G.R. No.

212690 (Formerly UDK-15080), February 20, 2017

SPOUSES ROMEO PAJARES AND IDA T. PAJARES, Petitioners, v. REMARKABLE

LAUNDRY AND DRY CLEANING, REPRESENTED BY ARCHEMEDES G.
SOLIS, Respondent.

DECISION

DEL CASTILLO, J.:

Breach of contract may give rise to an action for specific performance or rescission of
contract.1 It may also be the cause of action in a complaint for damages filed pursuant
to Art. 1170 of the Civil Code.2 In the specific performance and rescission of contract
cases, the subject matter is incapable of pecuniary estimation, hence jurisdiction
belongs to the Regional Trial Court (RTC). In the case for damages, however, the court
that has jurisdiction depends upon the total amount of the damages claimed.

Assailed in this Petition for Review on Certiorari3 is the December 11, 2013 Decision4 of
the Court of Appeals (CA) in CA-G.R. CEB SP No. 07711 that set aside the February 19,
2013 Order5 of the RTC, Branch 17, Cebu City dismissing Civil Case No. CEB-39025 for
lack of jurisdiction.

Factual Antecedents

On September 3, 2012, Remarkable Laundry and Dry Cleaning (respondent) filed a

Complaint denominated as "Breach of Contract and Damages"6 against spouses Romeo
and Ida Pajares (petitioners) before the RTC of Cebu City, which was docketed as Civil
Case No. CEB-39025 and assigned to Branch 17 of said court. Respondent alleged that
it entered into a Remarkable Dealer Outlet Contract7 with petitioners whereby the
latter, acting as a dealer outlet, shall accept and receive items or materials for laundry
which are then picked up and processed by the former in its main plant or laundry
outlet; that petitioners violated Article IV (Standard Required Quota & Penalties) of said
contract, which required them to produce at least 200 kilos of laundry items each week,
when, on April 30, 2012, they ceased dealer outlet operations on account of lack of
personnel; that respondent made written demands upon petitioners for the payment of
penalties imposed and provided for in the contract, but the latter failed to pay; and,
that petitioners' violation constitutes breach of contract. Respondent thus prayed, as
fol1ows:

WHEREFORE, premises considered, by reason of the above-mentioned breach of the

subject dealer contract agreement made by the defendant, it is most respectfully
prayed of the Honorable Court to order the said defendant to pay the following
incidental and consequential damages to the plaintiff., to wit:

a) TWO HUNDRED THOUSAND PESOS (PHP200,000.00) plus legal interest as incidental

and consequential [sic] for violating Articles IV and XVI of the Remarkable Laundry
Dealer Contract dated 08 September 2011.

b) Thirty Thousand Pesos (P30,000.00) as legal expenses.

c) Thirty Thousand Pesos (P30,000.00) as exemplary damages.

d) Twenty Thousand Pesos (P20,000.00) as cost of suit.

e) Such other reliefs that the Honorable Court deems as just and equitable.8 (Italics in
the original)

Petitioners submitted their Answer,9 to which respondent filed its Reply.10

During pre-trial, the issue of jurisdiction was raised, and the parties were required to
submit their respective position papers.

Ruling of the Regional Trial Court

On February 19, 2013, the RTC issued an Order dismissing Civil Case No. CEB-39025
for lack of jurisdiction, stating:

In the instant case, the plaintiff's complaint is for the recovery of damages for the
alleged breach of contract. The complaint sought the award of P200,000.00 as
incidental and consequential damages; the amount of P30,000.00 as legal expenses;
the amount of P30,000.00 as exemplary damages; and the amount of P20,000.00 as
cost of the suit, or for the total amount of P280,000.00 as damages.

Under the provisions of Batas Pambansa Blg. 129 as amended by Republic Act No.
7691, the amount of demand or claim in the complaint for the Regional Trial Courts
(RTCs) to exercise exclusive original jurisdiction shall exceed P300,000.00; otherwise,
the action shall fall under the jurisdiction of the Municipal Trial Courts. In this case, the
total amount of demand in the complaint is only P280,000.00, which is less than the
jurisdictional amount of the RTCs. Hence, this Court (RTC) has no jurisdiction over the
instant case.

WHEREFORE, premises considered, the instant case is hereby DISMISSED for lack of
jurisdiction.

Notify the counsels.

SO ORDERED.11 (Emphasis in the original)

Respondent filed its Motion for Reconsideration,12 arguing that as Civil Case No. CEB-
39025 is for breach of contract, or one whose subject is incapable of pecuniary
estimation, jurisdiction thus falls with the RTC. However, in an April29, 2013
Order,13 the RTC held its ground.

Ruling of the Court of Appeals

Respondent filed CA-G.R. CEB SP No. 07711, a Petition for Certiorari14 seeking to nullify
the RTC's February 19, 2013 and April 29, 2013 Orders. It argued that the RTC acted
with grave abuse of discretion in dismissing Civil Case No. CEB-39025. According to
respondent, said case is one whose subject matter is incapable of pecuniary estimation
and that the damages prayed for therein are merely incidental thereto. Hence, Civil
Case No. CEB-39025 falls within the jurisdiction of the RTC pursuant to Section 19
of Batas Pambansa Blg. 129, as Amended (BP 129).

On December 11, 2013, the CA rendered the assailed Decision setting aside the
February 19, 2013 Order of the RTC and remanding the case to the court a quo for
further proceedings. It held as follows:

In determining the jurisdiction of an action whose subject is incapable of pecuniary

estimation, the nature of the principal action or remedy sought must first be
ascertained. If it is primarily for the recovery of a sum of money, the claim is
considered capable of pecuniary estimation and the jurisdiction of the court depends on
the amount of the claim. But, where the primary issue is something other than the right
to recover a sum of money, where the money claim is purely incidental to, or a
consequence of the principal relief sought, such are actions whose subjects are
incapable of pecuniary estimation, hence cognizable by the RTCs.15

xxxx

Verily, what determines the nature of the action and which court has jurisdiction over it
are the allegations of the complaint and the character of the relief sought.16

In our considered view, the complaint, is one incapable of pecuniary estimation; thus,
one within the RTC's jurisdiction. x x x

xxxx

A case for breach of contract [sic] is a cause of action either for specific performance or
rescission of contracts. An action for rescission of contract, as a counterpart of an
action for specific performance, is incapable of pecuniary estimation, and therefore falls
under the jurisdiction of the RTC.17

Thus, the totality of damages principle finds no application in the instant case since the
same applies only when damages is principally and primarily demanded in accordance
with the specification in Administrative Circular No. 09-94 which reads: 'in cases where
the claim for damages is the main cause of action...the amount of such claim shall be
considered in determining the jurisdiction of the court.'

Thus, the court a quo should not have dismissed the instant case.

WHEREFORE, in view of the foregoing, the Order dated February 19, 2013 of the
Regional Trial Court, 7th Judicial Region, Branch 17, Cebu City in Civil Case No. CEB-
39025 for Breach of Contract and Damages is hereby REVERSED and SET ASIDE. This
case is hereby REMANDED to the RTC which is ORDERED to PROCEED with the trial on
the merits with dispatch.

SO ORDERED.18

Petitioners sought to reconsider, but were denied. Hence, the present Petition.
 Issue

In a June 29, 2015 Resolution,19 this Court resolved to give due course to the Petition,
which claims that the CA erred in declaring that the RTC had jurisdiction over
respondent's Complaint which, although denominated as one for breach of contract, is
essentially one for simple payment of damages.

Petitioners' Arguments

In praying that the assailed CA dispositions be set aside and that the RTC's February
19, 2013 Order dismissing Civil Case No. CEB-39025 be reinstated, petitioners in their
Petition and Reply20 espouse the original findings of the RTC that Civil Case No. CEB-
39025 is for the recovery of a sum of money in the form of damages. They asserted
that in determining jurisdiction over the subject matter, the allegations in the Complaint
and the principal relief in the prayer thereof must be considered; that since respondent
merely prayed for the payment of damages in its Complaint and not a judgment on the
claim of breach of contract, then jurisdiction should be determined based solely on the
total amount of the claim or demand as alleged in the prayer; that while breach of
contract may involve a claim for specific performance or rescission, neither relief was
sought in respondent's Complaint; and, that respondent "chose to focus his [sic]
primary relief on the payment of damages,"21 which is "the true, actual, and principal
relief sought, and is not merely incidental to or a consequence of the alleged breach of
contract."22 Petitioners conclude that, applying the totality of claims rule, respondent's
Complaint should be dismissed as the claim stated therein is below the jurisdictional
amount of the RTC.

Respondent's Arguments

Respondent, on the other hand, counters in its Comment23 that the CA is correct in
declaring that Civil Case No. CEB-39025 is primarily based on breach of contract, and
the damages prayed for are merely incidental to the principal action; that the Complaint
itself made reference to the Remarkable Dealer Outlet Contract and the breach
committed by petitioners, which gave rise to a cause of action against the latter; and,
that with the filing of the case, the trial court was thus called upon to determine
whether petitioners violated the dealer outlet contract, and if so, the amount of
damages that may be adjudged in respondent's favor.

Our Ruling

The Court grants the Petition. The RTC was correct in categorizing Civil Case No. CEB-
39025 as an action for damages seeking to recover an amount below its jurisdictional
limit.

Respondent's complaint denominated

as one for ''Breach of Contract &
Damages" is neither an action for
specific performance nor a complaint
for rescission of contract.
In ruling that respondent's Complaint is incapable of pecuniary estimation and that the
RTC has jurisdiction, the CA comported itself with the following ratiocination:

A case for breach of contract [sic] is a cause of action either for specific performance or
rescission of contracts. An action for rescission of contract, as a counterpart of an
action for specific performance, is incapable of pecuniary estimation, and therefore falls
under the jurisdiction of the RTC.24

without, however, determining whether, from the four corners of the Complaint,
respondent actually intended to initiate an action for specific performance or an action
for rescission of contract. Specific performance is ''[t]he remedy of requiring exact
performance of a contract in the specific form in which it was made, or according to the
precise terms agreed upon. [It is t]he actual accomplishment of a contract by a party
bound to fulfill it."25 Rescission of contract under Article 1191 of the Civil Code, on the
other hand, is a remedy available to the obligee when the obligor cannot comply with
what is incumbent upon him.26 It is predicated on a breach of faith by the other party
who violates the reciprocity between them. Rescission may also refer to a remedy
granted by law to the contracting parties and sometimes even to third persons in order
to secure reparation of damages caused them by a valid contract, by means of
restoration of things to their condition in which they were prior to the celebration of the
contract.27

In a line of cases, this Court held that �

In determining whether an action is one the subject matter of which is not capable of
pecuniary estimation this Court has adopted the criterion of first ascertaining the nature
of the principal action or remedy sought. If it is primarily for the recovery of a sum of
money, the claim is considered capable of pecuniary estimation, and whether
jurisdiction is in the municipal trial courts or in the courts of first instance would depend
on the amount of the claim. However, where the basic issue is something other than
the right to recover a sum of money, where the money claim is purely incidental to, or
a consequence of, the principal relief sought, this Court has considered such actions as
cases where the subject of the litigation may not be estimated in terms of money, and
are cognizable exclusively by courts of first instance (now Regional Trial Courts).28

To write finis to this controversy, therefore, it is imperative that we first determine the
real nature of respondent's principal action, as well as the relief sought in its Complaint,
which we quote in haec verba:

REPUBLIC OF THE PHILIPPNES

REGIONAL TRIAL COURT
BRANCH ____
CEBUCITY

� Remarkable Laundry and Dry Cleaning � Civil Case No. ____
herein represented by Archemedes G. For: Breach of Contract &
� �
Solis, Damages
� Plaintiff,
� vs.
Spouses Romeo Pajares and Ida T.
�
Pajares,
� Defendants.

--------------------------------------------------------------------------------

COMPLAINT

Plaintiff, by counsels, to the Honorable Court most respectfully states THAT:

l. Plaintiff Remarkable Laundry and Dry Cleaning Services, is a sole proprietorship

business owned by Archemedes Solis with principal office address at PREDECO CMPD
AS-Ostechi Bldg. Banilad, Hernan Cortes St., Mandaue City.

2. Defendant Ida Pajares is of legal age, Filipino, married with address at Hermag
Village, Basak Mandaue City where she can be served with summons and other
processes of the Honorable Court.

3. On 08 SEP 2011, parties entered and signed a Remarkable Laundry Dealer Outlet
Contract for the processing of laundry materials, plaintiff being the owner of
Remarkable Laundry and the defendant being the authorized dealer of the said
business. (Attached and marked as Annex "A" is a copy of the Remarkable Laundry
Dealer Outlet Contract.)

CAUSES OF ACTION:

4. Sometime on [sic] the second (2nd) quarter of 2012, defendant failed to follow the
required standard purchase quota mentioned in Article IV of the subject dealership
agreement.

5. Defendant through a letter dated April 24, 2012 said it [sic] would CEASE
OPERATION. It [sic] further stated that they [sic] would just notify or advise the office
when they are [sic] ready for the business again making the whole business endeavor
totally dependent upon their [sic] whims and caprices. (Attached and marked as Annex
"B" is a copy of letter of the defendant dated April 24, 2012.)

6. The aforementioned act of unilateral cessation of operation by the defendant

constitutes a serious breach to [sic] the contract because it totally, whimsically and
grossly disregarded the Remarkable Laundry Dealer Outlet Contract, which resulted to
[sic] failure on its part in obtaining the minimum purchase or delivery of 200 kilos per
week for the entire duration of its cessation of operations.

7. Under the aforementioned Dealer Contract, specifically m Article XV of the same are
classified as BREACH BY THE OUTLETS:
'The parties agree that the happening of any of the stipulation and events by the dealer
outlet is otherwise [sic] in default of any of its obligations or violate any of the terms
and condition under this agreement.

Any violation of the above-mentioned provisions shall result in the immediate

termination of this agreement, without prejudice to any of the RL Main Operators rights
or remedies granted to it by law.

THE DEALER OUTLET SHALL ALSO BE LIABLE TO PAY A FINE OF TWENTY FIVE
THOUSAND PESOS, (P25,000.00) FOR EVERY VIOLATION AND PHP 50,000 IF PRE-
TERMINATION BY THE RL MAIN OPERATOR DUE TO BREACH OF THIS AGREEMENT.'

8. Likewise it is provided in the said contract that:

... The DEALER OUTLET must have a minimum 200 kilos on a six-day or per week pick-
up for the entire duration of the contract to free the dealer outlet from being charge[d]
Php 200/week on falling below required minimum kilos per week of laundry materials.
Automatic charging shall become part of the billing on the services of the dealer outlet
on cases where the minimum requirements on required kilos are not met.[']

9. The cessation of operation by the defendant, which is tantamount to gross infraction

to [sic] the subject contract, resulted to [sic] incidental damages amounting to Two
Hundred Thousand Pesos (PHP200,000.00). Defendant should have opted to comply
with the Pre-termination clause in the subject contract other than its [sic] unilateral and
whimsical cessation of operations.

10. The plaintiff formally reminded the defendant of her obligations under the subject
contract through demand letters, but to no avail. The defendant purposely ignored the
letters by [sic] the plaintiff. (Attached and marked as Annex "C" to "C-2" are the
Demand Letters dated May 2, 2012, June 2, 2012 and June 19, 2012 respectively.)

11. To reiterate, the defendant temporarily stopped its business operation prior to the
two-year contract duration had elapsed to the prejudice of the plaintiff, which is a clear
disregard of its two-year obligation to operate the business unless a pre-termination is
called.

12. Under Article 1159 of the Civil Code of the Philippines provides [sic]:

'Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith'

13. Likewise, Article 1170 of the Civil Code of the Philippines [provides] that:

'Those who in the performance of their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof are liable for
damages.'

14. That the above-mentioned violations by the defendant to the Remarkable Laundry
Dealer Contract, specifically Articles IV and XVI thereof constitute gross breach of
contract which are unlawful and malicious under the Civil Code of the Philippines, which
caused the plaintiff to incur incidental and consequential damages as found in the
subject dealer contract in the total amount of Two Hundred Thousand Pesos
(PHP200,000.00) and incidental legal expenses to protect its rights in the amount of
P30,000.00

PRAYER:

WHEREFORE, premises considered, by reason of the above-mentioned breach of the

subject dealer contract agreement made by the defendant, it is most respectfully
prayed of the Honorable Court to order the said defendant to pay the
following incidental and consequential damages to the plaintiff, to wit:

a) TWO HUNDRED THOUSAND PESOS (PHP200,000.00) plus legal interest as incidental

and consequential [damages] for violating Articles IV and XVI of the Remarkable
Laundry Dealer Contract dated 08 SEP 2011;

b) Thirty Thousand Pesos (P30,000.00) as legal expenses;

c) Thirty Thousand Pesos (P30,000.00) as exemplary damages;

d) Twenty Thousand Pesos (P20,000.00) as cost of suit;

e) Such other reliefs that the Honorable Court deems as just and equitable.

August 31, 2012, Cebu City, Philippines.29

An analysis of the factual and material allegations in the Complaint shows that there is
nothing therein which would support a conclusion that respondent's Complaint is one
for specific performance or rescission of contract. It should be recalled that the principal
obligation of petitioners under the Remarkable Laundry Dealership Contract is to act as
respondent's dealer outlet. Respondent, however, neither asked the RTC to compel
petitioners to perform such obligation as contemplated in said contract nor sought the
rescission thereof. The Complaint's body, heading, and relief are bereft of such
allegation. In fact, neither phrase appeared on or was used in the Complaint when, for
purposes of clarity, respondent's counsels, who are presumed to be learned in law,
could and should have used any of those phrases to indicate the proper designation of
the Complaint. To the contrary, respondent's counsels designated the Complaint as one
for "Breach of Contract & Damages," which is a misnomer and inaccurate. This
erroneous notion was reiterated in respondent's Memorandum30 wherein it was stated
that "the main action of CEB 39025 is one for a breach of contract."31There is no such
thing as an "action for breach of contract." Rather, "[b]reach of contract is a cause of
action,32 but not the action or relief itself"33 Breach of contract may be the cause of
action in a complaint for specific performance or rescission of contract, both of which
are incapable of pecuniary estimation and, therefore, cognizable by the RTC. However,
as will be discussed below, breach of contract may also be the cause of action in a
complaint for damages.

A complaint primarily
seeking to enforce the
accessory obligation
contained in the penal
clause is actually an action
for damages capable of
pecuniary estimation.

Neither can we sustain respondent's contention that its Complaint is incapable of

pecuniary estimation since it primarily seeks to enforce the penal clause contained in
Article IV of the Remarkable Dealer Outlet Contract, which reads:

Article IV: STANDARD REQUIRED QUOTA & PENALTIES

In consideration [sic] for such renewal of franchise-dealership rights, the dealer outlet
must have a minimum 200 kilos on a six-day or per week pick-up for the entire
duration of the contract to FREE the dealer outlet from being charge [sic] Php200/week
on falling below required minimum kilos per week of laundry materials. Automatic
charging shall become part of the billing on the services of the dealer outlet on cases
where the minimum requirements on required kilos are not met.

The RL Main Operator has the option to cancel, terminate this dealership outlet
contract, at its option should [sic] in the event that there are unpaid services equivalent
to a two-week minimum required number of kilos of laundry materials but not P8,000
worth of collectibles, for services performed by the RL Main Operator or its assigned
Franchise Outlet, unpaid bills on ordered and delivered support products, falling below
required monthly minimum number of kilos.

Ten [percent] (10%) interest charge per month will be collected on all unpaid
obligations but should not be more than 45 days or an additional 10% on top of
uncollected amount shall be imposed and shall earn additional 10% on the next
succeeding months if it still remains unpaid. However, if the cause of default is due to
issuance of a bouncing check the amount of such check shall earn same penalty charge
with additional 5% for the first two weeks and 10% for the next two weeks and its
succeeding two weeks thereafter from the date of dishonor until fully paid without
prejudice to the filling of appropriate cases before the courts of justice. Violation of this
provision if remained unsettled for two months shall be considered as violation
[wherein] Article XV of this agreement shall be applied.34

To Our mind, petitioners' responsibility under the above penal clause involves the
payment of liquidated damages because under Article 222635 of the Civil Code the
amount the parties stipulated to pay in case of breach are liquidated damages. "It is
attached to an obligation in order to ensure performance and has a double function:(1)
to provide for liquidated damages, and (2) to strengthen the coercive force of the
obligation by the threat of greater responsibility in the event of breach."36

Concomitantly, what respondent primarily seeks in its Complaint is to recover aforesaid

liquidated damages (which it termed as "incidental and consequential damages")
premised on the alleged breach of contract committed by the petitioners when they
unilaterally ceased business operations. Breach of contract may also be the cause of
action in a complaint for damages filed pursuant to Article 1170 of the Civil Code. It
provides:

Art. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof; are
liable for damages. (Emphasis supplied)

In Pacmac, Inc. v. Intermediate Appellate Court,37 this Court held that the party who
unilaterally terminated the exclusive distributorship contract without any legal
justification can be held liable for damages by reason of the breach committed pursuant
to Article 1170.

In sum, after juxtaposing Article IV of the Remarkable Dealer Outlet Contract vis-�-
vis the prayer sought in respondent's Complaint, this Court is convinced that said
Complaint is one for damages. True, breach of contract may give rise to a complaint for
specific performance or rescission of contract. In which case, the subject matter is
incapable of pecuniary estimation and, therefore, jurisdiction is lodged with the RTC.
However, breach of contract may also be the cause of action in a complaint for
damages. Thus, it is not correct to immediately conclude, as the CA erroneously did,
that since the cause of action is breach of contract, the case would only either be
specific performance or rescission of contract because it may happen, as in this case,
that the complaint is one for damages.

In an action for damages, the court

which has jurisdiction is determined by
the total amount of damages claimed.

Having thus determined the nature of respondent's principal action, the next question
brought to fore is whether it is the RTC which has jurisdiction over the subject matter of
Civil Case No. CEB-39025.

Paragraph 8, Section 1938 of BP 129, as amended by Republic Act No. 7691,39 provides
that where the amount of the demand exceeds P100,000.00, exclusive of interest,
damages of whatever kind, attorney's fees, litigation expenses, and costs, exclusive
jurisdiction is lodged with the RTC. Otherwise, jurisdiction belongs to the Municipal Trial
Court.40

The above jurisdictional amount had been increased to P200,000.00 on March 20, 1999
and further raised to P300,000.00 on February 22, 2004 pursuant to Section 5 of RA
7691.41

Then in Administrative Circular No. 09-9442 this Court declared that "where the claim for
damages is the main cause of action, or one of the causes of action, the amount of such
claim shall be considered in determining the jurisdiction of the court." In other words,
where the complaint primarily seeks to recover damages, all claims for damages should
be considered in determining which court has jurisdiction over the subject matter of the
case regardless of whether they arose from a single cause of action or several causes of
action.
Since the total amount of the damages claimed by the respondent in its Complaint filed
with the RTC on September 3, 2012 amounted only to P280,000.00, said court was
correct in refusing to take cognizance of the case.

WHEREFORE, the Petition is GRANTED and the December 11, 2013 Decision and
March 19, 2014 Resolution of the Court of Appeals in CA-G.R. CEB SP No. 07711
are REVERSED and SET ASIDE. The February 19, 2013 Order of the Regional Trial
Court, Branch 17, Cebu City dismissing Civil Case No. CEB-39025 for lack of jurisdiction
is REINSTATED.

SO ORDERED.

G.R. No. 159271, July 13, 2015

SPOUSES BENITO BAYSA AND VICTORIA BAYSA, Petitioners, v. SPOUSES FIDEL

PLANTILLA AND SUSAN PLANTILLA, REGISTER OF DEEDS OF QUEZON CITY,
AND THE SHERIFF OF QUEZON CITY, Respondents.

DECISION

BERSAMIN, J.:

The petitioners seek the reversal and setting aside of the decision promulgated on
December 20, 2002,1 whereby the Court of Appeals (CA) declared the extrajudicial
foreclosure of their mortgaged property valid.2

Antecedents

The case involves a real estate mortgage (REM) entered into by the petitioners
involving their parcel of land in Cubao, Quezon City covered by their Transfer Certificate
of Title No. 260376 of the Register of Deeds of Quezon City to secure the payment of
their obligation amounting to P2.3 Million in favor of the respondent spouses. Based on
the terms of the REM, the petitioners agreed to pay interest on the principal amount at
the rate of 2.5%/month, or P57,500.00/month. Upon the default of the petitioners, the
respondent spouses commenced the extrajudicial foreclosure of the REM to recover
from the petitioners the total liability of P3,579,100.00 (inclusive of the principal and
the unpaid interest).

The petitioners sued the respondent spouses in the Regional Trial Court (RTC) in
Quezon City to annul the extrajudicial foreclosure of the REM and the public auction
conducted pursuant to the extrajudicial foreclosure. They alleged that all the
proceedings relevant to the extrajudicial foreclosure were null and void, pointing out
that there had been no power or authority to sell inserted in the REM or attached
thereto as required by Section 1 Act No. 3135; and that the interest rate of 8% was
unconscionable and violative of the Anti-Usury Law.

The pertinent details as summarized by the RTC and adopted by the CA are the
following:
On August 4, 1992, plaintiffs-spouses (Benito and Victoria Baysa) executed a real
estate mortgage in favor of the defendants-spouses Fidel R. Plantilla and Susan Plantilla
whereby plaintiffs-spouses mortgaged their parcel of land in Cubao, Quezon City x x x
to secure the payment of their indebtedness in the principal sum of P2,300,000.00 and
accruing interest at the legal rate thereon and payable according to the terms of the
Mortgage Note xxx. The Mortgage Note signed by both parties containing the terms of
payment and interest rate was also executed on August 4, 1992 xxx. It was expressly
agreed upon by both parties in the mortgage note that the interest on the loan of
P2,300,000.00 was 2.5% per month (P57,500.00) or a monthly rate equal to 7
percentage points above the prime rate of the Standard Chartered Bank of Makati on
the fifth working day before the interest is due. The improvements existing on the land
in question are a house, shop and warehouse. This parcel of land including the
improvements is worth PI5 million. The interest at the rate of P57,500.00 from
September 1992 up to May 1993 were regularly paid. They suffered business reverses
and difficulty in collection so they became irregular in the monthly payment of the
agreed interest and for late payment they were charged 8% interest per month, the
same is reflected in the statement of account dated March 31, 1994 for P3,053,772.00
x x x in the statement of account as of May 6, 1994 xxx and in the statement of
overdue account dated April 21, 1994 xxx. When 8% interest sur-charge was imposed,
they stopped paying the monthly interest because of some difficulty in their business
and high interest rate which overburdened them. Then the defendants filed an
extrajudicial foreclosure. A certain Mrs. de la Cruz approaching them as representative
of the defendants collecting the unpaid balance of P3,123,830.00 as reflected in the
statement of account as of May 6, 1994 xxx and they told her that they were willing to
pay what ever be the balance but the interest has to be recomputed not on the basis of
8% interest per month. They received a notice of sheriffs sale that the property will be
foreclosed xxx, the amount of mortgage indebtedness was P3,579,100.00. Their
principal loan was P2,300,000.00 and they have paid P1,032,599.88 for interest of the
loan x x x. When he received the notice of sheriffs sale he was surprised because they
have an agreement with the representative that they were asking for a period of six (6)
months to pay after knowing the correct amount of their balance xxx.

The defendants' evidence x x x shows that x x x no payment was made by the plaintiffs
on the principal loan of P2,300,000.00. Only the monthly interest of 2.5% of the
principal or P57,500.00 were paid by the plaintiffs regularly from August 1992 until
June 1993. The interest paid for the months of July, August, September and October,
1993 were paid late and after that no payments were made on the monthly interest
from November 1993 until the property was foreclosed. When plaintiffs defaulted in the
payment of the monthly interest, Emilia de la Cruz, certified public accountant, was
consulted by the mother of the defendants who advised the latter to hire the services of
counsel to file a petition for foreclosure of the mortgage, x x x (they) sent a letter of
demand x x x addressed to plaintiffs-spouses Baysa to pay the principal loan and
interest due xxx. Despite the receipt of the said letter of demand, plaintiffs did not pay
their indebtedness to the defendants, hence, x x x a petition for foreclosure was filed
with the Office of the Sheriff of the Quezon City Regional Trial Court which prayed that
in view of the non-payment of the indebtedness of the plaintiffs in the amount of
P3,579,100.00 (principal and unpaid interest) that the mortgaged property x x x be
foreclosed at a public auction x x x.3
ChanRoblesVirtualawlibrary

Decision of the RTC

After trial, the RTC rendered its decision dated December 27, 1996,4 disposing thusly:

WHEREFORE, a decision is hereby rendered in this case dismissing the instant

complaint for lack of cause of action.

Ordering the plaintiffs to pay the defendants on the counterclaim the amount of
P50,000.00 for moral damages, P50,000.00 for exemplary damages and P50,000.00 for
attorney's fees, and to pay the costs of the suit.

SO ORDERED.5 ChanRoblesVirtualawlibrary

In support of the dismissal of the petitioners' complaint, and in upholding the validity of
the extrajudicial foreclosure, the RTC explained:

x x x x The deed of real estate mortgage (Exh. A) in paragraph 13 thereof expressly

states the consent of the mortgagors to the extra-judicial foreclosure of the mortgaged
property in the event of non-payment, to wit:

Paragraph 13. x x x; - In the event of non-payment of the entire principal and accrued
interest due under the conditions described in this paragraph, the mortgagors expressly
and specifically agree to the extra-judicial foreclosure of the mortgaged property.6

Furthermore, the RTC allowed the additional interest of 8%, observing that:

x x x x The defendants did not increase the agreed interest of 2.5% per month. The 8%
additional interest on accrued interest is allowed because accrued interest earns legal
rate of interest which is now 12% per annum as per under Central Bank Circular No.
416 which applies to loans and forebearance of money.7]� x x x x ChanRoblesVirtualawlibrary

Judgment of the CA

Aggrieved, the petitioners appealed, submitting the following issues for the resolution of
the CA, namely:

1. Whether or not the extrajudicial foreclosure is valid despite the lack of

provision in the mortgage deed granting special power to sell to the
mortgagee; cralawlawlibrary

2. If valid, whether the procedure taken thereon complies with the provisions
of Act No. 3135, as amended; and

3. Whether or not the 8% compounded monthly interest is legal.8

On December 20, 2002, the CA promulgated the assailed judgment,9 affirming the
validity of the foreclosure proceedings but invalidating the imposition of the 8%
additional interest for lack of legal basis considering that the REM did not contain a
stipulation to that effect. Its pertinent ratiocination and disposition stated:
We agree with the lower court that the extrajudicial foreclosure was not visited with
vice for failure of the mortgagor in the mortgage deed to grant special power to sell the
property in favor of the mortgagee. It suffices that the mortgagee document empowers
the mortgagee to extrajudicially foreclose the property. Such authority to extrajudicially
foreclose by necessary implication carries with it the grant of power to sell the property
at a public auction. It is only when the deed is silent as to the grant of authority to
extrajudicially foreclose on the mortgage that a mortgagee is prevented from availing
of such remedy.

In Centeno vs. Court of Appeals, the Supreme Court, when confronted with the same
issue, chose to uphold the validity of the extrajudicial foreclosure.

xxxx

But all is not lost with the appellants. We agree that the 8% monthly interest on the
unpaid interest is not warranted by the mortgage deed, for there is nothing in it that
provides for the imposition of such exorbitant interest on the unpaid interest. Article
1958 of the New Civil Code is clear on the matter: "(I)nterest due and unpaid shall not
earn interest." And while the parties may stipulate to capitalize the interest due and
unpaid, the same shall not be valid unless it be in writing, pursuant to Article 1956 of
the Civil Code.

xxxx

WHEREFORE, the Decision of the lower court is hereby SET ASIDE. The extrajudicial
foreclosure is hereby declared to be VALID, but a re-computation of the amount of
mortgage indebtedness is ordered by removing the 8% interest imposed by the
mortgagee on the unpaid interest. The award of moral and exemplary damages and
attorney's fees are hereby DELETED.

SO ORDERED.10 ChanRoblesVirtualawlibrary

Upon denial of the petitioners' motion for reconsideration, as well as of the respondent
spouses' partial motion for reconsideration through the resolution promulgated on July
24, 2003,11 the petitioner has come to the Court for a further review. chanrobleslaw

Issues

The issues raised by the petitioners can be narrowed down to:

1.) Whether or not the Court of Appeals erred when it declared that the extrajudicial foreclosure
was valid despite the lack of provision in the mortgage deed granting special power to sell
to the mortgagee;
2.) Whether or not the Court of Appeals erred when it concluded that consenting to the
extrajudicial foreclosure of the property, by necessary implication, carries with it the grant
of power to sell the property at public action;
3.) Whether or not the Court of Appeals erred in not declaring the 2.5% monthly interest illegal
and usurious, considering that the 8% interest was already declared as invalid and
unwarranted; and
4.) Whether or not the Court of Appeals erred in ruling that petitioners have lost their right to
 redeem the property.12

Ruling of the Court

The appeal is meritorious.

On the first and second issues, we hold the CA in error for affirming the RTC's
declaration of the extrajudicial foreclosure as valid.

In the extrajudicial foreclosure of property subject of a real estate mortgage, Act No.
3135 (An Act to Regulate the Sale of Property Under Special Powers Inserted in or
Annexed to Real Estate Mortgages) is quite explicit and definite about the special power
to sell the property being required to be either inserted in or attached to the deed of
mortgage. Section 1 of Act No. 3135 provides:

Section 1. When a sale is made under a special power inserted in or attached to

any real estate mortgage hereafter made as security for the payment of money or
the fulfillment of any other obligation, the provisions of the following section shall
govern as to the manner in which the sale and redemption shall be effected, whether or
not provision for the same is made in the power.

Accordingly, to enable the extrajudicial foreclosure of the REM of the petitioners, the
special power to sell should have been either inserted in the REM itself or embodied in a
separate instrument attached to the REM. But it is not disputed that no special power to
sell was either inserted in the REM or attached to the REM. Hence, the respondent
spouses as the foreclosing mortgagees could not initiate the extrajudicial foreclosure,
but must resort to judicial foreclosure pursuant to the procedure set forth in Rule 68 of
the Rules of Court. The omission of the special power to sell the property subject of the
mortgage was fatal to the validity and efficacy of the extrajudicial foreclosure, and
warranted the invalidation of the entire proceedings conducted by the sheriff.

The CA opined that the extrajudicial foreclosure was nonetheless valid despite the
omission of the special power to sell. It upheld the ruling of the RTC by citing paragraph
13 of the REM, which stated:

In the event of non-payment of the entire principal and accrued interest due under the
conditions described in this paragraph, the mortgagors expressly and specifically agree
to the extra-judicial foreclosure of the mortgaged property.13

It held to be enough that the REM thereby empowered the respondent spouses as the
mortgagees to extrajudicially foreclose the property inasmuch as such agreement by
the petitioners (as the mortgagors) carried with it by necessary implication the grant of
the power to sell the property at the public auction. It relied on the ruling in Centeno v.
Court ofAppeals.14

We cannot subscribe to the opinion of the CA.

Based on the text of paragraph 13, supra, the petitioners evidently agreed only to the
holding of the extrajudicial foreclosure should they default in their obligations. Their
agreement was a mere expression of their amenability to extrajudicial foreclosure as
the means of foreclosing the mortgage, and did not constitute the special power or
authority to sell the mortgaged property to enable the mortgagees to recover the
unpaid obligations. What was necessary was the special power or authority to sell -
whether inserted in the REM itself, or annexed thereto - that authorized the respondent
spouses to sell in the public auction their mortgaged property.

The requirement for the special power or authority to sell finds support in the civil law.
To begin with, because the sale of the property by virtue of the extrajudicial foreclosure
would be made through the sheriff by the respondent spouses as the mortgagees acting
as the agents of the petitioners as the mortgagors-owners, there must be a written
authority from the latter in favor of the former as their agents; otherwise, the sale
would be void.15 And, secondly, considering that, pursuant to Article 1878, (5), of the
Civil Code, a special power of attorney was necessary for entering "into any contract by
which the ownership of an immovable is transmitted or acquired either gratuitously or
for a valuable consideration," the written authority must be a special power of attorney
to sell.16 Contrary to the CA's opinion, therefore, the power or authority to sell by virtue
of the extrajudicial foreclosure of the REM could not be necessarily implied from the
text of paragraph 13, supra, expressing the petitioners' agreement to the extrajudicial
foreclosure.

The reliance on the ruling in Centeno v. Court of Appeals was inadequate, if not also
misplaced. Although the Centeno Court was confronted with several issues, including
whether or not the extrajudicial foreclosure of the mortgage was a total nullity because
the deed of mortgage did not contain a special power of attorney to sell in favor of the
mortgagees, a meticulous reading of Centeno reveals that the Court did not expressly
deal with and resolve such issue, because the Court limited itself to the effects of the
failure of the petitioners thereat to annotate on the Torrens title the sale in their favor
of the property. In other words, the Court was silent on the issue of validity of the
foreclosure sale despite the lack of the special power of attorney to sell being inserted
in or annexed to the deed of mortgage. Under the circumstances, Centeno has no
precedential value in this case.

II

Anent the third issue, the petitioners contend that after declaring the 8% compounded
interest invalid and unwarranted, the CA should have further declared the interest of
2.5%/month illegal and usurious; that with nullity of the stipulation of interest, the
result should be as if the loan agreement contained no stipulation on interest; and that,
consequently, the P1,032,599.88 paid as interest should be deducted from the principal
loan of P2.3 Million for being illegal and usurious.

The contention of the petitioners is bereft of merit.

To start with, the petitioners are now estopped from assailing the validity of the
monthly interest payments made. They expressly consented to be liable to pay
2.5%/month on the principal loan of P2.3 Million, and actually made several payments
of interest at that rate. Secondly, they did not assail the rate of 2.5%/month as interest
in the lower courts, doing so only in this appeal. Hence, they cannot be permitted to
bring the issue for the first time in this Court, for that would be unfair not only to the
adverse parties but also to the lower courts by depriving the latter of the opportunity to
pass upon the issue. And, thirdly, the invalidation by the CA of the 8% compounded
interest does not justify deleting the stipulation on the 2.5%/month interest that was
really separate and distinct from the former.

III

Having found and declared the extrajudicial foreclosure of the REM and the foreclosure
sale of the mortgaged property of the petitioner void for want of the special power to
sell, we deem it unnecessary to consider and determine the final issue on whether or
not the petitioners had lost their right to redeem. In other words, there is no right of
redemption to speak of if the foreclosure was void.

WHEREFORE, the Court GRANTS the petition for review

on certiorari ; REVERSES and SETS ASIDE the judgment of the Court of Appeals
promulgated on December 20, 2002; DECLARES the extrajudicial foreclosure and the
certificate of sale NULL and VOID; CANCELS Transfer Certificate of Title No. N-141864
registered in the names of respondents SPOUSES FIDEL R. PLANTILLA and SUSAN
PLANTILLA; DIRECTS the Register of Deeds of Quezon City
to RESTORE and REINSTATE Transfer Certificate of Title No.260376 in the names of
petitioners SPOUSES BENITO A. BAYSA and VICTORIA C. BAYSA; REMANDS this
case to the court of origin for the recomputation and accounting of the mortgage
indebtedness without the 8% interest imposed by the respondents on the unpaid
interest; and ORDERS respondents SPOUSES FIDEL R. PLANTILLA and SUSAN
PLANTILLA to pay the costs of suit.

SO ORDERED. chanroblesvirtuallawlibrary

G.R. No. 194152, June 05, 2017

MAKILITO B. MAHINAY, Petitioner, v. DURA TIRE & RUBBER INDUSTRIES,

INC., Respondent.

DECISION

LEONEN, J.:

The period to redeem a property sold in an extrajudicial foreclosure sale is not

extendible. A pending action to annul the foreclosure sale does not toll the running of
the one (1)-year period of redemption under Act No. 3135.1

This resolves a Petition for Review on Certiorari2 directly filed before this Court,
assailing the Judgment on the Pleadings3 dated April 13, 2010 and Order4 dated
September 2, 2010 rendered by Branch 20 of the Regional Trial Court of Cebu City in
Civil Case No. CEB-33639. The trial court dismissed the Complaint filed by Makilito B.
Mahinay (Mahinay), declaring that he already lost his right to redeem a parcel of land
sold in an extrajudicial foreclosure sale.5

The parcel of land, with an area of 3,616 square meters and located in Barrio Kiot,
Cebu City, was covered by Transfer Certificate of Title (TCT) No. 111078 under the
name of A&A Swiss International Commercial, Inc. (A&A Swiss).6 The property was
mortgaged to Dura Tire and Rubber Industries, Inc. (Dura Tire), a corporation engaged
in the supply of raw materials for tire processing and recapping, as security for credit
purchases to be made by Move Overland Venture and Exploring, Inc. (Move
Overland).7 Under the mortgage agreement, Dura Tire was given the express authority
to extrajudicially foreclose the property should Move Overland fail to pay its credit
purchases.8

On June 5, 1992, A&A Swiss sold the property to Mahinay for the sum of
P540,000.00.9 In the Deed of Absolute Sale,10 Mahinay acknowledged that the property
had been previously mortgaged by A&A Swiss to Dura Tire, holding himself liable for
any claims that Dura Tire may have against Move Overland.11

On August 21, 1994, Mahinay wrote Dura Tire, requesting a statement of account of
Move Overland's credit purchases. Mahinay sought to pay Move Overland's obligation to
release the property from the mortgage.12 Dura Tire, however, ignored Mahinay's
request.13

For Move Overland's failure to pay its credit purchases, Dura Tire applied for
extrajudicial foreclosure of the property on January 6, 1995.14 Mahinay protested the
impending sale and filed a third-party claim before the Office of the Provincial Sheriff of
Cebu.15

Despite the protest, Sheriff Romeo Laurel (Sheriff Laurel) proceeded with the sale and
issued a Certificate of Sale in favor of Dura Tire, the highest bidder at the sale.16 The
property was purchased at P950,000.00, and the Certificate of Sale was registered on
February 20, 1995.17

On March 23, 1995, Mahinay filed a Complaint18 for specific performance and annulment
of auction sale before the Regional Trial Court of Cebu City. According to Mahinay, there
was no proof that Dura Tire supplied raw materials to Move Overland after the property
was mortgaged.19 Mahinay added that Dura Tire allegedly deprived him of the
opportunity to release the property from the mortgage by failing to furnish him with
Move Overland's statement of account.20 Dura Tire, therefore, had no right to foreclose
the mortgage and the foreclosure sale was void.

In its Answer,21 Dura Tire mainly argued that Mahinay had no cause of action to file the
Complaint to annul the foreclosure sale since he was not privy to the mortgage
agreement.22

Acting on Dura Tire's affirmative defense, Branch 15 of the Regional Trial Court of Cebu
City initially dismissed the Complaint.23 However, on mandamus and certiorari, the
Court of Appeals set aside the order of the trial court and remanded the case for further
proceedings.24 The case was then re-raffled to Branch 12 of the Regional Trial Court of
Cebu City.25
After pre-trial proceedings, the trial court again ordered the dismissal of the Complaint
due to Mahinay's failure to prosecute the case. However, upon Mahinay's Motion for
Reconsideration, the case was reinstated.26

The case was again re-raffled, this time to Branch 58.27 After due proceedings, the trial
court ultimately dismissed Mahinay's Complaint in the Decision28 dated July 29, 2004.
The trial court held that Dura Tire was entitled to foreclose the property because of
Move Overland's unpaid credit purchases.29

Mahinay's appeal was dismissed by the Court of Appeals in the Decision30 dated June
16, 2006. The Court of Appeals held that Mahinay had no right to question the
foreclosure of the property.31 Mahinay, as "substitute mortgagor,"32 was fully aware that
the property he purchased from A&A Swiss was previously mortgaged to Dura Tire to
answer for Move Overland's obligation. Considering that Move Overland failed to pay for
its credit purchases, Dura Tire had every right to foreclose the property.33

Mahinay filed a Petition for Review on Certiorari34 before this Court. In G.R. No. 173117,
this Court denied Mahinay's Petition as well as his Motion for Reconsideration.35 The
June 16, 2006 Decision of the Court of Appeals thus became final and executory on
August 8, 2007, 15 days after Mahinay received a copy of the Resolution denying his
Motion for Reconsideration filed before this Court.36

Relying on the Court of Appeals' finding that he was a "substitute mortgagor," Mahinay
filed a Complaint37 for judicial declaration of right to redeem on August 24, 2007. "As
the admitted owner of the [property] at the time of the foreclosure,"38 Mahinay argued
that he "must have possessed and still continues to possess the absolute right to
redeem the [property]."39

Dura Tire answered40 the Complaint, raising the affirmative defense of res judicata.
Dura Tire argued that the Complaint for judicial declaration of right to redeem had
identical parties, subject matter, and causes of action with that of the Complaint for
annulment of foreclosure sale.41 Furthermore, the period of Mahinay's right of
redemption had already lapsed. Therefore, Mahinay could not be allowed to belatedly
redeem the property.42

During the hearing on October 27, 2008, Mahinay and Dura Tire jointly moved for a
judgment on the pleadings. The trial court granted the motion and deemed the case
submitted for decision after the filing of memoranda.43

Mahinay having acquired the property from A&A Swiss before Dura Tire foreclosed the
property, the trial court ruled that Mahinay became a "successor-in-interest" to the
property even before the foreclosure sale. Therefore, by operation of law, Mahinay was
legally entitled to redeem the property.44 However, considering that one (1) year period
of redemption had already lapsed, Mahinay could no longer exercise his right of
redemption.45

Despite Dura Tire's refusal to accept his offer to pay Move Overland's unpaid credit
purchases, the trial court said that "there was nothing to stop [Mahinay] from
redeeming the property as soon as he became aware of the foreclosure sale. [Mahinay]
could have . . . filed an action to compel [Dura Tire] to accept payment by way of
redemption."46

Hence, in the Judgment on the Pleadings47 dated April 13, 2010, Branch 20 of the
Regional Trial Court of Cebu City dismissed Mahinay's Complaint for judicial declaration
of right to redeem. The dispositive portion of the Judgment read:

Upon the foregoing considerations, the court finds no factual and legal basis to grant
the plaintiffs plea to be allowed to redeem the foreclosed property subject of this case.

IN CONSEQUENCE, Judgment is hereby rendered DISMISSING the plaintiffs Complaint.

SO ORDERED.48 (Emphasis in the original)

Mahinay filed a Motion for Reconsideration, which the trial court denied in the
Order49 dated September 2, 2010.

