G.R. No.

180036 July 25, 2012

SITUS DEVELOPMENT CORPORATION, DAILY SUPERMARKET, INC.
and COLOR LITHOGRAPHIC PRESS, INC., Petitioners,
vs.
ASIATRUST BANK, ALLIED BANKING CORPORATION,
METROPOLITAN BANK AND TRUST COMPANY, and CAMERON
GRANVILLE II ASSET MANAGEMENT, INC. (CAMERON), Respondents.
D E C I S I O N
SERENO, J.:
The instant Rule 45 Petition assails the Decision
1
and Resolution
2
of the
Court of Appeals (CA) in CA-G.R. CV No. 80223. The CA reversed and set
aside the Adjudication
3
of the Regional Trial Court (RTC), Branch 93,
Quezon City (the Rehabilitation Court) in Civil Case No. Q-02-010, which
had approved the Second Amended Rehabilitation Plan of petitioners Situs
Development Corporation, Daily Supermarket, Inc. and Color Lithographic
Press, Inc. (collectively, petitioners or petitioner corporations) over the
objections of respondents Asiatrust Bank (Asiatrust), Allied Banking
Corporation (Allied Bank) and Metropolitan Bank and Trust Company
(Metrobank). Respondent Cameron Granville II Asset Management, Inc.
(Cameron), a Special Purpose Vehicle, was the transferee of Metrobanks
rights, title and interest in the instant case.
The facts are not in issue, and we quote with favor the narration of the
appellate court:
In 1972, the Chua Family, headed by its patriarch, Cua Yong Hu, a.k.a.
Tony Chua, started a printing business and put up Color Lithographic
Press, Inc. (COLOR). On June 6, 1995, the Chua Family ventured into real
estate development/leasing by organizing Situs Development Corporation
(SITUS) in order to build a shopping mall complex, known as Metrolane
Complex (COMPLEX) at 20th Avenue corner P. Tuazon, Cubao, Quezon
City. To finance the construction of the COMPLEX, SITUS, COLOR and Tony
Chua and his wife, Siok Lu Chua, obtained several loans from (1) ALLIED
secured by real estate mortgages over two lots covered by TCT Nos. RT-
13620 and RT-13621; (2) ASIATRUST secured by a real estate mortgage
over a lot covered by TCT No. 79915; and (3) Global Banking Corporation,
now METROBANK, secured by a real estate mortgage over a lot covered by
TCT No. 79916. The COMPLEX was built on said four (4) lots, all of which
are registered in the names of Tony Chua and his wife, Siok Lu Chua. On
March 21, 1996, the Chua Family expanded into retail merchandising and
organized Daily Supermarket, Inc. (DAILY). All three (3) corporations have
interlocking directors and are all housed in the COMPLEX. The Chua Family
also resides in the COMPLEX, while the other units are being leased to
tenants. SITUS, COLOR and DAILY obtained additional loans from ALLIED,
ASIATRUST and METROBANK and their real estate mortgages were
updated and/or amended. Spouses Chua likewise executed five (5)
Continuing Guarantee/Comprehensive Surety in favor of ALLIED to
guarantee the payment of the loans of SITUS and DAILY.
SITUS, COLOR, DAILY and the spouses Chua failed to pay their obligations
as they fell due, despite demands.
On November 22, 2000, ALLIED filed with the Office of the Clerk of Court
and Ex-Officio Sheriff of Quezon City an application for extrajudicial
foreclosure of the mortgage on the properties of spouses Chua covered by
TCT Nos. RT-13620 and RT-13621. The auction sale was scheduled on
February 6, 2001. However, on February 5, 2001, SITUS, COLOR and
spouses Chua filed a complaint for nullification of foreclosure proceedings,
with prayer for temporary restraining order/injunction, with the Regional
Trial Court, Branch 87, Quezon City, docketed as Civil Case No. Q-01-
43280. As no temporary restraining order was issued, the scheduled
auction sale proceeded wherein ALLIED emerged as the highest bidder in
the amount of P88,958,700.00. The Certificate of Sale dated March 9,
2001 in favor of ALLIED was approved by the Executive Judge of the
Regional Trial Court of Quezon City on September 9, 2002 and the same
was annotated on TCT Nos. RT-13620 and RT-13621 on September 23,
2002.
On July 26, 2001, METROBANK likewise filed an application for
extrajudicial foreclosure of the mortgage on the property of spouses Chua
covered by TCT No. 79916. The auction sale was conducted on September
18, 2001, with METROBANK as the highest bidder in the amount of
P95,282,563.86.
On May 16, 2002, ASIATRUST sent a demand letter to DAILY and COLOR
for the payment of their outstanding obligations.
On June 11, 2002, SITUS, DAILY and COLOR, herein petitioners, filed a
petition for the declaration of state of suspension of payments with
approval of proposed rehabilitation plan, docketed as Civil Case No. Q-02-
010, with the Regional Trial Court, Branch 93, Quezon City.
Petitioners alleged that due to the 1997 Asian financial crisis, peso
devaluation and high interest rate, their loan obligations ballooned and
they foresee their inability to meet their obligations as they fall due; that
their loan obligations are secured by the real properties of their major
stockholder, Tony Chua; that ALLIED has already initiated foreclosure
proceedings; that Global Banking Corporation, now METROBANK, and
ASIATRUST made final demands for payment of their obligations; that
they foresee a very good future ahead of them if they would be given a
"breathing spell" from their obligations as they fall due; and that their
assets are more than sufficient to pay off their debts. Petitioners submitted
a program of rehabilitation for the approval of creditors and the court a
quo.
A Stay Order dated June 17, 2002, was issued by the court a quo directing
as follows:
a.) a stay in the enforcement of all claims, whether for money or
otherwise and whether such enforcement is by court action or
otherwise, against the petitioners Situs Development Corporation,
Daily Supermarket, Inc., & Color Lithographic Press, Inc., their
guarantors and sureties not solidarily liable with them;
b.) prohibiting Situs Development Corporation, Daily Supermarket,
Inc., & Color Lithographic Press, Inc., from selling, encumbering,
transferring or disposing in any manner any of their properties
except in the ordinary course of business;
c.) prohibiting Situs Development Corporation, Daily Supermarket,
Inc. & Color Lithographic Press, Inc., from making any payment of
their liabilities outstanding as of the filing of the instant petition;
d.) prohibiting Situs Development Corporation, Daily Supermarket,
Inc. and Color Lithographic Press, Inc.s suppliers of goods and
services from withholding supply of goods and services in the
ordinary course of business for as long as Situs Development
Corporation, Daily Supermarket, Inc. & Color Lithographic Press,
Inc., make payments for the goods and services supplied after the
issuance of this stay order; and
e.) directing the payment in full of all administrative expenses
incurred after the issuance of this stay order.
The court a quo appointed Mr. Antonio B. Garcia as the Rehabilitation
Receiver, set the initial hearing on the petition on August 2, 2002 and
directed all creditors and interested parties, including the Securities and
Exchange Commission (SEC), to file their comment on or opposition to the
petition.
ALLIED filed its opposition and comment praying for the dismissal of the
petition and the lifting of the Stay Order on the grounds that it is defective
in form and substance; that it contains substantial inaccuracies and
inconsistencies; and that it does not contain a viable rehabilitation plan.
ASIATRUST filed its comment with partial opposition praying likewise for
the dismissal of the petition on the grounds that it is not in due form and
lacks substantial allegations on its debt obligations with its various
creditors; that petitioners do not have a viable rehabilitation plan; and that
petitioners do not have a clear source of repayment of their obligations.
No comment or opposition was filed by SEC.
In an Order dated August 2, 2002, the court a quo found prima facie merit
in the petition and gave due course thereto. The Rehabilitation Receiver
was given forty-five (45) days within which to submit his report on the
proposed rehabilitation plan.
On October 15, 2002, METROBANK filed a Manifestation stating that it was
participating in the proceedings as a mere observer inasmuch as the
mortgage executed in its favor by spouses Chua on the property covered
by TCT No. 79916 was foreclosed by it on September 18, 2001, so that it
ceased to be a creditor of COLOR as its claim was already fully satisfied.
On October 9, 2002, petitioners filed a motion for the cancellation of the
certificate of sale approved on September 9, 2002 by the Executive Judge
of the RTC of Quezon City and the annotation thereof on TCT Nos. RT-
13620 and RT-13621, as the same were done in violation of the Stay
Order dated June 17, 2002. A vehement opposition was filed by ALLIED
arguing that the foreclosure proceedings cannot be considered as a
"claim", as understood under Section 1, Rule 2 of the Interim Rules of
Procedure on Corporate Rehabilitation, since the issuance of the Certificate
of Sale and annotation thereof on the certificates of titles do not constitute
demands for payment of debt or enforcement of pecuniary liabilities; that
the auction sale was conducted more than one year before the filing of the
petition for rehabilitation; and that TCT Nos. RT-13620 and RT-13621 are
registered in the names of "Cua Yong Hu/Tony Chua and Siok Lu Chua",
hence, should not have been included in the Inventory of Assets of
petitioners.
On October 21, 2002, ASIATRUST filed an urgent manifestation praying for
the outright dismissal of the petition inasmuch as METROBANK and ALLIED
had already foreclosed the mortgages on the properties that stood as
securities for petitioners obligations, as well as the lifting of the Stay
Order.
On October 19, 2002, the Rehabilitation Receiver submitted his Report on
petitioners proposed Rehabilitation Plan, to which oppositions were filed
by ALLIED and METROBANK.
On November 21, 2002, petitioners proposed to amend their Rehabilitation
Plan. On December 2, 2002, petitioners filed and submitted an Amended
Rehabilitation Plan, which was opposed by ALLIED and ASIATRUST.
On January 8, 2003, petitioners filed a motion to admit Second Amended
Rehabilitation Program of Situs Development Corporation, the pertinent
provisions of which read:
1. Situs will assume the outstanding obligations of its non-profiting
affiliate companies: Daily Supermarket, Inc. and Color Lithographic
Press, Inc.;
2. Situs will convert all its debts to equity;
3. Situs will lease the properties from the new owners at P50.00
per square meter for a period of 25 years or at P555,200.00 a
month, with a yearly escalation of 5%;
4. The annual lease income will be distributed among the new
owners according to their percentage ownership and, in the event
that the property is sold, any profit will be shared accordingly;
5. The new owners are Asiatrust with 21% ownership, Metrobank
with 17% ownership, Allied with 30% ownership, and Tony Chua
with 32% ownership;
6. The two properties in Cavite which were mortgaged to
ASIATRUST will be returned to its registered owner since the
properties where the Complex sits is enough to cover the loan
obligations; and
7. All unpaid interests, penalties and other charges are waived.
Comments on and oppositions to the Second Amended Rehabilitation Plan
were filed by ALLIED, ASIATRUST and METROBANK.
On August 15, 2003, ALLIED filed a motion praying for the dismissal of the
petition as no Rehabilitation Plan was approved upon the lapse of 180 days
from the date of the initial hearing on August 2, 2002, as mandated in
Section 11 of the Interim Rules of Procedure on Corporate Rehabilitation.
On August 14, 2003, the court a quo rendered an ADJUDICATION
approving the Second Amended Rehabilitation Program as SITUS deserves
a sporting chance at rehabilitation, subject to the following conditions:
1. The first phase of implementation shall cover immediately the
payment of the appurtenant shares to the creditors/new owners
out of the monthly rental income of P555,200.00 as outlined in
paragraph D.1 of the plan;
2. An automatic review of the progress of implementation shall be
undertaken six (6) months from and after the initial payment
described in condition no. 1 above;
3. The rehabilitation receiver, petitioner and creditors/new owners
to file written reports on the sixth month of implementation and to
seasonably prompt the court to set up the matter for a monitoring
hearing thereon;
4. At the end of one year from and after the initial implementation
of the plan, the court shall undertake a review of the entire
rehabilitation program for the purpose of determining the
desirability of terminating or continuing with the rehabilitation;
5. The rehabilitation receiver, petitioner and creditors/new owners
to file written reports conformably with condition no. 4 above and
to seasonably prompt the court accordingly.
In approving the Second Amended Rehabilitation Program, the court a quo
held:
From the original rehabilitation proposal which simply involved a
condoning and restructuring of the loan obligations, the petitioners came
out with an amended rehabilitation plan that calls for, among others, a
concentration into the business of commercial leasing coupled with the
consolidation of the debts of Daily and Color with that of Situs; a
conversion of debt to equity in proportionate terms; a reduction of the
principal stockholders control of Situs Development; a proportionate share
in the monthly rental income of Situs by creditors/new owners.
The creditor banks have consistently opposed the rehabilitation plans
submitted by the petitioners. To the creditor banks, they would be [better-
off] if the businesses of the petitioners would be simply liquidated. A most
simple view indeed, except that such a view totally ignores the
susceptibility of petitioner Situs to rehabilitation. The creditor banks are
fully aware that the real property on which the building structure of Situs
Development sits is more than sufficient to answer for all the outstanding
obligations of petitioners. This fact alone should be enough to afford the
petitioners a sporting chance at business resuscitation. That the realties
are titled in the name of Mr. Tony Chua is of no moment insofar as the
rehabilitation is concerned, after all, the creditor banks were fully aware of
the real facts when they willingly extended loans to the petitioners.
To the court the 2nd Amended Rehabilitation Program of Situs
Development Corporation Inc., a copy of which is enclosed and made an
integral part of this adjudication, deserves due consideration. Although
said plan is opposed by the creditor banks, the court notes that it bears
the approval of the rehabilitation receiver who had the opportunity to
peruse it. Moreover, under the plan, the shareholders of Situs
Development will lose controlling interest in the corporation. There is also
no clear showing that the properties of the debtor will be readily sold by a
liquidator within a three-month period from termination of the herein
proceedings and that the creditors would get more from said sale than
what they would get under the plan. The court thus considers the
creditors opposition to be unreasonable.
In an Order dated August 25, 2003, the court a quo declared that the
motion to dismiss filed by ALLIED was mooted with the issuance of the
Adjudication.
Aggrieved, ALLIED, ASIATRUST and METROBANK filed their separate
notices of appeal.
On November 10, 2003, petitioners filed with the court a quo a motion for
declaration of nullity of the certificate of sale in favor of ALLIED alleging
that the issuance thereof was in violation of the Stay Order, as well as a
motion to direct the Register of Deeds to annotate the Adjudication on TCT
Nos. RT-13620, RT-13621, TCT Nos. 79915 and 79916. Said motions were
opposed by ALLIED on the grounds that the properties foreclosed by it
belonged to spouses Chua and not to petitioners; that the auction sale was
conducted on February 6, 2001, or more than a year prior to the filing of
the petition for rehabilitation; and that the issuance of the Certificate of
Sale and its annotation on the certificates of title are merely incidental to
the foreclosure proceedings; and that the Stay Order does not cover the
issuance of the Certificate of Sale and the registration thereof on the
certificates of title as they do not in any way refer to its enforcement of a
monetary claim against petitioners.
In Separate Orders dated January 9, 2004, the court a quo granted both
motions of petitioners. The court a quo held that while the foreclosure was
conducted prior to the issuance of the Stay Order, however, the
foreclosure does not fully and effectively terminate until after the issuance
of the title in the name of the creditor, such that until a new title is issued,
any action in the interregnum, judicial or not, is deemed an enforcement
of the claim arising from such foreclosure, which in this case will be in
patent violation of the Stay Order.
4

