Asset Privatization Trust vs Court

of Appeals
November 20, 2012

300 SCRA 579 – Business Organization – Corporation Law – Corporation Generally Not
Entitled To Moral Damages – Power To Enter Into Contracts
In 1968, the government undertook to support the financing of Marinduque Mining and
Industrial Corporation (MMIC). The government then issued debenture bonds in favor of
MMIC which enable the latter to take out loans from the Development Bank of the
Philippines (DBP) and the Philippine National Bank (PNB). The loans were mortgaged by
MMIC’s assets. In 1984 however, MMIC’s indebtedness reached P13.7 billion and P8.7
billion to DPB and PNB respectively. MMIC had trouble paying and this exposed the
government, because of the debenture bonds, to a P22 billion obligation.
In order to mitigate MMIC’s loan liability, a financial restructuring plan (FRP) was drafted in
the presence of MMIC’s representatives as well as representatives from DBP and PNB. The
two banks however never formally approved the said FRP. Eventually, the staggering loans
became overdue and PNB and DBP chose to foreclose MMIC’s assets, FRP no longer
feasible at that point. So the assets were foreclosed and were eventually assigned to the
Asset Privatization Trust (APT).
Later, Jesus Cabarrus, Sr., a stockholder of MMIC initiated a derivative suit against PNB
and DBP with APT being impleaded as the successor in interest of the two banks. The suit
basically questioned the foreclosure as Cabarrus asserted that the foreclosure was invalid
because he insisted that the FRP was adopted by PNB and DBP as a consequence of the
presence of the banks’ representatives when the said FRP was drafted. Cabarrus asserts
that APT should restore the assets to MMIC and that PNB and DBP should honor the FRP.
The suit was filed in the RTC of Makati but while the case was pending, the parties agreed
to submit the case for arbitration. Hence, Makati RTC dismissed the case upon motion of
the parties.
The Arbitration Committee (AC) which heard the case ruled in favor of Cabarrus. The AC
granted Cabarrus prayer and at the same time awarded him P10 million in moral damages.
Not only that, the AC also awarded P2.5 billion in moral damages in favor of MMIC to be
paid by the government. APT’s MFR was denied. Cabarrus then filed before the Makati
RTC a motion to confirm the arbitration award. APT opposed the same as it alleged that the
motion is improper. Makati RTC denied APT’s opposition and confirmed the arbitration
award. The Court of Appeals affirmed the ruling of the RTC.
ISSUE: Whether or not the ruling of the Arbitration Committee as affirmed by the Regional
Trial Court of Makati (Branch 62) and the Court of Appeals is correct.
HELD: No.
1. The award of damages in favor of MMIC is improper. First, it was not made a party to the
case. The derivative suit filed by Cabarrus failed to implead MMIC. So how can an award
for damages be awarded to a non-party? Second, even if MMIC, which is actually a real
party in interest, was impleaded, it is not entitled to moral damages. It is not yet a well
settled jurisprudence that corporations are entitled to moral damages. While the Supreme
Court in some cases did award certain corporations moral damages for besmirched
reputations, such is not applicable in this case because when the alleged wrongful
foreclosure was done, MMIC was already in bad standing hence it has no good wholesome
reputation to protect. So it could not be said that there was a “reputation” besmirched by the
act of foreclosure. Likewise, the award of moral damages in favor of Cabarrus is invalid. He
cannot have possibly suffered any moral damages because the alleged wrongful act was
committed against MMIC. It is a basic postulate that a corporation has a personality
separate and distinct from its stockholders. The properties foreclosed belonged to MMIC,
not to its stockholders. Hence, if wrong was committed in the foreclosure, it was done
against the corporation.
2. The FRP is not valid hence the foreclosure is valid. The mere presence of DBP’s and PNB’s
representatives during the drafting of FRP is not constitutive of the banks’ formal approval
of the FRP. The representatives are personalities distinct from PNB and DBP. PNB and
DBP have their own boards and officers who may have different decisions. The
representatives were not shown to have been authorized by the respective boards of the
two banks to enter into any agreement with MMIC.
3. Further, the proceeding is procedurally infirm. RTC Makati had already dismissed the civil
case when the parties opted for arbitration. Hence, it should have never took cognizance of
the Cabarrus’ motion to confirm the AC’ award. The same should have been brought
through a separate action not through a motion because RTC Makati already lost
jurisdiction over the case when it dismissed it to give way for the arbitration. The arbitration
was a not a continuation of the civil case filed in Makati RTC.