On a pure question of law, Mahinay directly filed a Petition for Review on

Certiorari50 before this Court. Dura Tire filed its Comment,51 to which Mahinay filed a
Reply.52

Mahinay maintains that he should be allowed to redeem the property he bought from
A&A Swiss despite the lapse of one (1) year from the registration of the Certificate of
Sale on February 20, 1995. Mahinay primarily argues that the one (1)-year period of
redemption was tolled when he filed the Complaint for annulment of foreclosure sale on
March 23, 1995 and resumed when the June 16, 2006 Decision of the Court of Appeals
became final and executory on August 8, 2007.53 As basis, Mahinay cites Consolidated
Bank & Trust Corp. v. Intermediate Appellate Court.54

In the alternative, Mahinay contends that the one (1)-year period of redemption should
be counted from the time the June 16, 2006 Decision of the Court of Appeals became
final and executory on August 8, 2007. Mahinay theorizes that his right of redemption
only arose when he was judicially declared "entitled to redeem the property" in this
decision.55

Since he filed his Complaint for judicial declaration of right to redeem on August 24,
2007, only 16 days after August 8, 2007, Mahinay claims that he exercised his right of
redemption within the one (1)-year period under Act No. 3135.56

Dura Tire counters that nothing prevented Mahinay from exercising his right of
redemption within one (1) year from the registration of the Certificate of Sale.57 Dura
Tire argues that Mahinay's filing of an action for annulment of foreclosure sale did not
toll the running of the redemption period because the law does not allow its
extension.58 Since the one (1)-year period of redemption already lapsed, Dura Tire
maintains that Mahinay can no longer redeem the property at the bid price paid by the
purchaser.

The sole issue for this Court's resolution is whether the one (1)-year period of
redemption was tolled when Mahinay filed his Complaint for annulment of foreclosure
sale.

This Petition must be denied.

Contrary to Mahinay's claim, his right to redeem the mortgaged property did not arise
from the Court of Appeals' "judicial declaration" that he was a "substitute mortgagor" of
A&A Swiss. By force of law, specifically, Section 6 of Act No. 3135, Mahinay's right to
redeem arose when the mortgaged property was extrajudicially foreclosed and sold at
public auction. There is no dispute that Mahinay had a lien on the property subsequent
to the mortgage. Consequently, he had the right to buy it back from the purchaser at
the sale, Dura Tire in this case, "from and at any time within the term of one year from
and after the date of the sale." Section 6 of Act No. 313559 provides: chanRoblesvirtualLawlibrary

Section 6. In all cases in which an extrajudicial sale is made under the special power
hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or
judgment creditor of said debtor, or any person having a lien on the property
subsequent to the mortgage or deed of trust under which the property is sold, may
redeem the same at any time within the term of one year from and after the date of the
sale; and such redemption shall be governed by the provisions of sections four hundred
and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in
so far as these are not inconsistent with the provisions of this Act.
The "date of the sale" referred to in Section 6 is the date the certificate of sale is
registered with the Register of Deeds. This is because the sale of registered land does
not "'take effect as a conveyance, or bind the land' until it is registered."60

The right of redemption being statutory,61 the mortgagor may compel the purchaser to
sell back the property within the one (1)-year period under Act No. 3135. If the
purchaser refuses to sell back the property, the mortgagor may tender payment to the
Sheriff who conducted the foreclosure sale.62 Here, Mahinay should have tendered
payment to Sheriff Laurel instead of insisting on directly paying Move Overland's unpaid
credit purchases to Dura Tire.

As early as 1956, this Court held in Mateo v. Court of Appeals63 that "the right of
redemption . . . must . . . be exercised in the mode prescribed by the statute."64 The
one (1)-year period of redemption is fixed, hence, non-extendible, to "avoid prolonged
economic uncertainty over the ownership of the thing sold."65

Since the period of redemption is fixed, it cannot be tolled or interrupted by the filing of
cases to annul the foreclosure sale or to enforce the right of redemption. "To rule
otherwise . . . would constitute a dangerous precedent. A likely offshoot of such a ruling
is the institution of frivolous suits for annulment of mortgage intended merely to give
the mortgagor more time to redeem the mortgaged property."66

In CMS Stock Brokerage, Inc. v. Court of Appeals,67 Rosario Sandejas (Sandejas)

mortgaged two (2) parcels of land in favor of the Bank of the Philippine Islands. She
subsequently mortgaged the same parcels of land to CMS Stock Brokerage, Inc. In
1971, CMS Stock Brokerage, Inc. extrajudicially foreclosed the properties, which were
sold at a public auction. The certificate of sale was registered on May 19, 1971.68

More than a year after the registration of the Certificate of Sale, or on November 15,
1972, Sandejas wrote the president of the CMS Stock Brokerage, Inc., requesting for
three (3) years within which to redeem the properties she mortgaged to it.69 The
president allegedly agreed, even giving her five (5) more years to redeem the
properties.70
However, on February 2, 1973, first mortgagee Bank of the Philippine Islands
extrajudicially foreclosed the properties.71 Despite the third-party claim and action for
quieting of title filed by Sandejas, the Sheriff proceeded with the public auction with
Carolina Industries, Inc. emerging as the highest bidder.72 The certificate of sale was
issued to Carolina Industries, Inc. and was registered on December 16, 1983.73

The action for quieting of title was ultimately resolved in favor of CMS Stock Brokerage,
Inc. In G.R. No. 101351, this Court held that CMS Stock Brokerage, Inc. was "the real
owner" of the properties, not Sandejas.74

Nine (9) years after the registration of the Certificate of Sale in favor of Carolina
Industries, or on December 15, 1992, CMS Stock Brokerage, Inc. tendered
P2,341,166.48 as redemption money with the Clerk of Court. It then filed with the trial
court a motion to require the Sheriff to execute a certificate of redemption.75 The trial
court, however, denied the motion, reasoning the right of redemption of CMS Stock
Brokerage, Inc. had already lapsed.76

This Court affirmed the trial court's decision. On whether the quieting of title action filed
by Sandejas tolled the running of the one (1)-year period of redemption, this Court
ruled in the negative. According to this Court, "the issue of ownership insofar as [CMS
Stock Brokerage, Inc.'s] right of redemption as judgment debtor is concerned, has no
bearing whatsoever, so as have the effect of tolling or interrupting the running of the
12-month redemption period."77 This Court noted that the decision on the quieting of
title case would only affect Sandejas' title to the property.

In Spouses Pahang v. Judge Vestil,78 where spouses Antonio and Lolita Pahang (the
Spouses Pahang) were represented by Mahinay's law firm,79 the Spouses Pahang loaned
P1,500,000.00 from Metrobank and mortgaged a parcel of land as security for the
mortgage.80 When the Spouses Pahang failed to pay their loan, Metrobank
extrajudicially foreclosed the property. At the public sale, Metrobank emerged as the
highest bidder and a corresponding certificate of sale was issued to it. The Certificate of
Sale was registered on January 27, 1998.81

On December 29, 1998, Metrobank wrote the Spouses Pahang to remind them of the
expiration of their right of redemption on January 27, 1999,82 Ignoring Metrobank's
note, the Spouses Pahang instead filed an action for annulment of extrajudicial sale,
contending that Metrobank charged them excessive interests and other fees. They
likewise prayed in their Complaint that they be allowed to redeem their mortgaged
property.83

The right of redemption of the Spouses Pahang thus expired on January 27, 1999.
Metrobank consolidated its ownership over the properties, and a transfer certificate of
title was issued in its name. It subsequently filed a petition for issuance of a writ of
possession.84

The Spouses Pahang opposed the petition, arguing that their pending action for
annulment of extrajudicial sale tolled the running of the one (1)-year period of
redemption.85
Rejecting the argument of the Spouses Pahang, this Court held that the "filing of an
action by the redemptioner to enforce his right to redeem does not suspend the running
of the statutory period to redeem the property."86 This Court added that upon the lapse
of the one (1)-year period of redemption, it is the trial court's ministerial duty to issue a
writ of possession to the purchaser at the foreclosure sale.87

Here, the Certificate of Sale in favor of Dura Tire was registered on February 20, 1995.
Mahinay, as the successor-in-interest of previous owner A&A Swiss, had one (1) year
from February 20, 1995, or on February 20, 1996,88 to exercise his right of redemption
and buy back the property from Dura Tire at the bid price of P950,000.00.

With Mahinay failing to redeem the property within the one (1)-year period of
redemption, his right to redeem had already lapsed. As discussed, the pendency of an
action to annul the foreclosure sale or to enforce the right to redeem does not toll the
running of the period of redemption. The trial court correctly dismissed the Complaint
for judicial declaration of right to redeem.

Mahinay nevertheless cites Consolidated Bank & Trust Corp. v. Intermediate Appellate
Court89 in arguing that the one (1)-year period of redemption was tolled when he filed
the Complaint for annulment of foreclosure sale. In Consolidated Bank, Nicos Industrial
Corporation mortgaged parcels of land to Consolidated Bank to secure loans totalling
P4,076,518.64. When the corporation failed to pay, Consolidated Bank applied for the
extrajudicial foreclosure of the properties.90

Writs of attachment were issued in favor of Consolidated Bank and Notices of Levy were
annotated on the transfer certificates of title covering the mortgaged properties.
However, a year later, the properties were subsequently foreclosed by first mortgagee
United Coconut Planters Bank, and a certificate of sale was issued to the latter on
September 6, 1983. A month later, the United Coconut Planters Bank sold the
properties to Manuel Go, who, in turn, sold the properties to Golden Star Industrial
Corporation. Nicos then executed a Waiver of Right of Redemption in favor of Golden
Star.91

Golden Star then filed a petition for issuance of a writ of possession over the properties.
The writ of possession was issued, allowing Golden Star to seize the properties under
the custody of the Sheriff of Manila.92

Consolidated Bank then filed a motion to annul the writ of possession on November 21,
1983. On a petition for review on certiorari before this Court, Golden Star argued,
among others, that Consolidated Bank had no right to possess the properties. At that
time, one (1) year from the registration of the certificate of sale had already lapsed.93

This Court held that Consolidated Bank's filing of the motion to annul the writ of
possession tolled the running of the one (1)-year period of redemption.94 This Court
found that Nicos and Golden Star "conspired to defeat [Consolidated Bank's] lien on the
attached properties and to deny the latter its right of redemption."95 Considering that
Consolidated Bank filed its motion to annul the writ of possession on November 21,
1983, just two (2) months after the certificate of sale was registered on September 6,
1983, this Court held that Consolidated Bank may still redeem the properties from
Golden Star.96
Consolidated Bank is not precedent for the present case.

Consolidated Bank cited Ong Chua v. Carr,97 an inapplicable case, as basis for ruling
that "the pendency of an action tolls the term of the right of redemption."98Ong
Chua involved a sale with right to repurchase,99 and the period of the "right of
redemption" referred to in that case was governed by the provisions of the Civil Code
on conventional redemption, specifically, Articles 1601 and 1606.100 On the other hand,
the present case involves the redemption of an extrajudicially foreclosed property. The
right of redemption involved in this case is governed by Section 6 of Act No. 3135.

The respondents in Consolidated Bank actively denied the petitioner its right of
redemption.101 This Court, therefore, held that the petitioner in Consolidated Bank was
a victim of fraud.102 No such fraud exists in the present case.

Moreover, the previously discussed cases of CMS Stock Brokerage103 and Spouses
Pahang104 were promulgated later than Consolidated Bank.105 That the pendency of an
action questioning the legality of the foreclosure sale or enforcing the right of
redemption does not toll the running of the period of redemption must be the
controlling doctrine.

All told, the trial court correctly dismissed Mahinay's Complaint for judicial declaration
of right to redeem. To grant the Complaint would have extended the period of
redemption for Mahinay, in contravention of the fixed one (1)-year period provided in
Act No. 3135.

WHEREFORE, the Petition for Review on Certiorari is DENIED. The Judgment on the
Pleadings dated April 13, 2010 and Order dated September 2, 2010 rendered by Branch
20 of the Regional Trial Court of Cebu City in Civil Case No. CEB-33639 are AFFIRMED.

SO ORDERED.

G.R. No. 207976, November 14, 2018

PLANTERS DEVELOPMENT BANK, Petitioner, v. LUBIYA AGRO INDUSTRIAL

CORPORATION, Respondent.

DECISION

A. REYES, JR., J.:

Nature of the Case

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to
reverse and set aside the January 24, 2013 Decision1 and June 20, 2013 Resolution2 of
the Court of Appeals (CA) in CA-G.R. CV No. 01761-MIN. The challenged rulings
partially reversed the March 5, 2008 Decision3 of the Regional Trial Court (RTC), Branch
35, General Santos City in Civil Case No. 6884, dismissing herein respondent's
complaint for nullification of loan agreement and foreclosure proceedings.
 Factual Antecedents

On August 23, 1995 and November 13, 1997, petitioner Planters Development Bank
(Planters Bank) granted two (2) loans to respondent Lubiya Agro Industrial Corporation
(Lubiya) in the amounts of P6,500,000.00 and P5,000,000.00, respectively. The said
loans were secured by real estate mortgages over two (2) parcels of land with
improvements thereon located in General Santos City covered by Transfer Certificate of
Title Nos. T-55058 and T-55057.4

When Lubiya defaulted, Planters Bank sent a letter dated June 8, 1998 to it demanding
payment and informing the latter that failure to heed such demand shall prompt
Planters Bank to institute a legal action against it.5 Consequently, due to Libuya's failure
to settle its obligation, Planters Bank extrajudicially foreclosed the properties offered as
security by Lubiya. A public auction was held on October 6, 1998 wherein Planters Bank
emerged as the sole and highest bidder. A Certificate of Sale was thereafter issued in
its favor and recorded with the Registry of Deeds on November 11, 1998. After the
expiration of the redemption period, ownership over the properties was consolidated
and titles thereto were correspondingly issued in the name of Planters Bank.6

On January 23, 2001, Lubiya filed a complaint for nullification of the loan agreement,
foreclosure proceedings, damages, and attorney's fees, with application for the issuance
of a temporary restraining order and injunction against Planters Bank. The said
complaint was anchored on Planters Bank's alleged failure to furnish Lubiya with notices
regarding the foreclosure and sale of the mortgaged properties despite being obligated
in their mortgage contract to do so.7

In its Answer, Planters Bank admitted that the loan agreements are contracts of
adhesion and Lubiya was indeed not notified of the extrajudicial foreclosure
proceedings.8

In view of the foregoing admissions, Lubiya moved for a summary judgment alleging
that no genuine issues exist as to the material facts of the case. The RTC granted the
motion and rendered judgment on March 5, 2008. Strangely however, the summary
judgment was adversed to Lubiya as the RTC dismissed its complaint against Planters
Bank, to wit:

WHEREFORE, premises considered, the instant case is hereby ordered DISMISSED. No

pronouncement as to cost.

SO ORDERED.9

Thus, Lubiya appealed before the CA.

CA Ruling

On appeal, the CA reversed the decision of the RTC and nullified the foreclosure sale.
The dispositive portion of its January 24, 2013 Decision reads:
WHEREFORE, premises considered, the appeal is PARTIALLY GRANTED. The loan
agreements are hereby declared valid, legal and subsisting. However, the extrajudicial
foreclosure proceedings conducted on October 6, 1998 is declared null and void.
Consequently, the certificate of sale as well as the consolidation of the title in favor of
the bank are also declared null and void.

SO ORDERED.10

In so ruling, the CA found that Planters Bank failed to personally notify Lubiya of the
extrajudicial foreclosure proceedings as required in Paragraph 12 of the parties' real
estate mortgage contracts. This omission not only constituted a breach of its obligations
under the contracts but also invalidated the foreclosure.

Planters Bank moved for, but was denied, reconsideration of the adverted decision.
Hence, this petition.

Issue

The sole issue before this Court is whether or not the lack of personal notice of the
extrajudicial foreclosure proceedings upon the mortgagor renders the same null and
void.

Planters Bank, in the main, alleges that the CA erred in giving a restrictive
interpretation to Paragraph 12 of the real estate mortgage contracts. It insists that the
June 8, 1998 letter informing Lubiya of its intention to institute legal action against it
constituted sufficient compliance with the requirement of "notification of any judicial or
extrajudicial action."11

In its Comment,12 respondent maintains that Planters Bank's failure to give personal
notice of the foreclosure proceedings violates Lubiya's fundamental right to due
process.

Ruling of the Court

The petition has no merit.

As a general rule, personal notice to the mortgagor in extrajudicial foreclosure

proceedings is not necessary.13 Section 3 of Act No. 313514 governing extra-judicial
foreclosure of real estate mortgages only requires the 1) posting of the notice of
extrajudicial foreclosure sale in three public places; and 2) publication of the said notice
in a newspaper of general circulation,15viz:

Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days
in at least three public places of the municipality or city where the property is situated,
and if such property is worth more than four hundred pesos, such notice shall also be
published once a week for at least three consecutive weeks in a newspaper of general
circulation in the municipality and city.
Nevertheless, jurisprudence is replete with Our pronouncement that despite the above
provisions of the law, the parties to a mortgage contract are not precluded from
imposing additional stipulations.16 This includes the requirement of personal notification
to the mortgagor of any action relative to the mortgage contract, such as the institution
of an extrajudicial foreclosure proceeding.17

Thus, the exception to the rule is when the parties stipulate that personal notice is
additionally required to be given the mortgagor. Failure to abide by the general rule, or
its exception, renders the foreclosure proceedings null and void.18

In the instant case, paragraph 12 of the parties' real estate mortgage contracts state:

All correspondence relative to this mortgage, including demand letters, summons,

subpoenas, or notification of any judicial or extra-judicial action, shall be sent to
the Mortgagor at the above given address or at the address that may hereafter be
given in writing by the Mortgagor to the Mortgagee.19 (Emphasis and italics supplied)

However, in an effort to extricate itself from its duties under the mortgage contracts,
Planters Bank avers that the foregoing provision does not state that it should notify
Lubiya of the actual extrajudicial foreclosure sale before it can be validly conducted. As
such, it conveniently insists that the demand letter dated June 8, 1998, which Lubiya
received on June 24, 1998 prior to the auction sale on October 6, 1998, duly satisfied
the notice requirement agreed upon by the parties.20

This argument fails to persuade.

The provisions of Act No. 3135 notwithstanding, under paragraph 12 of the real estate
mortgage contracts signed by the parties, Planters Bank obligated itself to notify Lubiya
of any judicial or extrajudicial action it may resort to with respect to the mortgages.
Hence, We cannot agree with Planters Bank that the June 8, 1998 demand letter that it
sent to Lubiya satisfies the bank's additional obligation to provide personal notice of the
extrajudicial foreclosure sale to the mortgagor.

As the Court elucidated in Metropolitan Bank v. Wong,21 the bank's violation of

paragraph 12 of the real estate mortgage contracts is sufficient to invalidate the
extrajudicial foreclosure sale:

In this case, petitioner and respondent in entering into a contract of real estate
mortgage, agreed inter alia:

all correspondence relative to this mortgage, including demand letters, summonses,

subpoenas, or notifications of any judicial or extra-judicial action shall be sent to the
MORTGAGOR x x x.

Precisely, the purpose of the foregoing stipulation is to apprise respondent of any action
which petitioner might take on the subject property, thus according him the opportunity
to safeguard his rights. When petitioner failed to send the notice of foreclosure sale to
respondent, he committed a contractual breach sufficient to render the foreclosure sale
on November 23, 1981 null and void.22
We reiterated the Wong ruling in Global Holiday Ownership Corporation v. Metropolitan
Bank and Trust Company,23 Carlos Lim v. Development Bank of the
Philippines,24 and Ramirez v. The Manila Banking Corporation.25 Notably, all these cases
involved provisions similar to paragraph 12 of the mortgage contracts in the present
case.

Time and again, We have underscored that the purpose of stipulations of such nature is
to precisely apprise the mortgagors of any action which the mortgagees might take on
the mortgaged properties in order to accord the former of an opportunity to safeguard
their rights.26 Thus, when Planters Bank failed to send the notice of foreclosure sale to
Lubiya, it committed a contractual breach sufficient to render the foreclosure sale on
October 6, 1998 null and void.27 Besides, the loan agreements and mortgage contracts
are standard contracts of adhesion prepared by petitioner itself. If the parties did not
intend to require personal notice in addition to the statutory requirements of posting
and publication, the said provision should not have been included in the mortgage
contracts.

Fundamentally, a contract is the law between the parties and, absent any showing that
its provisions are wholly or in part contrary to law, morals, good customs, public order,
or public policy, it shall be enforced to the letter by the courts.28 Consequently, the
failure by the mortgagee to send the notice of foreclosure sale to mortgagor constitutes
a contractual breach sufficient to render the foreclosure sale null and void.29

WHEREFORE, the petition is DENIED. The Decision dated January 24, 2013 and
Resolution dated June 20, 2013 Resolution of the Court of Appeals in CA-G.R. CV No.
01761-MIN are hereby AFFIRMED.

SO ORDERED.

[ G.R. No. 208251, November 10, 2020 ]

PHILIPPINE WIRELESS, INC. AND REPUBLIC TELECOMMUNICATIONS, INC., PETITIONERS,

VS. OPTIMUM DEVELOPMENT BANK (FORMERLY CAPITOL DEVELOPMENT BANK),
RESPONDENT.

DECISION

CARANDANG, J.:

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court (Rules),
assailing the Decision2 dated April 17, 2013 and the Resolution3 dated July 16, 2013 of the Court of
Appeals (CA) in CA-G.R. CV No. 92685 denying the appeal of petitioners Philippine Wireless, Inc.
(PWI) and Republic Telecommunications, Inc. (RETELCO) for lack of merit.

Antecedents

In August 1997, PWI entered into a Credit Agreement with respondent Capitol Development Bank
(Capitol), availing a ₱20,000,000.00 credit facility from Capitol secured by the corporate suretyship
of RETELCO. In the Continuing Suretyship Agreement RETELCO executed, it undertook to jointly
and severally pay with PWI the obligation PWI may incur pursuant to the Credit Agreement.4
On September 11, 1997, PWI borrowed ₱10,000,000.00 from Capitol, payable on October 13, 1997
at 36% interest rate per annum under Account No. COM 735. The next day, or on September 12,
1997, PWI borrowed another ₱10,000,000.00 from Capitol, payable on October 13, 1997 at 36%
interest rate per annum under Account No. COM 735-A.5

When the loans matured, PWI requested for several extensions to pay the loans. Capitol agreed, on
the condition that the interests corresponding to the extension period be paid by PWI. After several
extensions, the maturity date of the loans became May 13, 1998.6

Meanwhile, in February 1998, Capitol extended another loan to PWI in the amount of ₱2,200,000.00
payable on June 4, 1998 at 32.53% interest per annum under Account No. COM-735-B.7

As of June 10, 1998, PWI's unpaid loans under Account Nos. COM 735, COM 735-A, and COM 735-
B amounted to ₱23,363,378.73. Thus, on June 15, 1998, Capitol demanded payment from PWI.
Capitol also demanded payment from RETELCO pursuant to the Continuing Suretyship Agreement.
However, despite repeated demands, PWI and RETELCO failed to pay their outstanding obligations
that had already ballooned to ₱24,669, 709.40 as of July 10, 1998. Thus, Capitol instituted a
Complaint for collection of a sum of money docketed as Civil Case No. 66906 in the Regional Trial
Court (RTC) of Pasig.8

In their Answer, PWI and RETELCO argued that Capitol is estopped from proceeding with the
collection case as it was aware of the possible restructuring or repayment plan to settle all of PWI's
debts. PWI and RETELCO also raised that the collection case was not instituted in the name of the
real party-in-interest.9

Ruling of the Regional Trial Court

On September 15, 2008, the RTC of Pasig rendered its Decision, the dispositive portion of which
reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff:

1. ORDERING defendants jointly and severally, to pay the plaintiff the amount of Php
24,669,709.40 with 6% legal interest from July 16, 1998 until full payment, as actual
damages.

2. ORDERING defendants jointly and severally, to pay plaintiff attorney's fees equivalent to
10% of the entire obligation.

3. Cost of the suits.

SO ORDERED.10 (Emphasis in the original)

Thereafter, PWI and RETELCO filed an appeal under Rule 41 of the Rules seeking to reverse and
set aside the Decision dated September 15, 2008 of the RTC of Pasig.11

On August 20, 2009, while the appeal under Rule 41 of the Rules of PWI and RETELCO was
pending before the CA, PWI and RETELCO instituted a petition for corporate rehabilitation with the
RTC of Makati docketed as Special Proceeding No. M-6853.12
On August 24, 2009, the RTC of Makati (rehabilitation court) issued a Stay Order,13 the dispositive
portion of which states:

IN VIEW OF THE FOREGOING, this Court issues a Stay Order, in accordance with Section
7, Rule 2 of the aforecited Rules of Procedure on Corporate Rehabilitation, as follows:

1. Appointing Atty. Pamela Barbara D. Quizon-Labayen with address at Unit 410 Cornell
St., Southpointe Townhomes, Merville, Paranaque City, as rehabilitation receiver who
shall be considered as an officer of the court and who shall have the powers, duties and
functions as provided in Section 12, Rule 3 of the aforecited Rules of Procedure on
Corporate Rehabilitation. The rehabilitation receiver must post a bond of Php 1,000,000.00
before entering upon his powers, duties and functions and must take an oath, as provided
under Section 13, Rule 3 of the aforecited Rules. The petitioners is [sic] directed to serve
immediately a copy of this Stay Order upon the rehabilitation receiver, Atty. Pamela
Barbara D. Quizon-Labayen who shall manifest her acceptance or non-acceptance of her
appointment to this Court not later than ten (10) days from receipt hereof;

2. Staying enforcement of all claims, whether for money or otherwise and whether such
enforcement by this court, action or otherwise, against the petitioners, and its guarantors and
sureties not solidarity liable with the petitioners;

3. Prohibiting the petitioners from selling, encumbering, transferring or disposing in any

manner any of the properties except in the ordinary course of business;

4. Prohibiting the petitioners from making any payment of its liabilities outstanding as of the
date of filing of the verified Petition on August 20, 2009;

5. Prohibiting the suppliers of the petitioners from withholding supply of goods or services in
the ordinary course of business for as long as the petitioners makes [sic] payments for the
services and goods supplied after the issuance of the Stay Order.

6. Directing the petitioners to pay in full all administrative expenses incurred after the
issuance of this Stay Order.

x x x x14 (Emphasis in the original; underscoring supplied)

However, Atty. Labayen failed to manifest her acceptance or non-acceptance of her appointment as
rehabilitation receiver. In an Order15 dated October 21, 2009, the rehabilitation court appointed
ℒαwρhi ৷

Atty. Lito A. Mondragon in her stead. On December 7, 2009, Atty. Mondragon took his oath as
rehabilitation receiver16 of PWI and RETELCO.17

On February 12, 2010, PWI and RETELCO filed a Manifestation with Motion with the CA seeking the
suspension of the appellate proceedings in accordance with the 2008 Rules of Procedure on
Corporate Rehabilitation18 (2008 Rehabilitation Rules) which was granted in a Resolution dated
August 20, 2010.19

The CA directed PWI and RETELCO to give an update on the status of the rehabilitation
proceedings. In their Manifestation dated December 20, 2010, PWI and RETELCO reported that the
rehabilitation receiver had already filed a Rehabilitation Receiver's Report dated November 24,
2010. Also, in their Compliance dated July 12, 2011, PWI and RETELCO manifested that an
Order20 dated April 1, 2011 was issued by the rehabilitation court in Special Proceeding No. M-
6853, approving the Rehabilitation Plan they submitted. Three sets of creditors filed their Petition for
Review with the CA assailing the grant of the petition for corporate rehabilitation and seeking the
nullification of the approved rehabilitation plan.21

Thereafter, in the appealed case, the CA issued a Minute Resolution dated August 9, 2011 ordering
the resumption of the appellate proceedings in the collection case and for PWI and RETELCO to
submit their Appellants' Brief.22

Ruling of the Court of Appeals

On April 17, 2013, the CA rendered its Decision,23 the dispositive portion of which states:

WHEREFORE, premises considered, the present appeal is DENIED for lack of merit. The
assailed Decision dated September 15, 2008 rendered by the Regional Trial Court, Branch
71, Pasig City in Civil Case No. 66906, is hereby AFFIRMED.

SO ORDERED.24 (Emphasis in the original)

In affirming the ruling of the RTC, the CA pointed out that the petition for corporate rehabilitation was
only initiated after the RTC of Pasig rendered the appealed Decision. For the CA, it did not err in
continuing with the appellate proceedings because the Rehabilitation Plan of PWI and RETELCO
was approved in a petition for corporate rehabilitation initiated after the decision in the collection
case was appealed to the CA.25 The CA also noted the three petitions for review separately filed
with the CA assailing the rehabilitation court's Order dated April 1, 2011 approving the Rehabilitation
Plan. The CA opined that the rehabilitation court's Order dated April 1, 2011 is not yet final so as to
adversely affect the appellate proceedings in the collection case because the three petitions for
review can still be granted or denied by the CA and raised to the Court.26

The CA also ruled that Capitol is a real party-in-interest as it stands to be benefited or injured by any
judgment in the case.27 The CA also held that Capitol is not barred from proceeding with the
collection case despite its alleged knowledge of the existence of a steering committee created to
prepare a restructuring plan to settle PWI's debts. The CA explained that the principle of estoppel
cannot be applied because Capitol did not make any admission or representation which would make
PWI and RETELCO believe that the bank will no longer enforce the loan obligations against
them.28 Lastly, the CA declared that PWI and RETELCO cannot renege on their loan obligations
and simply invoke the existence of "[']circumstances beyond its control['] or [']acts of God[']"29 to
justify non-payment of their loan obligations without establishing entitlement to such exemption.30

In a Resolution31 dated July 16, 2013, the CA denied the Motion for Reconsideration PWI and
RETELCO filed for lack of merit.

In the present petition, PWI and RETELCO argue that the stay order contemplated in Section 7,
Rule 3 of the 2008 Rehabilitation Rules,32 which was carried over to Section 7(b) of Republic Act
No. (R.A.) 10142 or the Financial Rehabilitation and Insolvency Act of 2010,33 covers all actions for
claims against a corporation pending before any court, tribunal or board. They emphasize that these
claims shall be suspended in whatever stage they may be found upon the appointment of a
rehabilitation receiver.34 Citing various jurisprudence, PWI and RETELCO maintain that all
monetary claims against a distressed corporation, without distinction, are suspended pending the
rehabilitation proceedings.35
In its Comment,36 Capitol, now called Optimum Development Bank (Optimum), highlights that the
RTC of Pasig could no longer suspend the collection case when the Stay Order37 was issued on
August 24, 2009. The Decision dated September 15,2008 of the RTC of Pasig was already appealed
on October 28, 2008 by PWI and RETELCO to the CA.38 Even assuming arguendo that
proceedings are still pending before the RTC of Pasig, Optimum posits that the RTC of Pasig was
justified in not suspending the proceedings because the Stay Order merely enjoins the enforcement
of claims and not its determination.39 Optimum stresses that, just like the appeal PWI and
RETELCO made to the CA, the present petition does not impugn the determination by the RTC of
Pasig of PWI and RETELCO's liability. What is only being questioned is the propriety of suspending
the proceedings in light of the Stay Order.40 In the present case, Optimum insists that the Stay
Order was only issued a year after the Decision of the RTC of Pasig was rendered and after the
decision was appealed.41 Optimum also maintains that the CA is justified in resuming the appellate
proceedings since the collection case has been pending for more than 15 years already.42 Optimum
argues that continuing the appellate proceedings would not unduly hinder 'or prevent the
rehabilitation of PWI. Optimum also notes that the timing of the filing of the petition for rehabilitation,
11 years after the filing of the collection case by Capitol, is suspicious.43

In their Reply,44 PWI and RETELCO clarify that it is the appeal pending before the CA that they are
asking the Court to suspend. PWI and RETELCO also reiterate that a stay order suspends all
actions for claims against a corporation under rehabilitation in whatever stage they may be and
wherever they may be pending, including one that is pending appeal before the CA. PWI and
RETELCO also add that the suspension covers all claims of a pecuniary nature such as the present
collection case.45

The parties submitted their memoranda46 reiterating their respective positions.

Issue

The issue to be resolved is whether the appellate proceedings assailing the money judgment the
RTC of Pasig rendered in a collection case against PWI and RETELCO may be suspended by a
stay order issued in a petition for rehabilitation PWI and RETELCO initiated after the decision on the
collection case was appealed.

Ruling of the Court

The petition is not meritorious.

The collection case instituted by the

creditor against the principal debtor
and its surety may proceed despite a
stay order issued by the rehabilitation
court. The issuance of a stay order
does not affect the right to commence
actions or proceedings insofar as it is
necessary to preserve a claim against
the debtor.

Presidential Decree No. (P.D.) 902-A47 as amended, previously governed the rehabilitation of
distressed corporations. Subparagraph (c) of Section 6 of P.D. 902-A, as amended by P.D. 1799,
reads as follows:
 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 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 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, further, That the Commission may appoint a
rehabilitation receiver of corporations, partnerships or other associations supervised or
regulated by other government agencies, such as banks and insurance companies, upon
request of the government agency concerned: 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 supplied; italics in the original)

In cases such as Rizal Commercial Banking Corp. v. IAC48 and Castillo v. Uniwide Warehouse
Club, Inc. and/or Gow49 the Court ruled that upon the appointment of a management committee,
rehabilitation receiver, board or body 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.50

The continuation of proceedings pending before the Securities and Exchange Commission (SEC)
mentioned in P.D. 902-A, as amended, is applicable only to pending suspension of payment and
rehabilitation cases filed as of June 30, 2000 as provided in Section 5.2 of R.A. 8799 or the
Securities Regulation Code:

5.2. The Commission's jurisdiction over all cases enumerated under Section 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]

On November 21, 2000, after the transfer of cases from the SEC to the RTC, the Court issued its
Interim Rules of Procedure on Corporate Rehabilitation51 (2000 Rehabilitation Rules). Section 6,
Rule 4 of the 2000 Rehabilitation Rules states:

Section 6. 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 (a) appointing a
Rehabilitation Receiver and fixing his bond; (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; (c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any
manner any of its properties except in the ordinary course of business; (d) prohibiting the
debtor from making any payment of its liabilities outstanding as at the date of filing of the
petition; (e) prohibiting the debtor's suppliers of goods or services from withholding supply of
goods and services in the ordinary course of business for as long as the debtor makes
 payments for the services and goods supplied after the issuance of the stay order; (t)
directing the payment in full of all administrative expenses incurred after the issuance of the
stay order; (g) fixing the initial hearing on the petition not earlier than forty five (45) days but
not later than sixty (60) days from the filing thereof; (h) directing the petitioner to publish the
Order in a newspaper of general circulation in the Philippines once a week for two (2)
consecutive weeks; (i) directing all creditors and all interested parties (including the
Securities and Exchange Commission) to file and serve on the debtor a verified comment on
or opposition to the petition, with supporting affidavits and documents, not later than ten (10)
days before the date of the initial hearing and putting them on notice that their failure to do
so will bar them from participating in the proceedings; and U) directing the creditors and
interested parties to secure from the court copies of the petition and its annexes within such
time as to enable themselves to file their comment on or opposition to the petition and to
prepare for the initial hearing of the petition. (Emphasis supplied)

The 2000 Rehabilitation Rules explicitly stated that 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"52 is suspended by the
issuance of a stay order.

However, at the time the petition for rehabilitation of PWI and RETELCO was initiated and the Stay
Order dated August 24, 2009 was issued, the rules governing corporate rehabilitation was already
the 2008 Rehabilitation Rules.53 Section 6, Rule 4 of the 2000 Rehabilitation Rules had been
superseded by Section 7, Rule 3 of the 2008 Rehabilitation Rules which enumerates the
consequences of the issuance of a stay order as follows:

Section 7. Stay Order. - If the court finds the petition to be sufficient in form and substance, it
shall, not later than five (5) working days from the filing of the petition, issue an order: (a)
appointing a rehabilitation receiver and fixing his bond; (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 persons not solidarily
liable with the debtor; provided, that the stay order shall not cover claims against
letters of credit and similar security arrangements issued by a third party to secure
the payment of the debtor's obligations; provided, further, that the stay order shall not
cover foreclosure by a creditor of property not belonging to a debtor under corporate
rehabilitation; provided, however, that where the owner of such property sought to be
foreclosed is also a guarantor or one who is not solidarily liable, said owner shall be entitled
to the benefit of exclusion as such guarantor; (c) prohibiting the debtor from selling,
encumbering, transferring, or disposing in any manner any of its properties except in the
ordinary course of business; (d) prohibiting the debtor from making any payment of its
liabilities except as provided in items (e), (f) and (g) of this Section or when ordered by the
court pursuant to Section 10 of Rule 3; (e) prohibiting the debtor's suppliers of goods or
services from withholding supply of goods and services in the ordinary course of business for
as long as the debtor makes payments for the services and goods supplied after the
issuance of the stay order; (f) directing the payment in full of all administrative expenses
incurred after the issuance of the stay order; (g) directing the payment of new loans or other
forms of credit accommodations obtained for the rehabilitation of the debtor with prior court
approval; (h) fixing the elates of the initial hearing on the petition not earlier than forty-five
(45) days but not later than sixty (60) days from the filing thereof; (i) directing the petitioner to
publish the Order in a newspaper of general circulation in the Philippines once a week for
two (2) consecutive weeks; (j) directing the petitioner to furnish a copy of the petition and its
annexes, as well as the stay order, to the creditors named in the petition and the appropriate
regulatory agencies such as, but not limited to, the Securities and Exchange Commission,
the Bangko Sentral ng Pilipinas, the Insurance Commission, the National
 Telecommunications Commission, the Housing and Land Use Regulatory Board and the
Energy Regulatory Commission; (k) directing the petitioner that foreign creditors with no
known addresses in the Philippines be individually given a copy of the stay order at their
foreign addresses; (l) directing all creditors and all interested parties (including the regulatory
agencies concerned) to file and serve on the debtor a verified comment on or opposition to
the petition, with supporting affidavits and documents, not later than fifteen (15) days before
the date of the first initial hearing and putting them on notice that their failure to do so will bar
them from participating in the proceedings; and (m) directing the creditors and interested
parties to secure from the court copies of the petition and its annexes within such time as to
enable themselves to file their comment on or opposition to the petition and to prepare for
the initial hearing of the petition.

The issuance of a stay order does not affect the right to commence actions or
proceedings insofar as it is necessary to preserve a claim against the
debtor. (Emphasis and underscoring supplied; italics in the original)

Noticeably, the consequences of the issuance of a stay order enumerated in Section 6, Rule 4 of the
2000 Rehabilitation Rules were modified and expanded in Section 7, Rule 3 of the 2008
Rehabilitation Rules. It is worthy to point out that the Court included a paragraph clarifying that "a
stay order does not affect the right to commence actions or proceedings insofar as it is necessary to
preserve a claim against the debtor."54 Therefore, it is clear that the Court recognizes in the 2008
Rehabilitation Rules the right of creditors to commence actions or proceedings necessary to
safeguard its claim against distressed corporations like PWI and RETELCO despite a stay order.

Though the petition for rehabilitation of PWI and RETELCO was filed under the 2008 Rehabilitation
Rules, the significant changes incorporated in R.A. 10142 or the Financial Rehabilitation and
Insolvency Act (FRIA) of 201055 may be applied to resolve the present petition. To integrate the
changes introduced in the FRIA, the Court enacted the Financial Rehabilitation Rules of
Procedure56 (2013 FRIA Rules) on August 27, 2013. Section 2, Rule 1 of the 2013 FRIA Rules
provides that it shall govern rehabilitation cases already pending, except when its application would
not be feasible or would work injustice, to wit:

Section 2. Scope. - These Rules shall apply to petitions for rehabilitation of corporations,
partnerships, and sole proprietorships, filed pursuant to Republic Act No. 10142, otherwise
known as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010.

These Rules shall similarly govern all further proceedings in suspension of payments
and rehabilitation cases already pending, except to the extent that, in the opinion of the
court, its application would not be feasible or would work injustice, in which event the
procedures originally applicable shall continue to govern. (Emphasis supplied; italics in the
original)

Similarly, in Section 146 of the FRIA, it is stated that:

Section 146. Application to Pending Insolvency, Suspension of Payments and Rehabilitation

Cases. - This Act shall govern all petitions filed after it has taken effect. All further
proceedings in insolvency, suspension of payments and rehabilitation cases then pending,
except to the extent that in the opinion of the court their application would not be feasible or
would work injustice, in which event the procedures set forth in prior laws and regulations
shall apply.
Therefore, the retroactive application of the pertinent provisions of the 2013 FRIA Rules is permitted
in resolving the issue on the non-suspension of the appellate proceedings in the CA despite the
issuance by the rehabilitation court of a stay order during the pendency of the appeal.

In Allied Banking Corp. v. Equitable PCI Bank, Inc.,57 the Court found that the application of the
2013 FRIA Rules was proper in resolving a rehabilitation case instituted under the 2000
Rehabilitation Rules "insofar as it clarifies the effect of an order staying claims against a debtor
sought to be rehabilitated".58

A creditors' right to commence actions or proceedings under Section 7, Rule 3 of the 2008
Rehabilitation Rules was carried over in the last paragraph of Section 8, Rule 2 of the 2013 FRIA
Rules which states:

Section 8. Commencement of Proceedings and Issuance of a Commencement Order. - The

rehabilitation proceedings shall be deemed to have commenced from the date of filing of the
petition.

The Commencement Order shall:

(V) include a Stay or Suspension Order, which shall:

(i) suspend all actions or proceedings in court or otherwise, for the enforcement of all claims
against the debtor;

(ii) suspend all actions to enforce any judgment, attachment or other provisional remedies
against the debtor;

(iii) prohibit the debtor from selling, encumbering, transferring or disposing in any manner
any of its properties except in the ordinary course of business; and

(iv) prohibit the debtor from making any payment of its liabilities outstanding as of the
commencement date except as may be provided herein.

The issuance of a stay order does not affect the right to commence actions or
proceedings in order to preserve ad cautelam a claim against the debtor and to toll the
running of the prescriptive period to file the claim.For this purpose, the plaintiff may file
the appropriate court action or proceeding by paying the amount of One Hundred Thousand
Pesos (P100,000.00) or one-tenth (1/10) of the prescribed filing fee, whichever is lower. The
payment of the balance of the filing fee shall be a jurisdictional requirement for the
reinstatement or revival of the case. (Emphasis supplied; italics in the original)

The Stay Order issued by the rehabilitation court, which effectively started the rehabilitation
proceedings, together with its order suspending all claims against PWI and RETELCO, is akin to a
commencement order under Section 8, Rule 2 of the 2013 FRIA Rules. The quoted provision clearly
recognizes the right of creditors to commence actions or proceedings in order to preserve ad
cautelam their respective claims against a distressed corporation despite the issuance of a stay
order. This provision reinforces Section 7, Rule 3 of the 2008 Rehabilitation Rules and
acknowledges creditors' right to commence actions or proceedings against a corporation undergoing
rehabilitation.
In their petition, PWI and RETELCO argued that the Court's ruling in Phil. Airlines, Inc. v. Court of
Appeals59 is applicable to the present case.60 This case originated from a complaint for design
infringement and damages instituted by Sabine Koschinger against the company. Before the trial
court had rendered a decision, the SEC gave due course to Philippine Airlines' petition for the
appointment of a rehabilitation receiver pursuant to P.D. 902-A. The Court upheld the suspension of
monetary claims against Philippine Airlines because of the SEC's order placing it under receivership.
The Court recognized the need to suspend the payment of the claims pending the rehabilitation
proceedings in order to enable the management committee/receiver to channel the efforts towards
restructuring and rehabilitation.61 The Court explained that "[t]he continuation of the appeal
proceedings would have unduly hindered the management committee's task of rehabilitating the
ailing corporation, giving rise precisely to the situation that the stay order sought to avoid."62

The ruling in Phil. Airlines, Inc. v. Court of Appeals cannot be applied to the present case to justify
suspending the appellate proceedings of Capitol's collection case against PWI and RETELCO as
they do not involve the same factual milieu. It must be emphasized that Philippine Airlines' petition
for the appointment of a rehabilitation receiver was filed pursuant to P.D. 902-A, as amended, and it
was resolved by applying the provisions under the 2000 Rehabilitation Rules,63 the provisions of
which did not yet include the amendment introduced in the last paragraph of Section 7, Rule 3 of the
2008 Rehabilitation Rules. Unlike the Phil. Airlines, Inc. v. Court of Appeals case, the petition for
corporate rehabilitation of PWI and RETELCO was initiated pursuant to the 2008 Rehabilitation
Rules. More importantly, it is now clear in Section 7, Rule 3 of the 2008 Rehabilitation Rules and
Section 8, Rule 2 of the 2013 FRIA Rules that creditors have a right to commence actions to
preserve their claims against a distressed corporation under rehabilitation.

Likewise, in Philippine Airlines, Incorporated v. Zamora,64 the Court declared that:

x x x [N]o other action may be taken in, including the rendition of judgment during the state of
suspension - what are automatically stayed or suspended are the proceedings of an action
or suit and not just the payment of claims during the execution stage after the case had
become final and executory.

The suspension of action for claims against a corporation under rehabilitation receiver or
management committee embraces all phases of the suit, be it before the trial court or any
tribunal or before this Court. Furthermore, the actions that are suspended cover all claims
against a distressed corporation whether for damages founded on a breach of contract of
carriage, labor cases, collection suits or any other claims of a pecuniary nature.65

However, the principle expressed above cannot be indiscriminately applied in resolving all
controversies involving suspension of claims of distressed corporations presented before Us. The
application. of the quoted declaration of the Court must be done cautiously, taking into consideration
the context in which it was decided. Similar to Philippine Airlines v. Court of Appeals, the ruling of the
Court in Philippine Airlines, Incorporated v. Zamora, quoted above cannot be applied to the present
case because the labor case from which the case originated was still pending in the National Labor
Relations Commission (NLRC) when Philippine Airlines filed a petition for the appointment of a
rehabilitation receiver. Moreover, Philippine Airlines' petition for the appointment of a rehabilitation
receiver was filed pursuant to P.D. No. 902-A, as amended, and the Court relied only on its
provisions and prior decided cases in resolving the dispute.66 Considering the apparent differences
between Philippine Airlines, Incorporated v. Zamora and the present case, adopting principles from
said case, insofar as implications of stay order is concerned, to resolve the case at bar, is misplaced.