On 25 April 2007, the appellate court rendered the assailed Decision, the
dispositive portion of which reads:
WHEREFORE, the appeals are GRANTED. The ADJUDICATION dated August
14, 2003 is REVERSED and SET ASIDE, the petition for the declaration of
state of suspension of payments with approval of proposed rehabilitation
plan is DISMISSED and the Stay Order dated June 17, 2002 is LIFTED.
The twin Orders dated January 9, 2004 declaring the Certificate of Sale
issued in favor of Allied Banking Corporation null and void, with respect to
the properties covered by TCT No. RT-13620 and RT-13621, and directing
the Register of Deeds of Quezon City to cancel the annotation of the
Certificate of Sale on said titles, as well as to annotate said
ADJUDICATION thereon, are likewise REVERSED and SET ASIDE.
SO ORDERED.
5

In so concluding, the CA reasoned that the Stay Order did not affect the
claims of Allied Bank and Metrobank, because these claims were not
directed against the properties of petitioners, but against those of spouses
Chua.
The CA also reasoned that when the Stay Order was issued, Allied Bank
and Metrobank were already the owners of the foreclosed properties,
subject only to the right of redemption of Spouses Tony and Siok Lu Chua
(spouses Chua), because the extrajudicial foreclosure proceedings had
taken place prior to the filing of the Petition for Rehabilitation and the
issuance of the Stay Order.
Furthermore, the CA agreed with the contention of respondents that the
Petition was insufficient in form and in substance. Among the reasons cited
by the appellate court was the fact that the inventory of assets of
petitioner corporations included properties that were not owned by them,
but registered in the names of spouses Chua and already acquired by
Allied Bank and Metrobank; and that the financial statements submitted by
petitioner corporations showed that their total liabilities exceeded their
total assets.
Finally, the CA ruled that the Petition for Rehabilitation should be
dismissed, because the rehabilitation plan was approved by the court more
than 180 days from the date of the initial hearing, contrary to the directive
of Section 11, Rule 4 of the Interim Rules on Corporate Rehabilitation.
6

