CREDTRANS CASES#3

G.R. No. L-17825             June 26, 1922

In the matter of the Involuntary insolvency of U. DE POLI.

FELISA ROMAN, claimant-appellee,
vs.
ASIA BANKING CORPORATION, claimant-appellant.

Wolfson, Wolfson and Schwarzkopf and Gibbs, McDonough & Johnson for appellant.
Antonio V. Herrero for appellee.

OSTRAND, J.:

This is an appeal from an order entered by the Court of First Instance of Manila in civil No.
19240, the insolvency of Umberto de Poli, and declaring the lien claimed by the appellee Felisa
Roman upon a lot of leaf tobacco, consisting of 576 bales, and found in the possession of said
insolvent, superior to that claimed by the appellant, the Asia Banking Corporation.

The order appealed from is based upon the following stipulation of facts:

It is hereby stipulated and agreed by and between Felisa Roman and Asia Banking
Corporation, and on their behalf by their undersigned attorneys, that their respective
rights, in relation to the 576 bultos of tobacco mentioned in the order of this court dated
April 25, 1921, be, and hereby are, submitted to the court for decision upon the
following:

I. Felisa Roman claims the 576 bultos of tobacco under and by virtue of the instrument,
a copy of which is hereto attached and made a part hereof and marked Exhibit A.

II. That on November 25, 1920, said Felisa Roman notified the said Asia Banking
Corporation of her contention, a copy of which notification is hereto attached and made a
part hereof and marked Exhibit B.

III. That on November 29, 1920, said Asia Banking Corporation replied as per copy
hereto attached and marked Exhibit C.

IV. That at the time the above entitled insolvency proceedings were filed the
576 bultos of tobacco were in possession of U. de Poli and now are in possession of the
assignee.

V. That on November 18, 1920, U. de Poli, for value received, issued a quedan, covering
aforesaid 576 bultos of tobacco, to the Asia Banking Corporation as per copy of quedan
attached and marked Exhibit D.

VI. That aforesaid 576 bultos of tobacco are part and parcel of the
2,777 bultos purchased by U. de Poli from Felisa Roman.
 VII. The parties further stipulate and agree that any further evidence that either of the
parties desire to submit shall be taken into consideration together with this stipulation.

Manila, P. I., April 28, 1921.

(Sgd.) ANTONIO V. HERRERO

Attorney for Felisa Roman

(Sgd.) WOLFSON, WOLFSON & SCHWARZKOPF

Attorney for Asia Banking Corp.

Exhibit A referred to in the foregoing stipulation reads:

1.º Que la primera parte es dueña de unos dos mil quinientos a tres mil quintales de
tacabo de distintas clases, producidos en los municipios de San Isidro, Kabiaw y Gapan
adquiridos por compra con dinero perteneciente a sus bienes parafernales, de los
cuales es ella administradora.

2.º Que ha convenido la venta de dichos dos mil quinientos a tres mil quintales de
tabaco mencionada con la Segunda Parte, cuya compraventa se regira por las
condiciones siguientes:

(a) La Primera Parte remitira a la Segunda debidamente enfardado el tabaco de que ella
es propietaria en bultos no menores de cincuenta kilos, siendo de cuenta de dicha
Primera Parte todos los gastos que origine dicha mercancja hasta la estacion de
ferrocarril de Tutuban, en cuyo lugar se hara cargo la Segunda y desde cuyo instante
seran de cuenta de esta los riesgos de la mercancia.

(b) El precio en que la Primera Parte vende a la Segunda el tabaco mencionada es el de

veintiseis pesos (P26), moneda filipina, por quintal, pagaderos en la forma que despues
se establece.

(c) La Segunda Parte sera la consignataria del tabaco en esta Ciudad de Manila quien
se hara cargo de el cuando reciba la factura de embarque y la guia de Rentas Internas,
trasladandolo a su bodega quedando en la misma en calidad de deposito hasta la fecha
en que dicha Segunda Parte pague el precio del mismo, siendo de cuenta de dicha
Segunda Parte el pago de almacenaje y seguro.

(d) LLegada la ultima expedicion del tabaco, se procedera a pesar el mismo con
intervencion de la Primera Parte o de un agente de ella, y conocido el numero total de
quintales remitidos, se hara liquidacion del precio a cuenta del cual se pagaran quince
mil pesos (P15,000), y el resto se dividira en cuatro pagares vencederos cada uno de
ellos treinta dias despues del anterior pago; esto es, el primer pagare vencera a los
treinta dias de la fecha en que se hayan pagado los quince mil pesos, el segundo a
igual tiempo del anterior pago, y asi sucesivamente; conviniendose que el capital debido
como precio del tabaco devengara un interes del diez por ciento anual.

Los plazos concedidos al comprador para el pago del precio quedan sujetos a la
condicion resolutoria de que si antes del vencimiento de cualquier plazo, el comprador
vendiese parte del tabaco en proporcion al importe de cualquiera de los pagares que
 restasen por vencer, o caso de que vendiese, pues se conviene para este caso que
desde el momento en que la Segunda Parte venda el tabaco, el deposito del mismo,
como garantia del pago del precio, queda cancelado y simultaneamente es exigible el
importe de la parte por pagar.

Leido este documento por los otorgantes y encontrandolo conforme con lo por ellos
convenido, lo firman la Primera Parte en el lugar de su residencia, San Isidro de Nueva
Ecija, y la Segunda en esta Ciudad de Manila, en las fechas que respectivamente al pie
de este documento aparecen.

(Fdos.) FELISA ROMAN VDA. DE MORENO

U. DE POLI

Firmado en presencia de:

(Fdos.) ANTONIO V. HERRERO

T. BARRETTO

("Acknowledged before Notary")

Exhibit D is a warehouse receipt issued by the warehouse of U. de Poli for 576 bales of
tobacco. The first paragraph of the receipt reads as follows:

Quedan depositados en estos almacenes por orden del Sr. U. de Poli la cantidad de
quinientos setenta y seis fardos de tabaco en rama segun marcas detalladas al margen,
y con arreglo a las condiciones siguientes:

In the left margin of the face of the receipts, U. de Poli certifies that he is the sole owner of the
merchandise therein described. The receipt is endorced in blank "Umberto de Poli;" it is not
marked "non-negotiable" or "not negotiable."

Exhibit B and C referred to in the stipulation are not material to the issues and do not appear in
the printed record.

Though Exhibit A in its paragraph (c) states that the tobacco should remain in the warehouse of
U. de Poli as a deposit until the price was paid, it appears clearly from the language of the
exhibit as a whole that it evidences a contract of sale and the recitals in order of the Court of
First Instance, dated January 18, 1921, which form part of the printed record, show that De Poli
received from Felisa Roman, under this contract, 2,777 bales of tobacco of the total value of
P78,815.69, of which he paid P15,000 in cash and executed four notes of P15,953.92 each for
the balance. The sale having been thus consummated, the only lien upon the tobacco which
Felisa Roman can claim is a vendor's lien.

The order appealed from is based upon the theory that the tobacco was transferred to the Asia
Banking Corporation as security for a loan and that as the transfer neither fulfilled the
requirements of the Civil Code for a pledge nor constituted a chattel mortgage under Act No.
1508, the vendor's lien of Felisa Roman should be accorded preference over it.
It is quite evident that the court below failed to take into consideration the provisions of section
49 of Act No. 2137 which reads:

Where a negotiable receipts has been issued for goods, no seller's lien or right of
stoppage in transitu shall defeat the rights of any purchaser for value in good faith to
whom such receipt has been negotiated, whether such negotiation be prior or
subsequent to the notification to the warehouseman who issued such receipt of the
seller's claim to a lien or right of stoppage in transitu. Nor shall the warehouseman be
obliged to deliver or justified in delivering the goods to an unpaid seller unless the receipt
is first surrendered for cancellation.

The term "purchaser" as used in the section quoted, includes mortgagee and pledgee. (See
section 58 (a) of the same Act.)

In view of the foregoing provisions, there can be no doubt whatever that if the warehouse
receipt in question is negotiable, the vendor's lien of Felisa Roman cannot prevail against the
rights of the Asia Banking Corporation as the indorse of the receipt. The only question of
importance to be determined in this case is, therefore, whether the receipt before us is
negotiable.

The matter is not entirely free from doubt. The receipt is not perfect: It recites that the
merchandise is deposited in the warehouse "por orden" instead of "a la orden" or "sujeto a la
orden" of the depositor and it contain no other direct statement showing whether the goods
received are to be delivered to the bearer, to a specified person, or to a specified person or his
order.

We think, however, that it must be considered a negotiable receipt. A warehouse receipt, like
any other document, must be interpreted according to its evident intent (Civil Code, arts.
1281 et seq.) and it is quite obvious that the deposit evidenced by the receipt in this case was
intended to be made subject to the order of the depositor and therefore negotiable. That the
words "por orden" are used instead of "a la orden" is very evidently merely a clerical or
grammatical error. If any intelligent meaning is to be attacked to the phrase "Quedan
depositados en estos almacenes por orden del Sr. U. de Poli" it must be held to mean "Quedan
depositados en estos almacenes a la orden del Sr. U. de Poli." The phrase must be construed
to mean that U. de Poli was the person authorized to endorse and deliver the receipts; any other
interpretation would mean that no one had such power and the clause, as well as the entire
receipts, would be rendered nugatory.

Moreover, the endorsement in blank of the receipt in controversy together with its delivery by U.
de Poli to the appellant bank took place on the very of the issuance of the warehouse receipt,
thereby immediately demonstrating the intention of U. de Poli and of the appellant bank, by the
employment of the phrase "por orden del Sr. U. de Poli" to make the receipt negotiable and
subject to the very transfer which he then and there made by such endorsement in blank and
delivery of the receipt to the blank.

As hereinbefore stated, the receipt was not marked "non-negotiable." Under modern statutes
the negotiability of warehouse receipts has been enlarged, the statutes having the effect of
making such receipts negotiable unless marked "non-negotiable." (27 R. C. L., 967 and cases
cited.)
Section 7 of the Uniform Warehouse Receipts Act, says:

A non-negotiable receipt shall have plainly placed upon its face by the warehouseman
issuing it 'non-negotiable,' or 'not negotiable.' In case of the warehouseman's failure so
to do, a holder of the receipt who purchased it for value supposing it to be negotiable
may, at his option, treat such receipt as imposing upon the warehouseman the same
liabilities he would have incurred had the receipt been negotiable.

This section shall not apply, however, to letters, memoranda, or written

acknowledgments of an informal character.

This section appears to give any warehouse receipt not marked "non-negotiable" or "not
negotiable" practically the same effect as a receipt which, by its terms, is negotiable provided
the holder of such unmarked receipt acquired it for value supposing it to be negotiable,
circumstances which admittedly exist in the present case.

We therefore hold that the warehouse receipts in controversy was negotiable and that the rights
of the endorsee thereof, the appellant, are superior to the vendor's lien of the appellee and
should be given preference over the latter.

The order appealed from is therefore reversed without costs. So ordered.

[G.R. No. L-38427. March 12, 1975.]

CENTRAL BANK OF THE PHILIPPINES as Liquidator of the FIDELITY

SAVINGS BANK, Petitioner, v. HONORABLE JUDGE JESUS P. MORFE, as
Presiding Judge of Branch XIII, Court of First Instance of Manila, Spouses
AUGUSTO and ADELAIDA PADILLA and Spouses MARCELA and JOB
ELIZES, Respondents.

F.E. Evangelista & Agapito S. Fajardo for Petitioner.

Juan C. Nabong, Jr. for respondent Spouses Augusto and Adelaida Padilla.

Albert R. Palacio for respondent spouses Marcela and Job Elizes.

SYNOPSIS
Private respondents secured against Savings Bank, after the same had been
declared insolvent, final judgments for the recovery of the balance of their time
deposits. Payment of the same as preferred credits evidenced by final judgments in
accordance with Article 2244 (14) (b) of the Civil Code was directed by the
liquidation court. From this order, the Central Bank appealed by certiorari.

The Supreme Court held that Art. 2244 (14) (b) of the Civil Code does not apply
and the judgments obtained by the respondents against the involvent savings bank
do not enjoy preference.

Orders of the lower court reversed and set aside.

SYLLABUS
1. BANKS: CLAIMS AND CREDITS AGAINST AN INSOLVENT BANK; JUDGMENT
OBTAINED AFTER DECLARATION OF INSOLVENCY NOT A PREFERRED CLAIM. —
Article 2244 (14)(b) of the Civil Code on preferred credits does not apply to
judgments for the payment of the deposits in an insolvent savings bank which
obtained after the declaration of insolvency.

2. ID.; ID.; ID.; RATIONALE. — A contrary rule on practice would be productive of

injustice, mischief and confusion. To recognize such judgments as entitled to
priority would mean that depositors in insolvent banks, after learning that the bank
is insolvent as shown by the fact that it can no longer pay withdrawals or that it has
closed its doors or has been enjoined by the Monetary Board from doing business,
would rush to the courts to secure judgments for the payment of their deposits. In
such eventuality, the courts would be swamped with suits of that character. Some
of the judgments would be default judgment. Depositors armed with such
judgments would pester the liquidation court with claims for preference on the basis
of Article 2244 (14)(b) of the Civil Code. Less alert depositors would be prejudiced.
That inequitable situation could not have been contemplated by the framers of
section 29 of the General Banking Law on the proceedings upon insolvency.

3. ID.; ID.; ASSETS OF INSOLVENT BANK HELD IN TRUST FOR THE EQUAL
BENEFIT OF ALL CREDITORS. — "The general principle of equality that the assets of
an insolvent are to be distributed ratably among general creditors applies with full
force to the distribution of the assets of a bank. A general depositor of a bank is
merely a general creditor, and, as such, is not entitled to any preference or priority
over other general creditors. The assets of a bank in process of liquidation are held
in trust for the equal benefit of all creditors, and one cannot be permitted to obtain
an advantage or preference over, another by an attachment, execution or
otherwise.

4. ID.; ID.; EFFECT OF JUDGMENT OBTAINED BY A CREDITOR.— The effect of a

judgment obtained against it by a creditor is only to fix the amount of debt. He can
acquire no lien which will give him any preference or advantage over other general
creditors.

DECISION

AQUINO, J.:

This case involves the question of whether a final judgment for the payment of a
time deposit in a savings bank, which judgment was obtained after the bank was
declared insolvent, is a preferred claim against the bank. The question arises under
the following facts:chanrob1es virtual 1aw library

On February 18, 1969 the Monetary Board found the Fidelity Savings Bank to be
insolvent. The Board directed the Superintendent of Banks to take charge of its
assets, forbade it to do business, and instructed the Central Bank Legal Counsel to
take appropriate legal actions (Resolution No. 350).

On December 9, 1969 the Board resolved to seek the court’s assistance and
supervision in the liquidation of the bank. The resolution was implemented only on
January 25, 1972 when the Central Bank of the Philippines filed the corresponding
petition for assistance and supervision in the Court of First Instance of Manila (Civil
Case No. 86005 assigned to Branch XIII).

Prior to the institution of the liquidation proceeding but after the declaration of
insolvency, or, specifically, sometime in March, 1971, the spouses Job Elizes and
Marcela P. Elizes filed a complaint in the Court of First Instance of Manila against
the Fidelity Savings Bank for the recovery of the sum of P50,584 as the balance of
their time deposits (Civil Case No. 82520 assigned to Branch I).

In the judgment rendered in that case on December 13, 1972 the Fidelity Savings
Bank was ordered to pay the Elizes spouses the sum of P50,584 plus accumulated
interest.

In another case, assigned to Branch XXX of the Court of First Instance of Manila,
the spouses Augusto A. Padilla and Adelaida Padilla secured on April 14, 1972 a
judgment against the Fidelity Savings Bank for the sums of P80,000 as the balance
of their time deposits, plus interests, P70,000 as moral and exemplary damages
and P9,600 as attorney’s fees (Civil Case No. 84200 where the action was filed on
September 6, 1971).

In its orders of August 20, 1973 and February 25, 1974, the lower court (Branch
XIII having cognizance of the liquidation proceeding), upon motions of the Elizes
and Padilla spouses and over the opposition of the Central Bank, directed the latter,
as liquidator, to pay their time deposits as preferred credits, evidenced by final
judgments, within the meaning of article 2244(14)(b) of the Civil Code, if there are
enough funds in the liquidator’s custody in excess of the credits more preferred
under section 30 of the Central Bank Law in relation to articles 2244 and 2251 of
the Civil Code.

From the said order, the Central Bank appealed to this Court by certiorari. It
contends that the final judgments secured by the Elizes and Padilla spouses do not
enjoy any preference because (a) they were rendered after the Fidelity Savings
Bank was declared insolvent and (b) under the charter of the Central Bank and the
General Banking Law, no final judgment can be validly obtained against an
insolvent bank.

