China Banking Corporation vs. ASB Holdings, Inc.

A rehabilitation plan proposing dacion en pago arrangements does not violate the constitutional prohibition against impairment of contracts where the proposal is not compulsory and requires the mutual consent of the secured creditor, and the creditor retains its preferred status in the event of liquidation.

Respondent corporations, collectively known as the ASB Group, secured loans from China Bank: a P35,000,000.00 credit line granted in 1999 to ASB Development Corporation, and a P265,000,000.00 omnibus credit line granted in 2000 to ASB Realty Corporation. Both loans were secured by real estate mortgages over properties in Caloocan City and Makati City. The respondents defaulted on the agreed loan amortizations, interest, and other charges, prompting demands for payment.

• Loans and Default: In 1999, ASB Development Corporation obtained a P35,000,000.00 credit line from China Bank, secured by a real estate mortgage over two lots in Caloocan City. In 2000, ASB Realty Corporation obtained a P265,000,000.00 omnibus credit line from the same bank, secured by real estate mortgages over properties in Makati City. Respondent corporations subsequently defaulted on the payment of amortizations, interest, and other charges.
• Petition for Rehabilitation: Citing a glut in the real estate market, peso depreciation, and decreased investor confidence, respondents filed a petition for corporate rehabilitation under P.D. 902-A before the SEC. They claimed total assets of P19.4 billion against total liabilities of P12.7 billion, asserting that while they possessed sufficient property to cover obligations, they foresaw an inability to pay debts within one year. They prayed for the appointment of a receiver, suspension of all claims, and approval of a rehabilitation plan.
• The Rehabilitation Plan: Submitted on August 18, 2000, the plan proposed a dacion en pago program to reduce debt quickly. Secured creditors were invited to complete dacion en pago transactions based on "mutually agreed upon terms," waiving all penalties and other charges. The plan explicitly provided that if the dacion en pago failed because secured creditors refused to agree, it would settle obligations to secured creditors with mortgaged properties at ASB selling prices.
• SEC Approval: The SEC Hearing Panel approved the rehabilitation plan on April 26, 2001. The SEC En Banc denied the bank's appeal with finality on June 10, 2003, finding that the dacion en pago was not compulsory and the panel did not overstep its lawful authority.

• Impairment of Contracts: Petitioner argued that the SEC order compelling the bank to surrender its present collateral and accept certain properties via dacion en pago violates the constitutional proscription against impairment of contracts and curtails its freedom to contract.
• Preference of Credits: Petitioner maintained that the value of the properties offered via dacion en pago was insufficient to cover the outstanding loans, rendering the bank's statutory preference as a secured creditor illusory.
• Accuracy of Financial Condition: Petitioner contended that the rehabilitation plan did not present a true, accurate, and independently verified picture of the respondents-debtors’ respective financial conditions.

• No Compulsion: Respondent countered that the dacion en pago arrangement was not compulsory, as it could only proceed upon the mutual agreement of the parties; secured creditors could reject the proposal.
• No Impairment: Respondent argued that the non-impairment clause is a limit on the exercise of legislative power, not on the quasi-judicial power exercised by the SEC in approving the rehabilitation plan.
• Viability of the Plan: Respondent asserted that the rehabilitation plan was viable, noting that 54% of obligations to creditor banks had already been paid within two years of the plan's approval.

• Impairment of Contracts: Whether the ASB rehabilitation plan violates the principles of mutuality of contracts and curtails a party’s freedom to contract.
• Viability of the Plan: Whether the ASB rehabilitation plan presents a true, accurate, and independently verified picture of respondents-debtors’ respective financial conditions.