Aggrieved by the ruling of the appellate court, petitioners then filed the
instant Rule 45 Petition before this court and prayed for the issuance of a
status quo order.
On 10 December 2007, we resolved to direct the parties to maintain the
status quo as of the date of the issuance of the Stay Order of the trial
court.
On 17 March 2008, petitioners filed a "Manifestation and Motion to
Substitute Metro Bank with Cameron Granville II Asset Management,
Inc.,"
7
alleging that since Metrobank had sold, transferred and conveyed
all its rights, title and interest over the loans of petitioners to Cameron,
Metrobank was no longer a real party-in-interest in this case. Furthermore,
petitioners prayed that Metrobank and Cameron be directed to disclose the
transfer price or discounted value of the sale allegedly because, under Art.
1634 of the Civil Code, they had the right of redemption of the sold credits
by paying only the transfer price to the transferee.
THE ISSUES
The resolution of this case hinges on the following issues:
1. Whether the dismissal of the Petition for Rehabilitation is in
order;
2. Whether the Stay Order affects foreclosure proceedings
involving properties mortgaged by stockholders to secure
corporate debts; and
3. Whether petitioners can redeem the credit transferred by
Metrobank to Cameron by paying only the price paid by the
transferee.
THE COURTS RULING
We lift the status quo order and affirm the Decision of the appellate court.
I
The dismissal of the Petition for Rehabilitation is in order
We find no reversible error on the part of the appellate court when it
dismissed the Petition for Rehabilitation.
The Rules provide that "the petition shall be dismissed if no rehabilitation
plan is approved by the court upon the lapse of one hundred eighty (180)
days from the date of the initial hearing."
8
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."
9

In this case, the Second Amended Rehabilitation Program was approved by
the trial court beyond the 180-day period counted from the date of the
initial hearing. However, the evidence on record does not support the
lower courts finding that the debtor corporations may still be successfully
rehabilitated.
The trial courts only justification for approving the Second Amended
Rehabilitation Program is that "the creditor banks are fully aware that the
real property on which the building structure of Situs Development sits is
more than sufficient to answer for all the outstanding obligations of the
petitioners."
10
It then went on to conclude that "[t]his fact alone should be
enough to afford the petitioners a sporting chance at business
resuscitation."
11

We do not agree.
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.
12
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
ones property that of the corporation, since the stockholder and the
corporation are separate entities.
13

In this case, the parcels of land mortgaged to respondent banks are owned
not by petitioners, but by spouses Chua.
14
Applying the doctrine of
separate juridical personality, these properties cannot be considered as
part of the corporate assets. Even if spouses Chua are the majority
stockholders in petitioner corporations, they own these properties in their
individual capacities. Thus, the parcels of land in question cannot be
included in the inventory of assets of petitioner corporations.
The fact that these properties were mortgaged to secure corporate debts is
of no moment. A mortgage is an accessory undertaking to secure the
fulfillment of a principal obligation.
15
In a third-party mortgage, the
mortgaged property stands as security for the loan obtained by the
principal debtor; but until the mortgaged property is foreclosed, ownership
thereof remains with the third-party mortgagor.
Here, the properties owned by spouses Chua were mortgaged as security
for the debts contracted by petitioner corporations. However, ownership of
these properties remained with the spouses notwithstanding the fact that
these were mortgaged to secure corporate debts. We have ruled that
"when a debtor mortgages his property, he merely subjects it to a lien but
ownership thereof is not parted with."
16
This leads to no other conclusion
than that, notwithstanding the mortgage, the real properties in question
belong to spouses Chua; hence, these properties should not be considered
as assets of petitioner corporations.
Since the real properties in question cannot be considered as corporate
assets, the trial courts pronouncement that petitioners were susceptible of
rehabilitation was bereft of any basis. Based on the rehabilitation courts
narration of facts, Situs Development Corporation has total assets of
P54,176,149.22 with total liabilities of P74,304,188.01; Daily
Supermarket, Inc. has total assets of P43,986,412.33 with total liabilities
of P114,219,462.00; and Color Lithographic Press, Inc. has total assets of
P7,618,006.69 and total liabilities of P6,588,534.99.
17
Clearly, the
aggregate total liabilities of petitioner corporations far exceed their
aggregate total assets.
We take this opportunity to point out that 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.
18
However, if the continued existence of the corporation is no
longer viable, rehabilitation can no longer be an option. The purpose of
rehabilitation proceedings is to enable the company to gain a new lease on
life,
19
and not to prolong its inevitable demise.
II
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."
20

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:
"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.
Likewise, the enforcement of the mortgage lien cannot be considered as a
claim against a guarantor or a surety not solidarily liable with the debtor
corporations. While spouses Chua executed Continuing Guaranty and
Comprehensive Surety undertakings in favor of Allied Bank, the bank did
not proceed against them as individual guarantors or sureties. Rather, by
initiating extrajudicial foreclosure proceedings, the bank was directly
proceeding against the property mortgaged to them by the spouses as
security. The Civil Code provides that the property upon which a mortgage
is imposed directly and immediately subjected to the fulfillment of the
obligation for whose security the mortgage was constituted.
21
As such, a
real estate mortgage is a lien on the property itself, inseparable from the
property upon which it was constituted.
In this case, we find that the undertaking of spouses Chua with respect to
the loans of petitioner corporations is the sale at public auction of certain
real properties belonging to them to satisfy the indebtedness of petitioner
corporations in case of a default by the latter. This undertaking is properly
that of a third-party mortgagor or an accommodation mortgagor, whereby
one mortgages ones property to stand as security for the indebtedness of
another.
22

In Pacific Wide Realty and Development Corporation v. Puerto Azul Land,
Inc.,
23
we ruled that 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.
24

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.
25
(Emphasis supplied)
From the foregoing, we therefore hold that foreclosure proceedings over
the properties in question are not suspended by the trial courts issuance
of the Stay Order.
Furthermore, even assuming that the properties in question fall under the
ambit of the Stay Order, the issuance thereof should not affect the
execution of the Certificate of Sale.
In Rizal Commercial Banking Corporation v. Intermediate Appellate Court
and BF Homes, Inc.,
26
the debtor corporation filed a Petition for
Rehabilitation and Declaration of Suspension of Payments before the
Securities and Exchange Commission (SEC). Prior to the SECs
appointment of a management committee and during the pendency of the
case, the mortgagee-bank foreclosed on the real estate mortgage over
some of the corporations mortgaged properties. An auction sale was
conducted, and the mortgagee-bank emerged as the highest bidder.
However, because of the pendency of the rehabilitation case before the
SEC, the Sheriff withheld the delivery of the Certificate of Sale. Ruling on
the validity of the foreclosure proceedings, we held that the conduct of the
foreclosure sale was valid, because it was carried out prior to the issuance
of the SECs order appointing a management committee. We held that the
appointment of a management committee, rehabilitation receiver, board or
body pursuant to Presidential Decree No. 902-A is the operative act that
suspends all actions or claims against a distressed corporation.
In the case at bar, the auction sale for the parcels of land covered by TCT
Nos. RT-13620 and RT-13621 and mortgaged to respondent Allied Bank
was conducted on 6 February 2001, while the foreclosure sale for the
parcel of land covered by TCT No. 79916 and mortgaged to Metrobank was
conducted on 18 September 2001. Clearly, the foreclosure proceedings
commenced and the auction sale was conducted before the issuance of the
Stay Order and the appointment of the Rehabilitation Receiver on 17 June
2002. In fact, the public auctions took place almost a year before
petitioner corporations filed the Petition for Rehabilitation with the court a
quo on 11 June 2002. Therefore, the execution of the Certificate of Sale
may no longer be suspended by the trial courts issuance of the Stay
Order, even if the questioned properties are assumed to fall under the
ambit of the Stay Order, since the foreclosure proceedings and the auction
sale were conducted prior to the appointment of the Rehabilitation
Receiver.
III
Petitioners cannot redeem the credit transferred by Metrobank to Cameron
by reimbursing the transferee
Petitioners claim that, based on Republic Act (R.A.) No. 9182 or the
Special Purpose Vehicle (SPV) Act of 2002, they have the right of legal
redemption by paying Cameron the transfer price plus the cost of money
up to the time of redemption and the judicial costs in case of sale or
transfer of Non-Performing Loans (NPLs) under litigation.
27