More recently, in La Savoie Development Corp. v. Buenavista Properties, Inc.,67 the Court applied
the ruling in Phil. Airlines, Inc. v. Court of Appeals, in declaring that the "effect of the Stay Order is
to ipso jure suspend the proceedings in the x x x RTC at whatever stage the action may be."68 This
case originated from a complaint for termination of contract and recovery of property with damages
Buenavista Properties, Inc. (Buenavista) filed against La Savoie Development Corp. (La Savoie) in
1998. On June 12, 2013, the RTC of Quezon City issued a decision in favor of Buenavista.
Subsequently, La Savoie filed a manifestation dated June 21, 2003 informing the court that a stay
order dated June 4, 2003 was issued by the RTC of Makati and asking the RTC of Quezon City to
suspend its proceedings. In ruling that the decision of the RTC of Quezon City did not attain finality
due to the issuance of a stay order pursuant to the 2000 Rehabilitation Rules, the Court applied the
amendatory provisions of P.D. No. 902-A which mandated the suspension of all actions for claims
against a corporation placed under a management committee by the SEC.69 Noticeably, what may
be applied is the favorable treatment under the transitory clause under Section 146 of the FRIA
wherein suppletory application of FRIA Rules to pending rehabilitation cases is permitted "except to
the extent that in the opinion of the court their application would not be feasible or would work
injustice."70

Accordingly, the collection case instituted by the creditor against the principal debtor and its surety
may proceed despite a stay order issued by the rehabilitation court. The CA was correct in resuming
the appellate proceedings of the collection case Capitol filed against PWI and RETELCO despite the
stay order issued by the rehabilitation court in relation to PWI and RETELCO's rehabilitation.
Regardless of the date the petition for rehabilitation was initiated, the issuance of a stay order no
longer bars the court from making a determination of rights and liabilities in a collection case
involving distressed corporations.

Undoubtedly, the objective in undergoing rehabilitation "is to enable the company to gain a new
lease on life and thereby allow creditors to be paid their claims from its earnings."71 Nevertheless,
allowing the continuation of the collection case against distressed corporations under rehabilitation is
not inconsistent with the inherent objective of rehabilitation proceedings. What Section 7, Rule 3 of
the 2008 Rehabilitation Rules and Section 8, Rule 2 of the 2013 FRIA Rules disallow is the
enforcement of claims against the distressed corporation through the execution of money judgment
which will undermine efforts to preserve its assets and restore its economic viability.

It is apparent that the Court, in formulating the 2008 Rehabilitation Rules and the 2013 FRIA Rules,
did not intend to bar creditors from filing actions and instituting proceedings necessary to preserve
their claim against distressed corporations and to toll the running of the prescriptive period. In
construing Section 7, Rule 3 of the 2008 Rehabilitation Rules and Section 8, Rule 2 of the 2013
FRIA Rules, these provisions must be harmonized and taken as a whole, giving effect to each word.
The Court is clear in enacting the 2008 Rehabilitation Rules and the 2013 FRIA Rules. Insofar as
creditors' claims are concerned, what was sought to be suspended in a stay order issued pursuant to
Section 7, Rule 3 of the 2008 Rehabilitation Rules or a commencement order issued under Section
8, Rule 2 of the FRIA Rules is the execution and satisfaction of judgments against corporations
under rehabilitation. Therefore, while a stay order is immediately executory72 the CA was correct in
continuing the proceedings in the appellate level because it is allowed under the FRIA Rules.

WHEREFORE, premises considered, the Petition for Review on Certiorari is DENIED.

SO ORDERED.

G.R. No. 177382, February 17, 2016

VIVA SHIPPING LINES, INC., Petitioner, v. KEPPEL PHILIPPINES MINING, INC.,

METROPOLITAN BANK & TRUST COMPANY, PILIPINAS SHELL PETROLEUM
CORPORATION, CITY OF BATANGAS, CITY OF LUCENA, PROVINCE OF QUEZON,
ALEJANDRO OLIT, NIDA MONTILLA, PIO HERNANDEZ, EUGENIO BACULO, AND
HARLAN BACALTOS, Respondents.

DECISION

LEONEN, J.:

Rule 43 of the Rules of Court prescribes the procedure to assail the final orders and
decisions in corporate rehabilitation cases filed under the Interim Rules of Procedure on
Corporate Rehabilitation.1 Liberality in the application of the rules is not an end in itself.
It must be pleaded with factual basis and must be allowed for equitable ends. There
must be no indication that the violation of the rule is due to negligence or design.
Liberality is an extreme exception, justifiable only when equity exists.

On October 4, 2005, Viva Shipping Lines, Inc. (Viva Shipping Lines) filed a Petition for
Corporate Rehabilitation before the Regional Trial Court of Lucena City.2 The Regional
Trial Court initially denied the Petition for failure to comply with the requirements in
Rule 4, Sections 2 and 3 of the Interim Rules of Procedure on Corporate
Rehabilitation.3 On October 17, 2005, Viva Shipping Lines filed an Amended Petition.4

In the Amended Petition, Viva Shipping Lines claimed to own and operate 19 maritime
vessels5 and Ocean Palace Mall, a shopping mall in downtown Lucena City.6 Viva
Shipping Lines also declared its total properties' assessed value at about
P45,172,790.00.7 However, these allegations were contrary to the attached documents
in the Amended Petition.

One of the attachments, the Property Inventory List, showed that Viva Shipping Lines
owned only two (2) maritime vessels: M/V Viva Penafrancia V and M/V Marian
Queen.8 The list also stated that the fair market value of all of Viva Shipping Lines'
assets amounted to P447,860,000.00,9 P400 million more than what was alleged in its
Amended Petition. Some of the properties listed in the Property Inventory List were
already marked as "encumbered" by its creditors;10 hence, only PI47,630,000.00 of real
property and its vessels were marked as "free assets."11

Viva Shipping Lines also declared the following debts:

Name of Creditor Nature of Debts Amount of Obligation

(1) Metropolitan Bank & Trust Loan secured by Real P 176,428,745,50
Company Estate Mortgage
(2) Keppel Philippines Marine, Charges for Repair of 9,000,000.00 +
Inc. Vessels
(3) Province of Quezon, Lucena Realty Taxes and 35,000,000.00 +
City, and Province of Batangas, Assessments __________________________ _
Batangas City
TOTAL12 P 220,428,745.50 +
According to Viva Shipping Lines, the devaluation of the Philippine peso, increased
competition, and mismanagement of its businesses made it difficult to pay its debts as
they became due.13 It also stated that "almost all [its] vessels were rendered
unserviceable either because of age and deterioration that [it] can no longer compete
with modern made vessels owned by other operators."14

In its Company Rehabilitation Plan, Viva Shipping Lines enumerated possible sources of
funding such as the sale of old vessels and commercial lots of its sister company, Sto.
Domingo Shipping Lines.15 It also proposed the conversion of the Ocean Palace Mall into
a hotel, the acquisition of two (2) new vessels for shipping operations, and the "re-
operation"16 of an oil mill in Buenavista, Quezon.17

Viva Shipping Lines nominated two individuals to be appointed as rehabilitation

receiver: Armando F. Ragudo, a businessman from Tayabas, Quezon, and Atty. Calixto
Ferdinand B. Dauz III, a lawyer from Lucena City.18 A day after filing the Amended
Petition, Viva Shipping Lines submitted the name of a third nominee, Former Judge Jose
F. Mendoza (Judge Mendoza).19

On October 19, 2005, the Regional Trial Court found that Viva Shipping Lines' Amended
Petition to be "sufficient in form and substance," and issued a stay order.20 It stayed the
enforcement of all monetary and judicial claims against Viva Shipping Lines, and
prohibited Viva Shipping Lines from selling, encumbering, transferring, or disposing of
any of its properties except in the ordinary course of business.21 The Regional Trial
Court also appointed Judge Mendoza as rehabilitation receiver.

Before the initial hearing scheduled on December 5, 2005, the City of Batangas, Keppel
Philippines Marine, Inc., and Metropolitan Bank and Trust Company (Metrobank) filed
their respective comments and oppositions to Viva Shipping Lines' Amended Petition.22

During the initial hearing, Pilipinas Shell Petroleum Corporation (Pilipinas Shell) moved
for additional time to write its opposition to Viva Shipping Lines' Amended
Petition.23 Pilipinas Shell later filed its Comment/Opposition with Formal Notice of
Claim.24

Luzviminda C. Cueto, a former employee of Viva Shipping Lines, also filed a

Manifestation and Registration of Monetary Claim stating that Viva Shipping Lines owes
her P232,000.00 as separation and 13th month pay.25 The Securities and Exchange
Commission filed a Comment informing the Regional Trial Court that Viva Shipping
Lines violated certain laws and rules of the Commission.26

On March 24, 2006, Judge Mendoza withdrew his acceptance of appointment as

rehabilitation receiver.27 As replacement, Viva Shipping Lines nominated Atty. Antonio
Acyatan, while Metrobank nominated Atty. Rosario S. Bernaldo.28 Keppel Philippines
Marine, Inc. adopted Metrobank's nomination.29

On April 4, 2006, Metrobank filed a Motion for Production or Inspection of relevant

documents relating to Viva Shipping Lines' business operations such as board
resolutions, tax returns, accounting ledgers, bank accounts, and contracts.30 Viva
Shipping Lines filed its opposition. However, the Regional Trial Court granted
Metrobank's Motion.31 Viva Shipping Lines failed to comply with the Order to produce
the documents,32 as well as with the Regional Trial Court Order to submit a
memorandum.33

On September 27, 2006, Viva Shipping Lines' former employees Alejandro Olit, Nida
Montilla, Pio Hernandez, Eugenio Baculo, and Harlan Bacaltos34 (Alejandro Olit, et al.)
filed their comment on the Amended Petition, informing the Regional Trial Court of their
pending complaint against Viva Shipping Lines before the National Labor Relations
Commission.35

In the Order dated October 30, 2006,36 the Regional Trial Court lifted the stay order and
dismissed Viva Shipping Lines' Amended Petition for failure to show the company's
viability and the feasibility of rehabilitation. The Regional Trial Court summarized Viva
Shipping Lines' creditors and debts:37

Name of Creditor Nature of Debts38 Amount of

Obligation
1 BatangasCity Real Estate Taxes� � 264,006.52
2 Keppel Philippines Marine, Inc. Charges for Repair of� 20,054 977.84
Vessels
3 Metropolitan Bank & Trust Loan secured by Real Estate 191,953,46.79
Company Mortgage
4 Pilipinas Shell Petroleum Corp. Supply Agreement 20,546,797.74
5 Luzviminda C. Cueto Labor 232,000.00
TOTAL P 233,061,247.89

The Regional Trial Court also noted the following as Viva Shipping Lines' free assets:39

Nature of Property Assessed Value Market Value

1 Agricultural/Industrial Lot in San Narciso, Quezon P 16,493,050.00 P40,000,000.00
covered by TCT No. T-l55423
2 Agricultural Lot located at San Andres, Quezon 1,235,010.00 47,630,000.00
covered by TCT No. T-215549
3 MV Viva Penafrancia 5 30,000,000.00
4 MV Marian Queen[40 ] 30,000,000.00
� TOTAL P 147,630,000.00
The Regional Trial Court found that Viva Shipping Lines' assets all appeared to be non-
performing. Further, it noted that Viva Shipping Lines failed to show any evidence of
consent to sell real properties belonging to its sister company.41

Aggrieved, Viva Shipping Lines filed a Petition for Review under Rule 43 of the Rules of
Court before the Court of Appeals.42 It only impleaded Hon. Adolfo V. Encomienda, the
Presiding Judge of the trial court that rendered the assailed decision. It did not implead
any of its creditors, but served copies of the Petition on counsels for Metrobank, Keppel
Philippines Marine, Inc., Pilipinas Shell, City of Batangas, Province of Quezon, and City
of Lucena.43 Viva Shipping Lines neither impleaded nor served a copy of the Petition on
its former employees or their counsels.

The Court of Appeals dismissed Viva Shipping Lines' Petition for Review in the
Resolution dated January 5, 2007.44 It found that Viva Shipping Lines failed to comply
with procedural requirements under Rule 43,45 The Court of Appeals ruled that due to
the failure of Viva Shipping Lines to implead its creditors as respondents, "there are no
respondents who may be required to file a comment on the petition, pursuant to
Section 8 of Rule 43,"46

Viva Shipping Lines moved for reconsideration.47 It argued that its procedural misstep
was cured when it served copies of the Petition on the Regional Trial Court and on its
former employees.48 In the Resolution dated March 30, 2007, the Court of Appeals
denied Viva Shipping Lines' Motion for Reconsideration.49

Viva Shipping Lines filed before this court a Petition for Review on Certiorari assailing
the January 5, 2007 and March 30, 2007 Court of Appeals Resolutions.50 It prayed that
the case be remanded to the Court of Appeals for adjudication on the merits.51

Without necessarily giving due course to the Petition, this court required respondents to
comment.52 Keppel Philippines Marine, Inc.,53 Pilipinas Shell,54 Metrobank,55 former
employees Alejandro Olit et al.,56 the City of Batangas,57 the City Treasurer of
Lucena,58 and the Provincial Treasurer of Quezon59 filed their respective Comments.

On September 17, 2008,60 December 10, 2008,61 and July 20, 2009,62 this court
required Viva Shipping Lines to file replies to respondents' comments. Viva Shipping
Lines' counsel, Abesamis Law Office, withdrew its representation, which was accepted
by this court.63 Viva Shipping Lines was unable to file its consolidated reply; hence, this
court resolved that Viva Shipping Lines' right to file a consolidated reply was deemed
waived.64

On September 1, 2011, Atty. Vicente M. Joyas (Atty. Joyas) entered his appearance as
Viva Shipping Lines' new counsel.65 Atty. Joyas moved for several extensions of time to
comply with this court's order to file a consolidated reply. This court allowed Atty.
Joyas' Motions, and Viva Shipping Lines' consolidated reply was noted in our Resolution
dated December 7, 2011.66 This court then ordered the parties to submit their
respective memoranda.67

Viva Shipping Lines, Inc.68 and respondents Pilipinas Shell,69 Keppel Philippines Marine,
Inc.,70 and Metrobank71 submitted their respective memoranda. This court dispensed
with the filing of the other respondents' memoranda.72

We resolve the following issues:

First, whether the Court of Appeals erred in dismissing petitioner Viva Shipping Lines'
Petition for Review on procedural grounds; and

Second, whether petitioner was denied substantial justice when the Court of Appeals
did not give due course to its petition.

Petitioner argues that the Court of Appeals should have given due course to its Petition
and excused its non-compliance with procedural rules.73 For petitioner, the Interim
Rules of Procedure on Corporate Rehabilitation mandates a liberal construction of
procedural rules, which must prevail over the strict application of Rule 43 of the Rules
of Court.74

According to petitioner, this court disfavors dismissals based on pure technicalities and
adopts a policy stating that rules on appeal are "not iron�clad and must yield to
loftier demands of substantial [j]ustice and equity."75 For petitioner, the immediate
dismissal of its Petition for Review is contrary to the purpose of corporate rehabilitation
to rescue and rehabilitate financially distressed companies.76

Respondents, on the other hand, argue that the dismissal of petitioner's Petition for
Review was proper for its failure to implead any of its creditors. Petitioner's procedural
misstep resulted in the denial of the creditors' right to due process as they could not file
a comment on the Petition.77 Respondent Pilipinas Shell points out that petitioner did
not even try to explain why it failed to implead its creditors in its Petition.78

Respondents cite Rule 43, Section 7, which states that non-compliance with any of the
requirements of proof of service of the Petition, and the required contents, shall be
sufficient ground for the dismissal of the Petition.79 Compliance with Rule 43 is required
under the Interim Rules of Procedure on Corporate Rehabilitation because it is the
prescribed mode of appealing trial court decisions and final orders in corporate
rehabilitation cases.80 According to respondent Metrobank, contrary to the views of
petitioner, the policy of liberality in construction of the Interim Rules of Procedure on
Corporate Rehabilitation are limited to proceedings in the Regional Trial Court, and not
with respect to procedural rules in elevating appeals relating to corporate
rehabilitation.81

Respondents note that because petitioner repeatedly defied procedural rules, it

therefore was no longer entitled to the relaxation of these rules.82 Respondent Pilipinas
Shell also points out the defects in the verification, certification of non-forum shopping,
and attachments of petitioner in its Petition before this court.83

Respondent City of Batangas emphasizes that the Rules of Court are promulgated to
facilitate the adjudication of cases. It argues that petitioner should not be afforded
equitable considerations as it acted in bad faith by concealing material information
during the rehabilitation proceedings.84
Respondents further argue that even if the Court of Appeals gave due course to the
Petition, it would still have dismissed the case on the merits. Respondents cite
petitioner's failure to provide material facts with sufficient particularity in its Amended
Petition for Corporate Rehabilitation.85 Petitioner also failed to disclose some of its
creditors, as well as the several pending cases relating to its financial liabilities.86 It
failed to describe with specificity the cause of its inability to pay its debts.87 It also failed
to clarify which vessels were still under its ownership, and which vessels had maritime
liens.88 Petitioner merely estimated its liabilities against its creditors.89 Respondents also
allege that petitioner nominated rehabilitators who are professionally connected with its
counsel despite the existence of conflict of interest.90

Respondents point out that petitioner's admission that almost all its vessels are
rendered unserviceable suggests that rehabilitation is no longer viable.91 Former
employees also mention that despite petitioner's desire to rehabilitate, after the
Regional Trial Court's final order, petitioner began disposing of some of its
assets.92 Respondents also cannot rely on the plan to sell some of petitioner's sister
company's properties. They also express doubts regarding petitioner's plan of
converting its mall to a hotel/restaurant because it had no such experience.
Respondents thus characterize Viva Shipping Lines' rehabilitation plan as "unrealistic,
untested, and improbable."93

We deny the Petition.

Corporate rehabilitation is a remedy for corporations, partnerships, and associations

"who [foresee] the impossibility of meeting [their] debts when they respectively fall
due."94 A corporation under rehabilitation continues with its corporate life and activities
to achieve solvency,95 or a position where the corporation is able to pay its obligations
as they fall due in the ordinary course of business. Solvency is a state where the
businesses' liabilities are less than its assets.96

Corporate rehabilitation is a type of proceeding available to a business that is insolvent.

In general, insolvency proceedings provide for predictability that commercial obligations
will be met despite business downturns. Stability in the economy results when there is
assurance to the investing public that obligations will be reasonably paid. It is
considered state policy

to encourage debtors, both juridical and natural persons, and their creditors
to collectively and realistically resolve and adjust competing claims and property
rights[.] . . . [Rehabilitation or liquidation shall be made with a view to ensure or
maintain certainty and predictability in commercial affairs, preserve and maximize the
value of the assets of these debtors, recognize creditor rights and respect priority of
claims, and ensure equitable treatment of creditors who are similarly situated. When
rehabilitation is not feasible, it is in the interest of the State to facilitate a speedy and
orderly liquidation of these debtors' assets and the settlement of their
obligations.97 (Emphasis supplied)

The rationale in corporate rehabilitation is to resuscitate businesses in financial distress

because "assets . . . are often more valuable when so maintained than they would be
when liquidated."98 Rehabilitation assumes that assets are still serviceable to meet the
purposes of the business. The corporation receives assistance from the court and a
disinterested rehabilitation receiver to balance the interest to recover and continue
ordinary business, all the while attending to the interest of its creditors to be paid
equitably. These interests are also referred to as the rehabilitative and
the equitable purposes of corporate rehabilitation.99

The nature of corporate rehabilitation was thoroughly discussed in Pryce Corporation v.

China Banking Corporation:100

Corporate rehabilitation is one of many statutorily provided remedies for businesses

that experience a downturn. Rather than leave the various creditors unprotected,
legislation now provides for an orderly procedure of equitably and fairly addressing their
concerns. Corporate rehabilitation allows a court-supervised process to rejuvenate a
corporation.... It provides a corporation's owners a sound chance to re�engage the
market, hopefully with more vigor and enlightened services, having learned from a
painful experience.

Necessarily, a business in the red and about to incur tremendous losses may not be
able to pay all its creditors. Rather than leave it to the strongest or most resourceful
amongst all of them, the state steps in to equitably distribute the corporation's limited
resources.
....

Rather than let struggling corporations slip and vanish, the better option is to allow
commercial courts to come in and apply the process for corporate rehabilitation.101 ChanRoblesVirtualawlibrary

Philippine Bank of Communications v. Basic Polyprinters and Packaging

Corporation102 reiterates that courts "must endeavor to balance the interests of all the
parties that had a stake in the success of rehabilitating the debtors."103 These parties
include the corporation seeking rehabilitation, its creditors, and the public in general.104

The public's interest lies in the court's ability to effectively ensure that the obligations of
the debtor, who has experienced severe economic difficulties, are fairly and equitably
served. The alternative might be a chaotic rush by all creditors to file separate cases
with the possibility of different; trial courts issuing various writs competing for the same
assets. Rehabilitation is a means to temper the effect of a business downturn
experienced for whatever reason. In the process, it gives entrepreneurs a second
chance. Not only is it a humane and equitable relief, it encourages efficiency and
maximizes welfare in the economy.

Clearly then, there are instances when corporate rehabilitation can no longer be
achieved. When rehabilitation will not result in a better present value recovery for the
creditors,105 the more appropriate remedy is liquidation.106

It does not make sense to hold, suspend, or continue to devalue outstanding credits of
a business that has no chance of recovery. In such cases, the optimum economic
welfare will be achieved if the corporation is allowed to wind up its affairs in an orderly
manner. Liquidation allows the corporation to wind up its affairs and equitably distribute
its assets among its creditors.107

Liquidation is diametrically opposed to rehabilitation. Both cannot be undertaken at the

same time.108 In rehabilitation, corporations have to maintain their assets to continue
business operations. In liquidation, on the other hand, corporations preserve their
assets in order to sell them. Without these assets, business operations are effectively
discontinued. The proceeds of the sale are distributed equitably among creditors, and
surplus is divided or losses are re-allocated.109

Proceedings in case of insolvency are not limited to rehabilitation. Our laws have
evolved to provide for different procedures where a debtor can undergo judicially
supervised reorganization or liquidation of its assets.110

Corporate rehabilitation traces its roots to Act No. 1956, otherwise known as the
Insolvency Law of 1909. Under the Insolvency Law, a debtor in possession of sufficient
properties to cover all its debts but foresees the impossibility of meeting them when
they fall due may file a petition before the court to be declared in a state of suspension
of payments.111 This allows time for the debtor to organize its affairs in order to achieve
a state where it can comply with its obligations.

The relief was also provided in the amendatory provisions of Presidential Decree No.
902-A. Section 5 of Presidential Decree No. 902-A states that the Securities and
Exchange Commission has jurisdiction to decide:

d) Petitions of corporations, partnerships or associations to be declared in the state of

suspension of payments in cases where the corporation, partnership or
association possesses sufficient property to cover all its debts but foresees the
impossibility of meeting them when they respectively fall due or in cases where the
corporation, partnership or 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.112 (Emphasis supplied).

In 2000, the jurisdiction of the Securities and Exchange Commission over thesis cases
was transferred to the Regional Trial Court,113 by operation of Section 5.2 of the
Securities Regulation Code.114 In the same year, this court approved the Interim Rules
of Procedure on Corporate Rehabilitation. The Interim Rules of Procedure on Corporate
Rehabilitation provides a summary and non-adversarial proceeding to expedite the
resolution of cases for the benefit of the corporation in need of rehabilitation, its
creditors, and the public in general.115

Currently, the prevailing law and procedure for corporate rehabilitation is the Financial
Rehabilitation and Insolvency Act of 2010 (FRIA).116 FRIA provides procedures for the
different types of rehabilitation and liquidation proceedings. The Financial Rehabilitation
Rules of Procedure was issued by this court on August 27, 2013.117

However, since the Regional Trial Court acted on petitioner's Amended Petition before
FRIA was enacted, Presidential Decree No. 902-A and the Interim Rules of Procedure on
Corporate Rehabilitation were applied to this case.118

II
The controversy in this case arose from petitioner's failure to comply with appellate
procedural rules in corporate rehabilitation cases. Petitioner now pleads this court to
apply the policy of liberality in constructing the rules of procedure.119

We observe that during the corporate rehabilitation proceedings, the Regional Trial
Court already exercised the liberality contemplated by the Interim Rules of Procedure
on Corporate Rehabilitation. The Regional Trial Court initially dismissed Viva Shipping
Lines' Petition but allowed the filing of an amended petition. Later on, the same court
issued a stay order when there were sufficient grounds to believe that the Amended
Petition complied with Rule 4, Section 2 of the Interim Rules of Procedure on Corporate
Rehabilitation. Petitioner was not penalized for its non-compliance with the court's order
to produce relevant documents or for its non-submission of a memorandum.120

Even with these accommodations, the trial court still found basis to dismiss the plea for
rehabilitation.

Any final order or decision of the Regional Trial Court may be subject of an
appeal.121 In Re: Mode of Appeal in Cases Formerly Cognizable by the Securities and
Exchange Commission,122 this court clarified that all decisions and final orders falling
under the Interim Rules of Procedure on Corporate Rehabilitation shall be appealable to
the Court of Appeals through a petition for review under Rule 43 of the Rules of
Court.123

New Frontier Sugar Corporation v. Regional Trial Court, Branch 39, Iloilo City 124 clarifies
that an appeal from a final order or decision in corporate rehabilitation proceedings may
be dismissed for being filed under the wrong mode of appeal.125

New Frontier Sugar doctrinally requires compliance with the procedural rules for
appealing corporate rehabilitation decisions. It is true that Rule 1, Section 6 of the
Rules of Court provides that the "[r]ules shall be liberally construed in order to promote
their objective of securing a just, speedy and inexpensive disposition of every action
and proceeding." However, this provision does not negate the entire Rules of Court by
providing a license to disregard all the other provisions. Resort to liberal construction
must be rational and well-grounded, and its factual bases must be so clear such that
they outweigh the intent or purpose of an apparent reading of the rules.

Rule 43 prescribes the mode of appeal for corporate rehabilitation cases:

Sec. 5. How appeal taken. - Appeal shall be taken by filing a verified petition for review
in seven (7) legible copies with the Court of Appeals, with proof of service of a copy
thereof on the adverse party and on the court or agency a quo. The original copy of the
petition intended for the Court of Appeals shall be indicated as such by the petitioner.
....

Sec. 6. Contents of the petition. - The petition for review shall (a) state the full names
of the parties to the case, without impleading the court or agencies either as petitioners
or respondents; (b) contain a concise statement of the facts and issues involved and
the grounds relied upon for the review; (c) be accompanied by a clearly legible
duplicate original or a certified true copy of the award, judgment, final order or
resolution appealed from, together with certified true copies of such material portions of
the record referred to therein and other supporting papers; and (d) contain a sworn
certification against forum shopping as provided in the last paragraph of section 2, Rule
42. The petition shall state the specific material dates showing that it was filed within
the period fixed herein. (Emphasis supplied)

Petitioner did not comply with some of these requirements. First, it did not implead its
creditors as respondents. Instead, petitioner only impleaded the Presiding Judge of the
Regional Trial Court, contrary to Section 6(a) of Rule 43. Second, it did not serve a
copy of the Petition on some of its creditors, specifically, its former employees. Finally,
it did not serve a copy of the Petition on the Regional Trial Court.

Petitioner justified its failure to furnish its former employees with copies of the Petition
by stating that the former employees were late in filing their opposition before the trial
court.126 It also stated that its failure to furnish the Regional Trial Court with a copy of
the Petition was unintentional.127

The Court of Appeals correctly dismissed petitioner's Rule 43 Petition as a consequence

of non-compliance with procedural rules. Rule 43, Section 7 of the Rules of Court
states:

Sec. 7. Effect of failure to comply with requirements. - The failure of the petitioner to
comply with any of the foregoing requirements regarding the payment of the docket
and other lawful fees, the deposit of costs, proof of service of the petition, and the
contents of and the documents which should accompany the petition shall be sufficient
ground for the dismissal thereof.

Petitioner admitted its failure to comply with the rules. It begs the indulgence of the
court to give due course to its Petition based on their belated compliance with some of
these procedural rules and the policy on the liberal construction of procedural rules.

There are two kinds of "liberality" with respect to the construction of provisions of law.
The first requires ambiguity in the text of the provision and usually pertains to a
situation where there can be two or more viable meanings given the factual context
presented by a case. Liberality here means a presumption or predilection to interpret
the text in favor of the cause of the party requesting for "liberality."

Then there is the "liberality" that actually means a request for the suspension of the
operation of a provision of law, whether substantive or procedural. This liberality
requires equity. There may be some rights that are not recognized in law, and if courts
refuse to recognize these rights, an unfair situation may arise.128 Specifically, the case
may be a situation that was not contemplated on or was not possible at the time the
legal norm was drafted or promulgated.

It is in the second sense that petitioner pleads this court.

III

Our courts are not only courts of law, but are also courts of equity.129 Equity is justice
outside legal provisions, and must be exercised in the absence of law, not against
it.130 In Reyes v. Lim:131

Equity jurisdiction aims to do complete justice in cases where a court of law is unable to
adapt its judgments to the special circumstances of a case because of the inflexibility of
its statutory or legal jurisdiction. Equity is the principle by which substantial justice may
be attained in cases where the prescribed or customary forms of ordinary law are
inadequate.132 (Citation omitted)

Liberality lies within the bounded discretion of a court to allow an equitable result when
the proven circumstances require it. Liberality acknowledges a lacuna in the text of a
provision of law. This may be because those who promulgated the rule may not have
foreseen the unique circumstances of a case at bar. Human foresight as laws and rules
are prepared is powerful, but not perfect.

Liberality is not an end in itself. Otherwise, it becomes a backdoor disguising the

arbitrariness or despotism of judges and justices. In North Bulacan Corp. v.
PBCom,133 the Regional Trial Court ignored several procedural rules violated by the
petitioning corporation and allowed rehabilitation in the guise of liberality. This court
found that the Regional Trial Court grossly abused its authority when it allowed
rehabilitation despite the corporation's blatant non-compliance with the rules.

The factual antecedents of a plea for the exercise of liberality must be clear. There
must also be a showing that the factual basis for a plea for liberality is not one that is
due to the negligence or design of the party requesting the suspension of the rules.
Likewise, the basis for claiming an equitable result � for all the parties � must be
clearly and sufficiently pleaded and argued. Courts exercise liberality in line with their
equity jurisdiction; hence, it may only be exercised if it will result in fairness and
justice.

IV

The first rule breached by petitioner is the failure to implead all the indispensable
parties. Petitioner did not even interpose reasons why it should be excused from
compliance with the rule to "state the full names of the parties to the case, without
impleading the court... as ... respondents." Petitioner did exactly the opposite. It failed
to state the full names of its creditors as respondents. Instead, it impleaded the
Presiding Judge of the originating court.

The Rules of Court requires petitioner to implead respondents as a matter of due

process. Under the Constitution, "[n]o person shall be deprived of life, liberty or
property without due process of the law."134 An appeal to a corporate rehabilitation case
may deprive creditor-stakeholders of property. Due process dictates that these
creditors be impleaded to give n them an opportunity to protect the property owed to
them.

Creditors are indispensable parties to a rehabilitation case, even if a rehabilitation case

is non-adversarial. In Boston Equity Resources, Inc. v. Court of Appeals:135

An indispensable party is one who has such an interest in the controversy or subject
matter of a case that a final adjudication cannot be made in his or her absence, without
injuring or affecting that interest. He or she is a party who has not only an interest in
the subject matter of the controversy, but "an interest of such nature that a final
decree cannot be made without affecting [that] interest or leaving the controversy in
such a condition that its final determination may be wholly inconsistent with equity and
good conscience. It has also been considered that an indispensable party is a person in
whose absence there cannot be a determination between the parties already before the
court which is effective, complete or equitable." Further, an indispensable party is one
who must be included in an action before it may properly proceed.136

A corporate rehabilitation case cannot be decided without the creditors' participation.

The court's role is to balance the interests of the corporation, the creditors, and the
general public. Impleading creditors as respondents on appeal will give them the
opportunity to present their legal arguments before the appellate court. The courts will
not be able to balance these interests if the creditors are not parties to a case. Ruling
on petitioner's appeal in the absence of its creditors will not result in judgment that is
effective, complete, and equitable.

This court cannot exercise its equity jurisdiction and allow petitioner to circumvent the
requirement to implead its creditors as respondents. Tolerance of such failure will not
only be unfair to the creditors, it is contrary to the goals of corporate rehabilitation, and
will invalidate the cardinal principle of due process of law.

The failure of petitioner to implead its creditors as respondents cannot be cured by

serving copies of the Petition on its creditors. Since the creditors were not impleaded as
respondents, the copy of the Petition only serves to inform them that a petition has
been filed before the appellate court. Their participation was still significantly truncated.
Petitioner's failure to implead them deprived them of a fair hearing. The appellate court
only serves court orders and processes on parties formally named and identified by the
petitioner. Since the creditors were not named as respondents, they could not receive
court orders prompting them to file remedies to protect their property rights.

The next procedural rule that petitioner pleaded to suspend is the rule requiring it to
furnish all parties with copies of the Rule 43 Petition. Petitioner admitted its failure to
furnish its former employees with copies of the Petition because they belatedly filed
their claims before the Regional Trial Court.

This argument is specious at best; at worst, it foists a fraud on this court. The former
employees were unable to raise their claims on time because petitioner did not declare
them as creditors. The Amended Petition did not contain any information regarding
pending litigation between petitioner and its former employees. The only way the
former employees could become aware of the corporate rehabilitation proceedings was
either through the required publication or through news informally circulated among
their colleagues. Clearly, it was petitioner who caused the belated filing of its former
employees' claims when it failed to notify its employees of the corporate rehabilitation
proceedings. Petitioner's failure was conveniently and disreputably hidden from this
court.

Former employee Luzviminda C. Cueto filed her Manifestation and Registration of

Monetary Claim as early as November 25, 2005. Alejandro Olit, et al., the other
employees, filed their Comment on September 27, 2006. By the time petitioner filed its
Petition for Review dated November 21, 2006 before the Court of Appeals, it was well
aware that these individuals had expressed their interest in the corporate rehabilitation
proceedings. Petitioner and its counsel had no excuse to exclude these former
employees as respondents on appeal.

Petitioner's belated compliance with the requirement to serve the Petition for Review on
its former employees did not cure the procedural lapse. There were two sets of
employees with claims against petitioner: Luzviminda C. Cueto and Alejandro Olit, et al.
When the Court of Appeals dismissed petitioner's appeal, petitioner only served a copy
on Alejandro Olit, et al. Petitioner still did not serve a copy on Luzviminda C. Cueto.

We do not see how it will be in the interest of justice to allow a petition that fails to
inform some of its creditors that the final order of the corporate rehabilitation
proceeding was appealed. By not declaring its former employees as creditors in the
Amended Petition for Corporate Rehabilitation and by not notifying the same employees
that an appeal had been filed, petitioner consistently denied the due process rights of
these employees.

This court cannot be a party to the inequitable way that petitioner's employees were
treated.

Petitioner also pleaded to be excused from the requirement under Rule 6, Section 5 of
the Rules of Court to serve a copy of the Petition on the originating court. According to
petitioner, the annexes for the Petition for Review filed before the Court of Appeals
arrived from Lucena City on the last day of filing the petition. Petitioner's representative
from Lucena City and petitioner's counsel rushed to compile and reproduce all the
documents, and in such rush, failed to send a copy to the Regional Trial Court. When
petitioner realized that it failed to furnish the originating court with a copy of the
Petition, a copy was immediately sent by registered mail.137

Again, petitioner's excuse is unacceptable. Petitioner had 15 days to file a Rule 43

petition, which should include the proof of service to the originating court. Rushing the
compilation of the pleading with the annexes has nothing to do with being able to
comply with the requirement to submit a proof of service of the copy of the petition for
review to the originating court. If at all, it further reflects the unprofessional way that
petitioner and its counsel treated our rules.

As this court has consistently ruled, "[t]he right to appeal is not a natural right[,] nor a
part of due process; it is merely a statutory privilege, and may be exercised only in the
manner and in accordance with the provisions of the law."138

In line with this, liberality in corporate rehabilitation procedure only generally refers to
the trial court, not to the proceedings before the appellate court. The Interim Rules of
Procedure on Corporate Rehabilitation covers petitions for rehabilitation filed before the
Regional Trial Court. Thus, Rule 2, Section 2 of the Interim Rules of Procedure on
Corporate Rehabilitation, which refers to liberal construction, is limited to the Regional
Trial Court. The liberality was given "to assist the parties in obtaining a just,
expeditious, and inexpensive disposition of the case."139

In Spouses Ortiz v. Court of Appeals,140 the petitioners made a procedural mistake with
the attachments of the petition before the Court of Appeals. The petitioners
subsequently provided the correct attachments; however, this court still upheld the
Court of Appeals' dismissal:

The party who seeks to avail [itself] of [an appeal] must comply with the requirements
of the rules. Failing to do so, the right to appeal is lost. Rules of procedure are required
to be followed, except only when for the most persuasive of reasons, they may be
relaxed to relieve a litigant of an injustice not commensurate with the degree of his
thoughtlessness in not complying with the procedure prescribed.141

Petitioner's excuses do not trigger the application of the policy of liberality in construing
procedural rules. For the courts to exercise liberality, petitioner must show that it is
suffering from an injustice not commensurate to the thoughtlessness of its procedural
mistakes. Not only did petitioner exercise injustice towards its creditors, its Rule 43
Petition for Review did not show that the Regional Trial Court erred in dismissing its
Amended Petition for Corporate Rehabilitation.

Petitioner's main argument for the continuation of corporate rehabilitation proceedings

is that the Regional Trial Court should have allowed petitioner to clarify its Amended
Petition with respect to details regarding its assets and its liabilities to its creditors
instead of dismissing the Petition outright.142

The Regional Trial Court correctly dismissed the Amended Petition for Corporate
Rehabilitation. The dismissal of the Amended Petition did not emanate from petitioner's
failure to provide complete details on its assets and liabilities but on the trial court's
finding that rehabilitation is no longer viable for petitioner. Under the Interim Rules of
Procedure on Corporate Rehabilitation, a "petition shall be dismissed if no rehabilitation
plan is approved by the court upon the lapse of one hundred eighty (180) days from
the date of the initial hearing."143 The proceedings are also deemed terminated upon
the trial court's disapproval of a rehabilitation plan, "or a determination that the
rehabilitation plan may no longer be implemented in accordance with its terms,
conditions, restrictions, or assumptions."144

Bank of the Philippine Islands v. Sarabia Manor Hotel Corp. 145 provides the test to help
trial courts evaluate the economic feasibility of a rehabilitation plan:

In order to determine the feasibility of a proposed rehabilitation plan, it is imperative

that a thorough examination and analysis of the distressed corporation's 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.146 (Emphasis supplied)

Professor Stephanie V. Gomez of the University of the Philippines College of Law

suggests specific characteristics of an economically feasible rehabilitation plan:

a. The debtor has assets that can generate more cash if used in its daily
operations than if sold.

b. Liquidity issues can be addressed by a practicable business plan that will

generate enough cash to sustain daily operations.

c. The debtor has a definite source of financing for the proper and full
implementation of a Rehabilitation Plan that is anchored on realistic
assumptions and goals.147 (Emhasis supplied)

These requirements put emphasis on liquidity: the cash flow that the distressed
corporation will obtain from rehabilitating its assets and operations. A corporation's
assets may be more than its current liabilities, but some assets may be in the form of
land or capital equipment, such as machinery or vessels. Rehabilitation sees to it that
these assets generate more value if used efficiently rather than if liquidated.

On the other hand, this court enumerated the characteristics of a rehabilitation plan
that is infeasible:

(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.148ChanRoblesVirtualawlibrary

In addition to the tests of economic feasibility, Professor Stephanie V. Gomez also

suggests that the Financial and Rehabilitation and Insolvency Act of 2010 emphasizes
on rehabilitation that provides for better present value recovery for its creditors.149

Present value recovery acknowledges that, in order to pave way for rehabilitation, the
creditor will not be paid by the debtor when the credit falls due. The court may order a
suspension of payments to set a rehabilitation plan in motion; in the meantime, the
creditor remains unpaid. By the time the creditor is paid, the financial and economic
conditions will have been changed. Money paid in the past has a different value in the
future.150 It is unfair if the creditor merely receives the face value of the debt. Present
value of the credit takes into account the interest that the amount of money would
have earned if the creditor were paid on time.151
Trial courts must ensure that the projected cash flow from a business' rehabilitation
plan allows for the closest present value recovery for its creditors. If the projected cash
flow is realistic and allows the corporation to meet all its obligations, then courts should
favor rehabilitation over liquidation. However, if the projected cash flow is unrealistic,
then courts should consider converting the proceedings into that for liquidation to
protect the creditors.

The Regional Trial Court correctly dismissed petitioner's rehabilitation plan. It found
that petitioner's assets are non-performing.152 Petitioner admitted this in its Amended
Petition when it stated that its vessels were no longer serviceable.153 In Wonder Book
Corporation v. Philippine Bank of Communications,154 a rehabilitation plan is infeasible if
the assets are nearly fully or fully depreciated. This reduces the probability that
rehabilitation may restore and reinstate petitioner to its former position of successful
operation and solvency.

Petitioner's rehabilitation plan should have shown that petitioner has enough
serviceable assets to be able to continue its business. Yet, the plan showed that the
source of funding would be to sell petitioner's old vessels. Disposing of the assets
constituting petitioner's main business cannot result in rehabilitation. A business
primarily engaged as a shipping line cannot operate without its ships. On the other
hand, the plan to purchase new vessels sacrifices the corporation's cash flow. This is
contrary to the goal of corporate rehabilitation, which is to allow present value recovery
for creditors. The plan to buy new vessels after selling the two vessels it currently owns
is neither sound nor workable as a business plan.

The other part of the rehabilitation plan entails selling properties of petitioner's sister
company. As pointed out by the Regional Trial Court, this plan requires conformity from
the sister company. Even if the two companies have the same directorship and
ownership, they are still two separate juridical entities. In BPI Family Savings Bank v.
St. Michael Medical Center,155 this court refused to include in the financial and liquidity
assessment the financial statements of another corporation that the petitioning-
corporation plans to merge with.

As pointed out by respondents, petitioner's rehabilitation plan is almost impossible to

implement. Even an ordinary individual with no business acumen can discern the
groundlessness of petitioner's rehabilitation plan. Petitioner should have presented a
more realistic and practicable rehabilitation plan within the time periods allotted after
initiatory hearing, or otherwise, should have opted for liquidation.

Finally, petitioner argues that after Judge Mendoza's withdrawal as rehabilitation

receiver, the Regional Trial Court should have appointed a new rehabilitation receiver to
evaluate the rehabilitation plan. We rule otherwise. It is not solely the responsibility of
the rehabilitation receiver to determine the validity of the rehabilitation plan. The
Interim Rules of Procedure on Corporate Rehabilitation allows the trial court to
disapprove a rehabilitation plan156 and terminate proceedings or, should the instances
warrant, to allow modifications to a rehabilitation plan.157

The Regional Trial Court rendered a decision in accordance with facts and law. Thus, we
deny the plea for liberalization of procedural rules. To grant the plea would cause more
economic hardship and injustice to all those concerned. chanrobleslaw

WHEREFORE, the Petition is DENIED. The Court of Appeals Resolutions dated January
7, 2007 and March 30, 2007 in CA-G.R. SP No. 96974 are AFFIRMED.

SO ORDERED.

[ G.R. No. 206150. August 09, 2017 ]

LAND BANK OF THE PHILIPPINES, PETITIONER, VS. FASTECH SYNERGY
PHILIPPINES, INC. (FORMERLY FIRST ASIA SYSTEM TECHNOLOGY, INC.),
FASTECH MICROASSEMBLY & TEST, INC., FASTECH ELECTRONIQUE, INC.,
AND FASTECH PROPERTIES, INC., RESPONDENTS.