Republic Act No. 265 provides:jgc:chanrobles.com.ph

"SEC. 29. Proceedings upon insolvency. — Whenever, upon examination by the

Superintendent or his examiners or agents into the condition of any banking
institution, it shall be disclosed that the condition of the same is one of insolvency,
or that its continuance in business would involve probable loss to its depositors or
creditors, it shall be the duty of the Superintendent forthwith, in writing, to inform
the Monetary Board of the facts, and the Board, upon finding the statements of the
Superintendent to be true, shall forthwith forbid the institution to do business in the
Philippines and shall take charge of its assets and proceeds according to law.

"The Monetary Board shall thereupon determine within thirty days whether the
institution may be reorganized or otherwise placed in such a condition so that it
may be permitted to resume business with safety to its creditors and shall prescribe
the conditions under which such resumption of business shall take place. In such
case the expenses and fees in the administration of the institution shall be
determined by the Board and shall be paid to the Central Bank out of the assets of
such banking institution.

"At any time within ten days after the Monetary Board has taken charge of the
assets of any banking institution, such institution may apply to the Court of First
Instance for an order requiring the Monetary Board to show cause why it should not
be enjoined from continuing such charge of its assets, and the court may direct the
Board to refrain from further proceedings and to surrender charge of its assets.

"If the Monetary Board shall determine that the banking institution cannot resume
business with safety to its creditors, it shall, by the Solicitor General, file a petition
in the Court of First Instance reciting the proceedings which have been taken and
praying the assistance and supervision of the court in the liquidation of the affairs
of the same. The Superintendent shall thereafter, upon order of the Monetary Board
and under the supervision of the court and with all convenient speed, convert the
assets of the banking institution to money.

"SEC. 30. Distribution of assets. — In case of liquidation of a banking institution,

after payment of the costs of the proceedings, including reasonable expenses and
fees of the Central Bank to be allowed by the court, the Central Bank shall pay the
debts of such institution, under the order of the court, in accordance with their legal
priority."cralaw virtua1aw library

The General Banking Act, Republic Act No. 337, provides:jgc:chanrobles.com.ph

"SEC. 85. Any director or officer of any banking institution who receives or permits
or causes to be received in said bank any deposit, or who pays out or permits or
causes to be paid out any funds of said bank, or who transfers or permits or causes
to be transferred any securities or property of said bank, after said bank becomes
insolvent, shall be punished by fine of not less than one thousand nor more than
ten thousand pesos and by imprisonment for not less than two nor more than ten
years."cralaw virtua1aw library

The Civil Code provides:jgc:chanrobles.com.ph

"ART. 2237. Insolvency shall be governed by special laws insofar as they are not
inconsistent with this Code. (n)
"ART. 2244. With reference to other property, real and personal, of the debtor, the
following claims or credits shall be preferred in the order named:chanrob1es virtual
1aw library
x           x          x

(14) Credits which, without special privilege, appear in (a) a public instrument; or
(b) in a final judgment, if they have been the subject of litigation. These credits
shall have preference among themselves in the order of priority of the dates of the
instruments and of the judgments, respectively. (1924a)

"ART. 2251. Those credits which do not enjoy any preference with respect to
specific property, and those which enjoy preference, as to the amount not paid,
shall be satisfied according to the following rules:chanrob1es virtual 1aw library

(1) In the order established in article 2244;(2) Common credits referred to in article
2246 shall be paid pro rata regardless of dates. (1929a)."

The trial court or, to be exact, the liquidation court noted that there is no provision
in the charter of the Central Bank and in the General Banking Law (Republic Acts
Nos. 265 and 337, respectively) which suspends or abates civil actions against an
insolvent bank pending in courts other than the liquidation court. It reasoned out
that, because such actions are not suspended, judgments against insolvent banks
could be considered as preferred credits under article 2244(14)(b) of the Civil Code.
It further noted that, in contrast with the Central Bank Act, section 18 of the
Insolvency Law provides that upon the issuance by the court of an order declaring a
person insolvent, "all civil proceedings against the said insolvent shall be stayed."

The liquidation court directed the Central Bank to honor the writs of execution
issued by Branches I and XXX for the enforcement of the judgments obtained by
the Elizes and Padilla spouses. It suggested that, after satisfaction of the
judgments, the Central Bank, as liquidator, should include said judgments in the list
of preferred credits contained in the "Project of Distribution" "with the notation
‘already paid’."

On the other hand, the Central Bank argues that after the Monetary Board has
declared that a bank is insolvent and has ordered it to cease operations, the Board
becomes the trustee of its assets "for the equal benefit of all the creditors, including
the depositors." The Central Bank cites the ruling that "the assets of an insolvent
banking institution are held in trust for the equal benefit of all creditors, and after
its insolvency, one cannot obtain an advantage or a preference over another by an
attachment, execution or otherwise" (Rohr v. Stanton Trust & Savings Bank, 76
Mont. 248, 245 Pac. 947).

The stand of the Central Bank is that all depositors and creditors of the insolvent
bank should file their actions with the liquidation court. In support of that view it
cites the provision that the Insolvency Law does not apply to banks (last sentence,
sec. 52 of Act No. 1956).

It also invokes the provision penalizing a director or officer of a hank who

disburses, or allows disbursement, of the funds of the bank after it becomes
insolvent (Sec. 85, General Banking Act, Republic Act No. 337). It cites the ruling
that "a creditor of an insolvent state bank in the hands of a liquidator who
recovered a judgment against it is not entitled to a preference for (by) the mere
fact that he is a judgment creditor" (Thomas H. Briggs & Sons, Inc. v. Allen, 207 N.
Carolina 10, 175 S. E. 838, Braver, Liquidation of Financial Institutions, p. 922).

It should be noted that fixed, savings, and current deposits of money in banks and
similar institutions are not true deposits. They are considered simple loans and, as
such, are not preferred credits (Art. 1980, Civil Code; In re Liquidation of Mercantile
Bank of China: Tan Tiong Tick v. American Apothecaries Co., 65 Phil. 414; Pacific
Coast Biscuit Co. v. Chinese Grocers Association, 65 Phil. 375; Fletcher American
National Bank v. Ang Cheng Lian, 65 Phil. 385; Pacific Commercial Co. v. American
Apothecaries Co., 65 Phil. 429; Gopoco Grocery v. Pacific Coast Biscuit Co., 65 Phil.
443).

The aforequoted section 29 of the Central Bank’s charter explicitly provides that
when a bank is found to be insolvent, the Monetary Board shall forbid it to do
business and shall take charge of its assets. The Board in its Resolution No. 350
dated February 18, 1969 banned the Fidelity Savings Bank from doing business. It
took charge of the bank’s assets. Evidently, one purpose in prohibiting the insolvent
bank from doing business is to prevent some depositors from having an undue or
fraudulent preference over other creditors and depositors.

That purpose would be nullified if, as in this case, after the bank is declared
insolvent, suits by some depositors could be maintained and judgments would be
rendered for the payment of their deposits and then such judgments would be
considered preferred credits under article 2244(14)(b) of the Civil Code.

We are of the opinion that such judgments cannot be considered preferred and that
article 2244(14)(b) does not apply to judgments for the payment of the deposits in
an insolvent savings bank which were obtained after the declaration of insolvency.

A contrary rule or practice would be productive of injustice, mischief and confusion.

To recognize such judgments as entitled to priority would mean that depositors in
insolvent banks, after learning that the bank is insolvent as shown by the fact that
it can no longer pay withdrawals or that it has closed its doors or has been enjoined
by the Monetary Board from doing business, would rush to the courts to secure
judgments for the payment of their deposits.

In such an eventuality, the courts would be swamped with suits of that character.
Some of the judgments would be default judgments. Depositors armed with such
judgments would pester the liquidation court with claims for preference on the basis
of article 2244(14)(b). Less alert depositors would be prejudiced. That inequitable
situation could not have been contemplated by the framers of section 29.
The Rohr case (supra) supplies some illumination on the disposition of the instant
case. It appears in that case that the Stanton Trust & Savings Bank of Great Falls
closed its doors to business on July 9, 1923. On November 7, 1924 the bank (then
already under liquidation) issued to William Rohr a certificate stating that he was
entitled to claim from the bank $1,191.72 and that he was entitled to dividends
thereon. Later, Rohr sued the bank for the payment of his claim. The bank
demurred to the complaint. The trial court sustained the demurrer. Rohr appealed.
In affirming the order sustaining the demurrer, the Supreme Court of Montana
said:jgc:chanrobles.com.ph

"The general principle of equity that the assets of an insolvent are to be distributed
ratably among general creditors applies with full force to the distribution of the
assets of a bank. A general depositor of a bank is merely a general creditor, and, as
such, is not entitled to any preference or priority over other general creditors.

"The assets of a bank in process of liquidation are held in trust for the equal benefit
of all creditors. and one cannot be permitted to obtain an advantage or preference
over another by an attachment, execution or otherwise. A disputed claim of a
creditor may be adjudicated, but those whose claims are recognized and admitted
may not successfully maintain action thereon. So to permit would defeat the very
purpose of the liquidation of a bank whether being voluntarily accomplished or
through the intervention of a receiver.
x           x          x

"The available assets of such a bank are held in trust, and so conserved that each
depositor or other creditor shall receive payment or dividend according to the
amount of his debt, and that none of equal class shall receive any advantage or
preference over another."cralaw virtua1aw library

And with respect to a national bank under voluntary liquidation, the court noted in
the Rohr case that the assets of such a bank "become a trust fund, to be
administered for the benefit of all creditors pro rata, and, while the bank retains its
corporate existence, and may be sued, the effect of a judgment obtained against it
by a creditor is only to fix the amount of debt. He can acquire no lien which will give
him any preference or advantage over other general creditors." (245 Pac. 249) **

Considering that the deposits in question, in their inception, were not preferred
credits, it does not seem logical and just that they should be raised to the category
of preferred credits simply because the depositors, taking advantage of the long
interval between the declaration of insolvency and the filing of the petition for
judicial assistance and supervision, were able to secure judgments for the payment
of their time deposits.

The judicial declaration that the said deposits were payable to the depositors, as
indisputably they were due, could not have given the Elizes and Padilla spouses a
priority over the other depositors whose deposits were likewise indisputably due
and owing from the insolvent bank but who did not want to incur litigation expenses
in securing a judgment for the payment of the deposits.

The circumstance that the Fidelity Savings Bank, having stopped operations since
February 19, 1969, was forbidden to do business (and that ban would include the
payment of time deposits) implies that suits for the payment of such deposits were
prohibited. What was directly prohibited should not be encompassed indirectly. (See
Maurello v. Broadway Bank & Trust Co. of Paterson, 176 Atl. 391, 114 N.J.L. 167).

It is noteworthy that in the trial court’s order of October 3, 1972, which contains
the Bank Liquidation Rules and Regulations, it indicated in Step III the procedure
for processing the claims against the insolvent bank. In Step IV, the court directed
the Central Bank, as liquidator, to submit a Project of Distribution which should
include "a list of the preferred credits to be paid in full in the order of priorities
established in Articles 2241, 2242, 2243, 2246 and 2247" of the Civil Code (note
that article 2244 was not mentioned). There is no cogent reason why the Elizes and
Padilla spouses should not adhere to the procedure outlined in the said rules and
regulations.

WHEREFORE, the lower court’s orders of August 20, 1973 and February 25, 1974
are reversed and set aside. No costs.

SO ORDERED.

Makalintal, C.J., Fernando, Barredo and Fernandez, JJ., concur.

Antonio, J., did not take part.

Endnotes:

**. . . . "It must be borne in mind that the predominant policy of the insolvent
system is intended to secure an equality among creditors, and to prohibit all
preferences except such as are expressly permitted. When, therefore, doubtful or
ambiguous provisions of the enactments making up the system are to be
construed, that interpretation which best comports with and gives effect to the
ultimate and controlling purpose of the statute must be adopted and applied, rather
than one which totally, or even partially, defeat or thwart that design. And this is
but another way of saying that preferences which do not clearly and unequivocally
appear to be authorized ought not to be created by mere construction, since the
tendency of all preferences is to frustrate, to some extent, equality among
creditors, and thus to disturb the very policy which lies at the root of all the
insolvent laws." (Roberts v. Edie, 85 Md. 181, 36 Atl. 820, 822).

"When control of a bank for liquidation purposes is taken by the superintendent of

banks, the question of preference creates in reality a controversy between the
depositor claiming a preference and the other depositors who are general creditors,
inasmuch as the assets in which all are to participate are diminished to the extent
of whatever preferences are allowed. The creation of preferences, generally
speaking, should therefore be discouraged except in cases where the right thereto
is clearly established. As said in Cavin v. Gleason, 105 N.Y. 256, at page 262, 11
N.E. 504, 506:chanrob1es virtual 1aw library

‘The equitable doctrine that, as between creditors, equality is equity, admits, so far
as we know, of no exception founded on the greater supposed sacredness of one
debt, or that it arose out of a violation of duty, or that its loss involves greater
apparent hardship in one case than another, unless it appears, in addition, that
there is some specific recognized equity founded on some agreement, or the
relation of the debt to the assigned property, which entitles the claimant, according
to equitable principles, to preferential payment’." (Ramisch v. Fulton, 41 Ohio App.
443, 180 N.E. 735).

"Ordinary deposit becomes bank’s money and creates debtor-creditor relation,

precluding preference as against bank’s receiver." (Andrew v. Union Savings Bank &
Trust Co. of Davenport, 220 Iowa 712, 263 N.W. 495).

"Where judgment was rendered against bank after bank was in custody of
liquidator, judgment creditor was not entitled to preference because of judgment"
(Thomas H. Briggs & Sons, Inc. v. Allen, 207 N. C. 10, 175 S. E. 838).

G.R. No. 201199, October 16, 2013

STEEL CORPORATION OF THE PHILIPPINES, Petitioner, v. MAPFRE INSULAR

INSURANCE CORPORATION, NEW INDIA ASSURANCE COMPANY LIMITED,
PHILIPPINE CHARTER INSURANCE CORPORATION, MALAYAN INSURANCE
CO., INC., AND ASIA INSURANCE PHIL. CORP., Respondents.

DECISION

CARPIO, J.:
The Case

This is a petition1 for review on certiorari under Rule 45 of the Rules of Court.

Petitioner Steel Corporation of the Philippines (SCP) challenges the 8 February 2012
Decision2 and 27 March 2012 Resolution3 of the Court of Appeals in CA-G.R. SP No.
1 19760. The Court of Appeals declared void the 1 June 2011 Order 4 of the Regional
Trial Court (RTC), acting as rehabilitation court, Fourth Judicial Region, Branch 3,
Batangas City, in SP. PROC. No. 06-7993.
The Facts

SCP is a domestic corporation engaged in the manufacture and distribution of cold-

rolled and galvanized steel sheets and coils. It obtained loans from several creditors
and, as security, mortgaged its assets in their favor. The creditors appointed Bank
of the Philippine Islands (BPI) as their trustee. On 17 December 1997, SCP and BPI
entered into a Mortgage Trust Indenture (MTI) requiring SCP to insure all of its
assets until the loans are fully paid. Under the MTI, the insurance policies were to
be made payable to BPI.

During the course of its business, SCP suffered financial difficulties. On 11

September 2006, one of the creditors, Equitable PCI Bank, Inc., now known as
Banco de Oro-EPCI, Inc., filed with the RTC a petition to have SCP placed under
corporate rehabilitation. On 12 September 2006, the RTC issued a stay order to
defer all claims against SCP and appointed Atty. Santiago T. Gabionza, Jr. as
rehabilitation receiver. On 3 December 2007, the RTC rendered a Decision
approving the modified rehabilitation plan.

Under Collective Master Policy No. UCPB Gem HOF075089, SCP insured against
material damage and business interruption its assets located in Barangay Munting
Tubig, Balayan, Batangas, for the period 19 August 2007 to 19 August 2008. On 8
June 2008, a fire broke out at SCP’s plant damaging its machineries. Invoking its
right under the MTI, BPI demanded and received from the insurers $450,000
insurance proceeds.