Petitioners claim is anchored on Section 13 of the SPV Act, which
provides:
Sec. 13. Nature of Transfer. All sales or transfers of Non-Performing
Assets to an SPV shall be in the nature of a true sale after proper notice in
accordance with the procedures as provided for in section 12: Provided,
That GFIs and GOCCs shall be subject to existing law on the disposition of
assets: Provided, further, That in the transfer of the NPLs, the provisions
on subrogation and assignment of credits under the New Civil Code shall
apply.
In turn, Art. 1634 of the Civil Code on Assignment of Credits and Other
Incorporeal Rights provides:
Art. 1634. When a credit or other incorporeal right in litigation is sold, the
debtor shall have a right to extinguish it by reimbursing the assignee for
the price the latter paid therefor, the judicial costs incurred by him, and
the interest on the price from the day on which the same was paid.
A credit or other incorporeal right shall be considered in litigation from the
time the complaint concerning the same is answered.
The debtor may exercise his right within thirty days from the date the
assignee demands payment from him.
At the outset, we find that the issue is only belatedly raised in the instant
Petition
28
and was never threshed out in the proceedings below.
Fundamental considerations of fair play, justice and due process dictate
that this Court should not pass upon this question.
29
"Questions raised on
appeal must be within the issues framed by the parties; consequently,
issues not raised before the trial court cannot be raised for the first time
on appeal."
30

As early as 21 December 2005, Metrobank notified petitioners that the
credit had been transferred to Cameron. However, petitioners only raised
the issue of their alleged equitable right of redemption in their
"Manifestation and Motion to Substitute Metro Bank with Cameron
Granville II Asset Management, Inc." dated 17 March 2008.
31
They have
not even raised this issue in the instant Petition for Review filed on 26
November 2007. This being so, the argument should not be considered,
having been belatedly raised on appeal.
Moreover, even if we were to consider the foregoing issue, petitioners
cannot take refuge in the provisions of the SPV Act of 2004 in conjunction
with Art. 1634 of the Civil Code.
For the debtor to be entitled to extinguish his credit by reimbursing the
assignee under Art. 1634, the following requisites must concur:
(a) there must be a credit or other incorporeal right;
(b) the credit or other incorporeal right must be in litigation;
(c) the credit or other incorporeal right must be sold to an
assignee pending litigation;
(d) the assignee must have demanded payment from the debtor;
(e) the debtor must reimburse the assignee for the price paid by
the latter, the judicial costs incurred by the latter and the interest
on the price from the day on which the same was paid; and
(f) the reimbursement must be done within 30 days from the date
of the assignees demand.
In this case, the credit owed by petitioner corporations to Metrobank had
already been extinguished when the bank foreclosed upon the parcel of
land mortgaged to it by the spouses Chua as security for petitioners
debts, in full satisfaction of the loan the bank had extended. Therefore,
during the pendency of these proceedings, what was transferred by
Metrobank to Cameron was ownership over the foreclosed property,
subject only to the right of redemption by the proper party within one year
reckoned from the date of registration of the Certificate of Sale.
Moreover, the provisions of the Civil Code on subrogation and assignment
of credits are only applicable to NPLs,
32
defined in the SPV Act of 2002 as
follows:
"Non-Performing Loans or NPLs" refers to loans and receivables such as
mortgage loans, unsecured loans, consumption loans, trade receivables,
lease receivables, credit card receivables and all registered and
unregistered security and collateral instruments, including but not limited
to, real estate mortgages, chattel mortgages, pledges, and antichresis,
whose principal and/or interest have remained unpaid for at least one
hundred eighty (180) days after they have become past due or any of the
events of default under the loan agreement has occurred.
33

What is involved in this case is more properly a real property acquired by a
financial institution in settlement of a loan (ROPOA).1wphi1 Under the
law, ROPOAs are defined in this manner: "ROPOAs" refers to real and
other properties owned or acquired by an financial institution in settlement
of loans and receivables, including real properties, shares of stocks, and
chattels formerly constituting collaterals for secured loans which have
been acquired by way of dation in payment (dacion en pago) or judicial or
extra-judicial foreclosure or execution of judgment.
34

May the subject property be considered as one acquired by Metrobank
pursuant to an extrajudicial foreclosure sale?
The Implementing Rules and Regulations of the SPV Act of 2002 provide
that, in case of extrajudicial foreclosure, a property is deemed acquired by
a financial institution on the date of notarization of the Sheriffs
Certificate.
35

In this case, a Certificate of Sale has not been executed in favor of
Metrobank in deference to the Stay Order issued by the rehabilitation
court. However, we reiterate that the rehabilitation court has no
jurisdiction to suspend foreclosure proceedings over a third-party
mortgage. Much less can it restrain the issuance of a Certificate of Sale
after the subject properties have been sold at public auction more than a
year before the Petition for Rehabilitation was filed. The property
foreclosed by Metrobank was clearly beyond the ambit of the Stay Order.
Consequently, there was no valid ground for the Sheriff to withhold the
issuance and execution of the Certificate of Sale.
The parcel of land mortgaged to Metrobank and subsequently transferred
to Cameron should be treated as a ROPOA as provided for by law. Hence,
the application of Art. 1634 finds no basis in law.
WHEREFORE, in view of the foregoing, the instant Rule 45 Petition for
Review is DENIED. The assailed Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 80223 are AFFIRMED. The Status Quo Order
issued by this Court on 10 December 2007 is LIFTED.
SO ORDERED.

G.R. No. 171132 August 15, 2012
MANUEL D. YNGSON, JR. (in his capacity as the Liquidator of
ARCAM & COMPANY, INC.), Petitioner,
vs.
PHILIPPINE NATIONAL BANK, Respondent.
D E C I S I O N
VILLARAMA, JR., J.:
On appeal are the Resolutions dated April 14, 2005
1
and January 24,
2006
2
of the Court of Appeals (CA) in CA-G.R. SP No. 88735. The CA
dismissed petitioner's petition for review of the January 4, 2005
Resolution
3
and February 9, 2000 Order
4
of the Securities and Exchange
Commission (SEC) for failure of petitioner to attach to the petition copies
of material portions of the records and other relevant or pertinent
documents.
The facts follow:
ARCAM & Company, Inc. (ARCAM) is engaged in the operation of a sugar
mill in Pampanga.
5
Between 1991 and 1993, ARCAM applied for and was
granted a loan by respondent Philippine National Bank (PNB).
6
To secure
the loan, ARCAM executed a Real Estate Mortgage over a 350,004-square
meter parcel of land covered by TCT No. 340592-R and a Chattel Mortgage
over various personal properties consisting of machinery, generators, field
transportation and heavy equipment.
ARCAM, however, defaulted on its obligations to PNB. Thus, on November
25, 1993, pursuant to the provisions of the Real Estate Mortgage and
Chattel Mortgage, PNB initiated extrajudicial foreclosure proceedings in the
Office of the Clerk of Court/Ex Officio Sheriff of the Regional Trial
Court (RTC) of Guagua, Pampanga.
7
The public auction was scheduled on
December 29, 1993 for the mortgaged real properties and December 8,
1993 for the mortgaged personal properties.
On December 7, 1993, ARCAM filed before the SEC a Petition for
Suspension of Payments, Appointment of a Management or Rehabilitation
Committee, and Approval of Rehabilitation Plan, with application for
issuance of a temporary restraining order (TRO) and writ of preliminary
injunction. The SEC issued a TRO and subsequently a writ of preliminary
injunction, enjoining PNB and the Sheriff of the RTC of Guagua, Pampanga
from proceeding with the foreclosure sale of the mortgaged properties.
8
An
interim management committee was also created.
On February 9, 2000, the SEC ruled that ARCAM can no longer be
rehabilitated. The SEC noted that the petition for suspension of payment
was filed in December 1993 and six years had passed but the potential
white knight" investor had not infused the much needed capital to bail out
ARCAM from its financial difficulties.
9
Thus, the SEC decreed that ARCAM
be dissolved and placed under liquidation.
10
The SEC Hearing Panel also
granted PNBs motion to dissolve the preliminary injunction and appointed
Atty. Manuel D. Yngson, Jr. & Associates as Liquidator for
ARCAM.
11
With this development, PNB revived the foreclosure case and
requested the RTC Clerk of Court to re-schedule the sale at public auction
of the mortgaged properties.
Contending that foreclosure during liquidation was improper, petitioner
filed with the SEC a Motion for the Issuance of a Temporary Restraining
Order and/or Writ of Preliminary Injunction to enjoin the foreclosure sale
of ARCAMs assets. The SEC en banc issued a TRO effective for seventy-
two (72) hours, but said TRO lapsed without any writ of preliminary
injunction being issued by the SEC. Consequently, on July 28, 2000, PNB
resumed the proceedings for the extrajudicial foreclosure sale of the
mortgaged properties.
12
PNB emerged as the highest winning bidder in the
auction sale, and certificates of sale were issued in its favor.
On November 16, 2000, petitioner filed with the SEC a motion to nullify
the auction sale.
13
Petitioner posited that all actions against companies
which are under liquidation, like ARCAM, are suspended because
liquidation is a continuation of the petition for suspension proceedings.
Petitioner argued that the prohibition against foreclosure subsisted during
liquidation because payment of all of ARCAMs obligations was proscribed
except those authorized by the Commission. Moreover, petitioner asserted
that the mortgaged assets should be included in the liquidation and the
proceeds shared with the unsecured creditors.
In its Opposition, PNB asserted that neither Presidential Decree (P.D.) No.
902-A nor the SEC rules prohibits secured creditors from foreclosing on
their mortgages to satisfy the mortgagors debt after the termination of
the rehabilitation proceedings and during liquidation proceedings.
14

