COMMERCIAL LAW REVIEW

Pre-Need Code Cases

Atty. Maria Zarah R. Villanueva-Castro

SEC VS. HON. LAIGO

G.R. NO. 188639, SEPTEMBER 2, 2015
It is improper to include the trust find in a debtor corporation’s insolvent estate. that the
proceeds of trust funds shall redound solely to the planholders. Moreover, in no case shall
the trust fund assets be used to satisfy claims of other credits of the pre-need company.

Facts:

Before the Pre-Need Code of the Philippines was enacted, the SEC issued the SEC issued
the New Rules on the Registration and Sale of Pre-Need Plans to govern the pre-need
industry. The New Rules required pre-need providers to create a trust find as a
requirement for registration.

Legacy, a pre-need provider, complied with the trust fund requirement and entered into a
trust agreement with Land Bank of the Philippines. However, in mid-2000, Legacy was
unable to pay its obligations to planholders as the industry collapsed. In 2009, the
planholders of Legacy filed a Petition for Involuntary Insolvency which was granted by the
RTC.

The SEC opposed the inclusion of the trust fund in the inventory of Legacy’s corporate
assets as such would violate the New Rules, which treated trust funds as principally
established for the exclusive purpose of guaranteeing the delivery of the benefits due to
planholders. Including the trust find in Legacy’s assets would frustrate the principle goals
of the law.

Nevertheless, Judge Laigo ordered the assignee to take possession of the trust fund because
he viewed said fund as corporate assets, thus included in the insolvent corporate’s estate.

The SEC filed a Petition for Certiorari under Section 5(1), Art. VIII of the 1987
Constitution, alleging the issue is one of transcendental importance to Filipinos who
invested savings and hard-earned money in Legacy. The SEC stressed that the setting-up
of the trust funds effectively created a demarcation line between the claims of
planholders vis-à-vis those of the other creditors of Legacy.

Furthermore, the SEC argued that Section 52 of the Pre-Need Code should be given
retroactive effect for being procedural in character.

Issue(s):
1. Whether or not Judge Laigo committed grave abuse of discretion in treating the
trust fund as part of the insolvency estate of Legacy.

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 COMMERCIAL LAW REVIEW
Pre-Need Code Cases
Atty. Maria Zarah R. Villanueva-Castro

Held:

1. Yes, Judge Laigo gravely abused his discretion in treating the trust fund as
assets that form part of Legacy’s insolvent estate.

Section 52(b)of the Pre-Need Code clearly provides that liquidation proceedings in courts
shall proceed independently of proceedings in the Insurance Commission for the liquidation
of claims and creditors of the company have no personality to litigate their claims against
the trust funds. As a curative and remedial law, it can be thus applied retroactively.

Section 30 of the Pre-Need Code clearly provides that the proceeds of trust funds shall
redound solely to the planholders. Moreover, in no case shall the trust fund assets be used
to satisfy claims of other credits of the pre-need company. Moreover, the benefits are
exempt from taxes and shall not be held liable for attachment, garnishment, levy, or seizure
or under any legal or equitable processes except to pay the debt of the planholder to the
benefit plan.

The Assignee incorrectly argues that the trust fund can be subject to insolvency proceedings
because Legacy has retained a beneficial interest in the execution of the trust fund
agreement. However, Legacy’s claimed interest in the enforcement of such trust is mere
apparent than real. Legacy is not the beneficiary.

First, the trust is established for the benefit and account of the planholders. A person is a
beneficiary of a trust if there is a manifest intention to give such a person the beneficial
interest over the trust properties. Clearly, that because the beneficial ownership is vested
in the planholders and the legal ownership in the trustee, LBP, Legacy, as trustor, is left
without any iota of interest in the trust fund. This is consistent with the nature of a trust
arrangement, whereby there is a separation of interests in the subject matter of the trust,
the beneficiary having an equitable interest, and the trustee having an interest which is
normally legal interest.

