E.

BARRETTO vs VILLANUEVA (1961)

FACTS: Rosario Cruzado sold all her right, title, and interest and that of her children
in the house and lot herein involved to Villanueva forP19K. 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."Artiticle 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
sased pro-rata after the payment of the taxes and assessment upon the immovable
property or real rights. Appellants 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: 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. 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 modies the mortgage credits.
The law, however, does not make any distinction between registered

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. HONORABLE COURT OF

APPEALS and REMINGTON INDUSTRIAL SALES CORPORATION, respondents.

The facts are as follows:

Marinduque Mining Industrial Corporation (Marinduque Mining), a corporation

engaged in the manufacture of pure and refined nickel, nickel and cobalt in mixed
sulfides, copper ore/concentrates, cement and pyrite conc., obtained from the
Philippine National Bank (PNB) various loan accommodations. To secure the loans,
Marinduque Mining executed on October 9, 1978 a Deed of Real Estate Mortgage
and Chattel Mortgage in favor of PNB. The mortgage covered all of Marinduque
Minings real properties, located at Surigao del Norte, Sipalay, Negros Occidental, and
at Antipolo, Rizal, including the improvements thereon. As of November 20, 1980, the
loans extended by PNB amounted to P4 Billion, exclusive of interest and charges. [1]

On July 13, 1981, Marinduque Mining executed in favor of PNB and the
Development Bank of the Philippines (DBP) a second Mortgage Trust Agreement. In
said agreement, Marinduque Mining mortgaged to PNB and DBP all its real properties
located at Surigao del Norte, Sipalay, Negros Occidental, and Antipolo, Rizal, including
the improvements thereon. The mortgage also covered all of Marinduque Minings
chattels, as well as assets of whatever kind, nature and description which Marinduque
Mining may subsequently acquire in substitution or replenishment or in addition to the
properties covered by the previous Deed of Real and Chattel Mortgage dated October
7, 1978. Apparently, Marinduque Mining had also obtained loans totaling P2 Billion
from DBP, exclusive of interest and charges. [2]

On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an
Amendment to Mortgage Trust Agreement by virtue of which Marinduque Mining
mortgaged in favor of PNB and DBP all other real and personal properties and other
real rights subsequently acquired by Marinduque Mining. [3]

For failure of Marinduque Mining to settle its loan obligations, PNB and DBP
instituted sometime on July and August 1984 extrajudicial foreclosure proceedings over
the mortgaged properties.

The events following the foreclosure are narrated by DBP in its petition, as
follows:
In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP
emerged and were declared the highest bidders over the foreclosed real properties,
buildings, mining claims, leasehold rights together with the improvements thereon as
well as machineries [sic] and equipments [sic] of MMIC located at Nonoc Nickel
Refinery Plant at Surigao del Norte for a bid price of P14,238,048,150.00 [and]
[o]ver the foreclosed chattels of MMIC located at Nonoc Refinery Plant at Surigao del
Norte, PNB and DBP as highest bidders, bidded for P170,577,610.00 (Exhs. 5 to
5-A, 6, 7 to 7-AA- PNB/DBP). For the foreclosed real properties together with all
the buildings, major machineries & equipment and other improvements of MMIC located
at Antipolo, Rizal, likewise held on August 31, 1984, were sold to PNB and DBP as
highest bidders in the sum of P1,107,167,950.00 (Exhs. 10 to 10-X- PNB/ DBP).
At the auction sale conducted on September 7, 1984[,] over the foreclosed real
properties, buildings, & machineries/equipment of MMIC located at Sipalay, Negros
Occidental were sold to PNB and DBP, as highest bidders, in the amount of
P2,383,534,000.00 and P543,040,000.00 respectively (Exhs. 8 to 8-BB, 9 to 90-
GGGGGGPNB/DBP).
Finally, at the public auction sale conducted on September 18, 1984 on the foreclosed
personal properties of MMIC, the same were sold to PNB and DBP as the highest
bidder in the sum of P678,772,000.00 (Exhs. 11 and12-QQQQQPNB).
PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely,
in order to ensure the continued operation of the Nickel refinery plant and to prevent
the deterioration of the assets foreclosed, assigned and transferred to Nonoc Mining
and Industrial Corporation all their rights, interest and participation over the foreclosed
properties of MMIC located at Nonoc Island, Surigao del Norte for an initial
consideration of P14,361,000,000.00 (Exh. 13-PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP assigned
and transferred in favor of Maricalum Mining Corp. all its rights, interest and
participation over the foreclosed properties of MMIC at Sipalay, Negros Occidental for
an initial consideration of P325,800,000.00 (Exh. 14PNB/DBP).
On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as
amended, again assigned, transferred and conveyed to the National Government thru
[sic] the Asset Privatization Trust (APT) all its existing rights and interest over the
assets of MMIC, earlier assigned to Nonoc Mining and Industrial Corporation,
Maricalum Mining Corporation and Island Cement Corporation (Exh. 15 & 15-
APNB/DBP).[4]

In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining
purchased and caused to be delivered construction materials and other merchandise
from Remington Industrial Sales Corporation (Remington) worth P921,755.95. The
purchases remained unpaid as of August 1, 1984 when Remington filed a complaint
for a sum of money and damages against Marinduque Mining for the value of the
unpaid construction materials and other merchandise purchased by Marinduque Mining,
as well as interest, attorneys fees and the costs of suit.