On January 4, 2005, the SEC issued a Resolution
15
denying petitioners
motion to nullify the auction sale. It held that PNB was not legally barred
from foreclosing on the mortgages. Aggrieved, petitioner filed on February
28, 2005, a petition for review in the CA questioning the January 4, 2005
Resolution of the SEC.
16

By Resolution dated April 14, 2005, the CA dismissed the petition on the
ground that petitioner failed to attach material portions of the record and
other documents relevant to the petition as required in Rule 46, Section 3
of the 1997 Rules of Civil Procedure, as amended. The CA likewise denied
ARCAMs motion for reconsideration in its Resolution dated January 24,
2006.
Hence this petition under Rule 45 arguing that:
4.1. THE SEC ERRED IN FAILING TO APPLY THE RULES OF CONCURRENCE
AND PREFERENCE OF CREDITS UNDER THE CIVIL CODE AND
JURISPRUDENCE WHEN PD 902-A PROVIDES THAT THE SAME BE APPLIED
IN INSTANCES WHEREBY AN ENTITY IS ORDERED DISSOLVED AND
PLACED UNDER LIQUIDATION ON ACCOUNT OF FAILURE TO
REHABILITATE DUE TO INSOLVENCY.
17

4.2. IT WAS GROSSLY ERRONEOUS FOR THE SEC TO HAVE ALLOWED PNB
TO FORECLOSE THE MORTGAGE WITHOUT FIRST ALLOWING THE ARCAM
LIQUIDATOR TO
MAKE A DETERMINATION OF THE LIENS OVER THE ARCAM REAL
PROPERTIES, SINCE THE LIQUIDATOR HAD INITIALLY DETERMINED THAT
ASIDE FROM PNB, SOME ARCAM WORKERS MAY ALSO HAVE A LEGAL LIEN
OVER THE SAID PROPERTY AS REGARDS THEIR CLAIMS FOR UNPAID
WAGES. THESE LIENS OVER THE SAME MOVABLE OR REAL PROPERTY ARE
TO BE SATISFIED PRO-RATA WITH THE CONTRACTUAL LIENS PURSUANT
TO 2247 AND 2249 OF THE CIVIL CODE, IN RELATION TO 2241 TO 2242
RESPECTIVELY. ALSO, THERE MAY BE SOME TAX ASSESSMENTS THAT
THE LIQUIDATOR DOES NOT KNOW ABOUT, AND IF THERE WERE, THESE
COULD COMPRISE TAX LIENS, WHICH UNDER ARTICLE 2243 OF THE CIVIL
CODE ARE CLEARLY GIVEN PRIORITY OVER OTHER PREFERRED CLAIMS
SINCE SUCH ARE TO BE SATISFIED FIRST, OVER OTHER LIENS PROVIDED
UNDER ARTICLES 2241 AND 2242 OF THE CIVIL CODE, SUCH AS
MORTGAGE LIENS.
18

4.3. THE SEC LABORED UNDER THE MISTAKEN IMPRESSION THAT AFTER
AN ENTITY IS DISSOLVED AND PLACED UNDER LIQUIDATION DUE TO
INSOLVENCY, SECURED CREDITORS ARE AUTOMATICALLY ALLOWED TO
FORECLOSE OR EXECUTE OR OTHERWISE MAKE GOOD ON THEIR
CREDITS AGAINST THE DEBTOR.
19

4.4. JURISPRUDENCE ON THE MATTER ALSO NEGATES THE SECS
HOLDING THAT THE FORECLOSURE BY PNB WAS LEGAL. EVEN ASSUMING
FOR THE SAKE OF ARGUMENT THAT PNB IS THE SOLE AND ONLY LIEN
HOLDER, IT STILL CANNOT FORECLOSE UNLESS THE LIQUIDATOR
AGREES TO SUCH OR THAT THE SEC GAVE PNB PRIOR PERMISSION TO
INSTITUTE THE SEPARATE FORECLOSURE PROCEEDINGS.
20

4.5. RESPONDENT PNB SHOULD BE MADE TO PAY DAMAGES FOR THE
REASON THAT THE FORECLOSURE PROCEEDINGS WERE ATTENDED WITH
BAD FAITH.
21

The issues to be resolved are: (1) whether the CA correctly dismissed the
petition for failure to attach material documents referred to in the petition;
and (2) 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.
On the procedural issue, the Court finds that the CA erred in dismissing
the petition for review before it on the ground of failure to attach material
portions of the record and other documents relevant to the petition. A
perusal of the petition for review filed with the CA, and as admitted by
PNB,
22
reveals that certified true copies of the assailed January 4, 2005
SEC Resolution and the February 9, 2000 SEC Order appointing petitioner
Atty. Manuel D. Yngson, Jr. as liquidator were annexed therein.
We find the foregoing attached documents sufficient for the appellate court
to decide the case at bar considering that the SEC resolution contains
statements of the factual antecedents material to the case. The Resolution
also contains the SECs findings on the legality of PNBs foreclosure of the
mortgages. The SEC held that when the rehabilitation proceeding was
terminated and the suspensive effect of the order staying the enforcement
of claims was lifted, PNB could already assert its preference over
unsecured creditors, and the secured asset and the proceeds need not be
included in the liquidation and shared with the unsecured creditors.
23

Before the CA, petitioner raised only the same legal questions as there
was no controversy involving factual matters. Petitioner claimed that the
SEC erred in not applying the rules on concurrence and preference of
credits, and in denying its motion to nullify the auction sale of the secured
properties.
24
Therefore, the assailed SEC Resolution is the only material
portion of the record that should be annexed with the petition for the CA to
decide on the correctness of the SECs interpretation of the law and
jurisprudence on the matter before it.
Having so ruled, this Court would normally order the remand of the case to
the CA for resolution of the substantive issues. However, we find it more
appropriate to decide the merits of the case in the interest of speedy
justice considering that the parties have adequately argued all points and
issues raised. It is the policy of the Court to strive to settle an entire
controversy in a single proceeding, and to leave no root or branch to bear
the seeds of future litigation.
25
The ends of speedy justice would not be
served by a remand of this case to the CA especially since any ruling of
the CA on the matter could end up being appealed to this Court.
Did the SEC then err in ruling that PNB was not barred from foreclosing on
the mortgages? We answer in the negative.
In the case of Consuelo Metal Corporation v. Planters Development Bank,
26

