Wednesday, April 8, 2015

Credit Transactions Case Doctrines: Antichresis, Insolvency, Rehabilitation, Liquidation

CREDIT TRANSACTIONS
Reviewer IV
Antichresis, Insolvency, Rehabilitation and Liquidation
Atty. Anthony Peralta
by Olive Cachapero


ANTICHRESIS

DIEGO v. FERNANDO, 109 PHIL 143 (1960)
Foreclosure of Antichresis, Art. 2137

Issue: Whether the contract between the parties is one of mortgage or of antichresis. MORTGAGE.
Ø  Appellant, while admitting that the contract Exhibit "A" shows a deed of mortgage, contends that the admitted fact that the loan was without interest, coupled with the transfer of the possession of the properties mortgaged to the mortgagee, reveals that the true transaction between him and appellee was one of antichresis.

Held: It is not an essential requisite of a mortgage that possession of the mortgaged premises be retained by the mortagagor. To be antichresis, it must be expressly agreed between creditor and debtor that the former, having been given possession of the properties given as security, is to apply their fruits to the payment of the interest, if owing, and thereafter to the principal of his credit (Art. 2132, Civil Code); so that if a contract of loan with security does not stipulate the payment of interest but provides for the delivery to the creditor by the debtor of the property given as security, in order that the latter may gather its fruits, without stating that said fruits are to be applied to the payment of interest, if any, and afterwards that of the principal, the contract is a mortgage and not antichresis.

As such mortgagee in possession, his rights and obligations are similar to those of an antichretic creditor:
1.        If the mortgagee acquires possession in any lawful manner, he is entitled to retain such possession until the indebtedness is satisfied and the property redeemed;
2.       that the non-payment of the debt within the term agreed does not vest the ownership of the property in the creditor;
3.       that the general duty of the mortgagee in possession towards the premises is that of the ordinary prudent owner;
4.       that the mortgagee must account for the rents and profits of the land, or its value for purposes of use and occupation, any amount thus realized going towards the discharge on the mortgage debt;
5.        that if the mortgage remains in possession after the mortgage debt has been satisfied, he becomes a trustee for the mortgagor as to the excess of the rents and profits over such debt; and lastly,
6.       that the mortgagor can only enforce his rights to the land by an equitable action for an account and to redeem.

ü  A creditor with a lien on real property who took possession thereof with the consent of the debtor, held it as an "antichretic creditor with the right to collect the credit with interest from the fruits, returning to the antichretic creditor the balance, if any, after deducting the expenses," because the fact that the debtor consented and asked the creditor to take charge of managing his property "does not entitle the latter to appropriate to itself the fruits thereof unless the former has expressly waived his right thereto."

In the present case, the parties having agreed that the loan was to be without interest, and the appellant not having expressly waived his right to the fruits of the properties mortgaged during the time they were in appellee's possession, the latter, like an antichretic creditor, must account for the value of the fruits received by him, and deduct it from the loan obtained by appellant. The appellee should be made to account for the fruits he received from the properties mortgaged from the time of the filing of this action until full payment by appellant, which fruits should be deducted from the total amount due him from appellant under this judgment. (deficiency should be recovered)


INSOLVENCY

DE BARRETO, ET. AL. v. VILLANUEVA, ET. AL., (1961)
Special Preferred Credits
(Important: See full text of the Resolution)

Facts: Rosario Cruzado sold all her right, title, and interest and that of her children in the house and lot herein involved to Villanueva for P19K. The purchaser paid P1,500 in advance, and executed a promissory note for the balance. However, the buyer could only pay P5,500 On account of the note, for which reason the vendor obtained judgment for the unpaid balance. In the meantime, the buyer Villanueva was able to secure a clean certificate of title and mortgaged the property to appellant Barretto to secure a loan of P30K, said mortgage having been duly recorded.

Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the mortgage in her favor, obtained judgment, and upon its becoming final asked for execution. Cruzado filed a motion for recognition for her "vendor's lien" invoking Articles 2242, 2243, and 2249 of the new Civil Code. After hearing, the court below ordered the "lien" annotated on the back of the title, with the proviso that in case of sale under the foreclosure decree the vendor's lien and the mortgage credit of appellant Barretto should be paid pro rata from the proceeds.

Appellants insist that:
1.        The vendor's lien, under Articles 2242 and 2243 of the new, Civil Code of the Philippines, can only become effective in the event of insolvency of the vendee, which has not been proved to exist in the instant case; and .
2.       That the Cruzado is not a true vendor of the foreclosed property.

Article 2242 of the new Civil Code enumerates the claims, mortgage and liens that constitute an encumbrance on specific immovable property, and among them are: .
(2) For the unpaid price of real property sold, upon the immovable sold; and
(5) Mortgage credits recorded in the Registry of Property."

Article 2249 of the same Code provides that "if there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro-rata after the payment of the taxes and assessment upon the immovable property or real rights.

Held: Application of the above-quoted provisions to the case at bar would mean that the herein appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with the appellants the proceeds of the foreclosure sale.

Issue: Appellant’s argument: inasmuch as the unpaid vendor's lien in this case was not registered, it should not prejudice the said appellants' registered rights over the property.

Held: There is nothing to this argument. Note must be taken of the fact that article 2242 of the new Civil Code enumerating the preferred claims, mortgages and liens on immovables, specifically requires that. Unlike the unpaid price of real property sold. mortgage credits, in order to be given preference, should be recorded in the Registry of Property. If the legislative intent was to impose the same requirement in the case of the vendor's lien, or the unpaid price of real property sold, the lawmakers could have easily inserted the same qualification which now modifies the mortgage credits. The law, however, does not make any distinction between registered and unregistered vendor's lien, which only goes to show that any lien of that kind enjoys the preferred credit status.

