Civil Law Review 2 | Atty.
Legarda 1
CARRIED LUMBER COMPANY vs. AGRICULTURAL CREDIT AND
COOPERATIVE FINANCING ADMINISTRATION (ACCFA)
G.R. No. L-21836 April 22, 1975 J. Aquino
The enumeration in article 2242 is not an order of preference. That article
lists the credits which may concur with respect to specific real properties
and which would be satisfied pro rata according to article 2249.There is no
dispute that the Facoma warehouse was constructed by means of the
materials supplied by Carried Lumber Company and that the construction
was financed by the ACCFA which had loaned P27,200 to the Facoma.
Therefore, it is just and proper that the two creditors should have pro
rata shares in that warehouse.
Facts:
Lumber company's materialman's lien. — From October 11 to November
8, 1954 the Sta. Barbara Farmer's Cooperative Marketing Association, Inc.
(Facoma) purchased on credit from the Carried Lumber Company lumber
and materials which were used in the construction of the Facoma's
warehouse. The company extended credit to the Facoma after having
been informed by the ACCFA's General Manager in a telegram dated
October 23, 1954 that a loan of P27,200 had been approved for the
construction of the Facoma's warehouse.
On October 27, 1954, after the company had supplied the Facoma with
lumber and construction materials worth P4,999.40, they executed a
contract whereby it was agreed that the company would sell lumber and
construction materials to the Facoma with a value not exceeding P27,200.
The Facoma made partial payments. As of January 1, 1955 it had not paid
to the company the balance of its account amounting to P4,733.55. On
May 18, 1959 the company sued the Facoma for the recovery of that
amount. They entered into compromise agreements whereby Facoma
would pay the company the sum of P5,500 in monthly installments from
October 31, 1960 to March 31, 1961, subject to the acceleration proviso
that failure on the part of the Facoma to pay any installment would
render the whole unpaid balance due and demandable.
In view of the Facoma's failure to pay the stipulated installments, the
Carried Lumber Company secured a writ of execution to enforce the
judgment. The sheriff levied upon the Facoma's lease rights,
warehouse and ricemill building. On January, 3, 1961 he issued a
notice scheduling the sale of the attached properties on January 31, 1961
On January 25, 1961 the ACCFA filed a third-party claim with the sheriff.
Its provincial director informed the sheriff that the properties levied
upon had already been sold to the ACCFA on November 5, 1960. For that
reason, it contended that the same could not again be sold at public
auction. It formally objected to the proposed auction sale.
As scheduled, the sheriff on January 31, 1961 sold for P5,610.50 the
Facoma's lease rights, warehouse and ricemill building to the Carried
Lumber Company, as the highest bidder. There being no redemption
within the one-year period, the sheriff on June 29, 1962 issued a final
deed of sale in favor of the Carried Lumber Company for the said lease
rights, warehouse and ricemill building.
ACCFA's mortgage lien. — As already stated, the Facoma obtained from
the ACCFA a loan of P27,200 for the construction of its warehouse. As
security for that loan, the Facoma on November 10, 1954 mortgaged to
the ACCFA its lease rights over a parcel of land located at Barrio
Maningding Sta. Barbara, Pangasinan and the warehouse to be
constructed on the said land together with the other improvements
existing thereon. The mortgage was recorded on November 13, 1954 in
the registration book provided for in Act No. 3344.
Two supplementary mortgages dated February 19 and October 19, 1955
were executed by the Facoma in favor of the ACCFA as security for other
Case Digest 2018 – PREFERENCE OF CREDIT
loans amounting to P11,600 and P15,408.80, respectively. The other
loans were used by the Facoma for the construction of a ricemill building
and for the purchase of a ricemill which were also mortgaged to the
ACCFA.
The Facoma also defaulted in the payment of its mortgage obligations.
The ACCFA in a letter dated September 19, 1960 requested the Provincial
Sheriff of Pangasinan to foreclose the mortgages extrajudicially (Exh. 4).
The sheriff issued a notice of auction sale dated October 13, 1960. He
scheduled the sale on November 5, 1960 (Exh. 5).
In a letter dated October 20, 1960 the Carried Lumber Company notified
the sheriff and the Facoma that pursuant to article 2242(4) of the Civil
Code, it had a preferential lien over the warehouse of the Facoma for
having furnished the lumber and materials used in its construction and
the cost of which had not been fully paid for. The sheriff proceeded with
the foreclosure sale. On November 5, 1960 he sold the mortgaged
properties to the ACCFA, as the highest bidder for the sum of P68,067.35.
On that date, he issued a certificate of sale covering the Facoma's lease
rights, warehouse, ricemill, ricemill building and a diesel engine (Exh. 6).
Proceedings in this case. — On March 1, 1961 or after the execution of the
Carried Lumber Company's judgment against the Facoma and the
issuance of the certificate of sale in its favor, the company sued the ACCFA
for the purpose of asserting its preferential lien over the Facoma's
warehouse and ricemill building and in order to obtain possession
thereof. One of ACCFA's defenses was that the company waived its lien
when it filed an ordinary action to recover its claim instead of enforcing
its lien.
The lower court held that the lumber company's materialman's lien was
superior to the ACCFA's mortgage lien because the company's lien is
sanctioned by paragraph 4 of article 2242 of the Civil Code, whereas the
ACCFA's mortgage lien is covered by paragraph 5 of the same article. The
lower court reasoned out that the company's lien "existed ahead" of the
ACCFA's mortgage lien. It noted that the ACCFA was aware of the
company's claim because the company sent to the ACCFA on October 23,
1954 a telegraphic inquiry as to the loan which the ACCFA would extend
to the Facoma for the construction of its warehouse and the ACCFA
confirmed in a telegraph answer that the loan would be granted to the
Facoma.
Issue: WON lumber company’s materialman’s lien was superior to
the ACCFA’s mortgage lien?
Ruling: NO. The two creditors should have pro rata shares in that
warehouse.
As this is a clear case of concurrence of credits with respect to an
immovable property, the Facoma warehouse, it has to be resolved under
the following provisions of the Civil Code:
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:
xxx xxx xxx
(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;

