Banco de Oro-EPCI, Inc. vs. JAPRL Development Corporation

A party who actively seeks affirmative relief from a trial court — such as a suspension of proceedings — voluntarily submits to that court's jurisdiction and waives any defect in the service of summons, notwithstanding an earlier challenge to the court's jurisdiction over the party's person.

Banco de Oro-EPCI, Inc. (formerly Equitable PCI Bank, Inc.) is a banking institution that extends credit facilities financed by public deposits. JAPRL Development Corporation (JAPRL) was a corporate borrower to which petitioner extended ₱230,000,000 in credit facilities on March 28, 2003, after evaluating JAPRL's financial statements for fiscal years 1998, 1999, and 2000. Rapid Forming Corporation (RFC), JAPRL's subsidiary, and Jose U. Arollado acted as JAPRL's sureties. The dispute implicates Section 40 of the General Banking Law (Republic Act No. 8791), which authorizes banks to terminate credit accommodations and demand immediate repayment when financial statements submitted by a borrower prove false or incorrect in any material detail, and the Interim Rules of Procedure on Corporate Rehabilitation, which govern stay orders in corporate rehabilitation proceedings.

On March 28, 2003, after evaluating the financial statements of JAPRL Development Corporation for fiscal years 1998, 1999, and 2000, Banco de Oro-EPCI, Inc. extended credit facilities to JAPRL amounting to ₱230,000,000. Rapid Forming Corporation and Jose U. Arollado acted as JAPRL's sureties. Despite its seemingly strong financial position, JAPRL defaulted on the payment of four trust receipts soon after the loan was approved. Petitioner subsequently learned from MRM Management, JAPRL's financial adviser, that JAPRL had altered and falsified its financial statements — allegedly bloating sales revenues to project a large income from operations for the relevant fiscal years so as to appear a viable investment. Citing the default provisions of the Trust Receipt Agreement, petitioner demanded immediate payment of JAPRL's outstanding obligations amounting to ₱194,493,388.98.

On August 30, 2003, JAPRL and RFC filed a petition for rehabilitation in the RTC of Quezon City, Branch 90, disclosing a decline in sales over the preceding three years and a staggering loss in 2002. A stay order was issued on September 28, 2003, but the rehabilitation plan was eventually rejected by the Quezon City RTC on May 9, 2005. Meanwhile, on August 21, 2003, petitioner had filed a complaint for sum of money with an application for a writ of preliminary attachment against respondents in the RTC of Makati City, Branch 145, asserting that JAPRL was guilty of fraud in altering and falsifying its financial statements. The Makati RTC denied the attachment application for lack of merit but ordered the service of summons on respondents. The officer's return stated that on July 9, 2004, the summons was served on JAPRL, RFC, and Arollado through Ms. Grace Cano, an "administrative assistant," who acknowledged receipt.

Respondents moved to dismiss the complaint, arguing that an "administrative assistant" was not among the persons enumerated in Section 11, Rule 14 of the Rules of Court on whom summons against a corporation may be served, and that personal service was required for Arollado as an individual defendant under Section 6, Rule 14. The Makati RTC denied the motion on October 10, 2005, reasoning that corporate officers are often busy and summonses are usually received by administrative assistants or secretaries in the regular course of business. Respondents moved for reconsideration but withdrew it before the Makati RTC could resolve the matter. On February 20, 2006, JAPRL and RFC filed a second petition for rehabilitation in the RTC of Calamba, Laguna, Branch 34, which issued a stay order on March 13, 2006. Relying on that stay order, respondents moved to suspend the proceedings in Civil Case No. 03-991. On July 7, 2006, the Makati RTC granted the motion as to JAPRL and RFC but ordered Arollado to file an answer, ruling that because he was jointly and solidarily liable, proceedings against him should continue. Respondents' motion for reconsideration was denied.