Second, considering that the law required pre-need companies to establish a trust fund as
per the New Rules for the benefit of the planholders. This is pursuant to Section 16 of the
SRC, which proides the establishment of trust funds for the payment of benefits under pre-
need plans. This is precisely why Congress enacted the Pre-Need Code so that the rights of
the pre-need planholders would be categorically defined and protected.

In effect, Legacy merely agreed to facilitate the payment of the benefits from the trust fund
to the intended beneficiaries, acting as a conduit or an agent of the trustee in the
enforcement of the trust agreement. Under the general principles of trust, a trustee, by the
terms of the agreement may be permitted to delegate to agents or to co-trustees or to other
persons the administration of the trust or the performance of act which could not otherwise
be properly delegated. In a trust, it is the trustee, and not the trustor, who owes fiduciary
duty to the beneficiary. The trust fund should not revert to Legacy, which has no beneficial
interest over it. Not being an asset of Legacy, the trust fund is immune from its reach and
cannot be included by the RTC in the insolvency estate.

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 COMMERCIAL LAW REVIEW
Pre-Need Code Cases
Atty. Maria Zarah R. Villanueva-Castro

PRIMANILA PLANS, INC. VS. SEC

G.R. No. 193791, August 6, 2014
Section 64.1 of the SRC provides the SEC can issue a CDO motu proprio. A cease and desist
order may only be issued by the Commission after proper investigation or verification, and
upon showing that the acts sought to be restrained could result in injury or fraud to the
investing public. However, prior hearing is not required whenever the Commission finds it
appropriate to issue a cease and desist order that aims to curtail fraud or grave or
irreparable injury to investors.

Facts:

The SEC issued a Cease and Desist Order against Primanila after an investigation by the
SEC’s Compliance and Enforcement Department discovered that (1) Primanila’s principal
office was closed without notice to the public; (2) its website showed it was still selling
pension plans; (3) it failed to renew its dealer’s license for non-traditional securities and
instruments; and (4) it has not been issued a secondary license to act as dealer or general
agent for pre-need pension plans for 2008; (5) Primanila’s bank account was still active; and
(6) Primanila underdeclared the total amount of its collections, P302,081, when, in fact, its
planholders, mostly from the PNP, remitted over P1.6 million to Primanila.

The SEC then declared that Primanila violated Section 16 of the SRC, which requires a
license to sell pre-need plans and Rules 3 and 15 of the New Rules on the Registration and
Sale of Pre-Need Plans, which require registration of the corporation and its agents.
Primanila filed a Motion for Reconsideration / Lift the CDO arguing it was denied due
process as the CDO was issued with a notice or formal charge, denying the findings of the
CED’s investigation. The SEC denied the motion. Primanila appealed to the CA, which
affirmed the SEC in toto.

Issue(s):

1. Whether or not the SEC’s Cease and Desist Order against Primanila was valid.

Held:

1. Yes, the CDO issued against Primanila was valid.

Section 64.1 provides the SEC can issue a CDO motu proprio. There is good reason for this
provision, as any delay in the restraint of acts that yield such results can only generate
further injury to the public that the SEC is obliged to protect. The authority of the SEC and
the manner by which it can issue cease and desist orders are provided in Section 64 of
the SRC, which provides, to wit:

“The Commission, after proper investigation or verification, motu

proprio, or upon verified complaint by any aggrieved party, may issue a cease
and desist order without the necessity of a prior hearing if in its
judgment the act or practice, unless restrained, will operate as a fraud on

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Pre-Need Code Cases
Atty. Maria Zarah R. Villanueva-Castro

investors or is otherwise likely to cause grave or irreparable injury or prejudice

to the investing public.”

