BDO Unibank, Inc. vs. Co

A secured creditor's right to enforce its lien under Section 114 of the FRIA requires competent proof of its secured status before the liquidation court, and a belated challenge to an order nullifying the application of payment—after an unreasonable and unexplained delay of one year and nine months—is barred by laches. The determination of whether a creditor is secured and whether its set-off was valid are questions of fact not reviewable under Rule 45.

Ailene Chua Co, proprietor of Twin Blessings Enterprise and Co Branding Enterprise, and her husband Andrew Co, were financially distressed debtors who sought relief through voluntary insolvency proceedings under the Financial Rehabilitation and Insolvency Act of 2010 (FRIA, Republic Act No. 10142). BDO Unibank, Inc. was one of their creditors, holding two US dollar time deposit accounts belonging to Ailene and claiming unpaid balances on her credit cards and loans. The FRIA provides the statutory framework for the rehabilitation or liquidation of distressed debtors, mandating orderly distribution of assets to creditors, recognition of creditor rights and priority of claims, and protection against fraudulent or preferential transactions occurring within ninety days before the commencement date.

Ailene Chua Co, proprietor of Twin Blessings Enterprise and Co Branding Enterprise, and her husband Andrew Co, were financially distressed debtors who, in November 2011, filed a Petition for Voluntary Insolvency before the Regional Trial Court (RTC), Branch 90 of Quezon City, docketed as SP. PROC. No. Q-11-70234. As required under the Financial Rehabilitation and Insolvency Act of 2010 (FRIA), respondents disclosed that Ailene maintained two US dollar time deposit accounts with BDO Unibank, Inc.: Account No. 302703078315 and Account No. 302703452706. Acting on the petition, the RTC issued a Liquidation Order on December 9, 2011, declaring respondents insolvent, ordering the liquidation of their assets, and directing compliance with publication requirements. The RTC further ordered the deputy sheriff to take possession of respondents' properties, prohibited respondents from making payments or transfers except for administrative expenses, and directed all creditors to file their claims with the liquidator upon election and appointment.

BDO, as one of respondents' creditors, filed a Notice of Claim to collect the total outstanding balance of PHP 287,904.19 from respondents' Standard Mastercard and Mastercard Shop More. After confirming BDO's claims along with those of other creditors, the RTC issued an Order on October 16, 2013, directing BDO to render an accounting of Ailene's dollar deposit accounts and to hold the deposits in trust until further orders. In its Compliance, BDO informed the trial court that the amount in Account No. 302703452706 had been entirely applied to Ailene's outstanding obligation under her Back-to-Back Loan, with the set-off allegedly taking place on October 17, 2011—before the filing of the Petition for Insolvency. As for Account No. 302703078315, BDO claimed the fund was likewise applied in full to Ailene's outstanding Superlite Loan obligation on January 30, 2012. BDO stated that both accounts had zero balances and were already closed, leaving nothing to hold in trust for other creditors.

Respondents filed a Motion for Production to ascertain the veracity of BDO's unilateral off-setting, particularly the material dates and amounts in the deposit accounts vis-à-vis Ailene's obligations. Finding merit, the RTC issued an Omnibus Order on September 15, 2014, directing BDO to produce the complete ledgers of both dollar accounts from opening date to closure. BDO did not comply. About a year later, on September 7, 2015, BDO filed a Motion to Exclude the dollar time deposit accounts from the list of assets for distribution, reiterating that the funds had been used to pay Ailene's personal loan obligations. The motion was opposed by respondents' counsel, who moved to cite BDO for contempt, and by other creditors—Hongkong and Shanghai Banking Corporation and First United Finance & Leasing Corporation—who argued that the application of payment was unsupported by documentary evidence and that, pursuant to Section 58 of the FRIA, BDO's actions were presumed intended to defraud other creditors since the transactions occurred within the 90-day period before the liquidation order.

