Yngson, Jr. vs. Philippine National Bank

A secured creditor may foreclose on its mortgage after the debtor corporation is placed under liquidation, the stay order having been lifted and rehabilitation terminated. The preference of credit for unpaid wages under the Labor Code is a priority in the distribution of the debtor’s general assets, not a lien on a specific property; thus, it cannot nullify a foreclosure sale conducted by a secured creditor enforcing a mortgage lien.

Between 1991 and 1993, ARCAM & Company, Inc., a sugar mill operator, obtained loans from Philippine National Bank secured by a Real Estate Mortgage over a 350,004-square meter parcel and a Chattel Mortgage over machinery, generators, and equipment. ARCAM defaulted, and PNB initiated extrajudicial foreclosure in November 1993. ARCAM immediately filed a petition for suspension of payments and rehabilitation with the Securities and Exchange Commission, which stayed the foreclosure. After six years of unsuccessful rehabilitation efforts, the SEC dissolved ARCAM, placed it under liquidation, and lifted the injunction.

• Loan and Security: ARCAM & Company, Inc., operating a sugar mill in Pampanga, obtained loans from PNB between 1991 and 1993. The obligations were secured by a Real Estate Mortgage over a 350,004-square meter lot (TCT No. 340592-R) and a Chattel Mortgage over various machinery, generators, field transportation, and heavy equipment.
• Default and Initial Foreclosure: ARCAM defaulted. On November 25, 1993, PNB initiated extrajudicial foreclosure, scheduling the auction of personal properties on December 8, 1993 and real properties on December 29, 1993.
• Rehabilitation Proceeding: On December 7, 1993, ARCAM filed a petition for suspension of payments, appointment of a management/rehabilitation committee, and approval of a rehabilitation plan with the SEC. The SEC issued a TRO and subsequently a writ of preliminary injunction staying the foreclosure. An interim management committee was created.
• Liquidation Order: After six years, no “white knight” investor infused capital. On February 9, 2000, the SEC found ARCAM could no longer be rehabilitated, ordered its dissolution and liquidation, dissolved the preliminary injunction, and appointed Atty. Manuel D. Yngson, Jr. as liquidator.
• Post-Liquidation Foreclosure: PNB revived the foreclosure. The liquidator sought another TRO/injunction from the SEC, but only a 72-hour TRO issued and lapsed. On July 28, 2000, PNB foreclosed extrajudicially, winning as highest bidder; certificates of sale were issued in its favor.
• Motion to Nullify: On November 16, 2000, the liquidator moved before the SEC to nullify the auction sale. He argued that liquidation continues the suspension of payments proceeding; thus, all actions against ARCAM, including foreclosure, remained suspended. He maintained that the mortgaged assets should be gathered in the liquidation and the proceeds shared with unsecured creditors, including workers with unpaid wages and possible tax liens.
• SEC Resolution: On January 4, 2005, the SEC denied the motion, ruling that PNB was not legally barred from foreclosing after the termination of rehabilitation and lifting of the injunction.

• Continuing Suspension of Claims: Petitioner argued that liquidation is a continuation of suspension of payments proceedings; the prohibition against enforcement of all claims, including foreclosure, persists during liquidation, and any payment of ARCAM’s obligations is proscribed unless authorized by the SEC.
• Concurrence and Preference of Credits: Petitioner maintained that the SEC should have applied the Civil Code rules on concurrence and preference of credits. The liquidator had determined that workers might hold legal liens for unpaid wages, and potential tax liens could exist; under Articles 2247, 2249, 2241, and 2242, these liens should be satisfied pro-rata with contractual liens, and tax liens under Article 2243 enjoy absolute priority over other preferred claims.
• Prior Determination by Liquidator: Petitioner insisted that foreclosure should not have been allowed without the liquidator first determining all liens over ARCAM’s properties, including workers’ claims and tax assessments, and without securing SEC permission for separate foreclosure.
• Jurisprudence and Bad Faith: Petitioner asserted that even if PNB were the sole lienholder, jurisprudence requires liquidator’s agreement or SEC prior approval before foreclosure. The foreclosure was attended by bad faith, entitling ARCAM to damages.

• No Prohibition Under Law: PNB countered that neither Presidential Decree No. 902-A nor any SEC rule prohibits a secured creditor from foreclosing its mortgage after the rehabilitation proceedings have been terminated and the debtor placed under liquidation.
• Right of Secured Creditor: PNB contended that as a secured creditor, it retained the right to enforce its lien and foreclose independently of the liquidation, and the proceeds need not be shared with unsecured creditors.