On August 11, 2006, respondents filed a petition for certiorari in the Court of Appeals alleging that the Makati RTC committed grave abuse of discretion in issuing the October 10, 2005 and July 7, 2006 orders, asserting that the court never acquired jurisdiction over their persons due to defective service of summons. The CA, in its June 7, 2007 decision, held that service on a mere administrative assistant was defective and that the Makati RTC never acquired jurisdiction over respondents, thus granting the petition. Petitioner's motion for reconsideration was denied on August 31, 2007, giving rise to the present petition.

• Evasion of Service and Bad Faith: Petitioner asserted that respondents maliciously evaded service of summonses to prevent the Makati RTC from acquiring jurisdiction over their persons and employed bad faith to delay proceedings by cunningly exploiting procedural technicalities to avoid payment of their obligations.
• Public Interest in Banking: Petitioner contended that, considering the amount involved, respondents utterly disregarded the significance of a stable and efficient banking system to the national economy, and that justice and fairness dictated that the Makati RTC hear whether respondents committed fraud in securing the credit accommodation.

• Defective Service of Summons: Respondents argued that the Makati RTC never acquired jurisdiction over their persons because the summonses were served on a mere administrative assistant, who is not among the persons enumerated in Section 11, Rule 14 of the Rules of Court for service on a corporation, and that personal service under Section 6, Rule 14 was required for Arollado.
• Grave Abuse of Discretion: Respondents asserted that the Makati RTC committed grave abuse of discretion in issuing the October 10, 2005 and July 7, 2006 orders, and that the court could not hear the complaint for sum of money for want of jurisdiction over their persons.

• Timeliness of Certiorari Petition: Whether the Court of Appeals should have dismissed respondents' petition for certiorari outright on the ground that the assailed Makati RTC order had become final and the petition was filed beyond the 60-day reglementary period.
• Voluntary Submission to Jurisdiction: Whether respondents voluntarily submitted to the jurisdiction of the Makati RTC by moving to suspend the proceedings, thereby waiving any defect in the service of summons.
• Effect of Stay Order on Surety: Whether the stay order issued by the Calamba RTC in the corporate rehabilitation proceedings precluded the Makati RTC from proceeding against Arollado, the surety solidarily liable with JAPRL and RFC.
• Fraud and the Right to Demand Immediate Repayment: Whether petitioner was entitled to immediate repayment under Section 40 of the General Banking Law on account of alleged falsified financial statements.

• Timeliness of Certiorari Petition: Yes. The CA should have dismissed the certiorari petition outright because respondents withdrew their motion for reconsideration of the October 10, 2005 order, rendering it final, and the petition was filed ten months and one day after that order — far beyond the 60-day period prescribed by Section 4, Rule 65 of the Rules of Court.
• Voluntary Submission to Jurisdiction: Yes. By moving to suspend the proceedings in Civil Case No. 03-991 on the basis of the Calamba RTC stay order, respondents waived whatever defect existed in the service of summons and were deemed to have voluntarily submitted to the Makati RTC's jurisdiction.
• Effect of Stay Order on Surety: No. The stay order under the Interim Rules of Procedure on Corporate Rehabilitation defers claims against the corporation seeking rehabilitation but does not bar proceedings against a surety solidarily liable with the corporation; a creditor can demand payment from such a surety.
• Fraud and the Right to Demand Immediate Repayment: Yes. Under Section 40 of the General Banking Law, if a borrower's financial statements prove false or incorrect in any material detail, the bank may terminate the credit accommodation and demand immediate repayment; a finding of fraud would also entitle petitioner to move for dismissal of the rehabilitation case, as rehabilitation was never intended as a refuge for a fraudulent debtor.

• Timeliness of Certiorari Petition: Respondents' petition for certiorari in the CA questioned the jurisdiction of the Makati RTC over their persons, which in effect assailed only the October 10, 2005 order denying their motion to dismiss. Because they withdrew their motion for reconsideration of that order, it became final and executory. Moreover, the certiorari petition was filed ten months and one day after the assailed order — well beyond the 60-day period allowed by Section 4, Rule 65 of the Rules of Court. The CA therefore should have dismissed the petition outright. The Court also noted that respondents' motion for reconsideration was still pending in the Makati RTC when they filed the CA petition, rendering it premature as an additional ground for dismissal.

