Kaizen Builders, Inc. vs. Court of Appeals

A Commencement Order issued under RA No. 10142 ipso jure suspends all actions for the enforcement of claims against the distressed corporation at whatever stage they may be, including pending appeals, unless the case falls under the expressly enumerated exceptions in Section 18 of the Act; any decision rendered in violation of the stay order is void ab initio.

Ofelia Ursais purchased a house and lot from Kaizen Builders, Inc. (formerly Megalopolis Properties, Inc.) in 2004. The parties subsequently entered into a buy-back and swap arrangement, followed by an investment agreement, and eventually a rescission agreement that left Kaizen Builders owing Ofelia unpaid amounts. Cecille F. Apostol was Kaizen Builders' chief executive officer and was held solidarily liable with the corporation. The dispute arose from Kaizen Builders' failure to remit monthly interest and pay the remaining balance under the rescission agreement, prompting Ofelia to file a complaint for sum of money.

In 2004, Ofelia Ursais purchased from Kaizen Builders, Inc. (formerly Megalopolis Properties, Inc.) a house and lot situated in White Pine Street, Camp 7, Baguio City. In 2007, the parties executed a contract to sell where Kaizen Builders bought back from Ofelia the White Pine property for ₱2,700,000.00 and swapped it with another house and lot in Kingstone Ville, Camp 1, Baguio City. The parties deducted from the price the ₱300,000.00 unpaid balance of Ofelia on the White Pine property and the ₱2,200,000.00 value of the Kingstone Ville property, leaving a remaining ₱200,000.00 to be paid in cash. The parties later replaced the contract to sell with another agreement under which Ofelia invested the ₱2,200,000.00 in Kaizen Builders' development of the Kingstone Ville project.

In 2008, the parties rescinded the investment agreement. Ofelia received ₱320,000.00 from Kaizen Builders, and the parties stipulated that ₱380,000.00 would be paid on installment basis while the remaining ₱1,500,000.00 would bear interest of 1.5% or ₱22,500.00 per month. Despite repeated demands, Kaizen Builders stopped remitting the monthly interest beginning November 2009 and refused to deliver the ₱380,000.00.

In 2011, Ofelia filed a complaint for sum of money against Kaizen Builders and its chief executive officer, Cecille F. Apostol, before the RTC of Baguio City, docketed as Civil Case No. 7426-R. On May 8, 2013, the RTC rendered judgment holding Kaizen Builders and Cecille solidarily liable to pay Ofelia ₱1,500,000.00 with legal interest from June 17, 2009, and ₱178,750.00 representing unpaid interest from October 2009 to June 2010, with legal interest from June 17, 2010. Ofelia sought partial reconsideration, claiming the RTC failed to include the ₱380,000.00 and the payment of monthly interest up to the present. Ofelia subsequently died and was substituted by her heirs. On November 15, 2013, the RTC granted the motion and amended its Decision to include the ₱380,000.00 with legal interest from July 25, 2008, and adjusted the interest computation on the ₱1,500,000.00 to commence from June 17, 2010.

Aggrieved, Kaizen Builders and Cecille elevated the case to the CA. Meanwhile, Kaizen Builders filed a petition for corporate rehabilitation before the special commercial court, docketed as Special Proceedings Case No. 2466-R. On August 12, 2015, the rehabilitation court issued a Commencement Order consolidating all legal proceedings by and against Kaizen Builders and suspending all actions for the enforcement of claims against it. Kaizen Builders and Cecille moved to consolidate the appealed case with the rehabilitation proceedings, but on December 8, 2015, the CA denied the motion, explaining that the appeal would not affect the rehabilitation case since the two proceedings involved different parties, issues, and reliefs. After an unsuccessful reconsideration, Kaizen Builders and Cecille filed a Petition for Certiorari and Prohibition under Rule 65 before the Supreme Court, docketed as G.R. No. 226894. On February 14, 2018, the CA resolved to hold the proceedings in abeyance, but that resolution was subsequently recalled. On October 1, 2018, the CA rendered a Decision on the merits, partially granting the appeal and affirming the RTC rulings with modification as to interest rates and computation. Dissatisfied, Kaizen Builders and Cecille filed a Petition for Review on Certiorari under Rule 45, docketed as G.R. No. 247647.

• Grave Abuse of Discretion (G.R. No. 226894): Petitioners argued that the CA acted with grave abuse of discretion in denying the motion to consolidate CA-G.R. CV No. 102330 with Special Proceedings Case No. 2466-R or at least suspending the decision on the merits of the appeal pending the rehabilitation case, and prayed that the proceedings before the CA be suspended within the duration of the rehabilitation case.
• Reversible Error on Liability (G.R. No. 247647): Petitioners argued that the CA committed reversible error in holding them liable to pay Ofelia's heirs.

