mind that the award of
attorneys fees is the exception, not the general rule, and it is not sound public policy to place a
penalty on the right to litigate; nor should attorneys fees be awarded every time a party wins a
lawsuit. The matter of attorneys fees cannot be dealt with only in the dispositive portion of the
decision. The text of the decision must state the reason behind the award of attorneys
fees. Otherwise, its award is totally unjustified.[25]
In the instant case, the award of attorneys fees was merely cited in the dispositive portion of the
RTC decision without the RTC stating any legal or factual basis for said award. Hence, the Court of
Appeals erred in sustaining the RTCs award of attorneys fees.
Since we have already resolved that the RTC and Court of Appeals were correct in awarding moral
and exemplary damages, we shall now determine whether their corresponding amounts were
proper.
The purpose of awarding moral damages is to enable the injured party to obtain means, diversion
or amusement that will serve to alleviate the moral suffering he has undergone by reason of
defendants culpable action.[26] On the other hand, the aim of awarding exemplary damages is to
deter serious wrongdoings. [27]
Article 2216 of the Civil Code provides that assessment of damages is left to the discretion of the
court according to the circumstances of each case. This discretion is limited by the principle that the
amount awarded should not be palpably excessive as to indicate that it was the result of prejudice
or corruption on the part of the trial court. [28]Simply put, the amount of damages must be fair,
reasonable and proportionate to the injury suffered.
The RTC and the Court of Appeals ordered petitioner to pay Deanna and Nikolai P50,000.00 each
as moral damages. This amount is reasonable considering the harrowing experience they underwent
at their tender age and the danger they were exposed to when they were stranded in San
Francisco. Both of them testified that they were afraid and were not able to eat and sleep during
the time they were stranded in San Francisco.[29] Likewise, the award of P25,000.00 each to Deanna
and Nikolai as exemplary damages is fair so as to deter petitioner and other common carriers from
committing similar or other serious wrongdoings.
Both courts also directed petitioner to pay private respondent Aurora R. Buncio P75,000.00 as moral
damages. This is equitable and proportionate considering the serious anxiety and mental anguish
she experienced as a mother when Deanna and Nikolai were not allowed to take the connecting
flight as scheduled and the fact that they were stranded in a foreign country and in the company of
strangers. Private respondent Aurora R. Buncio testified that she was very fearful for the lives of
Deanna and Nikolai when they were stranded in San Francisco, and that by reason thereof she
suffered emotional stress and experienced upset stomach. [30] Also, the award of P30,000.00 as
moral damages to Mrs. Regalado is appropriate because of the serious anxiety and wounded feelings
she felt as a grandmother when Deanna and Nikolai, whom she was to meet for the first time, did
not arrive at the Los Angeles Airport. Mrs. Regalado testified that she was seriously worried when
Deanna and Nikolai did not arrive in Los Angeles on 3 May 1980, and she was hurt when she saw
the two crying upon arriving in Los Angeles on 4 May 1980.[31] The omission of award of damages
to private respondent Manuel S. Buncio was proper for lack of basis. His court testimony was rightly
disregarded by the RTC because he failed to appear in his scheduled cross-examination.[32]
On another point, we held in Eastern Shipping Lines, Inc. v. Court of Appeals,[33] that when an
obligation, not constituting a loan or forbearance of money is breached, an interest on the amount
of damages awarded may be imposed at the rate of 6% per annum. We further declared that when
the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether it is a loan/forbearance of money or not, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be then equivalent to a forbearance
of credit.
In the instant case, petitioners obligation arose from a contract of carriage and not from a loan or
forbearance of money. Thus, an interest of 6% per annum should be imposed on the damages
awarded, to be computed from the time of the extra-judicial demand on 17 July 1980 up to the
finality of this Decision. In addition, the interest shall become 12% per annum from the finality of
this Decision up to its satisfaction.
Finally, the records[34] show that Mrs. Regalado died on 1 March 1995 at the age of 74, while
Deanna passed away on 8 December 2003 at the age of 32. This being the case, the foregoing
award of damages plus interests in their favor should be given to their respective heirs.
WHEREFORE, the Petition is PARTLY GRANTED. The Decision of the Court of Appeals, dated 20
December 1995, in CA-G.R. CV No. 26921, is hereby AFFIRMED with the
following MODIFICATIONS: (1) the award of attorneys fees is deleted; (2) an interest of 6% per
annum is imposed on the damages awarded, to be computed from 17 July 1980 up to the finality
of this Decision; and (3) an interest of 12% per annum is also imposed from the finality of this
Decision up to its satisfaction. The damages and interests granted in favor of deceased
Mrs. Regalado and deceased Deanna are hereby awarded to their respective heirs. Costs against
petitioner.
SO ORDERED.
MINITA V. CHICO-NAZARIO
Associate Justice
[G.R. No. 148372. June 27, 2005]
CLARION PRINTING HOUSE, INC., and EULOGIO YUTINGCO, petitioners, vs. THE
HONORABLE NATIONAL LABOR RELATIONS COMMISSION (Third Division) and
MICHELLE MICLAT, respondents.
DECISION
CARPIO-MORALES, J.:
Respondent Michelle Miclat (Miclat) was employed on April 21, 1997 on a probationary basis as
marketing assistant with a monthly salary of P6,500.00 by petitioner Clarion Printing House
(CLARION) owned by its co-petitioner Eulogio Yutingco. At the time of her employment, she was
not informed of the standards that would qualify her as a regular employee.
On September 16, 1997, the EYCO Group of Companies of which CLARION formed part filed with
the Securities and Exchange Commission (SEC) a Petition for the Declaration of Suspension of
Payment, Formation and Appointment of Rehabilitation Receiver/ Committee, Approval of
Rehabilitation Plan with Alternative Prayer for Liquidation and Dissolution of Corporation [1] the
pertinent allegations of which read:
xxx
5. The situation was that since all these companies were sister companies and were operating under
a unified and centralized management team, the financial requirements of one company would
normally be backed up or supported by one of the available fundings from the other companies.
6. The expansion exhausted the cash availability of Nikon, NKI, and 2000 because those fundings
were absorbed by the requirements of NPI and EYCO Properties, Inc. which were placed on real
estate investments. However, at the time that those investments and expansions were made, there
was no cause for alarm because the market situation was very bright and very promising, hence,
the decision of the management to implement the expansion.
7. The situation resulted in the cash position being spread thin. However, despite the thin cash
positioning, the management still was very positive and saw a very viable proposition since the
expansion and the additional investments would result in a bigger real estate base which would be
very credible collateral for further expansions. It was envisioned that in the end, there would be
bigger cash procurement which would result in greater volume of production, profitability and other
good results based on the expectations and projections of the team itself.
8. Unfortunately, factors beyond the control and anticipation of the management came into
play which caught the petitioners flat-footed, such as:
a) The glut in the real estate market which has resulted in the bubble economy for the real
estate demand which right now has resulted in a severe slow down in the sales of properties;
b) The economic interplay consisting of the inflation and the erratic changes in the peso
-dollar exchange rate which precipitated a soaring banking interest.
c) Labor problems that has precipitated adverse company effect on the media and in the financial
circuit.
d) Liberalization of the industry (GATT) which has resulted in flooding the market with imported
goods;
e) Other related adverse matters.
9. The inability of the EYCO Group of Companies to meet the obligations as they fall due on the
schedule agreed with the bank has now become a stark reality. The situation therefore is that since
the obligations would not be met within the scheduled due date, complications and problems would
definitely arise that would impair and affect the operations of the entire conglomerate comprising
the EYCO Group of Companies.
xxx
12. By virtue of this development, there is a need for suspension of all accounts o[r] obligations
incurred by the petitioners in their separate and combined capacities in the meantime that they are
working for the rehabilitation of the companies that would eventually redound to the benefit of these
creditors.
13. The foregoing notwithstanding, however, the present combined financial condition of the
petitioners clearly indicates that their assets are more than enough to pay off the credits.
x x x (Emphasis and underscoring supplied)[2]
On September 19, 1997, the SEC issued an Order [3] the pertinent portions of which read:
xxx
It appearing that the petition is sufficient in form and
substance, the corporate petitioners prayer for the creation of management or receivership commi
ttee andcreditors approval of the proposed Rehabilitation Plan is hereby set for hearing on October
22, 1997 at 2:00 oclock in the afternoon at the SICD, SEC Bldg., EDSA, Greenhills, Mandaluyong
City.
xxx
Finally, the petitioners are hereby enjoined from disposing any and all of their properties in any
manner, whatsoever, except in the ordinary course of business and from making any payment
outside of the legitimate business expenses during the pendency of the proceedings and as a
consequence of the filing of the Petition, all actions, claims and proceedings against herein
petitioners pending before any court, tribunal, office board and/or commission are deemed
SUSPENDED until further orders from this Hearing Panel pursuant to the rulings of the Supreme
Court in the cases of RCBC v. IAC et al., 213 SCRA 830 and BPI v. CA, 229 SCRA 223. (Underscoring
supplied)
And on September 30, 1997, the SEC issued an Order [4] approving the creation of an interim
receiver for the EYCO Group of Companies.
On October 10, 1997, the EYCO Group of Companies issued to its employees the following
Memorandum:[5]
This is to formally announce the entry of the Interim Receiver Group represented by SGV from today
until October 22, 1997 or until further formal notice from the SEC.
This interim receiver groups function is to make sure that all assets of the company are secured
and accounted for both for the protection of us and our creditors.
Their function will involve familiarization with the different processes and controls in our organization
& keeping physical track of our assets like inventories and machineries.
Anything that would be required from you would need to be in writing and duly approved by the top
management in order for us to maintain a clear line.
We trust that this temporary inconvenience will benefit all of us in the spirit of goodwill. Lets extend
our full cooperation to them.
Thank you. (Underscoring supplied)
On October 22, 1997, the Assistant Personnel Manager of CLARION informed Miclat by telephone
that her employment contract had been terminated effective October 23, 1997. No reason was given
for the termination.
The following day or on October 23, 1997, on reporting for work, Miclat was informed by the General
Sales Manager that her termination was part of CLARIONs cost-cutting measures.
On November 17, 1997, Miclat filed a complaint[6] for illegal dismissal against CLARION and Yutingco
(petitioners) before the National Labor Relations Commission (NLRC).
In the meantime, or on January 7, 1998, the EYCO Group of Companies issued a
Memorandum[7] addressed to company managers advising them of a temporary partial shutdown of
some operations of the Company commencing on January 12, 1998 up to February 28, 1998:
In view of the numerous external factors such as slowdown in business and consumer demand and
consistent with Art. 286 of the Revised Labor Code of the Philippines, we are constrained to go on
a temporary partial shutdown of some operations of the Company.
To implement this measure, please submit to my office through your local HRAD the list of those
whom you will require to report for work and their specific schedules. Upon revalidation and approval
of this list, all those not in the list will not receive any pay nor will it be credited against their VL.
Please submit the listing no later than the morning of Friday, January 09, 1998.
Shutdown shall commence on January 12, 1998 up to February 28, 1998, unless otherwise recalled
at an earlier date.
Implementation of th[ese] directives will be done through your HRAD departments. (Underscoring
supplied)
In her Position Paper[8] dated March 3, 1998 filed before the labor arbiter, Miclat claimed that she
was never informed of the standards which would qualify her as a regular employee. She asserted,
however, that she qualified as a regular employee since her immediate supervisor even submitted
a written recommendation in her favor before she was terminated without just or authorized cause.
Respecting the alleged financial losses cited by petitioners as basis for her termination, Miclat
disputed the same, she contending that as marketing assistant tasked to receive sales calls, produce
sales reports and conduct market surveys, a credible assessment on production and sales showed
otherwise.
In any event, Miclat claimed that assuming that her termination was necessary, the manner in which
it was carried out was illegal, no written notice thereof having been served on her, and she merely
learned of it only a day before it became effective.
Additionally, Miclat claimed that she did not receive separation pay, 13th month pay and salaries for
October 21, 22 and 23, 1997.
On the other hand, petitioners claimed that they could not be faulted for retrenching some of its
employees including Miclat, they drawing attention to the EYCO Group of Companies being placed
under receivership, notice of which was sent to its supervisors and rank and file employees via a
Memorandum of July 21, 1997; that in the same memorandum, the EYCO Group of Companies
advised them of a scheme for voluntary separation from employment with payment of severance
pay; and that CLARION was only adopting the LAST IN, FIRST OUT PRINCIPLE when it terminated
Miclat who was relatively new in the company.
Contending that Miclats termination was made with due process, petitioners referred to the EYCO
Group of Companies abovesaid July 21, 1997 Memorandum which, so they claimed, substantially
complied with the notice requirement, it having been issued more than one month before Miclat
was terminated on October 23, 1997.
By Decision[9] of November 23, 1998, the labor arbiter found that Miclat was illegally
dismissed and directed her reinstatement. The dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered ordering the
respondent to reinstate complainant to her former or equivalent position without loss of seniority
rights and benefits and to pay her backwages, from the time of dismissal to actual reinstatement,
proportionate 13th month pay and two (2) days salary computed as follows:
a.1) Backwages 10/23/97 to 11/30/98
P6,500.00 x 13.25 months = P86,125.00
a.2) Proportionate 13th month pay
1/12 of P86,125 = 7,177.08
b) 13th month pay - 1997
=P6,500 x 9.75 months/12 = 5,281.25
c) Two days salary
=P6,500/26 x 2 days = 500.00
TOTAL P 99,083.33
(Emphasis and underscoring supplied).
Before the National Labor Relations Commission (NLRC) to which petitioners appealed, they argued
that:[10]
1. [CLARION] was placed under receivership thereby evidencing the fact that it sustained business
losses to warrant the termination of [Miclat] from her employment.
2. The dismissal of [Miclat] from her employment having been effected in accordance with the law
and in good faith, [Miclat] does not deserve to be reinstated and paid backwages, 13 th month pay
and two (2) days salary.
And petitioners pointed out that CLARION had expressed its decision to shutdown its operations by
Memorandum[11] of January 7, 1998 to its company managers.
Appended to petitioners appeal before the NLRC were photocopies of their balance sheets from 1997
to November 1998 which they claimed to unanimously show that x x x [petitioner] company
experienced business reverses which were made the basis x x x in retrenching x x x. [12]
By Resolution[13] of June 17, 1999, the NLRC affirmed the labor arbiters decision. The pertinent
portion of the NLRC Resolution reads:
There are three (3) valid requisites for valid retrenchment: (1) the retrenchment is necessary to
prevent losses and such losses are proven; (2) written notices to the employees and to the
Department of Labor and Employment at least one (1) month prior to the intended date of
retrenchment; and (3) payment of separation pay equivalent to one (1) month pay or at least month
pay for every year of service, whichever is higher. The two notices are mandatory. If the notice to
the workers is later than the notices sent to DOLE, the date of termination should be at least one
month from the date of notice to the workers.
In Lopez Sugar Corporation v. Federation of Free Workers Philippine Labor Union Association (PLUA-
NACUSIP) and National Labor Relations Commission, the Supreme Court had the occasion to set
forth four standards which would justify retrenchment, being, firstly, - the losses expected should
be substantial and not merely de minimis in extent. If the loss purportedly sought to be forestalled
by retrenchment is clearly shown to be insubstantial and inconsequential in character, the bona fide
nature of the retrenchment would appear to be seriously in question; secondly, - the substantial
loss apprehended must be reasonably imminent, as such imminence can be perceived objectively
and in good faith by the employer. There should, in other words, be a certain degree of urgency for
the retrenchment, which is after all a drastic course with serious consequences for the livelihood of
the employees retired or otherwise laid-off; thirdly, - because of the consequential nature of
retrenchment, it must be reasonably necessary and likely to effectively prevent the expected losses.
The employer should have taken other measures prior or parallel to retrenchment to forestall losses,
i.e., cut other cost than labor costs; and lastly, - the alleged losses if already realized and the
expected imminent losses sought to be forestalled, must be proven by sufficient and convincing
evidence.
The records show that these requirements were not substantially complied with. And proofs
presented by respondents-appellants were short of being sufficient and convincing to justify valid
retrenchment. Their position must therefore fail. The reason is simple. Evidences on record
presented fall short of the requirement of substantial, sufficient and convincing evidence to persuade
this Commission to declare the validity of retrenchment espoused by respondents-appellants. The
petition before the Securit[ies] and Exchange Commission for suspension of payment does not prove
anything to come within the bounds of justifying retrenchment. In fact, the petition itself lends
credence to the fact that retrenchment was not actually reinstated under the circumstances
prevailing when it stated, The foregoing notwithstanding, however, the present combined financial
condition of the petitioners clearly indicates that their assets are more than enough to pay off the
credits. Verily, reading further into the petition, We are not ready to disregard the fact that
the petition merely seeks to suspend payments of their obligation from creditor banks and other
financing institutions, and not because of imminent substantial financial loss. On this account, We
take note of paragraph 7 of the petition which stated: The situation resulted in cash position being
spread thin. However, despite the thin cash positioning, the management was very positive and
saw a very viable proposition since the expansion and the additional investments would result in a
bigger real estate base which would be a very credible collateral for further expansions. It was
envisioned that in the end, there would a bigger cash procurement which would result in greater
volume of production, profitability and other good results based on the expectations and projections
of the team itself. Admittedly, this does not create a picture of retrenchable business atmosphere
pursuant to Article 283 of the Labor Code.
We cannot disregard the fact that respondent-appellants failed in almost all of the criteria set by
law and jurisprudence in justifying valid retrenchment. The two (2) mandatory notices were
violated. The supposed notice to the DOLE (Annex 4, List of Employees on Shutdown) is of no
moment, the same having no bearing in this case. Herein complainant-appellee was not even listed
therein and the date of receipt by DOLE, that is, January 18, 1999, was way out of time in relation
to this case. And no proof was adduced to evidence cost cutting measures, to say the least. Nor
was there proof shown that separation pay had been awarded to complainant-appellee.
WHEREFORE, premises considered, and finding no grave abuse of discretion on the findings of Labor
Arbiter Nieves V. De Castro, the appeal is DENIED for lack of merit.
The decision appealed from is AFFIRMED in toto. (Italics in the original; underscoring supplied;
citations omitted)
Petitioners Motion for Reconsideration of the NLRC resolution having been denied by Resolution [14] of
July 29, 1999, petitioners filed a petition for certiorari[15] before the Court of Appeals (CA) raising
the following arguments:
1. PETITIONER CLARION WAS PLACED UNDER RECEIVERSHIP THEREBY EVIDENCING THE FACT
THAT IT SUSTAINED BUSINESS LOSSES TO WARRANT THE TERMINATION OF PRIVATE
RESPONDENT MICLAT FROM HER EMPLOYMENT.
2. THE DISMISSAL OF PRIVATE RESPONDENT MICLAT FROM HER EMPLOYMENT HAVING
BEEN EFFECTED IN ACCORDANCE WITH THE LAW AND IN GOOD FAITH, PRIVATE RESPONDENT
DOES NOT DESERVE TO BE REINSTATED AND PAID BACKWAGES, 13 TH MONTH PAY AND TWO (2)
DAYS SALARY. (Underscoring supplied)
By Decision[16] of November 24, 2000, the CA sustained the resolutions of the NLRC in this wise:
In the instant case, Clarion failed to prove its ground for retrenchment as well as compliance with
the mandated procedure of furnishing the employee and the Department of Labor and Employment
(hereafter, DOLE) with one (1) month written notice and payment of separation pay to the
employee. Clarions failure to discharge its burden of proof is evident from the following instances:
First, Clarion presented no evidence whatsoever before the Labor Arbiter. To prove serious business
losses, Clarion presented its 1997 and 1998 financial statements and the SEC Order for the Creation
of an Interim Receiver, for the first time on appeal before the NLRC. The Supreme Court has
consistently disallowed such practice unless the party making the belated submission of evidence
had satisfactorily explained the delay. In the instant case, said financial statements are not
admissible in evidence due to Clarions failure to explain the delay.
Second, even if such financial statements were admitted in evidence, they would not alter the
outcome of the case as statements have weak probative value. The required method of proof in
such case is the presentation of financial statements prepared by independent auditors and not
merely by company accountants. Again, petitioner failed in this regard.
Third, even audited financial statements are not enough. The employer must present the statement
for the year immediately preceding the year the employee was retrenched, which Clarion failed to
do in the instant case, to prove not only the fact of business losses but more importantly, the fact
that such losses were substantial, continuing and without immediate prospect of abatement. Hence,
neither the NLRC nor the courts must blindly accept such audited financial statements. They must
examine and make inferences from the data presented to establish business losses. Furthermore,
they must be cautioned by the fact that sliding incomes or decreasing gross revenues alone are not
necessarily business losses within the meaning of Art. 283 since in the nature of things, the
possibility of incurring losses is constantly present in business operations.
Last, even if business losses were indeed sufficiently proven, the employer must still prove that
retrenchment was resorted to only after less drastic measures such as the reduction of both
management and rank-and-file bonuses and salaries, going on reduced time, improving
manufacturing efficiency, reduction of marketing and advertising costs, faster collection of customer
accounts, reduction of raw materials investment and others, have been tried and found wanting.
Again, petitioner failed to prove the exhaustion of less drastic measures short of retrenchment as it
had failed with the other requisites.
It is interesting to note that Miclat started as a probationary employee on 21 April 1997. There being
no stipulation to the contrary, her probation period had a duration of six (6) months from her date
of employment. Thus, after the end of the probation period on 22 October 1997, she became a
regular employee as of 23 October 1997 since she was allowed to work after the end of said period.
It is also clear that her probationary employment was not terminated at the end of the probation
period on the ground that the employee failed to qualify in accordance with reasonable standards
made known to her at the time of engagement.
However, 23 October 1997 was also the day of Miclats termination from employment on the ground
of retrenchment. Thus, we have a bizarre situation when the first day of an employees regular
employment was also the day of her termination. However, this is entirely possible, as had in fact
happened in the instant case, where the employers basis for termination is Art. 288, instead of Art.
281 of the Labor Code. If petitioner terminated Miclat with Art. 281 in mind, it would have been too