On September 7, 1984, Remingtons original complaint was amended to include

PNB and DBP as co-defendants in view of the foreclosure by the latter of the real
and chattel mortgages on the real and personal properties, chattels, mining claims,
machinery, equipment and other assets of Marinduque Mining. [5]

On September 13, 1984, Remington filed a second amended complaint to include

as additional defendant, the Nonoc Mining and Industrial Corporation (Nonoc
Mining). Nonoc Mining is the assignee of all real and personal properties, chattels,
machinery, equipment and all other assets of Marinduque Mining at its Nonoc Nickel
Factory in Surigao del Norte.[6]

On March 26, 1986, Remington filed a third amended complaint including the
Maricalum Mining Corporation (Maricalum Mining) and Island Cement Corporation
(Island Cement) as co-defendants.Remington asserted that Marinduque Mining, PNB,
DBP, Nonoc Mining, Maricalum Mining and Island Cement must be treated in law as
one and the same entity by disregarding the veil of corporate fiction since:
1. Co-defendants NMIC, Maricalum and Island Cement which are newly created
entities are practically owned wholly by defendants PNB and DBP, and managed by
their officers, aside from the fact that the aforesaid co-defendants NMIC, Maricalum
and Island Cement were organized in such a hurry and in such suspicious
circumstances by co-defendants PNB and DBP after the supposed extra-judicial
foreclosure of MMICs assets as to make their supposed projects assets, machineries
and equipment which were originally owned by co-defendant MMIC beyond the reach
of creditors of the latter.
2. The personnel, key officers and rank-and-file workers and employees of co-
defendants NMIC, Maricalum and Island Cement creations of co-defendants PNB and
DBP were the personnel of co-defendant MMIC such that x x x practically there has
only been a change of name for all legal purpose and intents.
3. The places of business not to mention the mining claims and project premises of
co-defendants NMIC, Maricalum and Island Cement likewise used to be the places of
business, mining claims and project premises of co-defendant MMIC as to make the
aforesaid co-defendants NMIC, Maricalum and Island Cement mere adjuncts and
subsidiaries of co-defendants PNB and DBP, and subject to their control and
management.
On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island Cement
being all corporations created by the government in the pursuit of business ventures
should not be allowed to ignore, x x x or obliterate with impunity nay illegally, the
financial obligations of x x x MMIC whose operations co-defendants PNB and DBP
had highly financed before the alleged extrajudicial foreclosure of defendant MMICs
assets, machineries and equipment to the extent that major policies of co-defendant
MMIC were being decided upon by co-defendants PNB and DBP as major financiers
who were represented in its board of directors forming part of the majority thereof
which through the alleged extrajudicial foreclosure culminated in a complete take-over
by co-defendants PNB and DBP bringing about the organization of their co-defendants
NMIC, Maricalum and Island Cement to which were transferred all the assets,
machineries and pieces of equipment of co-defendant MMIC used in its nickel mining
project in Surigao del Norte, copper mining operation in Sipalay, Negros Occidental
and cement factory in Antipolo, Rizal to the prejudice of creditors of co-defendant
MMIC such as plaintiff Remington Industrial Sales Corporation whose stockholders,
officers and rank-and-file workers in the legitimate pursuit of its business activities,
invested considerable time, sweat and private money to supply, among others, co-
defendant MMIC with some of its vital needs for its operation, which co-defendant
MMIC during the time of the transactions material to this case became x x x co-
defendants PNB and DBPs instrumentality, business conduit, alter ego, agency (sic),
subsidiary or auxiliary corporation, by virtue of which it becomes doubly necessary to
disregard the corporation fiction that co-defendants PNB, DBP, MMIC, NMIC,
Maricalum and Island Cement, six (6) distinct and separate entities, when in fact
and in law, they should be treated as one and the same at least as far as plaintiffs
transactions with co-defendant MMIC are concerned, so as not to defeat public
convenience, justify wrong, subvert justice, protect fraud or confuse legitimate issues
involving creditors such as plaintiff, a fact which all defendants were as (sic) still are
aware of during all the time material to the transactions subject of this case. [7]

On April 3, 1989, Remington filed a motion for leave to file a fourth amended
complaint impleading the Asset Privatization Trust (APT) as co-defendant. Said fourth
amended complaint was admitted by the lower court in its Order dated April 29,
1989.