xxx xxx xxx (1923a)
ART. 2243. The claims or credits enumerated in the
preceding 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. Taxes
mentioned in No. 1, article 2241, and No. 1 article
2242, shall first be satisfied. (n)
ART. 2249. 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 properties or real right. (1927a)
The term pro rata in article 2249 means in proportion or ratably or
a division according to share, interest or liability of each.
The trial court erred in holding that the lumber company's lien over the
warehouse is superior to the ACCFA's mortgage lien. It was mistaken in
assuming that the enumeration of ten claims, mortgages and liens in
article 2242 creates an order of preference. It is not correct to say that the
materialman's (mechanic's) lien or refectionary credit of the lumber
company, being listed as No. 4 in article 2242, is superior to the ACCFA's
mortgage credit which is listed as No. 5. The enumeration in article 2242
is not an order of preference. That article lists the credits which may
concur with respect to specific real properties and which would be
satisfied pro rata according to article 2249.
There is no dispute that the Facoma warehouse was constructed by
means of the materials supplied by Carried Lumber Company and that the
construction was financed by the ACCFA which had loaned P27,200 to the
Facoma (Exh. 1). Therefore, it is just and proper that the two creditors
should have pro rata shares in that warehouse.
The lower court's solution of awarding the warehouse to the lumber
company was an unwarranted disregard of the ACCFA's claim. On the
other hand, the sheriff's adjudication of the whole warehouse to the
ACCFA nullifies the lumber company's claim. Neither solution is just
because it results in unjust enrichment by one party at the expense of the
other.
The instant case is different from Luzon Lumber & Hardware Co. vs.
Quiambao, 94 Phil, 663, where the defendant spouses mortgaged their
three lots and the two buildings to be constructed thereon to the
Rehabilitation Finance Corporation (RFC) to secure a loan. The mortgage
was registered on September 13, 1948. The materials used in the
construction of the two buildings were bought on credit by the defendant
spouses from plaintiff lumber company during the period from October,
1948 to March, 1949 or after the registration of the mortgage. To cover
the unpaid balance of the price of the materials, plaintiff lumber company
sued defendant spouses. The RFC was impleaded as a defendant after it
had foreclosed the mortgage and bought the lots and building as the
highest bidder at the auction sale.
It was held that the mortgage credit of the RFC was superior to the
refectionary credit (credito refacionario) held by the lumber company.
The RFC loan was used to defray the cost of constructing the two
buildings. By express stipulation, the mortgage included all the
improvements which would be constructed on the lots. The mortgage lien
over the buildings attached thereto as of the recording of the mortgage
and not as of the time of their construction. (Under article 1923 of the old
Code a refectionary credit should be registered and, if not recorded, it is
inferior to a registered mortgage credit).
Also inapplicable to this case is the ruling that in order to implement
the pro rata sharing among the creditors mentioned in article 2242, as
directed in article 2249, the said creditors "must necessarily be convened
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Case Digest 2018 – PREFERENCE OF CREDIT
and the import of their claims ascertained" and that, to do so, "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 (now 86) of the Rules of Court, or other