late to present such theory at this stage and it would have been equally devastating for petitioner
had it done so because no evidence exists to show that Miclat failed to qualify with petitioners
standards for regularization. Failure to discharge its burden of proof would still be petitioners
undoing.
Whichever way We examine the case, the conclusion is the same Miclat was illegally dismissed.
Consequently, reinstatement without loss of seniority rights and full backwages from date of
dismissal on 23 October 1997 until actual reinstatement is in order.
WHEREFORE, the instant petition is hereby DISMISSED and the 29 July 1999 and 7 June 1999
resolutions of the NLRC are SUSTAINED. (Emphasis and underscoring supplied)
By Resolution[17] of May 23, 2001, the CA denied petitioners motion for reconsideration of the
decision.
Hence, the present petition for review on certiorari, petitioners contending that:
WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN SUSTAINING
THE ASSAILED DECISIONS OF HONORABLE PUBLIC RESPONDENT COMMISSION:
A. HOLDING THAT PRIVATE RESPONDENT MICLAT WAS ILLEGALLY DISMISSED; and
B. ORDERING THE REINSTATEMENT OF PRIVATE RESPONDENT MICLAT TO HER FORMER OR
EQUIVALENT POSITION WITHOUT LOSS OF SENIORITY RIGHTS AND BENEFITS AND PAYMENT OF
BACKWAGES, 1[3]TH MONTH PAY AND TWO (2) DAYS SALARY.[18]
Petitioners argue that the conclusion of the CA that no sufficient proof of financial losses on the part
of CLARION was adduced is patently erroneous, given the serious business reverses it had gravely
suffered as reflected in its financial statements/balance sheets, thereby leaving as its only option
the retrenchment of its employees including Miclat.[19]
Petitioners further argue that when a company is under receivership and a receiver is appointed to
take control of its management and corporate affairs, one of the evident reasons is to prevent
further losses of said company and protect its remaining assets from being dissipated; and that the
submission of financial reports/statements prepared by independent auditors had been rendered
moot and academic, the company having shutdown its operations and having been placed under
receivership by the SEC due to its inability to pay or comply with its obligations. [20]
Respecting the CAs holding that the financial statements CLARION submitted for the first time on
appeal before the NLRC are inadmissible in evidence due to its failure to explain the delay in the
submission thereof, petitioners lament the CAs failure to consider that technical rules on evidence
prevailing in the courts are not controlling in proceedings before the NLRC which may consider
evidence such as documents and affidavits submitted by the parties for the first time on appeal.[21]
As to the CAs holding that CLARION failed to prove the exhaustion of less drastic measures short of
retrenching, petitioners advance that prior to the termination of Miclat, CLARION, together with the
other companies under the EYCO Group of Companies, was placed under receivership during which
drastic measures to continue business operations of the company and eventually rehabilitate itself
were implemented.[22]
Denying Miclats entitlement to backwages, petitioners proffer that her dismissal rested upon a valid
and authorized cause. And petitioners assail as grossly erroneous the award of 13thmonth pay to
Miclat, she not having sought it and, therefore, there was no jurisdiction to award the same. [23]
The petition is partly meritorious.
Contrary to the CAs ruling, petitioners could present evidence for the first time on appeal to the
NLRC. It is well-settled that the NLRC is not precluded from receiving evidence, even for the first
time on appeal, because technical rules of procedure are not binding in labor cases.
The settled rule is that the NLRC is not precluded from receiving evidence on appeal as technical
rules of evidence are not binding in labor cases. In fact, labor officials are mandated by the Labor
Code to use every and all reasonable means to ascertain the facts in each case speedily and
objectively, without regard to technicalities of law or procedure, all in the interest of due process.
Thus, in Lawin Security Services v. NLRC, and Bristol Laboratories Employees Association-DFA v.
NLRC, we held that even if the evidence was not submitted to the labor arbiter, the fact that it was
duly introduced on appeal to the NLRC is enough basis for the latter to be more judicious in admitting
the same, instead of falling back on the mere technicality that said evidence can no longer be
considered on appeal. Certainly, the first course of action would be more consistent with equity and
the basic notions of fairness. (Italics in the original; citations omitted) [24]
It is likewise well-settled that for retrenchment to be justified, any claim of actual or potential
business losses must satisfy the following standards: (1) the losses are substantial and not de
minimis; (2) the losses are actual or reasonably imminent; (3) the retrenchment is reasonably
necessary and is likely to be effective in preventing expected losses; and (4) the alleged losses, if
already incurred, or the expected imminent losses sought to be forestalled, are proven by sufficient
and convincing evidence.[25] And it is the employer who has the onus of proving the presence of
these standards.
Sections 5 and 6 of Presidential Decree No. 902-A (P.D. 902-A) (REORGANIZATION OF THE
SECURITIES AND EXCHANGE COMMISSION WITH ADDITIONAL POWERS AND PLACING SAID
AGENCY UNDER THE ADMINISTRATIVE SUPERVISION OF THE OFFICE OF THE PRESIDENT), [26] as
amended, read:
SEC. 5 In addition to the regulatory and adjudicative functions of THE SECURITIES AND EXCHANGE
COMMISSION over corporations, partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction
to hear and decide cases involving:
xxx
(d) Petitions of corporations, partnerships or associations declared in the state of
suspension of payments in cases where the corporation, partnership or association
possesses sufficient property to cover all debts but foresees the impossibility of meeting
them when they respectively fall due or in cases where the corporation, partnership,
association has no sufficient assets to cover its liabilities, but is under the management
of a Rehabilitation Receiver or Management Committee created pursuant to this Decree.
SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following
powers:
xxx
(c) To appoint one or more receivers of the property, real and personal, which is the subject of
the action pending before the Commission in accordance with the provisions of the Rules of Court
in such other cases whenever necessary in order to preserve the rights of the parties-litigants
and/or protect the interest of the investing public and creditors: Provided, however,
That the Commission may in appropriate cases, appoint a rehabilitation receiver of
corporations, partnerships or other associations not supervised or regulated by other
government agencies who shall have, in addition to powers of the regular receiver under
the provisions of the Rules of Court, such functions and powers as are provided for in the
succeeding paragraph (d) hereof: x x x
(d) To create and appoint a management committee, board or body upon petition or motu propio
to undertake the management of corporations, partnership or other associations not supervised or
regulated by other government agencies in appropriate cases when there is imminent danger
of dissipation, loss, wastage or destruction of assets or other properties or paralization
of business operations of such corporations or entities which may be prejudicial to the
interest of minority stockholders, parties-litigants of the general public: x x x (Emphasis
and underscoring supplied).
From the above-quoted provisions of P.D. No. 902-A, as amended, the appointment of a receiver
or management committee by the SEC presupposes a finding that, inter alia, a company possesses
sufficient property to cover all its debts but foresees the impossibility of meeting them when they
respectively fall due and there is imminent danger of dissipation, loss, wastage or destruction of
assets of other properties or paralization of business operations.
That the SEC, mandated by law to have regulatory functions over corporations, partnerships or
associations,[27] appointed an interim receiver for the EYCO Group of Companies on its petition in
light of, as quoted above, the therein enumerated factors beyond the control and anticipation of the
management rendering it unable to meet its obligation as they fall due, and thus resulting to
complications and problems . . . to arise that would impair and affect [its] operations . . . shows
that CLARION, together with the other member-companies of the EYCO Group of Companies, was
suffering business reverses justifying, among other things, the retrenchment of its employees.
This Court in fact takes judicial notice of the Decision[28] of the Court of Appeals dated June 11,
2000 in CA-G.R. SP No. 55208, Nikon Industrial Corp., Nikolite Industrial Corp., et al.[including
CLARION], otherwise known as the EYCO Group of Companies v. Philippine National Bank,
Solidbank Corporation, et al., collectively known and referred as the Consortium of Creditor
Banks, which was elevated to this Court via Petition for Certiorari and docketed as G.R. No.
145977, but which petition this Court dismissed by Resolution dated May 3, 2005:
Considering the joint manifestation and motion to dismiss of petitioners and respondents dated
February 24, 2003, stating that the parties have reached a final and comprehensive settlement of
all the claims and counterclaims subject matter of the case and accordingly, agreed to the dismissal
of the petition for certiorari, the Court Resolved to DISMISS the petition for certiorari (Underscoring
supplied).
The parties in G.R. No. 145977 having sought, and this Court having granted, the dismissal of the
appeal of the therein petitioners including CLARION, the CA decision which affirmed in toto the
September 14, 1999 Order of the SEC, the dispositive portion of which SEC Order reads:
WHEREFORE, premises considered, the appeal is as it is hereby, granted and the Order dated 18
December 1998 is set aside. The Petition to be Declared in State of Suspension of payments is
hereby disapproved and the SAC Plan terminated. Consequently, all committee, conservator/
receivers created pursuant to said Order are dissolved and discharged and all acts and orders issued
therein are vacated.
The Commission, likewise, orders the liquidation and dissolution of the appellee
corporations. The case is hereby remanded to the hearing panel below for that purpose.
x x x (Emphasis and underscoring supplied),
has now become final and executory. Ergo, the SECs disapproval of the EYCO Group of Companies
Petition for the Declaration of Suspension of Payment . . . and the order for the liquidation and
dissolution of these companies including CLARION, must be deemed to have been unassailed.
That judicial notice can be taken of the above-said case of Nikon Industrial Corp. et al. v. PNB et
al., there should be no doubt.
As provided in Section 1, Rule 129 of the Rules of Court:
SECTION 1. Judicial notice, when mandatory. A court shall take judicial notice, without the
introduction of evidence, of the existence and territorial extent of states, their political history, forms
of government and symbols of nationality, the law of nations, the admiralty and maritime courts of
the world and their seals, the political constitution and history of the Philippines, the official acts
of the legislative, executive and judicial departments of the Philippines, the laws of nature, the
measure of time, and the geographical divisions. (Emphasis and underscoring supplied)
which Mr. Justice Edgardo L. Paras interpreted as follows:
A court will take judicial notice of its own acts and records in the same case, of facts established
in prior proceedings in the same case, of the authenticity of its own records of another case between
the same parties, of the files of related cases in the same court, and of public records on file
in the same court. In addition judicial notice will be taken of the record, pleadings or judgment of
a case in another court between the same parties or involving one of the same parties, as well as
of the record of another case between different parties in the same court. Judicial notice will also
be taken of court personnel. (Emphasis and underscoring supplied) [29]
In fine, CLARIONs claim that at the time it terminated Miclat it was experiencing business reverses
gains more light from the SECs disapproval of the EYCO Group of Companies petition to be declared
in state of suspension of payment, filed before Miclats termination, and of the SECs
consequent order for the group of companies dissolution and liquidation.
This Courts finding that Miclats termination was justified notwithstanding, since at the time she was
hired on probationary basis she was not informed of the standards that would qualify her as a
regular employee, under Section 6, Rule I of the Implementing Rules of Book VI of the Labor Code
which reads:
SEC. 6. Probationary employment. There is probationary employment where the employee, upon
his engagement, is made to undergo a trial period during which the employer determines his fitness
to qualify for regular employment, based on reasonable standards made known to him at the time
of engagement.
Probationary employment shall be governed by the following rules:
xxx
(d) In all cases of probationary employment, the employer shall make known to the
employee the standards under which he will qualify as a regular employee at the time of
his engagement. Where no standards are made known to the employee at that time, he shall be
deemed a regular employee (Emphasis and underscoring supplied),
she was deemed to have been hired from day one as a regular employee. [30]
CLARION, however, failed to comply with the notice requirement provided for in Article 283 of the
Labor Code, to wit:
ART. 283. CLOSURE OF ESTABLISHMENT AND REDUCTION OF PERSONNEL. The employer may also
terminate the employment of any employee due to the installation of labor saving devices,
redundancy, retrenchment to prevent losses or the closing or cessation of operation of the
establishment or undertaking unless the closing is for the purpose of circumventing the provisions
of this Title, by serving a written notice on the worker and the Ministry of Labor and
Employment at least one (1) month before the intended date thereof. x x x (Emphasis and
underscoring supplied)
This Court thus deems it proper to award the amount equivalent to Miclats one (1) month salary
of P6,500.00 as nominal damages to deter employers from future violations of the statutory due
process rights of employees. [31]
Since Article 283 of the Labor Code also provides that [i]n case of retrenchment to prevent losses,
. . . the separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) month
pay for every year of service, whichever is higher. . . , [a] fraction of at least six (6) months
[being] considered one (1) whole year, this Court holds that Miclat is entitled to separation pay
equivalent to one (1) month salary.
As to Miclats entitlement to 13th month pay, paragraph 6 of the Revised Guidelines on the 13 th Month
Pay Law provides:
6. 13th Month Pay of Resigned or Separated Employee
An employee x x x whose services were terminated any time before the time for payment of the
13th month pay is entitled to this monetary benefit in proportion to the length of time he worked
during the calendar year up to the time of his resignation or termination from the service. Thus if
he worked only from January up to September his proportionate 13 th month pay shall be equivalent
to 1/12 of his total basic salary he earned during that period.
xxx
Having worked at CLARION for six months, Miclats 13th month pay should be computed as follows:
(Monthly Salary x 6 ) / 12 = Proportionate 13th month pay
(P6,500.00 x 6) / 12 = P3,250.00
With the appointment of a management receiver in September 1997, however, all claims and
proceedings against CLARION, including labor claims,[32] were deemed suspended during the
existence of the receivership.[33] The labor arbiter, the NLRC, as well as the CA should not have
proceeded to resolve respondents complaint for illegal dismissal and should instead have directed
respondent to lodge her claim before the then duly-appointed receiver of CLARION. To still require
respondent, however, at this time to refile her labor claim against CLARION under the peculiar
circumstances of the case that 8 years have lapsed since her termination and that all the arguments
and defenses of both parties were already ventilated before the labor arbiter, NLRC and the CA; and
that CLARION is already in the course of liquidation this Court deems it most expedient and
advantageous for both parties that CLARIONs liability be determined with finality, instead of still
requiring respondent to lodge her claim at this time before the liquidators of CLARION which would
just entail a mere reiteration of what has been already argued and pleaded. Furthermore, it would
be in the best interest of the other creditors of CLARION that claims against the company be finally
settled and determined so as to further expedite the liquidation proceedings. For the lesser number
of claims to be proved, the sooner the claims of all creditors of CLARION are processed and settled.
WHEREFORE, the Court of Appeals November 24, 2000 Decision, together with its May 23, 2001
Resolution, is SET ASIDE and another rendered declaring the legality of the dismissal of respondent,
Michelle Miclat. Petitioners are ORDERED, however, to PAY her the following in accordance with the
foregoing discussions:
1) P6,500.00 as nominal damages for non-compliance with statutory due process;
2) P6,500.00 as separation pay; and
3) P3,250.00 as 13th month pay.
Let a copy of this Decision be furnished the SEC Hearing Panel charged with the liquidation and
dissolution of petitioner corporation for inclusion, in the list of claims of its creditors, respondent
Michelle Miclats claims, to be satisfied in accordance with Article 110 of the Labor Code in relation
to the Civil Code provisions on Concurrence and Preference of Credits.
Costs against petitioners.
SO ORDERED.
Panganiban, (Chairman), Sandoval-Gutierrez, Corona, and Garcia, JJ., concur.
 [G.R. No. 160466. January 17, 2005]
SPOUSES ALFREDO and SUSANA ONG, petitioners, vs. PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, respondent.
DECISION
PUNO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside the
Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated February 17, 2003, affirming the
decision of the trial court denying petitioners motion to dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the
manufacture and export of finished wood products. Petitioners-spouses Alfredo and Susana Ong are
its President and Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial International Bank (now Equitable-
Philippine Commercial International Bank or E-PCIB) filed a case for collection of a sum of
money[1] against petitioners-spouses. Respondent bank sought to hold petitioners-spouses liable as
sureties on the three (3) promissory notes they issued to secure some of BMCs loans, totalling five
million pesos (P5,000,000.00).
The complaint alleged that in 1991, BMC needed additional capital for its business and applied
for various loans, amounting to a total of five million pesos, with the respondent bank. Petitioners-
spouses acted as sureties for these loans and issued three (3) promissory notes for the purpose.
Under the terms of the notes, it was stipulated that respondent bank may consider debtor BMC in
default and demand payment of the remaining balance of the loan upon the levy, attachment or
garnishment of any of its properties, or upon BMCs insolvency, or if it is declared to be in a state of
suspension of payments. Respondent bank granted BMCs loan applications.
On November 22, 1991, BMC filed a petition for rehabilitation and suspension of payments
with the Securities and Exchange Commission (SEC) after its properties were attached by creditors.
Respondent bank considered debtor BMC in default of its obligations and sought to collect payment
thereof from petitioners-spouses as sureties. In due time, petitioners-spouses filed their Answer.
On October 13, 1992, a Memorandum of Agreement (MOA)[2] was executed by debtor BMC,
the petitioners-spouses as President and Treasurer of BMC, and the consortium of creditor banks of
BMC (of which respondent bank is included). The MOA took effect upon its approval by the SEC on
November 27, 1992.[3]
Thereafter, petitioners-spouses moved to dismiss[4] the complaint. They argued that as
the SEC declared the principal debtor BMC in a state of suspension of payments and, under the
MOA, the creditor banks, including respondent bank, agreed to temporarily suspend any pending
civil action against the debtor BMC, the benefits of the MOA should be extended to petitioners-
spouses who acted as BMCs sureties in their contracts of loan with respondent bank. Petitioners-
spouses averred that respondent bank is barred from pursuing its collection case filed against them.
The trial court denied the motion to dismiss. Petitioners-spouses appealed to the Court
of Appeals which affirmed the trial courts ruling that a creditor can proceed against petitioners-
spouses as surety independently of its right to proceed against the principal debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case filed against them by respondent bank
should be dismissed for three (3) reasons: First, the MOA provided that during its effectivity, there
shall be a suspension of filing or pursuing of collection cases against the BMC and this provision
should benefit petitioners as sureties. Second, principal debtor BMC has been placed under
suspension of payment of debts by the SEC; petitioners contend that it would prejudice them if the
principal debtor BMC would enjoy the suspension of payment of its debts while petitioners, who
acted only as sureties for some of BMCs debts, would be compelled to make the payment;
petitioners add that compelling them to pay is contrary to Article 2063 of the Civil Code which
provides that a compromise between the creditor and principal debtor benefits the guarantor and
should not prejudice the latter. Lastly, petitioners rely on Article 2081 of the Civil Code which
provides that: the guarantor may set up against the creditor all the defenses which pertain to the
principal debtor and are inherent in the debt; but not those which are purely personal to the debtor.
Petitioners aver that if the principal debtor BMC can set up the defense of suspension of payment
of debts and filing of collection suits against respondent bank, petitioners as sureties should likewise
be allowed to avail of these defenses.
We find no merit in petitioners contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is
misplaced as these provisions refer to contracts of guaranty. They do not apply to
suretyship contracts. Petitioners-spouses are not guarantors but sureties of BMCs debts. There
is a sea of difference in the rights and liabilities of a guarantor and a surety. A guarantor insures
the solvency of the debtor while a surety is an insurer of the debt itself. A contract of
guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is only after the
creditor has proceeded against the properties of the principal debtor and the debt remains
unsatisfied that a guarantor can be held liable to answer for any unpaid amount. This is the principle
of excussion. In a suretyship contract, however, the benefit of excussion is not available to the
surety as he is principally liable for the payment of the debt. As the surety insures the debt
itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of whether
or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go directly against
the surety although the principal debtor is solvent and is able to pay or no prior demand is made
on the principal debtor. A surety is directly, equally and absolutely bound with the principal
debtor for the payment of the debt and is deemed as an original promissor and debtor
from the beginning.[5]
Under the suretyship contract entered into by petitioners-spouses with respondent bank, the
former obligated themselves to be solidarily bound with the principal debtor BMC for the payment
of its debts to respondent bank amounting to five million pesos (P5,000,000.00). Under Article
1216 of the Civil Code,[6] respondent bank as creditor may proceed against petitioners-spouses
as sureties despite the execution of the MOA which provided for the suspension of payment and
filing of collection suits against BMC. Respondent banks right to collect payment from the surety
exists independently of its right to proceed directly against the principal debtor. In fact, the creditor
bank may go against the surety alone without prior demand for payment on the principal debtor. [7]
The provisions of the MOA regarding the suspension of payments by BMC and the
non-filing of collection suits by the creditor banks pertain only to the property of the
principal debtor BMC. Firstly, in the rehabilitation receivership filed by BMC, only the properties
of BMC were mentioned in the petition with the SEC. [8] Secondly, there is nothing in the MOA that
involves the liabilities of the sureties whose properties are separate and distinct from that of the
debtor BMC. Lastly, it bears to stress that the MOA executed by BMC and signed by the creditor-
banks was approved by the SEC whose jurisdiction is limited only to corporations and corporate
assets. It has no jurisdiction over the properties of BMCs officers or sureties.
Clearly, the collection suit filed by respondent bank against petitioners-spouses as sureties
can prosper. The trial courts denial of petitioners motion to dismiss was proper.
IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as to
costs.
SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur .
SY CHIM and FELICIDAD G.R. No. 164958 As of the year 2000, the corporation had a gross profit of P45,084,908.11 and P42,954,252.32 in
2001.[5] As of April 19, 2002, it had a capital stock of P150,000,000.00, divided into 150,000 shares,
CHAN SY, with a par value of P1,000.00 per share. The treasury stocks amounted to P70,720,000.00. It had
a subscribed and paid-up capital of 103,733 shares and P103,733,000.00 respectively. The
Petitioners, Present: stockholders and the respective shareholdings were as follows:

PANGANIBAN, C.J., Chairperson, Stockholder No. of Shares Amount Subscribed

- versus - YNARES-SANTIAGO, Subscribed and Paid (PHP)

AUSTRIA-MARTINEZ, SY CHIM 35,013 35,013,000

CALLEJO, SR., and FELICIDAD CHAN SY 17,509 17,509,000

SY SIY HO & SONS, INC., CHICO-NAZARIO, JJ. CHARLIE TAN 20,338 20,338,000

doing business under the name ROMER TAN 19,636 19,636,000

and style GUAN YIAC JESSE JAMES TAN 11,233 11,233,000

HARDWARE, Promulgated: SY TIONG SHIOU 2 2,000

Respondents. JUANITA TAN SY 2 _ 2,000

January 27, 2006 TOTAL 103,733 PHP103,733,000[6]

x--------------------------------------------------x
DECISION
CALLEJO, SR., J.:
The Sy Siy Ho & Sons, Inc. (hereinafter referred to as the corporation) is a domestic corporation
which was organized in the 1940s,[1] engaged primarily in importing, buying and selling hardware,
machineries, spare parts, supplies and other allied products and merchandise to be sold exclusively
on wholesale basis. It was doing business under the name and style Guan Yiac Hardware [2] with
office at No. 453-455 T. Pinpin Street, Binondo, Manila.
The corporation was owned and controlled by Sy Chim and his children. Sometime in 1990, a
controversy ensued between Sy Chims two
sons, Sy Tiong Shiou and Sy Tiong Bio who was then the Vice President for Finance. Sy Chim sided
with Sy Tiong Shiou. The intra-corporate dispute reached the Securities and Exchange Commission
(SEC), docketed as SEC Case No. 04443.
On May 31, 1993, the stockholders of record, Sy Chim and Sy Tiong Shiou (Sy Chim Group), on the
one hand, and Sy Tiong Bio, Sy Tiong Gue, Sy Tiong Sim, Sy Tiong Han and Sy Tiong Yan (Sy Tiong
Bio Group), on the other, executed a Compromise Agreement, [3] where the latter group relinquished
their shares to Sy Chim. The parties also agreed to divide and distribute the assets and liabilities of
the corporation as follows:
(a) Mr. SY CHIM GROUP Four (4) parts, or three (3) parts Sy Chim, one (1) part Sy Tiong Shiou.
(b) Mr. SY TIONG BIO GROUP Five (5) parts at the rate of one (1) each. [4]
Some of the shares of stocks were assigned to Felicidad Chan Sy, wife of Sy Chim. The spouses Sy
Chim and Felicidad Chan Sy, and spouses Sy Tiong Shiou and Juanita Tan Sy, and their children,
Charlie, Romer and Jesse James Tan, then became stockholders and members of the Board of
Directors of the corporation. The officers of the corporation were as follows: Sy Chim, President;
Felicidad Chan Sy, Assistant Treasurer; Sy Tiong Shiou, Vice President and General Manager;
Juanita Tan Sy (wife of Sy Tiong Shiou), Corporate Treasurer; and Charlie Tan (son of spouses Sy
Tiong Shiou), Assistant General Manager.
After almost a decade later, another intra-corporate dispute ensued, this time between Sy Chim
and his wife, on the one hand, and their son Sy Tiong Shiou, on the other. In a letter addressed to
the corporation dated February 3, 2003, Corporate Treasurer Juanita Tan Sy requested that she
immediately be removed from all responsibilities and obligations pertaining to all corporate funds
of the corporation, considering that Felicidad Chan Sy was the one who handled and managed all
deposits and funds while Sy Chim supervised all expenditures. She further reported that Felicidad
Chan Sy did not make any cash deposit to any bank from November 1, 2002 to January 31, 2003,
and that the total amount of cash as reflected in the bank statements is far less than that reported
in the corporations financial statements and other records. She then proposed that the Board call a
special meeting to discuss these matters.[7] Thus, on March 24, 2003, a special meeting of the board
of directors was held with the spouses Sy Tiong Shiou and Juanita Tan Sy and their sons Charlie,
Romer and Jesse James Tan in attendance. In two separate resolutions, Juanita Tan Sy
was removed as corporate treasurer and relieved of all responsibilities; the spouses Sy Chim were
held accountable for the undeposited money; and a new external auditor was hired to make a
complete audit of all books and records.[8] Banaria Banaria and Company then submitted Financial
Reports covering 2001 and 2002.[9]
In a Letter[10] dated April 15, 2003, Sy Tiong Shiou informed his parents of the corporations cash
balance shortage as of March 31, 2003 (as reflected in the auditors report) and that there was also
an undeposited amount of P2,000,000.00 for the current salary and emergency funds, and they had
several postdated checks in their possession. Sy Tiong Shiou requested that the shortage be
accounted for, and that the undeposited funds be remitted. He also requested that the postdated
checks and original receipts for all disbursements of corporate funds be turned over to Corporate
Treasurer Juanita Tan Sy. The spouses Sy Chim did not respond.
Spouses Sy Tiong Shiou and Juanita Tan Sy, their three sons held another meeting on April 21,
2003, again without written notice to the spouses Sy Chim, and approved a resolution [11] authorizing
Romer Tan to file a complaint for and in behalf of the corporation against the said spouses in the
Regional Trial Court (RTC) of Manila. Sy Tiong Shiou was elected President of the corporation.
The complaint[12] for accounting and damages against the spouses Sy Chim was filed on May 6,
2003. The complaint alleged that Felicidad Chan Sy, as custodian of all cash collections, had been
depositing amounts less than those appearing in the financial statements which are in the
defendants custody and that no deposits were made in the corporations account from November 1,
2002 to January 31, 2003. Based on the accountants report, Felicidad Chan Sy failed to account
for P67,117,230.30. Plaintiff further alleged that, based on the corporations General Information
Sheet for 2003, the subscribed shares of the corporation were as follows:
Name of Subscriber No. of Shares Subscribed Amount Paid-Up
Sy Tiong Shiou 27,987 P 27,987,000.00
Juanita Tan 32,017 32,017,000.00
Charlie Tan 12,512 12,512,000.00
Romer Tan 12,079 12,079,000.00
Jesse James Tan 6,910 6,910,000.00
Sy Chim 21,539 21,539,000.00
Felicidad Chan Sy 10,771 10,771,000.00
Total 123,815 P123,815,000.00[13]
Plaintiff prayed that, after due proceedings, judgment be rendered in its favor, as follows:
a. Ordering defendants to render a full, complete and true accounting of all the amounts, proceeds
and funds paid to, received and earned by the plaintiff since 1993 and to restitute to the plaintiff,
jointly and severally, all such amounts, proceeds and funds that they have misappropriated;
b. Ordering defendants to pay, jointly and severally, the plaintiff the amount of One Million
(P1,000,000.00) Pesos by way of exemplary damages, and One Million (P1,000,000.00) Pesos by
way of attorneys fees plus Five Thousand (P5,000.00) Pesos per court appearance and litigation
expenses in the amount of not less than One Hundred Thousand (P100,000.00) Pesos;
c. Cost of suit.
Plaintiff further prays for such other reliefs [it] deems just and equitable in the premises. [14]
In their answer[15] to the complaint, defendants averred, inter alia, that any unaccounted cash
account and irregularities in the management of the corporation, if any, were the full responsibility
of Sy Tiong Shiou, Romer Tans own father, since he has direct and actual management of the
corporation under the by-laws. Sy Chim, as corporate president, was a mere figurehead, who only
had general supervision over the corporations officers. Juanita Tan Sy, as corporate treasurer, had
custody of the corporations funds and should have kept a complete and accurate record of receipts,
disbursements, and other commercial transactions of the corporation. Felicidad Chan Sy merely
performed clerical work and acted as Corporate Treasurer only in the absence of Juanita Tan Sy and
under the latters close supervision. They averred that any and all meetings of the stockholders and
members of the corporations Board of Directors were null and void as they violated the corporate
by-laws as well as the Corporation Code. Defendants further denied executing any deed or
document authorizing the transfer of their shares, or that treasury shares had been issued by the
corporation. Assuming that treasury shares were validly issued in 2002 as claimed in the complaint,
defendants should have been allowed to exercise their pre-emptive rights over such shares.
Defendants prayed that they be granted the following reliefs:
(1) Dismissing the instant Complaint for utter lack of merit;
(2) Ordering Plaintiff Mr. Romer S. Tan to pay the following:
(a) Three Million Pesos (PHP3,000,000.00), by way of moral damages;
(b) Three Million Pesos (PHP3,000,000.00), by way of exemplary damages;
(c) Two Million Pesos (PHP2,000,000.00), by way of attorneys fees;
(d) Costs of suit.
Other reliefs just and equitable under the premises are, likewise prayed for. [16]
Feeling aggrieved, the spouses Sy Chim and Felicidad Chan Sy filed a criminal complaint in the
Office of the City Prosecutor of Makati against the spouses Sy Tiong Shiou and their children for
violation of Section 74 of the Corporation Code.
In the meantime, Sy Chim, as corporate president, called for a stockholders meeting on June 11,
2003. An amended complaint was filed on July 1, 2003, praying for the issuance of a temporary
restraining order
and/or writ of preliminary prohibitory injunction. It was alleged, among others, that on April 15,
2003, defendant Sy Chim and his other children and the siblings of Sy Tiong Shiou, namely, Sy Yu
Hui-Pabilona, Sy Tiong Gue, Sy Tiong Yan, Sy Yu San, Sy Yu Siong, Sy Yu Bun and her son, Bryan
Lim, with two armed unidentified men, forcibly entered the office and took P6,500,000.00 in cash
and postdated checks and other important documents, including five boxes of Hennesy X.O.
wine. Since defendant Sy Chim abandoned his duties and responsibilities as president, the board of
directors elected Sy Tiong Shiou as president during a special meeting on May 6, 2003. Sy Chim
issued a Notice of Stockholders Meeting on June 11, 2003 although he was no longer the president
of the corporation. The amended complaint further alleged that a criminal complaint for robbery
was filed against the culprits in the Office of the City Prosecutor of Manila.
The plaintiff corporation prayed for that the court grant injunctive relief, as follows:
a. An order be issued making the preliminary injunction permanent;
b. Ordering defendants to render a full, complete and true accounting of all the amounts, proceeds
and funds paid to, received and earned by the plaintiff since 1993 and to restitute to the plaintiff,
jointly and severally, all such amounts, proceeds and funds that they have misappropriated;
c. Ordering defendants to pay, jointly and severally, the plaintiff the amount of One Million
(P1,000,000.00) Pesos by way of exemplary damages, and One Million (P1,000,000.00) Pesos by
way of attorneys fees plus Five Thousand (P5,000.00) Pesos per court appearance and litigation
expenses in the amount of not less than One Hundred Thousand (P100,000.00) Pesos;
d. Cost of suit.
Plaintiff further prays for such other reliefs [it] deems just and equitable in the premises. [17]
During the hearing of plaintiffs petition for injunctive relief, defendants submitted the following to
the court: a Joint Affidavit,[18] the Joint Supporting Affidavit[19] of See Cha and See Su Pe, and the
Complaint-Affidavit[20] of Felicidad Chan Sy for violation of Section 74 of the Corporation Code
against the spouses Sy Tiong Shiou and Juanita Tan Sy, Jolie Ross Tan, Charlie Tan, Romer Tan and
Jesse James Tan filed in the Office of the City Prosecutor.
On August 6, 2003, the RTC issued an Order[21] granting the plea for a writ of preliminary injunction
on a bond of P500,000.00, and enjoined defendant Sy Chim or any person acting for and in his
behalf from calling or holding a stockholders and/or Board of Directors meetings of the
corporation. This was followed by a writ of preliminary injunction.[22]
On July 18, 2003, defendants filed a Motion for Production and Inspection of Documents [23] (all the
corporate books, accounting records, financial statements and other documents mentioned in, and
pertinent to, the allegations of the complaint), praying that they be permitted to inspect, examine
and photocopy such documents. Plaintiff opposed the motion, contending that it was premature
because defendants had not yet filed their answer to the complaint. [24] On August 5, 2003,
defendants also filed a Motion for the Appointment of an Independent Auditor, to conduct an audit
of the funds and assets of the plaintiff corporation.[25]
Plaintiff did not object to the motion.[26] The RTC granted the motion on August 8, 2003 and
appointed the accounting firm of Punongbayan &
Araullo to conduct the audit of the corporations books and records covering the period from 1993
to the present. The Motion for Production and Inspection of Documents filed by the defendants was,
however, denied. Instead, the parties have been directed to provide the accounting firm of all the
books of accounts, vouchers, receipts, purchase orders and similar other documents necessary, and
warned that failure to comply with the order will be dealt with as for contempt. The RTC also directed
plaintiff to make its records available to the accounting firm, and after completion of the firms task,
to make such records available for defendants inspection. [27]
In their answer to the amended complaint, defendants averred that the meetings of the stockholders
and board of directors were null and void for having been conducted without prior notice to them. [28]
Meanwhile, plaintiff moved that the court set aside its Order appointing an independent auditor.
On August 26, 2003, defendants filed a Motion for the Appointment of a Management
Committee,[29] thus:
3. Defendants alleged that under Article IV of the By-Laws of Sy Siy Ho & Sons, Inc., the funds of
the corporation are under the supervision, control and administration of Sy Tiong Shiou, as the
General Manager, and Sy Tiong Shious wife, Juanita Tan, as Treasurer; and that the direction and
control of the business and operations of Guan Yiac Hardware were in the hands of the General
Manager Sy Tiong Shiou, who had the power to direct and actively manage Guan Yiac Hardware.
4. Thus, defendants alleged that for any unaccounted difference of the corporations account,
including the PHP67,117,230.30 alleged in the Amended Complaint, it is Sy Tiong Shiou and Juanita
Tan who are at fault in view of their powers as General Manager and Treasurer under the By-Laws
of the Corporation and in actual practice since they have active control of the day-to-day operations
of the Corporation.
5. However, while this Honorable Court will still determine, in the course of these proceedings,
whether it is defendants Sy Chim and Felicidad Chan Sy or whether it is Sy Tiong Shiou and Juanita
Tan who are the parties responsible for the dissipation and loss of the corporate funds and assets
of Sy Siy Ho & Sons, Inc., the active day-to-day control and management of Sy Siy Ho & Sons, Inc.
is still under the control and supervision of Sy Tiong Shiou and Juanita Tan, especially so since
defendants had been physically ousted from their residence by Sy Tiong Shiou and his family since
15 April 2003, and defendants have been denied access to the corporate premises and its books
and records.
6. The plaintiff itself has alleged that there has been a massive dissipation and loss of its corporate
assets and funds, and this Court is still in the process of determining whether the General Manager,
Sy Tiong Shiou, and Treasurer, Juanita Tan, are the parties responsible for such dissipation and
loss. In view of the foregoing, until this Honorable Court resolves with finality that Sy Tiong Shiou
and his wife, Juanita Tan, are not responsible for the dissipation and loss, the control and
management of the Corporation must be transferred to an independent party to ensure the
preservation of the corporate assets.
7. While Sy Tiong Shiou and Juanita Tan remain in control of the management of the corporation,
there is imminent danger of further dissipation, loss, wastage or destruction of the corporate funds
and assets.
8. Nor can control and management of the corporation be transferred to the other stockholders
Romer Sy Tan, Jesse James Tan and Charlie Tan, or the Corporate Secretary Jolie Ross S. Tan, who
are all children of Sy Tiong Shiou and Juanita Tan.
9. Annexes E and J of the Amended Complaint, show that Romer Sy Tan, Jesse James Tan and
Charlie Tan, and Jolie Ross S. Tan, allegedly acting as the members of the Board of Directors and
the corporate secretary of Sy Siy Ho & Sons, Inc., took part in the actuations against defendants.
9.1 Plaintiffs annex E shows that Romer Sy Tan, Jesse James Tan and Charlie Tan all signed the
minutes of the purported special meeting of the board of directors wherein, in a highly self-serving
manner, Juanita Tan was declared to have no knowledge of the deposits, disbursements and
expenditures of the plaintiff since 1993, and that all of these as well as the deposits were in the
control of the defendants. Jolie Ross Tan, on the other hand, signed the Secretarys Certificate
wherein Juanita Tan was removed of all responsibilities pertaining to the funds of the corporation
since 1993.
9.2 On the other hand, annex J of plaintiffs Amended Complaint shows that Romer Sy Tan, Jesse
James Tan and Charlie Tan, and Jolie Ross S. Tan all signed the minutes of the purported special
joint meeting of the board of directors and stockholders wherein they supposedly declared defendant
Sy Chim as having abandoned his position, made Sy Tiong Shiou the President and Chairman of the
Board of Directors of the corporation, made Juanita Tan the Vice President of the corporation, and
cancelled defendant Sy Chims authority as a signatory on the corporations bank accounts.
9.3 Romer Sy Tan is also acting as the representative of Sy Siy Ho & Sons, Inc. in this and in another
case against the defendants.
10. Hence, all of the children of Sy Tiong Shiou and Juanita Tan have taken action against their
grandparents, defendants Sy Chim and Felicidad Chan Sy. Obviously, the entire family of Sy Tiong
Shiou and Juanita Tan is acting against the defendants. In view of the foregoing, the management
and control of Sy Siy Ho & Sons, Inc. cannot be transferred to any or all of the children of Sy Tiong
Shiou and Juanita Tan since they obviously would not protect the interests of defendants Sy Chim
and Felicidad Chan Sy as stockholders of Sy Siy Ho & Sons, Inc.
11. Thus, there exists an urgent need for the immediate appointment of a management committee
to administer, manage and preserve the assets, funds, properties and records of Sy Siy Ho & Sons,
Inc. in order to prevent any further dissipation, wastage and loss. [30]
The control and management of the corporation must be transferred pendente lite to an
independent party to ensure the preservation of the corporate assets. [31]
Plaintiff opposed the motion, contending that defendants failed to allege and establish the two
requisites for the creation of a management committee under Section 1, Rule 9 of the Interim Rules
of Procedure for Intra-Corporate Controversies (Interim Rules for brevity) under Republic Act No.
8799. It averred that, compared to previous years under the management of Sy Tiong Shiou, the
volume of sales and importation of the corporation had considerably increased, and that its