• Suspension of Proceedings: Whether the CA committed grave abuse of discretion in proceeding with and resolving the appeal despite the issuance of a Commencement Order by the rehabilitation court suspending all actions for the enforcement of claims against Kaizen Builders.
• Validity of CA Decision: Whether the CA's Resolution dated December 8, 2015 and Decision dated October 1, 2018 are void for having been rendered in violation of the mandatory stay/suspension order under RA No. 10142.
• Liability on the Merits (G.R. No. 247647): Whether the CA committed reversible error in holding Kaizen Builders and Cecille liable to pay the heirs of Ofelia Ursais.

• Suspension of Proceedings: Yes. The CA committed grave abuse of discretion in proceeding with the appeal despite the Commencement Order, which ipso jure suspended all actions for claims against the distressed corporation at whatever stage they may be, the appeal not falling under any of the exceptions in Section 18 of RA No. 10142.
• Validity of CA Decision: Yes. The CA's Resolution and Decision are void ab initio, having been rendered in violation of a mandatory law, pursuant to the doctrine that acts executed against mandatory or prohibitory laws are void.
• Liability on the Merits (G.R. No. 247647): Dismissed. With the CA Decision declared void, there is no valid judgment for the Court to review, rendering the petition for review moot.

• Suspension of Proceedings: RA No. 10142 statutorily defined rehabilitation as the restoration of the debtor to a condition of successful operation and solvency. Sections 16 and 17 of the Act authorize the rehabilitation court to issue a Commencement Order that includes a Stay or Suspension Order, which suspends all actions or proceedings for the enforcement of claims against the debtor and consolidates the resolution of all legal proceedings by and against it. The Act makes no distinction as to the claims suspended; Section 4(c) provides an all-encompassing definition of "claim" covering all demands of whatever nature or character against the debtor or its property, whether liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed. The indiscriminate suspension of actions is intended to expedite rehabilitation and enable the rehabilitation receiver to exercise its powers free from judicial or extrajudicial interference. The date when the claim arose or when the action was filed has no bearing on whether the action is suspended; the stay order embraces all phases of the suit. The only exceptions are those expressly enumerated in Section 18, none of which applies to the CA appeal. The appeal emanated from a money claim against a distressed corporation and was pending at the time the Commencement Order was issued on August 12, 2015. The CA should have abstained from resolving the appeal.

• Validity of CA Decision: Acts executed against the provisions of mandatory or prohibitory laws are void. In Lingkod Manggagawa sa Rubberworld, Adidas-Anglo vs. Rubberworld (Phils.) Inc., the Court held that decisions rendered by labor tribunals in violation of a SEC suspension order were void ab initio and could not attain final and executory status. In La Savoie Development Corp. vs. Buenavista Properties, Inc., the Court applied the same rule under the Interim Rules, holding that a decision rendered in violation of a stay order did not attain finality. Applying these precedents, the CA's Resolution dated December 8, 2015 and Decision dated October 1, 2018 were rendered in defiance of the effects of a Commencement Order and against the provisions of a mandatory law, and are therefore void. The CA disregarded the state policy under Section 2 of RA No. 10142 to encourage debtors and creditors to collectively and realistically resolve competing claims and property rights.

• Liability on the Merits (G.R. No. 247647): With the findings warranting the grant of the petition for certiorari and prohibition in G.R. No. 226894, there is no valid CA judgment for the Court to review in G.R. No. 247647. The petition for review was accordingly dismissed for lack of a valid judgment to review.

• Ipso Jure Suspension Under a Commencement Order — A Commencement Order issued under RA No. 10142 ipso jure suspends all actions for the enforcement of claims against the distressed corporation at whatever stage the proceedings may be. The suspension applies indiscriminately to all claims as defined in Section 4(c) of the Act, regardless of when the claim arose or when the action was filed. The stay order embraces all phases of the suit. The only exceptions are those expressly enumerated in Section 18 of RA No. 10142: (a) cases already pending appeal in the Supreme Court as of commencement date; (b) cases pending at specialized courts or quasi-judicial agencies capable of resolving the claim more quickly, fairly, and efficiently, subject to the court's discretion; (c) enforcement of claims against sureties and other persons solidarily liable with the debtor, and third-party or accommodation mortgagors, unless the property is necessary for rehabilitation; (d) actions of customers or clients of securities market participants; (e) actions of licensed brokers or dealers to sell pledged securities; (f) clearing and settlement of financial transactions through clearing agencies; and (g) criminal actions against the individual debtor or its officers. The Court applied this doctrine by holding that the CA appeal, being a money claim against Kaizen Builders, fell within the scope of the stay order and did not qualify under any exception.