DECISION
LEONEN, J.:
Courts will not render judgment on a moot and academic case unless any of the following
circumstances exists: "(1) [g]rave constitutional violations; (2) [e]xceptional character of the
case; (3) [p]aramount public interest; (4) [t]he case presents an opportunity to guide the
bench, the bar, and the public; or (5) [t]he case is capable of repetition yet evading review." [1]

This is a Petition for Review on Certiorari[2] under Rule 45 of the 1997 Rules of Civil Procedure,
praying that the Court of Appeals September 28, 2012 Decision [3] and March 5, 2013
Resolution[4] be modified to consider the concerns raised by Land Bank of the Philippines
(petitioner).[5] These concerns pertain to the rehabilitation of respondents Fastech Synergy
Philippines, Inc. (Fastech Synergy),[6] Fastech Microassembly & Test, Inc. (Fastech
Microassembly), Fastech Electronique, Inc. (Fastech Electronique), and Fastech Properties,
Inc, (Fastech Properties) (collectively, Fastech Corporations). In its September 28, 2012
Decision, the Court of Appeals set aside the December 9, 2011 Resolution [7] of Branch 149,
Regional Trial Court, Makati City (Rehabilitation Court), which dismissed respondents' Joint
Petition for corporate rehabilitation (Rehabilitation Petition). [8] In this Decision, the Court of
Appeals approved respondents' Rehabilitation Plan, which was attached to their Rehabilitation
Petition filed under Republic Act No. 10142,[9] on April 8, 2011,[10] and remanded the case
back to the Rehabilitation Court.[11]

The Fastech Corporations claimed that they filed a joint petition since they have common
managers, assets, and creditors.[12] Due to financial losses, their assets would not be enough
to pay their peso and dollar debts from the following creditors:

Creditors Peso debts Dollar debts

1. Planters Development P55,175.00 N/A
Bank (Planters Bank)
2. Penta Capita], Investment P10,260,00.00 US$1,638,669.00
Corporation (Penta Capital)
3. Union Bank of the P9,000,000.00 US$370,000.00
Philippines (UnionBank)
4. Bank of the Philippine P54,653,431.00 N/A
Islands (BPI)
5. Land Bank of the N/A US$340,000.00
 Philippines (Landbank)

TOTAL: P73,968,606.00 US$2,348,669,00[13]

They prayed for the approval of their Rehabilitation Plan, which they submitted together with
their Rehabilitation Petition. The terms and conditions of the Rehabilitation Plan provided for a
two (2)-year grace period for the payment of the Fastech Corporations' outstanding loans and
a waiver of accumulated interests and penalties. Likewise, they indicated a 12-year period
from the end of the grace period for the payment of interests accrued during the grace period.
Finally, they stipulated an interest of four percent (4%) per annum for real estate-secured
creditors and two percent (2%) per annum for chattel mortgage-secured creditors. [14]

On April 19, 2011, the Rehabilitation Court acted on the Rehabilitation Petition by issuing a
Commencement Order with Stay Order. It appointed Atty. Rosario Bernaldo (Atty. Bernaldo) as
Rehabilitation Receiver.[15]

On May 18, 2011, the Rehabilitation Petition was heard and the Rehabilitation Court eventually
gave it due course to it. The creditors—Planters Bank, UnionBank, BPI, and Landbank—later
filed their respective Notices of Claims and Comments.[16]

After the Fastech Corporations' presentation of their Rehabilitation Plan to Atty. Bernaldo and
their creditors, the Rehabilitation Court issued its June 22, 2011 Order requiring them to
submit a revised rehabilitation plan. The Fastech Corporations submitted their Revised
Rehabilitation Plan and their creditors filed their respective comments and oppositions to it. [17]

In the meantime, Atty. Bernaldo submitted her Preliminary Report and opined that the Fastech
Corporations' original Rehabilitation Plan was viable.[18] She stated that the Fastech
Corporations "may be successfully rehabilitated, considering the sufficiency of their assets to
cover their liabilities and the underlying assumptions, financial projections and procedures to
accomplish said goals in their Rehabilitation Plan."[19]

External auditors of the Fastech Corporations gave comments on the financial statements.
[20]
They issued qualified audit opinions on the 2008 financial statements of Fastech
Microassembly and Fastech Electronique but noted that these companies were unable to
prove financial support from their respective major stockholders. [21] However, the auditors
were unable to provide opinions on Fastech Synergy's and Fastech Properties' 2008 financial
statements due to insufficient audit evidence.[22] Finally, they were also unable to give audit
opinions on the 2009 financial statements of the Fastech Corporations for lack of appropriate
audit evidence.[23]

The Rehabilitation Court directed the Fastech Corporations to submit their Reply on the
comments and oppositions presented by their creditors, to which they complied with on
September 30, 2011.[24]

On December 9, 2011, the Rehabilitation Court issued a Resolution [25] dismissing the
Rehabilitation Petition based on the following:

1. The Singapore Stock Exchange has already deleted one of the petitioners. Yet,
petitioners did not even bother to explain and/or inform this court the status of such
deletion; or the steps being taken by the petitioners to resolve the incident.
 It must be noted here, then and now, that listed corporations in the stock exchange
has an easy access to the public for their contributions to the capital built up to
finance corporate business transactions including CAPEX and working capital.
Thus, the public is always a very good source of money for business ventures of
corporations. Petitioners had lost such good source of cheap money.

2. Petitioners miserably failed to overcome the unqualified adverse opinions of their

external auditors. Petitioners did not explain what had happened to those adverse
observations of the auditors. Thus, petitioners submitted before this court
unreliable financial statements amounting to non-compliance of the basic
requirements of the Law and the Rules for rehabilitation purposes.

3. Petitioners denied this court of its fair determination of the feasibility of the
submitted rehabilitation plan by withholding from this court its basic assumptions of
its rehabilitation plan.

4. Petitioners miserably failed to demonstrate before this court that they will have a
better future business financial results [sic] of operation after their failures to meet
the various restructuring plans they have secured from these creditors' banks.

5. The new way of doing business, i.e. niche manner of manufacturing its products or
customers built design and needs, will be experimental, hence it will be completely
and entirely dependent upon the number of customers petitioners may have. There
is a great deal of competition in the petitioners' field of business, hence such new
business venture becomes unreliable and uncertain. Thus, the possibility of success
is quite uncertain, hence it is not feasible. There is [sic] no historical reliable facts
and figures for this court to begin with for evaluation and study! [26]

The Rehabilitation Court noted that there were no credible bases to determine if the Fastech
Corporations could be rehabilitated since they failed to submit the bases for their positive
financial projections due to confidentiality.[27] The dispositive portion of its December 9, 2011
Resolution read:

WHEREFORE, premises considered, the petition is hereby DISMISSED for unreliable facts and
figures submitted for evaluation and study by this court, hence this court could not arrive at
the feasibility that petitioners could be rehabilitated. Thus, the petition is being DISMISSED for
reason that its attachments, i.e. the financial statements and balance sheets of the
petitioners contained materially false and misleading facts and figures. (Section 25, (b), (3) of
R.A. No. 10142).

Moreover, considering that the facts and figures submitted by petitioners are unreliable and
not credible, this court could not also declare that petitioners be placed under liquidation.

SO ORDERED.[28]

The Fastech Corporations elevated the case before the Court of Appeals by filing a Petition for
Review[29] under Rule 43 of the 1997 Rules of Civil Procedure. The case was docketed as CA-
G.R. SP No. 122836. The Fastech Corporations prayed that a Writ of Preliminary Injunction
and/or a Temporary Restraining Order be issued.[30] They argued that their rehabilitation was
feasible and that the Rehabilitation Court erred in ruling that they "[would] not have a better
future due to their failures to meet various restructuring plans." [31]
On January 24, 2012, the Court of Appeals issued a Temporary Restraining Order to prevent
the case from being moot and academic considering the Ex Parte Petition for Issuance of a
Writ of Possession filed by Planters Bank over the properties of the Fastech Corporations. [32] A
Writ of Preliminary Injunction was issued by the Court of Appeals on March 22, 2012. [33]

On April 30, 2012, Atty. Bernaldo filed her Manifestation before the Court of Appeals. [34] She
maintained that the Fastech Corporations' rehabilitation was viable as "the financial
projections and procedures set forth to accomplish the goals in their Rehabilitation Plan
[were] attainable."[35]

On September 28, 2012, the Court of Appeals issued a Decision, [36] granting the Fastech
Corporations' Petition for Review, which it found to have "serve[d] the purpose of corporate
rehabilitation."[37] The rehabilitation would allow the continued employment of its more than
100 employees and would assure payment to creditors, which would all equally participate in
the Fastech Corporations' rehabilitation. Further, stockholders would benefit in the long run if
the Rehabilitation Plan was successful. Finally, the general public would likewise gain
considering that the Fastech Corporations would open the Philippine market to new
opportunities.[38]

The Court of Appeals ruled that the Rehabilitation Court erred in disregarding the opinion of
Atty. Bernaldo that the Fastech Corporations "may be successfully rehabilitated." [39] The
Rehabilitation Court "failed to distinguish the difference between an adverse or negative
opinion and a disclaimer or when an auditor [could not] formulate an opinion with exactitude
for lack of sufficient data."[40]

The dispositive portion of the Court of Appeals September 28, 2012 Decision read:

WHEREFORE, the instant petition is GRANTED. The assailed issuance

is REVERSED and SET ASIDE. The Joint Petition in SP Case No. M-7130 is REINSTATED and
the Rehabilitation Plan attached thereto is APPROVED. Respondent Planters Development
Bank is permanently ENJOINED from effecting the foreclosure of [the Fastech Corporations']
property during the pendency of the implementation of the Rehabilitation Plan.

The petition is REMANDED to the Regional Trial Court, National Capital Judicial Region, Br.
149, Makati City, for its supervision in the implementation of the Rehabilitation Plan.

SO ORDERED.[41] (Emphasis in the original)

Landbank and Planters Bank separately moved for reconsideration. Landbank argued that the
Rehabilitation Plan should not have been approved since it would not benefit the Fastech
Corporations' creditors, while Planters Bank averred that the rehabilitation of the Fastech
Corporations could no longer be obtained.[42]

On March 5, 2013, the Court of Appeals issued a Resolution[43] denying both motions. It added
that Atty. Bernaldo's Manifestation bolstered its finding that the rehabilitation was possible if
"implemented in accordance with the Rehabilitation Plan."[44]

On April 18, 2013, Planters Bank and its successor-in-interest, Philippine Asset Growth Two,
Inc. (PAGTI), filed a Petition for Review before this Court. This Petition assailed the September
28, 2012 Decision and March 5, 2013 Resolution of the Court of Appeals. The case, docketed
as G.R. No. 206528, was entitled Philippine Asset Growth Two, Inc. (Successor-In-Interest of
Planters Development Bank) and Planters Development Bank v. Fastech Synergy Philippines,
Inc. (Formerly First Asia System Technology, Inc.), Fastech Microassembly & Test, Inc.,
Fastech Electronique, Inc., and Fastech Properties, Inc.[45]

On April 25, 2013, Landbank also filed a Petition for Review before this Court against the
Fastech Corporations. Petitioner likewise assails the September 28, 2012 Decision and March
5, 2013 Resolution of the Court of Appeals.[46] It questions the correctness of the Court of
Appeals' application of Republic Act No. 10142 without considering the issues put forward by
the creditors, petitioner included.[47]

Petitioner argues that respondents' creditors raised valid issues that should be addressed
before declaring that rehabilitation was viable.[48] It maintains that it does not agree with the
period of the repayment plan, which could take almost 20 years, or with the waiver of interest
and penalties incurred prior to the filing of rehabilitation. [49]

Petitioner points out that the Rehabilitation Receiver's opinion is subjective and possibly
partial in favor of rehabilitation.[50] There are also some concerns which are beyond the
Rehabilitation Receiver's competence and must be directly addressed by respondents to show
petitioner that they are sincere in gaining the benefits of rehabilitation and are "not simply
hiding behind its protective mantle to evade [their] obligations." [51]

Petitioner prays that the assailed Decision and Resolution of the Court of Appeals be modified
to take its concerns into account.[52]

On October 7, 2013, respondents filed their Comment.[53] They counter that petitioner raised
questions of fact, which could not be entertained by this Court. The resolution of petitioner's
concerns would involve an examination of the records and evidence of the case. [54] Further,
petitioner did not object to respondents' rehabilitation. Its opposition is merely on the
stipulations in the Rehabilitation Plan.[55]

On February 3, 2014, petitioner filed its Reply.[56] It reiterates that the approval of the
Rehabilitation Plan, without resolving the issues it has raised, "violates the very essence and
policy behind the enactment of the [Financial Rehabilitation Plan and Insolvency Act]." Thus,
the question on the correctness of the rehabilitation's approval is not a question of fact but of
law.

On March 12, 2014, this Court issued a Resolution,[57] giving due course to the petition and
requiring the parties to file their respective memoranda.

Petitioner submitted its Memorandum[58] on May 19, 2014, while respondents submitted their
Memorandum[59] on May 29, 2014. Both Memoranda contained a rehash of their arguments in
their previous pleadings.

On January 4, 2016, respondents filed their Manifestation and Update [60] regarding their
compliance with the September 28, 2012 Decision of the Court of Appeals. They report that
"[i]n accordance with the Rehabilitation Plan, [respondents] had made four (4) quarterly
payments with a total amount of Thirty Five Million Four Hundred Eighty Four Thousand Three
Hundred Eighteen and Thirty Two Centavos (Php 35,484,318.32)." [61] The payment consisted of
both principal and interest payments. They also paid their non-bank creditors. These show
that the approved Rehabilitation Plan is viable.[62]

On April 1, 2016, respondents filed another Manifestation and Update, [63] attaching in it the
Compliance[64] submitted by Atty. Bernaldo. Respondents emphasize the conclusion of Atty.
Bernaldo that respondents "generally performed better than the projections in the approved
rehabilitation plan."[65]
On November 25, 2016, PAGTI and Planters Bank filed their Manifestation, [66] stating that this
Court already issued a Decision on June 28, 2016 in G.R. No. 206528. This Court granted
PAGTI and Planters Bank's petition and reversed the September 28, 2012 Decision and March
5, 2013 Resolution of the Court of Appeals in CA-G.R. SP No. 122836. [67]

On June 16, 2017, PAGTI and Planters Bank filed another Manifestation, [68] stating that this
Court's June 28, 2016 Decision in G.R. No. 206528 became final and executory on March 17,
2017.[69]

Thus, this Court resolves the issue of whether the Court of Appeals erred in approving the
Rehabilitation Plan of respondents.

The sole issue raised by petitioner has already been ruled upon by this Court. One (1) of the
issues resolved in G.R. No. 206528 was whether the rehabilitation of respondents was
feasible. This Court found that rehabilitation was not possible and thoroughly explained:

....

II.

Rehabilitation is statutorily defined under Republic Act No. 10142, otherwise known as the
"Financial Rehabilitation and Insolvency Act of 2010" (FRIA), as follows:

Section 4. Definition of Terms. — As used in this Act, the term:

....

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful
operation and solvency, if it is shown that its continuance of operation is economically
feasible and its creditors can recover by way of the present value of payments projected in
the plan, more if the debtor continues as a going concern than if it is immediately liquidated.
(Emphasis supplied)

Case law explains that 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. Thus, the basic
issues in rehabilitation proceedings concern the viability and desirability of continuing the
business operations of the distressed corporation, all with a view of effectively restoring it to
a state of solvency or to its former healthy financial condition through the adoption of a
rehabilitation plan.

III.

In the present case, however, the Rehabilitation Plan failed to comply with the minimum
requirements, i.e.: (a) material financial commitments to support the rehabilitation plan;
and (b) a proper liquidation analysis, under Section 18, Rule 3 of the 2008 Rules of Procedure
on Corporate Rehabilitation 80 (Rules), which Rules were in force at the time respondents'
rehabilitation petition was filed on April 8, 2011:
Section 18. Rehabilitation Plan. — The rehabilitation plan shall include (a) the desired
business targets or goals and the duration and coverage of the rehabilitation; (b) the terms
and conditions of such rehabilitation which shall include the manner of its implementation,
giving due regard to the interests of secured creditors such as, but not limited, to the non-
impairment of their security liens or interests; (c) the material financial commitments to
support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan,
which may include debt to equity conversion, restructuring of the debts, dacion en pago or
sale or exchange or any disposition of assets or of the interest of shareholders, partners or
members; (e) a liquidation analysis setting out for each creditor that the present value of
payments it would receive under the plan is more than that which it would receive if the
assets of the debtor were sold by a liquidator within a six-month period from the estimated
date of filing of the petition; and (f) such other relevant information to enable a reasonable
investor to make an informed decision on the feasibility of the rehabilitation plan. (Emphases
supplied)

The Court expounds.

A. Lack of Material Financial Commitment

to Support the Rehabilitation Plan.

A material financial commitment becomes significant in gauging the resolve, determination,

earnestness, and good faith of the distressed corporation in financing the proposed
rehabilitation plan. This commitment may include the voluntary undertakings of the
stockholders or the would-be investors of the debtor-corporation indicating their readiness,
willingness, and ability to contribute funds or property to guarantee the continued successful
operation of the debtor-corporation during the period of rehabilitation.

In this case, respondents' Chief Operating Officer, Primo D. Mateo, Jr., in his executed
Affidavit of General Financial Condition dated April 8, 2011, averred that respondents will
not require the infusion of additional capital as he, instead, proposed to have all accrued
penalties, charges, and interests waived, and a reduced interest rate prospectively applied to
all respondents' obligations, in addition to the implementation of a two (2)-year grace period.
Thus, there appears to be no concrete plan to build on respondents' beleaguered financial
position through substantial investments as the plan for rehabilitation appears to be pegged
merely on financial reprieves. Anathema to the true purpose of rehabilitation, a distressed
corporation cannot be restored to its former position of successful operation and regain
solvency by the sole strategy of delaying payments/waiving accrued interests and penalties at
the expense of the creditors.

The Court also notes that while respondents have substantial total assets, a large portion of
the assets of Fastech Synergy and Fastech Properties is comprised of noncurrent assets, such
as advances to affiliates which include Fastech Microassembly, and investment properties
which form part of the common assets of Fastech Properties, Fastech Electronique, and
Fastech Microassembly. Moreover, while there is a claim that unnamed customers have
made investments by way of consigning production equipment, and advancing money to fund
procurement of various equipment intended to increase production capacity, this can hardly
be construed as a material financial commitment which would inspire confidence that the
rehabilitation would turn out to be successful. Case law holds that nothing short of legally
binding investment commitment/s from third parties is required to qualify as a material
financial commitment. Here, no such binding investment was presented.

B. Lack of Liquidation Analysis.

Respondents likewise failed to include any liquidation analysis in their Rehabilitation Plan.
The total liquidation assets and the estimated liquidation return to the creditors, as well as
the fair market value vis-a-vis the forced liquidation value of the fixed assets were not shown.
As such, the Court could not ascertain if the petitioning debtor's creditors can recover by way
of the present value of payments projected in the plan, more if the debtor continues as a going
concern than if it is immediately liquidated. This is a crucial factor in a corporate
rehabilitation case, which the CA, unfortunately, failed to address.

C. Effect of Non-Compliance.

The failure of the Rehabilitation Plan to state any material financial commitment to support
rehabilitation, as well as to include a liquidation analysis, renders the CA's considerations for
approving the same, i.e., that: (a) respondents would be able to meet their obligations to
their creditors within their operating cash profits and other assets without disrupting their
business operations; (b) the Rehabilitation Receiver's opinion carries great weight;
and (c) rehabilitation will be beneficial for respondents' creditors, employees, stockholders,
and the economy, as actually unsubstantiated, and hence, insufficient to decree the
feasibility of respondents' rehabilitation. It is well to emphasize that the remedy of
rehabilitation should be denied to corporations that do not qualify under the Rules. Neither
should it be allowed to corporations whose sole purpose is to delay the enforcement of any of
the rights of the creditors.

Even if the Court were to set aside the failure of the Rehabilitation Plan to comply with the
fundamental requisites of material financial commitment to support the rehabilitation and an
accompanying liquidation analysis, a review of the financial documents presented by
respondents fails to convince the Court of the feasibility of the proposed plan.

IV.

The test in evaluating the economic feasibility of the plan was laid down in Bank of the
Philippine Islands v. Sarabia Manor Hotel Corporation (Bank of the Philippine Islands), to wit;

In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that a

thorough examination and analysis of the distressed corporation's 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.

In the recent case of Viva Shipping Lines, Inc. v. Keppel Philippines Mining, Inc., the Court
took note of the characteristics of an economically feasible rehabilitation plan as opposed to
an infeasible rehabilitation plan:

Professor Stephanie V. Gomez of the University of the Philippines College of Law suggests
specific characteristics of an economically feasible rehabilitation plan:
a. The debtor has assets that can generate more cash if used in its daily operations than if
sold.

b. Liquidity issues can be addressed by a practicable business plan that will generate
enough cash to sustain daily operations.

c. The debtor has a definite source of financing for the proper and full implementation of a
Rehabilitation Plan that is anchored on realistic assumptions and goals.

These requirements put emphasis on liquidity: the cash flow that the distressed corporation
will obtain from rehabilitating its assets and operations. A corporation's assets may be more
than its current liabilities, but some assets may be in the form of land or capital equipment,
such as machinery or vessels. Rehabilitation sees to it that these assets generate more value
if used efficiently rather than if liquidated.

On the other hand, this court enumerated the characteristics of a rehabilitation plan that is
infeasible:

(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.

In addition to the tests of economic feasibility, Professor Stephanie V. Gomez also suggests
that the Financial and Rehabilitation and Insolvency Act of 2010 emphasizes on rehabilitation
that provides for better present value recovery for its creditors.

Present value recovery acknowledges that, in order to pave way for rehabilitation, the creditor
will not be paid by the debtor when the credit falls due. The court may order a suspension of
payments to set a rehabilitation plan in motion; in the meantime, the creditor remains unpaid.
By the time the creditor is paid, the financial and economic conditions will have been
changed. Money paid in the past has a different value in the future. It is unfair if the creditor
merely receives the face value of the debt. Present value of the credit takes into account the
interest that the amount of money would have earned if the creditor were paid on time.

Trial courts must ensure that the projected cash flow from a business' rehabilitation plan
allows for the closest present value recovery for its creditors. If the projected cash flow is
realistic and allows the corporation to meet all its obligations, then courts should favor
rehabilitation over liquidation. However, if the projected cash flow is unrealistic, then courts
should consider converting the proceedings into that for liquidation to protect the creditors.

A perusal of the 2009 audited financial statements shows that respondents' cash operating
position was not even enough to meet their maturing obligations. Notably, their current assets
were materially lower than their current liabilities, and consisted mostly of advances to
related parties in the case of Fastech Microassembly, Fastech Electronique, and Fastech
Properties. Moreover, the independent auditors recognized the absence of available historical
or reliable market information to support the assumptions made by the management to
determine the recoverable amount (value in use) of respondents' properties and equipment.

On the other hand, respondents' unaudited financial statements for the year 2010, and the
months of February and March 2011 were unaccompanied by any notes or explanation on how
the figures were arrived at. Besides, respondents' cash operating position remained
insufficient to meet their maturing obligations as their current assets are still substantially
lower than their current liabilities. The Court also notes the RTC-Makati's observation that
respondents added new accounts and/or deleted/omitted certain accounts, but failed to
explain or justify the same.

Verily, respondents' Rehabilitation Plan should have shown that they have enough serviceable
assets to be able to continue its business operation. In fact, as opposed to this objective, the
revised Rehabilitation Plan still requires "front load Capex spending" to replace common
equipment and facility equipment to ensure sustainability of capacity and capacity
robustness, thus, further sacrificing respondents' cash flow. In addition, the Court is hard-
pressed to see the effects of the outcome of the streamlining of respondents' manufacturing
operations on the carrying value of their existing properties and equipment.

In fine, the Rehabilitation Plan and the financial documents submitted in support thereof fail to
show the feasibility of rehabilitating respondents' business.

V.

The CA's reliance on the expertise of the court-appointed Rehabilitation Receiver, who opined
that respondents' rehabilitation is viable, in order to justify its finding that the financial
statements submitted were reliable, overlooks the fact that the determination of the validity
and the approval of the rehabilitation plan is not the responsibility of the rehabilitation
receiver, but remains the function of the court. The rehabilitation receiver's duty prior to the
court's approval of the plan is to study the best way to rehabilitate the debtor, and to ensure
that the value of the debtor's properties is reasonably maintained; and after approval, to
implement the rehabilitation plan. Notwithstanding the credentials of the court-appointed
rehabilitation receiver, the duty to determine the feasibility of the rehabilitation of the debtor
rests with the court. While the court may consider the receiver's report favorably
recommending the debtor's rehabilitation, it is not bound thereby if, in its judgment, the
debtor's rehabilitation is not feasible.
The purpose of rehabilitation proceedings is not only to enable the company to gain a new
lease on life, but also to allow creditors to be paid their claims from its earnings when so
rehabilitated. Hence, the remedy must be accorded only after a judicious regard of all
stakeholders' interests; it is not a one-sided tool that may be graciously invoked to escape
every position of distress. Thus, the remedy of rehabilitation 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: (a) the
absence of a sound and workable business plan; (b) baseless and unexplained assumptions,
targets, and goals; and (c) speculative capital infusion or complete lack thereof for the
execution of the business plan, as in this case.

VI.

In view of all the foregoing, the Court is therefore constrained to grant the instant petition,
notwithstanding the preliminary technical error as above-discussed. A distressed corporation
should not be rehabilitated when the results of the financial examination and analysis clearly
indicate that there lies no reasonable probability that it may be revived, to the detriment of its
numerous stakeholders which include not only the corporation's creditors but also the public
at large. In Bank of the Philippine Islands;

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 corporation's
stockholders, its creditors, and even the general public.

Thus, the higher interest of substantial justice will be better subserved by the reversal of the
CA Decision. Since the rehabilitation petition should not have been granted in the first place, it
is of no moment that the Rehabilitation Plan is currently under implementation. While
payments in accordance with the Rehabilitation Plan were already made, the same were only
possible because of the financial reprieves and protracted payment schedule accorded to
respondents, which, as above-intimated, only works at the expense of the creditors and
ultimately, do not meet the true purpose of rehabilitation.[70] (Emphasis in the original,
citations omitted)

The dispositive portion of the June 28, 2016 Decision in G.R. No. 206528 read:

WHEREFORE, the petition is GRANTED. The Decision dated September 28, 2012 and the
Resolution dated March 5, 2013 of the Court of Appeals in CA-G.R. SP No. 122836 are
hereby REVERSED and SET ASIDE. Accordingly, the Joint Petition for corporate
rehabilitation filed by respondents Fastech Synergy Philippines, Inc. (formerly First Asia
System Technology, Inc.), Fastech Microassembly & Test, Inc., Fastech Electronique, Inc., and
Fastech Properties, Inc., before the Regional Trial Court of Makati City, Branch 149 in SP Case
No. M-7130 is DISMISSED.

SO ORDERED

[G.R. No. L-33929. September 2, 1983.]

PHILIPPINE SAVINGS BANK, Petitioner, v. HON. GREGORIO T. LANTIN,

 Presiding Judge, Court of First Instance of Manila, Branch VII, and CANDIDO
RAMOS, Respondents.

Jose Diokno for Petitioner.

Romeo C . Carlos for Private Respondent.

SYLLABUS

1. CIVIL LAW; CREDIT TRANSACTION; CONCURRENCE AND PREFERENCE OF CREDITS;

INSUFFICIENT ASSETS OF DEBTOR RAISES QUESTION OF PREFERENCE AS WELL AS
QUESTION OF CONSEQUENCE IN CONCURRENCE OF CREDITS. — Concurrence of
credits occurs when the same specific property of the debtor or all of his property is
subjected to the claims of several creditors. The concurrence of credits raises no
questions of consequence were the value of the property or the value of all assets of
the debtor is sufficient to pay in fall all the creditors. However, it becomes material
when said assets are insufficient for then some creditors of necessity will not be paid or
some creditors will not obtain the full satisfaction of their claims. In this situation, the
question of preference will then arise, that is to say who of the creditors will be paid the
all of the others (Caguioa, Comments and Cases on Civil Law, 1970 ed., Vol. VI, p.
472).

2. ID.; ID.; PREFERENCE OF CREDITS; ARTICLES 2249 AND 2242 OF THE NEW CIVIL
CODE OF THE PHILIPPINES; CONSTRUED. — Under the system established by Article
2249 of the civil Code of the Philippines, only taxes and assessments upon immovable
property enjoy absolute preference. All the remaining specified classes of preferred
creditors under Article 2242 enjoy no priority among themselves. Their credits shall be
satisfied pro-rata, i.e., in proportion to the amount of the respective credits.

3. ID.; ID.; ARTICLE 2249 AND 2242 OF THE NEW CIVIL CODE; PAIL REQUISITE TO
THEIR FULL APPLICATION UNDER THE DE BARRETO CASE. — Under the De Barreto
decision, the full application of Articles 2242 and 2249 demands that there must first be
some proceeding where the class of all the preferred creditors may be bindingly
adjudicated, such as insolvency, the settlement of a decedent’s estate under Rule 87 of
the Rules of Court, or other liquidation proceedings of similar import.

4. REMEDIAL LAW; INSOLVENCY PROCEEDINGS AND SETTLEMENT OF A DECEDENT’S

ESTATE; BOTH PROCEEDINGS IN REM, OTHER EQUIVALENT GENERAL LIQUIDATION OF
SIMILAR NATURE. — Insolvency proceedings end settlement of a decedent’s estate are
both proceedings in rem which are binding the whole world. All persons having interest
in the subject matter involved, whether they were notified or not, are equally bound.
Consequently, a liquidation of similar import or other equivalent general liquidation
must also necessarily be a proceeding in rem so that all interested persons whether
known to the parties or not may be bound by such proceeding.

3. ID.; ACTION FOR COLLECTION OF UNPAID CONTRACTOR’S FEE; NOT AN ACTION IN

REM. — The proceedings in the court below do not partake of the insure of insolvency
proceedings or settlement of a decedent’s estate. The action filed by Ramos was only to
collect the unpaid cost of the construction of the duplex apartment. It is far from being
a general liquidation of the estate of the Tabligan spouses.

6. CIVIL LAW; CREDIT TRANSACTION; ANNOTATION OF CLAIMS AND CREDITS AS

STATUTORY LIENS; RELEVANCE TO THE STABILITY OF THE TORRENS SYSTEM. — In
the case at bar, although the lower court found that "there were no known creditors
other than the plaintiff and the defendant herein," this cannot be conclusive. It will not
bar other creditors in the event they show up and present their claims State petitioner
bank, claiming that they also have preferred liens against the property involved.
Consequently, Transfer Certificate of Title No. 101864 issued in favor of the bank which
is supposed to be indefeasible would remain constantly unstable and questionable. Such
could not have been the intention of Article 2243 of the Civil Code although it considers
claims and credits under Article 2242 as statutory liens. Neither does the De Barreto
case sanction such instability. In fact, an annotation, as suggested above, would insure
to the benefit of the public, particularly those who may subsequently wish to buy the
property in question or who have a business transaction in connection therewith. It
would facilitate the enforcement of a legal statutory right which cannot be barred by
laches (See Manila Railroad Co. v. Luzon Stevedoring Co., 100 Phil. 135).

7. ID.; SALE; BUYER IN GOOD FAITH OF REALTY; TAKES IT FEE FROM LIENS AND
ENCUMBRANCES OTHER THAN STATUTORY LIENS AND THOSE ANNOTATED IN THE
TITLE; CASE AT BAR. — Since the action filed by the private respondent is not one
which can be considered as "equivalent general liquidation" having the same import as
an insolvency or settlement of the decedent’s estate proceeding, the well established
principle must be applied that a purchaser in good faith and for value takes register
land free from liens and encumbrances other than statutory liens and those recorded in
the Certificate of Title. It Is an limited fact that at the time the deeds of real estate
mortgage in favor of the petitioner bank were constituted, the transfer certificate of title
of the spouses Tabligan was free from any recorded lien and encumbrances, so that the
only registered liens in the title were deeds in favor of the petitioner.

DECISION

GUTIERREZ, JR., J.:

This is a petition for review of the decision of the Court of First Instance of Manila,
Branch VII, presided over by respondent Judge Gregorio T. Lantin, in Civil Case No.
79914 entitled Candido Ramos v. Philippine Savings Bank and of the order denying a
motion for its reconsideration. The dispositive portion of the decision reads:jgc:chanrobles.com.ph

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant ordering the defendant to pay the plaintiff the sum of P15,000.00 as his pro-
rata share in the value of the duplex-apartment house which was built by the plaintiff
for the spouses likewise Filomeno Tabligan and Socorro Espiritu, which is now
registered in the name of the defendant under Transfer Certificate of Title No. 101864
issued by the Register of Deeds of the City of Manila, on August 6, 1970, with legal
interest from the date of the filing of the complaint until fully paid; to pay the sum of
P500.00 as attorney’s fees; and to pay the costs.

"The counterclaim interposed by the defendant is hereby dismissed." cralaw virtua1aw library

Involved in this case is a duplex-apartment house on a lot covered by TCT No. 86195
situated at San Diego Street, Sampaloc, Manila, and owned by the spouses Filomeno
and Socorro Tabligan.

The duplex-apartment house was built for the spouses by private respondent Candido
Ramos, a duly licensed architect and building contractor, at a total cost of P32,927.00.
The spouses paid private respondent the sum of P7,139.00 only. Hence, the latter used
his own money, P25,788.50 in all, to finish the construction of the duplex-apartment. chanrobles.com:cralaw:red

Meanwhile, on December 16, 1966, February 1, 1967, and February 28, 1967, the
spouses Tabligan obtained from petitioner Philippine Savings Bank three (3) loans in
the total amount of P35,000.00, the purpose of which was to complete the construction
of the duplex-apartment. To secure payment of the l2oans, the spouses executed in
favor of the petitioner three (3) promissory notes and three (3) deeds of real estate
mortgages over the property subject matter of this litigation.

On December 19, 1966, the petitioner registered the December 16, 1966 deed of real
estate mortgage with the Register of Deeds of Manila. The subsequent mortgages of
February 1, 1967, and February 28, 1967, were registered with the Register of Deeds
of Manila on February 2, 1967 and March 1, 1967, respectively. At the time of the
registration of these mortgages, Transfer Certificate of Title No. 86195 was free from all
liens and encumbrances.

The spouses failed to pay their monthly amortizations. As a result thereof, the
petitioner bank foreclosed the mortgages, and at the public auction held on July 23,
1969, was the highest bidder.

On August 5, 1969, the petitioner bank registered the certificate of sale issued in its
favor. On August 9, 1970, the bank consolidated its ownership over the property in
question, and Transfer Certificate of Title No. 101864 was issued by the Register of
Deeds of Manila in the name of the petitioner bank.

Upon the other hand, the private respondent filed an action against the spouses to
collect the unpaid cost of the construction of the duplex-apartment before the Court of
First Instance of Manila, Branch I, which case was docketed therein as Civil Case No.
69228. During its pendency, the private respondent succeeded in obtaining the
issuance of a writ of preliminary attachment, and pursuant thereto, had the property in
question attached. Consequently, a notice of adverse claim was annotated at the back
of Transfer Certificate of Title No. 86195.

On August 26, 1968, a decision was rendered in Civil Case No. 69228 in favor of the
private respondent and against the spouses. A writ of execution was accordingly issued
but was returned unsatisfied.

As the spouses did not have any properties to satisfy the judgment in Civil Case No.
69228, the private respondent addressed a letter to the petitioner for the delivery to
him (private respondent) of his pro-rata share in the value of the duplex-apartment in
accordance with Article 2242 of the Civil Code. The petitioner refused to pay the pro-
rata value prompting the private respondent to file the instant action. As earlier stated,
a decision was rendered in favor of the private Respondent. chanrobles virtual lawlibrary

The parties are agreed that the only issue is whether or not the private respondent is
entitled to claim a pro-rata share in the value of the property in question. The
applicable provision, Article 2242 of the Civil Code, reads as follows: jgc:chanrobles.com.ph

"ART. 2242. With reference to specific immovable property and real rights of the
debtor, the following claims, mortgages and liens shall be preferred, and shall
constitute an encumbrance on the immovable or real right: jgc:chanrobles.com.ph

"(1) Taxes due upon the land or building;

"(2) For the unpaid price of real property sold, upon the immovable sold;

"(3) Claims of laborers, masons, mechanics and other workmen, as well as of

architects, engineers and contractors, engaged in the construction, reconstruction or
repair of buildings, canals or other works, upon said buildings, canals or other works;

"(4) Claims of furnishers of materials used in the construction reconstruction, or repair

of buildings, canals or other works upon said buildings, canals or other works;

"(5) Mortgage credits recorded in the Registry of Property, upon the real estate
mortgaged;

"(6) Expenses for the preservation or improvement of real property when the law
authorizes reimbursement, upon the immovable preserved or improved;

"(7) Credits annotated in the Registry of Property, in virtue of a judicial order, by

attachments or executions, upon the property affected, and only as to later credits;

"(8) Claims of co-heirs for warranty in the partition of an immovable among them, upon
the real property thus divided;

"(9) Claims of donors of real property for pecuniary charges or other conditions
imposed upon the donee, upon the immovable donated;

"(10) Credits of insurers upon the property insured, for the insurance premium for two
years."cralaw virtua1aw library

Both the petitioner bank and private respondent Ramos rely on the case of De Barreto
v. Villanueva (6 SCRA 928).

The petitioner bank would impress upon this Court that the proceedings had before the
court below is not one of the proceedings contemplated in the De Barreto case that will
sustain the authority of the respondent court to adjudicate the claims of all preferred
creditors under Article 2242 of the Civil Code. Petitioner argues that for Article 2242 of
the Civil Code to apply, there must have been an insolvency proceeding or other
liquidation proceedings of similar import. And under the facts then obtaining, there
could have been no insolvency proceeding as there were only two known creditors. **
Consequently, it is argued that private respondent’s unpaid contractor’s claim did not
acquire the character of a statutory lien equal to the petitioner’s registered mortgage.

Upon the other hand, private respondent Ramos maintains that the proceedings had
before the court below can qualify as a general liquidation of the estate of the spouses
Tabligan because the only existing property of said spouses is the property subject
matter of this litigation.
chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph

Concurrence of credits occurs when the same specific property of the debtor or all of his
property is subjected to the claims of several creditors. The concurrence of credits
raises no questions of consequence where the value of the property or the value of all
assets of the debtor is sufficient to pay in full all the creditors. However, it becomes
material when said assets are insufficient for then some creditors of necessity will not
be paid or some creditors will not obtain the full satisfaction of their claims. In this
situation, the question of preference will then arise, that is to say who of the creditors
will be paid ahead of the others. (Caguioa, Comments and Cases on Civil Law, 1970
ed., Vol. VI, p. 472.)

Under the system established by Article 2249 of the Civil Code of the Philippines, only
taxes and assessments upon immovable property enjoy absolute preference. All the
remaining specified classes of preferred creditors under Article 2242 enjoy no priority
among themselves. Their credits shall be satisfied pro-rata, i.e., in proportion to the
amount of the respective credits.

Under the De Barreto decision, the full application of Articles 2242 and 2249 demands
that there must first be some proceeding where the claims of all the preferred creditors
may be bindingly adjudicated, such as insolvency, the settlement of a decedent’s estate
under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import.

The pertinent ruling reads: jgc:chanrobles.com.ph

"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 then 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 acquire the character and rank of a statutory lien co-equal to
the mortgagee’s recorded encumbrance, and must remain subordinate to the latter." cralaw virtua1aw library

The resolution of this petition, therefore, hinges on the determination of whether an

insolvency proceeding or other liquidation proceeding of similar import may be
considered to have been conducted in the court below.

The respondent court ruled in the affirmative holding that: jgc:chanrobles.com.ph

"There were no known creditors, other than the plaintiff and defendant herein, and the
proceedings in the present case may ascertain and bindingly adjudicate the respective
claims of the plaintiff and the defendant, serving as a substantial compliance with what
the Supreme Court stated: jgc:chanrobles.com.ph

"‘. . . it is thus apparent that the full application of Articles 2242 and 2249 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 a decedent’s estate
under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import.
(de Barretto v. Villanueva, Et Al., G.R. No. L-14938, December 29, 1962).’"

A careful considering of this petition leads us to agree with the petitioner. The
conclusions of the lower court are not supported by the law and the facts.

The proceedings in the court below do not partake of the nature of the insolvency
proceedings or settlement of a decedent’s estate. The action filed by Ramos was only to
collect the unpaid cost of the construction of the duplex apartment. It is far from being
a general liquidation of the estate of the Tabligan spouses.

Insolvency proceedings and settlement of a decedent’s estate are both proceedings in

rem which are binding against the whole world. All persons having interest in the
subject matter involved, whether they were notified or not, are equally bound.
Consequently, a liquidation of similar import or "other equivalent general liquidation’
must also necessarily be a proceeding in rem so that all interested persons whether
known to the parties or not may be bound by such proceeding.

In the case at bar, although the lower court found that "there were no known creditors
other than the plaintiff and the defendant herein", this can not be conclusive. It will not
bar other creditors in the event they show up and present their claims against the
petitioner bank, claiming that they also have preferred liens against the property
involved. Consequently, Transfer Certificate of Title No. 101864 issued in favor of the
bank which is supposed to be indefeasible would remain constantly unstable and
questionable. Such could not have been the intention of Article 2243 of the Civil Code
although it considers claims and credits under Article 2242 as statutory liens. Neither
does the De Barretto case sanction such instability. It emphasized the following: jgc:chanrobles.com.ph

"We are understandably loath (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 enumerated 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 to unforeseable proportions that could lead to economic disaster.

"Upon the other hand, it does not appear excessively burdensome to require the
privileged creditors 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.

In fact, an annotation, as suggested above, would inure to the benefit of the public,
particularly those who may subsequently wish to buy the property in question or who
have a business transaction in connection therewith. It would facilitate the enforcement
of a legal statutory right which cannot be barred by laches. (See Manila Railroad Co. v.
Luzon Stevedoring Co., 100 Phil. 135). chanrobles law library

Respondent Ramos admitted in the partial stipulation of facts submitted by both parties
that at the time of the loans to the spouses, the petitioner’s bank had no actual or
constructive knowledge of any lien against the property in question. The duplex
apartment house was built for P32,927.00. The spouses Tabligan borrowed P35,000.00
for the construction of the apartment house. The bank could not have known of any
contractor’s lien because, as far as it was concerned, it financed the entire construction
even if the stated purpose of the loans was only to "complete" the construction.

Since the action filed by the private respondent is not one which can be considered as
"equivalent general liquidation" having the same import as an insolvency or settlement
of the decedent’s estate proceeding, the well established principle must be applied that
a purchaser in good faith and for value takes registered land free from liens and
encumbrances other than statutory liens and those recorded in the Certificate of Title.
It is an admitted fact that at the time the deeds of real estate mortgage in favor of the
petitioner bank were constituted, the transfer certificate of title of the spouses Tabligan
was free from any recorded lien and encumbrances, so that the only registered liens in
the title were deeds in favor of the petitioner.

Prescinding from the foregoing, the private respondent’s claim must remain subordinate
to the petitioner bank’s title over the property evidenced by TCT No. 101864.

WHEREFORE, the petition is granted. The decision of the Court of First Instance of
Manila, Branch VII is, hereby, reversed and set aside. The complaint and the
counterclaim are dismissed.

SO ORDERED.

G.R. No. 178407, March 18, 2015

 METROPOLITAN BANK AND TRUST COMPANY, Petitioner, v. S.F. NAGUIAT
ENTERPRISES, INC., Respondent.

DECISION

LEONEN, J.:

This case calls for the determination of whether the approval and consent of the
insolvency court is required under Act No. 1956, otherwise known as the Insolvency
Law, before a secured creditor like petitioner Metropolitan Bank and Trust Company can
proceed with the extrajudicial foreclosure of the mortgaged property.

This is a Petition for Review1 under Rule 45, seeking to reverse and set aside the
November 15, 2006 Decision2 and June 14, 2007 Resolution3 of the Court of Appeals
(Sixth Division) in CA-G.R. SP No. 94968. The questioned Decision and Resolution
dismissed Metropolitan Bank and Trust Company's Petition for Certiorari and
Mandamus4 and denied its subsequent Motion for Reconsideration and Clarification.5

Sometime in April 1997, Spouses Rommel Naguiat and Celestina Naguiat and S.F.
Naguiat Enterprises, Inc. (S.F. Naguiat) executed a real estate mortgage6 in favor of
Metropolitan Bank and Trust Company (Metrobank) to secure certain credit
accommodations obtained from the latter amounting to P17 million. The mortgage was
constituted over the following properties:

(1) TCT No. 586767 - a parcel of land in the Barrio of Pulung Bulu, Angeles, Pampanga,
with an area of 489 square meters; and

(2) TCT No. 310523 - a parcel of land in Marikina, Rizal, with an area of 1,200.10
square meters.8

On March 3, 2005, S.F. Naguiat represented by Celestina T. Naguiat, Eugene T.

Naguiat, and Anna N. Africa obtained a loan9 from Metrobank in the amount of
P1,575,000.00. The loan was likewise secured by the 1997 real estate mortgage by
virtue of the Agreement on Existing Mortgage(s)10 executed between the parties on
March 15, 2004.

On July 7, 2005, S.F. Naguiat filed a Petition for Voluntary Insolvency with Application
for the Appointment of a Receiver11 pursuant to Act No. 1956, as amended,12 before the
Regional Trial Court of Angeles City and which was raffled to Branch 56.13 Among the
assets declared in the Petition was the property covered by TCT No. 58676 (one of the
properties mortgaged to Metrobank).14

Presiding Judge Irin Zenaida S. Buan (Judge Buan) issued the Order15 dated July 12,
2005, declaring S.F. Naguiat insolvent; directing the Deputy Sheriff to take possession
of all the properties of S.F. Naguiat until the appointment of a receiver/assignee; and
forbidding payment of any debts due, delivery of properties, and transfer of any of its
properties.

Pending the appointment of a receiver, Judge Buan directed the creditors, including
Metrobank, to file their respective Comments on the Petition.16 In lieu of a Comment,
Metrobank filed a Manifestation and Motion17 informing the court of Metrobank's
decision to withdraw from the insolvency proceedings because it intended to
extrajudicially foreclose the mortgaged property to satisfy its claim against S.F.
Naguiat.18

Subsequently, S.F. Naguiat defaulted in paying its loan.19 On November 8, 2005,

Metrobank instituted an extrajudicial foreclosure proceeding against the mortgaged
property covered by TCT No. 5867620 and sold the property at a public auction held on
December 9, 2005 to Phoenix Global Energy, Inc., the highest bidder.21 Afterwards,
Sheriff Claude B. Balasbas prepared the Certificate of Sale22 and submitted it for
approval to Clerk of Court Vicente S. Fernandez, Jr. and Executive Judge Bernardita
Gabitan-Erum (Executive Judge Gabitan-Erum). However, Executive Judge Gabitan-
Erum issued the Order23dated December 15, 2005 denying her approval of the
Certificate of Sale in view of the July 12, 2005 Order issued by the insolvency court.
Metrobank's subsequent Motion for Reconsideration was also denied in
the Order24dated April 24, 2006.

Aggrieved by both Orders of Executive Judge Gabitan-Erum, Metrobank filed a

Petition25 for certiorari and mandamus before the Court of Appeals on June 22, 2006.
S.F. Naguiat filed its Manifestation26 stating that it was not interposing any objection to
the Petition and requested that the issues raised in the Petition be resolved without
objection and argument on its part.27

On November 15, 2006, the Court of Appeals rendered its Decision dismissing the
Petition on the basis of Metrobank's failure to "obtain the permission of the insolvency
court to extrajudicially foreclose the mortgaged property."28 The Court of Appeals
declared that "a suspension of the foreclosure proceedings is in order, until an assignee
[or receiver,] is elected or appointed [by the insolvency court] so as to afford the
insolvent debtor proper representation in the foreclosure [proceedings]."29

Metrobank filed a Motion for Reconsideration and Clarification, which was denied by the
Court of Appeals in its Resolution dated June 14, 2007.30 The Court of Appeals held that
leave of court must be obtained from the insolvency court whether the foreclosure suit
was instituted judicially or extrajudicially so as to afford the insolvent estate's proper
representation (through the assignee) in such action31 and "to avoid the dissipation of
the insolvent debtor's assets in possession of the insolvency court without the latter's
knowledge."32

Hence, the present Petition for Review was filed. Petitioner contends that the Court of
Appeals decided questions of substance in a way not in accord with law and with the
applicable decisions of this court:

A.

By ruling that there must be a motion for leave of court to be filed and granted by the
insolvency court, before the petitioner, as a secured creditor of an insolvent, can
extrajudicially foreclose the mortgaged property, which is tantamount to a judicial
legislation.