obligation of P29,404,664.00 to Metrobank was paid, and was thus in current status. Plaintiff also
alleged that:
8. The kind of plaintiffs business requires a special talent or managerial sagacity that only a person
who has been exposed to it for a long and continuous period of time possesses. Sy Tiong Shiou is
that kind of individual because he has been in this kind of business for more than forty (40) years,
starting as an ordinary employee and now as President and General Manager of the plaintiff. As
such, he knows its intimate details and nuances.
9. The appointment of a management committee to manage the business affairs of the plaintiff
would not only be unwise and ill-advised. It might lead to a disastrous consequence for all its
stockholders and instead of saving the enterprise, as defendants would claim, it will only result to
its untimely demise. If this will happen, the interest of all the stockholders as well as the welfare of
its more than seventy (70) employees, including that of their families, will be greatly affected and
jeopardized. xxx[32]
On September 9, 2003, defendants filed a Motion for Leave to File and Third-Party Complaint against
Sy Tiong Shiou and Juanita Tan Sy, with the following prayer:
1. Declaring third-party defendants Sy Tiong Shiou and Juanita Tan directly and solely liable in
respect of plaintiffs claim for accounting and damages and, in the same judgment, in the remote
event that third-party plaintiffs Sy Chim and/or Felicidad Chan Sy are adjudged liable to plaintiff,
ordering Sy Tiong Shiou and Juanita Tan to pay all amounts necessary to discharge Sy Chims and
Felicidad Chan Sys liability to plaintiff by way of indemnity or reimbursement;
2. Ordering third-party defendants to pay third-party plaintiffs the amount of P300,000.00 as
litigation expenses and attorneys fees.
Third-party plaintiffs further pray for such other reliefs as the Honorable Court may deem just and
equitable under the premises.[33]
For their part, Sy Tiong Shiou and Juanita Tan Sy alleged
31. As shown, since 1993, third-party defendants Sy Tiong Shiou and Juanita Tan have had full and
complete control of the day-to-day operations and complete custody and control of the corporate
funds of Sy Siy Ho & Sons, Inc., hence, they are the real parties-in-interest in this case.
32. As shown, third-party defendants Sy Tiong Shiou and Juanita Tan are liable for any shortfall or
unaccounted difference of cash account of Sy Siy Ho & Sons, Inc. for the period 1993 to 2003,
including the PHP67,117,230.30 alleged in paragraph 12 of the Amended Complaint dated 30 June
2003, especially so since third-party plaintiffs have been physically ousted from their residence by
Sy Tiong Shiou and his family since 15 April 2003, and denied access to the corporate premises by
Sy Tiong Shiou and his family as well as its books and records.
33. Hence, third-party defendants Sy Tiong Shiou and Juanita Tan should render a full, complete
and true accounting of all the amounts, proceeds and funds paid to, received and earned by Sy Siy
Ho & Sons, Inc. since 1993, and should be declared solely liable to Sy Siy Ho & Sons, Inc. for any
shortfall or unaccounted difference of cash account of Sy Siy Ho & Sons, Inc. for the period 1993-
2003, including the PHP67,117,230.30 alleged in paragraph 12 of the Amended Complaint dated 30
June 2003, and in the remote event that this Honorable Court holds Sy Chim and Felicidad Chan Sy
liable to plaintiff, Sy Chim and Felicidad Chan Sy are entitled to full indemnity and reimbursement
from Sy Tiong Shiou and Juanita Tan in respect of plaintiffs claim. [34]
On September 12, 2003, the RTC issued an Order [35] granting the motion for the creation of a
management committee pendente lite to be composed of three members, one to be designated by
the court as chairman, and two others to be nominated by the parties within 10 days, failing which
the court would appoint the same. Such management committee would have the power and
functions enumerated under Section 5, Rule 9 of the Interim Rules.[36] The RTC justified the issuance
of its order on its finding that the parties were pointing accusing fingers at each other for the
unaccounted funds. According to the trial court, the question of who should be held responsible for
the unaccounted funds would only be determined after an extensive audit of the companys
books. Moreover, while the main case is yet to be heard, the fact remains that corporate assets,
funds, properties and records were in imminent danger of further dissipation or total loss. Thus, it
would serve the best interest of the company, as well as its stockholders and creditors, to have the
corporation managed by an independent committee exclusively accountable to the court. According
to the RTC, the corporations assets, income and properties would be protected and preserved until
the final determination of the main controversy.
The court further stated that the appointment of a receiver was justified where pleadings requesting
appointment were without qualification as to information and belief and were not controverted by
defendants.[37] It noted that sufficient allegations of misappropriation of corporate assets were
made, and that the appointment of a receiver is justified upon a showing that
one who is president, director, managing officer and controlling stockholder has allowed himself
unauthorized salary increases, used corporate funds for his private purposes, entrusted his duties
to others, conducted a competing business and made a secret profit by transactions between the
two concerns, used employees and equipment of the company for his own business, failed to keep
complete corporate accounts, incurred penalties for delinquent corporate taxes, and otherwise
caused waste and loss.[38]
On October 8, 2003, the RTC granted defendants Motion to File a Third-Party Complaint and ordered
that such complaint be admitted.[39] Third-party defendants failed to file their answer thereon and
were declared in default upon motion of the third-party plaintiffs.
Plaintiff corporation filed a motion for reconsideration of the September 12, 2003 Order of the trial
court creating a management committee. Plaintiff reiterating its claim that defendants failed to
adduce evidence to prove the twin requisites for the creation of a management committee under
Section 1, Rule 9 of the Interim Rules.
On October 15, 2003, the trial court issued a Supplemental Order [40] directing the president, vice
president, secretary, treasurer, accountant, bookkeeper of the corporation or any person acting on
their behalf or under their instruction to allow the parties or their duly-authorized representatives
to be present during the audit. The said officers were likewise enjoined to secure court approval
before disbursing funds in excess of P10,000.00. Finally, the officers were directed to submit the
names of the banks the corporation did business with and to indicate the balance of its accounts. The
trial court gave the said officers ten (10) days to comply with this order and that, upon their failure
to do so, would be dealt with as for contempt and meted the appropriate penalty as warranted by
the evidence.
However, Punongbayan & Araullo withdrew as independent auditor. [41] Plaintiff filed a motion for the
reconsideration of the Supplemental Order, and, thereafter, a Manifestation and Motion, [42] praying
that the order of the court appointing an independent auditor be executed. On December 11, 2003,
defendants filed a Comment/Opposition to Plaintiff Manifestation and Motion.[43] Plaintiff made a
reply thereto.
In an Order[44] dated December 19, 2003, the RTC denied plaintiffs motion for reconsideration of
the Supplemental Order. The trial court designated Wencita C. Salvador as comptroller tasked to
oversee the maintenance of corporate books of accounts, budget administration, internal control on
disbursements, reporting and interpretation of financial statements, tax administration, protection
of assets, financial evaluation and government reporting. She was also designated as a co-signatory
to all checks or withdrawals of funds, to receive a monthly fee of P50,000.00. The RTC reserved the
authority to expand her authority. However, it modified its Order dated October 15, 2003, in that
its prior approval was no longer required in the disbursement of funds, except those in excess
of P500,000.00. It further ordered plaintiff not to obtain any loan or other credit accommodations
without its prior approval, and directed plaintiffs depository banks to be advised of its order.
The hearing for the formation of the management committee was set on January 9, 2004.[45] Plaintiff
filed a motion for reconsideration of the trial courts Order dated December 19, 2003.
The spouses Sy Tiong Shiou and Juanita Tan Sy filed a petition for certiorari in the Court of Appeals
(CA) assailing the October 8, 2003 and
December 19, 2003 Orders of the RTC. The petition, docketed as CA-G.R. SP No. 81897 and raffled
to the appellate courts 7th Division, contained the following prayer:
1. Upon the filing of this petition, a temporary restraining order and/or writ of preliminary injunction
be issued restraining/enjoining the Honorable Respondent JUDGE from undertaking further
proceedings in Civil Case No. 03-106456 until further orders from this Honorable Court;
2. After due proceedings, this petition be given due course and, thereafter, judgment be rendered
annulling and setting aside the assailed Orders dated October 8, 2003 (Annex H, supra) and the
Order dated December 19, 2003 (Annex R, supra) and striking out and quashing the Third-Party
Complaint or ordering the Honorable Respondent JUDGE to strike out and quash the Third-Party
Complaint.
Petitioners also pray for costs and for such other reliefs as just and equitable under the premises. [46]
Meantime, in an Order[47] dated January 27, 2004, the RTC declared that its December 19, 2003
Order designating Wencita Salvador as comptroller was immediately executory.She was, likewise,
directed to immediately assume her functions and ordered all the corporation officers to immediately
turn over all corporate books and records as may be required by her, and to cooperate fully. The
court designated the accounting firm of R.S. Bernaldo & Associates to conduct the audit. The court
also directed the parties to provide the firm with all the financial books of the corporation.
In a Letter dated January 30, 2004, Salvador informed the corporation that she was assuming the
position of comptroller effective February 2, 2004.
The corporation filed an Urgent Motion[48] to lift the January 27, 2004 Order of the RTC, but before
the RTC could resolve the motion, the corporation filed a petition for certiorari with injunctive relief
in the CA, docketed as CA-G.R. SP No. 82171. The following allegations were made:
A. THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION AND ACTED WITHOUT OR IN
EXCESS OF JURISDICTION AND VIOLATED PETITIONERS RIGHT TO DUE PROCESS IN ISSUING THE
ORDER OF 12 SEPTEMBER 2003 (Annex F) GRANTING THE MOTION OF THE DEFENDANTS (Private
Respondents herein) FOR THE CREATION OF A MANAGEMENT COMMITTEE PENDENTE LITE, AND IN
NOT RESOLVING BUT INSTEAD MOOTING PETITIONERS MOTION FOR RECONSIDERATION (Annex
G) AND SUPPLEMENTAL MOTION FOR RECONSIDERATION OF SAID ORDER (Annex H).
B. THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION AND ACTED WITHOUT OR IN
EXCESS OF JURISDICTION AND VIOLATED PETITIONERS RIGHT TO DUE PROCESS IN ISSUING THE
SUPPLEMENTARY ORDER DATED OCTOBER 15, 2003 (Annex I), AND IN NOT RESOLVING BUT
INSTEAD MOOTING PETITIONERS MOTION FOR RECONSIDERATION OF SAID ORDER (Annex J).
C. THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION AND ACTED WITHOUT OR IN
EXCESS OF JURISDICTION AND VIOLATED PETITIONERS RIGHT TO DUE PROCESS IN ISSUING THE
ORDER DATED DECEMBER 19, 2003 (Annex P), AND IN NOT RESOLVING BUT INSTEAD MOOTING
PETITIONERS MOTION FOR RECONSIDERATION OF SAID ORDER (Annex Q).
D. THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION AND ACTED WITHOUT OR IN
EXCESS OF JURISDICTION AND VIOLATED PETITIONERS RIGHT TO DUE PROCESS IN ISSUING THE
ORDER DATED JANUARY 27, 2004 (Annex S) AND IN NOT RESOLVING BUT INSTEAD MOOTING
PETITIONERS URGENT MOTION TO LIFT ORDER DATED JANUARY 27, 2004 (Annex T).[49]
The appellate court set the hearing on the plea for injunctive relief. [50]
On June 29, 2005, the CA rendered judgment granting the petition and nullifying the orders issued
by the RTC. The fallo of the decision reads:
WHEREFORE, in view of the foregoing, the petition is GRANTED. The Orders of September 12,
2003, October 15, 2003, December 19, 2003 and January 27, 2004, are
hereby ANNULLED and SET ASIDE. The instant case is remanded to the Regional Trial Court of
Manila, Branch 46, for further proceedings with special instructions to resolve the same with
deliberate dispatch in accordance with the rules on summary procedure as defined by the Interim
Rules of Procedure for Intra-Corporate Controversies. No pronouncement as to cost.
SO ORDERED.[51]
The CA ruled that respondents failed to prove a requirement for the creation of a management
committee under Section 1, Rule 9 of the Interim Rules: that there was imminent danger of massive
dissipation, loss, wastage or destruction of assets and other properties of the corporation. The
appellate court declared that other than the bare allegations of Sy Chim and Felicidad Chan Sy that
they could not protect their interests because of dissention among themselves on the one hand,
and members of the board of directors on the other, they failed to show that the business operations
of the corporation were paralyzed. The CA emphasized that the creation of a management
committee is for the benefit of all the interested parties, not exclusively for the benefit of the party
at whose instance it is to be created. The appellate court stated that a simple turn over of pertinent
receipts would facilitate the accounting sought for, without resorting to the creation of a
management committee; the accuracy of the validity of the accounting report made as basis of the
complaint for accounting and damages should then be validated during trial on the
merits. Citing Jacinto v. First Womens Credit Corporation,[52] the CA ruled that the trial court abused
its discretion amounting to excess of jurisdiction in ordering the creation of a management
committee pendente lite.
The CA also ruled that the trial court abused its discretion in designating a comptroller and an
accounting firm to assess the corporations financial books and records. The CA stated that the
appointment of a comptroller was not authorized by the Interim Rules. Thus, while Section 2, Rule
9 of the Interim Rules allows the appointment of a receiver, there was no point in discussing the
same since the trial court committed abuse of its
discretion in creating a management committee. The CA concluded that, when the trial court created
a management committee and designated an auditing firm and a comptroller, it thereby imposed
additional burden on the corporation.
The CA likewise declared that the order imposing a limitation of Five Hundred Thousand Pesos
(P500,000.00) disbursement without prior court approval was likewise unnecessary and has no
direct bearing to the issue involved in the case pending before the court a quo.
Spouses Sy Chim and Felicidad Chan Sy filed a motion for the partial reconsideration of the decision,
which the appellate court denied.[53]
Said spouses, now petitioners, filed the instant petition for review on certiorari, alleging that:
I corporations claim for a full accounting and ensure that all books, records and documents of the
RESPONDENT COURT OF APPEALS ERRED IN INTERPRETING SECTION 1, RULE 9 OF THE INTERIM
RULES OF PROCEDURE GOVERNING INTRA-CORPORATE CONTROVERSIES BECAUSE IT FAILS TO
GIVE FULL FORCE AND EFFECT TO THE PROTECTIVE POWERS OF THE COURT.
II
RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE AUDIT AND ASSESSMENT OF THE
CORPORATE BOOKS AND RECORDS OF THE CORPORATION IS UNNECESSARY AND IS MORE THAN
WHAT THE CASE DEMANDS.
III
RESPONDENT COURT OF APPEALS ERRED IN RULING ON THE 8 AUGUST 2003 ORDER OF THE TRIAL
COURT DIRECTING THE CONDUCT OF AN AUDIT OF THE BOOKS AND RECORDS OF SY SIY HO &
SONS, INC. (SSHI) BECAUSE SUCH ORDER WAS NOT COVERED BY THE PETITION BEFORE THE
COURT OF APPEALS.
IV
RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE TRIAL COURT HAS NO POWER AND
AUTHORITY TO DESIGNATE A COMPTROLLER AND TO MONITOR THE DISBURSEMENTS OF THE
CORPORATION.
V
RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE APPOINTMENT OF AN AUDITING
FIRM IS PREMATURE
VI
RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE TRIAL COURT GRAVELY ABUSED
ITS DISCRETION IN ISSUING THE ASSAILED ORDERS.[54]
The threshold issue is whether or not the RTC committed grave abuse of its discretion amounting
to excess or lack of jurisdiction in (a) creating a management committee; (b) designating an
independent auditor and ordering an audit of the corporate books and records of the corporation;
and (c) appointing a comptroller; and whether the issues raised in this Court are factual in nature
and proscribed by Rule 45 of the Rules of Civil Procedure.
On the first issue, petitioners aver that the CA erred in strictly applying the requisites under Section
1, Rule 9 of the Interim Rules regarding the creation of a management committee. The petitioners
posit that the word and in Section 1(1), Rule 9 should be interpreted as or, since a literal
interpretation of the provision would frustrate the plain intention of the Rule. They point out that
the appellate courts strict interpretation of the rule is contrary to the spirit of Presidential Decree
No. 902-A. They further assert that the RTC is empowered to act and put a stop to misappropriation
of a corporations funds and thus prevent business operations from being paralyzed. According to
the petitioners, for the Court to idly wait and watch as assets of the corporation are plundered until
the business is paralyzed, would render inutile Section 1, Rule 9 of the Interim Rules.
Petitioners assert that at the time the complaint was filed in the trial court, respondents abused
their positions and mismanaged corporate affairs, thus necessitating the immediate creation of a
management committee.
Petitioners maintain that corporate funds have massively dissipated and would continue as long as
the management and control of the corporation remained with respondents. In fact, respondents
admitted in their complaint that there had been massive dissipation of the funds and assets of the
corporation since 1993 when they (respondents) were still corporate officers. Contrary to the ruling
of the CA, the creation of the management committee would ensure the continuity of the
corporations business operations and remove the management of the business from the hands of
those responsible for the dissipation of its assets. Thus, petitioners insist, the interest of the
corporation and its stockholders would be preserved and protected through the creation of a
management committee.
Petitioners further assert that the appointment of an independent auditing firm would satisfy the
corporation would be submitted to the auditor to ensure a fair, impartial and full accounting. Such
accounting would determine the full extent of misappropriation of corporate funds, as well as the