On 13 October 2009, SCP filed with the RTC a motion to direct BPI to turn over the
$450,000 insurance proceeds in order for SCP to repair and replace the damaged
machineries. On 5 January 2010, the RTC issued an Order directing BPI to release
the insurance proceeds directly to the contractors and suppliers who will undertake
the repairs and replacements of the damaged machineries. BPI filed with the Court
of Appeals a petition for certiorari under Rule 65 of the Rules of Court and, in its 28
September 2010 Decision,5 the Court of Appeals affirmed the RTC’s 5 January 2010
Order. However, in its 3 October 2012 Amended Decision, 6 the Court of Appeals
reversed itself and set aside the RTC’s 5 January 2010 Order. SCP filed with the
Court a petition for review on certiorari under Rule 45 and, in its 16 September
2013 Resolution,7 the Court denied the petition. The Court held
that:chanroblesvirtualawlibrary
After a judicious review of the records, the Court resolves to DENY the instant
petition and AFFIRM the October 3, 2012 Amended Decision and July 2, 2013
Resolution of the Court of Appeals (CA) in CA-G.R. SP No. 113078 for failure of
Steel Corporation of the Philippines (petitioner) to show that the CA committed any
reversible error in holding Bank of the Philippine Islands (respondent) entitled to
receive and hold in trust the subject insurance proceeds. Section 4.04, sub-
paragraph (f) of the Mortgage Trust Indenture Agreement between the parties
expressly stipulated that respondent shall receive the insurance proceeds in case
the risk or risks covered by the said policy occur and it may be released, applied,
and/or paid to petitioner to procure replacement equipment and/or machinery only
upon written notice to the creditors, who shall issue a Deed of Undertaking. No
such compliance was shown. It is hornbook that a contract is the law between the
parties and the obligation arising therefrom should be complied with in good faith.
Moreover, the rehabilitation proceedings were already terminated by the CA (which
decisions are immediately executory), hence, petitioner’s justification for release of
the insurance proceeds in its favor, i.e., to replace the burnt machineries, is not
feasible at this time.
Besides, the petition suffers from procedural defect in that it lacked copy of the
Regional Trial Court Order as well as relevant pleadings thereto, as required under
Section 4(d), Rule 45 of the Rules of Court.

SO ORDERED.8
Under Industrial All Risks Insurance Policy No. F-369430, SCP insured with
respondents Mapfre Insular Insurance Corporation, New India Assurance Company
Limited, Philippine Charter Insurance Corporation, Malayan Insurance Co., Inc., and
Asia Insurance Phil. Corp. (respondent insurers) against material damage and
business interruption its assets located in Barangay Munting Tubig for the period 19
August 2009 to 19 August 2010. On 7 December 2009, a fire again broke out at
SCP’s plant damaging its cold rolling mill and other machineries.

On 17 December 2010, SCP filed with the RTC a motion to direct respondent
insurers to pay insurance proceeds in the amounts of $28,000,000 property
damage and $8,000,000 business interruption.

During the 21 January 2011 hearing of SCP’s 17 December 2010 motion,

respondent insurers entered a special appearance solely for the purpose of
questioning the RTC’s jurisdiction over the insurance claim. On 7 February 2011,
respondent insurers filed with the RTC an opposition ad cautelam praying that SCP’s
17 December 2010 motion be denied.

In a letter dated 22 March 2011, respondent insurers denied liability on SCP’s

insurance claim because (1) SCP failed to comply with the terms of the policies; (2)
SCP defrauded the respondent insurers; (3) the gross over-insurance of the cold
rolling mill constitutes prima facie proof of arson; (4) SCP failed to show the actual
damage sustained by its machineries; (5) SCP failed to commence the repair and
replacement of the damaged machineries within 12 months; (6) SCP’s negligence
caused the fire; and (7) since SCP’s claim for property damage is non-compensable,
its claim for business interruption is also non-compensable. In their ad
cautelam opposition dated 24 March 2011, respondent insurers prayed that SCP’s
17 December 2010 motion be denied because (1) the amount of the claim for
property damage was increased from $28,000,000 to $30,000,000; (2) the RTC
lacked jurisdiction; (3) the RTC’s 5 January 2010 Order directing BPI to release the
insurance proceeds directly to the contractors and suppliers who will undertake the
repairs and replacements of SCP’s damaged machineries did not apply; and (4)
respondent insurers already denied SCP’s insurance claim.

On 25 March and 8 April 2011, the RTC issued an Order directing (1) SCP to
formally manifest its amenability to the repair and replacement of the damaged
machineries instead of payment of insurance proceeds; (2) SCP and respondent
insurers to file their memoranda; and (3) the creditors to file their respective
comments.
The RTC’s Ruling

In its 1 June 2011 Order, the RTC granted SCP’s 17 December 2010 motion and
directed respondent insurers to pay SCP $33,882,393 property damage and
$8,000,000 business interruption. The RTC held that:chanroblesvirtualawlibrary
At the outset, this Court notes that SCP’s manufacturing operations have suffered
from two separate fire incidents: one which damaged the ABB roll on June 8, 2008,
and the other which damaged the entire Cold Rolling Mill (CRM) on December 7,
2009. The claim for the first fire incident was partially paid by the insurers but the
proceeds were withheld by BPI as MTI Trustee. Thus, feeling aggrieved, SCP was
forced to file a Motion to Direct Trustee to Release Insurance Proceeds to SCP which
was granted by the previous judge, (over and above the objections of BPI which
argued that this Court had no jurisdiction over the matter) through his Order dated
January 5, 2010 x x x.

This Court, in resolving the instant motion, is inclined to agree with the previous
judge’s order and so upholds that it has jurisdiction over the insurance claims filed
by SCP in these rehabilitation proceedings. x x x.

In a resolution dated September 28, 2010, the Court of Appeals (BPI vs. Hon.
Albert A. Kalalo, C.A.-G.R. SP No. 113078) confirmed this Court’s authority and
jurisdiction to take cognizance of the insurance matter in the same rehabilitation
proceedings. The appellate court made it very clear that this court’s jurisdiction
includes the necessary and usual incidental powers that are essential to effectuate
SCP’s rehabilitation. x x x.

The argument that this Court cannot possibly pass upon the insurance claim of SCP
because it is only acting as a rehabilitation court cannot hold water. The mere fact
that this Court by raffle has been designated as a rehabilitation court in view of the
inhibition of RTC Branches 2 and 4 does not mean that it has lost its powers or
authority as a court of general jurisdiction. x x x.

x x x x

It is not true that the second panel of insurers are not “affected parties” and
therefore cannot be deemed covered by the in rem nature of the rehabilitation
proceedings. It is apt to note that the second panel of insurers unequivocably
admitted, in par. 21 of their Opposition, that “the panel of insurers are aware that
any proceeding initiated under the Rules on [C]orporate Rehabilitation shall be
considered in rem and that jurisdiction over all persons affected by the proceedings
shall be considered acquired upon publication of the notice of the commencement
of the proceedings in any newspaper of general circulation in the Philippines as
required by the Rules.”

The panel of insurers’ argument that they are not “affected parties” in the
rehabilitation proceedings because they do not hold any asset belonging to SCP
[“]which should be reflected in its audited financial statements” was sufficiently
rebutted by SCP when the latter argued that the insurers, holding as they do, sums
of money, recovery of which is sought by SCP, as the insured, are parts of the
assets of its estate (Bank of the Philippine Islands vs. Posadas, 56 Phil. 215, 230).
They are sums of money redounding to the benefit of its estate (i.e. assets) as an
insured (Heirs of Loreto Maramag vs. Heirs of Maramag, et al., 586 SCRA 774,
787). Thus, the fact that SCP, as insured, is claiming the proceeds of insurance
policies issued to it, makes the insurers affected parties covered by the instant
rehabilitation proceedings.

The panel of insurers further contend, that the claim “may not be resolved
summarily as the same requires a full-blown trial” such that it may be considered a
complaint and therefore this Court did not acquire jurisdiction over the res because
of the non-payment of docket fees. Contrary to this line of reasoning however, it
should be pointed out that the Interim Rules of Procedure on Corporate
Rehabilitation clearly recognizes the right of the parties affected by the proceedings
to file their opposition (Rule 3, Secs. 6, 10 and 20). The rehabilitation judge can
hold clarificatory hearings if there is a need to clarify certain questions arising from
such opposition. In short, the right to oppose (together with the corresponding right
to be heard on the opposition) does not necessarily mean that a “full-blown trial”
should be conducted. The instant proceedings does [sic] not automatically become
“adversarial” (as compared to “summary” proceedings) necessitating “full-blown
trial” just because the insurers have conveyed their intent to oppose (which they
did) the claim.

As the insurers themselves admit in par. 37 of their Opposition adversarial

proceedings simply means that it is “one having opposing parties, contested as
distinguished from an ex-parte application, one of which the party seeking relief has
given legal warning to the other party and afforded the latter an opportunity to
contest it” (Republic of the Philippines vs. Valencia, 141 SCRA 462[,] 1986). It is
very clear that the insurers have all the opportunity in these proceedings to oppose
even without the necessity of a “full-blown hearing.”

And since the subject motion for payment of the insurance claim does not
necessarily entail full-blown hearings despite it being an adversarial motion (i.e.
contested), the argument of the insurers that it is a complaint that must be
resolved in an original, separate, full-blown proceedings, independently of the
instant case which is summary in nature, and necessarily must comply with Sec.
141 of the Revised Rules of Court regarding the payment of filing fees [“]upon filing
of the pleading or other application which initiates an action or proceeding” does
not hold water and is fallacious.

x x x x

As to the corollary issue of the rightful payee of the insurance proceeds, this Court
hereby rules that contrary to the creditors’ argument that the proceeds of the
insurance claims should be given to the MTI Trustee pursuant to the MTI, it is
appropriate for this Court to emphasize what the appellate court in BPI vs. Hon.
Kalalo, has said – that although it is beyond dispute that the provisions of the MTI
continue to bind the parties, the MTI’s binding effect should be qualified. Pursuant
to the provision of the Interim Rules and in deference to the purpose of
rehabilitation proceedings, “the Mortgage Trust Indenture would be binding only
insofar as it does not conflict with the provisions of the rehabilitation plan
undertaken by the private respondent as well as if it does not hinder the corporate
rehabilitation of private respondent itself”. In deciding who has the better right to
receive the disputed insurance proceeds, the Court of Appeals said that “utmost
regard must be had to the restoration of herein private respondent to a position of
successful operation and solvency.”

x x x x

It is not true as contended by the second panel of insurers that there are
distinctions between the instant motion (for the second fire) from the first motion
(for the first fire) which had already been ruled in favor of SCP by the previous
judge. The factual circumstances under the first motion and the present one are
similar or analogous even if not entirely identical. Both motions refer to disputed
insurance claims arising from losses covered by existing policies issued to SCP.
Both have been disputed or opposed either by the MTI Trustee or by the insurers
themselves. Thus, both motions should be resolved in the same manner in order to
maintain consistency and stability in this Court’s judicial pronouncements.

This Court agrees with SCP when it argues that the creditors should realize that if
they insist on being paid the cash proceeds of the claim or if the proceeds are to be
given to the MTI trustee, the said act may not only constitute a violation of the Stay
Order (since it is virtually a satisfaction/enforcement/collection of their money
claims) but it would also result in SCP not being able to restart normal operations
which would adversely affect its rehabilitation. Hence, this Court mandates the
second panel of insurers to pay the insurance claims of SCP or in lieu thereof,
replace or reinstate the CRM.

WHEREFORE, premised and predicated on the foregoing, the Court hereby orders
the following:chanroblesvirtualawlibrary
1. Grant SCP’s unopposed Urgent Motion (to Withdraw Motion to Admit
Supplemental Motion dated December 2, 2009) dated September 9, 2010;

2. Order the second panel of insurers to already pay the additional business
interruption claim of US$8 million plus interest at the rate provided by Sec. 243 of
the Insurance Code (for the second fire); and

3. Order the second panel of insurers to pay to SCP the total sum of
US$33,882,393.00, plus interest at the rate provided by Sec. 243 of the Insurance
Code inclusive of the value of its CRM or in lieu thereof, replace or reinstate the
CRM.chanrob1esvirtualawlibrary
SO ORDERED.9
Respondent insurers filed with the Court of Appeals a petition 10 for certiorari under
Rule 65 of the Rules of Court raising mainly as issue that the RTC lacked jurisdiction
over SCP’s insurance claim and over respondent insurers.
The Court of Appeals’ Ruling

In its 8 February 2012 Decision, the Court of Appeals declared void the RTC’s 1
June 2011 Order. The Court of Appeals held that:chanroblesvirtualawlibrary
x x x [T]he present petition for certiorari under Rule 65, 1997 Rules of Civil
Procedure is an appropriate remedy, as it assails the very jurisdiction of the trial
court in granting private respondent’s insurance claims which were raised through a
mere “Motion to Pay” in the rehabilitation proceedings. It is basic that a special civil
action for certiorari is intended for the correction of errors of jurisdiction or grave
abuse of discretion amounting to lack or excess of jurisdiction. Its principal office is
to keep the inferior court within the parameters of its jurisdiction or to prevent it
from committing such a grave abuse of discretion amounting to lack or excess of
jurisdiction.

x x x x

Notably, even in the proceedings below, petitioners questioned the trial court’s
jurisdiction to resolve private respondent’s “Motion to Pay.” As the trial court noted
in its Order dated June 1, 2011, during the hearing on private respondent’s “Motion
to Pay” on January 21, 2011, petitioners entered a very special appearance solely
for the purpose of questioning the trial court’s jurisdiction. Record also bears that
petitioners assailed the trial court’s jurisdiction during the hearing on private
respondent’s “Motion to Resolve Critical Pending Incidents,” dated March 25, 2011,
and in pleadings filed before the trial court, to wit: (i) “Insurers’ Opposition Ad
Cautelam (To: ‘Motion to Direct Insurers to Pay Insurance Proceeds to Insured
Steel Corporation of the Philippines’ dated December 17, 2010)”; (ii) “Comment Ad
Cautelam (On Steel Corporation of the Philippines’ ‘Comment on the Opposition Ad
Cautelam dated January 20, 2011’)”; (iii) “Insurers’ Ad Cautelam Opposition versus
Honorable Court’s Assumption of Jurisdiction and/or Summary Resolution of Motion
in Movant’s Favor”; and (iv) “Insurers’ Memorandum (on Issue of Jurisdiction).”

There is no denying that the subject matter of private respondent’s “Motion to Pay”
comprised of its insurance claims for (i) business interruption in the amount of
US$8 million, and (ii) property loss in the amount of US$28 million. Said insurance
claims cannot be considered as “claims” within the jurisdiction of the trial court
functioning as a rehabilitation court. Rehabilitation courts only have limited
jurisdiction over the claims by creditors against the distressed company, not on the
claims of said distressed company against its debtors. The interim rules define
claim as referring to all claims or demands, of whatever nature or character against
a debtor or its property, whether for money or otherwise.

Even under the new Rules of Procedure on Corporate Rehabilitation, claim is defined
under Section 1, Rule 2 as “all claims or demands of whatever nature or character
against a debtor or its property, whether for money or otherwise.” This is also the
definition of a claim under Republic Act No. 10142. Section 4(c) thereof
reads:chanroblesvirtualawlibrary
“(c) Claim shall refer to all claims or demands of whatever nature or character
against the debtor or its property, whether for money or otherwise, liquidated or
unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed,
including, but not limited to[:] (1) all claims of the government, whether national or
local, including taxes, tariffs and customs duties; and (2) claims against directors
and officers of the debtor arising from the acts done in the discharge of their
functions falling within the scope of their authority: Provided, That, this inclusion
does not prohibit the creditors or third parties from filing cases against the directors
and officers acting in their personal capacities.”
Contrary to the trial court’s finding, petitioners cannot be considered as “affected
parties” within the purview of Section 1, Rule 3 of the Interim Rules o[n] Corporate
Rehabilitation. As explained in Metropolitan Waterworks and Sewerage System vs.
Daway, the provision, being merely a logical consequence of filing an in
rem petition for rehabilitation, shall only cover the distressed company’s creditors
and those other persons holding the assets belonging to the debtor under
rehabilitation that would be material to the rehabilitation proceedings. As the
Supreme Court explained in said case:chanroblesvirtualawlibrary
“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.”
In essence, private respondent’s “Motion to Pay” is a collection suit; hence, it must
be filed in a separate proceeding and the corresponding docket fees must be paid.
Too basic to require further elucidation is the settled doctrine that a court acquires
jurisdiction over a case only upon the payment of the prescribed fees. Here, the
filing of the “Motion to Pay” in the rehabilitation court was a circumvention of the
basic and indispensable requirement of payment of docket fees.

x x x x

There is also no gainsaying that the trial court had not validly acquired jurisdiction
over the persons of petitioners. Jurisdiction over the person of a party defendant is
acquired upon the service of summons in the manner required by law or, otherwise,
by his voluntary appearance. Petitioners were not served with summons. Their
appearance before the trial court cannot be considered as voluntary appearance
since the same was done precisely to question the jurisdiction of the trial court. It is
well-settled that a party who makes a special appearance in court challenging the
jurisdiction of said court based on the ground of invalidity of summons, among
others, cannot be considered to have submitted himself to the jurisdiction of the
court.