B.
By ruling that the Honorable Executive Judge Bernardita Gabitan-Erum did not abuse
her discretion in refusing to perform her ministerial duty of approving the subject
certificate of sale, despite the fact that the petitioner and the designated sheriff
complied with all the requirements mandated by Act No. 3135, as amended, circulars,
administrative matters and memorandums issued by the Honorable Supreme Court.

C.

By ruling that the action of the Honorable Executive Judge Bernardita Gabitan-Erum is
proper in denying the approval of the Certificate of Sale on the grounds that the
issuance of the Order dated 12 July 2005 declaring respondent insolvent and the
pendency of the insolvency proceeding forbid the petitioner, as a secured creditor, to
foreclose the subject mortgaged property.33 (Emphasis supplied)

On October 20, 2007, S.F. Naguiat filed a Manifestation34 stating that it interposed no
objection to the Petition and submitted the issues raised therein without any argument.

On November 28, 2007, the court resolved "to give due course to the petition [and] to
decide the case according to the pleadings already filed[.]"35

The issues for resolution are:

First, whether the Court of Appeals erred in ruling that prior leave of the insolvency
court is necessary before a secured creditor, like petitioner Metropolitan Bank and Trust
Company, can extrajudicially foreclose the mortgaged property.

Second, whether the Court of Appeals erred in ruling that Executive Judge Gabitan-
Erum did not abuse her discretion in refusing to approve the Certificate of Sale.

Petitioner argues that nowhere in Act No. 1956 does it require that a secured creditor
must first obtain leave or permission from the insolvency court before said creditor can
foreclose on the mortgaged property.36 It adds that this procedural requirement applies
only to civil suits, and not when the secured creditor opts to exercise the right to
foreclose extrajudicially the mortgaged property under Act No. 3135, as amended,
because extrajudicial foreclosure is not a civil suit.37 Thus, the Court of Appeals
allegedly imposed a new condition that was tantamount to unauthorized judicial
legislation when it required petitioner to file a Motion for Leave of the insolvency
court.38 Said condition, petitioner argues, defeated and rendered inutile its right or
prerogative under Act No. 1956 to independently initiate extrajudicial foreclosure of the
mortgaged property.39

Nonetheless, petitioner contends that the filing of its Manifestation before the
insolvency court served as sufficient notice of its intention and, in effect, asked the
court's permission to foreclose the mortgaged property.40

Petitioner further contends that "the powers and responsibilities of an Executive Judge
in extrajudicial foreclosure proceedings, in line with Administrative Order No. 6, is
merely to supervise the conduct of the extra-judicial foreclosure of the property"41 and
to oversee that the procedural requirements are faithfully complied with;42 and when
"the Clerk of Court and Sheriff concerned complied with their designated duties and
responsibilities under the [administrative] directives and under Act No. 3135, as
amended, and the corresponding filing and legal fees were duly paid, it becomes a
ministerial duty on the part of the executive judge to approve the certificate of
sale."43 Thus, Executive Judge Gabitan-Erum allegedly exceeded her authority by
"exercising judicial discretion in issuing her Orders dated December 15, 2006 and April
24, 2006 . . . despite the fact that Sheriff Balasbas complied with all the notices
requirements under Act No. 3135, [as] amended, . . . and the petitioner and the
highest bidder paid all the requisite filing and legal fees[.]"44

Furthermore, citing Chartered Bank v. C.A. Imperial and National Bank,45 petitioner
submits that the order of insolvency affected only unsecured creditors and not secured
creditors, like petitioner, which did not surrender its right over the mortgaged
property.46 Hence, it contends that the Court of Appeals seriously erred in holding as
proper Executive Judge Gabitan-Erum's disapproval of the Certificate of Sale on account
of the Order of insolvency issued by the insolvency court.47

Finally, petitioner points out that contrary to the Court of Appeals' ruling, "there is
nothing more to suspend because the extrajudicial foreclosure of the mortgaged
property was already a fait accompli as the public auction sale was conducted on
December 9, 2005 and all the requisite legal fees were paid and a Certificate of Sale
was already prepared."48 "The only remaining thing to do [was] for the . . . Executive
Judge to sign the Certificate of Sale, which she . . . refused to do."49

The Petition has no merit.

A look at the historical background of the laws governing insolvency in this country will
be helpful in resolving the questions presented before us.

The first insolvency law, Act No. 1956, was enacted on May 20, 1909. It was derived
from the Insolvency Act of California (1895), with a few provisions taken from the
United States Bankruptcy Act of 1898.50 Act No. 1956 was entitled "An Act Providing for
the Suspension of Payments, the Relief of Insolvent Debtors, the Protection of
Creditors, and the Punishment of Fraudulent Debtors." The remedies under the law
were through a suspension of payment51 (for a debtor who was solvent but illiquid) or a
discharge from debts and liabilities through the voluntary52 or involuntary53 insolvency
proceedings (for a debtor who was insolvent).

The objective of suspension of payments is the deferment of the payment of debts until
such time as the debtor, which possesses sufficient property to cover all its debts, is
able to convert such assets into cash or otherwise acquires the cash necessary to pay
its debts. On the other hand, the objective in insolvency proceedings is "to effect an
equitable distribution of the bankrupt's properties among his creditors and to benefit
the debtor by discharging54 him from his liabilities and enabling him to start afresh with
the property set apart for him as exempt."55

Act No. 1956 was meant to be a complete law on insolvency,56 and debts were to be
liquidated in accordance with the order of priority set forth under Chapter VI, Sections
48 to 50 on "Classification and Preference of Creditors"; and Sections 29 and 59 with
respect to mortgage or pledge of real or personal property, or lien thereon. Jurisdiction
over suspension of payments and insolvency was vested in the Courts of First Instance
(now the Regional Trial Courts).57

The Civil Code58 (effective August 30, 1950) established a system of concurrence and
preference of credits, which finds particular application in insolvency
proceedings.59Philippine Savings Bank v. Hon. Lantin60 explains this scheme:

Concurrence of credits occurs when the same specific property of the debtor or all of his
property is subjected to the claims of several creditors. The concurrence of credits
raises no questions of consequence where the value of the property or the value of all
assets of the debtor is sufficient to pay in full all the creditors. However, it becomes
material when said assets are insufficient for then some creditors of necessity will not
be paid or some creditors will not obtain the full satisfaction of their claims. In this
situation, the question of preference will then arise, that is to say who of the creditors
will be paid ahead of the others. (Caguioa, Comments and Cases on Civil Law, 1970
ed., Vol. VI, p. 472.)61

The credits are classified into three general categories, namely, "(a) special preferred
credits listed in Articles 224162 and 2242,63 (b) ordinary preferred credits listed in Article
2244[,]64and (c) common credits under Article 2245."65

The special preferred credits enumerated in Articles 2241 (with respect to movable
property) and 2242 (with respect to immovable property) are considered as mortgages
or pledges of real or personal property, or liens within the purview of Act No.
1956.66 These credits, which enjoy preference with respect to a specific movable or
immovable property, exclude all others to the extent of the value of the property.67 If
there are two or more liens on the same specific property, the lienholders divide the
value of the property involved pro rata, after the taxes on the same property are fully
paid.68

"Credits which are specially preferred because they constitute liens (tax or non-tax) in
turn, take precedence over ordinary preferred credits so far as concerns the property to
which the liens have attached. The specially preferred credits must be discharged first
out of the proceeds of the property to which they relate, before ordinary preferred
creditors may lay claim to any part of such proceeds."69

"In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate
property which follow such property. What Article 2244 creates are simply rights in
favor of certain creditors to have the cash and other assets of the insolvent applied in a
certain sequence or order of priority."70

It was held that concurrence and preference of credits can only be ascertained in the
context of a general liquidation proceeding that is in rem, such as an insolvency
proceeding, where properties of the debtor are inventoried and liquidated and the
claims of all the creditors may be bindingly adjudicated.71 The application of this order
of priorities established under the Civil Code in insolvency proceedings assures that
priority of claims are respected and credits belonging to the same class are equitably
treated.

Conformably, it is the policy of Act No. 1956 to place all the assets and liabilities of the
insolvent debtor completely within the jurisdiction and control of the insolvency court
without the intervention of any other court in the insolvent debtor's concerns or in the
administration of the estate.72 It was considered to be of prime importance that the
insolvency proceedings follow their course as speedily as possible in order that a
discharge, if the insolvent debtor is entitled to it, should be decreed without
unreasonable delay. "Proceedings of [this] nature cannot proceed properly or with due
dispatch unless they are controlled absolutely by the court having charge thereof."73

In 1981, Presidential Decree No. 1758 amended Presidential Decree No. 902-A, the
Securities and Exchange Commission charter. Under its terms,74 jurisdiction regarding
corporations that sought suspension of payments process was taken away from the
regular courts and given to the Securities and Exchange Commission.75 In addition, an
alternative to suspension of payments � rehabilitation � was introduced. It enables
a corporation whose assets are not sufficient to cover its liabilities to apply to the
Securities and Exchange Commission for the appointment of a rehabilitation receiver
and/or management committee76 and then to develop a rehabilitation plan with a view
to rejuvenating a financially distressed corporation. However, the procedure to avail of
the remedy was not spelled out until 20 years later when the Securities and Exchange
Commission finally adopted the Rules of Procedure on Corporate Recovery on January
4, 2000.

Shortly thereafter, with the passage of Republic Act No. 8799 or The Securities
Regulation Code on July 19, 2000, jurisdiction over corporation rehabilitation cases was
reverted to the Regional Trial Courts designated as commercial courts or rehabilitation
courts.77 This legal development was implemented by the Interim Rules of Procedure on
Corporate Rehabilitation (made effective in December 2000), which was later replaced
by A.M. 00-8-10-SC or the Rules of Procedure on Corporate Rehabilitation of 2008.

Act No. 1956 continued to remain in force and effect until its express repeal on July 18,
2010 when Republic Act No. 10142,78 otherwise known as the Financial Rehabilitation
and Insolvency Act of 2010, took effect. Republic Act No. 10142 now provides for court
proceedings in the rehabilitation or liquidation of debtors, both juridical and natural
persons, in a "timely, fair, transparent, effective and efficient"79 manner. The purpose of
insolvency proceedings is "to encourage debtors . . . and their creditors to collectively
and realistically resolve and adjust competing claims and property rights"80 while
"maintaining] certainty and predictability in commercial affairs, preserving] and
maximizing] the value of the assets of these debtors, recognizing] creditor rights and
respecting] priority of claims, and ensuring] equitable treatment of creditors who are
similarly situated."81 It has also been provided that whenever rehabilitation is no longer
feasible, "it is in the interest of the State to facilitate a speedy and orderly liquidation of
[the] debtors' assets and the settlement of their obligations."82

Unlike Act No. 1956, Republic Act No. 10142 provides a broad definition of the term,
"insolvent":

SEC. 4. Definition of Terms. - As used in this Act, the term:

....

(p) Insolvent shall refer to the financial condition of a debtor that is generally unable to
pay its or his liabilities as they fall due in the ordinary course of business or has
liabilities that are greater than its or his assets.

Republic Act No. 10142 also expressly categorizes different forms of debt relief
available to a corporate debtor in financial distress. These are out-of-court restructuring
agreements;83 pre-negotiated rehabilitation;84 court-supervised rehabilitation;85 and
liquidation (voluntary and involuntary).86 An insolvent individual debtor can avail of
suspension of payments,87 or liquidation.88

During liquidation proceedings, a secured creditor may waive its security or lien, prove
its claim, and share in the distribution of the assets of the debtor, in which case it will
be admitted as an unsecured creditor; or maintain its rights under the security or
lien,89 in which case:

1. [T]he value of the property may be fixed in a manner agreed upon by the
creditor and the liquidator. When the value of the property is less than the
claim . . . the [creditor] will be admitted ... as a creditor for the balance.
If its value exceeds the claim . . . the liquidator may convey the property
to the creditor and waive the debtor's right of redemption upon receiving
the excess from the creditor;

2. [T]he liquidator may sell the property and satisfy the secured creditor's
entire claim from the proceeds of the sale; or

3. [T]he secured creditor may enforce the lien or foreclose on the property
pursuant to applicable laws.90

A secured creditor, however, is subject to the temporary stay of foreclosure

proceedings for a period of 180 days,91 upon the issuance by the court of the
Liquidation Order.92

Republic Act No. 10142 was to govern all petitions filed after it had taken effect, and all
further proceedings in pending insolvency, suspension of payments, and rehabilitation
cases, except when its application "would not be feasible or would work injustice, in
which event the procedures set forth in prior laws and regulations shall apply."93

The relevant proceedings in this case took place prior to Republic Act No. 10142;
hence, the issue will be resolved according to the provisions of Act No. 1956.

II

Act No. 1956 impliedly requires a secured creditor to ask the permission of the
insolvent court before said creditor can foreclose the mortgaged property.

When read together, the following provisions of Act No. 1956 reveal the necessity
for leave of the insolvency court:
(A) Under Section 14, "[a]n insolvent debtor, owing debts exceeding in amount the sum of one
thousand pesos, may apply to be discharged from his debts and liabilities by petition to the
Court of First Instance of the province or city in which he has resided for six months next
preceding the filing of such petition. In his petition, he shall set forth his place of residence,
the period of his residence therein immediately prior to filing said petition, his inability to
pay all his debts in full, his willingness to surrender all his property, estate, and effects not
exempt from execution for the benefit of his creditors, and an application to be adjudged an
insolvent. He shall annex to his petition a schedule and inventory in the form hereinafter
provided. The filing of such petition shall be an act of insolvency."
(B) Under Section 16, "[the] inventory must contain, besides the creditors, an accurate
description of all the real and personal property, estate, and effects of the [insolvent],
including his homestead, if any, together with a statement of the value of each item of said
property, estate, and effects and its location, and a statement of the incumbrances thereon.
All property exempt by law from execution shall be set out in said inventory with a
statement of its valuation, location, and the incumbrances thereon, if any. The inventory
shall contain an outline of the facts giving rises [sic], or which might give rise, to a right of
action in favor of the insolvent debtor."
(C) Under Section 18, upon receipt of the petition, the court shall issue an order declaring the
petitioner insolvent, and directing the sheriff to take possession of and safely keep, until the
appointment of a receiver or assignee, all the debtor's real and personal property, except
those exempt by law from execution. The order also forbids the transfer of any property by
the debtor.
(D) Under Section 32, once an assignee is elected and qualified, the clerk of court shall assign
and convey to the assignee all the real and personal property of the debtor, not exempt
from execution, and such assignment shall relate back to the commencement of the
insolvency proceedings, and by operation n of law, shall vest the tide to all such property in
the assignee.

With the declaration of insolvency of the debtor, insolvency courts "obtain full and
complete jurisdiction over all property of the insolvent and of all claims by and against
[it.]"94 It follows that the insolvency court has exclusive jurisdiction to deal with the
property of the insolvent.95 Consequently, after the mortgagor-debtor has been
declared insolvent and the insolvency court has acquired control of his estate, a
mortgagee may not, without the permission of the insolvency court, institute
proceedings to enforce its lien. In so doing, it would interfere with the insolvency
court's possession and orderly administration of the insolvent's properties.96

It is true that under Section 59 of Act No. 1956, the creditor is given the option to
participate in the insolvency proceedings by proving the balance of his debt, after
deducting the value of the mortgaged property as agreed upon with the receiver or
determined by the court or by a sale of the property as directed by the court; or
proving his whole debt, after releasing his claim to the receiver/sheriff before the
election of an assignee, or to the assignee. However, Section 59 of Act No. 1956
proceeds to state that when "the property is not sold or released, and delivered up, or
its value fixed, the creditor [is] not allowed to prove any part of his debt," but the
assignee shall deliver to the creditor the mortgaged property. Hence, explicitly under
Section 59 and as a necessary consequence flowing from the exclusive jurisdiction of
the insolvency court over the estate of the insolvent, the mortgaged property must first
be formally delivered by the court or the assignee (if one has already been elected)
before a mortgagee-creditor can initiate proceedings for foreclosure.97

Here, the foreclosure and sale of the mortgaged property of the debtor, without leave
of court, contravene the provisions of Act No. 1956 and violate the Order dated July 12,
2005 of the insolvency court which declared S.F. Naguiat insolvent and forbidden from
making any transfer of any of its properties to any person.

Petitioner would insist that "respondent was given the opportunity to be represented in
the public auction sale conducted on December 9, 2005"98 because it received a copy of
the Notice of the Sheriffs Sale on November 11, 2005;"99 and the Notice of Auction Sale
was published in a newspaper of general circulation.100 However, respondent allegedly
opted not to participate by not attending the public auction sale.101

Such was to be expected because when the foreclosure proceeding was initiated,
respondent was already declared insolvent. Indeed, upon the adjudication of
insolvency, the insolvent ceased to exist and was in effect judicially declared dead as of
the filing of the insolvency petition and by the nature of things had no further interest
in the property covered by the mortgage.102 Under Section 32 of Act No. 1956, title to
the insolvent's estate relates back to the filing of the insolvency petition upon the
election of the assignee who shall thereafter act on behalf of all the creditors. Under
Section 36, the assignee has the power to redeem all valid mortgages or sell property
subject to mortgage. Thus, the extrajudicial foreclosure of the mortgaged property
initiated by petitioner without leave of insolvency court would effectively exclude the
assignee's right to participate in the public auction sale of the property and to redeem
the foreclosed property103 to the prejudice of all the other creditors of the insolvent.

Petitioner filed its Manifestation and Motion before the insolvency court on September
7, 2005,104 praying that it would no longer file the Comment required as it opted to
exercise its right to extrajudicially foreclose the property mortgaged and that it "be
allowed to temporarily withdraw its active participation in the . . . proceeding pending
the outcome of the extra-judicial foreclosure proceeding of the mortgaged property."105

Petitioner should have waited for the insolvency court to act on its Manifestation and
Motion before foreclosing the mortgaged property and its lien (assuming valid) would
not be impaired or its claim in any way jeopardized by any reasonable delay. There are
mechanisms within Act No. 1956 such as Section 59 that ensure that the interests of
the secured creditor are adequately protected. Parenthetically, mortgage liens are
retained in insolvency proceedings. What is merely suspended until court approval is
obtained is the creditor's enforcement of such preference.

On the other hand, to give the secured creditor a free hand in foreclosing its collateral
upon the initiation of insolvency proceedings may frustrate the basic objectives of Act
No. 1956 of maximizing the value of the estate of the insolvent or obtaining the highest
return possible from its sale for the benefit of all the creditors (both secured and
unsecured).

III

Executive Judge Gabitan-Erum did not unlawfully neglect to perform her duty when she
refused to approve and sign the Certificate of Sale, as would warrant the issuance of a
writ of mandamus against her.

An executive judge has the administrative duty in extrajudicial foreclosure proceedings

to ensure that all the conditions of Act No. 3135 have been complied with before
approving the sale at public auction of any mortgaged property.106

"Certain requisites must be established before a creditor can proceed to an extrajudicial

foreclosure, namely: first, there must have been the failure to pay the loan obtained
from the mortgagee-creditor; second, the loan obligation must be secured by a real
estate mortgage; and third, the mortgagee-creditor has the right to foreclose the real
estate mortgage either judicially or extrajudicially."107

Furthermore, Act No. 3135 outlines the notice and publication requirements and the
procedure for the extrajudicial foreclosure which constitute a condition sine qua non for
its validity. Specifically, Sections 2, 3, and 4 of the law prescribe the formalities of the
extrajudicial foreclosure proceeding:

SEC. 2. Said sale cannot be made legally outside of the province in which the property
sold is situated; and in case the place within said province in which the sale is to be
made is the subject of stipulation, such sale shall be made in said place or in the
municipal building of the municipality in which the property or part thereof is situated.

SEC. 3. Notice shall be given by posting notices of the sale for not less than twenty
days in at least three public places of the municipality or city where the property is
situated, and if such property is worth more than four hundred pesos, such notice shall
also be published once a week for at least three consecutive weeks in a newspaper of
general circulation in the municipality or city.

SEC. 4. The sale shall be made at public auction, between the hours of nine in the
morning and four in the afternoon; and shall be under the direction of the sheriff of the
province, the justice or auxiliary justice of the peace of the municipality in which such
sale has to be made, or a notary public of said municipality, who shall be entitled to
collect a fee of five pesos for each day of actual work performed, in addition to his
expenses.

''Mandamus will not issue to enforce a right which is in substantial dispute or to which a
substantial doubt exists."108

There was a valid reason for Executive Judge Gabitan-Erum to doubt the propriety of
the foreclosure sale. Her verification with the records of the Clerk of Court showed that
a Petition for Insolvency had been filed and had already been acted upon by the
insolvency court prior to the application for extrajudicial foreclosure of the mortgaged
properties. Among the inventoried unpaid debts and properties attached to the Petition
for Insolvency was the loan secured by the real estate mortgage subject of the
application for extrajudicial foreclosure sale.109 With the pendency of the insolvency
case, substantial doubt exists to justify the refusal by Executive Judge Gabitan-Erum to
approve the Certificate of Sale as the extrajudicial foreclosure sale without leave of the
insolvency court may contravene the policy and purpose of Act No. 1956.110
Act No. 3135 is silent with respect to mortgaged properties that are in custodia legis,
such as the property in this case, which was placed under the control and supervision of
the insolvency court. This court has declared that "[a] court which has control of such
property, exercises exclusive jurisdiction over the same, retains all incidents relative to
the conduct of such property. No court, except one having supervisory control or
superior jurisdiction in the premises, has a right to interfere with and change that
possession."111 The extrajudicial foreclosure and sale of the mortgaged property of the
debtor would clearly constitute an interference with the insolvency court's possession of
the property.

Furthermore, Executive Judge Gabitan-Erum noticed that the President of the highest
bidder in the public auction sale may be related to the owners of S.F. Naguiat
Enterprises, Inc. The President of the highest bidder, Phoenix Global Energy, Inc., was
a certain Eugene T. Naguiat.112 "Among the incorporators of S.F. Naguiat Enterprises,
Inc. [the insolvent corporation] [were] Sergio F. Naguiat, Maningning T. Naguiat,
Antolin M. Tiglao, Nero F. Naguiat and Antolin T. Naguiat. Later[,] its capital was
increased and the listed subscribers [were] Celestina T. Naguiat, Rommel T. Naguiat,
Antolin T. Naguiat, Sergio T. Naguiat, Jr., Alexander T. Naguiat, Coumelo T. Naguiat,
Fely Ann Breggs and Teresita Celine Quemer."113

Under the foregoing circumstances, the refusal of Executive Judge Gabitan-Erum to

approve the Certificate of Sale was in accord with her duty to act with prudence,
caution, and attention in the performance of her functions.

WHEREFORE, the Petition is DENIED, and the Court of Appeals' Decision dated
November 15, 2006 and Resolution dated June 14, 2007 are AFFIRMED.

SO ORDERED.

G.R. Nos. 218485-86 and 218493-97, April 28, 2021

BANCO DE ORO UNIBANK, INC., Petitioner, v. INTERNATIONAL COPRA EXPORT

CORPORATION, INTERCO MANUFACTURING CORPORATION, ICEC LAND
CORPORATION, AND KIMEE REALTY CORPORATION, Respondent.

G.R. Nos. 218487 AND 218498-503

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, v. INTERNATIONAL

COPRA EXPORT CORPORATION, INTERCO MANUFACTURING CORPORATION
ICEC LAND CORPORATION, AND KIMEE REALTY CORPORATION, Respondents.

G.R. Nos. 218488-90 AND 218504-07

INTERNATIONAL COPRA EXPORT CORPORATION, INTERCO MANUFACTURING

CORPORATION, ICEC LAND CORPORATION, AND KIMEE REALTY
CORPORATION, Petitioners, v. BANCO DE ORO UNIBANK, INC. AND
DEVELOPMENT BANK OF THE PHILIPPINES, Respondents.

G.R. Nos. 218491 AND 218508-13

 INTERNATIONAL COPRA EXPORT CORPORATION, INTERCO MANUFACTURING
CORPORATION, ICEC LAND CORPORATION, AND KIMEE REALTY
CORPORATION, Petitioners, v. ALLIED BANKING CORPORATION AND
PHILIPPINE NATIONAL BANK, Respondents.

G.R. Nos. 218523-29

INTERNATIONAL COPRA EXPORT CORPORATION, INTERCO MANUFACTURING

CORPORATION, ICEC LAND CORPORATION, AND KIMEE REALTY
CORPORATION, Petitioners, v. RIZAL COMMERCIAL BANKING CORPORATION,
ALLIED BANKING CORPORATION, PHILIPPINE NATIONAL BANK,
DEVELOPMENT BANK OF THE PHILIPPINES, BANCO DE ORO UNIBANK, INC.,
AND BANK OF THE PHILIPPINE ISLANDS, Respondents.

DECISION

LEONEN, J.:

Once enacted into law, a bill is not rendered inoperative by the absence of its own
implementing rules. Every law carries in its favor a presumption of validity. So long as
the law is susceptible of reasonable construction as to what it is and how it is applied,
the law, for all intents and purposes, is binding and enforceable.1

This Court resolves the consolidated Petitions for Review on Certiorari assailing the
Decision2 and Resolution3 of the Court of Appeals, which remanded the case to a
rehabilitation court and ordered it to direct the rehabilitation receiver to convene the
creditors to vote on the rehabilitation plan.

On September 9, 2010, International Copra Export Corporation (Interco), Interco

Manufacturing Corporation (Interco Manufacturing), ICEC Land Corporation (ICEC
Land), and Kimee Realty Corporation (Kimee), filed a Petition for Suspension of
Payments and Rehabilitation4 before the Regional Trial Court of Zamboanga City. The
Petition, filed pursuant to the provisions of the Financial Rehabilitation and Insolvency
Act (FRIA),5 was the result of Interco, et al.'s anticipated impossibility of meeting their
debts as they become due.6

Interco, et al. cited as reasons for their liquidity problem the "unforeseen regional and
global recession and worldwide economic meltdown, high financial costs for short term
loans, increases in fuel costs and costs of production."7 They said their creditors'
decision to stop the renewal and restructuring of their maturing loans, and the granting
of loans for operating capital, aggravated the problem.8

After finding the Petition sufficient in form and substance, the Regional Trial Court
issued a Stay Order9 on September 13, 2010. It likewise set the initial hearing on
November 12, 2010 and appointed Atty. Julio Elamparo (Atty. Elamparo) as the
rehabilitation receiver.10

On September 27, 2010, Interco, et al. submitted a Supplement to their Petition.11

On the day of the initial hearing, the Regional Trial Court declared that the proceedings
shall be governed by the 2008 Rules on Corporate Rehabilitation,12 and then directed
the oppositors and claimants to file their respective rejoinders and
comments.13 Development Bank of the Philippines (Development Bank), Banco De Oro
Unibank, Inc. (BDO), Rizal Commercial Banking Corporation (Rizal Commercial
Banking), Allied Banking Corporation (Allied Banking), and Philippine National Bank,
Bank of the Philippine Islands (BPI), some of creditors-claimants, complied with the trial
court's order.14

In its February 11, 2011 Order,15 the Regional Trial Court gave due course to the
Petition and directed Atty. Elamparo to submit his recommendation within 90 days from
receipt of the Order.16]

In compliance with the Regional Trial Court's directive, Atty. Elamparo sent a
Letter17 dated March 3, 2011 to the creditors-claimants, requiring them to submit
documents evidencing their claims and their proposed commercial terms on the
rehabilitation plan. He likewise informed the creditors of a general creditors' meeting to
be held on April 6, 2011.18

After the April 6, 2011 meeting,19 Atty. Elamparo submitted to the rehabilitation court
his Compliance with Recommendation and a modified version of the proposed
rehabilitation plan.20 He said that Interco, et al.'s rehabilitation was "very viable."21

Meanwhile, Allied Banking and Philippine National Bank commented on the Petition and
moved to amend the Stay Order.22 They likewise moved for clarification.23

In its May 30, 2011 Order,24 the Regional Trial Court stated that as early as November
12, 2010, it had decreed that it would apply the 2008 Rules on Corporate Rehabilitation
provided that they are not contrary to FRIA.25

On June 17, 2011, Development Bank filed its Comment/Opposition to Atty. Elamparo's
Compliance with Recommendation and modified rehabilitation plan.26

In its July 8, 2011 Resolution,27 the Regional Trial Court granted Interco, et al.'s Petition
and approved the modified rehabilitation plan.28 It decreed that the continuance of
Interco, et al.'s corporate life would be more beneficial not only to its creditors, but also
to its employees, stockholders, and the general public.29

BDO moved for reconsideration,30 but it was denied by the Regional Trial Court on April
29, 2011.31

In a Petition for Review32 before the Court of Appeals, Development Bank argued that
the rehabilitation court erred in not dismissing the Petition and in approving the
modified rehabilitation plan.33 It contended that Interco, et al.'s Petition was filed
merely to "delay" the enforcement of its creditors' claims,34 and that it made a
"misrepresentation" that warranted its outright dismissal.35

Similarly, Allied Banking and Philippine National Bank, Rizal Commercial Banking, BDO,
and BPI filed their respective Petitions for Review before the Court of Appeals.36
In the meantime, Atty. Elamparo, the rehabilitation receiver, requested for the approval
of the disposition of non-core assets and bidding rules.37 On October 20, 2011, the
Regional Trial Court granted38 the request and authorized him to dispose of Interco, et
al.'s non-core assets.39

At this, BDO and Rizal Commercial Banking filed before the Court of Appeals separate
Petitions for Certiorari, contending that the rehabilitation court committed grave abuse
of discretion in allowing the sale of the non�core assets.40 These Petitions were
consolidated.41

In its November 18, 2014 Decision,42 the Court of Appeals partially granted the
Petitions of BDO and Rizal Commercial Banking, and remanded the case to the
rehabilitation court, disposing thus:chanroblesvirtualawlibrary

WHEREFORE, the Petitions are partially GRANTED. The case is hereby remanded to the
Rehabilitation Court which is hereby ORDERED to DIRECT the Rehabilitation Receiver to
CONVENE the creditors within twenty (20) days from the finality of this Decision, for the
purpose of voting on the Rehabilitation Plan and to REPORT with dispatch the outcome
of the vote to the said court. The Rehabilitation Court is then ORDERED to confirm or
reject the Plan in accordance with Sections 64 and 65 of the FRIA. The Rehabilitation
Court is DIRECTED to proceed thereafter in accordance with the provisions of FRIA and
the FR Rules with utmost dispatch.43 chanRoblesvirtualLawlibrary

In ruling this, the Court of Appeals first settled whether the Regional Trial Court
properly acquired jurisdiction over the case. It held that petitions for financial
rehabilitation are like proceedings for suspension of payments, and were properly
lodged with the Regional Trial Court, which FRIA did not take away or modify.44

The Court of Appeals likewise declared that the absence of rules implementing FRIA did
not affect the Regional Trial Court's jurisdiction over petitions for financial rehabilitation,
as every law is presumed to be complete and self-executing.45

The Court of Appeals then said that FRIA applies to Interco, et al.'s Petition for
Suspension of Payments and Rehabilitation, it being filed after the law had taken effect.
It clarified that the discretion to not apply FRIA only applies to cases already pending
prior to FRIA's effectivity. It added that while the rehabilitation court erred in declaring
that the proceedings would be governed by the 2008 Rules on Corporate Rehabilitation,
only acts performed contrary to FRIA should be nullified, while those consistent with
FRIA should be sustained.46

Finally, the Court of Appeals found the Petition for Suspension of Payments and
Rehabilitation to be sufficient in form and substance.47 Nonetheless, it remanded the
case to the rehabilitation court after it found that Section 64 of FRIA had not been
complied with.48

Interco, et al.,49 BDO,50 and Development Bank51 each moved for reconsideration, but
all of them were denied by the Court of Appeals in its May 13, 2015 Resolution.52

In its February 24, 2015 Order, the rehabilitation court suspended the implementation
of the rehabilitation plan pending the finality of the November 18, 2014 Court of
Appeals Decision.53
In another Order dated February 17, 2016, the rehabilitation court reiterated its
previous directive holding in abeyance all actions relating to the rehabilitation plan
pending the finality of the Court of Appeals Decision.54

Meanwhile, the parties elevated the case to this Court through their separate Petitions
for Review on Certiorari.

Interco, et al. argue that the Court of Appeals erred in ruling that FRIA is applicable
since the rehabilitation court's decision to apply the 2008 Rules on Corporate
Rehabilitation has become the law of the case.55 They insist that FRIA gives the
rehabilitation court a wide latitude to decide whether to apply its provisions.56

They likewise maintain that while their Petition for Suspension of Payments and
Rehabilitation was filed after FRIA had taken effect, the law is inapplicable since its
provisions are not self-executory.57 They contend that the law's mandate directing this
Court to promulgate rules of procedure governing rehabilitation proceedings confirms
that it is not immediately enforceable.58 They claim that the Court of Appeals'
application of FRIA despite the absence of the implementing rules constitutes judicial
legislation violative of their right to due process.59

Interco, et al. add that, assuming that FRIA is self-executory, the voting requirement
under Section 64 could not be properly implemented due to the absence of governing
rules of procedure.60

They further assert that supposing that the voting requirement has not been complied
with, the creditors were accorded due process when they filed their comments or
oppositions to the Petition for Suspension of Payments and Rehabilitation in the April 6,
2011 creditors' meeting,61 which inputs were considered in the modified rehabilitation
plan.62
�
Finally, Interco, et al. aver that the Court of Appeals erred in ruling that Section 146 of
FRIA applies only to petitions filed before the law took effect.63

For its part, BDO maintains that the Court of Appeals correctly applied FRIA,64 as that
the absence of rules and regulations does not render its provisions
inoperative.65 Nonetheless, it claims that the Court of Appeals should have nullified the
order granting Interco, et al.'s Petition for Suspension of Payments and Rehabilitation
for being replete with inaccuracies.66 It argues that FRIA requires petitions to be
complete and accurate before there can be any further proceedings.67

BDO likewise contends that the Court of Appeals erred in remanding the case to the
rehabilitation court, and insists that it should have denied the modified rehabilitation
plan outright.68 It maintains that a perusal of the documents submitted by Interco, et
al. shows that its proposed rehabilitation plan is not feasible and viable.69

Lastly, BDO claims that the venue with respect to Kimmee was improperly laid.70

Philippine National Bank and Allied Banking similarly assert that the provisions of FRIA
can stand despite the absence of implementing rules.71 They add that implementing
rules serve only as guide and do not affect FRIA's validity.72

They further contend that since the Financial Rehabilitation Rules of Procedure, the
implementing rules and regulations of FRIA, states that it retroactively applies, the
2008 Rules on Corporate Rehabilitation is rendered inapplicable to Interco, et al.'s
Petition for Suspension of Payments and Rehabilitation.73

They likewise stress that Interco, et al. committed forum shopping when it filed several
petitions before this Court involving the same issues, assailing the same Court of
Appeals Decision, and impleading them in both as respondents.74

For its part, Development Bank maintains that the Court of Appeals erred in remanding
the case and not dismissing Interco, et al.'s Petition for Suspension of Payments and
Rehabilitation outright.75 It stresses that the Court of Appeals overlooked that no
commencement order was issued by the rehabilitation court, in disregard of the
mandatory language of Section 16 of FRIA.76 It maintains that because of the non-
issuance of the commencement order, the rehabilitation proceeding never began.77

In addition, Development Bank claims that there was no compliance with the conditions
under Section 64 of FRIA. It insists that the April 6, 2011 creditors' meeting does not
equate to the voting requirement.78

Finally, it contends that the rehabilitation court's failure to comply with FRIA,
particularly Sections 21, 25, 44, 45, and 46, which require among others the
establishment of a preliminary registry of claims and then making it available for public
inspection, violates its right to be heard on it claims79 and renders the rehabilitation
proceedings void.80

On March 22, 2017, this Court resolved to dispense with Rizal Commercial Banking's
filing of comment in G.R. Nos. 218523-29 and to deem BPI to have waived its right to
file a comment.81

This Court resolves the following issues:

First, whether or not International Copra Export Corporation, Interco Manufacturing

Corporation, ICEC Land Corporation, and Kimee Realty Corporation committed forum
shopping;

Second, whether or not the Court of Appeals erred in ruling that the Financial
Rehabilitation and Insolvency Act (FRIA) is applicable; and

Finally, whether or not the Court of Appeals erred in remanding the case to the
rehabilitation court.

A party commits forum shopping by instituting "two or more actions or proceedings

grounded on the same cause on the supposition that one or the other court would make
a favorable disposition."82 It may also be committed "when as a result of an adverse
decision in one (1) forum, or in anticipation thereof, a party seeks favorable opinion in
another forum through means other than appeal or certiorari."83

In City of Taguig v. City of Makati,84 this Court comprehensively discussed the concept,
origin, and purpose of the rule on forum shopping:chanroblesvirtualawlibrary
Top Rate Construction & General Services, Inc. v. Paxton Development
Corporation explained that:chanroblesvirtualawlibrary
Forum shopping is committed by a party who institutes two or more suits in different
courts, either simultaneously or successively, in order to ask the courts to rule on the
same or related causes or to grant the same or substantially the same reliefs, on the
supposition that one or the other court would make a favorable disposition or increase a
party's chances of obtaining a favorable decision or action.
First Philippine International Bank v. Court of Appeals recounted that forum shopping
originated as a concept in private international law:chanroblesvirtualawlibrary
To begin with, forum-shopping originated as a concept in private international law,
where non-resident litigants are given the option to choose the forum or place wherein
to bring their suit for various reasons or excuses, including to secure procedural
advantages, to annoy and harass the defendant, to avoid overcrowded dockets, or to
select a more friendly venue. To combat these less than honorable excuses, the
principle of forum non conveniens was developed whereby a court, in conflicts of law
cases, may refuse impositions on its jurisdiction where it is not the most "convenient"
or available forum and the parties are not precluded from seeking remedies elsewhere.

In this light, Black's Law Dictionary says that forum-shopping "occurs when a party
attempts to have his action tried in a particular court or jurisdiction where he feels he
will receive the most favorable judgment or verdict." Hence, according to Words and
Phrases, "a litigant is open to the charge of 'forum shopping' whenever he chooses a
forum with slight connection to factual circumstances surrounding his suit, and litigants
should be encouraged to attempt to settle their differences without imposing undue
expense and vexatious situations on the courts."
Further, Prubankers Association v. Prudential Bank and Trust Co. recounted
that:chanroblesvirtualawlibrary
The rule on forum-shopping was first included in Section 17 of the Interim Rules and
Guidelines issued by this Court on January 11, 1983, which imposed a sanction in this
wise: "A violation of the rule shall constitute contempt of court and shall be a cause for
the summary dismissal of both petitions, without prejudice to the taking of appropriate
action against the counsel or party concerned." Thereafter, the Court restated the rule
in Revised Circular No. 28-91 and Administrative Circular No. 04-94. Ultimately, the
rule was embodied in the 1997 amendments to the Rules of Court.85 (Emphasis in the
original, citations omitted)
Under the Rules of Civil Procedure, the rule governing forum shopping is expressed in
Rule 7, Section 5, which states:chanroblesvirtualawlibrary
SECTION 5. Certification against forum shopping. - The plaintiff or principal party shall
certify under oath in the complaint or other initiatory pleading asserting a claim for
relief, or in a sworn certification annexed thereto and simultaneously filed therewith:
(a) that he has not theretofore commenced any action or filed any claim involving the
same issues in any court, tribunal or quasi-judicial agency and, to the best of his
knowledge, no such other action or claim is pending therein; (b) if there is such other
pending action or claim, a complete statement of the present status thereof; and (c) if
he should thereafter learn that the same or similar action or claim has been filed or is
pending, he shall report that fact within five (5) days therefrom to the court wherein his
aforesaid complaint or initiatory pleading has been filed.

Failure to comply with the foregoing requirements shall not be curable by mere
amendment of the complaint or other initiatory pleading but shall be cause for the
dismissal of the case without prejudice, unless otherwise provided, upon motion and
after hearing. The submission of a false certification or non-compliance with any of the
undertakings therein shall constitute indirect contempt of court, without prejudice to
the corresponding administrative and criminal actions. If the acts of the party or his
counsel clearly constitute willful and deliberate forum shopping, the same shall be
ground for summary dismissal with prejudice and shall constitute direct contempt, as
well as a cause for administrative sanctions.
Though written in the same provision, the proscription against forum shopping is
distinct from the requirement of including a certification against forum shopping.86 This
Court has explained:chanroblesvirtualawlibrary
The distinction between the prohibition against forum shopping and the certification
requirement should by now be too elementary to be misunderstood. To reiterate,
compliance with the certification against forum shopping is separate from and
independent of the avoidance of the act of forum shopping itself. There is a difference
in the treatment between failure to comply with the certification requirement and
violation of the prohibition against forum shopping not only in terms of imposable
sanctions but also in the manner of enforcing them. The former constitutes sufficient
cause for the dismissal without prejudice of the complaint or initiatory pleading upon
motion and after hearing, while the latter is a ground for summary dismissal thereof
and for direct contempt. The rule expressly requires that a certification against forum
shopping should be attached to or filed simultaneously with the complaint or other
initiatory pleading regardless of whether forum shopping had in fact been
committed.87 (Citations omitted)
In Ao-as v. Court of Appeals,88 this Court recognized that there are three ways of
committing forum shopping:chanroblesvirtualawlibrary
As the present jurisprudence now stands, forum shopping can be committed in three
ways: (1) filing multiple cases based on the same cause of action and with the same
prayer, the previous case not having been resolved yet (litis pendentia); (2) filing
multiple cases based on the same cause of action and the same prayer, the previous
case having been finally resolved (res judicata); and (3) filing multiple cases based on
the same cause of action but with different prayers (splitting of causes of action, where
the ground for dismissal is also either litis pendentia or res judicata).89 (Citation
omitted)
The first mode of forum shopping pertains to litis pendentia, a "situation wherein
another action is pending between the same parties for the same cause of action, such
that the second action becomes unnecessary and vexatious."90 In Yap v. Chua,91 this
Court said:chanroblesvirtualawlibrary
Litis pendentia as a ground for the dismissal of a civil action refers to that situation
wherein another action is pending between the same parties for the same cause of
action, such that the second action becomes unnecessary and vexatious. The
underlying principle of litis pendentia is the theory that a party is not allowed to vex
another more than once regarding the same subject matter and for the same cause of
action. This theory is founded on the public policy that the same subject matter should
not be the subject of controversy in courts more than once, in order that possible
conflicting judgments may be avoided for the sake of the stability of the rights and
status of persons.
The requisites of litis pendentia are: (a) the identity of parties, or at least such as
representing the same interests in both actions; (b) the identity of rights asserted and
relief prayed for, the relief being founded on the same facts; and (c) the identity of the
two cases such that judgment in one, regardless of which party is successful, would
amount to res judicata in the other.92 (Citation omitted)
In this case, Interco, et al. filed three separate Petitions, all praying that the Court of
Appeals' rulings be reversed. All three are founded on the same arguments that the
provisions of FRIA are not self-executory and that the Court of Appeals erred in
remanding the case to the rehabilitation court. Their similarity results in a situation
where the resolution of one, regardless of which party is successful, would amount
to res judicata in the other. In doing so, Interco, et al. committed forum shopping,
warranting the outright dismissal of their Petitions.

Forum shopping is an act of malpractice, which trifles with court processes and
degrades the administration of justice. Not only does it congest court dockets, but it
also creates the possibility of different tribunals rendering conflicting decisions on the
same issue.93

Litigants must be reminded that "[p]rocedural rules are essential in the administration
of justice."94 They "should be treated with utmost respect and due regard, since they
are designed to facilitate the adjudication of cases to remedy the worsening problem of
delay in the resolution of rival claims and in the administration of justice."95 As held
in Malixi v. Baltzar:96chanrobleslawlibrary
Technical rules serve a purpose. They are not made to discourage litigants from
pursuing their case nor are they fabricated out of thin air. Every section in the Rules of
Court and every issuance of this Court with respect to procedural rules are promulgated
with the objective of a more efficient judicial system.97 chanRoblesvirtualLawlibrary

Nonetheless, if the strict application of procedural rules will tend to frustrate rather than
serve the broader interest of substantial justice,98 this Court may exercise its "power to
relax or suspend the rules or to except a case from their operation when compelling
reasons so warrant[.]"99 This principle was highlighted in Malixi, where this Court opted
to resolve the merits of the case despite petitioner's procedural lapses.

The same prevails in this case. The interest of substantial justice would be better
served if the issue as to the applicability of FRIA to the Petitions filed by Interco, et al.
would be finally resolved.

II

Republic Act No. 10142, or the Financial Rehabilitation and Insolvency Act (FRIA) of
2010, defines rehabilitation as follows:chanroblesvirtualawlibrary
(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of
successful operation and solvency, if it is shown that its continuance of operation is
economically feasible and its creditors can recover by way of the present value of
payments projected in the plan, more if the debtor continues as a going concern than if
it is immediately liquidated.100chanRoblesvirtualLawlibrary

Rehabilitation is a procedure of conserving and administering the assets and resources

of an insolvent debtor in the hopes of restoring it "to its former position of successful
operation and liquidity."101 Its purpose is to give the debtor a chance to "gain a new
lease on life and thereby allow creditors to be paid their claims from its earnings."102

The concept of rehabilitation has evolved through the years. Act No. 1956, or the
Insolvency Law of 1909, was the earliest law enacted in the Philippines to "extend
assistance to financially-distressed companies."103 It allowed an insolvent debtor to file
a petition for suspension of payments, provided that it has sufficient property to cover
all its debts.104 Jurisdiction over petitions filed under this law was lodged with the courts
of first instance, now the regional trial courts.105

In 1981, Presidential Decree No. 1758 was issued amending Presidential Decree No.
902-A or the SEC Reorganization Act. It transferred to the Securities and Exchange
Commission jurisdiction over petitions for suspension of payments filed by corporations.
In addition, it introduced the remedy of rehabilitation, which allowed corporate debtors
with insufficient assets to apply for the appointment of a rehabilitation receiver or
management committee.106

Rehabilitation goes beyond deferment of payments.107 It involves the development of a

rehabilitation plan to revive a financially distressed corporation to a state of liquidity.108

Upon the enactment of Republic Act No. 8799, or the Securities Regulation Code,
jurisdiction over rehabilitation cases was reverted to the courts of general jurisdiction or
the appropriate regional trial court.109

In 2000, this Court En Banc issued A.M. No. 00-8-10-SC, or the Interim Rules of
Procedure on Corporate Rehabilitation (Interim Rules). The Interim Rules covered
petitions for rehabilitation filed pursuant to Presidential Decree No. 902-A and Republic
Act No. 8799.110
�
Later, the 2008 Rules of Procedure on Corporate Rehabilitation was issued, amending
the 2000 Interim Rules. Under its terms, a "group of companies"111 may file a joint
petition for rehabilitation before the regional trial court having jurisdiction over the
principal office of the parent company.112

On July 18, 2010, Republic Act No. 10142, or FRIA, lapsed into law. It took effect on
August 31, 2010,113 but its implementing rule, the Financial Rehabilitation Rules of
Procedure (FR Rules), was only promulgated on August 27, 2013.