shareholdings of its stockholders. Petitioners insist that there was a necessity for the court to do so
in order to determine the true status of corporate funds, and to determine who should be held
responsible for the alleged misappropriation. Petitioners assert that the auditors report is of doubtful
credibility as it is inconsistent with the external auditors report (which has no indication of any
missing fund). Moreover, the appointment of an external auditor is necessitated by time constraints
and the volume of financial records to be examined. Petitioners point out that, as gleaned from the
amended complaint, the corporation prayed for the accounting of the missing funds; the
appointment of an impartial and competent auditor to conduct the audit achieves this purpose.
Petitioners maintain that respondent corporations failure to question the trial courts appointment of
an independent auditor and accounting firm through a motion for reconsideration effectively
estopped them from assailing such orders; instead of filing a petition for certiorari in the CA,
respondent should have moved that such orders be reconsidered.
On the issue of whether or not the trial court may designate a comptroller, petitioners point out that
although Section 1, Rule 9 of the Interim Rules does not specifically authorize the RTC to appoint a
comptroller, the same rule authorizes such court to appoint a receiver; this latter power necessarily
implies the authority to designate a comptroller.According to petitioners, a comptroller would
exercise more limited functions and ensure that no illegitimate corporate expenditures would be
made and that all government requirements will be complied with before the formation of a
management committee.
By way of comment, respondent avers that the issues raised by petitioners are factual, which is
proscribed by Rule 45 of the Rules of Civil Procedure; whether or not there is factual basis for the
creation of a management committee under Section 1, Rule 9 of the Interim Rules is a question of
fact. The CA correctly ruled that petitioners failed to allege and substantiate the need for the
appointment of an auditing firm, as well as the requisites for the creation of a management
committee. The Order of the trial court dated August 8, 2003 had already been overtaken and
rendered moot by the January 27, 2004 Order of the RTC which the CA affirmed. Also, whether or
not there is a need for the appointment of comptroller and the limits of her power are questions of
fact which should not be raised in this Court.
The petition is partially granted.
Section 1, Rule 9 of the Interim Rules provides:
SECTION 1. Creation of a management committee. As an incident to any of the cases filed under
these Rules or the Interim Rules on Corporate Rehabilitation, a party may apply for the appointment
of a management committee for the corporation, partnership or association, when there is imminent
danger of:
(1) Dissipation, loss, wastage or destruction of assets or other properties; and
(2) Paralyzation of its business operations which may be prejudicial to the interest of the minority
stockholders, parties-litigants or the general public.[55]
The said Rules, which took effect on April 1, 2001, was promulgated by the Court pursuant to its
power to promulgate rules concerning pleading, practice and procedure in all courts xxx providing
for simplified and inexpensive procedure for the speedy disposition of cases under Section 5(5),
Article VIII of the Constitution.
We do not agree with petitioners contention that the word and in Section 1, Rule 9 of the Interim
Rules should be interpreted to mean or. While it is true that in Section 6(d) of Presidential Decree
No. 902-A,[56] an applicant for the appointment of a management committee is mandated to prove
only one of the two requisites provided therein, the Court, in Jacinto v. First Womens Credit
Corporation,[57] ruled that the two requisites should be present before a management committee
may be created and a receiver appointed by the RTC:
A reading of the aforecited legal provision reveals that for a minority stockholder to obtain the
appointment of an interim management committee, he must do more than merely make a prima
facie showing of a denial of his right to share in the concerns of the corporation; he must show that
the corporate property is in danger of being wasted and destroyed; that the business of the
corporation is being diverted from the purpose for which it has been organized; and that there is
serious paralyzation of operations all to his detriment.
The rationale for the need to establish the confluence of the two (2) requisites under Section 1, Rule
9 by an applicant for the appointment of a danger of paralyzing the business operations of the corporation.
management committee is primarily based upon the fact that such committee and receiver
appointed by the court will immediately take over the management of the corporation, partnership
or association, including such power as it may deem appropriate, and any of the powers specified
in Section 5 of the Rule.[58]
Indeed, upon the appointment of a receiver, the duly elected/appointed officers of the corporation
are divested of the management of such
corporation in favor of the management committee/receiver. Such transference of the corporations
management will certainly have a negative, if not crippling effect, on the operations/affairs of the
corporation not only with banks and other business institutions including those abroad which it deals
business with. A wall of uncertainty is erected; the short and long-term plans of the management
of the corporation are disrupted, if not derailed.[59]
Thus, the creation and appointment of a management committee and a receiver is an extraordinary
and drastic remedy to be exercised with care and caution; and only when the requirements under
the Interim Rules are shown. It is a drastic course for the benefit of the minority stockholders, the
parties-litigants or the general public are allowed only under pressing circumstances and, when
there is inadequacy, ineffectual or exhaustion of legal or other remedies. The power to intervene
before the legal remedy is exhausted and misused when it is exercised in aid of such a
purpose.[60] The power of the court to continue a business of a corporation, partnership or
association must be exercised with the greatest care and caution. There should be a full
consideration of all the attendant facts, including the interest of all the parties concerned.
Neither Presidential Decree No. 902-A and Republic Act No. 8799 nor the Interim Rules of Procedure
define imminent danger. Danger is a general term, including peril, jeopardy, hazard and risk; as
used in the Rule, it refers to exposure or liability to injury. Imminent refers to something which is
threatening to happen at once, something close at hand, something to happen upon the instant,
close although not yet happening, and on the verge of happening. [61]
In the present case, petitioners failed to make a strong showing that there was an imminent danger
of dissipation, loss, wastage or destruction of assets or other properties of respondent
corporation and paralysis of its business operations which may be prejudicial to the interest of the
parties-litigants, petitioners, or the general public. The RTC thus committed grave abuse of its
discretion amounting to excess of jurisdiction in creating a management committee and the
subsequent appointment of a comptroller.
The bone of contention between the parties is whether there was a shortage or unaccounted funds
of the corporation, including P67,117,230.30 allegedly incurred from 1993 (when petitioner Sy Chim
assumed office as President, Felicidad Chan Sy as Assistant Treasurer, Sy Tiong Shiou as General
Manager, and Juanita Tan Sy as Corporate Treasurer); and who should be held accountable
therefor. Petitioners blame Sy Tiong Shiou and Juanita Tan Sy, while the latter pin liability on
petitioners based on the financial report of the Banaria Banaria and Company and the claim of
Juanita Tan Sy. However, these issues of fact have yet to be determined by the trial court after due
proceedings.Indeed, petitioners admitted the following in their motion for the appointment of a
management committee:
4. Thus, defendants allege that for any unaccounted difference of the corporations account,
including the PHP67,117,230.30 alleged in the Amended Complaint, it is Sy Tiong Shiou and Juanita
Tan who are at fault in view of their powers as General Manager and Treasurer under the By-laws
of the Corporation and in actual practice since they have active control of the day-to-day operations
of the Corporation.
5. However, while this Honorable Court will still determine, in the course of these proceedings,
whether it is defendants Sy Chim and Felicidad Chan Sy or whether it is Sy Tiong Shiou and Juanita
Tan who are the parties responsible for the dissipation and loss of the corporate funds and assets
of Sy Siy Ho & Sons, Inc., the active day-to-day control and management of Sy Siy Ho and Sons,
Inc. is still under the control and supervision of Sy Tiong Shiou and Juanita Tan, especially so since
defendants have been physically ousted from their residence by Sy Tiong Shiou and his family since
15 April 2003, and defendants have been denied access to the corporate premises and its books
and records.[62]
Petitioners failed to adduce a shred of evidence during the hearing of their motion to prove their
claim that there was imminent danger of dissipation, loss, wastage or destruction of the assets or
other properties of respondent ever since Sy Tiong Shiou became president and Juanita Tan Sy
continued discharging her duties as corporate treasurer; nor is there proof that there was imminent
We have reviewed the records and find that, contrary to the findings of the RTC, there is no imminent
danger of dissipation or total loss of the assets, funds, properties and records of respondent
corporation, or paralysis of business operations. In fact, records show that there has been no slack
in the business operations of respondent corporation.
Petitioners were divested of their corporate positions, and thus stockholdings in the corporation
were reduced. Petitioners claim that Sy Tiong Shiou and Juanita Tan Sy (third-party defendants
below) and their children unlawfully ousted them from their positions and reduced their
shareholdings in the corporation. They posit that the formers claim that they (petitioners)
misappropriated the funds and assets of respondent was designed to justify the unlawful ouster of
petitioners from the management of respondent corporation.Such claims, however, have yet to be
proven.
While the allegation that Sy Tiong Shiou and Juanita Tan Sy abused their positions and mismanaged
the affairs of respondent corporation is a distinct possibility, petitioners failed to adduce proof
thereon. Mere possibility without proof of abusing corporate positions and dissipation of assets and
properties of the corporation is not a valid ground for the appointment of a management
committee/receiver. Petitioners even failed to adduce evidence to controvert the following
allegations of respondent:
b. A comparative breakdown of the volume of sales and importation of the plaintiff for the years
2002 and 2003, during the watch of defendant Sy Chim as President and during the time that Sy
Tiong Shiou took over as President would clearly show that it has tremendously increased. A copy
of the comparative chart is attached hereto as Annex B;
c. In a certification dated August 29, 2003 issued by Amelin S. Yap, SVP, Center Head of Metrobank,
it is demonstrated that plaintiff, through the able and competent management and leadership of Sy
Tiong Shiou, has been able to service and pay its financial obligations when it paid Fourteen Million
Nine Hundred Eleven Thousand Six Hundred Sixty-Four (P14,911,664.00) Pesos under trust receipt
obligation from the period of April 2003 up to August 2003. Likewise, it has also paid Fourteen
Million Four Hundred Ninety-Three Thousand (P14,493,000.00) Pesos under loan obligation from
the period April 2003 to August 2003. Further, the bank certified that plaintiffs obligations are in
current status. Photocopy of the said certification is attached hereto as Annex C;
d. On September 1, 2003, CHINABANK, through its Senior Assistant Vice President, International
Banking Group, Elaine Marissa L. Ong issued a certification that, as per records as of August 28,
2003, plaintiffs outstanding trust receipts amounted only to P9,462,835.90 and that these trust
receipts are not beyond 180 days. Photocopy of the said certification is attached hereto as Annex
D;
e. Likewise, on September 1, 2003, Allied Banking Corporation, through its Senior Assistant Vice
President Florentina Garrovillo, issued a certification that, as per records as of August 29, 2003,
plaintiffs outstanding trust receipts amounted to Seven Million Two Hundred Ninety-Four Thousand
Three Hundred Six Pesos & 77/100 (Php7,294,306.77) and that, as of that date, these trust receipts
are not beyond 180 days. Photocopy of the said certification is attached hereto as Annex E.
7. In contrast, during defendant Sy Chims incumbency as President, the plaintiff could hardly pay
its financial obligations with its creditor banks. In fact, it has to ask and request for extensions.When
Trust Receipt with Reference No. 014/TR/000631/02 fell due on February 7, 2003 after 180 days,
defendant Sy Chim as President of the plaintiff could not pay the same and instead asked for an
extension of 90 days or up to May 8, 2003. Photocopy of the document showing this transaction is
attached hereto as Annex F.[63]
We agree that past conduct and condition of the corporation may be considered in determining the
present situation and what the future will be. However, a management committee or receiver will
not be appointed merely because of things done or attempted at a past time when the present
situation and the prospects for the future are not such as to warrant taking the control of
the property out of the hands of its owners.[64] The circumstances to justify the appointment
of a management committee/ receiver must be extraordinary and something more must be shown
than past misconduct and a mere apprehension based thereon of future wrongdoing. [65] To repeat,
in the absence of a strong showing of an imminent danger of dissipation, loss, wastage or
destruction of assets or other properties of a corporation and paralysis of its business operations,
the mere apprehension of future misconduct based upon prior mismanagement will not authorize
the appointment of a management committee/receiver.[66]
We also agree with the CA ruling that the RTC committed grave abuse of its discretion in excess of
its jurisdiction in appointing a comptroller and ordering her to immediately assume office before the
creation of a management committee. However, the CA ruled that the RTC committed a grave abuse
of its discretion amounting to excess of its jurisdiction, thus:
As defined in Blacks Law Dictionary, a comptroller is an officer of a business, charged with certain
duties in relation to the fiscal affairs of the same, principally to examine and audit the accounts, to
keep records, and report the financial situation from time to time. We have perused the Interim
Rules of Procedure for Intra-Corporate Controversies and nowhere in the said rules does it authorize
the designation of a comptroller. Rule 9, Section 2 of the Procedure, however, mandates that, in
the event the court finds the application for the creation of a management committee sufficient in
form and substance, the court shall issue an order appointing a receiver of known probity, integrity
and competence and without any conflict of interest as therein defined to immediately take over the
corporation, partnership or association,
specifying such powers as it may deem appropriate under the circumstances, including any of the
powers specified in Section 5 of said Rule. We see no need to discuss whether it would have been
appropriate for the court-a-quo to appoint a receiver in view of the finding of this Court that the
creation of a management committee was done in grave abuse of discretion. [67]
Indeed, the RTC committed grave abuse of its discretion in ordering the appointment of Wencita
Salvador as comptroller. We do not foreclose the power of a management committee to appoint a
comptroller under Section 5, Rule 9 of the Interim Rules. However, with the Courts ruling that the
creation of such committee and the appointment of a receiver is without factual basis, it follows that
the appointment of a comptroller is, likewise, unnecessary.
We agree with petitioners contention that the RTC acted in the exercise of its discretion in appointing
an independent auditor. Such appointment is appropriate and even necessary if only to limit the
issues for trial and thus abbreviate the proceedings. The ouster of petitioners as president and
treasurer of respondent and the takeover by third-party defendants and their children of the
management and control of the corporation is based on the claim of Juanita Tan Sy that petitioner
Felicidad Chan Sy had a shortage of P67,117,230.30 for 2001 and 2002 per the report of the
auditing firm, Banaria Banaria & Company. Petitioners, for their part, claim that such report is
inconsistent with that of respondents external auditor Anita Uy from 1994 to 2002 which were
submitted to the Bureau of Internal Revenue and the SEC showing that no amount was due to
stockholders.In the report of the Banaria Banaria & Company, the corporation had retained earnings
of P56,170,114.89 for the period ending December 31, 2001, whereas per report of Uy, respondent
had net earnings of only P16,252,114.89, hence, the need for an independent auditor. Moreover,
such audit would forestall any misappropriation of corporate funds and assets of respondent
corporation in the interim.
We note that petitioners prayed for the appointment of an independent auditor, and that respondent
did not even object to the motion. Consequently, the RTC appointed the Punongbayan & Araullo
firm to conduct the audit. However, respondent made a volte face and filed its Manifestation and
Motion dated November 26, 2003 and posited that an independent auditor was not necessary since
in its complaint, it merely prayed for an accounting of the funds which were missing based on the
report of the Banaria Banaria & Company auditing firm.
We hold that an independent audit is imperative in this case so that, based on such report, the RTC
would be able to determine the veracity not only of respondents claim that petitioners
misappropriated corporate funds and assets, but also that of petitioners who claim otherwise.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The Decision of the
Court of Appeals is AFFIRMED WITH THE MODIFICATIONthat the Orders of the Regional Trial
Court dated August 8, 2003, October 15, 2003 and January 27, 2004, relative to the appointment
of R.S. Bernabe and Associates as independent auditor, are AFFIRMED.
No costs.
SO ORDERED.
ROMEO J. CALLEJO, SR.
Associate Justice
G.R. No. 166197 February 27, 2007
METROPOLITAN BANK & TRUST COMPANY, Petitioner
vs.
ASB HOLDINGS, INC., ASB REALTY CORPORATION, ASB DEVELOPMENT
CORPORATION, ASB LAND, INC., ASB FINANCE, INC., MAKATI HOPE
