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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.

Situs vs Asia Trust Bank

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.

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.

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