The authority of the SEC under this rule is nonetheless with defined limits. A cease and
desist order may only be issued by the Commission after proper investigation or
verification, and upon showing that the acts sought to be restrained could result in injury
or fraud to the investing public. However, a prior hearing is not required whenever the
Commission finds it appropriate to issue a cease and desist order that aims to curtail fraud
or grave or irreparable injury to investors. Without doubt, these requisites were duly
satisfied by the SEC prior to its issuance of the subject cease and desist order.

Primanila was accorded due process notwithstanding the SEC's immediate issuance of the
cease and desist order on April 9, 2008. The SEC was not mandated to allow Primanila to
participate in the investigation conducted by the Commission prior to the cease and desist
order's issuance. Given the circumstances, it was sufficient for the satisfaction of the
demands of due process that the company was amply apprised of the results of the SEC
investigation, and then given the reasonable opportunity to present its defense. Primanila
was able to do this via its motion to reconsider and lift the cease and desist order. After the
CED filed its comment on the motion, Primanila was further given the chance to explain its
side to the SEC through the filing of its reply.

The acts specifically restrained by the subject cease and desist order were Primanila's sale,
offer for sale and collection of payments specifically for its Primasa plans. Notwithstanding
the findings of both the SEC and the CA on Primanila's activities, the company still argued
in its petition that it neither sold nor collected premiums for the Primasa product.
Primanila even argued the instructions on its website on the sale of such plans was one of
inadvertence because the website was supposedly launched by the developer without
authority of Primanila.

The SEC’s findings had substantial evidence. In the instant case, this substantial evidence
is derived from the results of the SEC investigation on Primanila's activities. Specifically on
the product Primasa plans, the SEC ascertained that there were detailed instructions on
Primanila's website as to how interested persons could apply for a plan, together with the
manner by which premium payments therefor could be effected. A money deposit by CED to
Primanila's Metrobank account indicated in the advertisement confirmed that the bank
account was active.

Primanila was engaged in the sale or, at the very least, an offer for sale to the public of the
Primasa plans. The offer for Primasa was direct and its reach was even expansive,
especially as it utilized its website as a medium and visits to it were, as could be expected,
from prospective clients.

It is indubitable the Primanila plans were not registered with the SEC and thus barred
from selling and offering said plans for sale. Primanila clearly violated Section 16 of
the SRC and pertinent rules which barred the sale or offer for sale to the public of a pre-
need product except in accordance with SEC rules and regulations.

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 COMMERCIAL LAW REVIEW
Pre-Need Code Cases
Atty. Maria Zarah R. Villanueva-Castro

SEC VS. COLLEGE ASSURANCE PLAN PHILIPPINES, INC.

G.R. No. 202052, March 7, 2018
The proceeds of the sale of MRT III Bonds of CAP, which were infused into the Trust Fund,
can’t be used to satisfy outstanding obligation to pay creditors. The Trust Fund is for the sole
benefit of the planholders.

Facts:

College Assurance Plans sells pre-need education plans, the benefits of which are
guaranteed under a Trust Fund. The Fund contributes a certain percentage of the money
collected from the planholders. In turn, the Fund was invested in assets and securities
through trustee banks. However, the Fund was adversely affected by the deregulation of
private educational institutions by the DepEd and the economic crisis.

Later, the SEC promulgated the New Rules on the Registration and Sale of Pre-Need Plans
which adopted the Pre-Need Uniform Chart of Accounts for reporting and operation of pre-
need companies in the Philippines. Due to the new rules on the valuation of trust funds
invested in real property, CAP incurred a trust fund deficiency of P3.17 billion. To correct
this, CAP proposed the purchase of MRT III Bonds from SMART/FEMI with a present
value of $14 million.

Nevertheless, CAP filed a Petition for Rehabilitation By this time, it had only paid around
$6.5 million of the value of the MRT III Bonds. The RTC issued a Stay Order and
suspended the enforcement of all claims against it. The 2006 Revised Business Plan was
approved the RTC, wherein the CAP would sell the MRT Bonds. However, SMART
demanded the outstanding balance for the Bonds.