As to the point made that the articles of the Civil Code on concurrence and preference of credits are applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. If we are to interpret this portion of the Code as intended only for insolvency cases, then other creditor-debtor relationships where there are concurrence of credits would be left without any rules to govern them, and it would render purposeless the special laws on insolvency.

Resolution on Motion to Consider (1962)
Appellants, spouses Barretto, have filed a motion vigorously urging that our decision be reconsidered and set aside, and a new one entered declaring that their right as mortgagees remain superior to the unrecorded claim of herein appellee for the balance of the purchase price of her rights, title, and interests in the mortgaged property.

We have reached the conclusion that our original decision must be reconsidered and set aside:

Under the system of the Civil Code of the Philippines, only taxes enjoy a similar absolute preference. All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves, but must be paid pro-rata i.e., in proportion to the amount of the respective credits. Thus, Article 2249 provides:
If there are two or more credits with respect to the same specific real property or real rights, they, shall be satisfied pro-rata after the payment of the taxes and assessments upon the immovable property or real rights."

The full application of Articles 2249 and 2242 demands that there must be first some proceedings where the claims of all the preferred creditors may be bindingly adjudicated, such as:
1.         insolvency,
2.       the settlement of decedents estate under Rule 87 of the Rules of Court, or
3.       other liquidation proceedings of similar import.

This explains the rule of Article 2243 of the new Civil Code that —
The claims or credits enumerated in the two preceding articles" shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency.

And the rule is further clarified in the Report of the Code Commission, as follows:
The question as to whether the Civil Code and the insolvency Law can be harmonized is settled by Article 2243. The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the Insolvency Law."

Rule
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two creditors will not enable the Court to ascertain the pro-rata dividend corresponding to each, because the rights of the other creditors likewise" enjoying preference under Article 2242 can not be ascertained.

Held: There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, did not require the character and rank of a statutory lien co-equal to the mortgagee's recorded encumbrance, and must remain subordinate to the latter.


DBP v. CA, 363 SCRA 307 (2001)
Special Preferred Credits

Rule
Directors of insolvent corporation, who are creditors of the company, can not secure to themselves any preference or advantage over other creditors in the payment of their claims. The governing body of officers thereof are charged with the duty of conducting its affairs strictly in the interest of its existing creditors, and it would be a breach of such trust for them to undertake to give any one of its members any advantage over any other creditors in securing the payment of his debts in preference to all others.   The legal principle prevents directors of an insolvent corporation from giving themselves a preference over outside creditors. 

There exists in Remington’s favor a “lien” on the unpaid purchases of Marinduque Mining, and as transferee of these purchases, DBP should be held liable for the value thereof. In the absence of liquidation proceedings, however, the claim of Remington cannot be enforced against DBP.  Article 2241 of the Civil Code provides:

Article 2241. With reference to specific movable property of the debtor, the following claims or liens shall be preferred:
x x x
(3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its form, substance and identity, neither is the right lost by the sale of the thing together with other property for a lump sum, when the price thereof can be determined proportionally;

(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof;

Held: Although Barretto involved specific immovable property, the ruling therein should apply equally in this case where specific movable property is involved.  As the extra-judicial foreclosure instituted by PNB and DBP is not the liquidation proceeding contemplated by the Civil Code, Remington cannot claim its pro rata share from DBP.


J.L. BERNARDO CONSTRUCTION v. CA, (2000)
Special Preferred Credits

There is no contractor’s lien in favor of petitioners.

Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy preference with respect to specific personal or real property of the debtor. Specifically, the contractor’s lien claimed by petitioners is granted under the third paragraph of Article 2242 which provides that the claims of contractors engaged in the construction, reconstruction or repair of buildings or other works shall be preferred with respect to the specific building or other immovable property constructed.

However, Article 2242 only finds application when there is a concurrence of credits, i.e. when the same specific property of the debtor is subjected to the claims of several creditors and the value of such property of the debtor is insufficient to pay in full all the creditors. In such a situation, the question of preference will arise, that is, there will be a need to determine which of the creditors will be paid ahead of the others. Fundamental tenets of due process will dictate that this statutory lien should then only be enforced in the context of some kind of a proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency proceedings.

This is made explicit by Article 2243 which states that the claims and liens enumerated in articles 2241 and 2242 shall be considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing insolvency.

Held: The action filed by petitioners in the trial court does not partake of the nature of an insolvency proceeding. It is basically for specific performance and damages. Thus, even if it is finally adjudicated that petitioners herein actually stand in the position of unpaid contractors and are entitled to invoke the contractor’s lien granted under Article 2242, such lien cannot be enforced in the present action for there is no way of determining whether or not there exist other preferred creditors with claims over the San Antonio Public Market. The records do not contain any allegation that petitioners are the only creditors with respect to such property. The fact that no third party claims have been filed in the trial court will not bar other creditors from subsequently bringing actions and claiming that they also have preferred liens against the property involved.

               
CORDOVA v. REYES DAWAY LIM BERNARDO LINDO ROSALES LAW OFFICES, (2007)
Common Credits, Art. 2245, Art. 2251

The Civil Code provisions on concurrence and preference of credits are applicable to the liquidation proceedings.