FRIA expressly repealed the Insolvency Law of 1909 and impliedly repealed laws,
orders, and rules that were inconsistent with its provisions.114 Its declared objective is
to encourage debtors and creditors to collectively resolve their competing claims.115

Here, the Petition for Suspension of Payments and Rehabilitation was filed before the
rehabilitation court on September 9, 2010, after FRIA had taken effect. Nonetheless,
Interco, et al. insist that FRIA cannot apply absent its implementing rules.
�
This contention is untenable.

At the outset, Interco, et al. themselves filed the Petition pursuant to the provisions of
FRIA. By invoking FRIA, they should be deemed estopped from contending that its
provisions are inapplicable to their case.
Furthermore, the absence of an implementing rule alone cannot render a law
inoperative. Every law is presumed valid, until and unless judicially declared invalid.
In Securities and Exchange Commission v. Interport Resources
Corporation:116chanrobleslawlibrary
In the absence of any constitutional or statutory infirmity, which may concern Sections
30 and 36 of the Revised Securities Act, this Court upholds these provisions as legal
and binding. It is well settled that every law has in its favor the presumption of validity.
Unless and until a specific provision of the law is declared invalid and unconstitutional,
the same is valid and binding for all intents and purposes. The mere absence of
implementing rules cannot effectively invalidate provisions of law, where a reasonable
construction that will support the law may be given. In People v. Rosenthal, this Court
ruled that:chanroblesvirtualawlibrary
In this connection we cannot pretermit reference to the rule that "legislation should not
be held invalid on the ground of uncertainty if susceptible of any reasonable
construction that will support and give it effect. An Act will not be declared inoperative
and ineffectual on the ground that it furnishes no adequate means to secure the
purpose for which it is passed, if men of common sense and reason can devise and
provide the means, and all the instrumentalities necessary for its execution are within
the reach of those intrusted therewith."
In Garcia v. Executive Secretary, the Court underlined the importance of the
presumption of validity of laws and the careful consideration with which the judiciary
strikes down as invalid acts of the legislature:chanroblesvirtualawlibrary
The policy of the courts is to avoid ruling on constitutional questions and to presume
that the acts of the political departments are valid in the absence of a clear and
unmistakable showing to the contrary. To doubt is to sustain. This presumption is based
on the doctrine of separation of powers which enjoins upon each department a
becoming respect for the acts of the other departments. The theory is that as the joint
act of Congress and the President of the Philippines, a law has been carefully studied
and determined to be in accordance with the fundamental law before it was finally
enacted.
The necessity for vesting administrative authorities with power to make rules and
regulations is based on the impracticability of lawmakers' providing general regulations
for various and varying details of management. To rule that the absence of
implementing rules can render ineffective an act of Congress, such as the Revised
Securities Act, would empower the administrative bodies to defeat the legislative will by
delaying the implementing rules. To assert that a law is less than a law, because it is
made to depend on a future event or act, is to rob the Legislature of the power to act
wisely for the public welfare whenever a law is passed relating to a state of affairs not
yet developed, or to things future and impossible to fully know. It is well established
that administrative authorities have the power to promulgate rules and regulations to
implement a given statute and to effectuate its policies, provided such rules and
regulations conform to the terms and standards prescribed by the statute as well as
purport to carry into effect its general policies. Nevertheless, it is undisputable that the
rules and regulations cannot assert for themselves a more extensive prerogative or
deviate from the mandate of the statute. Moreover, where the statute contains
sufficient standards and an unmistakable intent, as in the case of Sections 30 and 36 of
the Revised Securities Act, there should be no impediment to its
implementation.117 (Emphasis supplied, citations omitted)
Interco, et al. misread Section 146 of FRIA in insisting that the law's provisions do not
apply to their case. Section 146 provides:chanroblesvirtualawlibrary
SECTION 146. Application to Pending Insolvency, Suspension of Payments and
Rehabilitation Cases. - This Act shall govern all petitions filed after it has taken effect.
All further proceedings in insolvency, suspension of payments and rehabilitation cases
then pending, except to the extent that in the opinion of the court their application
would not be feasible or would work injustice, in which event the procedures set forth in
prior laws and regulations shall apply.
As the Court of Appeals correctly found,118 the discretion given to rehabilitation courts in
applying the 2008 Rules on Corporate Rehabilitation instead of FRIA pertains only to
petitions for rehabilitation filed before and are pending at the time FRIA took effect. In
cases involving petitions for rehabilitation filed after FRIA's effectivity, the rehabilitation
court has no option and is mandated to apply the provisions of FRIA.

In addition, if this Court considers the promulgation of the rules of procedure as a

precondition for the effectivity of FRIA, it would confer on the judiciary the power to
suspend the effectivity of a legislative act by simply refusing to promulgate guidelines
for its implementation.119

Besides, even if some of FRIA's provisions require an implementing rule for its proper
execution, this Court has already applied the 2008 Rules on Corporate Rehabilitation to
support and supply the wordings of FRIA. In Philippine Asset Growth Two, Inc. v.
Fastech Synergy Philippines, Inc.,120 this Court used the 2008 Rules on Corporate
Rehabilitation despite the petition for rehabilitation having been filed on April 8, 2011.

The 2008 Rules on Corporate Rehabilitation's suppletory application is reinforced by

Rule 1, Section 2 of the 2013 FR Rules, which states:chanroblesvirtualawlibrary
SECTION 2. Scope. - These Rules shall apply to petitions for rehabilitation of
corporations, partnerships, and sole proprietorships, filed pursuant to Republic Act No.
10142, otherwise known as the Financial Rehabilitation and Insolvency Act (FRIA) of
2010.

These Rules shall similarly govern all further proceedings in suspension of payments
and rehabilitation cases already pending, except to the extent that, in the opinion of
the court, its application would not be feasible or would work injustice, in which event
the procedures originally applicable shall continue to govern. (Emphasis supplied)
Rule 1, Section 2 reveals that the discretion given to courts in deciding not to apply the
FR Rules pertains to cases for suspension of payments and rehabilitation already
pending before FRIA took effect. The first paragraph mandates that the FR Rules shall
apply to petitions for rehabilitation filed pursuant to FRIA. The second paragraph
provides that rehabilitation courts may still apply the FR Rules to cases filed before
FRIA took effect, except when its application would work injustice to the parties.

Accordingly, the rehabilitation court correctly applied FRIA and, suppletorily, the 2008
Rules on Corporate Rehabilitation in Interco, et al.'s Petition for Suspension of
Payments and Rehabilitation. The 2008 Rules shall apply to the Petition, provided that it
is not inconsistent with FRIA. Indeed, as will be discussed later, the rehabilitation was
correct in applying the 2008 Rules. However, it should have gone further and applied
the additional requirements introduced by FRIA.
 III

FRIA declares it the State policy to encourage debtors and creditors to collectively
resolve their competing claims.121 In this regard, it permits a group of debtors to jointly
file a petition for rehabilitation, thus:chanroblesvirtualawlibrary
SECTION 12. Petition to Initiate Voluntary Proceedings by Debtor. - When approved by
the owner in case of a sole proprietorship, or by a majority of the partners in case of a
partnership, or, in case of a corporation, by a majority vote of the board of directors or
trustees and authorized by the vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or in case of nonstock corporation, by the vote of
at least two-thirds (2/3) of the members, in a stockholder's or member's meeting duly
called for the purpose, an insolvent debtor may initiate voluntary proceedings under
this Act by filing a petition for rehabilitation with the court and on the grounds
hereinafter specifically provided. The petition shall be verified to establish the
insolvency of the debtor and the viability of its rehabilitation, and include, whether as
an attachment or as part of the body of the petition, as a minimum, the following:

(a) Identification of the debtor, its principal activities and its addresses;

(b) Statement of the fact of and the cause of the debtor's insolvency or inability to pay
its obligations as they become due;

(c) The specific relief sought pursuant to this Act;

(d) The grounds upon which the petition is based;

(e) Other information that may be required under this Act depending on the form of
relief requested;

(f) Schedule of the debtor's debts and liabilities including a list of creditors with their
addresses, amounts of claims and collaterals, or securities, if any;

(g) An inventory of all its assets including receivables and claims against third parties;

(h) A Rehabilitation Plan;

(i) The names of at least three (3) nominees to the position of rehabilitation receiver;
and

j) Other documents required to be filed with the petition pursuant to this Act and the
rules of procedure as may be promulgated by the Supreme Court.

A group of debtors may jointly file a petition for rehabilitation under this Act when one
or more of its members foresee the impossibility of meeting debts when they
respectively fall due, and the financial distress would likely adversely affect the financial
condition and/or operations of the other members of the group and/or the participation
of the other members of the group is essential under the terms and conditions of the
proposed Rehabilitation Plan.
According to Section 4(n) of FRIA, a "group of debtors" refers
to:chanroblesvirtualawlibrary
(1) corporations that are financially related to one another as parent corporations,
subsidiaries or affiliates; (2) partnerships that are owned more than fifty percent (50%)
by the same person; and (3) single proprietorships that are owned by the same
person[.]
In their Petition for Suspension of Payments and Rehabilitation, Interco, Interco
Manufacturing, ICEC Land, and Kimmee allege that they are financially related to one
another as parent corporation, subsidiaries, or affiliates.122 However, BDO insists that
the Court of Appeals erred in ruling that Kimmee is financially related to the other
petitioning debtors.123

To begin with, the sufficiency of a petition for rehabilitation and the reasonability of a
rehabilitation plan are questions of fact beyond the ambit of this Court's power of
review.124 In resolving these issues, we are bound to examine the various financial
documents submitted by the parties before the rehabilitation court.

In Pascual v. Burgos,125 this Court decreed that only errors of law may be raised in a
Rule 45 petition. This Court is not a trier of facts.126 Absent any showing that material
facts and circumstances were overlooked or misinterpreted, factual findings of
commercial courts shall be deemed conclusive and binding on this
Court,127 thus:chanroblesvirtualawlibrary
The Rules of Court require that only questions of law should be raised in petitions filed
under Rule 45. This court is not a trier of facts. It will not entertain questions of fact as
the factual findings of the appellate courts are "final, binding, or conclusive on the
parties and upon this court" when supported by substantial evidence. Factual findings of
the appellate courts will not be reviewed nor disturbed on appeal to this court.
�
However, these rules do admit exceptions. Over time, the exceptions to these rules
have expanded. At present, there are 10 recognized exceptions that were first listed
in Medina v. Mayor Asistio, Jr.:chanroblesvirtualawlibrary
(1) When the conclusion is a finding grounded entirely on speculation, surmises or
conjectures; (2) When the inference made is manifestly mistaken, absurd or
impossible; (3) Where there is a grave abuse of discretion; (4) When the judgment is
based on a misapprehension of facts; (5) When the findings of fact are conflicting; (6)
When the Court of Appeals, in making its findings, went beyond the issues of the case
and the same is contrary to the admissions of both appellant and appellee; (7) The
findings of the Court of Appeals are contrary to those of the trial court; (8) When the
findings of fact are conclusions without citation of specific evidence on which they are
based; (9) When the facts set forth in the petition as well as in the petitioner's main
and reply briefs are not disputed by the respondents; and (10) The finding of fact of the
Court of Appeals is premised on the supposed absence of evidence and is contradicted
by the evidence on record.128 (Citations omitted, emphasis in the original)
Nonetheless, based on the Reports of Independent Auditors,129 Kimmee is an affiliate of
the parent company Interco,130 thus:chanroblesvirtualawlibrary
13. Related Party Transactions

Significant balances of amounts owed by (to) related parties follow:

� Nature of Relationship
ICEC Land Subsidiary
 IMC Associate
Kimmee Realty Corp. Affiliate

13. Related Party Transactions

In the normal course of business, the following transactions have been entered into with related
parties under common management control:
Related Party* Relationship
PBcom Affiliate
ICEC Land Subsidiary
IMC Subsidiary
Kimmee Realty Corp. Affiliate

13. Related Party Transactions

Enterprises and individuals that directly, or indirectly through one or more intermediaries,
control, or are controlled by, or under common control with the Company are related parties of
the Company, Individuals owning directly or indirectly, an interest in the voting management
personnel, including directors and officers of the Company and close members of the family of
these individuals and companies associated with these individuals also constitute related
parties.

In considering each possible related party relationship, attention is directed to the substance of
the relationship, and not merely the legal form.���

In the normal course of business, the following are the transactions with and balances of
related parties under common management control:
� Relationship
PBCOM Associate
ICEC Land Subsidiary
IMC Subsidiary
Kimmee Realty Corp. Affiliate131
IV

Development Bank insists that the Court of Appeals erred in not dismissing the Petition
for Suspension of Payments and Rehabilitation outright considering that the
rehabilitation court failed to issue a commencement order, disregarded its claims, and
whimsically adopted Interco, et al.'s statement of claims. It likewise maintains that
Interco, et al. filed the Petition in fraud and as a means to delay the enforcement of
their rights as creditors.

These contentions are unmeritorious.

FRIA provides that after a petition is found to be sufficient in form and substance, the
rehabilitation court shall issue a commencement order to signify the beginning of the
rehabilitation proceedings.132 The commencement order shall include "a declaration that
the debtor is under rehabilitation, the appointment of a rehabilitation receiver, a
directive for all creditors to file their verified notices of claim, and an order staying
claims against the [petitioning] debtor."133

Here, after the rehabilitation court had found the Petition to be sufficient in form and
substance, it issued a Stay Order which provided for, among others, the appointment of
Atty. Elamparo as rehabilitation receiver, the suspension of all claims against Interco, et
al., and the date of the initial hearing.134 Its denomination as "Stay Order" is
immaterial, since it provided the basic requirements of a commencement order required
by FRIA.

To clarify, the liberality in the nomenclature of the commencement order should apply
only in cases where such order was issued before the FR Rules' promulgation. This is an
aspect of equity; otherwise, strict adherence to procedural niceties would prevent
substantive relief. However, for cases where the commencement order is issued after
the effectivity of the FR Rules, the order must be properly designated as a
"commencement order."

Development Bank's other claims are questions of fact improper in a Rule 45 petition.
Particularly, determining whether the rehabilitation receiver and the rehabilitation court
considered Development Bank's interest is a factual issue that would require this Court
to review the financial statements submitted by the parties. As held in Bank of the
Philippine Islands v. Sarabia Manor Hotel Corporation:135chanrobleslawlibrary
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 Sarabia's
capacity to pay and BPI's 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.136
chanRoblesvirtualLawlibrary

Neither is Development Bank's claim of noncompliance with Sections 44, 45, and 46 of
FRIA sufficient to reverse the Court of Appeals' ruling. This matter was raised for the
first time before this Court. A perusal of its Petition for Review137 before the Court of
Appeals shows that this issue was not assigned as an error of the rehabilitation court.
In Multi-Realty Development Corporation v. Makati Tuscany Condominium
Corporation: 138chanrobleslawlibrary
Settled is the rule that no questions will be entertained on appeal unless they have
been raised below. Points of law, theories, issues and arguments not adequately
brought to the attention of the lower court need not be considered by the reviewing
court as they cannot be raised for the first time on appeal. Basic considerations of due
process impel this rule.139 (Citation omitted)
V

The creditors, particularly BDO140 and Development Bank,141 next assert that the terms
and conditions of the proposed rehabilitation plan are burdensome and prejudicial,
depriving them of their contractual rights and claims against Interco, et al. They
maintain that the rehabilitation court has no power to modify the contractual
stipulations agreed upon by the parties.

This contention lacks merit.

Article III, Section 9 of the Constitution provides that "[n]o law impairing the obligation
of contracts shall be passed." This refers to the non-impairment clause, which ensures
that the integrity of contracts is protected from any unwarranted State inference. It
ensures that the terms of a contract mutually agreed upon by the parties are not
tampered with or modified by a subsequent law.142 As held in Provincial Bus Operators
Association of the Philippines v. Department of Labor and Employment,143 "[t]his is to
encourage trade and credit by promoting confidence in the stability of contractual
relations."144

This constitutional limitation guarantees non-interference of the State in purely private

transactions. However, the non-impairment clause yields to the State's police
power.145 In Pryce Corporation v. China Banking Corporation:146chanrobleslawlibrary
The non-impairment clause first appeared in the United States Constitution as a
safeguard against the issuance of worthless paper money that disturbed economic
stability after the American Revolution. This constitutional provision was designed to
promote commercial stability. At its core is "a prohibition of state interference with
debtor-creditor relationships."

....
�
Nevertheless, this court has brushed aside invocations of the non-�impairment clause
to give way to a valid exercise of police power and afford protection to labor.

In Pacific Wide Realty and Development Corporation v. Puerto Azul Land, Inc. which
similarly involved corporate rehabilitation, this court found no merit in Pacific Wide's
invocation of the non-impairment clause, explaining as
follows:chanroblesvirtualawlibrary
We also find no merit in PWRDC's contention that there is a violation of the impairment
clause. Section 10, Article III of the Constitution mandates that no law impairing the
obligations of contract shall be passed. This case does not invalue a law or an executive
issuance declaring the modification of the contract among debtor PALI, its creditors and
its accommodation mortgagors. Thus, the non-impairment clause may not be invoked.
Furthermore, as held in Oposa v. Factoran, Jr. even assuming that the same may be
invoked, the non-impairment clause must yield to the police power of the State.
Property rights and contractual rights are not absolute. The constitutional guaranty of
non-impairment of obligations is limited by the exercise of the police power of the State
for the common good of the general public.

Successful rehabilitation of a distressed corporation will benefit its debtors, creditors,

employees, and the economy in general. The court may approve a rehabilitation plan
even over the opposition of creditors holding a majority of the total liabilities of the
debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition
of the creditors is manifestly unreasonable. The rehabilitation plan, once approved, is
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 have
opposed the plan or whether or not their claims have been scheduled.147 (Citations
omitted.)
Contracts partake of the nature of property rights. Thus, apart from the applicability of
the requirements of reasonability embedded in the due process clause, there is also
Article XII, Section 6,148 which mandates that the use of property is a social function.
�
This principle, which shows that the non-impairment clause is not absolute, was
reiterated in Victorio-Aquino v. Pacific Plans, Inc.149 There, this Court brushed aside the
petitioner's invocation of the non-impairment clause in questioning the rehabilitation
court's approval of the modified rehabilitation plan. This Court decreed that "[t]he non-
impairment clause under the Constitution applies only to the exercise of legislative
power. It does not apply to the Rehabilitation Court which exercises judicial power over
the rehabilitation proceedings."150]

Accordingly, the creditors' invocation cannot stand.

VI

The creditors next assail the rehabilitation court's confirmation of the rehabilitation plan
despite noncompliance with the voting requirement under Section 64 of FRIA.

One of the salient changes introduced by FRIA is the rehabilitation receiver's duty to
notify the creditors of the petitioning debtor that the rehabilitation plan is ready for
examination. Section 64 of FRIA requires that within 20 days from such notification, the
rehabilitation receiver shall convene the creditors to vote on the rehabilitation plan. If
the creditors approve the plan, Section 65 states that the rehabilitation plan shall be
submitted by the rehabilitation receiver to the rehabilitation court for confirmation. The
provisions state:chanroblesvirtualawlibrary
SECTION 64. Creditor Approval of Rehabilitation Plan. - The rehabilitation receiver shall
notify the creditors and stakeholders that the Plan is ready for their examination. Within
twenty (20) days from the said notification, the rehabilitation receiver shall convene the
creditors, either as a whole or per class, for purposes of voting on the approval of the
Plan. The Plan shall be deemed rejected unless approved by all classes of creditors
whose rights are adversely modified or affected by the Plan. For purposes of this
section, the Plan is deemed to have been approved by a class of creditors if members of
the said class holding more than fifty percent (50%) of the total claims of the said class
vote in favor of the Plan. The votes of the creditors shall be based solely on the amount
of their respective claims based on the registry of claims submitted by the rehabilitation
receiver pursuant to Section 44 hereof.
Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm the
Rehabilitation Plan if all of the following circumstances are
present:chanroblesvirtualawlibrary
(a) The Rehabilitation Plan complies with the requirements specified in this Act;

(b) The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;

(c) The shareholders, owners or partners of the juridical debtor lose at least their
controlling interest as a result of the Rehabilitation Plan; and

(d) The Rehabilitation Plan would likely provide the objecting class of creditors with
compensation which has a net present value greater than that which they would have
received if the debtor were under liquidation.
SECTION 65. Submission of Rehabilitation Plan to the Court. - If the Rehabilitation Plan
is approved, the rehabilitation receiver shall submit the same to the court for
confirmation. Within five (5) days from receipt of the Rehabilitation Plan, the court shall
notify the creditors that the Rehabilitation Plan has been submitted for confirmation,
that any creditor may obtain copies of the Rehabilitation Plan and that any creditor may
file an objection thereto.
If the plan is rejected by the creditors, the rehabilitation court may still confirm the
rehabilitation plan, subject to certain conditions provided under Section 64. This power
to override the creditor's disapproval of the rehabilitation plan refers to the
rehabilitation court's "cram-down" power, which was first discussed in Pryce and then
in Bank of the Philippine Islands v. Sarabia Manor Hotel Corporation,151 where this Court
said:chanroblesvirtualawlibrary
Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim
Rules of Procedure on Corporate Rehabilitation (Interim Rules) states that a
rehabilitation plan may be approved even over the opposition of the creditors holding a
majority of the corporation's 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, 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.152 (Citations omitted)
However, as the Court of Appeals pointed out, the exercise of the cram-down power is
not absolute. The rehabilitation court must ensure that all circumstances provided
under the second paragraph of Section 64 are present. Failure to comply with these
conditions violates the creditors' right to due process.153

Notably, one of the requirements provided under Section 64 is the rehabilitation

receiver's act of convening the creditors for purposes of voting on the proposed
rehabilitation plan. Yet, here, the rehabilitation court confirmed the rehabilitation plan
despite the creditors' failure to vote. Thus, the Court of Appeals decreed that the
confirmation was premature and ordered the remand of the case to the rehabilitation
court to convene the creditors and comply with the voting requirement.154 In ruling so,
the Court of Appeals applied the Pryce155 ruling, which states:chanroblesvirtualawlibrary
Corporate rehabilitation is one of many statutorily provided remedies for businesses
that experience a downturn. Rather than leave the various creditors unprotected,
legislation now provides for an orderly procedure of equitably and fairly addressing their
concerns. Corporate rehabilitation allows a court-supervised process to rejuvenate a
corporation. Its twin, insolvency, provides for a system of liquidation and a procedure of
equitably settling various debts owed by an individual or a business. It provides a
corporation's owners a sound chance to re-engage the market, hopefully with more
vigor and enlightened services, having learned from a painful experience.

Necessarily, a business in the red and about to incur tremendous losses may not be
able to pay all its creditors. Rather than leave it to the strongest or most resourceful
amongst all of them, the state steps in to equitably distribute the corporation's limited
resources.

The cram-down principle adopted by the Interim Rules does, in effect, dilute contracts.
When it permits the approval of a rehabilitation plan even over the opposition of
creditors, or when it imposes a binding effect of the approved plan on all parties
including those who did not participate in the proceedings, the burden of loss is shifted
to the creditors to allow the corporation to rehabilitate itself from insolvency.

Rather than let struggling corporations slip and vanish, the better option is to allow
commercial courts to come in and apply the process for corporate rehabilitation.

This option is preferred so as to avoid what Garrett Hardin called the Tragedy of
Commons. Here, Hardin submits that "coercive government regulation is necessary to
prevent the degradation of common�-pool resources [since] individual resource
appropriators receive the full benefit of their use and bear only a share of their cost."
By analogy to the game theory, this is the prisoner's dilemma: "Since no individual has
the right to control or exclude others, each appropriator has a very high discount rate
[with] little incentive to efficiently manage the resource in order to guarantee future
use." Thus, the cure is an exogenous policy to equitably distribute scarce resources.
This will incentivize future creditors to continue lending, resulting in something
productive rather than resulting in nothing.

In fact, these corporations exist within a market. The General Theory of Second Best
holds that "correction for one market imperfection will not necessarily be efficiency-
enhancing unless there is also simultaneous correction for all other market
imperfections." The correction of one market imperfection may adversely affect market
efficiency elsewhere, for instance, "a contract rule that corrects for an imperfection in
the market for consensual agreements may at the same time induce welfare losses
elsewhere." This theory is one justification for the passing of corporate rehabilitation
laws allowing the suspension of payments so that corporations can get back on their
feet.

As in all markets, the environment is never guaranteed. There are always risks.
Contracts are indeed sacred as the law between the parties. However, these contracts
exist within a society where nothing is risk-free, and the government is constantly
being called to attend to the realities of the times.

Corporate rehabilitation is preferred for addressing social costs. Allowing the

corporation room to get back on its feet will retain if not increase employment
opportunities for the market as a whole. Indirectly, the services offered by the
corporation will also benefit the market as "the fundamental impulse that sets and
keeps the capitalist engine in motion comes from the constant entry of new consumers'
goods, the new methods of production or transportation, the new markets, and the new
forms of industrial organization that capitalist enterprise creates."156 (Citations omitted)
Here, the Court of Appeals did not definitively conclude whether the rehabilitation plan
was viable. It did not decide the matter on the merits. On the contrary, and as
expressly provided in the dispositive portion of its Decision, the Court of Appeals
remanded the matter to the rehabilitation court, for the rehabilitation receiver to
convene the creditors for the purpose of complying with the voting requirement under
FRIA.

In line with the declared policy of FRIA to encourage debtors and creditors to
collectively resolve their competing claims, and considering the potential exigencies
that lurk and possibly tide over financially distressed corporations in the market, the
prudent option is for this Court to affirm the Court of Appeals Decision and direct the
rehabilitation court to convene the creditors for purposes of complying with the voting
requirement.

However, this Court notes that Interco, et al. filed the Petition for Suspension of
Payments and Rehabilitation in 2010. The case has been pending ever since. In the
interest of judicial economy and efficiency, and given that the creditors were given
ample opportunities to raise their objections to the Petition and the viability of the
proposed rehabilitation plan, this Court finds a remand of the case unnecessary.

To recall, during the rehabilitation proceedings, Interco, et al.'s creditors filed their
notice of claims157 and Comments or Oppositions to the Petition.158 Some of them
likewise submitted their letter-compliance m response to the March 3, 2011 letter of
the rehabilitation receiver.159

Further, the creditors admitted that a general creditors' meeting was held on April 6,
2011.160 The creditors do not deny that during this meeting, they conveyed their
comments and suggestions on the proposed rehabilitation plan.161

Finally, the creditors filed before the rehabilitation court their comment or opposition to
the revised rehabilitation plan submitted by the rehabilitation receiver. Notwithstanding
the creditors' oppositions, the rehabilitation court found "the petition to be well
grounded, proper and in order" and the rehabilitation of Interco, et al. feasible.162

This Court stresses that the rehabilitation court can best decide on the rehabilitation
plan's feasibility and viability. Owing to its technical expertise and in-depth knowledge
on rehabilitation proceedings, the rehabilitation court is in the most advantageous
position to receive and scrutinize the evidence submitted by the parties. Having
witnessed firsthand the manner and decorum of the parties involved, the rehabilitation
court has insight on nonverbal cues exhibited during the proceedings.

WHEREFORE, the Petitions are PARTIALLY GRANTED. The assailed November 18,
2014 Decision and May 13, 2015 Resolution of the Court of Appeals in CA-G.R. SP Nos.
04357, 04390, 04404, 04409, 04419, 04676, and 04695 are REVERSED and SET
ASIDE.
The July 8, 2011 Resolution of the Regional Trial Court of Zamboanga City, Branch 12,
which approved the revised or modified rehabilitation plan, is REINSTATED. The
Regional Trial Court, sitting as rehabilitation court, is directed to proceed with the
rehabilitation proceedings in accordance with the provisions of the Financial
Rehabilitation and Insolvency Act of 2010 and the 2013 Financial Rehabilitation Rules of
Procedure.chanroblesvirtualawlibrary

SO ORDERED.

[ G.R. No. 199582, July 07, 2020 ]

JULIE PARCON-SONG, PETITIONER, VS. LILIA B. PARCON, JOINED BY HER HUSBAND

JOAQUIN A. PARCON, MAYBANK PHILIPPINES, INC. (FORMERLY PNB REPUBLIC BANK),
AND THE REGISTER OF DEEDS OF QUEZON CITY, RESPONDENTS.

DECISION

LEONEN, J.:

This Court resolves a Petition for Review on Certiorari1 assailing the Decision2 and Resolution3 of
the Court of Appeals, which affirmed the Regional Trial Court Decision4 dismissing Julie Parcon-
Song's (Julie) Complaint for annulment of title, reconveyance of transfer certificate of title, annulment
of mortgage and foreclosure proceedings, and declaration of family home.5

Julie is the daughter of Spouses Joaquin and Lilia Parcon (the Parcon Spouses).6 In 1995, the
Parcon Spouses obtained two loans from Maybank Philippines, Inc. (Maybank).7 As security, they
executed a real estate mortgage over a parcel of land covered by Transfer Certificate of Title No.
107064, registered in the name of Lilia Parcon.8 The real estate mortgage was annotated on the
title.9

In 2001, when the Parcon Spouses defaulted on their loans, Maybank foreclosed the mortgage. In
the foreclosure proceedings, Maybank emerged as the highest bidder, and thus, was issued a
certificate of sale.10 The certificate of sale was registered with the Register of Deeds.11

On March 4, 2003, Julie filed a Complaint praying that the following be declared void: (1) Transfer
Certificate of Title No. 107064; (2) the real estate mortgage dated November 28, 1995 in favor of
Maybank; and (3) the foreclosure proceedings. She likewise sought that the property be reconveyed
to her as its true and lawful owner. Julie also prayed for a declaration of family home and that
Maybank be ordered to pay damages.12

Julie asserted that she had purchased the property from PACE Realty Investment, Inc. in August
1983, paying it in full. By way of trust, she used her mother's name to acquire the property.13 Thus,
in 1994, the title was registered in Lilia Parcon's name.14

Julie claimed that since then, Lilia Parcon has claimed ownership over the property. She contended
that her parents merely ignored her repeated demands to reconvey the property. She also alleged
that the property was mortgaged in favor of Maybank without her consent.15

The Parcon Spouses did not file an answer, and thus, were declared in default16
For its part, Maybank argued in its Answer that it was a mortgagee in good faith and for value. It
alleged that it verified the property with the Register of Deeds of Quezon City, and it found no defect
or anything suspicious about the genuineness and execution of the title. By way of counterclaim, it
also sought damages and attorney's fees.17

Initially, the Regional Trial Court dismissed the case after Julie had failed to prosecute. On
reconsideration, however, it eventually allowed her to present evidence. Yet, Julie was still unable to
continue her direct testimony and conduct cross-examination as her counsels failed to appear. Thus,
the trial court deemed her to have waived her right to formally offer her evidence.18

In the trial proceedings, Julie moved for the judicial admission that Maybank is a foreign corporation,
disqualified under the Constitution to own private lands. The Regional Trial Court took judicial notice
of Maybank's Articles of Incorporation and General Information Sheet.19

Eventually, the Regional Trial Court, in its July 14, 2008 Decision,20 dismissed Julie's Complaint. It
found that the mortgage was valid and that there was no implied or express trust on the
property.21 It ruled that since the title was not annotated, Maybank cannot be affected by any
interest Julie had over the property.22

The trial court further found that the foreclosure proceedings were valid, barring Julie from seeking
the sale's cancellation.23 Additionally, it ruled that the evidence showing that Maybank was a
Malaysian-owned foreign corporation had no relevance to the validity of the sale.24

The Court of Appeals, in its August 17, 2011 Decision,25 affirmed the Regional Trial Court Decision.

The Court of Appeals found that the title to the property was clean, not forged or fake, with no
registered liens and encumbrances, and registered in the mortgagor's name, Lilia Parcon.26 Thus, it
ruled, Maybank could very well rely on the title as a mortgagee in good faith, and did not need to
further investigate.27

The Court of Appeals also ruled that the extrajudicial sale was valid as the applicable law, Act No.
3135, only required that the mortgage be registered. It explained that while a family home is
generally exempt from execution, but if it was mortgaged to secure a debt, then it may be subject to
execution, forced sale, or attachment.28

Finally, the Court of Appeals found that Maybank, a foreign bank, was still given a license to operate
in the Philippines, which satisfied the requirement to protect Philippine equity. It cited Section 8 of
Republic Act No. 7721, which accorded foreign banks equal treatment as domestic banks, in ruling
that Maybank had the right to acquire the mortgaged property in foreclosure proceedings.29

In its November 28, 2011 Resolution,30 the Court of Appeals denied the Motion for Reconsideration.
Thus, Julie filed this Petition.31

Petitioner argues that the real estate mortgage is void as she is the property's real owner. She
claims that she paid for it with her own money and her parents were only holding the property in trust
for her—facts that her parents supposedly did not dispute.32

Petitioner also claims that respondent Maybank is not a mortgagee in good faith.33 She posits that
had the bank investigated, it would have discovered that she, not her parents, had been in open and
adverse possession of the property. Instead, the bank only relied on the title, which she says is a
sign of bad faith.34
Petitioner also contends that as a foreign corporation, respondent Maybank is prohibited under
Article XII, Section 3 of the 1987 Constitution from owning real property in the Philippines.33 She
further questions the bank's mode of entry as a foreign bank in the Philippine banking system,
saying it did not comply with Section 2 of Republic Act No. 7721.36 As such, the equal treatment
accorded to Philippine banks and foreign banks under Section 8 does not apply.37

In its Comment,38 respondent Maybank asserts that it is a mortgagee in good faith as it had
inspected the property. Petitioner allegedly failed to prove that it did not do so.39

Respondent Maybank also claims that it is a foreign bank authorized to operate in the Philippines
under Section 2(i) of Republic Act No. 7721.40 It further claims that its operations were justified by
Section 73 of Republic Act No. 8791.41 It asserts that it was granted a license by the Monetary
Board to operate as a foreign bank, and is thus accorded equal treatment as domestic banks. As
such, it can foreclose and acquire mortgaged properties.42 It notes that its ownership of the
mortgaged property is only temporary, as it is required to dispose of its foreclosed asset within five
years after its acquisition.43

Since this case raised the issue of the constitutionality of the property acquisition, it was referred to
the Court En Bane.44 In an August 8, 2017 Resolution, the Court En Bane accepted the case and
directed the Office of the Solicitor General to comment.45

In its Comment,46 the Office of the Solicitor General posits that the respondent Maybank's
foreclosure of the mortgage and acquisition of the property did not violate the Constitution.47

SECTION 2. Modes of Entry. — The Monetary Board may authorize foreign banks to operate in the
Philippine banking system through any of the following modes of entry: (i) by acquiring, purchasing
or owning up to sixty percent (60%) of the voting stock of an existing bank; (ii) by investing in up to
sixty percent (60%) of the voting stock of a new banking subsidiary incorporated under the laws of
the Philippines; or (iii) by establishing branches with full banking authority: Provided, That a foreign
bank may avail itself of only one (1) mode of entry: Provided, further, That a foreign bank or a
Philippine corporation may own up to a sixty percent (60%) of the voting stock of only one (1)
domestic bank or new banking subsidiary.

It notes that the foreign bank may operate in the Philippines.48 It adds that the bank had entered the
Philippine banking system by purchasing Philippine National Bank-Republic Bank from the Philippine
government,49 which meant it has the same functions, privileges, and limitations as all Philippine
banks.50

The Office of the Solicitor General adds that Republic Act No. 10641 has allowed foreign banks to
bid and take part in foreclosure sales of real property mortgaged to them and to possess it within five
years.51

The Office of the Solicitor further notes that the constitutional prohibition on alien ownership of lands
does not apply in this case, as respondent Maybank did not become the absolute owner of the
property.52 Unlike a domestic bank,53 a foreign bank does not acquire the property as an absolute
owner, but only as a possessor with a "special right and duty to sell"54 the property to a qualified
Philippine national within five years. Even if no redemption is made within a year of registration of
the certificate of sale, a foreign bank still cannot encumber, transform, or destroy the property it
acquired in a foreclosure sale.55
The Office of the Solicitor General maintains that the national patrimony remains preserved,
because Republic Act Nos. 4882 and 10641 prohibit title transfers to foreign banks and require them
to sell the foreclosed property to qualified Philippine nationals.56

On June 5, 2018, this Court ordered the Monetary Board of the Bangko Sentral ng Pilipinas (Bangko
Sentral) and the Bankers Association of the Philippines (the Bankers Association) to each comment
on whether the foreclosure and acquisition of respondent Maybank's properties, a fully-owned
foreign corporation, is allowed under the Constitution.57

Bangko Sentral maintains that foreign banks are authorized to foreclose mortgages on real property,
but are not allowed to acquire or own real properties.58 It explains that engaging in banking
business is distinct from owning or acquiring land in the Philippines. The business of foreign banks
in the Philippines is governed by Republic Act No. 7721, as amended by Republic Act No. 10641,
while owning or acquiring land is regulated under the Public Land Act and the 1987 Constitution.59

Citing the Senate and House's bicameral conference on the bill that soon became the General
Banking Law, Bangko Sentral distinguishes the policy on foreign ownership of land from that of
banks. It explains that the prohibition on land ownership is stricter because unlike land, the foreign
ownership of a bank is still limited by its engaging of business in Philippine money.60 It likewise
asserts that the liberalization of entry of foreign banks is not meant to allow foreign ownership of
land.61

Bangko Sentral also states that Republic Act No. 7721, as amended by Republic Act No. 10641, is
constitutional. It explains that the law, as affirmed in special laws and rules, only allows foreign
banks to foreclose real estate mortgages and possess foreclosed land,62 but not to consolidate title
over the properties.63

For its part, the Bankers Association maintains that respondent Maybank's foreclosure, bid,
certificate of sale, and possession of the property are not void.64 It contends that foreign banks are
not prohibited from participating in foreclosure proceedings and possessing land, as long as they
hold the title within the limits allowed under banking laws.65 In any case, it adds, the matter is
addressed if the land is subsequently transferred to a Philippine national.66

The Bankers Association also points out that since the foreclosure happened before Republic Act
No. 10641 was passed, the original Republic Act No. 7721 applies in this case.67

On Republic Act No. 7721, the Bankers Association elaborates that the law provides equal treatment
to foreign banks and grants them functions and privileges similar to domestic banks, including the
right to extrajudicially foreclose a security under a valid loan agreement.68

The Bankers Association points out that the loan business component, a core function of banks, will
be rendered ineffective if banks are prevented from enforcing their rights as secured creditors.
Likewise, to deny foreclosure and acquisition rights to foreign banks will disincentivize their entry,
which is contrary to the policy behind Republic Act No. 7721.69 It likewise asserts that it will also
benefit the economy, particularly small and medium enterprises, if more lending and borrowing is
encouraged.70 Furthermore, to disallow foreign banks from doing so may let unscrupulous persons
to take advantage of this prohibition by borrowing from foreign banks, defaulting, and defeating
enforcement proceedings with impunity.71

The Bankers Association also adds that under Section 6 of Republic Act No. 10641, foreign banks
may bid and take part in foreclosure sales of land mortgaged to them and to conditionally possess
the property.72 Thus, while land ownership is still limited to Philippine nationals, the law is not
unduly restrictive on the operations of foreign banks.73

Finally, the Bankers Association contends that the five-year period allowing foreign banks to possess
the property is the same period allowed under the General Banking Law for all banks to dispose of
foreclosed real properties. It surmises that this general rule is the reason why Republic Act No. 7721
was silent on such power of foreign banks.74 In any case, it points out that this power has been
made explicit in Republic Act No. 10641.75

For this Court's resolution are the following issues:

First, whether or not respondents Joaquin and Lilia Parcon are holding the property in trust for
petitioner Julie Parcon-Song;

Second, whether or not respondent Maybank Philippines, Inc. is a mortgagee in good faith;

Third, whether or not respondent Maybank Philippines, Inc. is a foreign bank authorized by the
Monetary Board to operate in the Philippine banking system; and Finally, whether or not respondent
Maybank Philippines, Inc.'s foreclosure and acquisition of the properties are authorized under the
Constitution despite it being a fully-owned foreign corporation.

This Court will no longer rule on the first and third issues.

Both the existence of the trust and respondent Maybank's authority to operate in the Philippines as a
foreign bank are questions of fact. These are not proper to raise in a Rule 45 petition, which
generally only entertains questions of law.76

This Court's jurisdiction is limited to errors of law. It is not our function to examine the evidence all
over again. If the lower courts' findings are not shown to be unsupported by evidence or based on a
gross misapprehension of facts, their factual conclusions shall be respected.77

Here, both lower courts found that respondent Maybank is a foreign bank authorized by the
Monetary Board to operate in the Philippine banking system.78 The Regional Trial Court further
ruled that no trust existed between petitioner and her parents.79 The Court of Appeals also noted
that the title was clean, registered in the name of Lilia Parcon, and had no annotations of liens,
encumbrances, or adverse claims.80

There is no evidence that these findings were unsupported or manifestly erroneous. Petitioner
contested these findings, yet she did not present any proof to establish her allegations.81 It is a
basic evidentiary rule that "[t]he party who alleges a fact has the burden of proving it."82 Bare
allegations warrant no merit.83 In Republic v. Estate of Hans Menzi:84

It is procedurally required for each party in a case to prove his own affirmative allegations by the
degree of evidence required by law. In civil cases such as this one, the degree of evidence required
of a party in order to support his claim is preponderance of evidence, or that evidence adduced by
one party which is more conclusive and credible than that of the other party. It is therefore incumbent
upon the plaintiff who is claiming a right to prove his case. Corollarily, the defendant must likewise
prove its own allegations to buttress its claim that it is not liable.

The party who alleges a fact has the burden of proving it. The burden of proof may be on the plaintiff
or the defendant. It is on the defendant if he alleges an affirmative defense which is not a denial of
an essential ingredient in the plaintiffs cause of action, but is one which, if established, will be a good
defense - i.e., an "avoidance" of the claim.83 (Citations omitted)

Thus, this Court affirms the lower courts' findings as to the absence of the trust and the authority of
respondent Maybank to operate as a foreign bank in the Philippines.

II

Likewise, the real estate mortgage is valid.

Under the doctrine of mortgagee in good faith, a mortgage is deemed valid if the mortgagee relied in
good faith on what appears on the face of the certificate of title. This is so even if the mortgagor
fraudulently acquired the title to the property.86 In Cabuhat v. Court of Appeals:87

However, it is well-settled that even if the procurement of a certificate of title was tainted with fraud
and misrepresentation, such defective title may be the source of a completely legal and valid title in
the hands of an innocent purchaser for value. . . .

Just as an innocent purchaser for value may rely on what appears in the certificate of title, a
mortgagee has the right to rely on what appears in the title presented to him, and in the absence of
anything to excite suspicion, he is under no obligation to look beyond the certificate and investigate
the title of the mortgagor appearing on the face of the said certificate. Furthermore, it is a well-
entrenched legal principle that when an innocent mortgagee who relies upon the correctness of a
certificate of title consequently acquires rights over the mortgaged property, the courts cannot
disregard such rights.88 (Citations omitted)

Generally, if the certificate of title indicates nothing that will raise concern, and the mortgagee is
unaware of any defect in the title or any other problematic circumstance surrounding the property,
the mortgagee is not required to further investigate.89

The rationale for this doctrine is the public's interest in sustaining the certificate of title's
indefeasibility "as evidence of the lawflil ownership of the land or of any encumbrance"90 on it. In
Andres v. Philippine National Bank:91

The doctrine protecting mortgagees and innocent purchasers in good faith emanates from the social
interest embedded in the legal concept granting indefeasibility of titles. The burden of discovery of
invalid transactions relating to the property covered by a title appearing regular on its face is shifted
from the third party relying on the title to the co-owners or the predecessors of the title holder.
Between the third party and the co-owners, it will be the latter that will be more intimately
knowledgeable about the status of the property and its history. The costs of discovery of the basis of
invalidity, thus, are better borne by them because it would naturally be lower. A reverse presumption
will only increase costs for the economy, delay transactions, and, thus, achieve a less optimal
welfare level for the entire society.92 (Citation omitted)

However, when the mortgagee is a bank, a higher standard is imposed before it is considered a
mortgagee in good faith. Banks cannot simply rely on the title alone, but must further investigate the
property to ensure the genuineness of the title.93 In Land Bank of the Philippines v. Belle
Corporation:94

When the purchaser or the mortgagee is a bank, the rule on innocent purchasers or mortgagees for
value is applied more strictly. Being in the business of extending loans secured by real estate
mortgage, banks are presumed to be familiar with the rules on land registration. Since the banking
business is impressed with public interest, they are expected to be more cautious, to exercise a
higher degree of diligence, care and prudence, than private individuals in their dealings, even those
involving registered lands. Banks may not simply rely on the face of the certificate of title. Hence,
they cannot assume that, simply because the title offered as security is on its face free of any
encumbrances or lien, they are relieved of the responsibility of taking further steps to verify the title
and inspect the properties to be mortgaged. As expected, the ascertainment of the status or
condition of a property offered to it as security for a loan must be a standard and indispensable part
of a bank's operations. It is of judicial notice that the standard practice for banks before approving a
loan is to send its representatives to the property offered as collateral to assess its actual condition,
verify the genuineness of the title, and investigate who is/are its real owner/s and actual
possessors.95 (Citations omitted)

Likewise, in Andres:

The general rule allows every person dealing with registered land to rely on the face of the title when
determining its absolute owner.

...

However, the banking industry belongs to a different category than private individuals. Banks are
considered businesses impressed with public interest, requiring "high standards of integrity and
performance." Consequently, banks must exercise greater care, prudence, and due diligence in their
property dealings. The standard operating practice for banks when acting on a loan application is "to
conduct an ocular inspection of the property offered for mortgage and to verify the genuineness of
the title to determine the real owner(s) thereof."96 (Citations omitted)

Thus, a bank is a mortgagee in good faith if it inspected and investigated the property in accordance
with the standards imposed on banks.

However, this Court rules that a bank should not necessarily be made liable if it did not investigate or
inspect the property. If the circumstances reveal that an investigation would still not yield a discovery
of any anomaly, or anything that would arouse suspicion, the bank should not be liable.