liquidation proceedings of similar import" (Resolution of the motion for
reconsideration in De Barretto vs. Villanueva, 110 Phil. 896, 904, 906).
The Barretto ruling was predicated on the assumption that such an
insolvency proceeding is necessary in order "to enable the court to
ascertain the pro rata dividend corresponding to each" of the two
creditors as well as the "other creditors" entitled to preference under
article 2242.
Where, as in this case, it appears that there are no other creditors aside
from the Carried Lumber Company and the ACCFA, the requirement that
the pro rata dividend should be ascertained in an insolvency or similar
proceeding should not be enforced.
Moreover, the instant case has features that easily distinguish it from
the Barretto case. Here, the lumber company, before the registration of
the mortgage, inquired from the ACCFA whether it would extend a loan to
the Facoma. The lumber company continued to supply lumber to the
Facoma after the ACCFA had made the telegraphic assurance that it
would extend a loan of P27,200 to the Facoma. In effect, the ACCFA had
prior notice of the lumber company materialman's lien.
Furthermore, in the Barretto case, the controversy was between the
supposed unpaid vendor and the mortgage who had acted in good faith
and was unaware of the vendor's lien for the unpaid price (No. 2 in article
2242). This Court found that the vendor's lien was questionable and
could not stand on equal footing with the mortgage lien.
As already noted, the ACCFA has been in possession of the warehouse
since January 27, 1961 (Exh. 10). The trial court should ascertain whether
the warehouse has yielded any income during the time that the ACCFA
has been in possession thereof. In any event, the rental value of the
warehouse should be determined. The ACCFA is entitled to deduct from
the earnings of the warehouse or its rental value the taxes and necessary
and useful expenses which it had incurred for the said warehouse. By
reason of its lien, the Carried Lumber Company has a   pro rata share in
the net earnings or rental value of the warehouse.
There is another aspect of this case which has eluded the attention of the
parties. The lumber company in its original complaint asserted a lien not
only over the Facoma's warehouse but also over its ricemill building. The
trial court sustained the lumber company's lien over the Facoma's
ricemill building. That is an error.
The evidence for the lumber company shows that it supplied materials
only for the construction of the warehouse (Exh. F, F-1). The company in
its letter to the sheriff specified that it was asserting a lien only over the
warehouse (Exh. B). It did not mention the ricemill building. It has no
materialman's lien on the ricemill building. On the other hand, the ACCFA
had a mortgage lien on the ricemill building (Exh. 2). It foreclosed its
mortgage and bought the ricemill building at the auction sale held on
November 5, 1960 (Exh. 5, 6).
WHEREFORE, the trial court's judgment is reversed. It is hereby adjudged
that the Carried Lumber Company and the ACCFA have concurrent liens
on the Sta. Barbara Facoma warehouse in the proportion of their credits
amounting to P5,655.50 (including the sheriff's fee of P45) and
P41,370.11 (Exh. 4), respectively.
Should the parties within a period of thirty (30) days from the finality of
this judgment be unable to agree as to how their liens over the Facoma
warehouse should be satisfied, then the Warehouse may be sold at public
auction by the sheriff to the highest bidder, and the net proceeds of the
sale should be allocated pro rata to the lumber company and the ACCFA.
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Case Digest 2018 – PREFERENCE OF CREDIT