Issue: Was petitioner a preferred or ordinary creditor under these provisions?  
Ø  Petitioner argues that he was a preferred creditor because private respondents illegally withdrew his shares from the custodian banks and sold them without his knowledge and consent and without authority from the SEC.  He quotes Article 2241 (2) of the Civil Code:
With reference to specific movable property of the debtor, the following claims or liens shall be preferred: 
(2)  Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed in the performance of their duties, on the movables, money or securities obtained by them;
Ø  He asserts that, as a preferred creditor, he was entitled to the entire monetary value of his shares.

Held: Petitioner’s argument is incorrect.  Article 2241 refers only to specific movable property.  His claim was for the payment of money, which is generic property and not specific or determinate. Petitioner’s CSPI shares were specific or determinate movable properties.  But after they were sold, the money raised from the sale became generic and were commingled with the cash and other assets of Philfinance. Unlike shares of stock, money is a generic thing. It is designated merely by its class or genus without any particular designation or physical segregation from all others of the same class. This means that once a certain amount is added to the cash balance, one can no longer pinpoint the specific amount included which then becomes part of a whole mass of money. 

Considering that petitioner did not fall under any of the provisions applicable to preferred creditors, he was deemed an ordinary creditor under Article 2245:
Credits of any other kind or class, or by any other right or title not comprised in the four preceding articles, shall enjoy no preference.

This being so, Article 2251 (2) states that:
Common credits referred to in Article 2245 shall be paid pro rata regardless of dates.

Like all the other ordinary creditors or claimants against Philfinance, he was entitled to a rate of recovery of only 15% of his money claim.



REHABILITATION

RCBC v. IAC, (1999)
General Concepts

Facts: BF Homes filed a “Petition for Rehabilitation and for Declaration of Suspension of Payments” (SEC Case No. 002693) with the SEC. One of the creditors listed in its inventory of creditors and liabilities was RCBC. RCBC requested the Provincial Sheriff of Rizal to extra-judicially foreclose its REM on some properties of BF Homes. In the auction sale, RCBC was the highest bidder.

RCBC argued that the SEC Case No. 2693 cannot be invoked to suspend the extra-judicial foreclosure of the REM in petitioner’s favor, as these do not constitute actions against private respondent contemplated under Section 6(c) of PD 902-A.

Majority opinion
Whenever a distressed corporation asks the SEC for rehabilitation and suspension of payments, preferred creditors may no longer assert such preference, but . . . stand on equal footing with other creditors. Foreclosure shall be disallowed so as not to prejudice other creditors, or cause discrimination among them.  If foreclosure is undertaken despite the fact that a petition for rehabilitation has been filed, the certificate of sale shall not be delivered pending rehabilitation.  Likewise, if this has also been done, no transfer of title shall be effected also, within the period of rehabilitation.  The rationale behind PD 902-A, as amended, is to effect a feasible and viable rehabilitation.  This cannot be achieved if one creditor is preferred over the others.

In this connection, the prohibition against foreclosure attaches as soon as a petition for rehabilitation is filed.  Were it otherwise, what is to prevent the petitioner from delaying the creation of a Management Committee and in the meantime dissipate all its assets.  The sooner the SEC takes over and imposes a freeze on all the assets, the better for all concerned.

DISSENTING OPINION
The dissent maintain that Section 6 (c) of PD 902-A is clear and unequivocal that, claims against the corporations, partnerships, or associations shall be suspended only upon the appointment of a management committee, rehabilitation receiver, board or body Thus, in the case under consideration, only upon the appointment of the Management Committee for BF Homes should the suspension of actions for claims against BF Homes have taken effect and not earlier.

Motion for Reconsideration
In support of its motion for reconsideration, RCBC contends:
Petitioner, being a mortgage creditor, is entitled to rely solely on its security and to refrain from joining the unsecured creditors in SEC Case No. 002693, the petition for rehabilitation filed by private respondent.

Issue: WON preferred creditors of distressed corporations stand on equal footing with all other creditors. YES.

Held: We find the motion for reconsideration meritorious.

The issue gains relevance and materiality only upon the appointment of a management committee, rehabilitation receiver, board, or body.  Insofar as petitioner RCBC is concerned, the provisions of PD No. 902-A are not yet applicable and it may still be allowed to assert its preferred status because it foreclosed on the mortgage prior to the appointment of the management committee.  The Court, therefore, grants the motion for reconsideration on this score.

Section 6(c) of PD 902-A, provides:
Sec. 6 In order to effectively exercise such jurisdiction, the Commission shall possess the following powers:
c)  To appoint one or more receivers of the property, real and personal, which is the subject of the action pending before the Commission in accordance with the pertinent provisions of the Rules of Court in such other cases whenever necessary to preserve the rights of the parties-litigants to and/or protect the interest of the investing public and creditors; Provided, however, that the Commission may, in appropriate cases, appoint a rehabilitation receiver of corporations, partnerships or other associations not supervised or regulated by other government agencies who shall have, in addition to the powers of a regular receiver under the provisions of the Rules of Court, such functions and powers as are provided for in the succeeding paragraph (d) hereof: Provided, finally, That upon appointment of a management committee, rehabilitation receiver, board or body, pursuant to this Decree, all actions for claims against corporations, partnerships or associations under management or receivership pending before any court, tribunal, board or body shall be suspended accordingly. (As amended by PDs No. 1673, 1758 and by PD No. 1799)

Rules
·         It is thus adequately clear that suspension of claims against a corporation under rehabilitation is counted or figured up only upon the appointment of a management committee or a rehabilitation receiver. 
·         The holding that suspension of actions for claims against a corporation under rehabilitation takes effect as soon as the application or a petition for rehabilitation is filed with the SEC – may, to some, be more logical and wise but unfortunately, such is incongruent with the clear language of the law.  
·         Furthermore, a petition for rehabilitation does not always result in the appointment of a receiver or the creation of a management committee.  The SEC has to initially determine whether such appointment is appropriate and necessary under the circumstances.  