The receiver sought the Rehabilitation Court’s approval of the sale of MRT III Bonds to
Development Bank and Land Bank of the Philippines. The court approved the sale. Then,
the receiver sought the court’s approval of CAP’s payment of its obligations to SMART and
FEMI partly from the proceeds of the sale to DBP and Land Bank. The RTC denied the
motion for payment to SMART and FEMI citing the Principle of Equality is Equity in
rehabilitation proceedings.

CAP filed a Petition for Certiorari to the CA arguing the RTC committed grave abuse of
discretion in denying the motion to pay SMART and FEMI from the proceeds of the sale of
the MRT III Bonds. The CA granted the petition and ruled the RTC committed grave abuse
of discretion in disapproving of the payment of CAP’s obligation to SMART and FEMI. The
CA ruled the payment to SMART and FEMI were “benefits” that could be validly
withdrawn from the Trust Fund pursuant to Rule 16.4 of the New Rules. Such payment
was not one to an ordinary creditor, but payment to the contributors of the source of the
assets of the Trust Fund, thus the Principle of Equality is Equity does not apply.

Issue(s):
1. Whether or not the CA erred in ruling that CAP’s obligation to pay SMART and
FEMI were “benefits” that could be validly withdrawn from the Trust Fund?

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Pre-Need Code Cases
Atty. Maria Zarah R. Villanueva-Castro

Held:
1. No, the CA erred. The obligation to pay did not constitute the “benefits” or
“cost of services rendered” or “property delivered” under Section 16.4, Rule
16 of the New Rules and Section 30 of the SRC.

The SEC correctly argued that the trust fund should be treated separately and distinctly
from the corporate assets and obligations of CAP. The MRT III Bonds already formed part
of the assets of the trust fund upon infusion, that is after CAP acquired them.

In respect of pre-need companies, the trust fund is set up from the planholders' payments to
pay for the cost of benefits and services, termination values payable to the planholders and
other costs necessary to ensure the delivery of benefits or services to the planholders as
provided for in the contracts.

The trust fund is to be treated as separate and distinct from the paid-up capital of the
company, and is established with a trustee under a trust agreement approved by the SEC
to pay the benefits as provided in the pre-need plans.

Section 16.4, Rule 16 of the New Rules, which governs the utilization of the trust fund,
provides that no withdrawal shall be made from the Trust Fund except for paying
the Benefits such as the monetary consideration, the cost of services rendered or
property delivered, among others.

“Benefits” in Section 16.4 is defined as the money or services which the Pre-Need Company
undertakes to deliver in the future to the planholder or his beneficiary. Benefits thus refer
to the payments made to the planholders as stipulated in their pre-need plans. Likewise,
Section 30 of the SRC expressly stipulates that the trust fund is to be used at all times for
the sole benefit of the planholders, and cannot ever be applied to satisfy the claims of the
creditors. Section 30 prohibits the utilization of the trust fund for purposes other than for
the benefit of the planholders. The allowed withdrawals (specifically, the cost of benefits or
services, the termination values payable to the planholders, the insurance premium
payments for insurance-funded benefits of memorial life plans and other costs) refer to
payments that the pre-need company had undertaken to be made based on the contracts.

The CA gravely erred in authorizing the payment out of the trust fund of the obligations
due to Smart and FEMI. Even assuming that the obligations were incurred by the
respondent in order to infuse sufficient money in the trust fund to correct its deficiencies,
such obligations should be paid for by its assets, not by the trust fund. Indeed, Section 30
definitely provided that the trust fund could not be used to satisfy the claims of the CAP’s
creditors, as held in SEC vs. Hon. Laigo. It is incorrect to state that the paid value of the
MRT III Bonds are part of the Trust Fund. The bonds in its entirety were assigned to the
Trust Fund when acquired by CAP.

Finally, the unpaid obligation is likewise not an administrative expense, which can only be
paid from CAP’s assets and not of the Trust Fund, which only planholders can claim from.

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