CHRISTIAN SCHOOL, INC., BEL-AIR HOLDINGS CORPORATION, WINCHESTER
TRADING, INC., VYL DEVELOPMENT CORPORATION, GERICK HOLDINGS
CORPORATION, NEIGHBORHOOD HOLDINGS, INC., and ROSARIO S.
BERNALDO, Respondents. CAMERON GRANVILLE 3 ASSET MANAGEMENT,
INC., Intervenor.
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari1 assailing the Decision
dated August 16, 20042 of the Court of Appeals in CA-G.R. SP No. 77260 and its
Resolution dated December 1, 2004.
The facts borne by the records are:
The Metropolitan Bank and Trust Company, petitioner, is a creditor bank of respondent
corporations, collectively known as the ASB Group of Companies, owner and developer
of condominium and real estate projects. Specifically, the loans extended by petitioner
bank to respondents ASB Realty Corporation and ASB Development Corporation
amounted to 523.5 million and 1.073 billion, respectively. These loans were secured
by real estate mortgages.
On May 2, 2000, the ASB Group of Companies filed with the Securities and Exchange
Commission (SEC) a Petition For Rehabilitation With Prayer For Suspension Of Actions
And Proceedings Against Petitioners,3 pursuant to Presidential Decree (P.D.) No. 902-
A, as amended, docketed as SEC Case No. 05-00-6609. The pertinent portions of the
petition allege:
6. The total assets of petitioner ASB Group of Companies, together with
petitioner ASB Allied Companies, amount to Nineteen Billion Four Hundred Ten
Million Pesos (19,410,000,000.00).
7. The Projects were financed with loans or borrowings from bank and
individual creditors which resulted in petitioner Group of Companies having a
total liability in the amount of Twelve Billion Seven Hundred Million Pesos
(12,700,000,000.00).
8. On account of the sudden non-renewal and/or the massive withdrawal by
creditors of their loans to petitioner ASB Holdings, Inc., coupled with the recent
developments in the country, like, among others, (i) the glut in the real estate
market; (ii) the severe drop in the sale of real properties; (iii) the depreciation
of the peso vis-a-vis the dollar; and (iv) the decreased investor confidence in
the economy, petitioner Group of Companies was unable to complete and sell
some of its projects on schedule and, hence, was unable to service its
obligations as they fell due.
9. Petitioner Group of Companies possesses sufficient property to cover its
obligations. However, petitioner Group of Companies foresees its inability to
pay its obligations within a period of one (1) year.
10. Because of the inability of the Group of Companies to pay its obligations
as they respectively fall due, its secured and non-secured creditors pressed
for payments of due and maturing obligations and threatened to initiate
separate actions against it, which will adversely affect its operations and
shatter its hope in rehabilitating itself for the benefit of its investors and
creditors and the general public.
11. There is a clear, present and imminent danger that the creditors of
petitioner Group of Companies will institute extrajudicial and judicial
foreclosure proceedings and file court actions unless restrained by this
Honorable Commission.
12. The institution of extrajudicial and judicial foreclosure proceedings and the
filing of court actions against petitioner Group of Companies will necessarily
result in the paralization of its business operation and its assets being lost,
dissipated or wasted.
13. There is, therefore, a need for the suspension of payment of all claims
against petitioner Group of Companies, in the separate and combined
capacities of its member companies, while it is working for its rehabilitation.
14. Petitioner Group of Companies has at least seven hundred twelve (712)
creditors, three hundred seventeen (317) contractors/suppliers and four
hundred ninety-two (492) condominium unit buyers, who will certainly be
prejudiced by the disruption of the operations of petitioner ASB Group of
Companies which seeks to protect the interest of the parties from any
precipitate action of any person who may only have his individual interest in
mind.
15. The business of petitioner ASB Group of Companies is feasible and
profitable. Petitioner Group of Companies will eventually be able to pay all its
obligations given some changes in its management, organization, policies,
strategies, operations, or finances.
16. With the support of this Honorable Commission, petitioner Group of
Companies is confident that it will be able to embark on a sound and viable
rehabilitation plan, with a built-in debt repayment schedule through the
optimal use of their present facilities, assets and resources. Although a
proposed rehabilitation plan is attached to this petition, a detailed and
comprehensive rehabilitation proposal will be presented for the approval of
this Honorable Commission, with the foregoing salient features:
a. Servicing and eventual full repayment of all debts and liabilities,
focusing on debt restructure and possible liquidation through dacion
en pago, transfer and assignment, or outright sale of assets, in order
to lighten the debt burden of petitioner Group of Companies;
b. Forming of strategic alliances with third party investors, including
joint ventures and similar arrangements;
 c. Contributing specified properties from petitioner ASB Allied
Companies;
d. Streamlining the operations of petitioner ASB Group of Companies,
and the effective management of its revenues and funds towards the
strengthening of its financial and business positions; and
e. Stabilizing the operations of petitioner Group of Companies, and
preparing it to take advantage of future opportunities for growth and
development.
On May 4, 2000, the Hearing Panel of the SEC Securities Investigation and Clearing
Department, finding the petition for rehabilitation sufficient in form and substance,
issued a sixty-day Suspension Order (a) suspending all actions for claims against the
ASB Group of Companies pending or still to be filed with any court, office, board, body,
or tribunal; (b) enjoining the ASB Group of Companies from disposing of their properties
in any manner, except in the ordinary course of business, and from paying their
liabilities outstanding as of the date of the filing of the petition; and (c) appointing Atty.
Monico V. Jacob as interim receiver of the ASB Group of Companies.
On May 22, 2000, the SEC Hearing Panel issued an Order appointing Mr. Fortunato Cruz
as interim receiver of the ASB Group of Companies, replacing Atty. Monico Jacob.
On August 18, 2000, the ASB Group of Companies submitted to the SEC for its approval
a Rehabilitation Plan,4thus:
Metropolitan Bank and Trust Co.
Principal Amount Principal (amount) plus any interest due and unpaid as of April 30,
2000, less any prepaid interest, without any penalties and charges.
Form of Agreement Dacion en Pago Agreement
Purpose To retire existing loans.
Tenor Immediate Dacion en Pago of related properties, subject to the approval of the
Securities and Exchange Commission (SEC).
Effective Date September 1, 2000, subject to the approval of the SEC.
Dacion En Pago
Arrangement ASB will dacion the banks equity in St. Francis Square and apply the
excess dacion value on its BSA Twin Tower loan. Further, Makati Hope, Buendia cor.
Malugay, 21 Annapolis (which is expected to be released by PNB) and # 28 & 23
Eisenhower St., will be dacioned to Metrobank, the excess of which will also be applied
to Metrobanks exposure on BSA Twin Towers. In return, State Condominium will be
freed up and placed in the ASB creditors asset pool. Further, Metrobank shall also
undertake the completion of BSA Twin Towers.
Outstanding Loan Balance
After Dacion En Pago None51awphi1.net
Petitioner bank, in its Comment/Opposition to the Rehabilitation Plan,6 objected to the
above Plan, specifically the arrangement concerning the mode of payment by
respondents ASB Realty Corporation and ASB Development Corporation of their loan
obligations.
Petitioner bank claimed that the above arrangement "is not acceptable" because: (1) it
does not agree with the valuation of the properties offered for dacion; (2) the waiver
of interests, penalties and charges after April 30, 2000 is not feasible considering that
the bank continues to incur costs on the funds owed by ASB Realty Corporation and
ASB Development Corporation; and (3) since the proposed dacion is not acceptable to
the bank, there is no basis to release the properties which serve as collateral for the
loans. Petitioner thus prayed that the Rehabilitation Plan be disapproved.
On April 26, 2001, the SEC Hearing Panel, finding petitioner banks objections
unreasonable, issued an Order7approving the Rehabilitation Plan and appointing Mr.
Fortunato Cruz as rehabilitation receiver, thus:
PREMISES CONSIDERED, the objections to the rehabilitation plan raised by the
creditors are hereby considered unreasonable.
Accordingly, the Rehabilitation Plan submitted by petitioners is hereby APPROVED,
except those pertaining to Mr. Roxas advances, and the ASB-Malayan Towers. Finally,
Interim Receiver Mr. Fortunato Cruz is appointed as Rehabilitation Receiver.
SO ORDERED.
On July 10, 2001, petitioner bank filed with the SEC En Banc a Petition for
Certiorari,8 docketed as EB-725, alleging that the SEC Hearing Panel, in approving the
Rehabilitation Plan, committed grave abuse of discretion amounting to lack or excess
of jurisdiction; and praying for the issuance of a temporary restraining order and/or a
writ of preliminary injunction to enjoin its implementation. Subsequently, the ASB
Group of Companies filed their Opposition9 to the petition, to which petitioner bank filed
its Reply.10
In a Resolution11 dated April 15, 2003, the SEC En Banc denied petitioner banks
Petition for Certiorari and affirmed the SEC Hearing Panels Order of April 26, 2001.
Petitioner bank then filed with the Court of Appeals a Petition for Review.12 On August
16, 2004, the appellate court rendered its Decision13 denying due course to the petition,
thus:
WHEREFORE, finding the instant petition not impressed with merit, the same is DENIED
DUE COURSE. No pronouncement as to costs.
SO ORDERED.
Petitioner banks Motion for Reconsideration was likewise denied in a Resolution dated
December 1, 2004.14
Hence, this petition for review on certiorari.
In the meantime, or on June 1, 2006, Cameron Granville 3 Asset Management, Inc.
(Cameron Granville) filed a Motion For Intervention15 alleging that in September of
2003, petitioner bank assigned the loans and mortgages of ASB Realty Corporation and
ASB Development Corporation to Asset Recovery Corporation (ARC). However,
pursuant to its Service Agreement with ARC, petitioner continued to pursue its action
before the Court of Appeals in CA-G.R. SP No. 77260 and before this Court in the instant
case. On March 31, 2006, ARC in turn assigned the loans and mortgages of the said
two respondent corporations to herein intervenor, Cameron Granville. In a Resolution
dated June 5, 2006,16 the Court granted the motion for intervention. Accordingly, on
August 28, 2006, the intervenor filed its Petition For Intervention17 and manifested
therein that it adopts as its own petitioner banks petition and all its other pleadings.
Thereafter, respondent ASB Group of Companies filed their Comment.18
Now to the resolution of the instant petition.
Petitioner bank contends that the Court of Appeals erred:
1. In not nullifying the SEC Resolution dated April 15, 2003 approving the
Rehabilitation Plan. Such approval illegally compels petitioner bank to accept,
through a dacion en pago arrangement, the mortgaged properties based on
ASB Group of Companies transfer values and to release part of the collateral.
This forced transfer of properties and diminution of the banks right to enforce
its lien on the mortgaged properties violate its constitutional right against
impairment of contracts and right to due process.
2. In not finding that the Rehabilitation Plan compels petitioner bank to waive
the interests, penalties and other charges that accrued after the SEC issued
its Stay Order. Again, this is in violation of the constitutional mandate on non-
impairment of contracts and due process.
3. In not finding that only respondent ASB Holdings, Inc. suffered financial
distress as stated in the Rehabilitation Plan and, as such, the coercive reach
of the SECs Stay Order under P.D. 902-A can extend only to the enforcement
of claims against this distressed corporation. It cannot suspend the claims and
actions against its affiliate corporations.
In their Comment, respondent corporations comprising the ASB Group of Companies
prayed for the dismissal of the instant petition for being unmeritorious.
The first two (2) assigned errors lack merit. We shall discuss them jointly as they are
closely interrelated.
We are not convinced that the approval of the Rehabilitation Plan impairs petitioner
banks lien over the mortgaged properties. Section 6 [c] of P.D. No. 902-A provides
that "upon appointment of a management committee, rehabilitation receiver, board or
body, pursuant to this Decree, all actions for claims against corporations, partnerships
or associations under management or receivership pending before any court, tribunal,
board or body shall be suspended."
By that statutory provision, it is clear that the approval of the Rehabilitation Plan and
the appointment of a rehabilitation receiver merely suspend the actions for claims
against respondent corporations. Petitioner banks preferred status over the unsecured
creditors relative to the mortgage liens is retained, but the enforcement of such
preference is suspended. The loan agreements between the parties have not been set
aside and petitioner bank may still enforce its preference when the assets of ASB Group
of Companies will be liquidated. Considering that the provisions of the loan agreements
are merely suspended, there is no impairment of contracts, specifically its lien in the
mortgaged properties.
As we stressed in Rizal Commercial Banking Corporation v. Intermediate Appellate
Court,19 such suspension "shall not prejudice or render ineffective the status of a
secured creditor as compared to a totally unsecured creditor," for what P.D. No. 902-A
merely provides is that all actions for claims against the distressed corporation,
partnership or association shall be suspended. This arrangement provided by law is
intended to give the receiver a chance to rehabilitate the corporation if there should
still be a possibility for doing so, without being unnecessarily disturbed by the creditors
actions against the distressed corporation. However, in the event that rehabilitation is
no longer feasible and the claims against the distressed corporation would eventually
have to be settled, the secured creditors, like petitioner bank, shall enjoy preference
over the unsecured creditors.
Likewise, there is no compulsion on the part of petitioner bank to accept a dacion en
pago arrangement of the mortgaged properties based on ASB Group of Companies
transfer values and to condone interests and penalties. The Rehabilitation Plan itself,
under item IV-A, explains the dacion en pago proposal, thus:
IV. THE REVISED REHABILITATION PLAN
A. The Total Approach
It is apparent that ASBs corporate indebtedness needs to be reduced as quickly as
possible in order to prevent rapid deterioration in equity. x x x. In order to reduce debt
quickly, we must do the following:
1. Complete or sell on-going projects;
2. Invite secured creditors to complete dacion en pago transactions, waiving
all penalties; and
3. Invite unsecured creditors to purchase real estate parcels and other assets
and set-off the amount of their outstanding claim against the purchase price.
The assets included in the above program include all real estate assets.
In order to determine the feasibility of the above, representatives of our financial
advisors met with or had discussions with most of the secured creditors. Preliminary
discussions indicate support from the secured creditors towards the concepts of the
program associated with them. The majority of these secured creditors appear to want
to complete dacion en pago transactions based on MUTUALLY AGREED UPON TERMS. x
x x. We continue to pursue discussions with secured creditors. Based on the program,
secured creditors claims amounting to PhP5.192 billion will be paid in full including
interest up to April 30, 2000. Secured creditors have been asked to waive all penalties
and other charges. This dacion en pago program is essential to eventually pay all
creditors and rehabilitate the ASB Group of Companies. If the dacion en pago herein
contemplated does not materialize for failure of the secured creditors to agree thereto,
this rehabilitation plan contemplates to settle the obligations (without interest,
penalties, and other related charges accruing after the date of the initial suspension
order) to secured creditors with mortgaged properties at ASB selling prices for the
general interest on the employees, creditors, unit buyers, government, general public
and the economy.
x x x.20 (Underscoring supplied)
Indeed, based on the above explanation in the Rehabilitation Plan, the dacion en pago
program and the intent of respondent ASB Group of Companies to ask creditors to
waive the interests, penalties and related charges are not compulsory in nature. They
are merely proposals for the creditors to accept. In fact, as explained, there was already
an initial discussion on these proposals and the majority of the secured creditors
showed their desire to complete dacion en pago transactions, but they must be "based
on MUTUALLY AGREED UPON TERMS." The SEC En Banc in its Resolution dated April
15, 2003, affirming the SEC Hearing Panels Order of April 26, 2001 approving the
Rehabilitation Plan, aptly declared:
Petitioner bank also argues that "ASB Group of Companies" is merely a generic name
used to describe collectively various companies and as such, it is not a legal entity with
juridical personality and cannot be a party to a suit. True, "ASB Group of Companies"
is merely used in this case as a generic name, for brevity, to collectively describe the
various companies/corporations that filed a Petition For Rehabilitation with the SEC.
However, in their petition, all the respondent corporations are individually named as
petitioners, not "ASB Group of Companies."
One last word. The purpose of rehabilitation proceedings is to enable the company to
gain new lease on life and thereby allows creditors to be paid their claims from its
earnings.25 Rehabilitation contemplates a continuance of corporate life and activities in
an effort to restore and reinstate the financially distressed corporation to its former
position of successful operation and solvency.26 This is in consonance with the States
objective to promote a wider and more meaningful equitable distribution of wealth to
protect investments and the public.27 The approval of the Rehabilitation Plan by the SEC
Hearing Panel, affirmed by both the SEC En Banc and the Court of Appeals, is precisely
in furtherance of the rationale behind P.D. No. 902-A, as amended, which is "to effect
a feasible and viable rehabilitation"28 of ailing corporations which affect the public
welfare.
WHEREFORE, we DENY the instant petition for review on certiorari. The assailed
Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 77260 are AFFIRMED.
Costs against intervenor Cameron Granville.