The trial court should ascertain the net earnings or net rental value of the
warehouse from January 27, 1961, when the ACCFA was placed in
possession thereof, up to the time the carried Lumber Company's lien is
satisfied. Such net earnings or net rental value should also be allocated
pro rata to the lumber company and the ACCFA. No pronouncement as to
costs.
 Civil Law Review 2 | Atty. Legarda 4
Case Digest 2018 – PREFERENCE OF CREDIT

CONSUELO METAL CORPORATION vs. PLANTERS DEVELOPMENT Civil Code on concurrence and preference of credits.Creditors of secured
BANK and ATTY. JESUSA PRADO-MANINGAS, in her capacity as Ex- obligations may pursue their security interest or lien, or they may choose
officio Sheriff of Manila to abandon the preference and prove their credits as ordinary claims. [18]

  Moreover, Section 2248 of the Civil Code provides:

G.R. No. 152580 June 26, 2008 J. Carpio
 Those credits which enjoy preference in relation to specific
The creditor-mortgagee has the right to foreclose the mortgage over a
real property or real rights, exclude all others to the extent of
specific real property whether or not the debtor-mortgagor is under
the value of the immovable or real right to which the
insolvency or liquidation proceedings. The right to foreclose such mortgage
preference refers.
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  In this case, Planters Bank, as a secured creditor, enjoys preference over
the mortgage upon the termination of the rehabilitation proceedings or a specific mortgaged property and has a right to foreclose the mortgage
upon the lifting of the stay order. 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
Facts:
proceedings. The right to foreclose such mortgage is merely suspended
upon the appointment of a management committee or rehabilitation
On 1 April 1996, CMC filed before the SEC a petition to be declared in a
receiver[19] or upon the issuance of a stay order by the trial court.
state of suspension of payment, for rehabilitation, and for the [20]
 However, the creditor-mortgagee may exercise his right to foreclose
appointment of a rehabilitation receiver or management committee
the mortgage upon the termination of the rehabilitation proceedings or
under Section 5(d) of Presidential Decree No. 902-A.[5] On 2 April 1996,
upon the lifting of the stay order.[21]
the SEC, finding the petition sufficient in form and substance, declared
that all actions for claims against CMC pending before any court, tribunal,
 Foreclosure proceedings have in their favor the presumption of
office, board, body and/or commission are deemed suspended
regularity and the burden of evidence to rebut the same is on the party
immediately until further order from the SEC.
that seeks to challenge the proceedings. [22]CMCs challenge to the
foreclosure proceedings has no merit. The notice of sale clearly specified
Thereafter, the SEC issued an Omnibus Order directing the dissolution
that the auction sale will be held at 10:00 oclock in the morning or soon
and liquidation of CMC. Thereafter, respondent Planters Development
thereafter, but not later than 2:00 oclock in the afternoon.[23] The Sheriffs
Bank (Planters Bank), one of CMCs creditors, commenced the extra-
Minutes of the Sale stated that the foreclosure sale was actually opened
judicial foreclosure of CMCs real estate mortgage. Public auctions were
at 10:00 A.M. and commenced at 2:30 P.M.[24] There was nothing irregular
scheduled on 30 January 2001 and 6 February 2001.
about the foreclosure proceedings.
 CMC filed a motion for the issuance of a temporary restraining order and
We REINSTATE the 29 November 2000 Omnibus Order of the Securities
a writ of preliminary injunction with the SEC to enjoin the foreclosure of
and Exchange Commission directing the Regional Trial Court, Branch 46,
the real estate mortgage. On 29 January 2001, the SEC issued
Manila to immediately undertake the liquidation of Consuelo Metal
a temporary restraining order to maintain the status quo and ordered the
Corporation.
immediate transfer of the case records to the trial court. The case was
then transferred to the trial court. In its 25 April 2001 Order, the trial
court denied CMCs motion for issuance of a temporary restraining
order. The trial court ruled that since the SEC had already terminated and
decided on the merits CMCs petition for suspension of payment, the trial
court no longer had legal basis to act on CMCs motion.

 On 13 June 2001, Planters Bank extra-judicially foreclosed the real estate
mortgage

Issue: Whether Planters Banks foreclosure of the real estate

mortgage is valid?

Ruling: Foreclosure of real estate mortgage is valid.

