Balayan Bay Rural Bank, Inc. vs. National Livelihood Development Corporation

When a bank is placed under receivership by the Monetary Board, the PDIC as statutory receiver/liquidator should be included in the case as a representative party acting in a fiduciary capacity, while the bank retains its juridical personality and remains the real party in interest. The inclusion is grounded on Section 3, Rule 3 of the Revised Rules of Court, not on Section 19, Rule 3 on transfer of interest, because the bank's assets are held in trust by the receiver and are not transferred by operation of law.

Petitioner Balayan Bay Rural Bank (Batangas), Inc. is a banking institution duly authorized by the Central Bank to engage in banking business. Respondent National Livelihood Development Corporation (NLDC) is a government institution created under Executive Order No. 715 (1981) to promote and generate the development of livelihood and community-based enterprises. The dispute arises from an unpaid loan obligation of the petitioner bank to NLDC, which became the subject of a collection suit. The case implicates the statutory framework governing banks placed under receivership under Section 30 of R.A. No. 7653 (New Central Bank Act), which designates the Philippine Deposit Insurance Corporation (PDIC) as receiver of closed banking institutions.

Petitioner Balayan Bay Rural Bank (Batangas), Inc. is a banking institution duly authorized by the Central Bank to engage in banking business. Respondent NLDC is a government institution created under Executive Order No. 715 (1981) to promote and generate the development of livelihood and community-based enterprises. On October 12, 2009, NLDC filed a complaint for collection of sum of money against petitioner bank before the RTC of Makati City, docketed as Civil Case No. 09-917 and raffled to Branch 147, seeking recovery of the bank's unpaid obligation in the amount of P1,603,179.86.

During the pendency of the case before the RTC, the Bangko Sentral ng Pilipinas, through the Monetary Board, issued MIN-70-26 November 2009 on November 26, 2009, placing petitioner bank under receivership and appointing the PDIC as receiver pursuant to Section 30 of R.A. No. 7653. After the bank was placed under receivership, NLDC filed a Motion for Substitution of Party and to set the case for pre-trial, invoking Section 19, Rule 3 of the Revised Rules of Court. NLDC claimed that by virtue of the transfer of interest of petitioner bank to the PDIC, the latter may be substituted as party or joined with the original party.

Petitioner bank opposed the motion, contending that the PDIC is not the real party in interest because it does not stand to be benefited or injured by the judgment. It argued that the PDIC is merely the Statutory Receiver/Liquidator of banks placed under receivership and is merely a representative of petitioner bank, which remains as the real party in interest, making the substitution improper. On June 11, 2010, the RTC issued an Order granting NLDC's motion and directing that the PDIC be substituted or joined as co-defendant, sustaining NLDC's position that the prosecution or defense of the action must be done through the liquidator lest no suit for or against the insolvent entity would prosper.

In the interregnum, the RTC issued a Decision dated June 18, 2010 in Civil Case No. 09-917 in favor of NLDC, ordering petitioner bank to pay the amount of P1,603,179.86 inclusive of interest and surcharges as actual damages and P30,000.00 as attorney's fees. While petitioner bank made no objection to this ruling, it maintained that the lower court committed an error of law in issuing the June 11, 2010 Order and elevated the matter before the Supreme Court on a question of law.

• Real Party in Interest: Petitioner argued that the PDIC is not the real party in interest in the case because it does not stand to be benefited or injured by the judgment in the suit.
• Mere Representative: Petitioner maintained that the PDIC is merely the Statutory Receiver/Liquidator of all banks placed by the Monetary Board under receivership and is merely a representative of petitioner bank, which remains as the real party in interest.
• Impropriety of Substitution: Petitioner contended that the substitution of the PDIC as defendant is not proper, since the PDIC was merely tasked to conserve the assets of the bank for the benefit of its creditors.

• Transfer of Interest: Respondent argued, invoking Section 19, Rule 3 of the Revised Rules of Court, that by virtue of the transfer of interest of petitioner bank to the PDIC, the latter may be substituted as party or joined with the original party.
• Necessity of Liquidator's Participation: Respondent maintained that the prosecution or defense of the action must be done through the liquidator, otherwise no suit for or against the insolvent entity would prosper.

• Substitution of PDIC: Whether or not the 11 June 2010 RTC Order which directed the substitution of the PDIC as defendant or its inclusion therein as co-defendant is contrary to law.

• Substitution of PDIC: No, but with correction. The petition was denied; however, the RTC erred in relying on Section 19, Rule 3 (transfer of interest). The PDIC should be included not as a substitute or co-defendant but as a representative party under Section 3, Rule 3, with the bank remaining as the real party in interest.

• Substitution of PDIC: After the Monetary Board declares a bank insolvent and orders it to cease operations, the Board becomes the trustee of its assets for the equal benefit of all creditors, including depositors. The assets of the insolvent bank are held in trust for equal benefit, and after insolvency, no creditor can obtain an advantage or preference over another by attachment, execution, or otherwise. The PDIC, as statutory receiver/liquidator, is mandated to immediately gather and take charge of all assets and liabilities of the institution and administer the same for the benefit of creditors. The PDIC may prosecute or defend the case by or against the bank as a representative party while the bank remains the real party in interest, pursuant to Section 3, Rule 3 of the Revised Rules of Court. The RTC's reliance on Section 19, Rule 3 on transfer of interest was erroneous because the properties of an insolvent bank are not transferred by operation of law to the statutory receiver/liquidator; rather, they are held in trust to be distributed to creditors after liquidation in accordance with the rules on concurrence and preference of credits. The insolvent bank's legal personality is not dissolved by virtue of being placed under receivership; it retains its juridical personality and capacity to sue and be sued, with the only limitation that the action must be brought through its statutory liquidator/receiver. The authority of the PDIC to represent the insolvent bank emanates from the fiduciary relation created by statute, which reposed upon the receiver the task of preserving and conserving the properties of the insolvent for the benefit of its creditors.