Under Paragraph (d), Section 6, certain situations must be shown to exist before a management committee may be created or appointed, such as;
1.        when there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties; or
2.       when there is paralization of business operations of such corporations or entities which may be prejudicial to the interest of minority stockholders, parties-litigants or to the general public.

On the other hand, receivers may be appointed whenever:
1.  necessary in order to preserve the rights of the parties-litigants; and/or
2.  protect the interest of the investing public and creditors. (Section 6 (c), P.D. 902-A.)

Otherwise, when such circumstances are not obtaining or when the SEC finds no such imminent danger of losing the corporate assets, a management committee or rehabilitation receiver need not be appointed and suspension of actions for claims may not be ordered by the SEC.  

Petitioner additionally argues in its motion for reconsideration that, being a mortgage creditor, it is entitled to rely on its security and that it need not join the unsecured creditors in filing their claims before the SEC-appointed receiver.  To support its position, petitioner cites the Court’s ruling in the case of Philippine Commercial International Bank vs. Court of Appeals, (172 SCRA 436 [1989]) that an order of suspension of payments as well as actions for claims applies only to claims of unsecured creditors and cannot extend to creditors holding a mortgage, pledge, or any lien on the property.

The majority opinion relied upon BF Homes, Inc. vs. CA held that “when a corporation threatened by bankruptcy is taken over by a receiver, all the creditors should stand on an equal footing.  Not anyone of them should be given preference by paying one or some of them ahead of the others.  This is precisely the reason for the suspension of all pending claims against the corporation under receivership.  Instead of creditors vexing  the courts with suits against the distressed firm, they are directed to file their claims with the receiver who is a duly appointed officer of the SEC.

The following rules of thumb shall are laid down:
1.        All claims against corporations, partnerships, or associations that are pending before any court, tribunal, or board, without distinction as to whether or not a creditor is secured or unsecured, shall be suspended effective upon the appointment of a management committee, rehabilitation receiver, board, or body in accordance with the provisions of Presidential Decree No. 902-A.
2.       Secured creditors retain their preference over unsecured creditors, but enforcement of such preference is equally suspended upon the appointment of a management committee, rehabilitation receiver, board, or body.  In the event that the assets of the corporation, partnership, or association are finally liquidated, however, secured and preferred credits under the applicable provisions of the Civil Code will definitely have preference over unsecured ones.

In other words, once a management committee, rehabilitation receiver, board or body is appointed pursuant to P.D. 902-A, all actions for claims against a distressed corporation pending before any court, tribunal, board or body shall be suspended accordingly. 

This suspension shall not prejudice or render ineffective the status of a secured creditor as compared to a totally unsecured creditor.   

However, in the event that rehabilitation is no longer feasible and claims against the distressed corporation would eventually have to be settled, the secured creditors shall enjoy preference over the unsecured creditors (still maintaining PCIB ruling), subject only to the provisions of the Civil Code on Concurrence and Preferences of Credit.

All claims of both a secured or unsecured creditor, without distinction on this score, are suspended once a management committee is appointed.  Secured creditors, in the meantime, shall not be allowed to assert such preference before the SEC.  It may be stressed, however, that this shall only take effect upon the appointment of a management committee, rehabilitation receiver, board, or body, as opined in the dissent.

In fine, the Court grants the motion for reconsideration for the cogent reason that suspension of actions for claims commences only from the time a management committee or receiver is appointed by the SEC.  Petitioner RCBC, therefore, could have rightfully, as it did, move for the extrajudicial foreclosure of its mortgage because a management committee was not appointed by the SEC until.





SUBREJUANITE v. ASB DEVELOPMENT CORPORATION, (2005)
General Concepts

Purpose for the suspension of the proceedings
·         to prevent a creditor from obtaining an advantage or preference over another and to protect and preserve the rights of party litigants as well as the interest of the investing public or creditors.
·         intended to give enough breathing space for the management committee or rehabilitation receiver to make the business viable again, without having to divert attention and resources to litigations in various fora.
·         enable the management committee or rehabilitation receiver to effectively exercise its/his powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the “rescue” of the debtor company. 
·         to allow such other action to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the corporation instead of being directed toward its restructuring and rehabilitation.

In order to resolve whether the proceedings before the HLURB should be suspended, it is necessary to determine whether the complaint for rescission of contract with damages is a claim within the contemplation of PD No. 902-A.

Definition of “claim” as used in Sec. 6(c) of PD 902-A
Ø  refer only to debts or demands pecuniary in nature
Ø  claim as used in Sec. 6(c) of P.D. 902-A refers to debts or demands of a pecuniary nature.  It means “the assertion of a right to have money paid.  It is used in special proceedings like those before administrative court, on insolvency.”
Ø  Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, unsecured. In conflicts of law, a receiver may be appointed in any state which has jurisdiction over the defendant who owes a claim.
Ø  In Arranza v. B.F. Homes, Inc.claim is defined as referring to actions involving monetary considerations.