On January 10, 2017, the RTC issued an Omnibus Order denying BDO's motion for exclusion and nullifying the application of payment, ruling that the dollar time deposits must be included in respondents' assets for eventual distribution to creditors in accordance with the rules. The RTC reiterated its directive for BDO to produce the complete ledgers. During the March 28, 2017 hearing, the RTC gave BDO additional time to produce the ledgers, directed it to file an amended notice of claim reflecting the dollar time deposits and corresponding loans, and required BDO to issue demand drafts payable to the RTC. Instead of producing the complete ledgers, BDO filed a Motion to Admit with copies of a Time Deposit Certificate for Account No. 302703452706 (indicating a principal amount of USD 10,141.72), a Promissory Note with Assignment executed by Ailene in the amount of USD 10,000.00, and a Disclosure Statement on Loan and Credit Transaction for the period July 18, 2011 to October 17, 2011. BDO explained that Ailene obtained a Back-to-Back Loan secured by the time deposit, and upon maturity on October 17, 2011, she could no longer be contacted, so the account was terminated and the proceeds applied as payment. BDO admitted the off-setting occurred within the 90-day period but insisted the presumption of intent to defraud under Section 58 did not apply since it merely exercised its right as a secured creditor and the collation of respondents' assets had not yet commenced.

On February 5, 2018, the RTC admitted the Promissory Note with Assignment but again ordered BDO to produce the complete ledgers for both dollar accounts, a directive reiterated during the August 23, 2018 hearing. BDO filed a Motion for Reconsideration seeking absolute admission of the Promissory Note, exclusion of Account No. 302703452706 from the liquidation order, and validation of the termination of the time deposit as payment of the Back-to-Back loan. The RTC denied the motion on February 28, 2019. BDO then elevated the matter via certiorari to the Court of Appeals, which on January 16, 2020, found no grave abuse of discretion and dismissed the petition, affirming the RTC orders. BDO's motion for reconsideration was denied by the CA on September 2, 2020, prompting the present petition before the Supreme Court.

• Secured Creditor Status: Petitioner insisted that insolvency proceedings under the FRIA cannot impair or diminish its status as a secured creditor, and that the CA erred in ruling otherwise.
• Laches: Petitioner argued that the CA erred in ruling that the RTC's Order nullifying its application of payment may no longer be questioned because of laches.
• Section 58 of the FRIA: Petitioner faulted the CA for concluding that the grounds in Section 58 of the FRIA to nullify its application of payment are present in this case, maintaining that it merely exercised its right as a secured creditor and that the collation of assets had not commenced when the off-setting was done.
• Proper Remedy: Petitioner claimed that the CA erroneously ruled that the bank's Motion to Admit is not the proper remedy to prove the validity of its application of payment.

• Laches: Respondent argued that the order nullifying the application of payment was issued on January 10, 2017, and petitioner did not file any motion for reconsideration of that order. In seeking the reversal of the nullification order, petitioner is clearly attempting to rectify its negligence of failing to make a timely appeal, which should not be allowed because of the principle of laches.

• Grave Abuse of Discretion: Whether the CA correctly sustained the RTC's Orders dated August 23, 2018 and February 28, 2019, i.e., whether the RTC committed grave abuse of discretion in issuing interlocutory orders requiring BDO to produce complete ledgers of respondents' dollar deposit accounts.
• Laches: Whether BDO's challenge to the RTC's nullification of its application of payment was barred by laches due to its failure to timely question the January 10, 2017 Omnibus Order.
• Question of Fact vs. Question of Law: Whether the issues raised by BDO—the validity of the application of payment, its status as a secured creditor, and whether its interests should be considered in the insolvency proceedings—are questions of fact beyond the scope of a Rule 45 petition for review.

• Grave Abuse of Discretion: No. The RTC did not commit grave abuse of discretion; it was discharging its mandate as a special commercial court to facilitate orderly liquidation and protect the insolvent debtor's assets for the benefit of all creditors under the FRIA.
• Laches: Yes. BDO's challenge was barred by laches, as it allowed one year and nine months to lapse before seeking reversal of the January 10, 2017 Omnibus Order nullifying its application of payment, without providing any justification for the delay.
• Question of Fact vs. Question of Law: The issues raised are questions of fact requiring examination of financial documents before the RTC during trial proper, and are therefore beyond the ambit of a Rule 45 petition for review. Findings of fact by the CA are final and conclusive.

• Grave Abuse of Discretion: The assailed RTC orders are interlocutory in nature—pertaining to matters that decide some incident but do not terminate or finally dispose of the whole controversy. While certiorari under Rule 65 was the proper remedy (no appeal being available at that preliminary stage of insolvency proceedings), the writ will not issue absent grave abuse of discretion. The RTC's orders requiring production of complete ledgers were issued as early as September 15, 2014, during the initial progress of liquidation, to protect the assets of the insolvent debtor for the benefit of creditors. The RTC was discharging its mandate under Section 2 of the FRIA to facilitate speedy and orderly liquidation, ensure transparency, and preserve and maximize the value of the debtor's assets. The order for BDO to produce the ledgers was a measure to ensure transparency and efficiency in collating all assets belonging to respondents pursuant to the liquidation order. The August 23, 2018 Order was a mere reiteration of the February 5, 2018 Order admitting the Promissory Note with Assignment and requiring the bank anew to produce the complete ledgers. No grave abuse of discretion could be imputed to the RTC in this regard.