which involved factual antecedents similar to the present case, the court
has already settled the above question and upheld the right of the secured
creditor to foreclose the mortgages in its favor during the liquidation of a
debtor corporation. In that case, Consuelo Metal Corporation (CMC) filed
with the SEC a petition to be declared in a state of suspension of payment,
for rehabilitation, and for the appointment of a rehabilitation receiver or
management committee under Section 5(d) of P.D. No. 902-A. On April 2,
1996, the SEC, finding the petition sufficient in form and substance,
declared that "all actions for claims against CMC pending before any court,
tribunal, office, board, body and/or commission are deemed suspended
immediately until further orders" from the SEC. Then on November 29,
2000, upon the management committees recommendation, the SEC
issued an Omnibus Order directing the dissolution and liquidation of CMC.
Thereafter, respondent Planters Development Bank (Planters Bank), one of
CMCs creditors, commenced the extrajudicial foreclosure of CMCs real
estate mortgage. Planters Bank extrajudicially foreclosed on the real
estate mortgage as CMC failed to secure a TRO. CMC questioned the
validity of the foreclosure because it was done without the knowledge and
approval of the liquidator. The Court ruled in favor of the respondent bank,
as follows:
In Rizal Commercial Banking Corporation v. Intermediate Appellate Court,
we held that 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."
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.
27
(Emphasis
supplied)
It is worth mentioning that under Republic Act No. 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.1wphi1 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 debtors right of redemption upon receiving the excess from the
creditor;
(2) the liquidator may sell the property and satisfy the secured creditors
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. (Emphasis supplied)
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.
As to petitioner's argument on the right of first preference as regards
unpaid wages, the Court has elucidated in the case of Development Bank
of the Philippines v. NLRC
28
that a distinction should be made between a
preference of credit and a lien. A preference applies only to claims which
do not attach to specific properties. A lien creates a charge on a particular
property. The right of first preference as regards unpaid wages recognized
by Article 110 of the Labor Code, does not constitute a lien on the property
of the insolvent debtor in favor of workers. It is but a preference of credit
in their favor, a preference in application. It is a method adopted to
determine and specify the order in which credits should be paid in the final
distribution of the proceeds of the insolvent's assets. It is a right to a first
preference in the discharge of the funds of the judgment debtor.
Consequently, the right of first preference for unpaid wages may not be
invoked in this case to nullify the foreclosure sales conducted pursuant to
PNB 's right as a secured creditor to enforce its lien on specific properties
of its debtor, ARCAM.
WHEREFORE, the petition for review on certiorari is DENIED.
With costs against the petitioner.
SO ORDERED.

G.R. No. 175844 July 29, 2013
BANK OF THE PHILIPPINE ISLANDS, Petitioner,
vs.
SARABIA MANOR HOTEL CORPORATION, Respondent.
D E C I S I O N
PERLAS-BERNABE, J.:
Before the Court is a petition for review on certiorari
1
assailing the
Decision
2
dated April 24, 2006 and Resolution
3
dated December 6, 2006 of
the Court of Appeals, Cebu City (CA) in CA-G.R. CV. No. 81596 which
affirmed with modification the rehabilitation plan of respondent Sarabia
Manor Hotel Corporation (Sarabia) as approved by the Regional Trial Court
of Iloilo City, Branch 39 (RTC) through its Order
4
dated August 7, 2003.
The Facts
Sarabia is a corporation duly organized and existing under Philippine laws,
with principal place of business at 101 General Luna Street, Iloilo City.
5
It
was incorporated on February 22, 1982, with an authorized capital stock of
P10,000,000.00, fully subscribed and paid-up, for the primary purpose of
owning, leasing, managing and/or operating hotels, restaurants, barber
shops, beauty parlors, sauna and steam baths, massage parlors and such
other businesses incident to or necessary in the management or operation
of hotels.
6

In 1997, Sarabia obtained a P150,000,000.00 special loan package from
Far East Bank and Trust Company (FEBTC) in order to finance the
construction of a five-storey hotel building (New Building) for the purpose
of expanding its hotel business. An additional P20,000,000.00 stand-by
credit line was approved by FEBTC in the same year.
7

The foregoing debts were secured by real estate mortgages over several
parcels of land
8
owned by Sarabia and a comprehensive surety agreement
dated September 1, 1997 signed by its stockholders.
9
By virtue of a
merger, Bank of the Philippine Islands (BPI) assumed all of FEBTCs rights
against Sarabia.
10

Sarabia started to pay interests on its loans as soon as the funds were
released in October 1997. However, largely because of the delayed
completion of the New Building, Sarabia incurred various cash flow
problems. Thus, despite the fact that it had more assets than liabilities at
that time,
11
it, nevertheless, filed, on July 26, 2002, a Petition
12
for
corporate rehabilitation (rehabilitation petition) with prayer for the
issuance of a stay order before the RTC as it foresaw the impossibility to
meet its maturing obligations to its creditors when they fall due.
In the said petition, Sarabia claimed that its cash position suffered when it
was forced to take-over the construction of the New Building due to the
recurring default of its contractor, Santa Ana AJ Construction
Corporation (contractor),
13
and its subsequent abandonment of the said
project.
14
Accordingly, the New Building was completed only in the latter
part of 2000, or two years past the original target date of August 1998,
thereby skewing Sarabias projected revenues. In addition, it was
compelled to divert some of its funds in order to cover cost overruns. The
situation became even more difficult when the grace period for the
payment of the principal loan amounts ended in 2000 which resulted in
higher amortizations. Moreover, external events adversely affecting the
hotel industry, i.e., the September 11, 2001 terrorist attacks and the Abu
Sayyaf issue, also contributed to Sarabias financial difficulties.
15
Owing to
these circumstances, Sarabia failed to generate enough cash flow to
service its maturing obligations to its creditors, namely: (a) BPI (in the
amount of P191,476,421.42); (b) Rural Bank of Pavia (in the amount of
P2,500,000.00); (c) Vic Imperial Appliance Corp. (Imperial Appliance) (in
the amount of P5,000,000.00); (d) its various suppliers (in the amount of
P7,690,668.04); (e) the government (for minimum corporate income tax
in the amount of P547,161.18); and (f) its stockholders (in the amount of
P18,748,306.35).
16

In its proposed rehabilitation plan,
17
Sarabia sought for the restructuring
of all its outstanding loans, submitting that the interest payments on the
same be pegged at a uniform escalating rate of: (a) 7% per annum (p.a.)
for the years 2002 to 2005; (b) 8% p.a. for the years 2006 to 2010; (c)
10% p.a. for the years 2011 to 2013; (d) 12% p.a. for the years 2014 to
2015; and (e) 14% p.a. for the year 2018. Likewise, Sarabia sought to
make annual payments on the principal loans starting in 2004, also in
escalating amounts depending on cash flow. Further, it proposed that it
should pay off its outstanding obligations to the government and its
suppliers on their respective due dates, for the sake of its day to day
operations.
Finding Sarabias rehabilitation petition sufficient in form and substance,
the RTC issued a Stay Order
18
on August 2, 2002. It also appointed Liberty
B. Valderrama as Sarabias rehabilitation receiver (Receiver). Thereafter,
BPI filed its Opposition.
19

After several hearings, the RTC gave due course to the rehabilitation
petition and referred Sarabias proposed rehabilitation plan to the Receiver
for evaluation.
20

In a Recommendation
21
dated July 10, 2003 (Receivers Report), the
Receiver found that Sarabia may be rehabilitated and thus, made the
following recommendations:
(1) Restructure the loans with Sarabias creditors, namely, BPI,
Imperial Appliance, Rural Bank of Pavia, and Barcelo Gestion
Hotelera, S.L. (Barcelo), under the following terms and conditions:
(a) the total outstanding balance as of December 31, 2002 shall be
recomputed, with the interest for the years 2001 and 2002
capitalized and treated as part of the principal; (b) waive all
penalties; (c) extend the payment period to seventeen (17) years,
i.e., from 2003 to 2019, with a two-year grace period in principal
payment; (d) fix the interest rate at 6.75% p.a. plus 10% value
added tax on interest for the entire term of the restructured
loans;
22
(e) the interest and principal based on the amortization
schedule shall be payable annually at the last banking day of each
year; and (f) any deficiency shall be paid personally by Sarabias
stockholders in the event it fails to generate enough cash flow; on
the other hand, any excess funds generated at the end of the year
shall be paid to the creditors to accelerate the debt servicing;
23

(2) Pay Sarabias outstanding payables with its suppliers and the
government so as not to disrupt hotel operations;
24

(3) Convert the Advances from stockholders amounting to
P18,748,306.00 to stockholders equity and other advances
amounting to P42,688,734.00 as of the December 31, 2002
tentative financial statements to Deferred Credits; the said
conversion should increase stockholders equity to
P268,545,731.00 and bring the debt to equity ratio to 0.85:1;
25

(4) Require Sarabias stockholders to pay its payables to the hotel
recorded as Accounts Receivable Trade, amounting to
P285,612.17 as of December 31, 2001, and its remaining
receivables after such date;
26

(5) No compensation or cash dividends shall be paid to the
stockholders during the rehabilitation period, except those who are
directly employed by the hotel as a full time officer, employee or
consultant covered by a valid contract and for a reasonable fee;
27

(6) All capital expenditures which are over and above what is
provided in the case flow of the rehabilitation plan which will
materially affect Sarabias cash position but which are deemed
necessary in order to maintain the hotels competitiveness in the
industry shall be subject to the RTCs approval prior to its
implementation;
28