On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor
of Remington, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the
defendants Marinduque Mining & Industrial Corporation, Philippine National Bank,
Development Bank of the Philippines, Nonoc Mining and Industrial Corporation,
Maricalum Mining Corporation, Island Cement Corporation and Asset Privatization Trust
to pay, jointly and severally, the sum of P920,755.95, representing the principal
obligation, including the stipulated interest as of June 22, 1984, plus ten percent
(10%) surcharge per annum by way of penalty, until the amount is fully paid; the
sum equivalent to 10% of the amount due as and for attorneys fees; and to pay the
costs.[8]

Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and
APT, the Court of Appeals, in its Decision dated October 6, 1995, affirmed the
decision of the RTC. Petitioner filed a Motion for Reconsideration, which was denied
in the Resolution dated August 29, 1996.

Hence, this petition, DBP maintaining that Remington has no cause of action
against it or PNB, nor against their transferees, Nonoc Mining, Island Cement,
Maricalum Mining, and the APT.

On the other hand, private respondent Remington submits that the transfer of the
properties was made in fraud of creditors. The presence of fraud, according to
Remington, warrants the piercing of the corporate veil such that Marinduque Mining
and its transferees could be considered as one and the same corporation. The
transferees, therefore, are also liable for the value of Marinduque Minings purchases.
 In Yutivo Sons Hardware vs. Court of Tax Appeals ,[9] cited by the Court of
Appeals in its decision,[10] this Court declared:
It is an elementary and fundamental principle of corporation law that a corporation is
an entity separate and distinct from its stockholders and from other corporations to
which it may be connected. However, when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend crime, the law will
regard the corporation as an association of persons or in case of two corporations,
merge them into one. (Koppel [Phils.], Inc., vs. Yatco, 71 Phil. 496, citing 1
Fletcher Encyclopedia of Corporation, Permanent Ed., pp. 135-136; U.S. vs.
Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.) xxx

In accordance with the foregoing rule, this Court has disregarded the separate
personality of the corporation where the corporate entity was used to escape liability to
third parties.[11] In this case, however, we do not find any fraud on the part of
Marinduque Mining and its transferees to warrant the piercing of the corporate veil.

It bears stressing that PNB and DBP are mandated to foreclose on the mortgage
when the past due account had incurred arrearages of more than 20% of the total
outstanding obligation. Section 1 of Presidential Decree No. 385 (The Law on
Mandatory Foreclosure) provides:
It shall be mandatory for government financial institutions, after the lapse of sixty
(60) days from the issuance of this decree, to foreclose the collateral and/or
securities for any loan, credit accommodation, and/or guarantees granted by them
whenever the arrearages on such account, including accrued interest and other
charges, amount to at least twenty percent (20%) of the total outstanding obligations,
including interest and other charges, as appearing in the books of account and/or
related records of the financial institution concerned. This shall be without prejudice to
the exercise by the government financial institution of such rights and/or remedies
available to them under their respective contracts with their debtors, including the right
to foreclose on loans, credits, accomodations and/or guarantees on which the
arrearages are less than twenty (20%) percent.

Thus, PNB and DBP did not only have a right, but the duty under said law, to
foreclose upon the subject properties. The banks had no choice but to obey the
statutory command.

The import of this mandate was lost on the Court of Appeals, which reasoned
that under Article 19 of the Civil Code, Every person must, in the exercise of his
rights and in the performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith. The appellate court, however, did not point to
any fact evidencing bad faith on the part of the Marinduque Mining and its
transferees. Indeed, it skirted the issue entirely by holding that the question of actual
fraudulent intent on the part of the interlocking directors of DBP and Marinduque
Mining was irrelevant because:
As aptly stated by the appellee in its brief, x x x where the corporations have
directors and officers in common, there may be circumstances under which their
interest as officers in one company may disqualify them in equity from representing
both corporations in transactions between the two. Thus, where one corporation was
insolvent and indebted to another, it has been held that the directors of the creditor
corporation were disqualified, by reason of self-interest, from acting as directors of the
debtor corporation in the authorization of a mortgage or deed of trust to the former to
secure such indebtedness x x x (page 105 of the Appellees Brief). In the same
manner that x x x when the corporation is insolvent, its directors who are its creditors
can not secure to themselves any advantage or preference over other creditors. They
can not thus take advantage of their fiduciary relation and deal directly with
themselves, to the injury of others in equal right. If they do, equity will set aside the
transaction at the suit of creditors of the corporation or their representatives, without
reference to the question of any actual fraudulent intent on the part of the
directors, for the right of the creditors does not depend upon fraud in fact, but upon
the violation of the fiduciary relation to the directors. xxx. (page 106 of the Appellees
Brief.)
We also concede that x x x 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. It is not good morals or good law. 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. When
validity of these mortgages, to secure debts upon which the directors were indorsers,
was questioned by other creditors of the corporation, they should have been classed
as instruments rendered void by the legal principle which prevents directors of an
insolvent corporation from giving themselves a preference over outside creditors. x x
x (page 106-107 of the Appellees Brief.)[12]

The Court of Appeals made reference to two principles in corporation law. The
first pertains to transactions between corporations with interlocking directors resulting in
the prejudice to one of the corporations. This rule does not apply in this case,
however, since the corporation allegedly prejudiced (Remington) is a third party, not
one of the corporations with interlocking directors (Marinduque Mining and DBP).