CMC maintains that the foreclosure is void because it was undertaken

without the knowledge and previous consent of the liquidator and other
lien holders. CMC adds that the rules on concurrence and preference
of credits should apply in foreclosure proceedings. Assuming that
Planters Bank can foreclose the mortgage, CMC argues that the
foreclosure is still void because it was conducted in violation of Section
15, Rule 39 of the Rules of Court which states that the sale should not be
earlier than nine oclock in the morning and not later than two oclock in
the afternoon.

 On the other hand, Planters Bank argues that it has the right to foreclose
the real estate mortgage because of non-payment of the loan
obligation. Planters Bank adds that the rules on concurrence and
preference of credits and the rules on insolvency are not applicable in this
case because CMC has been not been declared insolvent and there are no
insolvency proceedings against CMC.

 In Rizal Commercial Banking Corporation v. Intermediate Appellate Court,

[17]
 we held that if rehabilitation is no longer feasible and the assets of the
corporation are finally liquidated, secured creditors shall enjoy
preference over unsecured creditors, subject only to the provisions of the

Topic: Insolvency Law; Financial Rehabilitation and Insolvency Act
of 2010
MARILYN VICTORIO-AQUINO vs.PACIFIC PLANS, INC. and MAMERTO
A. MARCELO, JR. (Court-Appointed Rehabilitation Receiver of Pacific
Plans, Inc.)
G.R. No. 193108 December 10, 2014
It is an established principle in rehabilitation proceedings that
rehabilitation courts have the cram down power to approve rehabilitation
plans even over the objections of creditors, which cram down power shall
nonetheless bind the latter. In fact, the CARR is given the authority to
"notify counterparties and the court as to contracts that the debtor has
decided to continue to perform or breach." A fortiori, the mere impairment
of contracts is not a justification to question the modification of a
rehabilitation plan because the very nature of rehabilitation proceedings
sometimes necessitates such a course of action.
Facts:
respondent filed a Petition for Corporate Rehabilitation with the Regional
Trial Court (Rehabilitation Court), praying that it be placed under
rehabilitation and suspension of payments pursuant to Presidential
Decree (P.D.) No. 902-A, as amended, in relation to the Interim Rules of
Procedure on Corporate Rehabilitation (Interim Rules). 6 At the time of
filing of the Petition for Corporate Rehabilitation, respondent had more
or less thirty four thousand (34,000) outstanding PEPTrads (PEPTrads
are educational plans where respondent guarantees to pay the
planholder, without regard to the actual cost at the time of enrolment, the
full amount of tuition and other school fees of a designated beneficiary).
Petitioner is a holder of two (2) units of respondent’s PEPTrads.
Pursuant to the prevailing rules on corporate rehabilitation, respondent
submitted to the Rehabilitation Court its proposed rehabilitation plan.
Under the terms thereof, respondent proposed the implementation of a
"Swap,"10 which will essentially give the planholder a means to exit from
the PEPTrads at terms and conditions relative to a termination value that
is more advantageous than those provided under the educational plan in
case of voluntary termination.11
On February 16, 2006, the Rehabilitation Receiver submitted an
Alternative Rehabilitation Plan (ARP) for the approval of the
Rehabilitation Court. Under the ARP, the benefits under the PEP Trads
shall be translated into fixed-value benefits as of December 31, 2004,
which will be termed as Base Year-end 2004 Entitlement, and shall be
computed as follows: (i) for availing plan holders, based on fifty-percent
(50%) of Average School Fee of SY 2005-2006 for every remaining year of
availment; (ii) for nonavailing (Group 1) plan holders, 12 based on the
higher of Base Year-end 2004 Entitlement under the Rehabilitation
Proposal or fifty-percent (50%) of Average School Fee of SY 2005-2006
for every year of availment; and (iii) for non-availing (Group 2) plan
holders,13 based on the planholders’ contributions with seven percent
(7%) net interest per annum from date of full payment on record to
December 31, 2004.14 The Base Year-end Entitlement will be covered by a
Rehabilitation Plan Agreement in lieu of a fixed-value plan.15
For petitioner, she is entitled toreceive an aggregate amount consisting
of: (a) the value of her total contributions plus interest at the rate of
seven percent (7%) from the date of full payment until December 31,