In fine, the Court finds that the trial court committed grave abuse of discretion
amounting to lack or excess of jurisdiction in issuing the Order dated June 1, 2011.
Grave abuse of discretion implies such capricious and whimsical exercise of
judgment as is equivalent to lack of jurisdiction or, in other words, where the power
is exercised in an arbitrary manner by reason of passion, prejudice, or personal
hostility, and it must be so patent or gross as to amount to an evasion of a positive
duty or to a virtual refusal to perform the duty enjoined or to act at all in
contemplation of law.

WHEREFORE, the trial court’s Order dated June 1, 2011 is declared NULL and VOID.
Respondents and all persons acting on their behalf are PERMANENTLY ENJOINED
from implementing the said Order dated June 1, 2011 and all related issuances, if
any, in SP Proc. No. 06-7993.

SO ORDERED.11
SCP filed a motion for reconsideration, which the Court of Appeals denied in its 27
March 2012 Resolution. Hence, the present petition.
The Issues

SCP raises mainly as issues that the Court of Appeals erred when it entertained
respondent insurers’ petition for certiorari filed under Rule 65 of the Rules of Court,
and when it held that the RTC acted with grave abuse of discretion amounting to
lack or excess of jurisdiction:chanroblesvirtualawlibrary
FIRST REASON

THE COURT OF APPEALS ERRED WHEN, AFTER EXPRESSLY SAYING THAT “IT IS
THE MANDATE OF THE COURT TO APPLY RELEVANT DECISIONS MATERIAL TO THE
RESOLUTION OF QUESTIONS BEFORE IT”, NEVERTHELESS REFUSED TO FOLLOW
AND APPLY CHINA BANKING CORPORATION VS. CEBU PRINTING AND PACKAGING
CORPORATION x x x UPON THE RESPONDENTS AND, INSTEAD, SUSTAINED A
REMEDY WHICH WAS NOT ONLY WRONG BUT ALSO COULD NOT HAVE BEEN
VALIDLY AVAILED OF BY THE RESPONDENTS FOR THE REVERSAL AND
NULLIFICATION OF THE ORDER OF THE REHABILITATION COURT OF BATANGAS
DIRECTING THE RESPONDENTS TO PAY TO THE PETITIONER THE PROCEEDS OF
INSURANCE POLICIES ISSUED BY THEM AND/OR TO REPLACE THE COLD ROLLING
MILL OF THE PETITIONER WHICH WAS LOST AS A CONSEQUENCE OF THE RISK
INSURED AGAINST.
SECOND REASON

THE COURT OF APPEALS ERRED WHEN IT DID NOT CONSIDER THE STATUS OF THE
PROCEEDINGS UNDER WHICH THE REHABILITATION COURT EXERCISED ITS
JURISDICTION AND, INSTEAD, FOUND THE SAID COURT AS WITHOUT
JURISDICTION TO DIRECT THE RESPONDENTS AS INSURERS TO PAY THE
INSURANCE PROCEEDS DUE FROM THEM AND/OR REPLACE THE COLD ROLLING
MILL OF THE PETITIONER SO THAT IT COULD CONTINUE TO REHABILITATE ITSELF
IN A MANNER AS WOULD SERVE THE POLICIES ON CORPORATE REHABILITATION
AS MANDATED BY P.D. NO. 902-A AND THE INTERIM RULES OF PROCEDURE ON
CORPORATE REHABILITATION.12
The Court’s Ruling

The petition is unmeritorious.

SCP claims that respondent insurers availed of the improper remedy when they
filed with the Court of Appeals a petition for certiorari under Rule 65 of the Rules of
Court, instead of a petition for review under Rule 43. Thus, the Court of Appeals
erred when it did not dismiss respondent insurers’ petition, applying China Banking
Corporation v. Cebu Printing and Packaging Corporation.13cralawlibrary

The Court disagrees. A petition for certiorari under Rule 65 is the proper remedy
when the issue raised involves errors of jurisdiction. On the other hand, a petition
for review under Rule 43 is the proper remedy when the issue raised involves errors
of judgment. In ABS-CBN Broadcasting Corp. v. World Interactive Network Systems
Japan Co., Ltd.,14 the Court held that:chanroblesvirtualawlibrary
Proper issues that may be raised in a petition for review under Rule 43 pertain to
errors of fact, law or mixed questions of fact and law. While a petition for certiorari
under Rule 65 should only limit itself to errors of jurisdiction, that is, grave abuse of
discretion amounting to a lack or excess of jurisdiction.15
In Suyat, Jr. v. Torres,16 the Court held that:chanroblesvirtualawlibrary
In a petition for certiorari, the jurisdiction of the court is narrow in scope. It is
limited to resolving only errors of jurisdiction. x x x Certiorari will issue only to
correct errors of jurisdiction. It is not a remedy to correct errors of judgment. An
error of judgment is one in which the court may commit in the exercise of its
jurisdiction, and which error is reversible only by appeal. Error of jurisdiction is one
where the act complained was issued by the court without or in excess of
jurisdiction and which error is correctible only by the extraordinary writ of certiorari.
Certiorari will not be issued to cure errors by the trial court or quasi-judicial body in
its appreciation of the evidence of the parties, and its conclusions anchored on the
said findings, and its conclusions of law. As long as the court acts within its
jurisdiction, any alleged errors committed in the exercise of its discretion will
amount to nothing more than mere errors of judgment, correctible by an appeal or
a petition for review under Rule 43 of the Rules of Court. 17
China Banking Corporation is inapplicable because the issue in that case is different
from the issue raised by respondent insurers in CA-G.R. SP No. 119760. In  China
Banking Corporation, the issue involved errors of judgment. In particular, Cebu
Printing and Packaging Corporation (CPPC) questioned the rehabilitation court’s
findings of fact and law in its 30 April 2002 Order denying due course to the petition
for corporate rehabilitation. CPPC never questioned the rehabilitation court’s
jurisdiction. Since the issue involved errors of judgment, the proper remedy, as
held in China Banking Corporation, was to file a petition for review under Rule 43.
In the present case, the issue raised by respondent insurers in CA-G.R. SP No.
119760 involved errors of jurisdiction. Respondent insurers questioned the RTC’s
jurisdiction over the subject matter of SCP’s insurance claim and over the persons
of respondent insurers. Since the issue involved errors of jurisdiction, the proper
remedy was to file a petition for certiorari under Rule 65.

SCP claims that the RTC has jurisdiction over the subject matter of the insurance
claim. Thus, the Court of Appeals erred when it held that the RTC acted with grave
abuse of discretion amounting to lack or excess of jurisdiction in issuing the 1 June
2011 Order.
The Court disagrees. The RTC, acting as rehabilitation court, has no jurisdiction
over the subject matter of the insurance claim of SCP against respondent insurers.
SCP must file a separate action for collection where respondent insurers can
properly thresh out their defenses. SCP cannot simply file with the RTC a motion to
direct respondent insurers to pay insurance proceeds. Section 3 of Republic Act No.
1014218 states that rehabilitation proceedings are “summary and non-adversarial”
in nature. They do not include adjudication of claims that require full trial on the
merits, like SCP’s insurance claim against respondent insurers. In Advent Capital
and Finance Corporation v. Alcantara,19 the Court held
that:chanroblesvirtualawlibrary
Ultimately, the issue is what court has jurisdiction to hear and adjudicate
the conflicting claims of the parties over the dividends that Belson held in
trust for their owners. Certainly, not the rehabilitation court which has not
been given the power to resolve ownership disputes between Advent Capital and
third parties. x x x.

Advent Capital must file a separate action for collection to recover the trust
fees that it allegedly earned and, with the trial court’s authorization if
warranted, put the money in escrow for payment to whoever it belongs. Having
failed to collect the trust fees at the end of each calendar quarter as stated in the
contract, all it had against the Alcantaras was a claim for payment which is
proper subject for an ordinary action for collection. It cannot enforce its
money claim by simply filing a motion in the rehabilitation case for delivery
of money belonging to the Alcantaras but in the possession of a third party.

Rehabilitation proceedings are summary and non-adversarial in nature,

and do not contemplate adjudication of claims that must be threshed out in
ordinary court proceedings. Adversarial proceedings similar to that in ordinary
courts are inconsistent with the commercial nature of a rehabilitation case. The
latter must be resolved quickly and expeditiously for the sake of the corporate
debtor, its creditors and other interested parties. Thus, the Interim Rules
“incorporate the concept of prohibited pleadings, affidavit evidence in lieu of oral
testimony, clarificatory hearings instead of the traditional approach of receiving
evidence, and the grant of authority to the court to decide the case, or any
incident, on the basis of affidavits and documentary evidence.”

Here, Advent Capital’s claim is disputed and requires a full trial on the

merits. It must be resolved in a separate action where the Alcantaras’
claim and defenses may also be presented and heard.20 (Emphases supplied)
The Court agrees with the ruling of the Court of Appeals that the jurisdiction of the
rehabilitation courts is over claims against the debtor that is under
rehabilitation, not over claims by the debtor against its own debtors or against
third parties. In its 8 February 2012 Decision, the Court of Appeals held
that:chanroblesvirtualawlibrary
x x x Said insurance claims cannot be considered as “claims” within the jurisdiction
of the trial court functioning as a rehabilitation court. Rehabilitation courts only
have limited jurisdiction over the claims by creditors against the distressed
company, not on the claims of said distressed company against its debtors. The
interim rules define claim as referring to all claims or demands, of whatever nature
or character against a debtor or its property, whether for money or otherwise.

Even under the new Rules of Procedure on Corporate Rehabilitation, claim is defined
under Section 1, Rule 2 as “all claims or demands of whatever nature or character
against a debtor or its property, whether for money or otherwise.” This is also the
definition of a claim under Republic Act No. 10142. Section 4(c) thereof
reads:chanroblesvirtualawlibrary
“(c) Claim shall refer to all claims or demands of whatever nature or
character against the debtor or its property, whether for money or otherwise,
liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or
undisputed, including, but not limited to[:] (1) all claims of the government,
whether national or local, including taxes, tariffs and customs duties; and (2)
claims against directors and officers of the debtor arising from the acts done in the
discharge of their functions falling within the scope of their authority: Provided,
That, this inclusion does not prohibit the creditors or third parties from filing cases
against the directors and officers acting in their personal capacities.” 21 (Emphasis
supplied)
Respondent insurers are not claiming or demanding any money or property from
SCP. In other words, respondent insurers are not creditors of SCP. Respondent
insurers are contingent debtors of SCP because they may possibly be, subject to
proof during trial, liable to SCP. Thus, the RTC has no jurisdiction over the
insurance claim of SCP against respondent insurers. SCP must file a separate action
against respondent insurers to recover whatever claim it may have against them.

WHEREFORE, the petition is DENIED. The Court AFFIRMS the 8 February 2012

Decision and 27 March 2012 Resolution of the Court of Appeals in CA-G.R. SP No.
119760.

SO ORDERED.

G.R. No. 179558               June 11, 2011

ASIATRUST DEVELOPMENT BANK, Petitioner,

vs.
FIRST AIKKA DEVELOPMENT, INC. and UNIVAC DEVELOPMENT, INC., Respondents.

DECISION

NACHURA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the Court
of Appeals (CA) Decision1 dated June 28, 2007 and Resolution2 dated August 29, 2007 in CA-
G.R. SP No. 97408.

The Facts
Respondents First Aikka Development, Inc. (FADI) and Univac Development, Inc. (UDI) are
domestic corporations engaged in the construction and/or development of roads, bridges,
infrastructure projects, subdivisions, housing, land, memorial parks, and other industrial and
commercial projects for the government or any private entity or individual.3

In the course of their business, FADI and UDI availed of separate loan accommodations or
credit lines with petitioner Asiatrust Development Bank.4 The aggregate amount of the loan
obtained by respondents was ₱114,000,000.00. Respondents religiously and faithfully complied
with their loan obligations, but during the Asian Financial Crisis, which directly and adversely
affected mainly the construction and real estate industry, respondents could not pay their
obligations in cash.5 This prompted respondents to negotiate with petitioner for different modes
of payment that the former might avail of. Petitioner thus agreed that respondents assign the
receivables of their various contracts to sell involving the lots in the residential subdivision
projects they were developing, instead of paying in cash.6

Notwithstanding the above agreement, petitioner insisted on collecting the loan per the loan
documents. Petitioner claimed that respondents were already in default and demanded the
payment of ₱145,830,220.95. Respondents denied that they were in default because of the
assignment of their receivables to petitioner. Respondents contested petitioner’s claim and
demanded for an accounting to determine the correct and true amount of their obligations.7

On May 10, 2006, respondents filed a consolidated Petition for Corporate Rehabilitation with
Prayer for Suspension of Payments8 with the Regional Trial Court (RTC) of Baguio City, Branch
59. The case was docketed as Civil Case No. 6267-R. Respondents alleged that they were
unable to pay their loan based on the claim of petitioner. Though they have sufficient assets to
pay their loan, respondents averred that they were not liquid. They also stated that they were
threatened by petitioner with various cases aimed at disrupting the operations of respondents
which might eventually lead to the cessation of their business.9 Respondents prayed that an
order be issued staying the enforcement of any and all claims of their creditors, investors, and
suppliers, whether for money or otherwise, against petitioner, their guarantors, and
sureties.10 By way of rehabilitation, respondents also sought the determination of the true and
correct amount of their loan obligation with petitioner.11

On May 16, 2006, the RTC issued an Order,12 the pertinent portions of which read:

After an examination of the contents of the petition setting forth with sufficient particularity and
material facts pursuant to Section 2 of Rule 4 of the Interim Rules of Procedures (sic) of
Corporate Rehabilitation and the supporting documents attached thereto and finding the same
to be sufficient in form and substance, the Court hereby:

1. ORDERS STAYING enforcement of all claims whether for money or otherwise and
whether such enforcement is by court action or otherwise, against the debtors (herein
petitioners)[, their] guarantors and [sureties] not solidarily liable with the debtors. In
particular[,] ASIATRUST BANK BE STAYED from proceeding with the foreclosure and
auction sale of the mortgaged properties;

2. APPOINTS PATRICK V. CAOILE as interim rehabilitation receiver with a bond of two

million (₱2,000,000.00) pesos;

xxxx
 7. FIXES the initial hearing on the petition on June 29, 2006 at 11:00 o’clock (sic) in the
morning.13

On June 2, 2006, Robert Cuchado, an officer of petitioner, went to Baguio City to secure a copy
of the petition for rehabilitation but failed to do so because, at that time, the personnel of the
rehabilitation court were attending the Judicial Service Training. Petitioner then tried to secure a
copy of the petition through the sheriff of the RTC of La Trinidad, Benguet. The rehabilitation
court, however, required petitioner to file a motion to that effect, together with a written
document authorizing the sheriff to secure a copy thereof. On June 9, 2006, the rehabilitation
court issued an Order granting the motion filed by petitioner and gave it a certified true copy of
the petition.14

On the day of the initial hearing, petitioner, through its counsel Atty. Mario C. Lorenzo (Atty.
Lorenzo), went to court with a Motion for Leave of Court to Admit Opposition to Rehabilitation
Petition15 with the attached Opposition to Petition for Rehabilitation. 16 In an Order17 dated July
17, 2006, the RTC denied the motion and explained:

Under par. 9 of the Stay Order[,] all creditors, etc., were given ten (10) days before the initial
hearing to file their comment or opposition to the petition and putting them on notice that failure
to do so will bar them from participating in the proceedings.

It is only on June 29, 2006, the date of the initial hearing that Asiatrust filed its Motion with
Leave to Admit Opposition. The motion partakes of the nature of a motion for extension of time
to file pleading which is a prohibited pleading under Rule 3(e) of the Interim Rules of Procedure
on Corporate Rehabilitation.18

On July 31, 2006, when the case was called for hearing, Enrico J. Ong (Ong) appeared as
representative of petitioner because the latter’s counsel could not go to court due to the
cancellation of his flight as a result of bad weather. The rehabilitation court recognized the
appearance of Ong only to inform the court that the counsel for petitioner could not attend the
hearing. There being no other oppositors or creditors in court despite due notices, the
rehabilitation court terminated the initial hearing and directed the rehabilitation receiver to
evaluate respondents’ rehabilitation plan and then report the results thereof to the court.19

On October 13, 2006, the rehabilitation receiver called for a conference and presented the draft
of the rehabilitation report to petitioner, represented by Atty. Lorenzo and Ong, and to
respondents. Petitioner filed a manifestation and motion in court calling its attention to the
alleged refusal of the receiver to hear its side. Petitioner thus asked for judicial assistance to
enable it to actively participate in the rehabilitation proceedings and protect its interest. The
receiver finalized and later on filed his evaluation report in court. He recommended the approval
of the rehabilitation plan.20

On December 5, 2006, the RTC issued an Order,21 the pertinent portions of which read:

On the same ground under Rule 3 of the Interim Rules, the Motion of Oppositor Asiatrust to
participate in the Rehabilitation Proceedings is DENIED. This pleading partakes of a [P]etition
for Relief which is also a prohibited pleading under par. d of Rule 3 of the same rule. Moreover,
the motion has also the purpose to reconsider the court’s ruling in denying the admission of their
opposition to the [P]etition for Rehabilitation.
It must be stressed that under par. 9 of the Stay Order, "All creditors, etc., were given ten (10)
days before the initial hearing to file their comment or opposition to the petition and putting them
on notice that failure to do so will bar them from participating in the proceedings."