• Voluntary Submission to Jurisdiction: When respondents moved to suspend the proceedings in Civil Case No. 03-991 before the Makati RTC — relying on the March 13, 2006 stay order issued by the Calamba RTC — they sought affirmative relief from that court. By doing so, they waived whatever defect existed in the service of summons and were deemed to have voluntarily submitted themselves to the Makati RTC's jurisdiction. The Court relied on the principle that a party who seeks affirmative relief from a court cannot later challenge its jurisdiction over the party's person.

• Effect of Stay Order on Surety: Under Section 6 of the Interim Rules of Procedure on Corporate Rehabilitation, a stay order stays enforcement of all claims against the debtor, its guarantors, and sureties not solidarily liable with the debtor. The Court clarified that a creditor can demand payment from a surety solidarily liable with the corporation seeking rehabilitation. Because Arollado was jointly and solidarily liable with JAPRL and RFC, the stay order did not bar proceedings against him. The Makati RTC could therefore proceed to hear Civil Case No. 03-991 against Arollado, and against JAPRL and RFC if warranted.

• Fraud and the Right to Demand Immediate Repayment: The Court emphasized that banking is imbued with public interest, as banks deal with the public's money and their viability depends on the ability to return deposits on demand. Section 40 of the General Banking Law provides that if a borrower's financial statements prove false or incorrect in any material detail, the bank may terminate the loan or credit accommodation and demand immediate repayment. Petitioner alleged that JAPRL fraudulently altered and falsified its financial statements to obtain credit facilities. Justice and fairness dictated that the Makati RTC hear whether respondents committed fraud. A finding of fraud would entitle petitioner to immediate payment of ₱194,493,388.98 and other appropriate damages, and would also support a motion to dismiss the rehabilitation case in the Calamba RTC, as rehabilitation was never intended to be a refuge for a debtor guilty of fraud. The Court further directed the Makati City Prosecutor to investigate whether probable cause existed to indict respondents for violation of Section 13 of the Trust Receipts Law, given their failure to pay the four trust receipts.

• Voluntary Submission to Jurisdiction — A party who seeks affirmative relief from a court — such as a motion to suspend proceedings — voluntarily submits to that court's jurisdiction and waives any defect in the service of summons, even if the party had previously challenged jurisdiction over the person. Applied here: respondents' motion to suspend proceedings in the Makati RTC, based on the Calamba RTC stay order, constituted voluntary submission and cured the alleged defect in service on an administrative assistant.

• Finality of Orders and Timeliness of Certiorari — An order becomes final when a motion for reconsideration is withdrawn before resolution; a subsequent petition for certiorari assailing that order must be filed within 60 days from notice of the order under Section 4, Rule 65 of the Rules of Court. A petition filed ten months after the assailed order is patently out of time and should be dismissed outright.

• Stay Order in Corporate Rehabilitation — Under Section 6 of the Interim Rules of Procedure on Corporate Rehabilitation, a stay order stays enforcement of all claims against the debtor, its guarantors, and sureties not solidarily liable with the debtor. A creditor may, however, demand payment from a surety solidarily liable with the corporation seeking rehabilitation; proceedings against such a surety are not barred.

• Fraud as a Ground for Termination of Credit Accommodation — Under Section 40 of the General Banking Law, if financial statements submitted by a borrower prove false or incorrect in any material detail, the bank may terminate the loan or credit accommodation and demand immediate repayment. Rehabilitation proceedings are not available as a refuge for a debtor guilty of fraud.

• "More importantly, when respondents moved for the suspension of proceedings in Civil Case No. 03-991 before the Makati RTC (on the basis of the March 13, 2006 order of the Calamba RTC), they waived whatever defect there was in the service of summons and were deemed to have submitted themselves voluntarily to the jurisdiction of the Makati RTC." — This is the ratio decidendi on voluntary submission: seeking affirmative relief from a court constitutes waiver of jurisdictional objections based on defective service of summons.