(7) Terminate the management contract with Barcelo, thereby
saving an estimated P25,830,997.00 in management fees, over
and above the salaries and benefits of certain managerial
employees;
29

(8) Appoint a new management team which would be required to
submit a comprehensive business plan to support the generation
of the target revenue as reported in the rehabilitation plan;
30

(9) Open a debt servicing account and transfer all excess funds
thereto, which in no case should be less than P500,000.00 at the
end of the month; the funds will be drawn payable to the creditors
only based on the amortization schedule;
31
and
(10) Release the surety obligations of Sarabias stockholders,
considering the adequate collaterals and securities covered by the
rehabilitation plan and the continuing mortgages over Sarabias
properties.
32

The RTC Ruling
In an Order
33
dated August 7, 2003, the RTC approved Sarabias
rehabilitation plan as recommended by the Receiver, finding the same to
be feasible. In this accord, it observed that the rehabilitation plan was
realistic since, based on Sarabias financial history, it was shown that it
has the inherent capacity to generate funds to pay its loan obligations
given the proper perspective.
34
The recommended rehabilitation plan was
also practical in terms of the interest rate pegged at 6.75% p.a. since it is
based on Sarabias ability to pay and the creditors perceived cost of
money.
35
It was likewise found to be viable since, based on the
extrapolations made by the Receiver, Sarabias revenue projections, albeit
projected to slow down, remained to have a positive business/profit
outlook altogether.
36

The RTC further noted that while it may be true that Sarabia has been
unable to comply with its existing terms with BPI, it has nonetheless
complied with its obligations to its employees and suppliers and pay its
taxes to both local and national government without disrupting the day-to-
day operations of its business as an on-going concern.
37

More significantly, the RTC did not give credence to BPIs opposition to the
Receivers recommended rehabilitation plan as neither BPI nor the
Receiver was able to substantiate the claim that BPIs cost of funds was at
the 10% p.a. threshold. In this regard, the RTC gave more credence to the
Receivers determination of fixing the interest rate at 6.75% p.a., taking
into consideration not only Sarabias ability to pay based on its proposed
interest rates, i.e., 7% to 14% p.a., but also BPIs perceived cost of
money based on its own published interest rates for deposits, i.e., 1% to
4.75% p.a., as well as the rates for treasury bills, i.e., 5.498% p.a. and CB
overnight borrowings, i.e., 7.094%. p.a.
38

The CA Ruling
In a Decision
39
dated April 24, 2006, the CA affirmed the RTCs ruling with
the modification of reinstating the surety obligations of Sarabias
stockholders to BPI as an additional safeguard for the effective
implementation of the approved rehabilitation plan.
40
It held that the RTCs
conclusions as to the feasibility of Sarabias rehabilitation was well-
supported by the companys financial statements, both internal and
independent, which were properly analyzed and examined by the
Receiver.
41
It also upheld the 6.75%. p.a. interest rate on Sarabias loans,
finding the said rate to be reasonable given that BPIs interests as a
creditor were properly accounted for. As published, BPIs time deposit rate
for an amount of P5,000,000.00 (with a term of 360-364 days) is at 5.5%
p.a.; while the benchmark ninety one-day commercial paper, which banks
used to price their loan averages to 6.4% p.a. in 2005, has a three-year
average rate of 6.57% p.a.
42
As such, the 6.75% p.a. interest rate would
be higher than the current market interest rates for time deposits and
benchmark commercial papers. Moreover, the CA pointed out that should
the prevailing market interest rates change as feared by BPI, the latter
may still move for the modification of the approved rehabilitation plan.
43

Aggrieved, BPI moved for reconsideration which was, however, denied in a
Resolution
44
dated December 6, 2006.
Hence, this petition.
The Issue Before the Court
The primordial issue raised for the Courts resolution is whether or not the
CA correctly affirmed Sarabias rehabilitation plan as approved by the RTC,
with the modification on the reinstatement of the surety obligations of
Sarabias stockholders.
BPI mainly argues that the approved rehabilitation plan did not give due
regard to its interests as a secured creditor in view of the imposition of a
fixed interest rate of 6.75% p.a. and the extended loan repayment
period.
45
It likewise avers that Sarabias misrepresentations in its
rehabilitation petition remain unresolved.
46

On the contrary, Sarabia essentially maintains that: (a) the present
petition improperly raises questions of fact;
47
(b) the approved
rehabilitation plan takes into consideration all the interests of the parties
and the terms and conditions stated therein are more reasonable than
what BPI proposes;
48
and (c) BPIs allegations of misrepresentation are
mere desperation moves to convince the Court to overturn the rulings of
the courts a quo.
49

The Courts Ruling
The petition has no merit.
A. Propriety of BPIs petition;
procedural considerations.
It is fundamental that a petition for review on certiorari filed under Rule 45
of the Rules of Court covers only questions of law. In this relation,
questions of fact are not reviewable and cannot be passed upon by the
Court unless, the following exceptions are found to exist: (a) when the
findings are grounded entirely on speculations, surmises, or conjectures;
(b) when the inference made is manifestly mistaken, absurd, or
impossible; (c) when there is a grave abuse of discretion; (d) when the
judgment is based on misappreciation of facts; (e) when the findings of
fact are conflicting; (f) when in making its findings, the same are contrary
to the admissions of both parties; (g) when the findings are contrary to
those of the trial court; (h) when the findings are conclusions without
citation of specific evidence on which they are based; (i) when the facts
set forth in the petition as well as in the petitioners main and reply briefs
are not disputed by the respondent; and (j) when the findings of fact are
premised on the supposed absence of evidence and contradicted by the
evidence on record.
50

The distinction between questions of law and questions of fact is well-
defined. A question of law exists when the doubt or difference centers on
what the law is on a certain state of facts. A question of fact, on the other
hand, exists if the doubt centers on the truth or falsity of the alleged facts.
This being so, the findings of fact of the CA are final and conclusive and
the Court will not review them on appeal.
51

In view of the foregoing, the Court finds BPIs petition to be improper
and hence, dismissible
52
as the issues raised therein involve questions of
fact which are beyond the ambit of a Rule 45 petition for review.
To elucidate, the determination of whether or not due regard was given to
the interests of BPI as a secured creditor in the approved rehabilitation
plan partakes of a question of fact since it will require a review of the
sufficiency and weight of evidence presented by the parties among
others, the various financial documents and data showing Sarabias
capacity to pay and BPIs perceived cost of money and not merely an
application of law. Therefore, given the complexion of the issues which BPI
presents, and finding none of the above-mentioned exceptions to exist,
the Court is constrained to dismiss its petition, and prudently uphold the
factual findings of the courts a quo which are entitled to great weight and
respect, and even accorded with finality. This especially obtains in
corporate rehabilitation proceedings wherein certain commercial courts
have been designated on account of their expertise and specialized
knowledge on the subject matter, as in this case.
In any event, even discounting the above-discussed procedural
considerations, the Courts still finds BPIs petition lacking in merit.
B. Approval of Sarabias
rehabilitation plan; substantive
considerations.
Records show that Sarabia has been in the hotel business for over thirty
years, tracing its operations back to 1972. Its hotel building has been even
considered a landmark in Iloilo, being one of its kind in the province and
having helped bring progress to the community.
23
Since then, its
expansion was continuous which led to its decision to commence with the
construction of a new hotel building. Unfortunately, its contractor
defaulted which impelled Sarabia to take-over the same. This significantly
skewed its projected revenues and led to various cash flow difficulties,
resulting in its incapacity to meet its maturing obligations.
Recognizing the volatile nature of every business, the rules on corporate
rehabilitation have been crafted in order to give companies sufficient
leeway to deal with debilitating financial predicaments in the hope of
restoring or reaching a sustainable operating form if only to best
accommodate the various interests of all its stakeholders, may it be the
corporations stockholders, its creditors and even the general public. In
this light, case law has defined corporate rehabilitation as an attempt to
conserve and administer the assets of an insolvent corporation in the hope
of its eventual return from financial stress to solvency. It contemplates the
continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and
liquidity. Verily, the purpose of rehabilitation proceedings is to enable the
company to gain a new lease on life and thereby allow creditors to be paid
their claims from its earnings.
54
Thus, rehabilitation shall be undertaken
when it is shown that the continued operation of the corporation is
economically more feasible and its creditors can recover, by way of the
present value of payments projected in the plan, more, if the corporation
continues as a going concern than if it is immediately liquidated.
55