The second principle invoked by respondent court involves directors who are
creditors which is also inapplicable herein. Here, the creditor of Marinduque Mining is
DBP, not the directors of Marinduque Mining.

Neither do we discern any bad faith on the part of DBP by its creation of Nonoc
Mining, Maricalum and Island Cement. As Remington itself concedes, DBP is not
authorized by its charter to engage in the mining business. [13] The creation of the
three corporations was necessary to manage and operate the assets acquired in the
foreclosure sale lest they deteriorate from non-use and lose their value. In the
absence of any entity willing to purchase these assets from the bank, what else
would it do with these properties in the meantime? Sound business practice required
that they be utilized for the purposes for which they were intended.

Remington also asserted in its third amended complaint that the use of Nonoc
Mining, Maricalum and Island Cement of the premises of Marinduque Mining and the
hiring of the latters officers and personnel also constitute badges of bad faith.

Assuming that the premises of Marinduque Mining were not among those acquired
by DBP in the foreclosure sale, convenience and practicality dictated that the
corporations so created occupy the premises where these assets were found instead of
relocating them. No doubt, many of these assets are heavy equipment and it may
have been impossible to move them. The same reasons of convenience and
practicality, not to mention efficiency, justified the hiring by Nonoc Mining, Maricalum
and Island Cement of Marinduque Minings personnel to manage and operate the
properties and to maintain the continuity of the mining operations.

To reiterate, the doctrine of piercing the veil of corporate fiction applies only when
such corporate fiction is used to defeat public convenience, justify wrong, protect fraud
or defend crime.[14] To disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established. It cannot be presumed.[15] In
this case, the Court finds that Remington failed to discharge its burden of proving bad
faith on the part of Marinduque Mining and its transferees in the mortgage and
foreclosure of the subject properties to justify the piercing of the corporate veil.

The Court of Appeals also held that there exists in Remingtons 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;

x x x

In Barretto vs. Villanueva,[16] the Court had occasion to construe Article 2242,
governing claims or liens over specific immovable property. The facts that gave rise to
the case were summarized by this Court in its resolution as follows:
x x x Rosario Cruzado sold all her right, title, and interest and that of her children
in the house and lot herein involved to Pura L. Villanueva for P19,000.00. The
purchaser paid P1,500 in advance, and executed a promissory note for the balance of
P17,500.00. 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 (No. 32626), and
mortgaged the property to appellant Magdalena C. Barretto, married to Jose C.
Baretto, to secure a loan of P30,000.03, said mortgage having been duly recorded.
Pura 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 on 31 July 1958. On 14 August 1958, Cruzado filed a motion for
recognition for her "vendor's lien" in the amount of P12,000.00, plus legal interest,
invoking Articles 2242, 2243, and 2249 of the new Civil Code. After hearing, the
court below ordered the "lien" annotated on the back of Certificate of Title No.
32526, with the proviso that in case of sale under the foreclousre decree the
vendor's lien and the mortgage credit of appellant Barretto should be paid pro
rata from the proceeds. Our original decision affirmed this order of the Court of First
Instance of Manila.

In its decision upholding the order of the lower court, the Court ratiocinated thus:
Article 2242 of the new Civil Code enumerates the claims, mortgages 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 assessments upon the immovable property or
real rights."
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.

x x x
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. [17]

Upon motion by appellants, however, the Court reconsidered its decision. Justice
J.B.L. Reyes, speaking for the Court, explained the reasons for the reversal:
A. The previous decision failed to take fully into account the radical changes
introduced by the Civil Code of the Philippines into the system of priorities among
creditors ordained by the Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors entitled to preference as to
specific real property under Article 1923 were to be resolved according to an order of
priorities established by Article 1927, whereby one class of creditors could exclude the
creditors of lower order until the claims of the former were fully satisfied out of the
proceeds of the sale of the real property subject of the preference, and could even
exhaust proceeds if necessary.
Under the system of the Civil Code of the Philippines, however, 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."
But in order to make this prorating fully effective, the preferred creditors enumerated in
Nos. 2 to 14 of Article 2242 (or such of them as have credits outstanding) must
necessarily be convened, and the import of their claims ascertained. It is thus
apparent that the full application of Articles 2249 and 2242 demands that there must
be first some proceeding where the claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency, the settlement of decedent's estate under
Rule 87 of the Rules of Court, or 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 xxx (Italics supplied).
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 this Article (2243). The preferences named in Articles 2261
and 2262 (now 2241 and 2242) are to be enforced in accordance with the
Insolvency Law." (Italics supplied)
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. Wherefore, the order of the Court of First Instance of Manila now
appealed from, decreeing that the proceeds of the foreclosure sale be apportioned only
between appellant and appellee, is incorrect, and must be reversed. [Underscoring
supplied]

The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr.,
etc., et al.,[18] and in two cases both entitled Development Bank of the Philippines
vs. NLRC.[19]
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.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals
dated October 6, 1995 and its Resolution promulgated on August 29, 1996
is REVERSED and SET ASIDE. The original complaint filed in the Regional Trial
Court in CV Case No. 84-25858 is hereby DISMISSED.

