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Philnico vs privatization

FACTS:

The Development Bank of the Philippines and the Philippine National Bank, by virtue
of foreclosure proceedings, became the holders of all the shares of stocks in PPC
(Philnico Processing Corp). The banks transferred their stocks to PMO (Privatization
and Management Office) in 1987. On May 1996, PMO, PIC, and PPC executed a
contract, denominated as the Amended and Restated Definitive Agreement (ARDA),
which laid down the terms and conditions of the purchases and acquisition by PIC from
PMO and wherein PIC agreed to pay PMO US $333,762,000.00 as purchase price,
payable in installments and in accordance with the schedule set.

In 1999, PMO, PIC, and PPC, executed an Amended Agreement which provided for
the restructuring of the payment terms of the entire obligation under the ARDA. Three
years later, in 2002, PMO notified PIC that they had defaulted in the payment of its
obligations and demand that they settle its unpaid amortizations within 90 days. PIC
replied in January 2003, requesting PMO to set aside its notice of default; to not rescind
the sale of PPC shares of stock; and to give PIC an opportunity to conclude its fund-
raising efforts for its business. PMO thereafter indicated in a letter their intention to
enforce the automatic reversion of the PPC shares of stock.

Before the deadline for payment set by PMO, PIC file before the RTC a Complaint for
Prohibition against Reversion of Shares with Prayer for Writ of Preliminary Injunction
and/or Temporary Restraining Order, Suspension of Payment and Fixing of Period of
Payment, against PMO, PPC, and PPC Corporate Secretary. After the summary hearing,
the RTC issued a TRO effective for 20 days, restraining PMO, PIC, and PIC Corp Sec
from effecting the reversion of the PPC shares of stock. PMO filed a Motion for
Reconsideration and a Motion to Dismiss which were both denied. When the parties
failed to arrive at an amicable settlement, the RTC issued its Pre-trial Order in which it
enumerated the respective issues for resolution submitted by the parties. The parties
filed their different Motions on the Issues for resolution and the RTC ruled in favor of
PIC. PMO assailed the RTC Order and filed a Petition for Certiorary before the Court
of Appeals. In its decision the CA disagrees with the RTC with the finding of a pactum
commissorium but affirmed the RTC denial. PIC and PMO both filed another set of
motions which were both denied.

ISSUE:

1. Whether or not the automatic reversion of the PPC shares of stock to PMO in case
of default by PIC constitutes pactum commissorium.
2. Whether or not there is no valid Pledge Agreement since PIC is not yet the
absolute owner of the said shares
HELD:

The court GRANTS the petition for review of PIC by declaring the automatic
reversion of the PPC shares of stock constitutes pactum commissorium. DENIES the
petition for review of PMO.

RULING:

1. Pactum commissorium is among the contractual stipulations that are deemed


contrary to law. It is defined as a stipulation empowering the creditor to appropriate
the thing given as guaranty for the fulfilment of the obligation in the event the
obligor fails to live up to his undertakings, without further formality, such as
foreclosure proceedings and a public sale. 2 Elements: (1) that there should be a
pledge or mortgage wherein a property is pledge or mortgage by way of security for
the payment of an obligation; and (2) that there should be stipulation for an
automatic appropriation by the creditor of the thing pledged or mortgage in the
event of nonpayment of the principal obligation within the stipulated period. Both
elements are present in the case (1) The Pledge Agreement and (2) there is
automatic appropriation in the event of default.
2. Among the requirements of a contract of pledge is that the pledgor is the absolute
owner of the thing pledge. PMO has transferred to PIC all the rights, title, and
interest in and to the PPC shares of stock, and delivered to PIC the certificates for
said shares for cancellation and replacement of new certificates already in the name
of PIC