Here, both lower courts consistently held that Transfer Certificate of Title No. 107064 was clean. It
was registered in the name of respondent Lilia Parcon and bore no annotations evidencing any trust,
lien, or encumbrance on the property. The title was not forged or fake. There is likewise no showing
that respondent Maybank was aware of any defect or any other conflicting right on the title when the
property was mortgaged to it.97

There is no factual finding on whether respondent Maybank actually inspected the property. The
Court of Appeals simply ruled that the inspection is not necessary and respondent Maybank's
reliance on the clean title was sufficient.98 Similarly, the Regional Trial Court found that it cannot be
prejudiced by rights over the property not duly annotated in the title.99

Regardless, the circumstances show that had respondent Maybank conducted an investigation, it
would still not have discovered any issue on the mortgaged property.

Petitioner has the burden to prove that she is in actual possession of the property—a burden she
failed to discharge.
By her account, petitioner allegedly purchased the property from PACE Realty Investment, Inc. using
her own money, but used her mother's name to acquire it.100 Thus, in 1994, the title was registered
in respondent Lilia Parcon's name.101 Petitioner admitted that she let her parents and siblings
occupy the property and gave them financial support.102

Clearly, the ones in actual possession of the property were the Parcon Spouses and petitioner's
siblings.103 Thus, had respondent Maybank investigated the property, it would still not have found
any issue.

Petitioner had had several chances to substantiate her claims. The Regional Trial Court had initially
dismissed the case because of her failure to prosecute. When she moved for reconsideration, the
trial court reinstated the case and allowed her to present her evidence. Nonetheless, she was unable
to continue her direct testimony and did not conduct a cross-examination because her counsels
failed to appear. Thus, the trial court deemed her to have waived her right to formally offer her
evidence.

Without clear and convincing evidence that petitioner's claims are facts, respondent Maybank
remains a mortgagee in good faith. Hence, this Court affirms the lower courts' finding that the
mortgage is valid.

III

Petitioner questions the constitutionality of respondent Maybank's foreclosure and acquisition of the
mortgaged property, arguing that it violates the prohibition on alien ownership of real property under
Article XII, Section 3 of the 1987 Constitution.104

We decline to rule on the constitutionality of the foreclosure. This case may be resolved on the basis
of a statute.

III (A)

Respondent Maybank's acquisition of the property is void. At the time of the foreclosure sale, the
governing law provided that foreign banks may not participate in the foreclosure and acquisition of
mortgaged properties.

As a foreign bank, respondent Maybank is authorized to operate in the Philippine banking system,
with the same rights and privileges as Philippine banks.105 Under Republic Act No. 8791, or the
General Banking Law, the entry of foreign banks is governed by Republic Act No. 7721, or the
Foreign Bank Liberalization Act.106

Enacted in 1994, 107 the underlying policy of the Foreign Bank Liberalization Act is to develop a
more "stable, competitive, efficient, and dynamic banking and financial system"108 by encouraging
greater foreign participation. It allowed foreign banks to operate in the Philippine banking system
through any of the following modes of entry:

(i) by acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an existing
bank; (ii) by investing in up to sixty percent (60%) of the voting stock of a new banking subsidiary
incorporated under the laws of the Philippines; or (iii) by establishing branches with full banking
authority[.]109
Under this provision, a foreign bank may own up to 60% of the voting stock of only one domestic
bank or new banking subsidiary.110

Nonetheless, the law maintained the State policy to keep the financial system "effectively controlled
by Filipinos."111 It mandated the Monetary Board to always ensure that "the control of seventy
percent (70%) of the resources or assets of the entire banking system is held by domestic banks
which are at least majority-owned by Filipinos[.]"112

Prior to its amendment in 2014, the Foreign Bank Liberalization Act was silent on whether foreign
banks can foreclose mortgages and acquire mortgaged properties.

Generally, for matters not covered by the Foreign Bank Liberalization Act, the provisions of the
General Banking Law applied to foreign banks."113 The General Banking Law allowed banks to
foreclose real estate mortgages and to acquire real properties mortgaged to it in good faith. Its
Section 52 provides:

SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims. —Notwithstanding the
limitations of the preceding Section, a bank may acquire, hold or convey real property
under the following circumstances:

52.1. Such as shall be mortgaged to it in good faith by way of security for debts;

....

Any real property acquired or held under the circumstances enumerated in the above paragraph
shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the
Monetary Board: Provided, however, That the bank may, after said period, continue to hold the
property for its own use, subject to the limitations of the preceding Section. (25a) (Emphasis
supplied)

However, a more specific rule is found in Republic Act No. 4882, which amended Republic Act No.
133. It states:

SECTION 1. Any provision of law to the contrary notwithstanding, private real property may be
mortgaged in favor of any individual, corporation, or association, but the mortgage or his successor
in interest, if disqualified to acquire or hold lands of the public domain in the Philippines, shall not
take possession of the mortgaged property during the existence of the mortgage and shall not take
possession of mortgaged property except after default and for the sole purpose of foreclosure,
receivership, enforcement or other proceedings and in no case for a period of more than five years
from actual possession and shall not bid or take part in any sale of such real property in case of
foreclosure: Provided, That said mortgagee or successor in interest may take possession of said
property after default in accordance with the prescribed judicial procedures for foreclosure and
receivership and in no case exceeding five years from actual possession.114 (Emphasis supplied)

Thus, a mortgagee who is prohibited from acquiring public lands may possess the property for five
years after default and for the purpose of foreclosure. However, it may not bid or take part in any
foreclosure sale of the real property.

In 2014, Congress enacted Republic Act No. 10641 to amend the Foreign Bank Liberalization Act.
The amendment allowed the full entry of foreign banks in the Philippines,115 though it maintained
the State policy to keep the financial system effectively controlled by Filipinos.116 Notably, it gave
authorized foreign banks the same functions, privileges, and limitations as domestic banks of the
same category. Likewise, any right, privilege, or incentive granted to foreign banks is extended to
Philippine banks.117 Thus, a new provision on foreclosure proceedings was added:

SEC. 9. Participation in Foreclosure Proceedings. — Foreign banks which are authorized to do

banking business in the Philippines through any of the modes of entry under Section 2 hereof shall
be allowed to bid and take part in foreclosure sales of real property mortgaged to them, as well as to
avail of enforcement and other proceedings, and accordingly take possession of the mortgaged
property, for a period not exceeding five (5) years from actual possession: Provided, That in no
event shall title to the property be transferred to such foreign bank. In case said bank is the winning
bidder, it shall, during the said five (5)-year period, transfer its rights to a qualified Philippine national,
without prejudice to a borrower's rights under applicable laws. Should the bank fail to transfer such
property within the five (5)-year period, it shall be penalized one half (1/2) of one percent (1%) per
annum of the price at which the property was foreclosed until it is able to transfer the property to a
qualified Philippine national.118

Thus, a foreign bank can now participate in foreclosure sales of real property mortgaged to it, and
even possess it. There are limitations, namely: (a) the possession must be limited to five years; (b)
the property title shall not be transferred to it; and (c) within the five-year period, it must transfer its
rights to a qualified Philippine national. In case a foreign bank fails to transfer the property, it will be
liable to pay half of 1% per annum of the foreclosure price until it transfers the property.

Clearly, under Republic Act No. 10641, foreign banks may now foreclose and acquire mortgaged
properties.

However, Republic Act No. 10641, which was enacted in 2014, does not apply in this case. Here,
the loans were obtained and the real estate mortgage was executed and annotated on the title in
1995.119 The default on the loans, the foreclosure of the mortgage, and the property acquisition
took place in 2001.120

The law then in place was Republic Act No. 4882. Consequently, respondent Maybank was still a
mortgagee disqualified to acquire lands in the Philippines. It may possess the mortgaged property
after default and solely for foreclosure, but it cannot bid or take part in any foreclosure sale.

Thus, the sale to respondent Maybank is invalid.

III (B)

Evidently, this case could be resolved without tackling whether a foreign bank's participation in a
foreclosure sale of real property is constitutionally allowed. This Court shall follow the dictates of the
constitutional policy of avoidance.

Before this Court may determine the constitutionality of a government act, the requisites for judicial
review must be satisfied. In In Re: Save the Supreme Court Judicial Independence and Fiscal
Autonomy Movement:121

The power of judicial review, like all powers granted by the Constitution, is subject to certain
limitations. Petitioner must comply with all the requisites for judicial review before this court may take
cognizance of the case. The requisites are:

(1) there must be an actual case or controversy calling for the exercise of judicial power;
 (2) the person challenging the act must have the standing to question the validity of the
subject act or issuance; otherwise stated, he must have a personal and substantial interest in
the case such that he has sustained, or will sustain, direct injury as a result of its
enforcement;

(3) the question of constitutionality must be raised at the earliest opportunity; and

(4) the issue of constitutionality must be the very lis mota of the case.122 (Citation omitted)

The fourth requisite is relevant here. Courts are obligated to presume that the acts of Congress are
valid, unless the contrary is clearly shown. Thus, courts avoid resolving the constitutionality of a law
if the case can be ruled on other grounds.123 The question of constitutionality will only be passed
upon if it is indispensable to the resolution of the case,124 but it cannot be raised
collaterally.125 This Court ruled:

Judicial review of official acts on the ground of unconstitutionality may be sought or availed of
through any of the actions cognizable by courts of justice, not necessarily in a suit for declaratory
relief. . . . The constitutional issue, however, (a) must be properly raised and presented in the case,
and (b) its resolution is necessary to a determination of the case, i.e., the issue of constitutionality
must be the very Us mota presented.126(Citation omitted)

These principles were further discussed in Ty v. Trampe:127

Having already definitively disposed of the case through the resolution of the foregoing two issues,
we find no more need to pass upon the third. It is axiomatic that the constitutionality of a law,
regulation, ordinance or act will not be resolved by courts if the controversy can be, as in this case it
has been, settled on other grounds. In the recent case of Macasiano vs. National Housing Authority,
this Court declared:

"It is a rule firmly entrenched in our jurisprudence that the constitutionality of an act of the legislature
will not be determined by the courts unless that question is properly raised and presented in
appropriate cases and is necessary to a determination of the case, i.e., the issue of constitutionality
must be the very lis mota presented. To reiterate, the essential requisites for a successful judicial
inquiry into the constitutionality of a law are: (a) the existence of an actual case or controversy
involving a conflict of legal rights susceptible of judicial determination, (b) the constitutional question
must be raised by a proper party, (c) the constitutional question must be raised at the earliest
opportunity, and (d) the resolution of the constitutional question must be necessary to the decision of
the case." (Italics supplied)

The aforequoted decision in Macasiano merely reiterated the ruling in Laurel vs. Garcia, where this
Court held:

"The Court does not ordinarily pass upon constitutional questions unless these questions are
properly raised in appropriate cases and their resolution is necessary for the determination of the
case[.] The Court will not pass upon a constitutional question although properly presented by the
record if the case can be disposed of on some other found such as the application of a statute or
general law[.]"128 (Emphasis in the original, citations omitted)

In Spouses Mirasol v. Court of Appeals,129 this Court explained that the presumption of
constitutionality is anchored on the doctrine of separation of powers. Courts should not assume that
legislative and executive acts were done without thoughtful consideration:
As regards the second issue, petitioners contend that P.D. No. 579 and its implementing issuances
are void for violating the due process clause and the prohibition against the taking of private property
without just compensation. Petitioners now ask this Court to exercise its power of judicial review.

Jurisprudence has laid down the following requisites for the exercise of this power: First, there must
be before the Court an actual case calling for the exercise of judicial review. Second, the question
before the Court must be ripe for adjudication. Third, the person challenging the validity of the act
must have standing to challenge. Fourth, the question of constitutionality must have been raised at
the earliest opportunity, and lastly, the issue of constitutionality must be the very lis mota of the case.

As a rule, the courts will not resolve the constitutionality of a law, if the controversy can be settled on
other grounds. The policy of the courts is to avoid ruling on constitutional questions and to presume
1âшphi1

that the acts of the political departments are valid, absent a clear and unmistakable showing to the
contrary. To doubt is to sustain. This presumption is based on the doctrine of separation of powers.
This means that the measure had first been carefully studied by the legislative and executive
departments and found to be in accord with the Constitution before it was finally enacted and
approved.

The present case was instituted primarily for accounting and specific performance. The Court of
Appeals correctly ruled that PNB's obligation to render an accounting is an issue, which can be
determined, without having to rule on the constitutionality of P.D. No. 579. In fact there is nothing in
P.D. No. 579, which is applicable to PNB's intransigence in refusing to give an accounting. The
governing law should be the law on agency, it being undisputed that PNB acted as petitioners' agent.
In other words, the requisite that the constitutionality of the law in question be the very lis mota of the
case is absent. Thus we cannot rule on the constitutionality of P.D. No. 579.130 (Citations omitted)

In this case, the applicable law that governed the sale is not Republic Act No. 10641. The
foreclosure took place in 2001, prior to the enactment of Republic Act No. 10641 in 2014. Republic
Act No. 10641 is not in question; thus, its constitutionality cannot be addressed.

Moreover, this case was filed for annulment of title, reconveyance of the transfer certificate of title,
annulment of mortgage and foreclosure proceedings, and declaration of family home. All the issues
may be resolved without determining the constitutionality of Republic Act No. 10641.

The judicial review requirement that a constitutional issue seasonably raised should be the lis mota
of the case is rooted in two constitutional principles: first, the principle of deference; and second, the
principle of reasonable caution in striking down an act by a co-equal political branch of government.

Article VIII, Section 1 of the Constitution, which specifies that courts may act on any grave abuse of
discretion by any government branch or instrumentality, does not license this Court to issue advisory
opinions. Apart from an actual case or controversy, this Court must be satisfied that the reliefs
prayed for require the resolution of a constitutional issue.

There are exceptions, namely: (a) when a facial review of the statute is allowed, as in cases of
actual or clearly imminent violation of the sovereign rights to free expression and its cognate rights;
or (b) when there is a clear and convincing showing that a fundamental constitutional right has been
actually violated in the application of a statute, which are of transcendental interest. The violation
must be so demonstrably and urgently egregious that it outweighs a reasonable policy of deference
in such specific instance. The facts constituting that violation must either be uncontested or
established on trial. The basis for ruling on the constitutional issue must also be clearly alleged and
traversed by the parties. Otherwise, this Court will not take cognizance of the constitutional issue, let
alone rule on it.
This case is no exception. We decline to resolve the constitutionality of Section 9 of Republic Act No.
10641 as it is not the very lis mota of the case. The relief can be granted simply by examining the
applicable statute. Besides, there was no constitutional violation so urgently egregious that it should
outweigh our reasonable policy of deference to the two other constitutional branches of government.

WHEREFORE, this Court PARTIALLY GRANTS the Petition. The August 17, 2011 Decision and
November 28, 2011 Resolution of the Court of Appeals in CA-G.R. CV No. 93681
is MODIFIED. Transfer Certificate of Title No. 107064 in the name of respondent Lilia Parcon and
the real estate mortgage dated November 28, 1995 in favor of respondent May bank
Philippines, Inc. are deemed VALID. Petitioner Julie Parcon-Song's prayer to transfer the property
to her as its true and lawful owner is DENIED. However, the foreclosure sale of the property in
favor of respondent Maybank Philippines, Inc. is declared VOID, without prejudice to another
foreclosure sale under Republic Act No. 10641 if warranted.

SO ORDERED.

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.

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 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.

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.

Upon the other hand, it does not appear excessively burdensome to require the privileged creditors
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.

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.

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.

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 contractor's 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 Municpality.

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 contractor's
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 Court's 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 contractor's 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, attorney's 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 court's 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. Petitioners4

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 court's 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 judge's ORDER dated September 5, 1991 for the issuance of a writ of
attachment and for the enforcement of a contractor's 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 judge's ORDER dated October 11, 1991 further enforcing the contractor's
lien and approving the guidelines for the operation of the San Antonio Public Market is also
NULLIFIED and SET ASIDE.

Petitioner's 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 contractor's 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 contractor's lien,
the appellate court held that the same right cannot be expanded to include the right to use the
building. Therefore, the trial court's 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 court's 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 MAISAPPRECIATED, 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 court's interlocutory orders
granting the writ of attachment and the contractor's lien?
 2. Whether or not the Court of Appeals committed reversible errors of law in its decision?

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
amounting to lack or excess of jurisdiction, and there is no appeal, or any plain, speedy, and
adequate remedy in the ordinary course of law. 7

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. We held in a recent case that certiorari may be issued
8

"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. However, we have held that certiorari is an appropriate remedy to assail an interlocutory
10

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. With such remedies still available to the Municipality
12

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 contractor's lien, we uphold the appellate court's ruling reversing the
trial court's grant of a contractor's lien in favor of petitioners.

Art.'s 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 contractor's lien claimed
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

However, Article 2242 only finds application when there is a concurrence of credits, i.e. when the
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. Fundamental tenets of due process will dictate that this statutory lien
14

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. Thus, even if it is finally
17

adjudicated that petitioners herein actually stand in the position of unpaid contractors and are
entitled to invoke the contractor's 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 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

Our decision herein is consistent with our ruling in Philippine Savings Bank v. Lantin, wherein we
19

also disallowed the contractor from enforcing his lien pursuant to Article 2242 of the Civil Code in an
action filed by him for the collection of unpaid construction costs.

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. If judgment be
20

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. Only in
21

the event that petitioners are able to purchase the property will they then acquire possession and
use of the same.

Clearly, the trial court's 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 court's
nullification of the same should be sustained. 1awp++i1

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 Appeal's Decision dated February 6, 1992 in CA-G.R. SP
No. 26336 insofar as it nullifies the contractor's lien granted by the trial court in favor of petitioners in
its September 5, 1991 Order. Consequently, we also UPHOLD the appellate court's nullification of
the trial court's October 11, 1991 Order approving the guidelines for the operation of the San Antonio
Public Market. However, we REVERSE the appellate court's order nullifying the writ of attachment
granted by the trial court.1âwphi1.nêt

No pronouncement as to costs.

SO ORDERED.

[G.R. NO. 146555 : July 3, 2007]

JOSE C. CORDOVA, Petitioner, v. REYES DAWAY LIM BERNARDO LINDO ROSALES

LAW OFFICES, ATTY. WENDELL CORONEL and the SECURITIES AND EXCHANGE
COMMISSION,*** Respondents.
 DECISION

CORONA, J.:

This is a Petition for Review on Certiorari 1 of a decision2 and resolution3 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 Filmanbank5 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 it10 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
Philfinance's 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, petitioner's 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. Petitioner's 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 petitioner's 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, petitioner's 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.

Petitioner's CSPI shares were specific or determinate movable properties.20 But after
they were sold, the money raised from the sale became generic21 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. Petitioner's 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.

Petitioner's 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? cralaw library

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:

x x x � � � � � x x x � � � � � x x x

(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;

x x x � � � � � x x x � � � � � x x x

(Emphasis supplied) cralawlibrary

He asserts that, as a preferred creditor, he was entitled to the entire monetary value of
his shares.

Petitioner's 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:

Common credits referred to in Article 2245 shall be paid pro rata regardless of dates.

Like all the other ordinary creditors or claimants against Philfinance, he was entitled to
a rate of recovery of only 15% of his money claim.

One final issue: was petitioner entitled to interest? cralaw library

The SEC argues that awarding interest to petitioner would have given petitioner an
unfair advantage or preference over the other creditors.28 Petitioner counters that he
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.

The guidelines for awarding interest were laid down in Eastern Shipping Lines, Inc. v.
CA:29

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
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.

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,
as follows:

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 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,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.30 (Emphasis supplied)cralawlibrary

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 loan31 or forbearance of money.32
Neither was he entitled to legal interest of 6% per annum under Article 2209 of the Civil
Code33 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 before
the CA that the SEC (as liquidator) had already paid him P5,062,500 representing 15%
of P33,750,000.35

Accordingly, petitioner was not entitled to interest under the law and current
jurisprudence.

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

We note that there is an undisputed finding by the SEC and CA that private respondents
sold the subject shares without authority from the SEC. Petitioner evidently has a cause
of action against private respondents for their bad faith and unauthorized acts, and the
resulting damage caused to him.37

WHEREFORE, the petition is hereby DENIED.

SO ORDERED.

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 petitioner's 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 petitioner's 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 RCBC's 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, petitioner's Motion for Judgment on the pleadings is

granted and judgment 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:

. . .: (1) even before RCBC asked the sheriff to extra-judicially

foreclose its mortgage on petitioner's 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 sheriff's certificate of sale has been
registered on BF Homes' TCT's . . . (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 owner's 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, R
ollo;
also
pp.
832-
834,
213
SCRA
830
[1992];
Empha
sis 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 petitioner's 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 cognizable of

Special Civil Case No. 10042.

5. The Regional Trial court had jurisdiction over Special Civil Case
No. 10042.

(p.
5, Roll
o.)

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 petitioner's "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, Ro
llo.)
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
Griño-Aquino and Campos took no part) denied petitioner's 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 RCBC's 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 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, R
ollo;
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 posses
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 nor
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 Court's 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
RCBC's 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.

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The foregoing majority opinion relied upon BF Homes, Inc. vs. Court of Appeals (190 SCRA 262
[1990] — per Cruz, J.: First Division) where it 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 Alemar's Sibal & Sons, Inc. vs. Hon. Jesus M.
Elbinias (pp. 99-100; 186 SCRA 94 [1991] — per Fernan, C.J.: Third Division).

Taking the lead from Alemar's 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:

SEC's 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 Bellosilio, J.: First Division) the
Court explicitly stared that ". . . the doctrine in the PCIB Case has since been abrogated. In Alemar's
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).

It may be stressed, however, that of all the cases cited by Justice Bellosillo in BPI, which abandoned
the Court's ruling in PCIB, only the present case satisfies the constitutional requirement that "no
doctrine or principle of law laid down by the court in a decision rendered en banc or in division may
be modified or reversed except by the court sitting en 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 which 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 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 of doing so. (This will be in consonance with Alemar's 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]).

The Majority ruling in our 1992 decision that preferred creditors of distressed corporations shall, in a
way, stand an 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 creditors, 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, petitioner's 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.

G.R. No. 165675 September 30, 2005

SPOUSES EDUARDO SOBREJUANITE and FIDELA SOBREJUANITE, Petitioners,
vs.
ASB DEVELOPMENT CORPORATION, Respondent.

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 Complaint1 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,
attorney’s 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) attorney’s 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 Commissioners3 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 appeal5 before the Office of the President which was dismissed6 for lack of merit.
Hence, ASBDC filed a petition7 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 Sobrejuanite’s 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.

Sobrejuanite’s motion for reconsideration was denied10 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
PETITIONER’S 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 decedent’s 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 attorney’s 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 attorney’s fees; and P50,000.00 as litigation expenses.

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 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 distressed corporation.

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
respondent’s 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
respondent’s 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.

WHEREFORE, the petition is DENIED. The assailed Decision of the Court of Appeals dated June
29, 2004 in CA-G.R. SP No. 79420 and its Resolution dated October 18, 2004, are AFFIRMED.

SO ORDERED.

G.R. No. 173610 October 1, 2012

TOWN AND COUNTRY ENTERPRISES, INC., Petitioner,

vs.
HONORABLE NORBERTO J. QUISUMBING, JR., ET. AL, Respondents.
x---------------x

G.R. No. 174132

TOWN AND COUNTRY ENTERPRISES, INC., Petitioner,

vs.
METROPOLITAN BANK AND TRUST CO., Respondent.

DECISION

PEREZ, J.:

These consolidated Rule 45 Petitions for Review on Certiorari primarily assail the 30 November
2005 Decision rendered by the Fourth Division of the Court of Appeals (CA) in CA-G.R. CV No.
84464 and the 24 May 2006 Decision rendered by said Court’s Sixteenth Division in CAG. R. SP No.
1

90311. 2

There is no dispute regarding the fact that petitioner Town & Country Enterprises, Inc. (TCEI)
obtained loans in the aggregate sum of ₱ 12,000,000.00 from respondent Metropolitan Bank & Trust
Co. (Metrobank). To secure the prompt payment of the loan, TCEI executed in favor of Metrobank a
3

thrice amended Deed of Real Estate Mortgage over twenty parcels of land registered in its name
4

and/or its corporate officers, petitioners Spouses Reynaldo and Lydia Campos (Spouses Campos),
under Transfer Certificates of Title (TCT) Nos. T-361540, T-361541, T-361542, T-361543, T-361544,
T-261545, T-361546, T-361547, T-361548, T-361565, T-361566, T-361567, T-361568, T-361569, T-
361570, T0361571, T-361572, T-361573, T-361574 and T-743815, all of the Cavite Provincial
Registry of Deeds. For failure of TCEI to heed its demands for the payment of the loan, Metrobank
5

caused the real estate mortgage to be extrajudicially foreclosed and the subject realties 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 Sale which was registered with the Cavite Provincial
6

Registry of Deeds on 10 April 2002. 7

In view of TCEI’s further refusal to heed its demands to turn over actual possession of the
properties, Metrobank filed on 23 September 2002 the petition for issuance of a writ of possession
docketed as LRC Case No. 2128-02 before the Regional Trial Court (RTC), Branch 21, in Imus,
Cavite, presided over by public respondent judge, the Hon. Norberto J. Quisumbing, Jr. Metrobank
8

invoked its right to said writ of possession under Section 7 of Act No. 3135. Claiming difficulty in
servicing its obligations as a consequence of the Asian financial crisis, on the other hand, TCEI filed
on 1 October 2002 the petition for declaration of a state of suspension of payments, with approval of
a proposed rehabilitation plan, which was docketed as SEC Case No. 023-02 before the same court,
sitting as a Special Commercial Court (Rehabilitation Court). With the issuance of a Stay Order on
9

8 October 2002 in the corporate rehabilitation case, TCEI filed on 21 October 2002 a motion to
10

suspend the proceedings in LRC Case No. 2128-02 which was granted by respondent judge in the
Order dated 2 December 2002. Aggrieved by the denial of its motion for reconsideration of the
11

same order, Metrobank filed the Rule 65 petition for certiorari which was docketed before the CA as
CA-G.R. SP No. 76147. 12

On 30 January 2004, the CA’s then Fifth Division rendered the Decision in CA-G.R. SP No. 76147,
13

directing respondent judge "to continue with the proceedings in [LRC Case No. 2128-02 and
eventually to issue the required writ of possession in favor of [Metrobank] over the foreclosed
properties." The foregoing directive was anchored on the second paragraph of Section 47 of
Republic Act (RA) No. 8741. Finding the Rehabilitation Plan submitted by TCEI feasible, on the
14
other hand, the rehabilitation court issued the Order dated 29 March 2004 in SEC Case No. 023-
02, the decretal portion of which states:
15

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 modification that the
interest charges shall be reduced from 36% to 24% per annum. After the five-year grace period,
[TCEI] shall commence to pay its existing obligations with its creditor banks monthly within a period
of three (3) years.

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
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.

The Rehabilitation Receiver is directed to strictly monitor the implementation of the Plan and submit
a quarterly report on the progress thereof.

SO ORDERED. 16

On 11 January 2005, the RTC issued in LRC Case No. 2128-02 an order granting Metrobank’s
petition for issuance of a writ of possession and directing the Clerk of Court to issue the writ therein
sought. Aggrieved, TCEI and the Spouses Campos perfected the appeal which was docketed
17

before the CA as CA-G.R. CV No. 84464, on the ground that it had been denied due process a
quo and that the writ of possession issued is contrary to the rules on corporate rehabilitation. On 30
18

November 2005, the CA’s then Fourth Division rendered the first assailed Decision, affirming the
RTC’s appealed 11 January 2005 Order. In denying the appeal, the CA ruled that, as purchaser of
the foreclosed properties, Metrobank was entitled to the writ of possession without delay since,
under Section 8 of Act No. 3135, the remedy of the mortgagor is to set aside the sale and the writ of
possession within 30 days after the purchaser was placed in possession and, if aggrieved from the
resolution thereof, to appeal in accordance with Section 14 of Act No. 496, otherwise known as
the Land Registration Act. Likewise finding that the proceedings before the RTC were ex parte by
nature, the CA decreed that TCEI and the Spouses Campos were not denied due process and that
the appealed order is not reviewable since only one party sought relief a quo. Dissatisfied with the
19

denial of the motion for reconsideration of the foregoing decision in the CA’s Resolution dated 26
July 2006, TCEI and the Spouses Campos filed the Rule 45 petition for review now docketed before
20

us as G.R. No. 173610. 21

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-
1046382, T-1046383, T-1046384, T-1046385, T-1046386, T-1046387 and T-1046388 in the name 22

of Metrobank which had consolidated its ownership over the subject properties on 25 April
2003. Maintaining that the transfers of title were invalid and ineffective, TCEI filed its 4 November
23

2004 motion which was styled as one to direct the Register of Deeds to "bring back the titles in [its]
name." TCEI argued that Metrobank’s act of transferring said titles to the latter’s name amounted to
contempt absent modification of the 8 October 2002 Stay Order and approval by the Rehabilitation
Court. The motion was, however, denied in the Rehabilitation Court’s 2 June 2005 Order, on the
24

ground that Metrobank’s right to exercise any act of dominion over the foreclosed properties had
already been recognized in the CA’s 30 January 2004 Decision in CA-G.R. SP No. 76147. 25
Insisting that the transfers of title in Metrobank’s name was violative of the Stay Order issued in 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. On 24 May 2006, said court’s Sixteenth Division rendered
26

the second assailed decision, dismissing TCEI’s petition for lack of merit on the ground that
Metrobank was already the owner of the foreclosed properties by the time the Stay Order was
issued on 8 October 2002. For this purpose, the CA took appropriate note of the fact that, in the 30
January 2004 Decision in CA-G.R. SP No. 76147, Metrobank’s ownership of the foreclosed
properties was considered consolidated for failure of TCEI to exercise its right of redemption within
three months from the foreclosure sale or the registration of the certificate of sale in accordance with
Sec. 47 of Republic Act (RA) No. 8791. Considering that said 30 January 2004 Decision had
27

already attained finality, the CA also ruled that the determinations therein made already amounted
to res judicata and that, as a consequence, TCEI’s petition for review was equivalent to forum
shopping. TCEI’s motion for reconsideration was likewise denied for lack of merit in the CA’s
28

Resolution dated 14 August 2006, hence its Rule 45 petition for review now docketed before us as
29

G.R. No. 174132. 30

In G.R. No. 173610, petitioners TCEI and the Spouses Campos seek the reversal of the CA’s 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 CA’s 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. A principal feature of corporate rehabilitation is the Stay Order which
31

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. Under
32

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 TCEI’s 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, petitioners argue that the subject properties
33

were placed in custodia legis upon approval of TCEI’s 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 debtor’s assets, should have been
34

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. By the time that the Rehabilitation Court issued the 8 October 2002 Stay Order in SEC Case
36

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 RTC’s 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, as amended, it has been consistently ruled that there is no reason to
37

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. The Stay Order issued by the
39

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 TCEI’s filing of its petition for
corporate rehabilitation on 1 October 2002.

In Equitable PCI Bank, Inc v. DNG Realty and Development Corporation, the Court upheld the
40

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 RCBC’s favor, the consolidation of title, and the issuance of the new titles in RCBC’s 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 TCEI’s 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. While it is true that
41

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, the rehabilitation receiver’s power to take possession,
42

control and custody of TCEI’s 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. It has been ruled that there is nothing in the concept of corporate rehabilitation that
43

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 TCEI’s 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,
Metrobank’s 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, the Court ruled that, after the
45

purchaser’s 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 RTC’s 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
nonadversarial and do not impair the debtor’s contracts or diminish the status of preferred
46 47

creditors. Concededly, the issuance of the Stay Order suspends the enforcement of all claims
48

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. This does not, however, apply to Metrobank which
49

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.

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 Order1 which states, in part, that the court was thereby:

xxx xxx xxx

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;

xxx xxx xxx

Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex

Parte motions2 filed by respondent Maynilad, issued the herein questioned Order3 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 Court’s 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 court’s 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 agreement5 which, among other
things, consisted of payments of petitioner’s mostly foreign loans.

To secure the concessionaire’s 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 Credit6 in the amount of US$120,000,000 in favor of MWSS for the full and prompt
performance of Maynilad’s 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 Maynilad’s 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 notice11 on November 24, 2003, to Citicorp International Limited, as agent for the
participating banks, that by virtue of Maynilad’s 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

PETITIONER’S 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 MAYNILAD’S 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 records13 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 court’s 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 Maynilad’s 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 Maynilad’s
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 Maynilad’s 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 Appeals16 that the concept of guarantee vis-à-
vis the concept of an irrevocable letter of credit are inconsistent with each other. The guarantee
theory destroys the independence of the bank’s 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 guarantor’s 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 documents18 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 Appeals23 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. Nery25 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 debtor’s 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 Appeals26 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 Agreement28 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

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.

The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act
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
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 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.
 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. Respondent’s 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.

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 and SET 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.

SO ORDERED.

G.R. No. 173846 February 2, 2011

JOSE MARCEL PANLILIO, ERLINDA PANLILIO, NICOLE MORRIS and MARIO T.

CRISTOBAL, Petitioners,
vs.
REGIONAL TRIAL COURT, BRANCH 51, CITY OF MANILA, represented by HON. PRESIDING
JUDGE ANTONIO M. ROSALES; PEOPLE OF THE PHILIPPINES; and the SOCIAL SECURITY
SYSTEM, Respondents.

DECISION

PERALTA, J.:
Before this Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court, seeking to
set aside the April 27, 2006 Decision2 and August 2, 2006 Resolution3 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 Order5 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

At the time, however, of the filing of the petition for rehabilitation, there were a number of criminal
charges7 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
Section 28 (h)8 of Republic Act 8282, or the Social Security Act of 1997 (SSS law), in relation to
Article 315 (1) (b)9 of the Revised Penal Code, or Estafa. Consequently, petitioners filed with the
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.

On December 13, 2004, Branch 51 issued an Order11 denying petitioners’ motion to suspend the
proceedings. It ruled that the stay order issued by Branch 24 did not cover criminal proceedings, to
wit:

xxxx

Clearly then, the issue is, whether the stay order issued by the RTC commercial court, Branch 24
includes the above-captioned criminal cases.

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.

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
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
Branch 51.

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 Court’s 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. Co24 (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 lauuphil

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.
 G.R. No. 206528, June 28, 2016

PHILIPPINE ASSET GROWTH TWO, INC. (SUCCESSOR-IN-INTEREST OF

PLANTERS DEVELOPMENT BANK) AND PLANTERS DEVELOPMENT
BANK, Petitioners, v. FASTECH SYNERGY PHILIPPINES, INC. (FORMERLY FIRST
ASIA SYSTEM TECHNOLOGY, INC.), FASTECH MICROASSEMBLY & TEST, INC.,
FASTECH ELECTRONIQUE, INC., AND FASTECH PROPERTIES, INC., Respondents.

DECISION

PERLAS-BERNABE, J.:

For the Court's resolution is a petition for review on certiorari1 assailing the
Decision2 dated September 28, 2012 and the Resolution3 dated March 5, 2013 of the
Court of Appeals (CA) in CA-G.R. SP No. 122836 which: (a) approved the Rehabilitation
Plan4 of respondents Fastech Synergy Philippines, Inc. (formerly First Asia System
Technology, Inc.) (Fastech Synergy), Fastech Microassembly & Test, Inc. (Fastech
Microassembly), Fastech Electronique, Inc. (Fastech Electronique), and Fastech
Properties, Inc. (Fastech Properties; collectively, respondents); (b) enjoined petitioner
Planters Development Bank (PDB) from effecting the foreclosure of respondents'
properties during the implementation thereof; and (c) remanded the case to the
Regional Trial Court (RTC) of Makati City, Branch 149 (RTC-Makati) to supervise its
implementation.

The Facts

On April 8, 2011, respondents filed a verified Joint Petition5 for corporate rehabilitation
(rehabilitation petition) before the RTC-Makati, with prayer for the issuance of a Stay or
Suspension Order,6 docketed as SP Case No. M-7130. They claimed that: (a) their
business operations and daily affairs are being managed by the same individuals;7 (b)
they share a majority of their common assets;8 and (c) they have common creditors
and common liabilities.9chanrobleslaw

Among the common creditors listed in the rehabilitation petition was PDB,10 which had
earlier filed a petition11 for extrajudicial foreclosure of mortgage over the two (2)
parcels of land, covered by Transfer Certificate of Title (TCT) Nos. T-45810212 and T-
45810313 and registered in the name of Fastech Properties (subject properties),14 listed
as common assets of respondents in the rehabilitation petition.15 The foreclosure sale
was held on April 13, 2011, with PDB emerging as the highest bidder.16 Respondents
claimed that this situation has impacted on their chance to recover from the losses they
have suffered over the years, since the said properties are being used by Fastech
Microassembly and Fastech Electronique17 in their business operations, and a source of
significant revenue for their owner-lessor, Fastech Properties.18 Hence, respondents
submitted for the court's approval their proposed Rehabilitation Plan,19 which sought:
(a) a waiver of all accrued interests and penalties; (b) a grace period of two (2) years
to pay the principal amount of respondents' outstanding loans, with the interests
accruing during the said period capitalized as part of the principal, to be paid over a
twelve (12)-year period after the grace period; and (c) an interest rate of four percent
(4%) and two percent (2%) per annum (p.a.) for creditors whose credits are secured
by real estate and chattel mortgages, respectively.20 chanrobleslaw
On April 19, 2011, the RTC-Makati issued a Commencement Order with Stay
Order,21 and appointed Atty. Rosario S. Bernaldo as Rehabilitation Receiver, which the
latter subsequently accepted.22 chanrobleslaw

After the initial hearing on May 18, 2011, and the filing of the comments/oppositions on
the rehabilitation petition,23 the RTC-Makati gave due course to the said petition, and,
thereafter, referred the same to the court-appointed Rehabilitation Receiver, who
submitted in due time her preliminary report,24 opining that respondents may be
rehabilitated, considering that their assets appear to be sufficient to cover their
liabilities, but reserved her comment to the Rehabilitation Plan's underlying
assumptions, financial goals, and procedures to accomplish said goals after the
submission of a revised rehabilitation plan as directed by the RTC-Makati,25 which
cralawred

respondents subsequently complied.26 chanrobleslaw

After the creditors had filed their respective comments and/or oppositions to the
revised Rehabilitation Plan, and respondents had submitted their consolidated
reply27 thereto, the court-appointed Rehabilitation Receiver submitted her
comments,28 opining that respondents may be successfully rehabilitated, considering
the sufficiency of their assets to cover their liabilities and the underlying assumptions,
financial projections and procedures to accomplish said goals in their Rehabilitation
Plan.29
chanrobleslaw

The RTC-Makati Ruling

In a Resolution30 dated December 9, 2011, the RTC-Makati dismissed the rehabilitation

petition despite the favorable recommendation of its appointed Rehabilitation Receiver.
It found the facts and figures submitted by respondents to be unreliable in view of the
disclaimer of opinion of the independent auditors who reviewed respondents' 2009
financial statements,31 which it considered as amounting to a "straightforward
unqualified adverse opinion."32 In the same vein, it did not give credence to the
unaudited 2010 financial statements as the same were mere photocopied documents
and unsigned by any of respondents' responsible officers.33 It also observed that
respondents added new accounts and/or deleted/omitted certain
accounts.34 Furthermore, it rejected the revised financial projections as the bases for
which were not submitted for its evaluation on the ground of confidentiality.35 chanrobleslaw

Aggrieved, respondents appealed36 to the CA, with prayer for the issuance of a
temporary restraining order (TRO) and/or a writ of preliminary injunction (WPI),
docketed as CA-G.R. SP No. 122836.

The Proceedings Before the CA

In a Resolution dated January 24, 2012, the CA issued a TRO37 so as not to render moot
and academic the case before it in view of PDB's pending Ex-Parte Petition for Issuance
of a Writ of Possession over the subject properties before the RTC of Bi�an, Laguna,
docketed as LRC Case No. B-5141.38 Thereafter, the CA issued a WPI39 on March 22,
2012.

On April 30, 2012, the court-appointed Rehabilitation Receiver submitted a

manifestation40 before the CA, maintaining that the rehabilitation of respondents is
viable since the financial projections and procedures set forth to accomplish the goals in
their Rehabilitation Plan are attainable.41 chanrobleslaw

After the creditors and respondents had filed their respective comments and reply to
the manifestation, the CA rendered a Decision42 dated September 28, 2012 (September
28, 2012 Decision), reversing and setting aside the RTC-Makati ruling.43 It ruled that
the RTC-Makati grievously erred in disregarding the report/opinion of the Rehabilitation
Receiver that respondents may be successfully rehabilitated, despite being highly
qualified to make an opinion on accounting in relation to rehabilitation matters.44 It
likewise observed that the RTC-Makati failed to distinguish the difference between an
adverse or negative opinion and a disclaimer or when an auditor cannot formulate an
opinion with exactitude for lack of sufficient data.45 Finally, the CA declared that the
Rehabilitation Plan is feasible and should be approved, finding that respondents would
be able to meet their obligations to their creditors within their operating cash profits
and other assets without disrupting their business operations, which will be beneficial to
their creditors, employees, stockholders, and the economy.46 chanrobleslaw

Accordingly, the CA reinstated the rehabilitation petition, approved respondents'

Rehabilitation Plan, and remanded the case to the RTC-Makati to supervise its
implementation. Considering that respondents' creditors are placed in equal footing as a
necessary consequence, it permanently enjoined PDB from "effecting the foreclosure" of
the subject properties during the implementation of the Rehabilitation Plan.47 chanrobleslaw

Dissatisfied, PDB filed a motion for reconsideration48 which was, however, denied in a
Resolution49 dated March 5, 2013 (March 5, 2013 Resolution).

In the interim, DivinaLaw entered50 its appearance as the new lead counsel of PDB, in
collaboration51 and with the conformity of its counsel of record, Janda Asia &
Associates.52 On April 3, 2013, DivinaLaw, on behalf of petitioner Philippine Asset
Growth Two, Inc. (PAGTI), filed a Motion for Substitution of Parties (motion for
substitution),53 averring that PAGTI had acquired PDB's claims and interests in the
instant case, hence, should be substituted as a party therein.

The Proceedings Before the Court

On April 18, 2013, PAGTI and PDB (petitioners), represented by DivinaLaw, filed the
instant petition, claiming that PDB received a copy of the March 5, 2013 Resolution on
April 3, 2013.54
chanrobleslaw

On July 10, 2013, respondents filed their Urgent Motion to Dismiss Petition for Review
on Certiorari for Being Filed Out of Time55 (urgent motion), positing that contrary to
petitioners' claim that PDB received notice of the March 5, 2013 Resolution on April 3,
2013, its counsel, Janda Asia & Associates, already received a Copy of the said
resolution on March 12, 2013. Thus, petitioners only had until March 27, 2013 to file a
petition for review on certiorari before the Court, and the petition filed on April 18,
2013 was filed out of time.56 chanrobleslaw

Meanwhile, the Court required respondents to file their comment57 to the petition, and
subsequently directed petitioners to submit their comment on respondents' urgent
motion, and reply to the latter's comment.58 chanrobleslaw

In their Comment,59 respondents prayed for the dismissal of the petition and reiterated
their stand that the same was filed out of time, arguing that the receipt of the March 5,
2013 Resolution on March 12, 2013 by Janda Asia & Associates, which remained as
collaborating counsel of PDB, binds petitioners and started the running of the fifteen
(15)-day period within which to file a petition for review on certiorari before the Court.
Thus, the petition filed on April 18, 2013 was filed beyond the reglementary
period.60 Respondents likewise maintained the viability of the rehabilitation plan, which
will benefit not only their employees, but their stockholders, creditors, and the general
public.61
chanrobleslaw

For their part, petitioners contended62 that: (a) the date of receipt of petitioners' lead
counsel, i.e., DivinaLaw's receipt of the March 5, 2013 Resolution, should be the
reckoning point of the fifteen (15)-day period within which to file the instant petition,
since only the lead counsel is entitled to service of court processes,63 citing the case
of Home Guaranty Corporation v. R-II Builders, Inc.;64 and (b) the CA erred in not
upholding the dismissal of the rehabilitation petition despite the insufficiency of the
Rehabilitation Plan which was based on financial statements that contained misleading
statements, and financial projections that are mere unfounded
assumptions/speculations.65 chanrobleslaw

Thereafter, respondents filed a Manifestation and Update (Re: Compliance to [the CA]
Decision dated September 28, 2012)66 before the Court, stating that it had achieved the
EBITDA67 requirement of the Rehabilitation Plan and made quarterly payments in favor
of the bank and non-bank creditors from December 28, 2014 to September 28, 2015,
totalling P27,119,481.79.68 However, the amount of P8,364,836.53 in favor of PDB was
not accepted, and is being held by respondents.69 chanrobleslaw

The Issues Before the Court

The essential issues for the Court's resolution are: (a) whether or not the petition for
review on certiorari was timely filed; and (b) the Rehabilitation Plan is feasible.
The Court's Ruling

I.
The Court first resolves the procedural issue anent the timeliness of the petition's filing.

It is a long-standing doctrine that where a party is represented by several counsels,

notice to one is sufficient, and binds the said party.70 Notice to any one of the several
counsels on record is equivalent to notice to all, and such notice starts the running of
the period to appeal notwithstanding that the other counsel on record has not received
a copy of the decision or resolution.71 chanrobleslaw

In the present case, PDB was represented by both Janda Asia & Associates and
DivinaLaw. It was not disputed that Janda Asia & Associates, which remained a counsel
of record, albeit, as collaborating counsel, received notice of the CA's March 5, 2013
Resolution on March 12, 2013. As such, it is from this date, and not from DivinaLaw's
receipt of the notice of said resolution on April 3, 2013 that the fifteen (15)-day
period72 to file the petition for review on certiorari before the Court started to run.
Hence, petitioners only had until March 27, 2013 to file a petition for review
on certiorari before the Court, and the petition filed on April 18, 2013 was filed out of
time. Notably, there is no showing that the CA had already resolved PAGTI's motion for
substitution;73 hence, it remained bound by the proceedings and the judgment rendered
against its transferor, PDB.

Generally, the failure to perfect an appeal in the manner and within the period provided
for by law renders the decision appealed from final and executory,74 and beyond the
competence of the Court to review. However, the Court has repeatedly relaxed this
procedural rule in the higher interest of substantial justice. In Barnes v. Padilla,75 it was
held that:ChanRoblesVirtualawlibrary

[A] final and executory judgment can no longer be attacked by any of the parties or be
modified, directly or indirectly, even by the highest court of the land.

