Bank of the Philippine Islands vs. Sarabia Manor Hotel Corporation

A rehabilitation plan may be approved over a majority creditor's opposition if rehabilitation is feasible and the opposition is manifestly unreasonable; opposition is manifestly unreasonable if the creditor insists on high interest rates that would impede rehabilitation despite adequate safeguards protecting its interests.

Corporate rehabilitation proceedings are designed to give financially distressed companies a chance to recover and pay creditors from future earnings, rather than facing immediate liquidation. The Interim Rules of Procedure on Corporate Rehabilitation include a "cram-down" clause, allowing courts to approve rehabilitation plans over majority creditor opposition if feasible and the opposition is manifestly unreasonable.

• Original Filing: RTC of Iloilo City, Branch 39, Civil Case No. 02-27252 (Petition for Corporate Rehabilitation)
• Lower Court Decision: August 7, 2003 — RTC approved the rehabilitation plan as recommended by the Receiver, fixing interest at 6.75% p.a.
• Appeal: CA (Cebu City) in CA-G.R. CV No. 81596
• CA Decision: April 24, 2006 — Affirmed RTC with modification reinstating the stockholders' surety obligations. Motion for reconsideration denied December 6, 2006.
• SC Action: Petition for Review on Certiorari under Rule 45

• Corporate Status: Sarabia Manor Hotel Corporation (Sarabia) is a hotel corporation incorporated in 1982, operating a landmark hotel in Iloilo City.
• The Loans: In 1997, Sarabia obtained a P150M loan and P20M standby credit line from FEBTC (later absorbed by BPI) to finance a new hotel building. Debts were secured by real estate mortgages and a comprehensive surety agreement from stockholders.
• Financial Distress: The contractor defaulted and abandoned the project, forcing Sarabia to take over construction. Completion was delayed by two years (finished 2000 instead of 1998), skewing projected revenues. The end of the principal loan grace period in 2000 increased amortizations, and external events (9/11 attacks, Abu Sayyaf issues) further hurt the hotel industry. Despite having more assets than liabilities, Sarabia could not meet maturing obligations.
• Rehabilitation Petition: On July 26, 2002, Sarabia filed for corporate rehabilitation. Sarabia proposed restructuring loans with escalating interest rates (7% to 14% p.a.) over 17 years.
• Receiver's Report: The Receiver found rehabilitation feasible. Key recommendations: restructure loans at a fixed 6.75% p.a. plus 10% VAT for the entire term; waive penalties; extend payment to 17 years with a 2-year grace period; stockholders to pay any deficiencies; convert stockholder advances to equity; and release stockholders' surety obligations.
• RTC Approval: The RTC approved the Receiver's plan. It found the 6.75% rate realistic based on Sarabia's capacity to pay and BPI's cost of money (BPI's deposit rates were 1-4.75%, T-bills 5.498%).
• CA Modification: The CA affirmed the RTC but reinstated the stockholders' surety obligations as an additional safeguard for BPI.

• BPI argued the rehabilitation plan disregarded its interests as a secured creditor by imposing a fixed 6.75% p.a. interest rate and extending the loan period.
• BPI proposed applying the original escalating interest rates (7% to 14%) instead of the fixed rate.
• BPI claimed Sarabia made misrepresentations in its petition regarding the acquisition of additional property (which was actually due to revaluation increment).
• BPI alleged Sarabia's projections were too optimistic and its management was incompetent.

• Sarabia argued the petition raised questions of fact, which is improper for a Rule 45 petition.
• Sarabia contended the rehabilitation plan reasonably accommodated all interests and was better than BPI's proposals.
• Sarabia dismissed the misrepresentation claims as desperate moves, noting it had already submitted a supplemental affidavit clarifying the asset increase.

• Procedural Issues: Whether BPI's petition for review on certiorari is proper given that it raises questions of fact.
• Substantive Issues: Whether the CA correctly affirmed the rehabilitation plan, specifically the imposition of a 6.75% p.a. interest rate, over BPI's opposition.

• Procedural: The SC dismissed the petition. A Rule 45 petition covers only questions of law. Determining whether BPI's interests were given due regard requires reviewing financial documents and data (Sarabia's capacity to pay, BPI's cost of money), which is a question of fact. None of the exceptions allowing factual review apply. The factual findings of the courts a quo are entitled to great weight and finality, especially from specialized commercial courts.
• Substantive: The SC found the rehabilitation plan feasible and BPI's opposition manifestly unreasonable.
• Feasibility: Sarabia has the financial capability and sustainable profits. It is an ongoing and growing concern with steady projected revenue growth. The creditors' interests are protected by adequate safeguards: stockholders will pay deficiencies, stockholder advances were converted to equity, capital expenditures require court approval, a new management team will be appointed, real estate mortgages are maintained, and the surety obligations were reinstated.
• Manifest Unreasonableness: BPI's opposition pushing for high interest rates is frowned upon because rehabilitation aims to minimize expenses. The 6.75% rate is reasonable and concordant with rehabilitation, being higher than BPI's cost of money (5.5% time deposit rate) and benchmark commercial paper rates (6.4-6.57%). BPI's proposed escalating rates rely on speculative market fluctuations and would impede rehabilitation. Furthermore, BPI's interests are already protected by mortgages and sureties.
• Misrepresentations: Sarabia clarified the asset increase via a supplemental affidavit. Bare allegations of misrepresentation, overly optimistic projections, and incompetence have no probative value.

• Cram-down Clause — Under Section 23, Rule 4 of the Interim Rules (now Section 64 of the FRIA), a rehabilitation plan may be approved over the opposition of majority creditors if rehabilitation is feasible and the opposition is manifestly unreasonable. This forces creditors to accept terms, preferring long-term viability over immediate but incomplete recovery.
• Manifestly Unreasonable Opposition — A majority creditor's opposition is manifestly unreasonable if it counter-proposes unrealistic payment terms that would impede rehabilitation, and persists on speculative assumptions that its credit will remain unfulfilled despite adequate safeguards in the plan.
• Corporate Rehabilitation — An attempt to conserve and administer the assets of an insolvent corporation in the hope of eventual return to solvency. It enables the company to gain a new lease on life, allowing creditors to be paid from earnings rather than through immediate liquidation.
• Questions of Fact vs. Law in Rule 45 — A question of law exists when the doubt centers on what the law is on a certain state of facts. A question of fact exists if the doubt centers on the truth or falsity of alleged facts. Rule 45 petitions only cover questions of law.

• Section 23, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation — Applied as the governing law at the time of approval. States that a rehabilitation plan may be approved over majority creditor opposition if feasible and opposition is manifestly unreasonable (Cram-down clause).
• Rule 45 of the Rules of Court — Applied to dismiss the petition on procedural grounds, as it limits review to questions of law.
• Section 64 of the FRIA — Cited as the current law incorporating the cram-down clause previously found in the Interim Rules.
• Section 25 of the FRIA — Cited as guidance on converting rehabilitation proceedings to liquidation when rehabilitation is not feasible.