As to the Rehabilitation Report and the Integrated Revised Rehabilitation Plan and Schedule of
the petitioners, the court, after a careful and thorough examination and review of the report, it is
its considered judgment that the rehabilitation of the debtor is feasible and hereby APPROVES
the Rehabilitation Report and the REVISED REHABILITATION PLAN.

xxxx

WHEREFORE, premises all duly considered, the Motion of Asiatrust to participate in the
Rehabilitation Proceedings is hereby DENIED, the Rehabilitation Report and the Integrated
Revised Rehabilitation Plan of Receiver Patrick Caoile is APPROVED and the Notice of the
Appearance of the Cabato Law Office as collaborating counsel for Oppositor Asiatrust is
NOTED.

The court appointed Receiver shall submit his report every three (3) months and a yearly report
on the status of the progress of the rehabilitation and the implementation and monitoring of the
same.

SO ORDERED.22

Aggrieved, petitioner elevated the case to the CA via a Petition for Review 23 under Rule 43 of
the Rules of Court.

On June 28, 2007, the appellate court affirmed the above RTC Orders. The appellate court
emphasized that petitioner’s failure to participate in the rehabilitation proceedings was due to its
own fault. First, petitioner failed to file on time its opposition to the petition for rehabilitation and
still failed to present good reason for it to be belatedly admitted. Second, on the date of the
second hearing, its counsel failed to go to court allegedly due to the cancellation of his flight,
which, to the mind of the court, was inexcusable. Lastly, instead of filing a comment to the
rehabilitation proceedings, petitioner filed a motion to participate in the rehabilitation
proceedings, which is a prohibited pleading. The CA thus concluded that petitioner was given
every opportunity to be heard in the rehabilitation proceedings, but it failed to avail of these
remedies. On the propriety of the joint petition for rehabilitation, the CA opined that the Interim
Rules of Procedure on Corporate Rehabilitation (the Rules) contains no prohibition. Finally, the
CA stressed that rehabilitation proceedings are non-adversarial and summary in nature which,
therefore, necessitate the proper observance of the period and procedures provided for by law
and the Rules.24

The Issues

Undaunted, petitioner comes before this Court, raising the following errors:

A.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED GRAVE

ERRORS OF LAW WHEN IT FAILED TO RULE THAT PETITIONER WAS UNJUSTLY
DEPRIVED OF ITS PROPERTY WITHOUT DUE PROCESS OF LAW WHEN IT WAS
 NOT ALLOWED TO PROVE THE TRUE AND CORRECT AMOUNT OF THE LOAN
OBLIGATIONS OWING TO IT BY THE RESPONDENTS BASED ON A MERE
TECHNICALITY, IN BLATANT DISREGARD OF THE APPLICABLE LAWS AND
DECISIONS OF THIS HONORABLE COURT.

B.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED GRAVE

ERRORS OF LAW WHEN IT AFFIRMED THE APPROVAL OF THE REHABILITATION
PLAN DESPITE THE REHABILITATION COURT’S FAILURE TO CONDUCT A
CLARIFICATORY HEARING TO RESOLVE THE UNSETTLED ISSUE ON THE
AMOUNT OF INDEBTEDNESS OF PRIVATE RESPONDENTS AND THE
REHABILITATION RECEIVER’S FAILURE TO MAKE A CREDIBLE AND
INDEPENDENT INVESTIGATION ON THE AMOUNT OF INDEBTEDNESS OF
RESPONDENT CORPORATIONS, THEREBY DEVIATING FROM THE USUAL AND
ACCEPTED COURSE OF JUDICIAL PROCEEDINGS.

C.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED GRAVE

ERRORS OF LAW WHEN IT INEXPLICABLY AFFIRMED THE REHABILITATION
COURT’S APPROVAL OF THE CONSOLIDATED PETITION FOR REHABILITATION,
DESPITE THE SUBSTANTIAL EVIDENCE SHOWING THAT THE PETITION WAS
FILED IN THE WRONG VENUE INSOFAR AS RESPONDENT UNIVAC
DEVELOPMENT IS CONCERNED AND WAS FATALLY DEFECTIVE ON ITS FACE.

D.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED A

SERIOUS ERROR OF LAW WHEN IT REFUSED TO RULE ON THE SUBSTANTIAL
AND FORMAL DEFECTS OF THE REHABILITATION PLAN ON THE PRETEXT THAT
THE REHABILITATION COURT’S APPROVAL OF THE RESPONDENTS’
REHABILITATION IS BINDING ON IT, DESPITE THE ABSENCE OF SUBSTANTIAL
EVIDENCE THAT WOULD SUPPORT THE DECISION OF THE REHABILITATION
COURT.

E.

WHETHER OR NOT THE HONORABLE COURT’S EXERCISE OF ITS

DISCRETIONARY REVIEW POWERS IS WARRANTED UNDER THE
CIRCUMSTANCES.25

Petitioner’s Arguments

Petitioner avers that it was denied due process when the rehabilitation court refused to admit its
opposition to the petition for rehabilitation and to comment on the rehabilitation plan.26 It
explains that the late submission of the opposition was brought about by the baseless and
unfounded requirements imposed by the court.27 Considering that there are valid and substantial
grounds for the dismissal of the petition for rehabilitation, petitioner insists that its comment and
opposition should have been admitted by the rehabilitation court. Petitioner points out that while
the court denied its motion for leave to admit its opposition, it (the court) allowed the Securities
and Exchange Commission to submit its comment long after the prescribed period.28

Petitioner adds that the rehabilitation court’s unwarranted refusal to recognize the appearance
of its duly authorized representative constitutes a denial of its right to due process. 29 Petitioner
also insists that mere delay in the submission of the comment on the petition for rehabilitation
does not warrant the denial of petitioner’s right to participate in the rehabilitation proceedings. It
likewise assails the rehabilitation court’s jurisdiction over UDI, whose principal place of business
is in Pasig City, which is beyond the jurisdiction of the RTC of Baguio City. It, thus, challenges
the consolidated petition for rehabilitation.30 Moreover, petitioner avers that respondents failed to
show that they had adequate capital to sustain their operations during the interim period of
corporate rehabilitation.31 Lastly, petitioner denies that it is estopped from assailing the
rehabilitation plan as it already received payment from respondents based on the rehabilitation
plan. It clarifies that it accepted the check payments subject to the outcome of this case.32

Respondents’ Arguments

Respondents, on the other hand, aver that the petition is legally infirm as there are no special
important reasons for the Court to exercise its sound judicial discretion to review the assailed
CA Decision.33 They also argue that petitioner’s failure to participate in the rehabilitation
proceedings could be attributed to its counsel’s own slackness and disregard for the rules.34 On
the issue of the rehabilitation court’s jurisdiction, respondents counter that petitioner could no
longer assail it as petitioner actively participated and continues to participate in the rehabilitation
proceedings, including the receipt of payments in accordance with the approved rehabilitation
plan.35 They explain that in the Orders dated May 16, 2006, the rehabilitation court held that the
petition is sufficient in form and substance; July 17, 2006, the rehabilitation court denied
petitioner’s motion for leave to admit its comment on the petition for rehabilitation; and July 31,
2006, the court declared that there is merit in the petition which was given due course.
Petitioner’s failure to assail the above orders rendered them final and immutable. Respondents
thus opine that petitioner could no longer assail them in this petition for review.36

Respondents likewise insist that petitioner could no longer participate in the rehabilitation
proceedings because of its failure to file its comment on the petition. In other words,
respondents said, the filing of the comment on the petition is a condition precedent to the filing
of the comment on the rehabilitation plan.37 On the amount of the loan obligation, respondents
claim that there was a valid basis and there was a determination of the true and correct amount
thereof.38

The Court’s Ruling

Though the rehabilitation proceedings had gone as far as the approval and the subsequent
implementation of the rehabilitation plan, we must confront the issue of the rehabilitation court’s
jurisdiction to hear and decide the case insofar as respondent UDI is concerned. A perusal of
petitioner’s pleadings clearly shows that it had repeatedly raised the jurisdictional question. The
courts below, however, ignored this issue as they did not recognize petitioner’s right to
participate in the rehabilitation proceedings.

While it is true that petitioner had been asking the rehabilitation and appellate courts that it be
allowed to participate, contrary to respondents’ contention, the same did not amount to estoppel
that would bar it from questioning the rehabilitation court’s jurisdiction. It is well-settled that the
court’s jurisdiction may be assailed at any stage of the proceedings, even for the first time on
appeal. The reason is that jurisdiction is conferred by law, and lack of it affects the very authority
of the court to take cognizance of and to render judgment on the action. 39 In its Opposition to the
petition for rehabilitation, petitioner already questioned the court’s jurisdiction over UDI. On
appeal to the CA, it again raised the same issue, but it failed to obtain a favorable decision. We
cannot, therefore, say that petitioner slept on its rights. It is not estopped from raising the
jurisdictional issue even at this stage. In any event, even if petitioner had not raised the issue of
jurisdiction, the reviewing court would still not be precluded from ruling on the matter of
jurisdiction.

Neither can estoppel be imputed to petitioner for its receipt of payments made by respondents
in accordance with the rehabilitation plan. It has been established that in its letters to
respondents, petitioner explained that it received payments subject to the results of its appeal.
Besides, it is a basic rule that estoppel does not confer jurisdiction on a tribunal that has none
over the cause of action or subject matter of the case.40

Records show that the Petition for Corporate Rehabilitation with Prayer for Suspension of
Payments41 was filed by two corporations, namely, FADI and UDI. Respondent FADI is a real
estate corporation duly organized and existing under and by virtue of Philippine laws, with
principal place of business in Baguio City.42 Respondent UDI, on the other hand, is a real estate
corporation with principal place of business in Pasig City.43 Respondents explain in their petition
that they filed the consolidated petition because they availed of separate but intertwined loan
obligations or credit lines, and that they have interlocking directors, owners, and officers. As
such, a full and complete settlement of the loan obligations will involve the two corporations and,
consequently, the rehabilitation of one will entail the rehabilitation of the other.44

We find that the consolidation of the petitions involving these two separate entities is not proper.

Although FADI and UDI have interlocking directors, owners, and officers and intertwined loans,
the two corporations are separate, each with a personality distinct from the other. To be sure, in
determining the feasibility of rehabilitation, the court evaluates the assets and liabilities of each
of these corporations separately and not jointly with other corporations.

Moreover, Section 2, Rule 3 of the Rules, the rule applicable at the time of the filing of the
petition, provides:

Sec. 2. Venue. – Petitions for rehabilitation pursuant to these Rules shall be filed in the Regional
Trial Court having jurisdiction over the territory where the debtor’s principal office is located.

Considering that UDI’s principal office is located in Pasig City, the petition should have been
filed with the RTC in Pasig City and not in Baguio City. The latter court cannot, therefore, take
cognizance of the rehabilitation petition insofar as UDI is concerned for lack of jurisdiction.

This error, however, will not result in the dismissal of the entire petition since the RTC of Baguio
City had jurisdiction over the petition of FADI in accordance with the above-quoted provision of
the Rules.

On the issue of whether the rehabilitation court, as affirmed by the CA, correctly denied
petitioner’s prayer to participate in the rehabilitation proceedings because of the belated filing of
its Comment/Opposition to respondents’ petition for rehabilitation, we answer in the negative.
The Court promulgated the Rules in order to provide a remedy for summary and non-adversarial
rehabilitation proceedings of distressed but viable corporations.45 These Rules are to be
construed liberally to obtain for the parties a just, expeditious, and inexpensive disposition of the
case.46 To be sure, strict compliance with the rules of procedure is essential to the
administration of justice. Nonetheless, technical rules of procedure are mere tools designed to
facilitate the attainment of justice. Their strict and rigid application should be relaxed when they
hinder rather than promote substantial justice.47 Otherwise stated, strict application of technical
rules of procedure should be shunned when they hinder rather than promote substantial
justice.48

In this case, instead of filing its opposition to the petition for rehabilitation at least ten days
before the date of the initial hearing as required by the Rules, petitioner filed a Motion for Leave
of Court to Admit Opposition to Rehabilitation Petition49 with the attached Opposition to Petition
for Rehabilitation50 on the date of the initial hearing. Because the pleading was not filed on time,
the RTC denied the motion. While the court has the discretion whether or not to admit the
opposition belatedly filed by petitioner, it is our considered opinion that the RTC gravely abused
its discretion when it refused to grant the motion, even as the factual circumstances of the case
require that the Rules be liberally construed in the interest of justice.

Admittedly, petitioner is respondents’ major creditor. The parties even explained that the new
payment scheme adopted in the approved rehabilitation plan maintained the same scheme as
that stipulated in the contracts between respondents and their creditors except that of petitioner.
In other words, respondents could pay the other creditors in the same manner as that stipulated
in their contracts but could not abide by the terms of their contracts with petitioner.

Moreover, petitioner and respondents differ in their assessment and computation of the latter’s
obligations to the former. Petitioner claims that respondents owe it ₱145,830,220.95, while the
latter only admit a total obligation of ₱24,202,015. This disparity in the parties’ claims makes it
more important for the rehabilitation court to have given petitioner the opportunity to be heard.
Besides, in their petition before the RTC, respondents sought the determination of the true and
correct amount of their loan with petitioner.51 We consider this as a compelling reason for the
liberal interpretation of the Rules, and the rehabilitation court should have admitted petitioner’s
comment on the petition for rehabilitation and allowed petitioner to participate in the
proceedings.

Time and again, we have held that cases should, as much as possible, be resolved on the
merits, not on mere technicalities. In cases where we dispense with the technicalities, we do not
mean to undermine the force and effectivity of the periods set by law. In those rare cases where
we did not stringently apply the procedural rules, there always existed a clear need to prevent
the commission of a grave injustice, as in the present case. 52 Our judicial system and the courts
have always tried to maintain a healthy balance between the strict enforcement of procedural
laws and the guarantee that every litigant be given the full opportunity for the just and proper
disposition of his cause.53

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 by way of the present value of payments projected in the rehabilitation
plan, more if the corporation continues as a going concern than if it is immediately
liquidated.541awvvphi1
Rehabilitation proceedings in our jurisdiction have equitable and rehabilitative purposes. On the
one hand, they attempt to provide for the efficient and equitable distribution of an insolvent
debtor’s remaining assets to its creditors; and on the other, to provide debtors with a "fresh
start" by relieving them of the weight of their outstanding debts and permitting them to
reorganize their affairs.55 The purpose of rehabilitation proceedings is to enable the company to
gain a new Lease on life and thereby allow creditors to be paid their claims from its earnings.56

The determination of the true and correct amount due petitioner is important in assessing
whether FADI may be successfully rehabilitated. It is thus necessary that petitioner be given the
opportunity to be heard by the rehabilitation court. The court should admit petitioner’s comment
on or opposition to FADI’s petition for rehabilitation and allow petitioner to participate in the
rehabilitation proceedings to determine if indeed FADI could maintain its corporate existence. A
remand of the case to the rehabilitation court is, therefore, imperative. To be sure, the
successful rehabilitation of a distressed corporation will benefit its debtors, creditors,
employees, and the economy in general.57

As much as we would like to honor the rehabilitation plan approved by the rehabilitation court,
particularly because it has already been partially implemented, we cannot sustain the decision
of the court, as affirmed by the CA, if we are to ensure that rehabilitation is indeed feasible. It is
especially important in this case to hear petitioner, as the major creditor of the distressed
corporation, since it is a banking institution.

Banks are entities engaged in the lending of funds obtained through deposits from the public.
They borrow the public’s excess money and lend out the same. Banks, therefore, redistribute
wealth in the economy by channeling idle savings to profitable investments. 58 Banks operate
(and earn income) by extending credit facilities financed primarily by deposits from the public.
They plough back the bulk of said deposits into the economy in the form of loans. Since banks
deal with the public’s money, their viability depends largely on their ability to return those
deposits on demand. For this reason, banking is undeniably imbued with public interest.
Consequently, much importance is given to sound lending practices and good corporate
governance.59

WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Court of

Appeals Decision dated June 28, 2007 and Resolution dated August 29, 2007 in CA-G.R. SP
No. 97408 are SET ASIDE. Consequently, the Order of the RTC dated July 17, 2006 and those
issued subsequent thereto are hereby NULLIFIED.