2005 (Net Translated Value); and (b) interest on the Net Translated Value
at the annual rate of seven percent (7%) from January 1, 2006 until
2010.16
The creditors/oppositors did not oppose/comment on the Rehabilitation
Receiver’s ARP, although the Parents Enabling Parents Coalition, Inc.
(PEPCI) filed with the CA, a Petition for Certiorari with Application for a
TRO/Writ of Preliminary Injunction dated February 10, 2006. As no
TRO/Writ of Preliminary Injunction has been issued against the conduct
of further proceedings, on April 27, 2006, the Court issued a
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Case Digest 2018 – PREFERENCE OF CREDIT
Decision 21 approving the ARP, which cradled several appeals filed with
the CA, and later on, to this Court that are still pending resolution. 22
Nevertheless, respondent commenced with the implementation of its ARP
in coordination with, and with clearance from, the Rehabilitation
Receiver.23
In the meantime, the value of the Philippine Peso strengthened and
appreciated. In view of this development, and considering that the trust
fund of respondent is mainly composed of NAPOCOR bonds that are
denominated in US Dollars, respondent submitted a manifestation with
the Rehabilitation Court on February 29, 2008, stating that the continued
appreciation of the Philippine Peso has grossly affected the value of the
U.S. Dollar-denominated NAPOCOR bonds, which stood as security for the
payment of the Net TranslatedValues of the PEPTrads. 24
Thereafter, the Rehabilitation Receiver filed a Manifestation with Motion
to Admit dated March 7, 2008, echoing the earlier tenor and substance of
respondent’s manifestation, and praying that the Modified Rehabilitation
Plan (MRP) be approved by the Rehabilitation Court. Under the MRP, the
ARP previously approved by the Rehabilitation Court is modified as
follows: (a) suspension of the tuition support; (b) converting the
Philippine Peso liabilities to U.S. Dollar liabilities by assigning to each
planholder a share of the remaining asset in proportion to the share of
liabilities in 2010; and (c) payments of the trust fund assets in U.S. Dollars
at maturity.25
After the submission of comments/opposition by the concerned parties,
the Rehabilitation Court issued a Resolution 26 dated July 28, 2008
approving the MRP. In approving the same, the Rehabilitation Court
reasoned that in view of the "cram down" power of the rehabilitation
court under Section 23 of the Interim Rules, courts have the power to
approve a rehabilitation plan over the objection of creditors and even
when such proposed rehabilitation plan involvesthe impairment of
contractual obligations.27
Petitioner questioned the approval of the MRP before the CA on
September 26, 2008. It likewise prayed for the issuance of a TRO and a
writ of preliminary injunction to stay the execution of the Resolution
dated July 28, 2008.
Issue: WON the Modified Rehabilitation Plan should be approved?
Ruling: YES.
It is undisputable that the corporation is in the process of corporate
rehabilitation precisely because it is undergoing financial distress.
Petitioner cannot expect to receive the contracted amount owed by
respondent because a modification of the terms and conditions of the
contract is certainly foreseeable and reasonable in a corporate
rehabilitation case, as correctly held by the Rehabilitation Court, to wit:
x x x It is an established principle in rehabilitation proceedings that
rehabilitation courts have the cram down power to approve
rehabilitation plans even over the objections of creditors, which cram
down power shall nonetheless bind the latter. In fact, the CARR is given
the authority to "notify counterparties and the court as to contracts that
the debtor has decided to continue to perform or breach." A fortiori, the
mere impairment of contracts is not a justification to question the
modification of a rehabilitation plan because the very nature of
rehabilitation proceedings sometimes necessitates such a course of
action.73
Indeed, the rights of petitioner arising from the contracts it entered with
respondent are not in any way weakened by the approval of the ARP, and
then the MRP, despiteany reduction in the amount of the obligation due
to petitioner. As enunciated in Pacific Wide,74 the reduction of the debt of
the debtor is one of the essential features of a rehabilitation case, and is
not considered prejudicial to the interest of a secured creditor, thus:
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Case Digest 2018 – PREFERENCE OF CREDIT