JL Bernardo Construction v CA 2000

Facts: 1990, San Antonio municipal Government (of Nueva Ecija) approved the
construction of the San AntonioPublic Market. It was supposed to be funded
by theEconomic Support Fund Secretariat (ESFS).Under the ESFS grant-loan-equity
program, the market would be funded by a grant from ESFS, loan extended by ESFS
and equity (or counterpart funds) from the municipality. Petitioners claimed they
entered into a business venture to participate in the bidding of the public market. So,
JL Construction (sole proprietorship owned byBernardo) thru Santiago Sugay submitted
its bid together with other qualified bidders. They won and were awarded the contract.
A construction agreement was then enteredinto by the municipality (thru respondent
Salonga, then the incumbent mayor) and JL Bernardo Construction. Petitioners claim
that under the contract, the municipality agreed to assume the expenses for
thedemolition, clearing and site filling of the construction site worth 1.15 million pesos
and to give cash equity of 767thousand pesos, both amounts to be remitted directly
to petitioners. Petitioners then allege that these amounts became due but the
municipality refused to pay despite repeated demands and despite the market being
98%complete. They say that Salonga induced them to advance expenses by making
representations that the municipality had the financial capability to reimburse them.1991,
petitioners filed for breach of contract, specific performance and collection of sum of
money, with prayer of preliminary attachment and enforcement of contractors lien
against the municipality and Salonga in his official and personal capacity.1995, RTC
granted the preliminary attachment. It also granted JL Bernardo Construction the right
to possession of the market and operate the same. It gave credence to the alleged
fraud.
With regard to the contractors lien, the RTC said that since petitioners have not been
reimbursed for the cash equity and for the demolition, clearing and site expenses,
they stand in the position of an unpaid contractor, then they are an unpaid contractor
which entitles them to Articles 2242 and 2243 of the CC, to alien worth 2.6 million
pesos (as of Aug 1, 1991), excluding other damages. It explained that although the
usual way is to enforce a lien is by a decree for the sale of the property and the
application of the proceeds to the debt, it is more practical to permit petitioners to
operate the market and apply their claims the income (rentals and goodwill
of prospective stallholders) derived therefrom.MR was denied so petitioners certioraried
to CA which favoured them. CA said Article 2242 is applicable in the context of
insolvency proceedings, as expressly stated in Article 2243. Even if petitioners are
entitled to possession, the same right cannot be expanded to the right to use the
building. The grant for petitioners to operate the market amounts to GAD. Petitioners
now in SC assailing CAs decision with regard to the contractors lien.

Issue:W/N petitioners can operate the market and apply the proceeds to their credit.
No.
Held and Ratio:1.

2241 and 2242 enumerates certain credits which enjoy preference with respect to
specific personal or real property of the debtor. a.Petitioners claimed contractor lien is
granted under 3rd paragraph of 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; b. BUT, 2242 applies only 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 is insufficient to pay in full all creditors;-

In such case, the question of preference will arise, that is, to whom of the creditors
shall be first; c. Due process dictates that this statutory lien should be enforced only
in the context of a proceeding where the claims of all preferred creditors may be
bindingly adjudicated; such as insolvency proceedings; d.2243 explicitly states this; that
the claims and liens in 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;
2. Petitioners suit is not in the nature of insolvency
proceedings:-Its basically specific performance and damages;-Thus, although they are
unpaid contractors and are entitled to contractors lien, such lien cannot be invoked in
the present action for it cannot be determined whether there are other preferred
creditors with claims over the market;-The allegations do not show that petitioners are
the only creditors with respect to such property;-

Although no third party claims have been filed, it will not bar other creditors from
filing subsequent actions and claim they have preferred liens; 3.

Since it is not alleged that petitioners have rights as mortgagee under the contract,
they could only obtain possession and use of the market by means of preliminary
attachment upon such property, in the event that they obtain favourable judgment from
the trial court: a. Under the rules, a writ of attachment (over registered real
property) is enforced by the sheriff by filing with the registry of deeds a copy of the
order of attachment, together with a description of the property, and by leaving a
copy of such

RCBC vs. IAC G.R. No. 74851, December 9, 1999

Facts: On September 28, 1984, BF Homes filed a Petition for Rehabilitation and for
Declaration of Suspension of Payments with the SEC. RCBC, one of the creditors
listed in BF Homes inventory of creditors and liabilities, on October 26, 1984,
requested the Provincial Sheriff of Rizal to extra-judicially foreclose its real estate
mortgage on some properties of BF Homes. BF Homes opposed the auction sale and
the SEC ordered the issuance of a writ of preliminary injunction upon petitioners filing
of a bond. Presumably unaware of the filing of the bond on the very day of the
auction sale, the sheriff proceeded with the public auction sale in which RCBC was
the highest bidder for the properties auctioned. But because of the proceedings in the
SEC, the sheriff withheld the delivery to RCBC of the certificate of sale covering the
auctioned properties.

