RCBC vs. IAC

The suspension of all actions for claims against a distressed corporation under Section 6(c) of Presidential Decree No. 902-A takes effect only upon the appointment of a management committee, rehabilitation receiver, board, or body—not upon the mere filing of a petition for rehabilitation with the SEC—and secured creditors retain their preference over unsecured creditors, though enforcement of such preference is suspended during rehabilitation.

RCBC was a listed creditor of BF Homes, holding a real estate mortgage over certain properties of the latter. BF Homes filed a petition for rehabilitation and suspension of payments with the SEC, which eventually led to a dispute over whether RCBC could proceed with extrajudicial foreclosure of its mortgage before the SEC appointed a management committee. The controversy required the Court to determine the operative event that triggers the suspension of claims under Section 6(c) of P.D. No. 902-A and to reconcile conflicting division decisions on whether secured creditors stand on equal footing with unsecured creditors during corporate rehabilitation.

On September 28, 1984, BF Homes filed a Petition for Rehabilitation and Declaration of Suspension of Payments with the SEC (SEC Case No. 002693), listing RCBC among its creditors. On October 26, 1984, RCBC requested the Provincial Sheriff of Rizal to extrajudicially foreclose its real estate mortgage on certain properties of BF Homes. The sheriff issued a notice of extrajudicial foreclosure sale on October 29, 1984, scheduling the auction for November 29, 1984, with copies furnished to both BF Homes and RCBC.

On motion of BF Homes, the SEC issued a temporary restraining order on November 28, 1984, effective for twenty days, enjoining RCBC and the sheriff from proceeding with the public auction sale. The sale was rescheduled to January 29, 1985. On January 25, 1985, the SEC ordered the issuance of a writ of preliminary injunction upon RCBC's filing of a bond. RCBC did not file the bond until January 29, 1985, the very day of the auction sale, so no writ of preliminary injunction had been issued by the SEC as of that date. Presumably unaware of the filing of the bond, the sheriffs proceeded with the public auction sale on January 29, 1985, in which RCBC was the highest bidder. On February 5, 1985, BF Homes filed in the SEC a consolidated motion to annul the auction sale and to cite RCBC and the sheriff for contempt. RCBC opposed the motion. Because of the pending SEC proceedings, the sheriff withheld delivery to RCBC of a certificate of sale covering the auctioned properties. On February 13, 1985, the SEC belatedly issued a writ of preliminary injunction stopping the auction sale that had been conducted two weeks earlier. On March 18, 1985, the SEC appointed a Management Committee for BF Homes.

Despite the pending SEC proceedings, RCBC filed with the RTC, Br. 140, Rizal, on March 13, 1985, an action for mandamus (Civil Case No. 10042) against the provincial sheriff and his deputy to compel them to execute in its favor a certificate of sale. The sheriffs answered that they proceeded with the auction sale because no writ of preliminary injunction had been issued by the SEC as of January 29, 1985, but informed the SEC that they would suspend issuance of the certificate of sale. On RCBC's motion, the trial court rendered judgment on the pleadings on May 8, 1985, ordering the sheriffs to execute and deliver the certificate of sale to RCBC.

On June 4, 1985, BF Homes filed an original complaint with the Intermediate Appellate Court pursuant to Section 9 of B.P. 129 praying for annulment of the RTC judgment, premised on the grounds that the SEC had already assumed exclusive jurisdiction over the assets before RCBC sought foreclosure, and that extrinsic fraud attended the procurement of the judgment because BF Homes was not impleaded in the mandamus case. On April 8, 1986, the IAC annulled the RTC decision, dismissed the mandamus case, and ordered the Register of Deeds for Pasay City to suspend issuance of new land titles to RCBC pending resolution of SEC Case No. 002693. RCBC appealed to the Supreme Court on June 18, 1986. During the pendency of the case, the SEC issued an order on October 16, 1986 denying BF Homes' consolidated motion to annul the auction sale, and the Register of Deeds of Pasay City thereafter effected the transfer of title to RCBC and issued new titles in its name. RCBC then moved to dismiss the petition as moot, which the Court denied in its September 14, 1992 decision, nullifying the TCTs issued to RCBC and affirming the IAC. RCBC filed a motion for reconsideration, which was resolved in this Resolution dated December 9, 1999.