Note: Finasia Investments and Finance Corp. v. CA and Arranza v. B.F. Homes, Inc. were promulgated prior to the effectivity of the Interim Rules of Procedure on Corporate Rehabilitation on December 15, 2000.  The interim rules define a claim as referring to all claims or demands, of whatever nature or character against a debtor or its property, whether for money or otherwise.  The definition is all-encompassing as it refers to all actions whether for money or otherwise.  There are no distinctions or exemptions.

Incidentally, although the petition for rehabilitation with prayer for suspension of actions and proceedings was filed before the SEC or prior to the effectivity of the interim rules, the same would still apply pursuant to Section 1, Rule 1 thereof which provides:

Section 1.  Scope – These Rules shall apply to petitions for rehabilitation filed by corporations, partnerships, and associations pursuant to Presidential Decree No. 902-A, as amended.
  
Held: Clearly then, the complaint filed by Sobrejuanite is a claim as defined under the Interim Rules of Procedure on Corporate Rehabilitation.  Even under our rulings in Finasia Investments and Finance Corp. v. CA and Arranza v. B.F. Homes, Inc., the complaint for rescission with damages would fall under the category of claim considering that it is for pecuniary considerations.

Facts: In their complaint, Sobrejuanite pray for the rescission of the contract and the refund their total payments to ASBDC; damages and costs. In the decision of the HLURB arbiter, ASBDC was ordered to pay. As such, the HLURB arbiter should have suspended the proceedings upon the approval by the SEC of the ASB Group of Companies’ rehabilitation plan and the appointment of its rehabilitation receiver.  By the suspension of the proceedings, the receiver is allowed to fully devote his time and efforts to the rehabilitation and restructuring of the distressed corporation. 

It is well to note that even the execution of final judgments may be held in abeyance when a corporation is under rehabilitation.  Hence, there is more reason in the instant case for the HLURB arbiter to order the suspension of the proceedings as the motion to suspend was filed soon after the institution of the complaint.  By allowing the proceedings to proceed, the HLURB arbiter unwittingly gave undue preference to Sobrejuanite over the other creditors and claimants of ASBDC, which is precisely the vice sought to be prevented by Section 6(c) of PD 902-A.  Thus:       

            As between creditors, the key phrase is “equality is equity.”  When a corporation threatened by bankruptcy is taken over by a receiver, all the creditors should stand on equal footing.  Not anyone of them should be given any preference by paying one or some of them ahead of the others.  This is precisely the reason for the suspension of all pending claims against the corporation under receivership.  Instead of creditors vexing the courts with suits against the distressed firm, they are directed to file their claims with the receiver who is a duly appointed officer of the SEC.

Petitioners’ reliance on Arranza v. B.F. Homes, Inc. is misplaced.  In that case, we held that the HLURB retained its jurisdiction despite the rehabilitation proceedings since the claim filed by the homeowners did not involve pecuniary considerations.  The claim therein was for specific performance to enforce the homeowners’ rights as regards right of way, open spaces, road and perimeter wall repairs, and security.    However, it can also be deduced therefrom that if the claim was for monetary awards, the proceedings before the HLURB should be suspended during the rehabilitation.  In this case, under the complaint for specific performance before the HLURB, petitioners do not aim to enforce a pecuniary demand.  Their claim for reimbursement. The HLURB, not the SEC, is equipped with the expertise to deal with that matter.

TOWN AND COUNTRY ENTERPRISES, INC. v. QUISUMBING, 2012
General Concepts

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.

Purpose: to enable the company to gain a new lease on life and allow its creditors to be paid their claims out of its earnings.

Principal feature: 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. 

Under Section 24, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation, 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.

Facts: In addition to the issuance of the Stay Order, petitioners call attention to the fact that the Rehabilitation Court approved TCEI’s rehabilitation plan in the Order. Considering that orders issued by the Rehabilitation Court are immediately executory, 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, 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.

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. 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. An essential function of corporate rehabilitation is, admittedly, the Stay Order which is a mechanism of suspension of all actions and claims against the distressed corporation upon the due appointment of a management committee or rehabilitation receiver. The Stay Order issued by the Rehabilitation Court 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.

Rules (Case Laws)
ü  The writ of possession procured by the creditor is valid despite the subsequent issuance of a stay order in the rehabilitation proceedings instituted by the debtor.
ü  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. 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.

Held: 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. Metrobank acted well-within its rights in applying for a writ of possession, the issuance of which has consistently been held to be a ministerial function which cannot be hindered by an injunction or an action for the annulment of the mortgage or the foreclosure itself. While it is true that the function ceases to be ministerial where the property is in the possession of a third party claiming a right adverse to that of the judgment debtor, the rehabilitation receiver’s power to take possession, control and custody of TCEI’s assets is far from adverse to the latter. A rehabilitation receiver is an officer of the court who is appointed for the protection of the interests of the corporate investors and creditors. It has been ruled that there is nothing in the concept of corporate rehabilitation that would ipso facto deprive the officers of a debtor corporation of control over its business or properties.



SITUS DEVELOPMENT CORP., ET. AL.  v. ASIATRUST BANK
General Concepts

G.R. NO. 180036, (2012)
·         The Rules provide that "the petition (Petition for Rehabilitation) shall be dismissed if no rehabilitation plan is approved by the court upon the lapse of 180 days from the date of the initial hearing." While the Rules expressly provide that the 180-day period may be extended, such extension may be granted only "if it appears by convincing and compelling evidence that the debtor may successfully be rehabilitated."