On March 13, 1985, despite the SEC case, RCBC filed with RTC an action for
mandamus against the provincial sheriff of Rizal to compel him to execute in its favor
a certificate of sale of the auctioned properties.
On March 18, 1985, the SEC appointed a Management Committee for BF Homes.

Consequently, the trial court granted RCBCs motion for judgment on the pleading
ordering respondents to execute and deliver to petitioner the Certificate of Auction
Sale.

On appeal, the SC affirmed CAs decision (setting aside RTCs decision dismissing
the mandamus case and suspending issuance to RCBC of new land titles until the
resolution of the SEC case) ruling that 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. Hence, this
Motion for Reconsideration.

Issue: When should the suspension of actions for claims against BF Homes take
effect?
Held: The issue of whether or not preferred creditors of distressed corporations stand
on equal footing with all other creditors gains relevance and materiality only upon
the appointment of a management committee, rehabilitation receiver, board or body.

Upon cursory reading of Section 6, par (c) of PD 902-A, it is 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
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. To insist on such ruling, no matter how practical
and noble would be to encroach upon legislative prerogative to define the wisdom of
the law --- plainly judicial legislation.

Once a management committee, rehabilitation receiver, board or body

isappointed pursuant to PD 902-A, all actions for claims against a distressed
corporation pending before any court, tribunal, board or body shall be
suspended accordingly; Suspension shall not prejudice or render ineffective the status
of a secured creditor as compared to a totally unsecured creditor. What it merely
provides is that all actions for claims against the corporation, partnership
or association shall be suspended. This should give the receiver a chance to
rehabilitate the corporation if there should still be a possibility for doing so. 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 subject only to the provisions of the
Civil Code on Concurrence and Preferences of Credit.

Spouses Sobrejuanite v. ASB Development Corp., G.R. No. 165675

FACTS OF THE CASE

1. On March 7, 2001, spouses Eduardo and Fidela Sobrejuanite (Sobrejuanite) filed

a Complaint for rescission of contract, refund of payments and damages, against ASB
Development Corporation (ASBDC) before the Housing and Land Use Regulatory
Board (HLURB).

2. Sobrejuanite alleged that they entered into a Contract to Sell with ASBDC over a
condominium unit and a parking space in the BSA Twin Tower-B Condominum located
at Bank Drive, Ortigas Center, Mandaluyong City. They averred that despite full
payment and demands, ASBDC failed to deliver the property on or before December
1999 as agreed. They prayed for the rescission of the contract; refund of payments
amounting to P2,674,637.10; payment of moral and exemplary damages, attorneys
fees, litigation expenses, appearance fee and costs of the suit.

3. ASBDC filed a motion to dismiss or suspend proceedings in view of the approval

by the Securities and Exchange Commission (SEC) on April 26, 2001 of the
rehabilitation plan of ASB Group of Companies, which includes ASBDC, and the
appointment of a rehabilitation receiver. The HLURB arbiter however denied the
motion and ordered the continuation of the proceedings.

ISSUE:
Whether the SECs approval of the corporate rehabilitation plan has the effect of
suspending the proceeding before HLURB.

RULING:
Yes. Section 6(c) of PD No. 902-A empowers the SEC:

c) To appoint one or more receivers of the property, real and personal,

which is the subject of the action pending before the Commission whenever
necessary in order to preserve the rights of the parties-litigants and/or protect the
interest of the investing public and creditors: 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.

The purpose for the suspension of the proceedings is 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. Such suspension is 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.

The suspension would 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.
MWSS vs. DAWAY AND MAYNILAD
G.R. No. 160732. June 21, 2004

FACTS: MWSS granted Maynilad under a Concession Agreement 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 which, among other things, consisted of payments of
petitioners mostly foreign loans.
To secure the concessionaires performance of its obligations, 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 for a three-year facility with a
number of foreign banks, led by Citicorp Intl Ltd., for the issuance of an Irrevocable
Standby Letter of Credit in favor of MWSS for the full and prompt performance of
Maynilads obligations to MWSS as aforestated.
Later, the parties agreed to resolve the issues between them [Maynilad is asking 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 and in filing to get what it desired, Maynilad unilaterally suspended the
payment of the concession fees] through an amendment of the Concession Agreement
which was based on the terms set down in MWSS Board of Trustees Resolution
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.
However Maynilad served upon MWSS a Notice of Event of Termination, claiming
that MWSS failed to comply with its obligations under the Concession Agreement and
its Amendment regarding the adjustment mechanism that would cover Maynilads foreign
exchange losses. Maynilad filed a Notice of Early Termination of the concession, which
was challenged by MWSS. This matter was eventually brought before the Appeals
Panel by MWSS. 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. MWSS, thereafter, submitted a written
notice to Citicorp Intl Ltd, as agent for the participating banks, that by virtue of
Maynilads failure to perform its obligations under the Concession Agreement, it was
drawing on the Irrevocable Standby Letter of Credit and thereby demanded payment.
Prior to this, however, Maynilad had filed on a petition for rehabilitation before the
RTC of Quezon City which resulted in the issuance of the Stay Order and the
disputed Order of November 27, 2003.