x x x, petitioner asserts that the Rehabilitation Plan is not legally feasible because
SO ORDERED.
respondents cannot dictate the terms of dacion.

ANGELINA SANDOVAL-GUTIERREZ
We do not agree. A cursory reading of the Rehabilitation Plan debunks this assertion.
Associate Justice
The Plan provides that dacion en pago transaction will be effected only if the secured
creditors, like petitioner, agree thereto and under terms and conditions mutually
agreeable to private respondents and the secured creditor concerned. The dacion en
pago program is essential to eventually pay all creditors and rehabilitate private
respondents. If the dacion en pago does not materialize in case secured creditors refuse
to agree thereto, the Rehabilitation Plan contemplates to settle the obligations to
secured creditors with mortgaged properties at selling prices. This is for the general
interest of the employees, creditors, unit buyers, government, general public, and the
economy.21 (Underscoring supplied)

With respect to the third assigned error, we note that the same was not raised by
petitioner bank in its Comment/Opposition to the Rehabilitation Plan filed with the SEC
Hearing Panel. Such belated issue cannot be considered, especially because it involves
a question of fact, the resolution of which is normally beyond the authority of this Court
as it is not a trier of facts.22

At any rate, the SEC En Banc found that the SEC Hearing Panel "acted within its legal
authority in resolving this case. Neither it overstepped its lawful authority nor acted
whimsically in approving the Rehabilitation Plan. Hence, it cannot be faulted of grave
abuse of discretion."23 We find no reason to disturb such finding, it being a fundamental
rule that factual findings of quasi-judicial agencies, like the SEC, which have acquired
expertise as their jurisdiction is confined to special matters such as the subject of this
case, are generally accorded great respect and even finality, absent any showing that
they arbitrarily disregarded evidence or misapprehended evidence to such an extent as
to compel a contrary conclusion if such evidence had been properly appreciated.24
G.R. No. 175844 July 29, 2013
BANK OF THE PHILIPPINE ISLANDS, Petitioner,
vs.
SARABIA MANOR HOTEL CORPORATION, Respondent.
DECISION
PERLAS-BERNABE, J.:
Before the Court is a petition for review on certiorari1 assailing the Decision2 dated April 24,
2006 and Resolution3dated December 6, 2006 of the Court of Appeals, Cebu City (CA) in CA-
G.R. CV. No. 81596 which affirmed with modification the rehabilitation plan of respondent
Sarabia Manor Hotel Corporation (Sarabia) as approved by the Regional Trial Court of Iloilo
City, Branch 39 (RTC) through its Order4 dated August 7, 2003.
The Facts
Sarabia is a corporation duly organized and existing under Philippine laws, with principal place
of business at 101 General Luna Street, Iloilo City.5 It was incorporated on February 22,
1982, with an authorized capital stock of 10,000,000.00, fully subscribed and paid-up, for
the primary purpose of owning, leasing, managing and/or operating hotels, restaurants,
barber shops, beauty parlors, sauna and steam baths, massage parlors and such other
businesses incident to or necessary in the management or operation of hotels.6
In 1997, Sarabia obtained a 150,000,000.00 special loan package from Far East Bank and
Trust Company (FEBTC) in order to finance the construction of a five-storey hotel building
(New Building) for the purpose of expanding its hotel business. An additional 20,000,000.00
stand-by credit line was approved by FEBTC in the same year.7
The foregoing debts were secured by real estate mortgages over several parcels of
land8 owned by Sarabia and a comprehensive surety agreement dated September 1, 1997
signed by its stockholders.9 By virtue of a merger, Bank of the Philippine Islands (BPI)
assumed all of FEBTCs rights against Sarabia.10
Sarabia started to pay interests on its loans as soon as the funds were released in October
1997. However, largely because of the delayed completion of the New Building, Sarabia
incurred various cash flow problems. Thus, despite the fact that it had more assets than
liabilities at that time,11 it, nevertheless, filed, on July 26, 2002, a Petition12 for corporate
rehabilitation (rehabilitation petition) with prayer for the issuance of a stay order before the
RTC as it foresaw the impossibility to meet its maturing obligations to its creditors when they
fall due.
In the said petition, Sarabia claimed that its cash position suffered when it was forced to
take-over the construction of the New Building due to the recurring default of its contractor,
Santa Ana AJ Construction Corporation (contractor),13 and its subsequent abandonment of
the said project.14 Accordingly, the New Building was completed only in the latter part of
2000, or two years past the original target date of August 1998, thereby skewing Sarabias
projected revenues. In addition, it was compelled to divert some of its funds in order to cover
cost overruns. The situation became even more difficult when the grace period for the
payment of the principal loan amounts ended in 2000 which resulted in higher amortizations.
Moreover, external events adversely affecting the hotel industry, i.e., the September 11,
2001 terrorist attacks and the Abu Sayyaf issue, also contributed to Sarabias financial
difficulties.15 Owing to these circumstances, Sarabia failed to generate enough cash flow to
service its maturing obligations to its creditors, namely: (a) BPI (in the amount of
191,476,421.42); (b) Rural Bank of Pavia (in the amount of 2,500,000.00); (c) Vic Imperial
Appliance Corp. (Imperial Appliance) (in the amount of 5,000,000.00); (d) its various
suppliers (in the amount of 7,690,668.04); (e) the government (for minimum corporate
income tax in the amount of 547,161.18); and (f) its stockholders (in the amount of
18,748,306.35).16
In its proposed rehabilitation plan,17 Sarabia sought for the restructuring of all its outstanding
loans, submitting that the interest payments on the same be pegged at a uniform escalating
rate of: (a) 7% per annum (p.a.) for the years 2002 to 2005; (b) 8% p.a. for the years 2006
to 2010; (c) 10% p.a. for the years 2011 to 2013; (d) 12% p.a. for the years 2014 to 2015;
and (e) 14% p.a. for the year 2018. Likewise, Sarabia sought to make annual payments on
the principal loans starting in 2004, also in escalating amounts depending on cash flow.
Further, it proposed that it should pay off its outstanding obligations to the government and
its suppliers on their respective due dates, for the sake of its day to day operations.
Finding Sarabias rehabilitation petition sufficient in form and substance, the RTC issued a
Stay Order18 on August 2, 2002. It also appointed Liberty B. Valderrama as Sarabias
rehabilitation receiver (Receiver). Thereafter, BPI filed its Opposition.19
After several hearings, the RTC gave due course to the rehabilitation petition and referred
Sarabias proposed rehabilitation plan to the Receiver for evaluation.20
In a Recommendation21 dated July 10, 2003 (Receivers Report), the Receiver found that
Sarabia may be rehabilitated and thus, made the following recommendations:
(1) Restructure the loans with Sarabias creditors, namely, BPI, Imperial Appliance,
Rural Bank of Pavia, and Barcelo Gestion Hotelera, S.L. (Barcelo), under the
following terms and conditions: (a) the total outstanding balance as of December
31, 2002 shall be recomputed, with the interest for the years 2001 and 2002
capitalized and treated as part of the principal; (b) waive all penalties; (c) extend
the payment period to seventeen (17) years, i.e., from 2003 to 2019, with a two-
year grace period in principal payment; (d) fix the interest rate at 6.75% p.a. plus
10% value added tax on interest for the entire term of the restructured loans;22 (e)
the interest and principal based on the amortization schedule shall be payable
annually at the last banking day of each year; and (f) any deficiency shall be paid
personally by Sarabias stockholders in the event it fails to generate enough cash
flow; on the other hand, any excess funds generated at the end of the year shall
be paid to the creditors to accelerate the debt servicing;23
(2) Pay Sarabias outstanding payables with its suppliers and the government so as
not to disrupt hotel operations;24
(3) Convert the Advances from stockholders amounting to 18,748,306.00 to
stockholders equity and other advances amounting to 42,688,734.00 as of the
December 31, 2002 tentative financial statements to Deferred Credits; the said
conversion should increase stockholders equity to 268,545,731.00 and bring the
debt to equity ratio to 0.85:1;25
(4) Require Sarabias stockholders to pay its payables to the hotel recorded as
Accounts Receivable Trade, amounting to 285,612.17 as of December 31, 2001,
and its remaining receivables after such date;26
(5) No compensation or cash dividends shall be paid to the stockholders during the
rehabilitation period, except those who are directly employed by the hotel as a full
 time officer, employee or consultant covered by a valid contract and for a
reasonable fee;27
(6) All capital expenditures which are over and above what is provided in the case
flow of the rehabilitation plan which will materially affect Sarabias cash position but
which are deemed necessary in order to maintain the hotels competitiveness in the
industry shall be subject to the RTCs approval prior to its implementation; 28
(7) Terminate the management contract with Barcelo, thereby saving an estimated
25,830,997.00 in management fees, over and above the salaries and benefits of
certain managerial employees;29
(8) Appoint a new management team which would be required to submit a
comprehensive business plan to support the generation of the target revenue as
reported in the rehabilitation plan;30
(9) Open a debt servicing account and transfer all excess funds thereto, which in
no case should be less than 500,000.00 at the end of the month; the funds will be
drawn payable to the creditors only based on the amortization schedule;31 and
(10) Release the surety obligations of Sarabias stockholders, considering the
adequate collaterals and securities covered by the rehabilitation plan and the
continuing mortgages over Sarabias properties.32
The RTC Ruling
In an Order33 dated August 7, 2003, the RTC approved Sarabias rehabilitation plan as
recommended by the Receiver, finding the same to be feasible. In this accord, it observed
that the rehabilitation plan was realistic since, based on Sarabias financial history, it was
shown that it has the inherent capacity to generate funds to pay its loan obligations given
the proper perspective.34 The recommended rehabilitation plan was also practical in terms of
the interest rate pegged at 6.75% p.a. since it is based on Sarabias ability to pay and the
creditors perceived cost of money.35 It was likewise found to be viable since, based on the
extrapolations made by the Receiver, Sarabias revenue projections, albeit projected to slow
down, remained to have a positive business/profit outlook altogether.36
The RTC further noted that while it may be true that Sarabia has been unable to comply with
its existing terms with BPI, it has nonetheless complied with its obligations to its employees
and suppliers and pay its taxes to both local and national government without disrupting the
day-to-day operations of its business as an on-going concern.37
More significantly, the RTC did not give credence to BPIs opposition to the Receivers
recommended rehabilitation plan as neither BPI nor the Receiver was able to substantiate
the claim that BPIs cost of funds was at the 10% p.a. threshold. In this regard, the RTC gave
more credence to the Receivers determination of fixing the interest rate at 6.75% p.a., taking
into consideration not only Sarabias ability to pay based on its proposed interest rates, i.e.,
7% to 14% p.a., but also BPIs perceived cost of money based on its own published interest
rates for deposits, i.e., 1% to 4.75% p.a., as well as the rates for treasury bills, i.e., 5.498%
p.a. and CB overnight borrowings, i.e., 7.094%. p.a.38
The CA Ruling
In a Decision39 dated April 24, 2006, the CA affirmed the RTCs ruling with the modification
of reinstating the surety obligations of Sarabias stockholders to BPI as an additional
safeguard for the effective implementation of the approved rehabilitation plan.40 It held that
the RTCs conclusions as to the feasibility of Sarabias rehabilitation was well-supported by
the companys financial statements, both internal and independent, which were properly
analyzed and examined by the Receiver.41 It also upheld the 6.75%. p.a. interest rate on
Sarabias loans, finding the said rate to be reasonable given that BPIs interests as a creditor
were properly accounted for. As published, BPIs time deposit rate for an amount of
5,000,000.00 (with a term of 360-364 days) is at 5.5% p.a.; while the benchmark ninety
one-day commercial paper, which banks used to price their loan averages to 6.4% p.a. in
2005, has a three-year average rate of 6.57% p.a.42 As such, the 6.75% p.a. interest rate
would be higher than the current market interest rates for time deposits and benchmark
commercial papers. Moreover, the CA pointed out that should the prevailing market interest
rates change as feared by BPI, the latter may still move for the modification of the approved
rehabilitation plan.43
Aggrieved, BPI moved for reconsideration which was, however, denied in a Resolution44 dated
December 6, 2006.
Hence, this petition.
The Issue Before the Court
The primordial issue raised for the Courts resolution is whether or not the CA correctly
affirmed Sarabias rehabilitation plan as approved by the RTC, with the modification on the
reinstatement of the surety obligations of Sarabias stockholders.
BPI mainly argues that the approved rehabilitation plan did not give due regard to its interests
as a secured creditor in view of the imposition of a fixed interest rate of 6.75% p.a. and the
extended loan repayment period.45 It likewise avers that Sarabias misrepresentations in its
rehabilitation petition remain unresolved.46
On the contrary, Sarabia essentially maintains that: (a) the present petition improperly raises
questions of fact;47 (b) the approved rehabilitation plan takes into consideration all the
interests of the parties and the terms and conditions stated therein are more reasonable than
what BPI proposes;48 and (c) BPIs allegations of misrepresentation are mere desperation
moves to convince the Court to overturn the rulings of the courts a quo.49
The Courts Ruling
The petition has no merit.
A. Propriety of BPIs petition;
procedural considerations.
It is fundamental that a petition for review on certiorari filed under Rule 45 of the Rules of
Court covers only questions of law. In this relation, questions of fact are not reviewable and
cannot be passed upon by the Court unless, the following exceptions are found to exist: (a)
when the findings are grounded entirely on speculations, surmises, or conjectures; (b) when
the inference made is manifestly mistaken, absurd, or impossible; (c) when there is a grave
abuse of discretion; (d) when the judgment is based on misappreciation of facts; (e) when
the findings of fact are conflicting; (f) when in making its findings, the same are contrary to
the admissions of both parties; (g) when the findings are contrary to those of the trial court;
(h) when the findings are conclusions without citation of specific evidence on which they are
based; (i) when the facts set forth in the petition as well as in the petitioners main and reply
briefs are not disputed by the respondent; and (j) when the findings of fact are premised on
the supposed absence of evidence and contradicted by the evidence on record.50
