JAPRL Development Corp. vs. Security Bank Corporation

Sureties who are solidarily liable with a debtor-corporation are excluded from the coverage of stay orders issued in corporate rehabilitation proceedings under Rule 4, Section 6(b) of the Interim Rules of Procedure on Corporate Rehabilitation. Pursuant to Article 1216 of the Civil Code, a creditor may proceed against any one of the solidary debtors or some or all of them simultaneously, and the pendency of rehabilitation proceedings against the principal debtor does not bar the creditor from separately enforcing the sureties' solidary liability.

JAPRL Development Corporation, engaged in steel fabrication and distribution, obtained a credit facility from Security Bank Corporation (SBC). To secure the obligation, JAPRL's Chairman and President executed a Continuing Suretyship Agreement (CSA) guaranteeing payment. When JAPRL defaulted and subsequently filed for corporate rehabilitation, SBC sought to enforce the suretyship agreement against the individual sureties despite stay orders issued in the rehabilitation proceedings, leading to a determination of whether the rehabilitation court's stay order extends to sureties solidarily liable with the debtor.

• JAPRL Development Corporation, a domestic corporation engaged in steel fabrication and distribution, applied for and was granted a P50,000,000.00 credit facility (Letter of Credit/Trust Receipt) by Security Bank Corporation, which took effect on July 15, 1996.
• On November 5, 2001, Peter Rafael C. Limson (Chairman) and Jose Uy Arollado (President) executed a Continuing Suretyship Agreement (CSA) in favor of SBC, guaranteeing the due and full payment of JAPRL's obligations under the credit facility.
• In 2003, JAPRL's financial adviser convened creditors including SBC to restructure JAPRL's loan obligations, submitting financial statements from 1998 to 2001.
• SBC discovered material inconsistencies between these financial statements and those previously submitted by JAPRL during the credit application, concluding that JAPRL committed misrepresentation.
• Paragraph 10(c) of the Credit Agreement provided that untrue representations constitute an event of default.
• On August 20, 2003, SBC sent a formal demand letter to JAPRL, Limson, and Arollado for the immediate payment of P43,926,021.41 representing outstanding obligations.
• Petitioners failed to comply with the demand, prompting SBC to file a complaint for sum of money with application for writ of preliminary attachment on September 1, 2003 before the RTC of Makati City.
• The CSA expressly provided that the sureties' liability is solidary and not contingent upon the pursuit by the Bank of remedies against the debtor or collaterals, and that the surety shall immediately become liable without need for notice or demand.
• During the rehabilitation proceedings, Limson and Arollado filed "Oppositions (Ad Cautelam)" and "Manifestations (Ad Cautelam)" before the Makati RTC, ostensibly to object to jurisdiction but substantially seeking the archiving of SBC's complaint pending the rehabilitation proceedings.

• Limson and Arollado claimed they were never served with summons, hence the Makati RTC failed to acquire jurisdiction over their persons.
• They argued that as sureties, they were covered by the Stay Orders issued in JAPRL's rehabilitation proceedings, which directed the stay of enforcement of all claims against the debtor and its sureties.
• They contended that under Rule 4, Section 6(b) of the Interim Rules on Corporate Rehabilitation, the stay order applies to sureties, and only those "not solidarily liable" with the debtor are excluded from its coverage.
• They argued that SBC could not unjustly enrich itself by recovering from both the debtor JAPRL under the rehabilitation plan and simultaneously from the sureties through the separate complaint.
• They maintained that as sureties, they could set up against the creditor all defenses pertaining to the principal debtor and had a right of reimbursement against JAPRL, hence proceedings against them should be suspended while the complaint against the debtor was archived.

• SBC argued that the Makati RTC acquired jurisdiction over Limson and Arollado because they voluntarily submitted themselves to the court's authority by filing pleadings seeking affirmative relief (archiving of the case).
• SBC contended that under Rule 4, Section 6(b) of the Interim Rules on Corporate Rehabilitation, sureties who are solidarily liable with the debtor are specifically excluded from the coverage of the stay order.
• SBC maintained that the property of the surety cannot be taken into custody by the rehabilitation receiver, and the surety can be sued separately to enforce his liability for the debts of the debtor.
• SBC asserted that under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously, and the demand against one does not bar subsequent actions against the others until the debt is fully collected.
• SBC argued that the rehabilitation court has no jurisdiction over the sureties who are not the financially-distressed corporation, and the sureties' liability is immediate and not contingent upon the rehabilitation proceedings.