• Juridical Personality of Banks Under Receivership — A bank ordered closed by the Monetary Board retains its juridical personality and can sue and be sued through its liquidator. The only limitation is that the prosecution or defense of the action must be done through the liquidator; otherwise, no suit for or against an insolvent entity would prosper. The Court applied this doctrine to hold that petitioner bank was not divested of its capacity to sue and be sued and remained the real party in interest, with the PDIC acting only as representative.

• Trust Doctrine in Bank Insolvency — After the Monetary Board declares a bank insolvent, the Board becomes the trustee of its assets for the equal benefit of all creditors. The assets are not transferred by operation of law to the statutory receiver/liquidator but are held in trust for distribution to creditors after liquidation. No creditor can obtain an advantage or preference over another by attachment, execution, or otherwise. The Court relied on this doctrine to reject the application of Section 19, Rule 3 (transfer of interest), since no actual transfer of interest occurs.

• Representative Party Doctrine — Under Section 3, Rule 3 of the Revised Rules of Court, where an action is allowed to be prosecuted or defended by a representative or someone acting in a fiduciary capacity, the beneficiary shall be included in the title of the case and shall be deemed the real party in interest. A representative may be a trustee of an express trust, a guardian, an executor or administrator, or a party authorized by law. The Court applied this doctrine to hold that the PDIC should be included as a representative party, with the bank as the beneficiary and real party in interest.

• "A bank which had been ordered closed by the monetary board retains its juridical personality which can sue and be sued through its liquidator. The only limitation being that the prosecution or defense of the action must be done through the liquidator." — This passage, quoted from Manalo vs. Court of Appeals, articulates the controlling doctrine that a bank under receivership retains its juridical personality and capacity to litigate through its liquidator, forming the ratio decidendi for the Court's ruling that the bank remains the real party in interest.

• "The properties of an insolvent bank are not transferred by operation of law to the statutory receiver/liquidator but rather these assets are just held in trust to be distributed to its creditors after the liquidation proceedings in accordance with the rules on concurrence and preference of credits." — This passage explains why Section 19, Rule 3 on transfer of interest does not apply, distinguishing the receivership context from ordinary transfers of interest and establishing the trust-based framework governing insolvent bank assets.

• "Nowhere in Section 3, Rule 3 of the Revised Rules of Court is it stated or, at the very least implied, that the representative is likewise deemed as the real party in interest." — This passage clarifies the distinction between the representative and the beneficiary under the Rules of Court, confirming that the PDIC as representative is not the real party in interest and that the bank retains that status.

• Barrameda vs. Rural Bank of Canaman, Inc., 650 Phil. 476 (2010) — Cited for the proposition that after the Monetary Board declares a bank insolvent, the Board becomes the trustee of its assets for the equal benefit of all creditors, and one creditor cannot obtain an advantage or preference over another by attachment, execution, or otherwise. Followed as supporting authority for the trust doctrine in bank insolvency.

• Bank of the Philippine Islands vs. Hong, G.R. No. 161771, February 15, 2012, 666 SCRA 71 — Cited for the principle that the debtor's properties are deemed conveyed to the liquidator in trust for the benefit of creditors, stockholders, and other persons in interest, and that liens or preferences shall be recognized by the liquidator to the extent allowed by law. Followed as supporting authority.

• Central Bank of the Philippines vs. Court of Appeals, G.R. No. 88353, May 8, 1992, 208 SCRA 652 — Cited for the principle that a bank retains its juridical personality even if placed under conservatorship and is neither replaced nor substituted by the conservator. Followed as supporting authority for the bank's retained legal personality.

• Ang vs. Ang, G.R. No. 186993, August 22, 2012, 678 SCRA 699 — Cited for the principle that under Section 3, Rule 3, the representative is not deemed the real party in interest; only the beneficiary holds that status. Followed to distinguish the representative from the real party in interest.

• Manalo vs. Court of Appeals, 419 Phil. 215 (2001) — Cited as controlling authority for the doctrine that a bank ordered closed by the Monetary Board retains its juridical personality and can sue and be sued through its liquidator, with the limitation that prosecution or defense must be done through the liquidator. Followed as the principal doctrinal basis for the ruling.

• Section 3, Rule 3, Revised Rules of Court — Provides that where an action is allowed to be prosecuted or defended by a representative or someone acting in a fiduciary capacity, the beneficiary shall be included in the title of the case and shall be deemed the real party in interest. Applied as the correct basis for including the PDIC as a representative party, with the bank as beneficiary and real party in interest.

• Section 19, Rule 3, Revised Rules of Court — Governs transfer of interest pendente lite, allowing the person to whom the interest is transferred to be substituted or joined in the action. The Court held that this provision was erroneously applied by the RTC, because no transfer of interest occurs when a bank is placed under receivership; the assets are merely held in trust by the receiver.

• Section 30, R.A. No. 7653 (New Central Bank Act) — Governs proceedings in receivership and liquidation of banks, authorizing the Monetary Board to designate the PDIC as receiver and mandating the receiver to gather and take charge of all assets and liabilities of the institution and administer the same for the benefit of creditors. Applied as the statutory source of the PDIC's fiduciary authority to represent the insolvent bank in legal actions.

Sereno, C.J. (Chairperson), Leonardo-De Castro, Bersamin, and Jardeleza, JJ., concurred.