• Invalidity of SEC Injunctions: Petitioner contended that the TRO and writ of preliminary injunction issued by the SEC enjoining the foreclosure sale were issued without or in excess of jurisdiction because they violated the clear provisions of P.D. No. 902-A, and were therefore null and void.
• Right to Rely on Security: Petitioner argued that, being a mortgage creditor, it was entitled to rely solely on its security and to refrain from joining the unsecured creditors in the SEC rehabilitation proceedings, citing the Court's ruling in Philippine Commercial International Bank vs. Court of Appeals that an order of suspension of payments applies only to claims of unsecured creditors and cannot extend to creditors holding a mortgage, pledge, or lien on the property.

• Effectivity of Suspension of Claims: Whether the suspension of actions for claims against a distressed corporation under Section 6(c) of P.D. No. 902-A takes effect upon the filing of a petition for rehabilitation or only upon the appointment of a management committee, rehabilitation receiver, board, or body.
• Status of Secured Creditors: Whether secured creditors retain their preference over unsecured creditors during corporate rehabilitation, and whether enforcement of such preference is suspended upon appointment of a management committee.

• Effectivity of Suspension of Claims: No. The suspension takes effect only upon the appointment of a management committee, rehabilitation receiver, board, or body, pursuant to the clear language of Section 6(c) of P.D. No. 902-A. RCBC's foreclosure on October 26, 1984 was valid because no management committee had been appointed until March 18, 1985.
• Status of Secured Creditors: Yes, secured creditors retain their preference, but enforcement of such preference is suspended upon appointment of a management committee. In the event of liquidation, secured and preferred credits under the Civil Code shall have preference over unsecured ones.

• Effectivity of Suspension of Claims: The clear and categorical language of Section 6(c) of P.D. No. 902-A provides that suspension of actions for claims takes effect "upon appointment of a management committee, rehabilitation receiver, board or body." The 1992 decision's holding that the prohibition against foreclosure attaches as soon as a petition for rehabilitation is filed, while perhaps more logical and practical, was incongruent with the statute's plain language and amounted to judicial legislation. Where the law speaks in clear and categorical language, there is no occasion for interpretation—only application. A petition for rehabilitation does not always result in the appointment of a receiver or management committee; the SEC must first determine whether circumstances warranting such appointment exist under Section 6(d), such as imminent danger of dissipation of assets or paralization of business operations prejudicial to stockholders, parties-litigants, or the general public. When the SEC does not deem it necessary to appoint a receiver or create a management committee, suspension of actions for claims may not be ordered. Since RCBC foreclosed its mortgage on October 26, 1984, before the SEC appointed a management committee on March 18, 1985, the foreclosure was valid and the IAC's annulment of the RTC judgment was erroneous.

• Status of Secured Creditors: The 1992 majority opinion held that preferred creditors "stand on equal footing" with other creditors upon filing of a rehabilitation petition, relying on Alemar's Sibal & Sons, Inc. vs. Elbinias, BF Homes, Inc. vs. Court of Appeals, and Araneta vs. Court of Appeals, which had departed from the earlier ruling in PCIB vs. Court of Appeals that suspension applies only to unsecured creditors. The Court noted that of all the cases abandoning the PCIB ruling, only the present case satisfied the constitutional requirement under Section 4, Article VIII of the 1987 Constitution that no doctrine laid down by the Court may be modified or reversed except by the Court sitting en banc; the rest were division decisions. The Court therefore settled the issue en banc by laying down two rules: first, all claims—secured or unsecured—are suspended effective upon appointment of a management committee; second, secured creditors retain their preference, but enforcement is equally suspended during rehabilitation, with preference restored in the event of liquidation subject to the Civil Code on concurrence and preferences of credit. This harmonized the PCIB ruling on secured creditor preference with the Alemar's Sibal-BF Homes-Araneta line on suspension of all claims, giving the receiver an opportunity to rehabilitate the corporation while preserving the secured creditor's ultimate priority in distribution of assets.

• Verba Legis (Plain Meaning Rule) — When the law is clear and free from any doubt or ambiguity, there is no room for construction or interpretation; the court has no choice but to apply the law exactly as written. The Court applied this doctrine to Section 6(c) of P.D. No. 902-A, holding that the provision's explicit language—suspension "upon appointment of a management committee, rehabilitation receiver, board or body"—must be applied as stated, and that the 1992 decision's extension of the suspension to the filing of the rehabilitation petition constituted impermissible judicial legislation.

• Suspension of Claims in Corporate Rehabilitation — Under Section 6(c) of P.D. No. 902-A, the following rules govern: (1) All claims against corporations, partnerships, or associations pending before any court, tribunal, or board, without distinction as to whether a creditor is secured or unsecured, shall be suspended effective upon the appointment of a management committee, rehabilitation receiver, board, or body; (2) Secured creditors retain their preference over unsecured creditors, but enforcement of such preference is equally suspended upon appointment of a management committee, rehabilitation receiver, board, or body; in the event of liquidation, secured and preferred credits under the applicable provisions of the Civil Code shall have preference over unsecured ones. The suspension gives the receiver a chance to rehabilitate the corporation if rehabilitation is still feasible.