• Laches: Laches is defined as the failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercise of due diligence could or should have been done earlier, warranting the presumption that the party has either abandoned or declined to assert the right. The CA correctly pointed out that BDO's certiorari petition only assailed the Orders dated August 23, 2018 and February 28, 2019, which had nothing to do with the nullification of BDO's application of payment contained in the earlier January 10, 2017 Omnibus Order—which BDO did not bother to question. BDO challenged the nullification order for the first time only in September 2018 when it filed a motion for reconsideration of the August 23, 2018 Order, well beyond the period for filing a motion for reconsideration under Rule 37, Section 1. Allowing one year and nine months to lapse before seeking reversal is unreasonable and constitutes laches. Even if the Court glossed over BDO's inaction, the petition still fails: Section 114 of the FRIA guarantees that the liquidation order shall not affect the right of a secured creditor to enforce its lien, but this requires competent proof of such secured status, because the liquidation court must also protect other creditors from fraudulent schemes that may reduce their shares in the insolvent debtor's assets. Due to its own continued defiance of the RTC's lawful orders to produce the complete ledgers, BDO failed to establish its claim that the applications of payment are outside the scope of the liquidation order.

• Question of Fact vs. Question of Law: The validity of the application of payment, BDO's alleged status as a secured creditor, and whether its interests as such should be considered in the insolvency proceedings are all questions of fact. 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 when the doubt centers on the truth or falsity of the alleged facts. The matters raised by BDO require examination of financial documents that ought to be presented before the RTC during trial proper, not merely an application of law. The findings of fact of the CA are final and conclusive and will not be reviewed on a Rule 45 petition. The RTC's Omnibus Order explicitly declared that the deposits are to be included in respondents' assets "for the eventual distribution to the creditors in accordance with the rules," assuring that distribution will be done in accordance with the FRIA and will recognize BDO's supposed right as a secured creditor should its status be proven later in the course of the insolvency proceedings.

• Laches — The failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercise of due diligence could or should have been done earlier, warranting the presumption that the party has either abandoned or declined to assert the right. The principle does not intend to penalize neglect but rather avoids recognizing a right when to do so would result in a clearly inequitable situation. Applied here: BDO allowed one year and nine months to lapse before seeking reversal of the January 10, 2017 Omnibus Order nullifying its application of payment, without justification, rendering its belated challenge inequitable and barred.

• Interlocutory Orders in Insolvency Proceedings — Orders issued during insolvency proceedings that decide some incident but do not terminate or finally dispose of the whole controversy are interlocutory in nature. No appeal is available at that preliminary stage; the proper remedy is certiorari under Rule 65, but the writ will not issue absent grave abuse of discretion amounting to lack or excess of jurisdiction. Applied here: the RTC's orders requiring BDO to produce complete ledgers were interlocutory, and certiorari was the proper remedy, but the writ was denied because the RTC acted within its jurisdiction in discharging its mandate under the FRIA.

• Rights of Secured Creditors Under the FRIA (Section 114) — The liquidation order shall not affect the right of a secured creditor to enforce its lien in accordance with the applicable contract or law. A secured creditor may waive his rights and prove his claim, or maintain his rights under the security or lien. However, such secured status requires competent proof before the liquidation court, which must also protect other creditors from fraudulent or preferential schemes. Applied here: BDO claimed secured creditor status but failed to prove it due to its obstinate refusal to produce the complete ledgers as ordered by the RTC.

• Question of Law vs. Question of Fact in Rule 45 Petitions — 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 when the doubt centers on the truth or falsity of the alleged facts. Findings of fact by the Court of Appeals are final and conclusive and will not be reviewed in a Rule 45 petition for review, which is limited to questions of law. Applied here: the validity of BDO's set-off, its secured creditor status, and whether its interests were duly regarded are all questions of fact requiring examination of financial documents, beyond the Supreme Court's power of review under Rule 45.