·         It is a fundamental principle in corporate law that a corporation is a juridical entity with a legal personality separate and distinct from the people comprising it. Hence, the rule is that assets of stockholders may not be considered as assets of the corporation, and vice-versa. The mere fact that one is a majority stockholder of a corporation does not make one s property that of the corporation, since the stockholder and the corporation are separate entities.

·         The Stay Order does not suspend the foreclosure of a mortgage constituted over the property of a third-party mortgagor.
Petitioners insist that the Stay Order covers the mortgaged properties, citing the Interim Rules on Corporate Rehabilitation (the Rules). Under the Rules, one of the effects of a Stay Order is the stay of the "enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor."
Based on a reading of the Rules, we rule that the Stay Order cannot suspend foreclosure proceedings already commenced over properties belonging to spouses Chua. The Stay Order can only cover those claims directed against petitioner corporations or their properties, against petitioners guarantors, or against petitioners sureties who are not solidarily liable with them.

·         Spouses Chua may not be considered as "debtors." The Interim Rules on Corporate Rehabilitation (the Rules) define the term "debtor" as follows:Ï‚rαlαω
"Debtor" shall mean any corporation, partnership, or association, whether supervised or regulated by the Securities and Exchange Commission or other government agencies, on whose behalf a petition for rehabilitation has been filed under these Rules.

The issuance of a Stay Order cannot suspend the foreclosure of accommodation mortgages, because the Stay Order may only cover the suspension of the enforcement of all claims against the debtor, its guarantors, and sureties not solidarily liable with the debtor. Thus, the suspension of enforcement of claims does not extend to the foreclosure of accommodation mortgages.

Moreover, the intent of the Rules is to exclude from the scope of the Stay Order the foreclosure of properties owned by accommodation mortgagors. The newly adopted Rules of Procedure on Corporate Rehabilitation provides for one of the effects of a Stay Order:
SEC. 7. Stay Order.
(b) staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and persons not solidarily liable with the debtor; provided, that the stay order shall not cover claims against letters of credit and similar security arrangements issued by a third party to secure the payment of the debtor's obligations; provided, further, that the stay order shall not cover foreclosure by a creditor of property not belonging to a debtor under corporate rehabilitation; provided, however, that where the owner of such property sought to be foreclosed is also a guarantor or one who is not solidarily liable, said owner shall be entitled to the benefit of excussion as such guarantor.

From the foregoing, we therefore hold that foreclosure proceedings over the properties in question are not suspended by the trial court s issuance of the Stay Order.


G.R. No. 180036, (2013)
Petitioners incorrectly argue that the properties belonging to their majority stockholders may be included in the rehabilitation plan, because these properties were mortgaged to secure petitioners’ loans. Under the FRIA, the Stay Order may now cover third-party or accommodation mortgages, in which the "mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver." The FRIA likewise provides that its provisions may be applicable to further proceedings in pending cases, except to the extent that, in the opinion of the court, their application would not be feasible or would work injustice.

Sec. 146 of the FRIA, which makes it applicable to "all further proceedings in insolvency, suspension of payments and rehabilitation cases x x x except to the extent that in the opinion of the court their application would not be feasible or would work injustice," still presupposes a prospective application. The wording of the law clearly shows that it is applicable to all further proceedings. In no way could it be made retrospectively applicable to the Stay Order issued by the rehabilitation court back in 2002.

At the time of the issuance of the Stay Order, the rules in force were the 2000 Interim Rules of Procedure on Corporate Rehabilitation (the "Interim Rules"). Under those rules, one of the effects of a Stay Order is the stay of the "enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor." Nowhere in the Interim Rules is the rehabilitation court authorized to suspend foreclosure proceedings against properties of third-party mortgagors. In fact, we have expressly ruled in Pacific Wide Realty and Development Corp. v. Puerto Azul Land, Inc. that the issuance of a Stay Order cannot suspend the foreclosure of accommodation mortgages. Whether or not the properties subject of the third-party mortgage are used by the debtor corporation or are necessary for its operation is of no moment, as the Interim Rules do not make a distinction. To repeat, when the Stay Order was issued, the rehabilitation court was only empowered to suspend claims against the debtor, its guarantors, and sureties not solidarily liable with the debtor. Thus, it was beyond the jurisdiction of the rehabilitation court to suspend foreclosure proceedings against properties of third-party mortgagors.

The third issue, therefore, is immaterial.1âwphi1 Whether or not respondent banks had acquired ownership of the subject properties at the time of the issuance of the Stay Order, the same conclusion will still be reached. The subject properties will still fall outside the ambit of the Stay Order issued by the rehabilitation court. Since the subject properties are beyond the reach of the Stay Order, and since foreclosure and consolidation of title may no longer be stalled, petitioners’ rehabilitation plan is no longer feasible. We therefore affirm our earlier finding that the dismissal of the Petition for the Declaration of State of Suspension of Payments with Approval of Proposed Rehabilitation Plan is in order.








MWSS v. DAWAY AND MAYNILAD WATER SERVICES, INC., (2004)
Exceptions to Stay or Suspension Order, Sec. 18, Sec. 16

I
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.

II
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.”

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.

III
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.