We find nothing onerous in the terms of PALI's rehabilitation plan. The
Interim Rules on Corporate Rehabilitation provides for means of
execution of the rehabilitation plan, which may include, among others,
the conversion of the debts or any portion thereof to equity, restructuring
of the debts, dacion en pago, or sale of assets or of the controlling interest.
The restructuring of the debts of PALI is part and parcel of its
rehabilitation. Moreover, per findings offact of the RTC and as affirmed by
the CA, the restructuring of the debts of PALI would not be prejudicial to
the interest of PWRDC as a secured creditor. Enlightening is the
observation of the CA in this regard, viz.:
There is nothing unreasonable or onerous about the 50%
reduction of the principal amount when, as found by the court
a quo, a Special Purpose Vehicle (SPV) acquired the credits of
PALI from its creditors at deep discounts of as much as 85%.
Meaning, PALI's creditors accepted only 15% of their credit's
value. Stated otherwise, if PALI's creditors are in a position to
accept 15% of their credit's value, with more reason that they
should be able to accept 50% thereof as full settlement by their
debtor. x x x.
prayer for the issuance of a TRO and/or a writ of preliminary injunction
must necessarily fail.
A final note. The evolving times of corporate rehabilitation, owing to the
rise and fall of economic activity over time, calls on the Judiciary to take
an active role in filling in the gaps of the law pertaining to this issue as the
inimitable factual milieu of each case would require a different approach
in the application of prevailing laws, rules and regulations on corporate
rehabilitation. In the case at bar, we hold that the modification of the
rehabilitation plan is a risk management tool to address the volatility of
the exchange rate of the Philippine Peso vis-à -vis the U.S. Dollars, with the
goal of ensuring that all planholders or creditors receive adequate
returns regardless of the tides of the Philippine market by making
payment in U.S. Dollars. This plan would prevent the trust fund of
respondent from being diluted due to the appreciation of the Philippine
Peso and assure that all planholders and creditors shall receive payment
upon maturity of the NAPOCOR bonds in the most equitable manner.
WHEREFORE, the petition is DENIED. The February 26, 2010 Decision
and July 21, 2010 Resolution of the Court of Appeals in CA-G.R. SP No.
105237 are hereby AFFIRMED.

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 nonimpairment 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 isfeasible 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.75

Similarly, the reasoning laid down by the CA for the application of the
cram-down power of the Rehabilitation Court is enlightening, thus:

This Court likewise rejects petitioner Aquino’s claims that the Modified
Rehabilitation Plan constitutes an impairment of contracts. The 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. As held by
the Supreme Court in Bank of the Philippine Islands vs. Securities and
Exchange Commission, [G.R. No. 164641, December 20, 2007:

"The Court reiterates that the SEC’s approval of the

Rehabilitation Plan did not impair BPI’s right to contract. As
correctly contended by private respondents, the
nonimpairment clause is a limit on the exercise of legislative
power and not of judicial or quasi-judicial power. The SEC,
through the hearing panel that heard the petition for approval
of the Rehabilitation Plan, was acting as a quasi judicial body
and thus, its order approving the plan cannot constitute an
impairment of the right and the freedom to contract." 76

In view of all of the foregoing, We find no basis to overturn the findings of

the CA with respect to the substantive issues in this case. Accordingly, the
 Civil Law Review 2 | Atty. Legarda 7
Case Digest 2018 – PREFERENCE OF CREDIT