However, this Court has relaxed this rule in order to serve substantial justice[,]
considering (a) matters of life, liberty, honor or property, (b) the existence of special or
compelling circumstances, (c) the merits of the case, (d) a cause not entirely
attributable to the fault or negligence of the party favored by the suspension of the
rules, (e) a lack of any showing that the review sought is merely frivolous and dilatory,
and (f) the other party will not be unjustly prejudiced thereby.76 chanroblesvirtuallawlibrary

After a meticulous scrutiny of this case, the Court finds that the unjustified
rehabilitation of respondents, by virtue of the CA ruling if so allowed to prevail,
warrants the relaxation of the procedural rule violated by petitioners in the higher
interest of substantial justice. The reasons therefor are hereunder explained.

II.

Rehabilitation is statutorily defined under Republic Act No. 10142,77 otherwise known as
the "Financial Rehabilitation and Insolvency Act of 2010" (FRIA), as follows: ChanRoblesVirtualawlibrary

Section 4. Definition of Terms. - As used in this Act, the term: x x x x

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of

successful operation and solvency, if it is shown that its continuance of operation is
economically feasible and its creditors can recover by way of the present value of
payments projected in the plan, more if the debtor continues as a going concern than if
it is immediately liquidated. (Emphasis supplied)
Case law explains that 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.78 Thus, the basic issues in rehabilitation proceedings
concern the viability and desirability of continuing the business operations of the
distressed corporation,79 all with a view of effectively restoring it to a state of solvency
or to its former healthy financial condition through the adoption of a rehabilitation plan.

III.

In the present case, however, the Rehabilitation Plan failed to comply with the
minimum requirements, i.e.: (a) material financial commitments to support the
rehabilitation plan; and (b) a proper liquidation analysis, under Section 18, Rule 3 of
the 2008 Rules of Procedure on Corporate Rehabilitation80 (Rules), which Rules were in
force at the time respondents' rehabilitation petition was filed on April 8, 2011:
ChanRoblesVirtualawlibrary

Section 18. Rehabilitation Plan. - The rehabilitation plan shall include (a) the desired
business targets or goals and the duration and coverage of the rehabilitation; (b) the
terms and conditions of such rehabilitation which shall include the manner of its
implementation, giving due regard to the interests of secured creditors such as, but not
limited, to the non-impairment of their security liens or interests; (c) the material
financial commitments to support the rehabilitation plan; (d) the means for the
execution of the rehabilitation plan, which may include debt to equity conversion,
restructuring of the debts, dacion en pago or sale or exchange or any disposition of
assets or of the interest of shareholders, partners or members; (e) a liquidation
analysis setting out for each creditor that the present value of payments it
would receive under the plan is more than that which it would receive if the
assets of the debtor were sold by a liquidator within a six-month period from
the estimated date of filing of the petition; and (f) such other relevant information
to enable a reasonable investor to make an informed decision on the feasibility of the
rehabilitation plan. (Emphases supplied)
The Court expounds.

A. Lack of Material Financial Commitment to Support the Rehabilitation Plan.

A material financial commitment becomes significant in gauging the resolve,

determination, earnestness, and good faith of the distressed corporation in financing
the proposed rehabilitation plan. This commitment may include the voluntary
undertakings of the stockholders or the would-be investors of the debtor-corporation
indicating their readiness, willingness, and ability to contribute funds or property to
guarantee the continued successful operation of the debtor-corporation during
the period of rehabilitation.81 chanrobleslaw

In this case, respondents' Chief Operating Officer, Primo D. Mateo, Jr., in his executed
Affidavit of General Financial Condition82 dated April 8, 2011, averred that
respondents will not require the infusion of additional capital as he, instead, proposed
to have all accrued penalties, charges, and interests waived, and a reduced interest
rate prospectively applied to all respondents' obligations, in addition to the
implementation of a two (2)-year grace period.83 Thus, there appears to be no concrete
plan to build on respondents' beleaguered financial position through substantial
investments as the plan for rehabilitation appears to be pegged merely on financial
reprieves. Anathema to the true purpose of rehabilitation, a distressed corporation
cannot be restored to its former position of successful operation and regain solvency by
the sole strategy of delaying payments/waiving accrued interests and penalties at the
expense of the creditors.

The Court also notes that while respondents have substantial total assets, a large
portion of the assets of Fastech Synergy84 and Fastech Properties85 is comprised of
noncurrent assets,86 such as advances to affiliates which include Fastech
Microassembly,87 and investment properties which form part of the common assets of
Fastech Properties, Fastech Electronique, and Fastech Microassembly.88 Moreover, while
there is a claim that unnamed customers have made investments by way of consigning
production equipment, and advancing money to fund procurement of various equipment
intended to increase production capacity,89 this can hardly be construed as a material
financial commitment which would inspire confidence that the rehabilitation would turn
out to be successful. Case law holds that nothing short of legally binding investment
commitment/s from third parties is required to qualify as a material financial
commitment.90 Here, no such binding investment was presented.

B. Lack of Liquidation Analysis.

Respondents likewise failed to include any liquidation analysis in their Rehabilitation

Plan. The total liquidation assets and the estimated liquidation return to the creditors,
as well as the fair market value vis-a-vis the forced liquidation value of the fixed assets
were not shown. As such, the Court could not ascertain if the petitioning debtor's
creditors can recover by way of the present value of payments projected in the plan,
more if the debtor continues as a going concern than if it is immediately liquidated. This
is a crucial factor in a corporate rehabilitation case, which the CA, unfortunately, failed
to address.

C. Effect of Non-Compliance.

The failure of the Rehabilitation Plan to state any material financial commitment to
support rehabilitation, as well as to include a liquidation analysis, renders the CA's
considerations for approving the same, i.e., that: (a) respondents would be able to
meet their obligations to their creditors within their operating cash profits and other
assets without disrupting their business operations; (b) the Rehabilitation Receiver's
opinion carries great weight; and (c) rehabilitation will be beneficial for respondents'
creditors, employees, stockholders, and the economy,91 as actually unsubstantiated,
and hence, insufficient to decree the feasibility of respondents' rehabilitation. It is well
to emphasize that the remedy of rehabilitation should be denied to corporations that do
not qualify under the Rules. Neither should it be allowed to corporations whose sole
purpose is to delay the enforcement of any of the rights of the creditors.

Even if the Court were to set aside the failure of the Rehabilitation Plan to comply with
the fundamental requisites of material financial commitment to support the
rehabilitation and an accompanying liquidation analysis, a review of the financial
documents presented by respondents fails to convince the Court of the feasibility of the
proposed plan.

IV.

The test in evaluating the economic feasibility of the plan was laid down in Bank of the
Philippine Islands v. Sarabia Manor Hotel Corporation 92 (Bank of the Philippine Islands),
to wit:
ChanRoblesVirtualawlibrary

In order to determine the feasibility of a proposed rehabilitation plan, it is imperative

that a thorough examination and analysis of the distressed corporation's 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.93 chanroblesvirtuallawlibrary

In the recent case of Viva Shipping Lines, Inc. v. Keppel Philippines Mining, Inc.,94 the
Court took note of the characteristics of an economically feasible rehabilitation plan as
opposed to an infeasible rehabilitation plan: ChanRoblesVirtualawlibrary

Professor Stephanie V. Gomez of the University of the Philippines College of Law

suggests specific characteristics of an economically feasible rehabilitation plan:

a. The debtor has assets that can generate more cash if used in its daily
operations than if sold.

b. Liquidity issues can be addressed by a practicable business plan that will

generate enough cash to sustain daily operations.

c. The debtor has a definite source of financing for the proper and full
implementation of a Rehabilitation Plan that is anchored on realistic
assumptions and goals.

These requirements put emphasis on liquidity: the cash flow that the distressed
corporation will obtain from rehabilitating its assets and operations. A corporation's
assets may be more than its current liabilities, but some assets may be in the form of
land or capital equipment, such as machinery or vessels. Rehabilitation sees to it that
these assets generate more value if used efficiently rather than if liquidated.

On the other hand, this court enumerated the characteristics of a rehabilitation plan
that is infeasible:
chanRoblesvirtualLawlibrary

(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.

In addition to the tests of economic feasibility, Professor Stephanie V. Gomez also

suggests that the Financial and Rehabilitation and Insolvency Act of 2010 emphasizes
on rehabilitation that provides for better present value recovery for its creditors.

Present value recovery acknowledges that, in order to pave way for rehabilitation, the
creditor will not be paid by the debtor when the credit falls due. The court may order a
suspension of payments to set a rehabilitation plan in motion; in the meantime, the
creditor remains unpaid. By the time the creditor is paid, the financial and economic
conditions will have been changed. Money paid in the past has a different value in the
future. It is unfair if the creditor merely receives the face value of the debt. Present
value of the credit takes into account the interest that the amount of money would
have earned if the creditor were paid on time.

Trial courts must ensure that the projected cash flow from a business' rehabilitation
plan allows for the closest present value recovery for its creditors. If the projected cash
flow is realistic and allows the corporation to meet all its obligations, then courts should
favor rehabilitation over liquidation. However, if the projected cash flow is unrealistic,
then courts should consider converting the proceedings into that for liquidation to
protect the creditors.95chanroblesvirtuallawlibrary

A perusal of the 2009 audited financial statements shows that respondents' cash
operating position96 was not even enough to meet their maturing obligations. Notably,
their current assets were materially lower than their current liabilities,97 and consisted
mostly of advances to related parties in the case of Fastech Microassembly, Fastech
Electronique, and Fastech Properties.98 Moreover, the independent auditors recognized
the absence of available historical or reliable market information to support the
assumptions made by the management to determine the recoverable amount (value in
use) of respondents' properties and equipment.99 chanrobleslaw

On the other hand, respondents' unaudited financial statements for the year 2010, and
the months of February and March 2011 were unaccompanied by any notes or
explanation on how the figures were arrived at. Besides, respondents' cash operating
position remained insufficient to meet their maturing obligations as their current assets
are still substantially lower than their current liabilities.100 The Court also notes the RTC-
Makati's observation that respondents added new accounts and/or deleted/omitted
certain accounts,101 but failed to explain or justify the same.

Verily, respondents' Rehabilitation Plan should have shown that they have enough
serviceable assets to be able to continue its business operation. In fact, as opposed to
this objective, the revised Rehabilitation Plan still requires "front load Capex spending"
to replace common equipment and facility equipment to ensure sustainability of
capacity and capacity robustness,102 thus, further sacrificing respondents' cash flow. In
addition, the Court is hard-pressed to see the effects of the outcome of the streamlining
of respondents' manufacturing operations on the carrying value of their existing
properties and equipment.

In fine, the Rehabilitation Plan and the financial documents submitted in support
thereof fail to show the feasibility of rehabilitating respondents' business.

V.

The CA's reliance on the expertise of the court-appointed Rehabilitation Receiver, who
opined that respondents' rehabilitation is viable, in order to justify its finding that the
financial statements submitted were reliable, overlooks the fact that the determination
of the validity and the approval of the rehabilitation plan is not the responsibility of the
rehabilitation receiver, but remains the function of the court. The rehabilitation
receiver's duty prior to the court's approval of the plan is to study the best way to
rehabilitate the debtor, and to ensure that the value of the debtor's properties is
reasonably maintained; and after approval, to implement the rehabilitation
plan.103 Notwithstanding the credentials of the court-appointed rehabilitation receiver,
the duty to determine the feasibility of the rehabilitation of the debtor rests with the
court. While the court may consider the receiver's report favorably recommending the
debtor's rehabilitation, it is not bound thereby if, in its judgment, the debtor's
rehabilitation is not feasible.

The purpose of rehabilitation proceedings is not only to enable the company to gain a
new lease on life, but also to allow creditors to be paid their claims from its earnings
when so rehabilitated. Hence, the remedy must be accorded only after a judicious
regard of all stakeholders' interests; it is not a one-sided tool that may be graciously
invoked to escape every position of distress.104 Thus, the remedy of rehabilitation
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: (a) the absence of a sound and workable business plan;
(b) baseless and unexplained assumptions, targets, and goals; and (c) speculative
capital infusion or complete lack thereof for the execution of the business plan,105 as in
this case.

VI.

In view of all the foregoing, the Court is therefore constrained to grant the instant
petition, notwithstanding the preliminary technical error as above-discussed. A
distressed corporation should not be rehabilitated when the results of the financial
examination and analysis clearly indicate that there lies no reasonable probability that it
may be revived, to the detriment of its numerous stakeholders which include not only
the corporation's creditors but also the public at large. In Bank of the Philippine
Islands:106
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
corporation's stockholders, its creditors, and even the general public.107chanroblesvirtuallawlibrary

Thus, the higher interest of substantial justice will be better subserved by the reversal
of the CA Decision. Since the rehabilitation petition should not have been granted in the
first place, it is of no moment that the Rehabilitation Plan is currently under
implementation. While payments in accordance with the Rehabilitation Plan were
already made, the same were only possible because of the financial reprieves and
protracted payment schedule accorded to respondents, which, as above-intimated, only
works at the expense of the creditors and ultimately, do not meet the true purpose of
rehabilitation.

WHEREFORE, the petition is GRANTED. The Decision dated September 28, 2012 and
the Resolution dated March 5, 2013 of the Court of Appeals in CA-G.R. SP No. 122836
are hereby REVERSED and SET ASIDE. Accordingly, the Joint Petition for corporate
rehabilitation filed by respondents Fastech Synergy Philippines, Inc. (formerly First Asia
System Technology, Inc.), Fastech Microassembly & Test, Inc., Fastech Electronique,
Inc., and Fastech Properties, Inc., before the Regional Trial Court of Makati City, Branch
149 in SP Case No. M-7130 is DISMISSED.

SO ORDERED. cha
 G.R. No. 172302, February 18, 2014

PRYCE CORPORATION, Petitioner, v. CHINA BANKING

CORPORATION, Respondent.

RESOLUTION

LEONEN, J.:

This case resolves conflicting decisions between two divisions. Only one may serve as
res judicata or a bar for the other to proceed. This case also settles the doctrine as to
whether a hearing is needed prior to the issuance of a stay order in corporate
rehabilitation proceedings.

The present case originated from a petition for corporate rehabilitation filed by
petitioner Pryce Corporation on July 9, 2004 with the Regional Trial Court of Makati,
Branch 138.1

The rehabilitation court found the petition sufficient in form and substance and issued a
stay order on July 13, 2004 appointing Gener T. Mendoza as rehabilitation receiver.2

On September 13, 2004, the rehabilitation court gave due course to the petition and
directed the rehabilitation receiver to evaluate and give recommendations on petitioner
Pryce Corporation�s proposed rehabilitation plan attached to its petition.3

The rehabilitation receiver did not approve this plan and submitted instead an amended
rehabilitation plan, which the rehabilitation court approved by order dated January 17,
2005.4 In its disposition, the court found petitioner Pryce Corporation �eligible to be
placed in a state of corporate rehabilitation.�5 The disposition likewise identified the
assets to be held and disposed of by petitioner Pryce Corporation and the manner by
which its liabilities shall be paid and liquidated.6

On February 23, 2005, respondent China Banking Corporation elevated the case to the
Court of Appeals. Its petition questioned the January 17, 2005 order that included the
following terms: chanRoblesvirtualLawlibrary

1. The indebtedness to China Banking Corporation and Bank of the Philippine Islands as well
as the long term commercial papers will be paid through a dacion en pago of developed real
estate assets of the petitioner.
� �
� xxx
� �
4. All accrued penalties are waived[.]
� �
5. Interests shall accrue only up to July 13, 2004, the date of issuance of the stay order[.]
� �
6. No interest will accrue during the pendency of petitioner�s corporate rehabilitation[.]
� �
7. Dollar�denominated loans will be converted to Philippine Pesos on the date of the
issuance of this Order using the reference rate of the Philippine Dealing System as of this
 date.7
Respondent China Banking Corporation contended that the rehabilitation plan�s
approval impaired the obligations of contracts. It argued that neither the provisions of
Presidential Decree No. 902�A nor the Interim Rules of Procedure on Corporate
Rehabilitation (Interim Rules) empowered commercial courts �to render without force
and effect valid contractual stipulations.�8 Moreover, the plan�s approval
authorizing dacion en pago of petitioner Pryce Corporation�s properties without
respondent China Banking Corporation�s consent not only violated �mutuality of
contract and due process, but [was] also antithetical to the avowed policies of the state
to maintain a competitive financial system.�9

The Bank of the Philippine Islands (BPI), another creditor of petitioner Pryce
Corporation, filed a separate petition with the Court of Appeals assailing the same order
by the rehabilitation court. BPI called the attention of the court �to the
non�impairment clause and the mutuality of contracts purportedly ran roughshod by
the [approved rehabilitation plan].�10

On July 28, 2005, the Court of Appeals Seventh (7th ) Division11 granted respondent
China Banking Corporation�s petition, and reversed and set aside the rehabilitation
court�s: (1) July 13, 2004 stay order that also appointed Gener T. Mendoza as
rehabilitation receiver; (2) September 13, 2004 order giving due course to the petition
and directing the rehabilitation receiver to evaluate and give recommendations on
petitioner Pryce Corporation�s proposed rehabilitation plan; and (3) January 17,
2005 order finding petitioner Pryce Corporation eligible to be placed in a state of
corporate rehabilitation, identifying assets to be disposed of, and determining the
manner of liquidation to pay the liabilities.12

With respect to BPI�s separate appeal, the Court of Appeals First (1st )
Division13 granted its petition initially and set aside the January 17, 2005 order of the
rehabilitation court in its decision dated May 3, 2006.14 On reconsideration, the court
issued a resolution dated May 23, 2007 setting aside its original decision and dismissing
the petition.15 BPI elevated the case to this court, docketed as G.R. No. 180316. By
resolution dated January 30, 2008, the First (1st ) Division of this court denied the
petition.16 By resolution dated April 28, 2008, this court denied reconsideration with
finality.17

Meanwhile, petitioner Pryce Corporation also appealed to this court assailing the July
28, 2005 decision of the Court of Appeals Seventh (7th ) Division granting respondent
China Banking Corporation�s petition as well as the resolution denying its motion for
reconsideration.

In the decision dated February 4, 2008,18 the First (1st ) Division of this court denied its
petition with the dispositive portion as follows: chanRoblesvirtualLawlibrary

WHEREFORE, we DENY the petition. The assailed Decision of the Court of Appeals in
CA�G.R. SP No. 88479 is AFFIRMED with the modification discussed above. Let the
records of this case be REMANDED to the RTC, Branch 138, Makati City, sitting as
Commercial Court, for further proceedings with dispatch to determine the merits of the
petition for rehabilitation. No costs.19
ChanRoblesVirtualawlibrary

Petitioner Pryce Corporation filed an omnibus motion for (1) reconsideration or (2)
partial reconsideration and (3) referral to the court En Banc dated February 29, 2008.
Respondent China Banking Corporation also filed a motion for reconsideration on even
date, praying that the February 4, 2008 decision be set aside and reconsidered only
insofar as it ordered the remand of the case for further proceedings �to determine
whether petitioner�s financial condition is serious and whether there is clear and
imminent danger that it will lose its corporate assets.�20

By resolution dated June 16, 2008, this court denied with finality the separate motions
for reconsideration filed by the parties.

On September 10, 2008, petitioner Pryce Corporation filed a second motion for
reconsideration praying that the Court of Appeals� decision dated February 4, 2008
be set aside.

The First Division of this court referred this case to the En Banc en consulta by
resolution dated June 22, 2009.21 The court En Banc, in its resolution dated April 13,
2010, resolved to accept this case.22

On July 30, 2013, petitioner Pryce Corporation and respondent China Banking
Corporation, through their respective counsel, filed a joint manifestation and motion to
suspend proceedings. The parties requested this court to defer its ruling on petitioner
Pryce Corporation�s second motion for reconsideration �so as to enable the parties
to work out a mutually acceptable arrangement.�23

By resolution dated August 6, 2013, this court granted the motion but only for two (2)
months. The registry receipts showed that counsel for respondent China Banking
Corporation and counsel for petitioner Pryce Corporation received their copies of this
resolution on September 5, 2013.24

More than two months had lapsed since September 5, 2013, but no agreement was
filed by the parties. Thus, we proceed to rule on petitioner Pryce Corporation�s
second motion for reconsideration.

This motion raises two grounds.

First, petitioner Pryce Corporation argues that the issue on the validity of the
rehabilitation court orders is now res judicata. Petitioner Pryce Corporation submits that
the ruling in BPI v. Pryce Corporation docketed as G.R. No. 180316 contradicts the
present case, and it has rendered the issue on the validity and regularity of the
rehabilitation court orders as res judicata.25
cralawred

Second, petitioner Pryce Corporation contends that Rule 4, Section 6 of the Interim
Rules of Procedure on Corporate Rehabilitation26 does not require the rehabilitation
court to hold a hearing before issuing a stay order. Considering that the Interim Rules
was promulgated later than Rizal Commercial Banking Corp. v. IAC27 that enunciated
the �serious situations� test,28 petitioner Pryce Corporation argues that the test
has effectively been abandoned by the �sufficiency in form and substance test�
under the Interim Rules.29

The present second motion for reconsideration involves the following issues:
 I. Whether the issue on the validity of the rehabilitation order dated January 17,
2005 is now res judicata in light of BPI v. Pryce Corporation docketed as G.R.
No. 180316;

II. Whether the rehabilitation court is required to hold a hearing to comply with the
�serious situations� test laid down in the case of Rizal Commercial Banking
Corp. v. IAC before issuing a stay order.

We proceed to discuss the first issue.

BPI v. Pryce Corporation docketed as G.R. No. 180316 rendered the issue on the
validity of the rehabilitation court�s January 17, 2005 order approving the amended
rehabilitation plan as res judicata.

In BPI v. Pryce Corporation, the Court of Appeals set aside initially the January 17,
2005 order of the rehabilitation court.30 On reconsideration, the court set aside its
original decision and dismissed the petition.31 On appeal, this court denied the petition
filed by BPI with finality. An entry of judgment was made for BPI v. Pryce
Corporation on June 2, 2008.32 In effect, this court upheld the January 17, 2005 order
of the rehabilitation court.

According to the doctrine of res judicata, �a final judgment or decree on the merits
by a court of competent jurisdiction is conclusive of the rights of the parties or their
privies in all later suits on all points and matters determined in the former suit.�33

The elements for res judicata to apply are as follows: (a) the former judgment was
final; (b) the court that rendered it had jurisdiction over the subject matter and the
parties; (c) the judgment was based on the merits; and (d) between the first and the
second actions, there was an identity of parties, subject matters, and causes of action.34

Res judicata embraces two concepts: (1) bar by prior judgment35 and (2)
conclusiveness of judgment.36

Bar by prior judgment exists �when, as between the first case where the judgment
was rendered and the second case that is sought to be barred, there is identity of
parties, subject matter, and causes of action.�37

On the other hand, the concept of conclusiveness of judgment finds application

�when a fact or question has been squarely put in issue, judicially passed upon, and
adjudged in a former suit by a court of competent jurisdiction.�38 This principle only
needs identity of parties and issues to apply.39

The elements of res judicata through bar by prior judgment are present in this case.

On the element of identity of parties, res judicata does not require absolute identity of
parties as substantial identity is enough.40 Substantial identity of parties exists �when
there is a community of interest between a party in the first case and a party in the
second case, even if the latter was not impleaded in the first case.�41 Parties that
represent the same interests in two petitions are, thus, considered substantial identity
of parties for purposes of res judicata.42 Definitely, one test to determine substantial
identity of interest would be to see whether the success or failure of one party
materially affects the other.

In the present case, respondent China Banking Corporation and BPI are creditors of
petitioner Pryce Corporation and are both questioning the rehabilitation court�s
approval of the amended rehabilitation plan. Thus, there is substantial identity of
parties since they are litigating for the same matter and in the same capacity as
creditors of petitioner Pryce Corporation.

There is no question that both cases deal with the subject matter of petitioner Pryce
Corporation�s rehabilitation. The element of identity of causes of action also exists.

In separate appeals, respondent China Banking Corporation and BPI questioned the
same January 17, 2005 order of the rehabilitation court before the Court of Appeals.

Since the January 17, 2005 order approving the amended rehabilitation plan was
affirmed and made final in G.R. No. 180316, this plan binds all creditors, including
respondent China Banking Corporation.

In any case, the Interim Rules or the rules in effect at the time the petition for
corporate rehabilitation was filed in 2004 adopts the cram�down principle which
�consists of two things: (i) approval despite opposition and (ii) binding effect of the
approved plan x x x.�43

First, the Interim Rules allows the rehabilitation court44 to �approve a rehabilitation
plan even over the opposition of creditors holding a majority of the total liabilities of the
debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition
of the creditors is manifestly unreasonable.�45

Second, it also provides that upon approval by the court, the rehabilitation 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.�46

Thus, the January 17, 2005 order approving the amended rehabilitation plan, now final
and executory resulting from the resolution of BPI v. Pryce Corporation docketed as
G.R. No. 180316, binds all creditors including respondent China Banking Corporation.

This judgment in BPI v. Pryce Corporation covers necessarily the rehabilitation

court�s September 13, 2004 order giving due course to the petition. The general rule
precluding relitigation of issues extends to questions implied necessarily in the final
judgment, viz: chanRoblesvirtualLawlibrary

The general rule precluding the relitigation of material facts or questions which were in
issue and adjudicated in former action are commonly applied to all matters essentially
connected with the subject matter of the litigation. Thus, it extends to questions
necessarily implied in the final judgment, although no specific finding may have been
made in reference thereto and although such matters were directly referred to in the
pleadings and were not actually or formally presented. x x x.47 ChanRoblesVirtualawlibrary
The dispositive portion of the Court of Appeals� decision in BPI v. Pryce Corporation,
reversed on reconsideration, only mentioned the January 17, 2005 order of the
rehabilitation court approving the amended rehabilitation plan. Nevertheless, the
affirmation of its validity necessarily included the September 13, 2004 order as this
earlier order gave due course to the petition and directed the rehabilitation receiver to
evaluate and give recommendations on the rehabilitation plan proposed by petitioner.48

In res judicata, the primacy given to the first case is related to the principle of
immutability of final judgments essential to an effective and efficient administration of
justice, viz:
chanRoblesvirtualLawlibrary

x x x [W]ell�settled is the principle that a decision that has acquired finality

becomes immutable and unalterable and may no longer be modified in any respect
even if the modification is meant to correct erroneous conclusions of fact or law and
whether it will be made by the court that rendered it or by the highest court of the
land.

The reason for this is that litigation must end and terminate sometime and somewhere,
and it is essential to an effective and efficient administration of justice that,
once a judgment has become final, the winning party be not deprived of the fruits of
the verdict. Courts must guard against any scheme calculated to bring about that result
and must frown upon any attempt to prolong the controversies.

The only exceptions to the general rule are the correction of clerical errors, the
so�called nunc pro tunc entries which cause no prejudice to any party, void
judgments, and whenever circumstances transpire after the finality of the decision
rendering its execution unjust and inequitable.49 (Emphasis provided) chanroblesvirtualawlibrary

Generally, the later case is the one abated applying the maxim qui prior est tempore,
potior est jure (he who is before in time is the better in right; priority in time gives
preference in law).50 However, there are limitations to this rule as discussed
in Victronics Computers, Inc. v. Regional Trial Court, Branch 63, Makati:51
In our jurisdiction, the law itself does not specifically require that the pending action
which would hold in abatement the other must be a pending prior action. Thus,
in Teodoro vs. Mirasol, this Court observed: chanRoblesvirtualLawlibrary

It is to be noted that the Rules do not require as a ground for dismissal of a complaint
that there is a prior pending action. They provide that there is a pending action,
not a pending prior action. The fact that the unlawful detainer suit was of a later
date is no bar to the dismissal of the present action. We find, therefore, no error in the
ruling of the court a quo that plaintiff�s action should be dismissed on the ground of
the pendency of another more appropriate action between the same parties and for the
same cause.
In Roa�Magsaysay vs. Magsaysay, wherein it was the first case which was abated,
this Court ruled: chanRoblesvirtualLawlibrary

In any event, since We are not really dealing with jurisdiction but mainly with venue,
considering both courts concerned do have jurisdiction over the causes of action of the
parties herein against each other, the better rule in the event of conflict between
two courts of concurrent jurisdiction as in the present case, is to allow the
litigation to be tried and decided by the court which, under the circumstances
obtaining in the controversy, would, in the mind of this Court, be in a better
position to serve the interests of justice, considering the nature of the
controversy, the comparative accessibility of the court to the parties, having in
view their peculiar positions and capabilities, and other similar factors. Without
in any manner casting doubt as to the capacity of the Court of First Instance of
Zambales to adjudicate properly cases involving domestic relations, it is easy to see
that the Juvenile and Domestic Relations Court of Quezon City which was created in
order to give specialized attention to family problems, armed as it is with adequate and
corresponding facilities not available to ordinary courts of first instance, would be able
to attend to the matters here in dispute with a little more degree of expertise and
experience, resulting in better service to the interests of justice. A reading of the
causes of action alleged by the contending spouses and a consideration of their nature,
cannot but convince Us that, since anyway, there is an available Domestic Court that
can legally take cognizance of such family issues, it is better that said Domestic Court
be the one chosen to settle the same as the facts and the law may warrant.
We made the same pronouncement in Ramos vs. Peralta: chanRoblesvirtualLawlibrary

Finally, the rule on litis pendentia does not require that the later case should
yield to the earlier case. What is required merely is that there be another pending
action, not a prior pending action. Considering the broader scope of inquiry involved in
Civil Case No. 4102 and the location of the property involved, no error was committed
by the lower court in deferring to the Bataan court�s jurisdiction.
An analysis of these cases unravels the ratio for the rejection of the
priority�in�time rule and establishes the criteria to determine which action should
be upheld and which is to be abated. In Teodoro, this Court used the criterion of
the more appropriate action. We ruled therein that the unlawful detainer case, which
was filed later, was the more appropriate action because the earlier case � for
specific performance or declaratory relief � filed by the lessee (Teodoro) in the Court
of First Instance (CFI) to seek the extension of the lease for another two (2) years or
the fixing of a longer term for it, was �prompted by a desire on plaintiff�s part to
anticipate the action for unlawful detainer, the probability of which was apparent from
the letter of the defendant to the plaintiff advising the latter that the contract of lease
expired on October 1, 1954.� The real issue between the parties therein was whether
or not the lessee should be allowed to continue occupying the leased premises under a
contract the terms of which were also the subject matter of the unlawful detainer case.
Consonant with the doctrine laid down in Pue vs. Gonzales and Lim Si vs. Lim, the right
of the lessee to occupy the land leased against the lessor should be decided under Rule
70 of the Rules of Court; the fact that the unlawful detainer case was filed later then of
no moment. Thus, the latter was the more appropriate action.

xxx

In Roa�Magsaysay[,] the criterion used was the consideration of

the interest of justice. In applying this standard, what was asked was which court
would be �in a better position to serve the interests of justice,� taking into account
(a) the nature of the controversy, (b) the comparative accessibility of the court to the
parties and (c) other similar factors. While such a test was enunciated therein, this
Court relied on its constitutional authority to change venue to avoid a miscarriage of
justice.

It is interesting to note that in common law, as earlier adverted to, and pursuant to
the Teodoro vs. Mirasol case, the bona fides or good faith of the parties is a
crucial element. In the former, the second case shall not be abated if not brought to
harass or vex; in the latter, the first case shall be abated if it is merely an anticipatory
action or, more appropriately, an anticipatory defense against an expected suit � a
clever move to steal the march from the aggrieved party.52 (Emphasis provided and
citations omitted)chanroblesvirtualawlibrary

None of these situations are present in the facts of this instant suit. In any case, it is
the better part of wisdom in protecting the creditors if the corporation is rehabilitated.

We now proceed to the second issue on whether the rehabilitation court is required to
hold a hearing to comply with the �serious situations� test laid down in Rizal
Commercial Banking Corp. v. IAC before issuing a stay order.

The rehabilitation court complied with the Interim Rules in its order dated July 13, 2004
on the issuance of a stay order and appointment of Gener T. Mendoza as rehabilitation
receiver.53

The 1999 Rizal Commercial Banking Corp. v. IAC54 case provides for the �serious
situations� test in that the suspension of claims is counted only upon the
appointment of a rehabilitation receiver,55 and certain situations serious in nature must
be shown to exist before one is appointed, viz: chanRoblesvirtualLawlibrary

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.56 ChanRoblesVirtualawlibrary

However, this case had been promulgated prior to the effectivity of the Interim Rules
that took effect on December 15, 2000.

Section 6 of the Interim Rules states explicitly that �[i]f 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 (a) appointing a Rehabilitation Receiver and fixing his
bond; (b) staying enforcement of all claims x x x.�57

Compliant with the rules, the July 13, 2004 stay order was issued not later than five (5)
days from the filing of the petition on July 9, 2004 after the rehabilitation court found
the petition sufficient in form and substance.

We agree that when a petition filed by a debtor �alleges all the material facts and
includes all the documents required by Rule 4�2 [of the Interim Rules],�58 it is
sufficient in form and substance.

Nowhere in the Interim Rules does it require a comprehensive discussion in the stay
order on the court�s findings of sufficiency in form and substance.

The stay order and appointment of a rehabilitation receiver dated July 13, 2004 is an
�extraordinary, preliminary, ex parte remed[y].�59 The effectivity period of a stay
order is only �from the date of its issuance until dismissal of the petition or
termination of the rehabilitation proceedings.�60 It is not a final disposition of the
case. It is an interlocutory order defined as one that �does not finally dispose of the
case, and does not end the Court�s task of adjudicating the parties� contentions
and determining their rights and liabilities as regards each other, but obviously
indicates that other things remain to be done by the Court.�61

Thus, it is not covered by the requirement under the Constitution that a decision must
include a discussion of the facts and laws on which it is based.62

Neither does the Interim Rules require a hearing before the issuance of a stay order.
What it requires is an initial hearing before it can give due course to63 or dismiss64 a
petition.

Nevertheless, while the Interim Rules does not require the holding of a hearing before
the issuance of a stay order, neither does it prohibit the holding of one. Thus, the trial
court has ample discretion to call a hearing when it is not confident that the allegations
in the petition are sufficient in form and substance, for so long as this hearing is held
within the five (5)�day period from the filing of the petition � the period within
which a stay order may issue as provided in the Interim Rules.

One of the important objectives of the Interim Rules is �to promote a speedy
disposition of corporate rehabilitation cases[,] x x x apparent from the strict time
frames, the non�adversarial nature of the proceedings, and the prohibition of certain
kinds of pleadings.�65 It is in light of this objective that a court with basis to issue a
stay order must do so not later than five (5) days from the date the petition was filed.66

Moreover, according to the November 17, 2000 memorandum submitted by the

Supreme Court Committee on the Interim Rules of Procedure on Corporate
Rehabilitation: chanRoblesvirtualLawlibrary

The Proposed Rules remove the concept of the Interim Receiver and replace it with a
rehabilitation receiver. This is to justify the immediate issuance of the stay order
because under Presidential Decree No. 902�A, as amended, the suspension of actions
takes effect only upon appointment of the rehabilitation receiver.67 (Emphasis
provided) chanroblesvirtualawlibrary

Even without this court going into the procedural issues, addressing the substantive
merits of the case will yield the same result.

Respondent China Banking Corporation mainly argues the violation of the constitutional
proscription against impairment of contractual obligations68 in that neither the
provisions of Pres. Dec. No. 902�A as amended nor the Interim Rules empower
commercial courts �to render without force and effect valid contractual
stipulations.�69

The non�impairment clause first appeared in the United States Constitution as a

safeguard against the issuance of worthless paper money that disturbed economic
stability after the American Revolution.70 This constitutional provision was designed to
promote commercial stability.71 At its core is �a prohibition of state interference with
debtor�creditor relationships.�72

This clause first became operative in the Philippines through the Philippine Bill of 1902,
the fifth paragraph of Section 5 which states �[t]hat no law impairing the obligation
of contracts shall be enacted.� It was consistently adopted in subsequent Philippine
fundamental laws, namely, the Jones Law of 1916,73 the 1935 Constitution,74 the 1973
Constitution,75 and the present Constitution.76

Nevertheless, this court has brushed aside invocations of the non�impairment clause
to give way to a valid exercise of police power77 and afford protection to labor.78

In Pacific Wide Realty and Development Corporation v. Puerto Azul Land, Inc. 79 which
similarly involved corporate rehabilitation, this court found no merit in Pacific Wide�s
invocation of the non�impairment clause, explaining as follows: chanRoblesvirtualLawlibrary

We also find no merit in PWRDC�s contention that there is a violation of the

impairment clause. Section 10, Article III of the Constitution mandates that no law
impairing the obligations of contract shall be passed. This case does not involve a law
or an executive issuance declaring the modification of the contract among debtor PALI,
its creditors and its accommodation mortgagors. Thus, the non�impairment clause
may not be invoked. Furthermore, as held in Oposa v. Factoran, Jr. even assuming that
the same may be invoked, the non�impairment clause must yield to the police power
of the State. Property rights and contractual rights are not absolute. The constitutional
guaranty of non�impairment of obligations is limited by the exercise of the police
power of the State for the common good of the general public.

Successful rehabilitation of a distressed corporation will benefit its debtors, creditors,

employees, and the economy in general. The court may approve a rehabilitation plan
even over the opposition of creditors holding a majority of the total liabilities of the
debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition
of the creditors is manifestly unreasonable. The rehabilitation plan, once approved, is
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 have
opposed the plan or whether or not their claims have been scheduled.80 ChanRoblesVirtualawlibrary

Corporate rehabilitation is one of many statutorily provided remedies for businesses

that experience a downturn. Rather than leave the various creditors unprotected,
legislation now provides for an orderly procedure of equitably and fairly addressing their
concerns. Corporate rehabilitation allows a court�supervised process to rejuvenate a
corporation. Its twin, insolvency, provides for a system of liquidation and a procedure of
equitably settling various debts owed by an individual or a business. It provides a
corporation�s owners a sound chance to re�engage the market, hopefully with
more vigor and enlightened services, having learned from a painful experience.

Necessarily, a business in the red and about to incur tremendous losses may not be
able to pay all its creditors. Rather than leave it to the strongest or most resourceful
amongst all of them, the state steps in to equitably distribute the corporation�s
limited resources.

The cram�down principle adopted by the Interim Rules does, in effect, dilute
contracts. When it permits the approval of a rehabilitation plan even over the opposition
of creditors,81 or when it imposes a binding effect of the approved plan on all parties
including those who did not participate in the proceedings,82 the burden of loss is
shifted to the creditors to allow the corporation to rehabilitate itself from insolvency.

Rather than let struggling corporations slip and vanish, the better option is to allow
commercial courts to come in and apply the process for corporate rehabilitation.

This option is preferred so as to avoid what Garrett Hardin called the Tragedy of
Commons. Here, Hardin submits that �coercive government regulation is necessary
to prevent the degradation of common�pool resources [since] individual resource
appropriators receive the full benefit of their use and bear only a share of their
cost.�83 By analogy to the game theory, this is the prisoner�s dilemma: �Since
no individual has the right to control or exclude others, each appropriator has a very
high discount rate [with] little incentive to efficiently manage the resource in order to
guarantee future use.�84 Thus, the cure is an exogenous policy to equitably distribute
scarce resources. This will incentivize future creditors to continue lending, resulting in
something productive rather than resulting in nothing.

In fact, these corporations exist within a market. The General Theory of Second Best
holds that �correction for one market imperfection will not necessarily be
efficiency�enhancing unless [there is also] simultaneous [correction] for all other
market imperfections.�85 The correction of one market imperfection may adversely
affect market efficiency elsewhere, for instance, �a contract rule that corrects for an
imperfection in the market for consensual agreements may [at the same time] induce
welfare losses elsewhere.�86 This theory is one justification for the passing of
corporate rehabilitation laws allowing the suspension of payments so that corporations
can get back on their feet.
As in all markets, the environment is never guaranteed. There are always risks.
Contracts are indeed sacred as the law between the parties. However, these contracts
exist within a society where nothing is risk�free, and the government is constantly
being called to attend to the realities of the times.

Corporate rehabilitation is preferred for addressing social costs. Allowing the

corporation room to get back on its feet will retain if not increase employment
opportunities for the market as a whole. Indirectly, the services offered by the
corporation will also benefit the market as �[t]he fundamental impulse that sets and
keeps the capitalist engine in motion comes from [the constant entry of] new
consumers� goods, the new methods of production or transportation, the new
markets, [and] the new forms of industrial organization that capitalist enterprise
creates.�87

As a final note, this is not the first time this court was made to review two separate
petitions appealed from two conflicting decisions, rendered by two divisions of the Court
of Appeals, and originating from the same case. In Serrano v. Ambassador Hotel,
Inc.,88 we ordered the Court of Appeals to adopt immediately a more efficient system in
its Internal Rules to avoid situations as this.

In this instance, it is fortunate that this court had the opportunity to correct the
situation and prevent conflicting judgments from reaching impending finality with the
referral to the En Banc.

We reiterate the need for our courts to be �constantly vigilant in extending their
judicial gaze to cases related to the matters submitted for their resolution�89 as to
�ensure against judicial confusion and [any] seeming conflict in the judiciary�s
decisions.�90

WHEREFORE, petitioner Pryce Corporation�s motion is GRANTED. This court�s

February 4, 2008 decision is RECONSIDERED and SET ASIDE.

SO ORDERED.

G.R. No. 152580 June 26, 2008

CONSUELO METAL CORPORATION, petitioner,

vs.
PLANTERS DEVELOPMENT BANK and ATTY. JESUSA PRADO-MANINGAS, in her capacity as
Ex-officio Sheriff of Manila, respondents.

DECISION

CARPIO, J.:

The Case
This is a petition for review1 seeking to reverse the 14 December 2001 Decision2 and the 6 March
2002 Resolution3 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 Corporation’s (CMC) petition for
certiorari and affirmed the 25 April 2001 Order4 of the Regional Trial Court, Branch 46, Manila (trial
court). In its 6 March 2002 Resolution, the Court of Appeals partially granted CMC’s 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 CMC’s rehabilitation and reiterated the suspension of all actions for claims against
CMC.7

On 29 November 2000, upon the management committee’s 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 CMC’s creditors,
commenced the extra-judicial foreclosure of CMC’s 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
CMC’s motion for issuance of a temporary restraining order. The trial court ruled that since the SEC
had already terminated and decided on the merits CMC’s petition for suspension of payment, the
trial court no longer had legal basis to act on CMC’s motion.

On 28 May 2001, the trial court denied CMC’s motion for reconsideration. 12 The trial court ruled that
CMC’s 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 CMC’s 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 CMC’s 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 CMC’s 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 Bank’s foreclosure of the real estate mortgage be declared void.

In its 6 March 2002 Resolution, the Court of Appeals partially granted CMC’s 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 CMC’s
dissolution and liquidation, Planters Bank’s 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 SEC’s jurisdiction over CMC’s dissolution and liquidation, or is only a continuation of the
SEC’s jurisdiction over CMC’s petition for suspension of payment; and

2. Whether Planters Bank’s foreclosure of the real estate mortgage is valid.

The Court’s Ruling

The petition has no merit.

The SEC has jurisdiction to order CMC’s dissolution

but the trial court has jurisdiction over CMC’s liquidation.

While CMC agrees with the ruling of the Court of Appeals that the SEC has jurisdiction over CMC’s
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 SEC’s jurisdiction over CMC’s 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 CMC’s 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 SEC’s
jurisdiction defined under Section 5(d) of Presidential Decree No. 902-A. Section 5.2 of RA 8799
provides:

The Commission’s 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 CMC’s petition for suspension of payment and issued a
suspension order on 2 April 1996 after it found CMC’s petition to be sufficient in form and substance.
While CMC’s 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 CMC’s petition for suspension of payment when it determined that CMC could no longer
be successfully rehabilitated.

However, the SEC’s 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 o’clock in the morning and not later than two o’clock 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
receiver19 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 CMC’s
challenge to the foreclosure proceedings has no merit. The notice of sale clearly specified that the
auction sale will be held "at 10:00 o’clock in the morning or soon thereafter, but not later than 2:00
o’clock in the afternoon."23 The Sheriff’s 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 Bank’s extra-judicial foreclosure of the real estate
mortgage is valid.

SO ORDERED.

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 and January 24, 2006 of the Court of Appeals
1 2

(CA) in CA-G.R. SP No. 88735. The CA dismissed petitioner's petition for review of the January 4,
2005 Resolution and February 9, 2000 Order of the Securities and Exchange Commission (SEC) for
3 4

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. Between 1991 and 1993, ARCAM applied for and was granted a loan by respondent
5

Philippine National Bank (PNB). To secure the loan, ARCAM executed a Real Estate Mortgage over
6

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. The public auction was scheduled on December 29, 1993 for
7

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. An interim management committee was also created.
8

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. Thus, the SEC decreed that ARCAM be dissolved and placed under
9

liquidation. The SEC Hearing Panel also granted PNB’s motion to dissolve the preliminary injunction
10

and appointed Atty. Manuel D. Yngson, Jr. & Associates as Liquidator for

ARCAM. With this development, PNB revived the foreclosure case and requested the RTC Clerk of
11

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 ARCAM’s 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. PNB emerged as the highest winning bidder in the auction sale, and
12

certificates of sale were issued in its favor.

On November 16, 2000, petitioner filed with the SEC a motion to nullify the auction sale. Petitioner
13

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
ARCAM’s 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 mortgagor’s debt after
the termination of the rehabilitation proceedings and during liquidation proceedings.14

On January 4, 2005, the SEC issued a Resolution denying petitioner’s motion to nullify the auction
15

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
ARCAM’s 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 SEC’S 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, reveals
22

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 SEC’s findings on the legality of PNB’s 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. Before the CA, petitioner raised
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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. Therefore, the assailed
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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 SEC’s 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. The ends of speedy justice would
25

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, which involved factual
26

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 committee’s recommendation, the SEC issued an Omnibus Order directing
the dissolution and liquidation of CMC. Thereafter, respondent Planters Development Bank (Planters
Bank), one of CMC’s creditors, commenced the extrajudicial foreclosure of CMC’s 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. (Emphasis supplied)
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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. When the value of the property is less than the claim it secures, the liquidator may
1âwphi1

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 debtor’s right of redemption upon receiving the
excess from the creditor;

(2) the liquidator may sell the property and satisfy the secured creditor’s 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. NLRC that a distinction should be
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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.