PANLILIO ET AL., v. REGIONAL TRIAL COURT, (2011)
Exceptions to Stay or Suspension Order, Sec. 18, Sec. 16

Principal feature of corporate rehabilitation is the suspension of claims against the distressed corporation. Section 6 (c) of Presidential Decree No. 902-A, as amended, provides for suspension of claims against corporations undergoing rehabilitation, to wit:
Section 6 (c).  x x x Provided, finally, that upon appointment of a management committee, rehabilitation receiver, board or body, pursuant to this Decree, all actions for claims against corporations, partnerships or associations under management or receivership pending before any court, tribunal, board or body, shall be suspended accordingly.
  
In November 21, 2000, this Court En Banc promulgated the Interim Rules of Procedure on Corporate Rehabilitation, Section 6, Rule 4 of which provides a stay order on all claims against the corporation, thus:
Stay Order. - If the court finds the petition to be sufficient in form and substance, it shall, not later than five (5) days from the filing of the petition, issue an Order x x x; (b) staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor; x x x

Issue: Does the suspension of “all claims” as an incident to a corporate rehabilitation also contemplate the suspension of criminal charges filed against the corporate officers of the distressed corporation? NO.

In Rosario v. Co (Rosario), a case of recent vintage, the issue resolved by this Court was whether or not during the pendency of rehabilitation proceedings, criminal charges for violation of Batas Pambansa Bilang 22 should be suspended, was disposed of as follows:
The filing of the case for violation of B.P. Blg. 22 is not a "claim" that can be enjoined within the purview of P.D. No. 902-A. True, although conviction of the accused for the alleged crime could result in the restitution, reparation or indemnification of the private offended party for the damage or injury he sustained by reason of the felonious act of the accused, nevertheless, prosecution for violation of B.P. Blg. 22 is a criminal action.

Facts: Rosario is at fours with the case at bar. Petitioners are charged with violations of Section 28 (h) of the SSS law, in relation to Article 315 (1) (b) of the Revised Penal Code, or Estafa.  The SSS law clearly “criminalizes” the non-remittance of SSS contributions by an employer to protect the employees from unscrupulous employers. Therefore, public interest requires that the said criminal acts be immediately investigated and prosecuted for the protection of society.

Held: The rehabilitation of SIHI and the settlement of claims against the corporation is not a legal ground for the extinction of petitioners’ criminal liabilities. There is no reason why criminal proceedings should be suspended during corporate rehabilitation, more so, since the prime purpose of the criminal action is to punish the offender in order to deter him and others from committing the same or similar offense, to isolate him from society, reform and rehabilitate him or, in general, to maintain social order. As correctly observed in Rosario, it would be absurd for one who has engaged in criminal conduct could escape punishment by the mere filing of a petition for rehabilitation by the corporation of which he is an officer.

The prosecution of the officers of the corporation has no bearing on the pending rehabilitation of the corporation, especially since they are charged in their individual capacities. Such being the case, the purpose of the law for the issuance of the stay order is not compromised, since the appointed rehabilitation receiver can still fully discharge his functions as mandated by law. It bears to stress that the rehabilitation receiver is not charged to defend the officers of the corporation. If there is anything that the rehabilitation receiver might be remotely interested in is whether the court also rules that petitioners are civilly liable. Such a scenario, however, is not a reason to suspend the criminal proceedings, because as aptly discussed in Rosario, should the court prosecuting the officers of the corporation find that an award or indemnification is warranted, such award would fall under the category of claims, the execution of which would be subject to the stay order issued by the rehabilitation court. The penal sanctions as a consequence of violation of the SSS law, in relation to the revised penal code can therefore be implemented if petitioners are found guilty after trial. However, any civil indemnity awarded as a result of their conviction would be subject to the stay order issued by the rehabilitation court. Only to this extent can the order of suspension be considered obligatory upon any court, tribunal, branch or body where there are pending actions for claims against the distressed corporation.

On a final note, this Court would like to point out that Congress has recently enacted Republic Act No. 10142, or the Financial Rehabilitation and Insolvency Act of 2010. Section 18 thereof explicitly provides that criminal actions against the individual officer of a corporation are not subject to the Stay or Suspension Order in rehabilitation proceedings, to wit:




 The Stay or Suspension Order shall not apply:
x x x x
(g) any criminal action against individual debtor or owner, partner, director or officer of a debtor shall not be affected by any proceeding commenced under this Act.



BPI v. SEC, (2007)
Cram Down Effect, Sec. 63 to 73

Facts: The ASB Group filed a petition for rehabilitation and suspension of payments before the SEC. The Rehabilitation Plan provides a dacion en pago by the ASB Group to BPI of one of the properties mortgaged to the latter at the ASB Group.  The dacion would constitute full payment of the entire obligation due to BPI because the balance was then to be considered waived, as per the Rehabilitation Plan. BPI opposed the Rehabilitation Plan and moved for the dismissal of the ASB Group’s petition for rehabilitation. BPI argued that the Order constituted an arbitrary violation of BPI’s freedom and right to contract since the Rehabilitation Plan compelled BPI to enter into a dacion en pago agreement with the ASB Group.

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. The rationale of P.D. No. 902-A, as amended, is to “effect a feasible and viable rehabilitation,” by preserving a foundering business as going concern, because the assets of a business are often more valuable when so maintained than they would be when liquidated.

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 non-impairment 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.

 Besides, the mere fact that the Rehabilitation Plan proposes a dacion en pago approach does not render it defective on the ground of  impairment of the right to contract. Dacion en pago is a special mode of payment where the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt.  The undertaking really partakes in a sense  of the nature of sale, that is, the creditor is really buying the thing or property of the debtor,  the payment for which is to be charged against the debtor’s debt.  As such, the essential elements of a contract of sale, namely; consent, object certain, and cause or consideration must be present. Being a form of contract, the dacion en pago agreement cannot be perfected without the consent of the parties involved.