ISSUE: WON 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

HELD: the petition for certiorari is granted.The Order of November 27, 2003 of the
RTC of Quezon City 90, is hereby declared null and voidand set aside.
YES
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
Maynilads claim that the banks are not solidarily liable with the debtor does not find
support in jurisprudence.
Letters of credit were developed for the purpose of insuring to a seller payment of a
definite amount upon the presentation of documentsand 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 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. 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.
They are definite undertakings to pay at sight once the documents stipulated therein
are presented.
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 debtors assets. These are the same characteristics of a
surety or solidary obligor. And being solidary, the claims against them can be pursued
separately from and independently of the rehabilitation case.
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 in favor of the MWSS as
a bond for the full and prompt performance of the obligations by the concessionaire
under the Concession Agreement and herein MWSS 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 of the Letter of Credit.
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.

BANK OF THE PHILIPPINE G.R. No. 164641 ISLANDS vs SECURITIES AND EXCHANGE
COMMISSION,

The antecedent facts are as follows:

The Bank of the Philippine Islands (BPI), through its predecessor-in-

interest, Far East Bank and Trust Company
[4]
(FEBTC), extended credit accommodations to the ASB Group with an outstanding a
ggregate principal amount of P86,800,000.00, secured by a real estate mortgage
over two (2) properties located in Greenhills, San Juan. [5] On 2 May 2000, the
ASB Group filed a petition for rehabilitation and suspension of payments before the
SEC, docketed as SEC Case No. 05-00-6609. [6] Thereafter, on 18 August 2000,
the interim receiver submitted its Proposed Rehabilitation Plan (Rehabilitation Plan)
[7]
for the ASB Group. The Rehabilitation Plan provides, among others, a dacion en
pago by the ASB Group to BPI of one of the properties mortgaged to the latter at
the ASB Group as selling value of P84,000,000.00 against the total amount of the
ASB Groups exposure to the bank. In turn, ASB Group would require the release of
the other property mortgaged to BPI, to be thereafter placed in the asset
pool. Specifically, the pertinent portion of the plan reads:

x x x ASB plans to invoke a dacion en pago for its #35 Eisenhower

property at ASBs selling value of P84 million against the total amount of
the ASBs exposure to the bank. In return, ASB requests the release of
the #27 Annapolis property which will be placed in the ASB creditors
asset pool. [8]

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.[9]

BPI opposed the Rehabilitation Plan and moved for the dismissal of the ASB
Groups petition for rehabilitation. [10] However, on 26 April 2001, the SEC hearing
panel issued an order[11] approving ASB Groups proposed rehabilitation plan and
appointed Mr. Fortunato Cruz as rehabilitation receiver.

BPI filed a petition for review [12] of the 26 April 2001 order before the SEC en banc,
imputing grave abuse of discretion on the part of the hearing panel. It argued that
the Orderconstituted an arbitrary violation of BPIs freedom and right to contract since
the Rehabilitation Plan compelled BPI to enter into a dacion en pago agreement with
the ASB Group.[13] The SEC en banc denied the petition.[14]
BPI then filed a petition for review [15] before the Court of Appeals (CA), claiming
that the SEC en banc erred in affirming the approval of the Rehabilitation Plan
despite being violative of BPIs contractual rights. BPI contended that the terms of the
Rehabilitation Plan would impair its freedom to contract, and alleged that the dacion
en pago was a mode of payment beneficial to the ASB Group only. [16]

The CA dismissed the petition for lack of merit. It held that considering that
the dacion en pago transaction could proceed only proceed upon the mutual agreement
of the parties, BPIs assertion that it is being coerced could not be sustained. At no
point would the Rehabilitation Plan compel secured creditors such as BPI to agree to
a settlement agreement against their will, the CA added. Moreover, BPI could refuse
to accept any arrangement contemplated by the receiver and just assert its preferred
right in the liquidation and distribution of the assets of the ASB Group. [17] BPI filed a
motion for reconsideration, but the same was denied for lack of merit. [18]

Before this Court, BPI asserts that the CA erred in ruling that the approval by the
SEC of the ASB Groups Rehabilitation Plan did not violate BPIs rights as a creditor.
[19]
It maintains its position that the dacion en pago is a form of coercion or
compulsion, and violative of the rights of secured creditors. [20] It asserts that in order
for the Rehabilitation Plan to be feasible and legally tenable, it must reflect the
express and free consent of the parties; i.e, that the conditions should not be
imposed but agreed upon by the parties. By approving the Rehabilitation Plan, the
SEC hearing panel totally disregarded the efficacy of the mortgage agreements between
the parties, and sanctioned a mode of payment which is solely for the unilateral
benefit of the ASB Group.[21] This is so because in the event that the secured
creditors such as itself would not agree to dacion en pago, the ASB Groups
obligations would be settled at the selling prices of the mortgaged properties to be
dictated by the ASB Group,[22] rendering BPIs status as a preferred creditor illusory. [23]