• Void Judgments Rendered in Violation of Mandatory Laws — Acts executed against the provisions of mandatory or prohibitory laws are void, except when the law itself authorizes their validity. A decision rendered in violation of a stay or suspension order is void ab initio, does not attain finality, and is regarded as a nullity — as if no judgment existed at all. No rights are divested by it, nor obtained from it. All proceedings upon which the void judgment is founded are equally worthless. The Court applied this doctrine to nullify the CA's Resolution and Decision, which were rendered in defiance of the Commencement Order's mandatory suspension effects.

• "The Commencement Order ipso jure suspended the proceedings in the CA at whatever stage it may be, considering that the appeal emanated from a money claim against a distressed corporation which is deemed stayed pending the rehabilitation case." — This passage articulates the ratio decidendi: the automatic and all-encompassing nature of the suspension upon issuance of a Commencement Order, regardless of the stage of the proceedings.

• "Acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity. The Labor Arbiter's decision in this case is void ab initio, and therefore, non-existent. A void judgment is in effect no judgment at all. No rights are divested by it nor obtained from it." — This quotation, adopted from Lingkod Manggagawa sa Rubberworld, states the canonical formulation of the void judgment doctrine as applied to decisions rendered in violation of stay orders, and is the doctrinal basis for nullifying the CA's rulings.

• "The indiscriminate suspension of actions for claims is intended to expedite the rehabilitation of the distressed corporation. It enables the management committee or the rehabilitation receiver to effectively exercise its/his powers free from any judicial or extrajudicial interference that might unduly hinder or prevent the rescue of the debtor company." — This passage explains the policy rationale behind the mandatory suspension of all claims, emphasizing the functional purpose of the stay order in the rehabilitation framework.

• Lingkod Manggagawa sa Rubberworld, Adidas-Anglo vs. Rubberworld (Phils.) Inc., 542 Phil. 203 (2007) — Controlling precedent followed. The Court held that decisions rendered by labor tribunals in violation of a SEC suspension order were void ab initio and could not attain final and executory status. This case established the principle that proceedings undertaken in violation of a mandatory stay order are null and void, which the Court applied to nullify the CA's Resolution and Decision.

• La Savoie Development Corp. vs. Buenavista Properties, Inc., G.R. Nos. 200934-35, June 19, 2019 — Controlling precedent followed. The Court held that a decision rendered in violation of a stay order did not attain finality, and that the rehabilitation court could exercise its cram-down power to approve a rehabilitation plan over the opposition of a creditor since the prior decision was void. This case reinforced the void judgment doctrine in the context of corporate rehabilitation stay orders.

• Castillo vs. Uniwide Warehouse Club, Inc. and/or Gow, 634 Phil. 41 (2010) — Cited for the proposition that an essential function of corporate rehabilitation is the mechanism of suspension of all actions and claims against the distressed corporation, and that allowing other actions to continue would burden the management committee or rehabilitation receiver.

• Malayan Insurance Company, Inc. vs. Victorias Milling Company, Inc., 603 Phil. 791 (2009) — Cited for the principle that the date when the claim arose or when the action was filed has no bearing on whether the action or claim is suspended, and that the stay order embraces all phases of the suit.

• Section 4(c), RA No. 10142 (Financial Rehabilitation and Insolvency Act of 2010) — Defines "claim" as all claims or demands of whatever nature or character against the debtor or its property, whether for money or otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including government claims and claims against directors and officers arising from acts done in discharge of their functions. Applied to show that the Act makes no distinction as to the claims suspended by a Commencement Order.

• Section 16, RA No. 10142 — Authorizes the rehabilitation court to issue a Commencement Order that includes a Stay or Suspension Order suspending all actions or proceedings for the enforcement of claims against the debtor. Applied as the statutory basis for the suspension of the CA proceedings.

• Section 17, RA No. 10142 — Enumerates the effects of a Commencement Order, including the consolidation of the resolution of all legal proceedings by and against the debtor to the court. Applied to establish that the CA proceedings should have been consolidated with and suspended by the rehabilitation proceedings.

• Section 18, RA No. 10142 — Enumerates the exceptions to the Stay or Suspension Order, including cases already pending appeal in the Supreme Court as of commencement date, cases at specialized courts, enforcement of claims against sureties and solidarily liable persons, and criminal actions. Applied to determine that the CA appeal did not fall under any exception.

• Section 2, RA No. 10142 — States the policy of the law to encourage debtors and their creditors to collectively and realistically resolve and adjust competing claims and property rights. Cited to underscore the state policy disregarded by the CA in proceeding with the appeal.

• A.M. No. 12-12-11-SC (2013 Financial Rehabilitation Rules of Procedure), Rule 2, Sections 12 and 14 — Echoed the manner of filing creditors' claims before the rehabilitation court, requiring verified notices of claim to be filed not later than five days before the initial hearing date. Cited to show that creditors are not without remedy, as they may ventilate their claims before the rehabilitation court.

Peralta, C.J. (Chairperson), Caguioa, J. Reyes, Jr., and Lazaro-Javier, JJ., concurred.