• "The protective remedy of rehabilitation was never intended to be a refuge of a debtor guilty of fraud." — This formulation articulates the principle that corporate rehabilitation cannot shield a fraudulent debtor from the consequences of misrepresentation in obtaining credit accommodations.

• "Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or credit accommodation granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of the obligation." — This is the text of Section 40 of the General Banking Law as quoted and applied by the Court, establishing the bank's statutory right to demand immediate repayment upon falsity of financial statements.

• "Since banks deal with the public's money, their viability depends largely on their ability to return those deposits on demand. For this reason, banking is undeniably imbued with public interest." — This passage frames the public-interest rationale underlying the Court's insistence on sound lending practices and the protection of banking system integrity.

• Mason vs. Court of Appeals, 459 Phil. 689 (2003) — Cited by respondents for the proposition that Section 11, Rule 14 of the Rules of Court contains an exclusive list of persons on whom summons against a corporation may be served; the Court did not disturb this rule but held that any defect was waived by voluntary submission.
• Orosa vs. Court of Appeals, 330 Phil. 67 (1996) — Cited in support of the doctrine that seeking affirmative relief from a court constitutes voluntary submission to its jurisdiction.
• Philippine Airlines vs. Kurangking, 438 Phil. 375 (2002) — Cited for the rule that under the Interim Rules of Procedure on Corporate Rehabilitation, a stay order defers all actions or claims against the corporation seeking rehabilitation from the date of issuance until dismissal or termination of proceedings.
• Philippine Blooming Mills vs. Court of Appeals, 459 Phil. 875 (2003) — Cited, in turn citing Traders Royal Bank vs. Court of Appeals, G.R. No. 78412, 26 September 1989, 177 SCRA 788, for the proposition that a creditor can demand payment from a surety solidarily liable with the corporation seeking rehabilitation.

• Section 11, Rule 14, Rules of Court — Enumerates the persons on whom summons against a domestic private juridical entity may be served: the president, managing partner, general manager, corporate secretary, treasurer, or in-house counsel. Respondents invoked this provision to argue that service on an "administrative assistant" was invalid; the Court held any defect was waived by voluntary submission.
• Section 6, Rule 14, Rules of Court — Mandates personal service of summons on an individual defendant. Arollado invoked this provision; the Court held any defect was waived.
• Section 4, Rule 65, Rules of Court — Requires that a petition for certiorari be filed not later than 60 days from notice of the judgment, order, or resolution. The Court held respondents' CA petition, filed ten months and one day after the assailed order, was patently out of time.
• Section 6, Interim Rules of Procedure on Corporate Rehabilitation (A.M. No. 00-8-10-SC) — Governs the stay order in corporate rehabilitation, staying enforcement of all claims against the debtor, its guarantors, and sureties not solidarily liable. The Court clarified that sureties solidarily liable are not covered by the stay.
• Section 11, Interim Rules of Procedure on Corporate Rehabilitation — Provides that the stay order is effective from issuance until dismissal of the petition or termination of rehabilitation proceedings.
• Section 40, General Banking Law (R.A. No. 8791) — Authorizes banks to demand financial statements from credit applicants and provides that if such statements prove false or incorrect in any material detail, the bank may terminate the credit accommodation and demand immediate repayment. The Court applied this provision to hold that petitioner would be entitled to immediate payment upon a finding of fraud.
• Section 2, General Banking Law — Declaration of policy recognizing the vital role of banks in providing an environment conducive to the sustained development of the national economy and promoting a stable and efficient banking system.
• Section 13, Trust Receipts Law (P.D. No. 115) — Provides that failure of an entrustee to turn over proceeds of sale or to return goods covered by a trust receipt constitutes the crime of estafa. The Court directed the Makati City Prosecutor to investigate whether probable cause existed to indict respondents under this provision.

Reynato S. Puno (Chief Justice, Chairperson), Antonio T. Carpio, Adolfo S. Azcuna, and Teresita J. Leonardo-De Castro concurred. Justice Azcuna was on official leave.