BPI v. SARABIA MANOR HOTEL CORP., G.R. NO. 175844 JULY 29, 2013
Cram Down Effect, Sec. 63 to 73

Cram-down clause
Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules) states that a rehabilitation plan may be approved even over the opposition of the creditors holding a majority of the corporation’s total liabilities if there is a showing that rehabilitation is feasible and the opposition of the creditors is manifestly unreasonable. Also known as the "cram-down" clause, this provision, which is currently incorporated in the FRIA, is necessary to curb the majority creditors’ natural tendency to dictate their own terms and conditions to the rehabilitation, absent due regard to the greater long-term benefit of all stakeholders. Otherwise stated, it forces the creditors to accept the terms and conditions of the rehabilitation plan, preferring long-term viability over immediate but incomplete recovery.

i. Feasibility of Sarabia’s rehabilitation.
If the results of the financial examination and analysis clearly indicate that there lies no reasonable probability that the distressed corporation could be revived and that liquidation would, in fact, better subserve the interests of its stakeholders, then it may be said that a rehabilitation would not be feasible. In such case, the rehabilitation court may convert the proceedings into one for liquidation.

Rehabilitation is x x x available to a corporation [which], while illiquid, has assets that can generate more cash if used in its daily operations than sold. Its liquidity issues can be addressed by a practicable business plan that will generate enough cash to sustain daily operations, has a definite source of financing for its proper and full implementation, and anchored on realistic assumptions and goals. This remedy should be denied to corporations whose insolvency appears to be irreversible and whose sole purpose is to delay the enforcement of any of the rights of the creditors, which is rendered obvious by the following: (a) the absence of a sound and workable business plan; (b) baseless and unexplained assumptions, targets and goals; (c) speculative capital infusion or complete lack thereof for the execution of the business plan; (d) cash flow cannot sustain daily operations; and (e) negative net worth and the assets are near full depreciation or fully depreciated.




LIQUIDATION
                               
CONSUELO METAL CORP v. PLANTERS DEVELOPMENT BANK & MANINGAS, (2008)
Secured Creditor Claims, Sec. 113, Sec. 114

While the SEC has jurisdiction to order the dissolution of a corporation,[16]jurisdiction over the liquidation of the corporation now pertains to the appropriate regional trial courts.  This is the reason why the SEC, in its 29 November 2000 Omnibus Order, directed that “the proceedings on and implementation of the order of liquidation be commenced at the Regional Trial Court to which this case shall be transferred.”  This is the correct procedure because the liquidation of a corporation requires the settlement of claims for and against the corporation, which clearly falls under the jurisdiction of the regular courts.  The trial court is in the best position to convene all the creditors of the corporation, ascertain their claims, and determine their preferences.

Rules
If rehabilitation is no longer feasible and the assets of the corporation are finally liquidated, secured creditors shall enjoy preference over unsecured creditors, subject only to the provisions of the Civil Code on concurrence and preference of credits.  Creditors of secured obligations may pursue their security interest or lien, or they may choose to abandon the preference and prove their credits as ordinary claims.  

Moreover, Section 2248 of the Civil Code provides:
         Those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the extent of the value of the immovable or real right to which the preference refers. 

 Held: In this case, Planters Bank, as a secured creditor, enjoys preference over a specific mortgaged property and has a right to foreclose the mortgage under Section 2248 of the Civil Code.   The creditor-mortgagee has the right to foreclose the mortgage over a specific real property whether or not the debtor-mortgagor is under insolvency or liquidation proceedings.  The right to foreclose such mortgage is merely suspended upon the appointment of a management committee or rehabilitation receiver or upon the issuance of a stay order by the trial court.  However, the creditor-mortgagee may exercise his right to foreclose the mortgage upon the termination of the rehabilitation proceedings or upon the lifting of the stay order.


YNGSON v. PNB, G.R. NO.171132, AUGUST 15, 2012
Secured Creditor Claims, Sec. 113, Sec. 114

Issue: Whether PNB, as a secured creditor, can foreclose on the mortgaged properties of a corporation under liquidation without the knowledge and prior approval of the liquidator or the SEC. YES.

It is worth mentioning that under RA 10142, otherwise known as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, the right of a secured creditor to enforce his lien during liquidation proceedings is retained. Section 114 of said law thus provides:

SEC. 114. Rights of Secured Creditors. – The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law. A secured creditor may:
a)       waive his rights under the security or lien, prove his claim in the liquidation proceedings and share in the distribution of the assets of the debtor; or
b)      maintain his rights under his security or lien;

If the secured creditor maintains his rights under the security or lien:
1.        the value of the property may be fixed in a manner agreed upon by the creditor and the liquidator. When the value of the property is less than the claim it secures, the liquidator may convey the property to the secured creditor and the latter will be admitted in the liquidation proceedings as a creditor for the balance; if its value exceeds the claim secured, the liquidator may convey the property to the creditor and waive the debtor’s right of redemption upon receiving the excess from the creditor;
2.       the liquidator may sell the property and satisfy the secured creditor’s entire claim from the proceeds of the sale; or
3.       the secured creditor may enforce the lien or foreclose on the property pursuant to applicable laws.

Held: In this case, PNB elected to maintain its rights under the security or lien; hence, its right to foreclose the mortgaged properties should be respected, in line with our pronouncement in Consuelo Metal Corporation.



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