We REMAND the records of the case pertaining to the petition for rehabilitation of First Aikka
Development, Inc. to the Regional Trial Court of Baguio City, Branch 59, for further proceedings.
The court is ORDERED to admit petitioner Asiatrust Development Bank’s Comment/Opposition
to the petition for rehabilitation and to allow petitioner to participate in said proceedings.

The Regional Trial Court of Baguio City, Branch 59, is likewise ORDERED to DISMISS the
petition for rehabilitation of Univac Development, Inc. for lack of jurisdiction.

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.
844641 and the 24 May 2006 Decision rendered by said Court’s Sixteenth Division in CAG. R.
SP No. 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).3 To secure the prompt payment of the loan, TCEI executed in favor of
Metrobank a thrice amended Deed of Real Estate Mortgage4 over twenty parcels of land
registered in its name 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. 5 For failure of TCEI to
heed its demands for the payment of the loan, Metrobank 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 Sale6 which was registered with the Cavite Provincial 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.8 Metrobank 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).9 With the issuance of a Stay Order on 8 October 2002 in the corporate
rehabilitation case,10 TCEI filed on 21 October 2002 a motion to suspend the proceedings in
LRC Case No. 2128-02 which was granted by respondent judge in the Order dated 2 December
2002.11 Aggrieved by the denial of its motion for reconsideration of the same order, Metrobank
filed the Rule 65 petition for certiorari which was docketed before the CA as CA-G.R. SP No.
76147.12

On 30 January 2004, the CA’s then Fifth Division rendered the Decision13 in CA-G.R. SP No.
76147, 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. 8741.14 Finding the Rehabilitation Plan submitted by TCEI
feasible, on the other hand, the rehabilitation court issued the Order dated 29 March 2004 in
SEC Case No. 023-02,15 the decretal portion of which states:

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.17 Aggrieved, TCEI and the Spouses Campos perfected the appeal which was
docketed 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.18 On 30 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.19 Dissatisfied with the denial of the motion for
reconsideration of the foregoing decision in the CA’s Resolution dated 26 July 2006, 20 TCEI and
the Spouses Campos filed the Rule 45 petition for review now docketed before 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-
104638822 in the name of Metrobank which had consolidated its ownership over the subject
properties on 25 April 2003.23 Maintaining that the transfers of title were invalid and ineffective,
TCEI filed its 4 November 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.24 The motion was, however, denied in the
Rehabilitation Court’s 2 June 2005 Order, on the 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. 90311.26 On 24 May 2006, said court’s Sixteenth
Division rendered 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. 8791.27 Considering that said 30
January 2004 Decision had 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.28 TCEI’s motion for reconsideration was likewise
denied for lack of merit in the CA’s Resolution dated 14 August 2006, 29 hence its Rule 45
petition for review now docketed before us as G.R. No. 174132.30

In G.R. No. 173610, petitioners TCEI and the Spouses Campos seek the reversal of the 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. 31 A principal feature of corporate rehabilitation is the Stay
Order which defers all actions or claims against the corporation seeking corporate rehabilitation
from the date of its issuance until the dismissal of the petition or termination of the rehabilitation
proceedings.32 Under Section 24, Rule 4 of the Interim Rules of Procedure on Corporate
Rehabilitation which was in force at the time TCEI filed its petition for rehabilitation a quo, the
approval of the rehabilitation plan also produces the following results:

a. The plan and its provisions shall be binding upon the debtor and all persons who may be
affected by it, including the creditors, whether or not such persons have participated in the
proceedings or opposed the plan or whether or not their claims have been scheduled;

b. The debtor shall comply with the provisions of the plan and shall take all actions necessary to
carry out the plan;

c. Payments shall be made to the creditors in accordance with the provisions of the plan;

d. Contracts and other arrangements between the debtor and its creditors shall be interpreted
as continuing to apply to the extent that they do not conflict with the provisions of the plan; and

e. Any compromises on amounts or rescheduling of timing of payments by the debtor shall be

binding on creditors regardless of whether or not the plan is successfully implemented.

In addition to the issuance of the Stay Order in SEC Case No. 023-02 on 8 October 2002,
petitioners call attention to the fact that the Rehabilitation Court approved 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,33 petitioners
argue that the subject properties 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,34 should have been considered a third person whose
possession of the foreclosed properties was an exception to the rule that the grant of a writ of
possession is ministerial. For these reasons, petitioners claim that the writ of possession issued
in favor of Metrobank is invalid and unenforceable.35

The dearth of merit in petitioners’ position is, however, evident from the fact that, Metrobank had
already acquired ownership over the subject realties when TCEI commenced its petition for
corporate rehabilitation on 1 October 2002. Although Metrobank concededly invoked Act No.
3135 in seeking the extrajudicial foreclosure of the mortgages executed by TCEI, the second
paragraph of Section 47 of RA 8791 – the law in force at said time – specifically provides as
follows:

Section 47. Foreclosure of Real Estate Mortgage. – x x x x

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the right to redeem the property in accordance with this
provision until, but not after, the registration of the certificate of foreclosure sale with the
applicable Register of Deeds which in no case shall be more than three (3) months after
foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale
prior to the effectivity of this Act shall retain their redemption rights until their expiration.

Having purchased the subject realties at public auction on 7 November 2001, Metrobank
undoubtedly acquired ownership over the same when TCEI failed to exercise its right of
redemption within the three-month period prescribed under the foregoing provision. With
ownership already vested in its favor as of 6 February 2002, it matters little that Metrobank
caused the certificate of sale to be registered with the Cavite Provincial Registry only on 10 April
2002 and/or executed an affidavit consolidating its ownership over the same properties only on
25 April 2003. The rule is settled that the mortgagor loses all interest over the foreclosed
property after the expiration of the redemption period and the purchaser becomes the absolute
owner thereof when no redemption is made.36 By the time that the Rehabilitation Court issued
the 8 October 2002 Stay Order in SEC Case No. 023-02, it cannot, therefore, be gainsaid that
Metrobank had long acquired ownership over the subject realties.

Viewed in the foregoing light, the CA cannot be faulted for upholding the 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 3135,37 as amended, it has been consistently ruled that there is no
reason to withhold said writ after the expiration of the redemption period when no redemption is
effected by the mortgagor. Indeed, the rule is settled that the right of the purchaser to the
possession of the foreclosed property becomes absolute after the redemption period, without a
redemption being effected by the property owner. Since the basis of this right to possession is
the purchaser's ownership of the property, the mere filing of an ex parte motion for the issuance
of the writ of possession would suffice, and no bond is required.38

Considering that Metrobank acquired ownership over the mortgaged properties upon the
expiration of the redemption period on 6 February 2002, TCEI is also out on a limb in invoking
the Stay Order issued by the Rehabilitation Court on 8 October 2002 and the approval of its
rehabilitation plan on 29 March 2004. An essential function of corporate rehabilitation is,
admittedly, the Stay Order which is a mechanism of suspension of all actions and claims against
the distressed corporation upon the due appointment of a management committee or
rehabilitation receiver.39 The Stay Order issued by the Rehabilitation Court in SEC Case No.
023-02 cannot, however, apply to the mortgage obligations owing to Metrobank which had
already been enforced even before TCEI’s filing of its petition for corporate rehabilitation on 1
October 2002.

In Equitable PCI Bank, Inc v. DNG Realty and Development Corporation,40 the Court upheld the
validity of the writ of possession procured by the creditor despite the subsequent issuance of a
stay order in the rehabilitation proceedings instituted by the debtor. In said case, Equitable PCI
Bank (Equitable) foreclosed on 30 June 2003 the mortgage executed in its favor by DNG Realty
and Development Corporation (DNG) and was declared the highest bidder at the 4 September
2003 public auction of the property. On 21 October 2003, DNG also instituted a petition for
corporate rehabilitation which resulted in the issuance of a Stay Order on 27 October 2003.
Having caused the recording of the Certificate of Sale on 3 December 2003, on the other hand,
Equitable executed an affidavit of consolidation of its ownership which served as basis for the
issuance of a new title in its favor on 10 December 2003. Equitable subsequently filed an action
for the issuance of a writ of possession on 17 March 2004 which was eventually granted on 6
September 2004. In affirming the validity of the certificate of sale, certificate of title and writ of
possession issued in favor of Equitable, the Court ruled as follows:

In RCBC, we upheld the extrajudicial foreclosure sale of the mortgage properties of BF Homes
wherein RCBC emerged as the highest bidder as it was done before the appointment of the
management committee. Noteworthy to mention was the fact that the issuance of the certificate
of sale in 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.41 While it is true that the function ceases to be ministerial where the property is in the
possession of a third party claiming a right adverse to that of the judgment debtor,42 the
rehabilitation receiver’s power to take possession, 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.43 It has been ruled that
there is nothing in the concept of corporate rehabilitation that would ipso facto deprive the
officers of a debtor corporation of control over its business or properties.44

Neither are we inclined to hospitably entertain 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,45 the Court ruled that,
after the 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 nonadversarial46 and do not impair the debtor’s contracts47 or
diminish the status of preferred creditors.48 Concededly, the issuance of the Stay Order
suspends the enforcement of all claims against the debtor, whether for money or otherwise, and
whether such enforcement is by court action or otherwise, effective from the date of its issuance
until the dismissal of the petition or the termination of the rehabilitation proceedings. 49 This does
not, however, apply to Metrobank which already acquired ownership over the subject realties
even before TCEI filed its petition for rehabilitation a quo.

WHEREFORE, premises considered, both petitions for review on certiorari are DENIED for lack

of merit.

SO ORDERED.
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. 190107               June 6, 2011

JAPRL DEVELOPMENT CORP., PETER RAFAEL C. LIMSON and JOSE UY

AROLLADO, Petitioners,
vs.
SECURITY BANK CORPORATION, Respondent.

DECISION

CARPIO MORALES, J.,

JAPRL Development Corporation (JAPRL), a domestic corporation engaged in fabrication,

manufacture and distribution of steel products, applied for a credit facility (Letter of Credit/Trust
Receipt) in the amount of Fifty Million (₱50,000,000) Pesos with Security Bank Corporation
(SBC). The application was approved and the Credit Agreement took effect on July 15, 1996.1
On November 5, 2001, petitioners Peter Rafael C. Limson (Limson) and Jose Uy Arollado
(Arollado), JAPRL Chairman and President, respectively, executed a Continuing Suretyship
Agreement (CSA)2 in favor of SBC wherein they guaranteed the due and full payment and
performance of JAPRL’s guaranteed obligations under the credit facility.3

In 2002, on JAPRL’s proposal, SBC extended the period of settlement of his obligations.

In 2003, JAPRL’s financial adviser, MRM Management Incorporated (MRM), convened JAPRL’s
creditors, SBC included, for the purpose of restructuring JAPRL’s existing loan obligations.
Copies of JAPRL’s financial statements from 1998 to 2001 were given for the creditors to study.

SBC soon discovered material inconsistencies in the financial statements given by MRM vis-à-
vis those submitted by JAPRL when it applied for a credit facility, drawing SBC to conclude that
JAPRL committed misrepresentation.

As paragraph 10 (c) of the Credit Agreement4 provided, if "any representation or warranty,

covenant or undertaking embodied [therein] and [in] the Credit Instrument or in any certificate,
statement or document submitted to SBC turns out to be untrue or ceases to be true in any
material respect, or is violated or not complied with," such will constitute an event of default
committed by JAPRL and its sureties.

On the basis of Item 2 of the CSA,5 SBC sent a formal letter of demand6 dated August 20, 2003
to petitioners JAPRL, Limson and Arollado for the immediate payment of Forty Three Million
Nine Hundred Twenty Six Thousand and Twenty One Pesos and 41/100 (₱43,926,021.41)
representing JAPRL’s outstanding obligations.

Petitioners failed to comply with SBC’s demand, hence, SBC filed on September 1, 2003 a
complaint for sum of money with application for issuance of writ of preliminary
attachment7 before the Regional Trial Court (RTC) of Makati City against JAPRL, Limson and
Arollado.

During the hearing on the prayer for the issuance of writ of preliminary attachment on
September 16, 2003, SBC’s counsel manifested that it received a copy of a Stay Order dated
September 8, 2003 issued by the RTC of Quezon City, Branch 90 wherein JAPRL’s petition for
rehabilitation was lodged. The Makati RTC at once ordered in open court the archiving of SBC’s
complaint for sum of money until disposition by the Quezon City RTC of JAPRL’s petition for
rehabilitation.8

When the Makati RTC reduced to writing its open court Order of September 16, 2003, however,
it instead declared the dismissal of SBC’s complaint without prejudice:

When this case was called for hearing, plaintiff’s counsel manifested that they received a Stay
Order from Regional Trial Court, Br. 190, Quezon City, relative to the approval of the
Rehabilitation Plan filed by defendant JAPRL Dev. Corp. and in view thereof he prayed that the
present case be archived instead. However, the Court is of the view to have the case dismissed
without prejudice so that a disposition be made on the case.

WHEREFORE, let the present case be ordered DISMISSED without prejudice to a refiling or
having a claim filed with the appropriate forum.
SO ORDERED.9 (underscoring supplied)

On SBC’s motion for reconsideration, however, the Makati RTC, by Order of January 9,
2004,10 reverted to its oral order of archiving SBC’s complaint.

SBC moved to clarify the Makati RTC January 9, 2004 Order, positing that the suspension of
the proceedings should only be with respect to JAPRL but not with respect to Limson and
Arollado.11 The Makati RTC, by Order of February 25, 2004, mantained its order archiving the
complaint against all petitioners herein, however.

SBC filed a motion for reconsideration12 of the February 25, 2004 Order, to which Limson and
Arollado separately filed an "Opposition (Ad Cautelam)"13 wherein they claimed that summons
were not served on them, hence, the Makati RTC failed to acquire jurisdiction over their person.
At any rate, they raised defenses against SBC’s claim that they acted as sureties of JAPRL.

Meanwhile, the proposed rehabilitation plan before the Quezon City RTC was disapproved by
Order of May 9, 2005.14 On SBC’s motion, the Makati RTC thus reinstated SBC’s complaint to
its docket, by Order of February 27, 2006.15

Petitioners later filed before the Makati RTC a Manifestation (Ad Cautelam) 16 informing that a
Stay Order dated March 13, 200617 was issued, this time by the Calamba RTC, Branch 34, in a
new petition for rehabilitation filed by JAPRL and its subsidiary, RAPID Forming Corporation,
and praying for the archiving of SBC’s complaint.

By Order of June 30, 2006,18 the Makati RTC again archived SBC’s complaint against
petitioners. SBC, by Consolidated Motion, moved for the reconsideration of the June 30, 2006
Order, averring that its complaint should not have been archived with respect to sureties Limson
and Arollado; and that since the two failed to file their respective Answers within the
reglementary period, they should be declared in default.

The Makati RTC denied, by Order of October 2, 2006,19 the Consolidated Motion of SBC,
prompting SBC to file a petition for certiorari before the Court of Appeals.

By Decision of September 25, 2008,20 the appellate court held that Limson and Arollado
voluntarily submitted themselves to the jurisdiction of the Makati RTC, despite the qualification
that the filing of their respective "Opposition[s] Ad Cautelam" and "Manifestation[s] Ad
Cautelam," was "by way of special appearance" they having sought affirmative relief by praying
for the archiving of SBC’s complaint.

The Manifestations and Oppositions filed by the individual private respondents to the court a
quo have the purpose of asking the court to archive the case until the final resolution of either
the Petition for Rehabilitation filed by private respondent corporation JAPRL in Quezon City or
the subsisting Petition for Rehabilitation filed in Calamba City, Laguna. Clearly, the purpose of
those pleadings is to seek for affirmative relief, (i.e. Suspending the proceedings in Civil Case
No. 03-1036) from the said court. By those pleadings asking for affirmative relief, the individual
private respondents had voluntarily appeared in court. As expressly stated in Rule 14, Section
20, of the Rules of Court, the defendant’s voluntary appearance in the action shall be equivalent
to service of summons. It is well settled that any form of appearance in court, by the defendant,
by his agent authorized to do so, or by attorney, is equivalent to service except where such
appearance is precisely to object to the jurisdiction of the court over the person of the
defendant. x x x 21 (italics in the original; underscoring supplied)

To the appellate court, SBC’s claim against Limson and Arollado in their capacity as sureties
could proceed independently of JAPRL’s petition for rehabilitation:

x x x [T]he 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.1âwphi1

Aside from that, it is specifically stated under Rule 4, Section 6 (b) of the Interim Rules of
Procedure on Corporate Rehabilitation, that the issuance of a Stay order will have an effect of:

(b) staying enforcement of all claims whether for money or otherwise and whether such
enforcement is by court action otherwise, against the debtor, its guarantors and sureties not
solidarily liable with the debtor.22 (emphasis and italics in the original; underscoring supplied)

The appellate court denied petitioners’ motion for reconsideration by Resolution of October 29,
2009,23 hence, the present petition for review on certiorari.24

The petition fails.