GATEWAY ELECTRONICS CORPORATION and GERONIMO B. DELOS
REYES, JR., vs. ASIANBANK CORPORATION
G.R. No. 172041 December 18, 2008J. Velasco
The neglect of the creditor to sue the principal at the time the debt falls due
does not discharge the surety, even if such delay continues until the
principal becomes insolvent.  And, in the absence of proof of resultant injury,
a surety is not discharged by the creditor’s mere statement that the creditor
will not look to the surety,  or that he need not trouble himself.   The
consequences of the delay, such as the subsequent insolvency of the
principal,  or the fact that the remedies against the principal may be lost by
lapse of time, are immaterial.
Facts:
Geronimo and Andrew executed separate but almost identical deeds of
suretyship for Gateway in favor of respondent Asianbank Corporation
(Asianbank). Gateway initially made payments on its loan obligations, but
eventually defaulted. Upon Gateway’s request, Asianbank extended the
maturity dates of the loan several times.
Thus, on December 15, 1999, Asianbank filed with the Regional Trial
Court (RTC) in Makati City a complaint for a sum of money against
Gateway, Geronimo, and Andrew. The complaint, as later amended, was
eventually raffled to Branch 60 of the court and docketed as Civil Case No.
99-2102 entitled Asian Bank Corporation v. Gateway Electronics
Corporation, Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes.
the RTC rendered judgment dated October 7, 20035 in favor of Gateway,
Holding that the defendants Gateway Electronics Corporation, Geronimo
De Los Reyes and Andrew De Los Reyes jointly and severally liable to pay
the plaintiff. The CA affirmed the ruling of the RTC. Gateway and
Geronimo filed a motion for reconsideration. This was followed by a
Supplemental Motion for Reconsideration dated January 20, 2006, stating
that in SEC Case No. 037-04, the RTC in Imus, Cavite had issued an Order
dated December 2, 2004, declaring Gateway insolvent and directing all its
creditors to appear before the court on a certain date for the purpose of
choosing among themselves the assignee of Gateway’s estate which the
court’s sheriff has meanwhile placed in custodia legis.7 Gateway and
Geronimo thus prayed that the assailed decision of the Makati City RTC be
set aside, the insolvency court having acquired exclusive jurisdiction over
the properties of Gateway by virtue of Section 60 of Act No. 1956, without
prejudice to Asianbank pursuing its claim in the insolvency proceedings.
Anent the first argument, suffice it to state that Geronimo was then the
president of Gateway and, as such, was benefited, albeit perhaps
indirectly, by the loan thus granted by Asianbank. And as we said
in Security Pacific Assurance Corporation, the surety is liable for the debt
of another although the surety possesses no direct or personal interest
over the obligation nor does the surety receive any benefit from it.27
Whether or not Asianbank really deviated from normal banking practice
by extending the period for Gateway to comply with its loan obligation or
by not going after the chattel mortgage adverted to is really of no
moment. Banks are primarily in the business of extending loans and earn
income from their lending operations by way of service and interest
charges. This is why Asianbank opted to give Gateway ample opportunity
to pay its obligations instead of foreclosing the chattel mortgage and in
the process holding on to assets of which the bank has really no direct
use.
The following excerpts from Palmares are in point:
We agree with respondent corporation that its mere failure to
immediately sue petitioner on her obligation does not release
her from liability. Where a creditor refrains from proceeding
against the principal, the surety is not exonerated. In other
words, mere want of diligence or forbearance does not affect
the creditor’s rights vis-à-vis the surety, unless the surety
requires him by appropriate notice to sue on the obligation.
Such gratuitous indulgence of the principal does not discharge
the surety whether given at the principal’s request or without
it, and whether it is yielded by the creditor through sympathy
or from an inclination to favor the principal x x x. The neglect
of the creditor to sue the principal at the time the debt falls due
does not discharge the surety, even if such delay continues
until the principal becomes insolvent. And, in the absence of
proof of resultant injury, a surety is not discharged by the
creditor’s mere statement that the creditor will not look to the
surety, or that he need not trouble himself.  The consequences
of the delay, such as the subsequent insolvency of the
principal, or the fact that the remedies against the principal
may be lost by lapse of time, are immaterial.

Issue: WON Asianbank’s claim for the payment of GEC’s loans should
be dismissed and ventilated before the insolvency court?

Ruling: YES but it does not mean that Geronimo’s liability is

extinguished.

Additionally, Geronimo’s lament about losing his right to subrogation is

erroneous. He argues that by virtue of the order of insolvency issued by
the insolvency court, title and right to possession to all the properties and
assets of Gateway were vested upon Gateway’s assignee in accordance
with Sec. 32 of the Insolvency Law.

The transfer of Gateway’s property to the insolvency assignee, if this be

the case, does not negate Geronimo’s right of subrogation, for such right
may be had or exercised in the insolvency proceedings. The possibility
that he may only recover a portion of the amount he is liable to pay is the
risk he assumed as a surety of Gateway. Such loss does not, however,
render ineffectual, let alone invalidate, his suretyship.

Geronimo’s other arguments to escape liability are puerile and really

partake more of a plea for liberality. They need not detain us long. In gist,
Geronimo argues: first, that he is a gratuitous surety of Gateway; second,
Asianbank deviated from normal banking practice, such as when it
extended the period for payment of Gateway’s obligation and when it
opted not to foreclose the chattel mortgage constituted as guarantee of
Gateway’s loan obligation; and third, implementing the appealed CA’s
decision would cause him great harm and injury.