• "It is thus adequately clear that suspension of claims against a corporation under rehabilitation is counted or figured up only upon the appointment of a management committee or a rehabilitation receiver." — This passage states the ratio decidendi: the operative event triggering suspension under P.D. No. 902-A is the appointment of a management committee or receiver, not the filing of the rehabilitation petition.

• "The holding that suspension of actions for claims against a corporation under rehabilitation takes effect as soon as the application or a petition for rehabilitation is filed with the SEC — may, to some, be more logical and wise but unfortunately, such is incongruent with the clear language of the law. To insist on such ruling, no matter how practical and noble, would be to encroach upon legislative prerogative to define the wisdom of the law — plainly judicial legislation." — This passage articulates the Court's rejection of the 1992 decision's rationale and reaffirms the primacy of statutory text over practical considerations.

• "All claims against corporations, partnerships, or associations that are pending before any court, tribunal, or board, without distinction as to whether or not a creditor is secured or unsecured, shall be suspended effective upon the appointment of a management committee, rehabilitation receiver, board, or body in accordance with the provisions of Presidential Decree No. 902-A." — This is the first of the two rules of thumb laid down by the Court for the guidance of the Bench and Bar, establishing the unified rule on suspension of all claims upon appointment of a management committee.

• PCIB vs. Court of Appeals, 172 SCRA 436 (1989) — Initially held that suspension of payments applies only to unsecured creditors and cannot extend to secured creditors holding a mortgage, pledge, or lien. The Court partially reinstated this ruling insofar as secured creditor preference in liquidation is concerned, while affirming that enforcement of such preference is suspended during rehabilitation.
• Alemar's Sibal & Sons, Inc. vs. Elbinias, 186 SCRA 94 (1991) — Held that all creditors stand on equal footing under receivership. Followed in this resolution with the clarification that the equal-footing principle applies only upon appointment of a management committee and does not extinguish the secured creditor's ultimate preference in liquidation.
• BF Homes, Inc. vs. Court of Appeals, 190 SCRA 262 (1990) — Reiterated the equal-footing doctrine. Followed with the same clarification as Alemar's Sibal.
• Araneta vs. Court of Appeals, 211 SCRA 390 (1992) — Applied the equal-footing rule. Followed with the same clarification.
• BPI vs. Court of Appeals, 229 SCRA 223 (1994) — Stated that the PCIB doctrine had been abrogated by Alemar's Sibal, BF Homes, Araneta, and RCBC. The Court noted that all those cases were division decisions and that only the present case satisfied the constitutional requirement for en banc modification of doctrine.
• State Investment House, Inc. vs. Court of Appeals, 277 SCRA 209 (1997) — Cited for the rule that secured creditors enjoy preference in liquidation subject to the Civil Code on concurrence and preferences of credit.
• Cebu Portland Cement Co. vs. Municipality of Naga, 24 SCRA 708 (1968) — Cited for the principle that where the law speaks in clear and categorical language, there is no occasion for interpretation, only application.

• Section 6(c), Presidential Decree No. 902-A (as amended by PDs No. 1673, 1758, and 1799) — 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 accordingly. Applied as the controlling provision to hold that suspension of claims takes effect upon appointment, not upon filing of the rehabilitation petition.
• Section 6(d), Presidential Decree No. 902-A — Sets the conditions for appointment of a management committee: (1) imminent danger of dissipation, loss, wastage, or destruction of assets or other properties; or (2) paralization of business operations prejudicial to the interest of minority stockholders, parties-litigants, or the general public. Cited to show that appointment of a management committee is not automatic upon filing of a rehabilitation petition but requires a prior SEC determination that specified circumstances exist.
• Section 4, Article VIII, 1987 Constitution — Provides that no doctrine or principle of law laid down by the Court in a decision rendered en banc or in division may be modified or reversed except by the Court sitting en banc. Noted to emphasize that only the present case, among those departing from the PCIB ruling, satisfied this constitutional requirement, as the others were division decisions.

Davide, Jr., C.J., Bellosillo, Puno, Vitug, Kapunan, Mendoza, Quisumbing, Purisima, Pardo, Buena, Gonzaga-Reyes, Ynares-Santiago, and De Leon, Jr., JJ., concur. Panganiban, J., wrote a separate concurring opinion (not reproduced in the provided text).