A reading of the separate Oppositions Ad Cautelam by Limson and Arollado to SBC’s Motion for
Reconsideration25 shows that they did not challenge the trial court’s jurisdiction. Albeit both
pleadings contained prefatory statements that the two did not receive summons, they pleaded
defenses in their favor, viz:

Limson’s Opposition Ad Cautelam

6. First of all, there is no gainsaying that herein defendant LIMSON as well as defendant
AROLLADO are being sued in their alleged capacities as SURETIES, with defendant JAPRL
being the DEBTOR. As SURETIES, they are covered by the Stay Order issued by the court
hearing the petition for corporate rehabilitation filed by Rapid Forming Corp. and defendant
JAPRL. The Stay Order directed, among others, the stay of enforcement of " ALL CLAIMS,
WHETHER FOR MONEY OR OTHERWISE, AND WHETHER SUCH ENFORCEMENT IS BY
COURT ACTION OR OTHERWISE, against the petitioner/s, and its/their guarantors and
SURETIES not solidarily liable with petitioner/s",26 x x x (all caps in the original)

Arollado’s Opposition (Ad Cautelam)

11. Certainly, the plaintiff cannot unjustly enrich itself and be allowed to recover from both the
DEBTOR JAPRL in accordance with the rehabilitation plan, and at the same time from the
alleged SURETIES LIMSON and AROLLADO through the present complaint.

12. Moreover, defendant AROLLADO, as surety, can set up against the plaintiff all the defenses
which pertain to the principal DEBTOR JAPRL and even those defenses that are inherent in the
debt. Likewise, defendant AROLLADO would, in any case, have a right of action for
reimbursement against JAPRL, the principal DEBTOR. Additionally, defendant AROLLADO is
given the right, under Article 1222 of the New Civil Code, to avail himself of all the
defenses which are derived from the nature of the obligation. Since the plaintiff, and even
defendants LIMSON and AROLLADO, are temporarily barred from enforcing a claim against
JAPRL, there is, therefore, every reason to suspend the proceedings against defendants
LIMSON and AROLLADO while the complaint is archived and cannot be prosecuted against the
DEBTOR JAPRL.27 (capitalization and emphasis in the original; underscoring supplied)

When a defendant’s appearance is made precisely to object to the jurisdiction of the court over
his person, it cannot be considered as appearance in court.28 Limson and Arollado glossed over
the alleged lack of service of summons, however, and proceeded to exhaustively discuss why
SBC’s complaint could not prosper against them as sureties. They thereby voluntarily submitted
themselves to the jurisdiction of the Makati RTC .

On a trial court’s suspension of proceedings against a surety of a corporation in the process of

rehabilitation, Banco de Oro-EPCI, Inc. v. JAPRL Development Corporation29 holds that a
creditor can demand payment from the surety solidarily liable with the corporation seeking
rehabilitation, it being not included in the list of stayed claims:

Indeed, Section 6(b) of the Interim Rules of Procedure of Corporate Rehabilitation which the
appellate court cited in the earlier-quoted portion of its decision, provides that a stay order does
not apply to sureties who are solidarily liable with the debtor. In Limson and Arollado’s case,
their solidary liability with JAPRL is documented.

3. Liability of the Surety – The liability of the Surety is solidary and not contingent upon the
pursuit by the Bank of whatever remedies it may have against the Debtor or the collaterals/liens
it may possess. If any of the Guaranteed Obligation is not paid or performed on due date (at
stated maturity or by acceleration), the Surety shall, without need for any notice, demand or any
other act or deed, immediately become liable therefor and the Surety shall pay and perform the
same. 30 (emphasis and underscoring supplied)

Limson and Arollado, as sureties, whose liability is solidary cannot, therefore, claim protection
from the rehabilitation court, they not being the financially-distressed corporation that may be
restored, not to mention that the rehabilitation court has no jurisdiction over them. Article 1216
of the Civil Code clearly is not on their side:

ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The demand made against any one of them shall not be an obstacle to
those which may subsequently be directed against the others, so long as the debt has not been
fully collected. (underscoring supplied)1âwphi1

IN FINE, SBC can pursue its claim against Limson and Arollado despite the pendency of
JAPRL’s petition for rehabilitation. For, by the CSA in favor of SBC, it is the obligation of the
sureties, who are therein stated to be solidary with JAPRL, to see to it that JAPRL’s debt is fully
paid.31

Finally, contrary to petitioners’ position, the appellate court’s decision only nullified the
suspension of proceedings against Limson and Arollado.32 The suspension with respect to
JAPRL remains, in line with Philippine Blooming Mills v. Court of Appeals.33
WHEREFORE, the petition is DENIED.

SO ORDERED.

G.R. No. 193108               December 10, 2014

MARILYN VICTORIO-AQUINO, Petitioner,
vs.
PACIFIC PLANS, INC. and MAMERTO A. MARCELO, JR. (Court-Appointed Rehabilitation
Receiver of Pacific Plans, Inc.), Respondents.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Revised Rules of
Court which seeks to annul and set aside the Decision1 of the Special First Division of the Court
of Appeals (CA), dated February 26, 2010, and its Resolution2 dated July 21, 2010 denying
petitioner's Motion for Reconsideration in the case entitled Marilyn Victoria-Aquino v. Pacific
Plans, Inc. and Mamerto A. Marcelo, Jr., docketed as CA-G.R. SP No. 105237.

Respondent Pacific Plans, Inc. (now Abundance Providers and Entrepreneurs Corporation or
"APEC")3 is engaged in the business of selling pre-need plans and educational plans, including
traditional open-ended educational plans (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.4 Petitioner is a holder of two (2) units of respondent’s PEPTrads.5

On April 7, 2005, foreseeing the impossibility of meeting its obligations to the availing
planholders as they fall due, 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.7

On April 12, 2005, the Rehabilitation Court issued a Stay Order, directing the suspension of
payments of the obligations of respondent and ordering all creditors and interested parties to file
their comments/oppositions, respectively, to the Petition for Corporate Rehabilitation.8 The same
Order also appointed respondent Mamerto A. Marcelo (Rehabilitation Receiver) as the
rehabilitation receiver and set the initial hearing of the case on May 25, 2005.9

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 ARP also provided for tuition support for each enrolment period until SY 2009-2010
depending on the prevailing market rate of the NAPOCOR Bonds and Peso-Dollar exchange
rate.17 The tuition support is computed as the lesser of the remaining balance of Base Year-end
2004 Entitlement, the last-term tuition or reimbursement on record and the following tuition
support ceiling:
Availment Mode Ceiling (in Php)
Annual ₱20,000.00
Semester ₱10,000.00
Trimester ₱6,000.0018

These tuition support payments are considered advances from the Base Year-end 2004
Entitlement.19

As to the funding for the tuition support, the same shall be sourced from either two (2) ways:

(1) Outright sale of the NAPOCOR bonds and conversion of Dollar proceeds to Peso, up to the
equivalent of the tuition support requirements. The payment of the tuition support will be
dependent on the terms and exchange rate under which the bonds are liquidated; or

(2) Forward sale of the underlying Dollars to a financial institution, which then issues notes
credit linked with NAPOCOR Bonds. The notes can then be sold to interested financial
institution to provide for liquidity to fund the requirements for tuition support.20

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 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 Resolution26 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, 2008.28

In dismissing or denying the Petition for Review, the CA held that: (a) petitioner did not pay the
proper amount of docket fees; (b) a Petition for Review under Rule 43 is an improper remedy to
question the approval of a modified rehabilitation plan; (c) contrary to petitioner’s claim, the
alterations in the MRP are consistent with the goalsof the ARP; and (d) the approval of the MRP
did not amount to an impairment of the contract between petitioner and respondent. The falloof
the assailed Decision29 states:

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us DENYING

or DISMISSING the petition for review filed in this case and AFFIRMING the corporate
rehabilitation Court’s Resolution dated July 28, 2008 in Special Proceeding No. M-
6059.30 Unfortunately for petitioner, despite its motion for reconsideration, the CA denied the
same on July 21, 2010.31

Hence, this Petition for Review on Certiorariraising the following grounds:

The Court of Appeals rendered a decision contrary to law and not in accord with the applicable
decisions of the Supreme Court when it sustained the Rehabilitation Court’s approval of the
Modified Rehabilitation Plan.
II

The Court of Appeals rendered a decision contrary to law when it ruled that a Petition for
Review was an improper remedy to question a final order of the Rehabilitation Court approving
the Modified Rehabilitation Plan.

III

The Court of Appeals rendered a decision not in accord with the issuances of the Supreme
Court and the usual course of judicial proceedings when it declared that Petitioner had not paid
the proper amount of filing and docket fees, despite the fact that, as clearly shown in the
receipts presented by petitioner, the proper amount of filing fees were paid.32

In its Comment dated October 23, 2006, respondent raised various procedural infirmities on the
petition warranting its dismissal, to wit: (1) the assailed decision has become final and executory
for failure of petitioner to timely serve a copy of the Petition for Time upon the CA in violation of
Section 3, Rule 45 of the Rules of Court; (2) petitioner’s motion for reconsideration on the
questioned decision raises no new arguments; thus, is merely pro formaand did not toll the
running of the reglementary period; (3) a petition for review under Rule 43 of the Rules of Court
is an improper mode to question the MRP; and (4) petitioner failed to pay the appropriate
amount of docket fees when she filed the Petition for Review with the CA.33

On procedural grounds, this Court finds for the petitioner.

First. Respondent asseverates that the CA correctly held that the Petition for Review under Rule
43 of the Rules of Court is an improper mode to question the Resolution approving the MRP,
since the same constitutes merely as an interlocutory order and, therefore, a proper subject of a
certiorari case under Rule 65 of the Rules of Court. On the other hand, petitioner counters that
such Resolution isa final order with respect to the approval of the MRP; hence, her recourse to
a Petition for Review under Rule 43 of the Rules of Court was proper. Petitioner further argues
that such remedy is clearly in line with the directive of AM No. 04-9-07-SC, 34 which took effect
on October 15, 2004 and, therefore, was the correct rule on appeals prevailing at the time
petitioner filed her petition with the CA.35

Petitioner’s contention is impressed with merit.

It bears emphasis that the governing rule at the time respondent filed its petition for
rehabilitation was the Interim Rules, which does not expressly state the mode of appeal from the
decisions, orders and resolutions of the Rehabilitation Court, either prior or after the approval of
the rehabilitation plan. Accordingly, this Court issued a Resolution, A.M. No. 04-9-07-
SC,36 which lays down the proper mode of appeal in cases involving corporate rehabilitation and
intra-corporate controversies in order to prevent cluttering the dockets of the courts with appeals
and/or petitions for certiorari. The first paragraph thereof provides:

1. All decisions and final orders in cases falling under the Interim Rules of Corporate
Rehabilitation and the Interim Rules of Procedure Governing Intra-Corporate Controversies
under Republic Act No. 8799 shall be appealable to the Court of Appeals through a petition for
review under Rule 43 of the Rules of Court.37
Under the said Resolution, all decisions and final orders of the rehabilitation court, regardless of
whether they are issued before or after the approval of the rehabilitation court, shall be brought
on appeal to the CA via a petition for review under Rule 43 of the Rules of Court.

Subsequently, the Supreme Court issued A.M. No. 00-8-10-SC38 (Rehabilitation Rules), which
took effect on January 16, 2009, embodying the rehabilitation rules applicable to petitions for
rehabilitation of corporations, partnerships and associations pursuant to P.D. No. 902-A, as
amended. Section 1, Rule 8 thereof unequivocally states:

SEC. 1. Motion for Reconsideration. — A party may file a motion for reconsideration of any
order issuedby the court prior to the approval of the rehabilitation plan. No relief can be
extended to the party aggrieved by the court’s order on the motion through a special civil action
for certiorari under Rule 65 of the Rules of Court. Such order can only be elevated to the Court
of Appeals as an assigned error in the petition for review of the decision or order approving or
disapproving the rehabilitation plan.

An order issued after the approval of the rehabilitation plan can be reviewed only through a
special civil action for certiorari under Rule 65 of the Rules of Court.39

While We agree with respondent that the later rule states that orders issued after the approval
of the rehabilitation plan can be reviewed only through a special civil action for certiorari under
Rule 65 of the Rules of Court, such rule does not apply to the instant case as the same was not
yet in effect at the time petitioner filed her Petition for Review with the CA. Stated otherwise, the
prevailing law at the time petitioner filed said petition with the CA is the Interim Rules as well as
A.M. No. 04-9-07-SC. As such, the proper remedy of appeal from all decisions and final orders
of the RTC was Rule 43 of the Rules of Court, and not Rule 65 thereof.

In any case, We cannot also subscribe to respondent’s view that the approval of the MRP is
merely an interlocutory order. In Alma Jose v. Javellana, 40 We have already defined a final order
as one that puts an end to the particular matter involved, or settles definitely the matter therein
disposed of, as to leave nothing for the trial court to do other than to execute the order.41 Here, it
cannot be gainsaid that the Resolution approving the MRP is a final order with respect to the
validity thereof, specifically on the following issues: (1) the suspension of the tuition support; (2)
conversion of Philippine Peso entitlements to U.S. Dollar entitlements; and (3) the payments in
U.S. Dollars upon maturity in 2010. In this regard, the issue as to its alleged infringement on the
non-impairment clause under the Constitution has likewise been settled. The doctrine laid down
in New Frontier Sugar Corp. v. Regional Trial Court Branch 39, Iloilo City, 42 cannot be used to
counter the foregoing because in that case, the Court merely stressed that an original action for
certiorarimay be directed against an interlocutory order of the lower court prior to an appeal from
the judgment; or where there is no appeal or any plain, speedy or adequate remedy.43 New
Frontier does not categorically preclude the filing of a petition for review under Rule43 for
decisions or orders issued after the approval of the rehabilitation plan such as a modification
thereof.

Second. We find respondent’s contention on the non-payment of the docket fees devoid of merit
because the records rather show that petitioner had, in fact, paid the appropriate amount of
docket fees for her Petition with the CA and her application for a TRO on September 12, 2008.
To support this allegation, petitioner attached copies of official receipts, representing the fees
she has paid in the aggregate amount of Four Thousand Six Hundred Eighty Pesos
(₱4,680.00). Third. With respect to respondent’s allegation that petitioner violated Section 2,44 in
relation to Section 3,45 Rule 45 of the Rules of Court, in particular the failure of petitioner to
serve a copy ofits petition for time with the CA within the prescribed period, the same is mislaid.

A careful examination of the records will show that said petition was personally served on the
CA on August 17, 2010, within the prescribed period pursuant to Sections 2 and 3, Rule 45 of
the Rules of Court. This is the most logical explanation since the Manifestation regarding such
service, together with the attached Petition for Time, was filed on August 18, 2010. Thus, the
date "August 27, 2010" on the stamp of the CA is clearly a clerical error and respondent’s
assertion that the CA was not timely served the Petition for Time is erroneous.

Similarly, owing to the significance of the issues raised in the instant case, We rule that any
lapse on the filing of the motion for reconsideration with the CA is not grave enough to dismiss
the instant petition on technical grounds. Moreover, it is settled that although a motion for
reconsideration may merely reiterate issues already passed upon by the court, that, by itself,
does not make it pro forma. In fact, the CA did not declare said motion for reconsideration as
pro forma when it denied the same. Hence, considering that the motion for reconsideration is
not pro forma and a mere scrap of paper, its filing tolled the running period of appeal pursuant to
Section 2,46 Rule 37 of the Rules of Court.

Fourth. Anent the Verification and Certification against Forum Shopping of the instant petition,
we recognize that petitioner failed to comply with Section 6, Rule II of A.M. No. 02-8-13-SC,
otherwise known as the Rules on Notarial Practice of 2004 (Notarial Rules), which provides that
in order for a jurat to be valid, the following requirements should be present:

SEC. 6. Jurat. - "Jurat" refers to an act in which an individual on a single occasion:

(a) appears in person before the notary public and presents an instrument or document;

(b) is personally known to the notary public or identified by the notary public through
competent evidence of identityas defined by these Rules;

(c) signs the instrument ordocument in the presence of the notary; and

(d) takes an oath or affirmation before the notary public as to such instrument or
document.47 as well as Section 12, Rule II of the Notarial Rules, which defines what
constitutes competent evidence of identity, to wit –

SEC. 12. Competent Evidence of Identity. - The phrase "competent evidence of identity" refers
to the identification of an individual based on:

(a) at least one current identification document issued by an official agency bearing the
photograph and signature of the individual; or

(b) the oath or affirmation of one credible witness not privy to the instrument, document
or transaction who is personally known to the notary public and who personally knows
the individual, or of two credible witnesses neither of whom is privy to the instrument,
document or transaction who each personally knows the individual and shows to the
notary public documentary identification.
While we agree with the observation of respondent that in the instant Petition, the Verification
and Certification against Forum Shopping attached thereto is defective because the jurat thereof
does not contain the required competent evidence of identity of the affiant, petitioner herein,
such omission may be overlooked in the name of judicial leniency, in order to give this Court an
avenue to dispose of the substantive issues of this case.