• "Allowing one year and nine months to lapse before seeking the reversal of the Omnibus Order dated January 10, 2017 is unreasonable and constitutes laches. It would be unfair and inequitable to entertain petitioner's belated attempt to set aside the order when it slept on its rights without providing any justification." — This passage articulates the ratio decidendi on the laches issue, explaining why BDO's belated challenge to the nullification order was inequitable and could not be entertained.

• "Due to its own continued defiance to the lawful orders of the liquidation court, petitioner failed to establish its claim that the applications of payment are outside the scope of the liquidation order." — This explains why BDO's assertion of secured creditor status failed: its refusal to comply with court orders to produce the complete ledgers prevented it from proving the very status it claimed.

• "The matters raised by petitioner undoubtedly require an examination of the financial documents ought to be presented before the RTC during the trial proper, hence, are outside the limit of this Court's power of review in a Rule 45 petition." — This defines the jurisdictional boundary that renders the petition improper, establishing that the issues are factual and not reviewable under Rule 45.

• Quintos vs. Nicolas, 736 Phil. 438 (2014) — Cited as controlling authority for the definition and elements of laches; the Court applied the doctrine to bar BDO's belated challenge to the nullification order.
• Bank of the Philippine Islands vs. Sarabia Manor Hotel Corp., 715 Phil. 420 (2013) — Cited for the distinction between questions of law and questions of fact in the context of corporate rehabilitation proceedings; the Court relied on this to characterize BDO's issues as factual and beyond Rule 45 review.
• Metropolitan Bank and Trust Company vs. S.F. Naguiat Enterprises, Inc., 756 Phil. 229 (2015) — Cited for the principle that the liquidation order does not affect a secured creditor's right to enforce its lien under Section 114 of the FRIA, while recognizing the need for competent proof of secured status.
• Biñan Rural Bank vs. Carlos, 759 Phil. 416 (2015) — Cited for the definition of interlocutory orders as those which decide some incident but do not terminate or finally dispose of the whole controversy.

• Section 58, Financial Rehabilitation and Insolvency Act of 2010 (R.A. No. 10142) — Governs rescission or nullity of certain pre-commencement transactions. A disputable presumption of intent to defraud creditors arises if a transaction involves an accelerated payment of claim to a creditor within ninety (90) days prior to the commencement date, among other circumstances. Applied: BDO admitted the off-setting took place within the 90-day period, triggering the presumption, though BDO argued it was inapplicable as a secured creditor exercising its rights.

• Section 114, FRIA — Guarantees that the liquidation order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law. Applied: The Court recognized this right but held that it requires competent proof of secured status, which BDO failed to establish due to its refusal to produce the complete ledgers.

• Section 113, FRIA — Provides that upon issuance of the liquidation order, legal title to and control of all assets of the debtor shall be deemed vested in the liquidator or, pending appointment, with the court. Applied: The RTC's orders directing accounting and production of ledgers were issued pursuant to this provision to protect and collate the insolvent debtor's assets.

• Section 127, FRIA — Allows rescission or nullity of transactions occurring prior to the liquidation order if executed with intent to defraud creditors or constituting undue preference, with the presumptions in Section 58 applying. Applied: This provision, together with Section 58, formed the statutory basis for the RTC's nullification of BDO's application of payment.

• Section 2, FRIA — Declaration of policy: the State shall ensure timely, fair, transparent, effective and efficient rehabilitation or liquidation, preserve and maximize the value of the debtor's assets, recognize creditor rights and respect priority of claims, and ensure equitable treatment of similarly situated creditors. Applied: The Court cited this provision to justify the RTC's mandate to facilitate orderly liquidation and protect assets for all creditors.

• Rule 45, Rules of Court — Governs petitions for review on certiorari before the Supreme Court, limited to questions of law. Applied: The petition was dismissed because the issues raised were questions of fact beyond the scope of Rule 45 review.

• Rule 65, Rules of Court — Governs certiorari proceedings, the proper remedy when no appeal is available for interlocutory orders. Applied: BDO correctly availed of certiorari before the CA, but the writ was denied because the RTC committed no grave abuse of discretion.

• Rule 37, Section 1, Rules of Court — Prescribes the period for filing a motion for reconsideration. Applied: BDO's September 2018 motion for reconsideration challenging the January 10, 2017 Omnibus Order was filed well beyond the reglementary period.

Leonen, SAJ. (Chairperson), Lazaro-Javier, J. Lopez, and Kho, Jr., JJ., concurred.