BPI further claims that despite its rejection of the Rehabilitation Plan, no effort was
made to resolve the impasse on the valuation of the mortgaged properties. With no
repayment scheme for secured creditors not accepting the Rehabilitation Plan, the
same has become discriminatory.[24] Moreover, any interference on the rights of the
secured creditors must not be so indefinite and open-ended as to effectively
deprive secured creditors of their right to their security,[25] BPI adds.

In its Comment,[26] the SEC, through the Office of the Solicitor General, claims that
the terms and conditions of the Rehabilitation Plan do not violate BPIs right as a
creditor because the dacion en pago transaction contemplated in the plan can only
proceed upon mutual agreement of the parties. Moreover, being a secured creditor,
BPI enjoys preference over unsecured creditors, thus there is no reason for BPI to
fear the non-payment of the loan, or the inability to assert its preferred right over the
mortgaged property.[27]

On the other hand, private respondents maintain that the non-impairment clause of the
Constitution relied on by BPI is a limit on the exercise of legislative power and not of
judicial or quasi-judicial power. The SECs approval of the Rehabilitation Plan was an
exercise of adjudicatory power by an administrative agency and thus the non-
impairment clause does not apply. [28] In addition, they stress that there is no coercion
or compulsion that would be employed under the Rehabilitation Plan. If dacion en
pago fails to materialize, the Rehabilitation Plan contemplates to settle the obligations
to secured creditors with mortgaged properties at selling prices. [29] Finally, they claim
that BPI failed to submit any valuation of the mortgage properties to substantiate its
objection to the Rehabilitation Plan, making its objection thereto totally unreasonable. [30]
The petition must be denied.
The very same issues confronted the Court in the case of Metropolitan Bank &
Trust Company v. ASB Holdings, et al .[31] In this case, Metropolitan Bank & Trust
Company (MBTC) refused to enter into a dacion en pago arrangement contained in
ASBs proposed Rehabilitation Plan. [32] MBTC argued, among others, that the forced
transfer of properties and the diminution of its right to enforce its lien on the
mortgaged properties violate its constitutional right against impairment of contracts and
right to due process.The Court ruled that there is no impairment of contracts because
the approval of the Rehabilitation Plan and the appointment of a rehabilitation receiver
merely suspends the action for claims against the ASB Group, and MBTC may still
enforce its preference when the assets of the ASB Group will be liquidated. But if the
rehabilitation is found to be no longer feasible, then the claims against the distressed
corporation would have to be settled eventually and the secured creditors shall enjoy
preference over the unsecured ones.Moreover, the Court stated that there is no
compulsion to enter into a dacion en pago agreement, nor to waive the interests,
penalties and related charges, since these are merely proposals to creditors such as
MBTC, such that in the event the secured creditors refuse the dacion, the
Rehabilitation Plan proposes to settle the obligations to secured creditors with
mortgaged properties at selling prices.

Rehabilitation proceedings in our jurisdiction, much like the bankruptcy laws of

the United States, have equitable and rehabilitative purposes. On the one hand, they
attempt to provide for the efficient and equitable distribution of an insolvent debtors
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. [33] The rationale of P.D. No. 902-A, as amended, is to effect
a feasible and viable rehabilitation, [34] 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. [35]

The Court reiterates that the SECs approval of the Rehabilitation Plan did not
impair BPIs 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.[36] 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.[37] 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 debtors 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.

We find no element of compulsion in the dacion en pago provision of the

Rehabilitation Plan. It was not the only solution presented by the ASB to pay its
creditors. In fact, it was stated in the Rehabilitation Plan that:

x x x. If the dacion en pago herein contemplated does not materialize

for failure of the secured creditors to agree thereto, the rehabilitation plan
contemplates to settle the obligations (without interest, penalties and
other related charges accruing after the date of the initial suspension
order) to secured creditors with mortgaged properties at ASB selling
prices for the general interest of the employees, creditors, unit buyers,
government, general public and the economy.

Thus, if BPI does not find the dacion en pago modality acceptable, the ASB Group
can propose to settle its debts at such amount as is equivalent to the selling price of
the mortgaged properties. If BPI still refuses this option, it can assert its rights in the
liquidation and distribution of the ASB Groups assets. It will not lose its status as a
secured creditor, retaining its preference over unsecured creditors when the assets of
the corporation are finally liquidated.
WHEREFORE, in view of the foregoing, the petition is
DENIED and the Decision dated 30 January 2004 of the Court of Appeals in CA-
G.R. SP No. 77309 is AFFIRMED.Costs against petitioner.