As to respondent’s allegation that the instant petition contained a false Certification of Non-
Forum Shopping since the same failed to disclose the pendency of a related petition pending
before the CA, the same warrants scant consideration.

While it would appear that there is substantial identity ofparties, since both petitioner and PEPCI
are creditors of respondent and both are questioning the Rehabilitation Court’s approval of the
MRP, the identity of cause of action is absent in the present case. An assiduous scrutiny of the
respondent’s Petition for Review with the CA and PEPCI’s Petition for Review dated September
3, 2008, also filed with the CA, will show that they raised different causes of action. In Majority
Stockholders of Ruby Industrial Corporation v. Lim,48 we have reiterated that no forum shopping
exists when two (2) groups of oppositors in a rehabilitation case act independently of each
other, even when they have sought relief from the same appellate court, thus:

On the charge of forum shopping, we have already ruled on the matter in G.R. Nos. 124185-87.
Thus:

We hold that private respondents are not guilty of forum shopping. In Ramos, Sr. v. Court of
Appeals, we ruled:

"The private respondents can be considered to have engaged in forum shopping if all of them,
acting as one group, filed identical special civil actions in the Court of Appeals and in this Court.
There must be identity of parties or interests represented, rights asserted and relief sought in
different tribunals. In the case at bar, two groups of private respondents appear to have acted
independently of each other when they sought relief from the appellate court. Both groups
sought relief from the same tribunal.

"It would not matter even if there are several divisions in the Court of Appeals. The adverse
party can always ask for the consolidation of the two cases. x xx"

In the case at bar, private respondents represent different groups with different interests - the
minority stockholders' group, represented by private respondent Lim; the unsecured creditors
group, Allied Leasing & Finance Corporation; and the old management group. Each group has
distinct rights to protect. In line with our ruling in Ramos, the cases filed by private respondents
should be consolidated. In fact, BENHAR and RUBY did just that - in their urgent motions filed
on December 1, 1993 and December 6, 1993, respectively, they prayed for the consolidation of
the cases before the Court of Appeals.49

In any case, this Court resolves tocondone any procedural lapse in the interest of substantial
justice given the nature of business of respondent and its overreaching implication to society.To
deny this Court of its duty to resolve the substantive issues would be tantamount to judicial
tragedy as planholders, like petitioner herein, would be placed in a state of limbo as to its
remedies under existing laws and jurisprudence.
Indeed, where strong considerations of substantive justice are manifest in the petition, the strict
application of the rules of procedure may be relaxed, in the exercise of its equity
jurisdiction.50 Thus, a rigid application of the rules of procedure will not be entertained if it will
only obstruct rather than serve the broader interests of justice in the light of the prevailing
circumstances in the case under consideration. 51 It is a prerogative duly embedded in
jurisprudence, as in Alcantara v. Philippine Commercial and International Bank, 52 where the
Court had the occasion to reiterate that:

x x x In appropriate cases, the courts may liberally construe procedural rules in order to meet
and advance the cause of substantial justice. Lapses in the literal observation of a procedural
rule will be overlooked when they do not involve public policy, when they arose from an honest
mistake or unforeseen accident, and when they have not prejudiced the adverse party or
deprived the court of its authority. The aforementioned conditions are present in the case at bar.
xxxx

There is ample jurisprudence holding that the subsequent and substantial compliance of an
appellant may call for the relaxation of the rules of procedure. In these cases, weruled that the
subsequent submission of the missing documents with the motion for reconsideration amounts
to substantial compliance. The reasons behind the failure of the petitioners in these two cases
to comply with the required attachments were no longer scrutinized. What we found noteworthy
in each case was the fact that the petitioners therein substantially complied with the formal
requirements. We ordered the remand of the petitions in these cases to the Court of Appeals,
stressing the ruling that by precipitately dismissing the petitions "the appellate court clearly put a
premium on technicalities at the expense of a just resolution of the case."

While it is true that the rules of procedure are intended to promote rather than frustrate the ends
of justice, and the swift unclogging of court docket is a laudable objective, it nevertheless must
not be met at the expense of substantial justice. This Court has time and again reiterated the
doctrine that the rules of procedure are mere tools aimed at facilitating the attainment of justice,
rather thanits frustration. A strict and rigid application of the rules must alwaysbe eschewed
when it would subvert the primary objective of the rules, that is, to enhance fair trials and
expedite justice. Technicalities should never beused to defeat the substantive rights of the other
party. Every party-litigant must be afforded the amplest opportunity for the proper and just
determination of his cause, free from the constraints of technicalities. Considering that there
was substantial compliance, a liberal interpretation of procedural rules in this labor case is more
in keeping with the constitutional mandate to secure social justice.53

Notwithstanding our liberal interpretation of the rules, the instant petition must fail on substantive
grounds.

Petitioner contends that the MRP is ultra vires insofar as it reduces the original claim and even
the original amount that petitioner was to receive under the ARP. 54 She also claims that it was
beyond the authority of the Rehabilitation Court to sanction a rehabilitation plan, or the
modification thereof, when the essential feature of the plan involves forcing creditors to reduce
their claims against respondent.55

Petitioner’s argument is misplaced. The "cram-down" power of the Rehabilitation Court has long
been established and even codified under Section 23, Rule 4 of the Interim Rules, to wit:
Section 23. Approval of the Rehabilitation Plan. – The court may approve a rehabilitation plan
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.

Such prerogative was carried over inthe Rehabilitation Rules, which maintains that the court
may approve a rehabilitation plan over the objection of the creditors if, in its judgment, the
rehabilitation of the debtors is feasible and the opposition of the creditors is manifestly
unreasonable. The required number of creditors opposing such plan under the Interim Rules
(i.e.,those holding the majority of the total liabilities of the debtor) was, in fact, removed.
Moreover, the criteria for manifest unreasonableness is spelled out, to wit:

SEC. 11. Approval of Rehabilitation Plan. — The court may approve a rehabilitation plan even
over the opposition of creditors of the debtor if, in its judgment, the rehabilitation of the debtor is
feasible and the opposition of the creditors is manifestly unreasonable. The opposition of the
creditors is manifestly unreasonable if the following are present:

(a) The rehabilitation plan complies with the requirements specified in Section 18 of Rule
3;56 (b) The rehabilitation plan would provide the objecting class of creditors with
payments whose present value projected in the plan would be greater than that which
they would have received if the assets of the debtor were sold by a liquidator within a six
(6)month period from the date of filing of the petition; and

(c) The rehabilitation receiver has recommended approval of the plan.

In approving the rehabilitation plan, the court shall ensure that the rights of the secured creditors
are not impaired. The court shall also issue the necessary orders or processes for its immediate
and successful implementation. It may impose such terms, conditions, or restrictions as the
effective implementation and monitoring thereof may reasonably require, or for the protection
and preservation of the interests of the creditors should the plan fail.57

This legal precept is not novel and has, in fact, been reinforced in recent decisions such as in
Bank of the Philippine Islands v. Sarabia Manor Hotel Corporation,58 where the Court elucidated
the rationale behind Section 23, Rule 4 of the Interim Rules, thus:

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 toaccept the terms
and conditions of the rehabilitation plan, preferring long-term viability over immediate but
incomplete recovery.59

as well as in Pryce Corporation v. China Banking Corporation,60 to wit:

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 cramdown principle which "consists of two things: (i)
approval despite opposition and (ii) binding effect of the approved plan x x x."
First, the Interim Rules allows the rehabilitation court 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."

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 inthe proceedings or
opposed the plan or whether or not their claims have been scheduled."

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.61

Based on the aforequoted doctrines, petitioner’s outright censure of the concept of the cram-
down power of the rehabilitation court cannot be countenanced. To adhere to the reasoning of
petitioner would be a step backward — a futile attempt to address an outdated set of
challenges. It is undeniable that there is a need to move to a regime of modern restructuring,
cram-down and court supervision in the matter of corporation rehabilitation in order to address
the greater interest of the public. This is clearly manifested in Section 64 of Republic Act (R.A.)
No. 10142, otherwise known as Financial Rehabilitation and Insolvency Act of 2010 (FRIA), the
latest law on corporate rehabilitation and insolvency, thus:

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 (2Q) 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 w hose rights are adversely
modified or affected by the Plan. For purposes of this section,the Plan is deemed tohave 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:

(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 interestas 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.62

While the voice and participation of the creditors is crucial in the determination of the viability of
the rehabilitation plan, as they stand to benefit or suffer in the implementation thereof, the
interests of all stakeholders is the ultimate and prime consideration. Thus, while we recognize
the predisposition of the planholders in vacillating on the enforcement of the MRP, since the
terms and conditions stated therein have been fundamentally changed from those stated in the
Original and Amended Rehabilitation Plan, the MRP cannot be considered an abrogation of
rights to the planholders/creditors.

First. An examination of the changes proposed in the MRP would confirm that the same is, in
fact, an effective risk management tool intended to serve both the interests of respondent and
its planholders/creditors.

It is a matter of fact and record that the Philippine Peso unexpectedly and uncharacteristically
strengthened and appreciated from Fifty-Two and 02/100 Pesos (Php52.02) to One U.S. Dollar
(USD1.00) at the time of the approval of the ARP to Forty and (63)/100 Pesos (Php40.63) to
One U.S. Dollar (USD1.00) as of March 7, 2008, the day the Rehabilitation Receiver filed his
Manifestation with Motion to Admit praying for the approval of the MRP.63 There is no
gainsaying that during this period, the value of the U.S. Dollar-denominated NAPOCOR bonds
— the assets covering the trust fund subject of the traditional education plan — has already
been substantially diluted because of the stronger value of the Philippine Peso vis-à-visthe U.S.
Dollar from the time of the approval of the ARP. 64 As succinctly held by the RTC in its
Resolution dated July 28, 2008, to wit:

First, there is in tr[u]th no quibble that the Philippine Peso has behaved in an uncharacteristic
mannerby appreciating significantly vis-àvis the United States Dollar. This fact is not disputed by
any of the parties. Further, the Court takes cognizance that at the time the Alternative
Rehabilitation Plan was approved on 27 April 2006, the exchange rate was Php52.02/US$1.00.
As of 15 July 2008, the exchange rate was Php45.35/US$1.00, or an appreciation of atleast
fourteen percent (14%). Since the NAPOCOR Bonds are denominated in United States dollars,
it means that the NAPOCOR Bonds have losttheir original value by at least fourteen percent
(14%) since the approval of the Alternative Rehabilitation Plan on 27 April 2006. Ergo, the
continued payment of tuition support in Philippine Pesos will lead to the certainty of the trust
fund being substantially diluted when the planholders avail of the same upon maturity of the
NAPOCOR Bonds in 2010.65

This defense mechanism is reasonable because sustaining the current terms of the ARP would
render the trust fund of no value given the high probability of its dilution. Resultantly, the very
foundation of the rehabilitation plan, which is to minimize the loss of all stakeholders, would be
rendered in futile since the trust funds may no longer be sufficient to meet the basic terms of the
ARP.

In addition, the MRP merely establishes the planholders’ claim on a percentage/pro rata share
of the assets of the trust fund. It does not, in any way, diminish the value of their claims or their
share in the proverbial pie. The propriety of this theory was recognized by the Rehabilitation
Court, to wit:

Second, the conversion of the Philippine Peso entitlements into United States Dollar
entitlements would not diminish the pro rata share of the planholders. Each planholder would
still receive his proportionate share of the pie, so to speak, albeitin United States Dollars. The
said conversion would merely ensure that regardless of the performance of the Philippine
Pesos, planholders of petitioner PPI are guaranteed payment upon maturity of the NAPOCOR
Bonds, without fear that their share will be substantially diluted. In fact, the planholders may
even benefit from this modification in the rehabilitation plan if the United States dollars
appreciates in 2010.66

As can be gleaned from the foregoing, the modification guarantees that each planholder has an
adequate return on his/her investment regardless of changes in the surge of the Philippine
economy.67

We, therefore, agree with respondent that the proposed modification seeks to establish a
balance between adequate returns to the planholders/creditors, while ensuring that respondent
shall be an on-going concern that can eventually undergo normal operations after the
implementation of the MRP.68

Second. The recommendation of the Rehabilitation Receiver cannot simply be unsung without
violating the basic tenet of Section 14, Rule 4 of the Interim Rules, which provides the powers
and functions of the Rehabilitation Receiver, thus:

Sec. 14. Powers and Functions of the Rehabilitation Receiver. - The Rehabilitation Receiver
shall nottake over the management and control of the debtor but shall closely oversee and
monitor the operations of the debtor during the pendency of the proceedings, and for this
purpose shall have the powers, duties and functions of a receiver under Presidential Decree No.
902-A, as amended, and the Rules of Court.

x x x Accordingly, he shall have the following powers and functions:

xxxx

(j) To monitor the operations of the debtor and to immediately report to the court any material
adverse change in the debtor's business;

xxxx

(l) To determine and recommend to the court the best way to salvage and protect the interests
of the creditors, stockholders, and the general public;

xxxx

(v) To recommend any modification of an approved rehabilitation plan as he may deem

appropriate;

(w) To bring to the attention of the court any material change affecting the debtor's ability to
meet the obligations under the rehabilitation plan;

x x x.69

As correctly recognized by the Rehabilitation Court in its Resolution dated July 28, 2008, the
Rehabilitation Receiver has the duty and authority to recommend any modification of an
approved rehabilitation plan as he may deem appropriate and for the purpose of achieving the
desired targets or goals set forth therein, thus:
It is the strenuous proposition of the CARR that under the Interim Rules, he has the duty to
recommend any modification of an approved rehabilitation plan as he may been appropriate. Ex
concesso, the Court recognizes that under Rule 4, Section 26 of the Interim Rules, an approved
rehabilitation plan may be modified if, in the judgment of the Court, such modification is
necessary to achieve the desired targets or goals set forth therein.70

The Rehabilitation Rules allow the modification and alteration of the rehabilitation plan precisely
because ofconditions that may supervene or affect the implementation thereof subsequent to its
approval. In the case at bar, to force through with the tuition support would surely jeopardize the
implementation of the ARP in the long-run since it would not be feasible to keep on liquidating
the NAPOCOR Bonds.

Third. We confirm that there is a substantial likelihood for respondent to be successfully

rehabilitated considering that its business remains viable and is operating on a going-concern
premise.

A careful reading of the records will show that respondent’s liquidity problems were mostly
caused by the deregulation of the education sector, which triggered sharp increases in tuition
fees of schools and universities beyond what was projected by pre-need companies dealing
with traditional educational plans. Surely, we are mindful of the financial distress in 1997, which
has destroyed various institutions not only in the Philippines but across Asia, further
compromising the pre-need industry’s ability to meet its obligations under the PEPTrads. The
surrounding circumstances of the time was peculiar and may no longer be pertinent at present.

Thus, pointing fingers to respondent at this point for its alleged mismanagement of assets would
be irrational, and even counter-productive, because the feasibility of respondent’s rehabilitation
has already been duly established by the Rehabilitation Court. A subsequent allegation to the
contrary has no leg to stand on. Conversely, by virtue of the corporate rehabilitation,
respondentwill have enough breathing room to improve its operations in order to sustain its
business operations and at the same time, settle all its outstanding obligations in a just and fair
manner, in accordance with the MRP. In this regard, We find reason in respondent’s contention
that the MRP will not only be beneficial to itself, but also to its planholders and creditors as well.
Anent petitioner’s argument that the approval of the MRP is offensive to the non-impairment
clause of the Constitution, the same fails to persuade.

Petitioner’s interpretation of Section 37 of the Rehabilitation Rules vis-à-vis the means within
which a rehabilitation plan may be pursued, is misplaced. As held in a plethora of cases, a
rehabilitation plan may involve a reduction of liability. On this score, the principle enunciated in
Pacific Wide Realty and Development Corporation v. Puerto Azul Land, Inc.,71 is instructive,
thus –

The restructuring of the debts of PALI is part and parcel of its rehabilitation. Moreover, per
findings of fact 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.72

Here, petitioner’s claim is not cancelled or obliterated all together.1awp++i1 Contrary to her

view, petitioner’s claim isin fact restructured in a way that would allow respondent to revive its
financial health while offering the optimal returns to its clients.

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 asto 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:

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 notbe 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.

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.1âwphi1 The court may approve a rehabilitation plan
evenover 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 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.

SO ORDERED.