Among other rules that foster the foregoing policies, Section 23, Rule 4 of
the Interim Rules of Procedure on Corporate Rehabilitation
56
(Interim
Rules) states that a rehabilitation plan may be approved even over the
opposition of the creditors holding a majority of the corporations 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,
57
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.
It is within the parameters of the aforesaid provision that the Court
examines the approval of Sarabias rehabilitation.
i. Feasibility of Sarabias rehabilitation.
In order to determine the feasibility of a proposed rehabilitation plan, it is
imperative that a thorough examination and analysis of the distressed
corporations financial data must be conducted. If the results of such
examination and analysis show that there is a real opportunity to
rehabilitate the corporation in view of the assumptions made and financial
goals stated in the proposed rehabilitation plan, then it may be said that a
rehabilitation is feasible. In this accord, the rehabilitation court should not
hesitate to allow the corporation to operate as an on-going concern, albeit
under the terms and conditions stated in the approved rehabilitation plan.
On the other hand, 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.
58
As further guidance
on the matter, the Courts pronouncement in Wonder Book Corporation v.
Philippine Bank of Communications
59
proves instructive:
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.
60
(Emphasis and underscoring supplied)
Keeping with these principles, the Court thus observes that:
First, Sarabia has the financial capability to undergo rehabilitation.
Based on the Receivers Report, Sarabias financial history shows that it
has the inherent capacity to generate funds to repay its loan obligations if
applied through the proper financial framework. The Receivers
examination and analysis of Sarabias financial data reveals that the
latters business is not only an on-going but also a growing concern.
Despite its financial constraints, Sarabia likewise continues to be profitable
with its hotelier business as its operations have not been disrupted.
61

Hence, given its current fiscal position, the prospect of substantial and
continuous revenue generation is a realistic goal.
Second, Sarabia has the ability to have sustainable profits over a long
period of time.
As concluded by the Receiver, Sarabias projected revenues shall have a
steady year-on-year growth from the time that it applied for rehabilitation
until the end of its rehabilitation plan in 2018, albeit with decreasing
growth rates (growth rate is at 26% in 2003, 5% in 2004-2007, 3% in
2008-2018).
62
Should such projections come through, Sarabia would have
the ability not just to pay off its existing debts but also to carry on with its
intended expansion. The projected sustainability of its business, as
mapped out in the approved rehabilitation plan, makes Sarabias
rehabilitation a more viable option to satisfy the interests of its
stakeholders in the long run as compared to its immediate liquidation.
Third, the interests of Sarabias creditors are well-protected.
As correctly perceived by the CA, adequate safeguards are found under
the approved rehabilitation plan, namely: (a) any deficiency in the
required minimum payments to creditors based on the presented
amortization schedule shall be paid personally by Sarabias stockholders;
(b) the conversion of the advances from stockholders amounting to
P18,748,306.00 and deferred credits amounting to P42,688,734 as of the
December 31, 2002 tentative audited financial statements to stockholders
equity was granted;
64
(c) all capital expenditures which are over and
above what is provided in the cash flow of the approved rehabilitation plan
which will materially affect the cash position of the hotel but which are
deemed necessary in order to maintain the hotels competitiveness in the
industry shall be subject to the approval by the Court prior to
implementation;
65
(d) the formation of Sarabias new management team
and the requirement that the latter shall be required to submit a
comprehensive business plan to support the generation of revenues as
reported in the Rehabilitation Plan, both short term and long term;
66
(e)
the maintenance of all Sarabias existing real estate mortgages over hotel
properties as collaterals and securities in favor of BPI until the formers full
and final liquidation of its outstanding loan obligations with the latter;
67

and (f) the reinstatement of the comprehensive surety agreement of
Sarabias stockholders regarding the formers debt to BPI.
68
With these
terms and conditions
69
in place, the subsisting obligations of Sarabia to its
creditors would, more likely than not, be satisfied.
Therefore, based on the above-stated reasons, the Court finds Sarabias
rehabilitation to be feasible.
ii. Manifest unreasonableness of BPIs opposition.
Although undefined in the Interim Rules, it may be said that the opposition
of a distressed corporations majority creditor is manifestly unreasonable if
it counter-proposes unrealistic payment terms and conditions which would,
more likely than not, impede rather than aid its rehabilitation. The
unreasonableness becomes further manifest if the rehabilitation plan, in
fact, provides for adequate safeguards to fulfill the majority creditors
claims, and yet the latter persists on speculative or unfounded
assumptions that his credit would remain unfulfilled.
While Section 23, Rule 4 of the Interim Rules states that the rehabilitation
court shall consider certain incidents in determining whether the opposition
is manifestly unreasonable,
70
BPI neither proposes Sarabias liquidation
over its rehabilitation nor questions the controlling interest of Sarabias
shareholders or owners. It only takes exception to: (a) the imposition of
the fixed interest rate of 6.75% p.a. as recommended by the Receiver and
as approved by the courts a quo, proposing that the original escalating
interest rates of 7%, 8%, 10%, 12%, and 14%, over seventeen years be
applied instead;
71
and (b) the fact that Sarabias misrepresentations in the
rehabilitation petition, i.e., that it physically acquired additional property
whereas in fact the increase was mainly due to the recognition of
Revaluation Increment and because of capital expenditures, were not
taken into consideration by the courts a quo.
72

Anent the first matter, it must be pointed out that oppositions which push
for high interests rates are generally frowned upon in rehabilitation
proceedings given that the inherent purpose of a rehabilitation is to find
ways and means to minimize the expenses of the distressed corporation
during the rehabilitation period. It is the objective of a rehabilitation
proceeding to provide the best possible framework for the corporation to
gradually regain or achieve a sustainable operating form. Hence, if a
creditor, whose interests remain well-preserved under the existing
rehabilitation plan, still declines to accept interests pegged at reasonable
rates during the period of rehabilitation, and, in turn, proposes rates which
are largely counter-productive to the rehabilitation, then it may be said
that the creditors opposition is manifestly unreasonable.
In this case, the Court finds BPIs opposition on the approved interest rate
to be manifestly unreasonable considering that: (a) the 6.75% p.a.
interest rate already constitutes a reasonable rate of interest which is
concordant with Sarabias projected rehabilitation; and (b) on the
contrary, BPIs proposed escalating interest rates remain hinged on the
theoretical assumption of future fluctuations in the market, this
notwithstanding the fact that its interests as a secured creditor remain
well-preserved.
The following observations impel the foregoing conclusion: first, the 6.75%
p.a. interest rate is actually higher than BPIs perceived cost of money as
evidenced by its published time deposit rate (for an amount of
P5,000,000.00, with a term of 360-364 days) which is only set at 5.5%
p.a.; second, the 6.75% p.a. is also higher than the benchmark ninety
one-day commercial paper, which is used by banks to price their loan
averages to 6.4% p.a. in 2005, and has a three-year average rate of
6.57% p.a.; and third, BPIs interests as a secured creditor are adequately
protected by the maintenance of all Sarabias existing real estate
mortgages over its hotel properties as collateral as well as by the
reinstatement of the comprehensive surety agreement of Sarabias
stockholders, among other terms in the approved rehabilitation plan.
As to the matter of Sarabias alleged misrepresentations, records disclose
that Sarabia already clarified its initial statements in its rehabilitation
petition by submitting, on its own accord, a supplemental affidavit dated
October 24, 2002
73
that explains that the increase in its properties and
assets was indeed by recognition of revaluation increment.
74
Proceeding
from this fact, the CA observed that BPI actually failed to establish its
claimed defects in light of Sarabias assertive and forceful explanation that
the alleged inaccuracies do not warrant the dismissal of its petition.
75

Thus, absent any compelling reason to disturb the CA's finding on this
score, the Court deems it proper to dismiss BPI's allegations of
misrepresentation against Sarabia.
As a final point, BPI claims that Sarabia's projections were "too optimistic,"
its management was "extremely incompetent"
76
and that it was even
forced to pay a pre-termination penalty due to its previous loan with the
Landbank of the Philippines.
77
Suffice it to state that bare allegations of
fact should not be entet1ained as they are bereft of any probative value.
78

In any event, even if it is assumed that the said allegations are
substantiated by clear and convincing evidence, the Court, absent any
cogent basis to proceed otherwise, remains steadfast in its preclusion to
thresh out matters of fact on a Rule 45 petition, as in this case.
All told, Sarabia's rehabilitation plan, as approved and modified by the CA,
is hereby sustained. In view of the foregoing pronouncements, the Court
finds it unnecessary to delve on the other ancillary issues as herein raised.
WHEREFORE, the petition is DENIED. Accordingly, the Decision dated April
24, 2006 and Resolution dated December 6, 2006 of the Court of Appeals,
Cebu City in CA-G.R. CV. No. 81596 are hereby AFFIRMED.
SO ORDERED.