• Impairment of Contracts: No violation of mutuality or freedom to contract exists. The dacion en pago provision in the rehabilitation plan is merely a proposal requiring the creditor's consent and is not compulsory. Because dacion en pago partakes of the nature of a contract of sale, it cannot be perfected without the consent of the parties. If the secured creditor refuses the dacion, the plan proposes settling obligations with mortgaged properties at selling prices; if the creditor still refuses, it may assert its rights in the liquidation and distribution of assets. Furthermore, the approval of the rehabilitation plan and the appointment of a receiver merely suspend actions for claims against the distressed corporation pursuant to Section 6(c) of P.D. 902-A; they do not set aside loan agreements or extinguish the secured creditor's preferred status, which remains enforceable upon liquidation.
• Viability of the Plan: Factual findings of quasi-judicial agencies like the SEC, which possess special technical knowledge over matters within their jurisdiction, are generally accorded respect and finality. The CA correctly observed that 54% of respondents' obligations to creditor banks had been paid within two years of the plan's approval, sufficiently laying to rest concerns about the plan's viability.

• Non-impairment of contracts in corporate rehabilitation — The approval of a corporate rehabilitation plan and the appointment of a rehabilitation receiver merely suspend actions for claims against the distressed corporation. They do not set aside loan agreements or impair contracts, as the enforcement of the secured creditor's preference is merely suspended. The secured creditor retains its preferred status over unsecured creditors and may enforce its lien upon liquidation if rehabilitation is no longer feasible.
• Nature of dacion en pago in rehabilitation plans — A dacion en pago proposal in a rehabilitation plan is not compulsory and requires the mutual consent of the secured creditor. Because dacion en pago partakes of the nature of a contract of sale, its essential elements—consent, object certain, and cause—must be present. If the secured creditor refuses the dacion, it may accept the mortgaged properties at selling prices or await liquidation to enforce its preference.

• "By that statutory provision, it is clear that the approval of the Rehabilitation Plan and the appointment of a rehabilitation receiver merely suspend the actions for claims against respondent corporations. Petitioner bank’s preferred status over the unsecured creditors relative to the mortgage liens is retained, but the enforcement of such preference is suspended."
• "We find no element of compulsion in the dacion en pago provision of the Rehabilitation Plan. It was not the only solution presented by the ASB to pay its creditors... Thus, if BPI does not find the dacion en pago modality acceptable, the ASB Group can propose to settle its debts at such amount as is equivalent to the selling price of the mortgaged properties. If BPI still refuses this option, it can assert its rights in the liquidation and distribution of the ASB Group’s assets."

• Metropolitan Bank & Trust Company v. ASB Holdings, Inc., G.R. No. 166197, February 27, 2007 — Controlling precedent. The Court ruled that the approval of the ASB rehabilitation plan did not impair contracts because the dacion en pago was not compulsory and the suspension of claims merely deferred the enforcement of the secured creditor's preference.
• Bank of the Philippine Islands v. Securities and Exchange Commission, G.R. No. 164641, December 20, 2007 — Followed. Reiterated that rehabilitation proceedings have equitable and rehabilitative purposes, the non-impairment clause limits legislative and not quasi-judicial power, and dacion en pago requires mutual consent.
• Rizal Commercial Banking Corporation v. Intermediate Appellate Court — Cited for the proposition that the suspension of claims under P.D. 902-A shall not prejudice or render ineffective the status of a secured creditor as compared to a totally unsecured creditor.
• Olaguer v. Domingo and Palele v. Court of Appeals — Followed. Applied the doctrine that courts will not interfere in matters addressed to the sound discretion of government agencies entrusted with the regulation of activities coming under their special technical knowledge and training.

• Section 6(c), Presidential Decree No. 902-A — Provides that upon appointment of a management committee, rehabilitation receiver, board or body, all actions for claims against corporations, partnerships or associations under management or receivership pending before any court, tribunal, board or body shall be suspended. Applied to justify that the approval of the rehabilitation plan and the appointment of a receiver merely suspend actions for claims, without obliterating the petitioner's status as a preferred secured creditor.

Consuelo Ynares-Santiago (Chairperson), Ma. Alicia Austria-Martinez, Minita V. Chico-Nazario, Antonio Eduardo B. Nachura