The distinction between questions of law and questions of fact is well-defined. A question of
law exists when the doubt or difference centers on what the law is on a certain state of facts.
A question of fact, on the other hand, exists if the doubt centers on the truth or falsity of the
alleged facts. This being so, the findings of fact of the CA are final and conclusive and the
Court will not review them on appeal.51
In view of the foregoing, the Court finds BPIs petition to be improper and hence,
dismissible52 as the issues raised therein involve questions of fact which are beyond the
ambit of a Rule 45 petition for review.
To elucidate, the determination of whether or not due regard was given to the interests of
BPI as a secured creditor in the approved rehabilitation plan partakes of a question of fact
since it will require a review of the sufficiency and weight of evidence presented by the parties
among others, the various financial documents and data showing Sarabias capacity to pay
and BPIs perceived cost of money and not merely an application of law. Therefore, given
the complexion of the issues which BPI presents, and finding none of the above-mentioned
exceptions to exist, the Court is constrained to dismiss its petition, and prudently uphold the
factual findings of the courts a quo which are entitled to great weight and respect, and even
accorded with finality. This especially obtains in corporate rehabilitation proceedings wherein
certain commercial courts have been designated on account of their expertise and specialized
knowledge on the subject matter, as in this case.
In any event, even discounting the above-discussed procedural considerations, the Courts
still finds BPIs petition lacking in merit.
B. Approval of Sarabias
rehabilitation plan; substantive
considerations.
Records show that Sarabia has been in the hotel business for over thirty years, tracing its
operations back to 1972. Its hotel building has been even considered a landmark in Iloilo,
being one of its kind in the province and having helped bring progress to the
community.23 Since then, its expansion was continuous which led to its decision to commence
with the construction of a new hotel building. Unfortunately, its contractor defaulted which
impelled Sarabia to take-over the same. This significantly skewed its projected revenues and
led to various cash flow difficulties, resulting in its incapacity to meet its maturing obligations.
Recognizing the volatile nature of every business, the rules on corporate rehabilitation have
been crafted in order to give companies sufficient leeway to deal with debilitating financial
predicaments in the hope of restoring or reaching a sustainable operating form if only to best
accommodate the various interests of all its stakeholders, may it be the corporations
stockholders, its creditors and even the general public. In this light, case law has defined
corporate rehabilitation as an attempt to conserve and administer the assets of an insolvent
corporation in the hope of its eventual return from financial stress to solvency. It
contemplates the continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and liquidity. Verily,
the purpose of rehabilitation proceedings is to enable the company to gain a new lease on
life and thereby allow creditors to be paid their claims from its earnings.54Thus, rehabilitation
shall be undertaken when it is shown that the continued operation of the corporation is
economically more feasible and its creditors can recover, by way of the present value of
payments projected in the plan, more, if the corporation continues as a going concern than
if it is immediately liquidated.55
Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim Rules
of Procedure on Corporate Rehabilitation56 (Interim Rules) states that a rehabilitation plan
may be approved even over the opposition of the creditors holding a majority of the
corporations total liabilities if there is a showing that rehabilitation is feasible and the
opposition of the creditors is manifestly unreasonable. Also known as the "cram-down"
clause, this provision, which is currently incorporated in the FRIA,57 is necessary to curb the
majority creditors natural tendency to dictate their own terms and conditions to the
rehabilitation, absent due regard to the greater long-term benefit of all stakeholders.
Otherwise stated, it forces the creditors to accept the terms and conditions of the
rehabilitation plan, preferring long-term viability over immediate but incomplete recovery.
It is within the parameters of the aforesaid provision that the Court examines the approval
of Sarabias rehabilitation.
i. Feasibility of Sarabias rehabilitation.
In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that a
thorough examination and analysis of the distressed corporations financial data must be
conducted. If the results of such examination and analysis show that there is a real
opportunity to rehabilitate the corporation in view of the assumptions made and financial
goals stated in the proposed rehabilitation plan, then it may be said that a rehabilitation is
feasible. In this accord, the rehabilitation court should not hesitate to allow the corporation
to operate as an on-going concern, albeit under the terms and conditions stated in the
approved rehabilitation plan. On the other hand, if the results of the financial examination
and analysis clearly indicate that there lies no reasonable probability that the distressed
corporation could be revived and that liquidation would, in fact, better subserve the interests
of its stakeholders, then it may be said that a rehabilitation would not be feasible. In such
case, the rehabilitation court may convert the proceedings into one for liquidation.58 As
further guidance on the matter, the Courts pronouncement in Wonder Book Corporation v.
Philippine Bank of Communications59 proves instructive:
Rehabilitation is x x x available to a corporation [which], while illiquid, has assets that can
generate more cash if used in its daily operations than sold. Its liquidity issues can be
addressed by a practicable business plan that will generate enough cash to sustain daily
operations, has a definite source of financing for its proper and full implementation, and
anchored on realistic assumptions and goals. This remedy should be denied to corporations
whose insolvency appears to be irreversible and whose sole purpose is to delay the
enforcement of any of the rights of the creditors, which is rendered obvious by the following:
(a) the absence of a sound and workable business plan; (b) baseless and unexplained
assumptions, targets and goals; (c) speculative capital infusion or complete lack thereof for
the execution of the business plan; (d) cash flow cannot sustain daily operations; and (e)
negative net worth and the assets are near full depreciation or fully depreciated.60 (Emphasis
and underscoring supplied)
Keeping with these principles, the Court thus observes that:
First, Sarabia has the financial capability to undergo rehabilitation.
Based on the Receivers Report, Sarabias financial history shows that it has the inherent
capacity to generate funds to repay its loan obligations if applied through the proper financial
framework. The Receivers examination and analysis of Sarabias financial data reveals that
the latters business is not only an on-going but also a growing concern. Despite its financial
constraints, Sarabia likewise continues to be profitable with its hotelier business as its
operations have not been disrupted.61 Hence, given its current fiscal position, the prospect of
substantial and continuous revenue generation is a realistic goal.
Second, Sarabia has the ability to have sustainable profits over a long period of time.
As concluded by the Receiver, Sarabias projected revenues shall have a steady year-on-year
growth from the time that it applied for rehabilitation until the end of its rehabilitation plan
in 2018, albeit with decreasing growth rates (growth rate is at 26% in 2003, 5% in 2004-
2007, 3% in 2008-2018).62 Should such projections come through, Sarabia would have the
ability not just to pay off its existing debts but also to carry on with its intended expansion.
The projected sustainability of its business, as mapped out in the approved rehabilitation
plan, makes Sarabias rehabilitation a more viable option to satisfy the interests of its
stakeholders in the long run as compared to its immediate liquidation.
Third, the interests of Sarabias creditors are well-protected.
As correctly perceived by the CA, adequate safeguards are found under the approved
rehabilitation plan, namely: (a) any deficiency in the required minimum payments to creditors
based on the presented amortization schedule shall be paid personally by Sarabias
stockholders;
(b) the conversion of the advances from stockholders amounting to 18,748,306.00 and
deferred credits amounting to 42,688,734 as of the December 31, 2002 tentative audited
financial statements to stockholders equity was granted;64 (c) all capital expenditures which
are over and above what is provided in the cash flow of the approved rehabilitation plan
which will materially affect the cash position of the hotel but which are deemed necessary in
order to maintain the hotels competitiveness in the industry shall be subject to the approval
by the Court prior to implementation;65 (d) the formation of Sarabias new management team
and the requirement that the latter shall be required to submit a comprehensive business
plan to support the generation of revenues as reported in the Rehabilitation Plan, both short
term and long term;66 (e) the maintenance of all Sarabias existing real estate mortgages
over hotel properties as collaterals and securities in favor of BPI until the formers full and
final liquidation of its outstanding loan obligations with the latter;67 and (f) the reinstatement
of the comprehensive surety agreement of Sarabias stockholders regarding the formers debt
to BPI.68 With these terms and conditions69 in place, the subsisting obligations of Sarabia to
its creditors would, more likely than not, be satisfied.
Therefore, based on the above-stated reasons, the Court finds Sarabias rehabilitation to be
feasible.
ii. Manifest unreasonableness of BPIs opposition.
Although undefined in the Interim Rules, it may be said that the opposition of a distressed
corporations majority creditor is manifestly unreasonable if it counter-proposes unrealistic
payment terms and conditions which would, more likely than not, impede rather than aid its
rehabilitation. The unreasonableness becomes further manifest if the rehabilitation plan, in
fact, provides for adequate safeguards to fulfill the majority creditors claims, and yet the
latter persists on speculative or unfounded assumptions that his credit would remain
unfulfilled.
While Section 23, Rule 4 of the Interim Rules states that the rehabilitation court shall consider
certain incidents in determining whether the opposition is manifestly unreasonable,70 BPI
neither proposes Sarabias liquidation over its rehabilitation nor questions the controlling
interest of Sarabias shareholders or owners. It only takes exception to: (a) the imposition of
the fixed interest rate of 6.75% p.a. as recommended by the Receiver and as approved by
the courts a quo, proposing that the original escalating interest rates of 7%, 8%, 10%, 12%,
and 14%, over seventeen years be applied instead;71 and (b) the fact that Sarabias
misrepresentations in the rehabilitation petition, i.e., that it physically acquired additional
property whereas in fact the increase was mainly due to the recognition of Revaluation
Increment and because of capital expenditures, were not taken into consideration by the
courts a quo.72
Anent the first matter, it must be pointed out that oppositions which push for high interests
rates are generally frowned upon in rehabilitation proceedings given that the inherent
purpose of a rehabilitation is to find ways and means to minimize the expenses of the
distressed corporation during the rehabilitation period. It is the objective of a rehabilitation
proceeding to provide the best possible framework for the corporation to gradually regain or
achieve a sustainable operating form. Hence, if a creditor, whose interests remain well-
preserved under the existing rehabilitation plan, still declines to accept interests pegged at
reasonable rates during the period of rehabilitation, and, in turn, proposes rates which are
largely counter-productive to the rehabilitation, then it may be said that the creditors
opposition is manifestly unreasonable.
In this case, the Court finds BPIs opposition on the approved interest rate to be manifestly
unreasonable considering that: (a) the 6.75% p.a. interest rate already constitutes a
reasonable rate of interest which is concordant with Sarabias projected rehabilitation; and
(b) on the contrary, BPIs proposed escalating interest rates remain hinged on the theoretical
assumption of future fluctuations in the market, this notwithstanding the fact that its interests
as a secured creditor remain well-preserved.
The following observations impel the foregoing conclusion: first, the 6.75% p.a. interest rate
is actually higher than BPIs perceived cost of money as evidenced by its published time
deposit rate (for an amount of 5,000,000.00, with a term of 360-364 days) which is only
set at 5.5% p.a.; second, the 6.75% p.a. is also higher than the benchmark ninety one-day
commercial paper, which is used by banks to price their loan averages to 6.4% p.a. in 2005,
and has a three-year average rate of 6.57% p.a.; and third, BPIs interests as a secured
creditor are adequately protected by the maintenance of all Sarabias existing real estate
mortgages over its hotel properties as collateral as well as by the reinstatement of the
comprehensive surety agreement of Sarabias stockholders, among other terms in the
approved rehabilitation plan.
As to the matter of Sarabias alleged misrepresentations, records disclose that Sarabia
already clarified its initial statements in its rehabilitation petition by submitting, on its own
accord, a supplemental affidavit dated October 24, 200273 that explains that the increase in
its properties and assets was indeed by recognition of revaluation increment.74 Proceeding
from this fact, the CA observed that BPI actually failed to establish its claimed defects in light
of Sarabias assertive and forceful explanation that the alleged inaccuracies do not warrant
the dismissal of its petition.75 Thus, absent any compelling reason to disturb the CA's finding
on this score, the Court deems it proper to dismiss BPI's allegations of misrepresentation
against Sarabia.
As a final point, BPI claims that Sarabia's projections were "too optimistic," its management
was "extremely incompetent"76 and that it was even forced to pay a pre-termination penalty
due to its previous loan with the Landbank of the Philippines.77 Suffice it to state that bare
allegations of fact should not be entet1ained as they are bereft of any probative value.78 In
any event, even if it is assumed that the said allegations are substantiated by clear and
convincing evidence, the Court, absent any cogent basis to proceed otherwise, remains
steadfast in its preclusion to thresh out matters of fact on a Rule 45 petition, as in this case.
All told, Sarabia's rehabilitation plan, as approved and modified by the CA, is hereby
sustained. In view of the foregoing pronouncements, the Court finds it unnecessary to delve
on the other ancillary issues as herein raised.
WHEREFORE, the petition is DENIED. Accordingly, the Decision dated April 24, 2006 and
Resolution dated December 6, 2006 of the Court of Appeals, Cebu City in CA-G.R. CV. No.
81596 are hereby AFFIRMED. SO ORDERED.
ESTELA M. PERLAS-BERNABE
Associate Justice