• Procedural:
  • Whether the Regional Trial Court of Makati acquired jurisdiction over the persons of Limson and Arollado despite the alleged lack of service of summons.
• Substantive Issues:
  • Whether sureties who are solidarily liable with the debtor-corporation are covered by the stay order issued in corporate rehabilitation proceedings under Rule 4, Section 6(b) of the Interim Rules of Procedure on Corporate Rehabilitation.
  • Whether the creditor may proceed separately and simultaneously against the sureties while rehabilitation proceedings are pending against the principal debtor.

• Procedural: The Supreme Court held that the Makati RTC validly acquired jurisdiction over Limson and Arollado. Although their pleadings contained prefatory statements that they had not received summons, they proceeded to exhaustively discuss defenses on the merits of SBC's claim against them as sureties, thereby voluntarily submitting themselves to the court's jurisdiction. Under Rule 14, Section 20 of the Rules of Court, a defendant's voluntary appearance in the action is equivalent to service of summons. An appearance made precisely to object to jurisdiction must be strictly limited to that purpose; once the defendant seeks affirmative relief or raises substantive defenses, the appearance becomes voluntary submission to jurisdiction.
• Substantive: The Court ruled that sureties who are solidarily liable with the debtor are not covered by the stay order in corporate rehabilitation proceedings. Rule 4, Section 6(b) of the Interim Rules of Procedure on Corporate Rehabilitation provides that the stay order stays enforcement of claims against the debtor, its guarantors, and sureties "not solidarily liable" with the debtor. By negative inference, sureties who are solidarily liable are excluded from the stay and may be proceeded against independently. The Court cited Article 1216 of the Civil Code, which allows the creditor to proceed against any one of the solidary debtors or some or all of them simultaneously. The rehabilitation court has no jurisdiction over the sureties who are not the financially-distressed corporation that may be restored to viability. The CSA expressly provided that the sureties' liability is solidary, immediate, and not contingent upon the pursuit of remedies against the principal debtor.

• Solidary Liability of Sureties in Rehabilitation Proceedings — Sureties who bind themselves solidarily with the principal debtor may be sued separately and simultaneously with the principal debtor despite the pendency of rehabilitation proceedings against the latter. The stay order under corporate rehabilitation rules applies only to the debtor and sureties not solidarily liable, excluding those whose liability is solidary.
• Voluntary Appearance as Equivalent to Service of Summons — Under Rule 14, Section 20 of the Rules of Court, a defendant's voluntary appearance in an action is equivalent to service of summons. Any form of appearance seeking affirmative relief constitutes voluntary submission to jurisdiction, except where the appearance is strictly and solely for the purpose of objecting to the court's jurisdiction over the person.
• Immediate Liability of Sureties — Sureties may be liable for future debts or amounts not yet known at the time the suretyship is executed, and their liability becomes immediate upon default by the principal debtor without need for notice or demand, unless otherwise stipulated.

• "The property of the surety cannot be taken into custody by the rehabilitation receiver (SEC) and said surety can be sued separately to enforce his liability as surety for the debts or obligations of the debtor."
• "The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against any one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected."
• "Limson and Arollado, as sureties, whose liability is solidary cannot, therefore, claim protection from the rehabilitation court, they not being the financially-distressed corporation that may be restored, not to mention that the rehabilitation court has no jurisdiction over them."

• Banco de Oro-EPCI, Inc. v. JAPRL Development Corporation — Cited as controlling precedent establishing that a creditor can demand payment from a surety who is solidarily liable with the corporation seeking rehabilitation, as such surety is not included in the list of stayed claims under the Interim Rules.
• Philippine Blooming Mills v. Court of Appeals — Cited regarding the principle that suspension of proceedings applies to the corporation undergoing rehabilitation but does not automatically extend to solidary sureties.
• French Oil Mill Machinery Co., Inc. v. Court of Appeals — Cited for the rule that when a defendant's appearance is made precisely to object to the jurisdiction of the court over his person, it cannot be considered as appearance in court.
• Paramount Insurance Corporation v. Court of Appeals — Cited for the principle that it is the obligation of the sureties to see to it that the debt is fully paid.

• Rule 4, Section 6(b) of the Interim Rules of Procedure on Corporate Rehabilitation — Provides that a stay order stays enforcement of claims against the debtor, its guarantors, and sureties not solidarily liable with the debtor, thereby excluding solidary sureties from the stay's coverage.
• Article 1216 of the New Civil Code — Allows the creditor to proceed against any one of the solidary debtors or some or all of them simultaneously.
• Article 1222 of the New Civil Code — Cited by petitioners regarding a surety's right to avail of defenses derived from the nature of the obligation, but held insufficient to bar separate action against solidary sureties.
• Rule 14, Section 20 of the Rules of Court — Provides that the defendant's voluntary appearance in the action shall be equivalent to service of summons.