• Procedural Compliance: Whether the Court of Appeals correctly dismissed the petition for review for failure to attach material portions of the record as required by Rule 46, Section 3 of the 1997 Rules of Civil Procedure.
• Right to Foreclose During Liquidation: Whether PNB, as a secured creditor, could foreclose on the mortgaged properties of a corporation under liquidation without the knowledge and prior approval of the liquidator or the SEC.
• Preference of Credits and Workers’ Lien: Whether the SEC erred in failing to apply the rules on concurrence and preference of credits, specifically the alleged priority of workers’ wage claims and tax liens over PNB’s mortgage lien.

• Procedural Compliance: The CA’s dismissal was erroneous. The petition before it contained certified true copies of the assailed January 4, 2005 SEC Resolution and the February 9, 2000 Order appointing the liquidator. These documents sufficiently presented the material factual antecedents and legal findings, as the petition raised only legal questions with no factual controversy. The assailed resolution was the only material portion of the record needed. In the interest of speedy justice, the Supreme Court resolved the merits directly rather than remanding the case.
• Right to Foreclose During Liquidation: The SEC correctly held that PNB was not barred from foreclosing. Following Consuelo Metal Corporation v. Planters Development Bank, once rehabilitation is no longer feasible and liquidation is ordered, secured creditors enjoy preference over unsecured creditors. A creditor-mortgagee has the right to foreclose the mortgage over specific real property whether or not the debtor is under insolvency or liquidation proceedings; that right is merely suspended during rehabilitation and revives upon termination of the proceedings or lifting of the stay order. Here, the SEC had dissolved the injunction and ordered liquidation. This rule is consistent with Section 114 of the Financial Rehabilitation and Insolvency Act (R.A. No. 10142), which allows a secured creditor to maintain its lien and foreclose pursuant to applicable laws.
• Preference of Credits and Workers’ Lien: The invocation of the Labor Code’s preference for unpaid wages did not nullify the foreclosure. Citing Development Bank of the Philippines v. NLRC, a distinction exists between a preference of credit and a lien. A preference applies only to claims that do not attach to specific properties, while a lien creates a charge on a particular property. Article 110 of the Labor Code confers only a preference of credit—a priority in the distribution of the debtor’s general assets—not a lien. Consequently, this preference cannot defeat a secured creditor’s right to enforce a mortgage lien on specific assets through foreclosure.

• Right of Secured Creditor During Liquidation — A secured creditor may enforce its lien and foreclose on the mortgaged property after the debtor corporation has been placed under liquidation. The right to foreclose is merely suspended upon the appointment of a management/rehabilitation committee or the issuance of a stay order, and it revives upon the termination of the rehabilitation proceedings or the lifting of the stay order. A secured creditor need not obtain prior approval from the liquidator or the SEC to foreclose. (Consuelo Metal Corporation v. Planters Development Bank, G.R. No. 152580, June 26, 2008, 555 SCRA 465; echoed in Section 114, R.A. No. 10142.)
• Preference of Credit vs. Lien — A preference of credit under Article 110 of the Labor Code (workers’ unpaid wages) is not a lien on a specific property. It is merely a right to first preference in the discharge of the debtor’s general funds upon final distribution of assets in insolvency. It cannot be invoked to nullify a foreclosure sale conducted by a secured creditor enforcing a real or chattel mortgage lien on specific properties. (Development Bank of the Philippines v. NLRC, G.R. No. 86227, January 19, 1994, 229 SCRA 350.)

• “In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, we held that if rehabilitation is no longer feasible and the assets of the corporation are finally liquidated, secured creditors shall enjoy preference over unsecured creditors, subject only to the provisions of the Civil Code on concurrence and preference of credits. Creditors of secured obligations may pursue their security interest or lien, or they may choose to abandon the preference and prove their credits as ordinary claims.” (Quoting Consuelo Metal Corporation)
• “The creditor-mortgagee has the right to foreclose the mortgage over a specific real property whether or not the debtor-mortgagor is under insolvency or liquidation proceedings. The right to foreclose such mortgage is merely suspended upon the appointment of a management committee or rehabilitation receiver or upon the issuance of a stay order by the trial court. However, the creditor-mortgagee may exercise his right to foreclose the mortgage upon the termination of the rehabilitation proceedings or upon the lifting of the stay order.” (Consuelo Metal Corporation)
• “A distinction should be made between a preference of credit and a lien. A preference applies only to claims which do not attach to specific properties. A lien creates a charge on a particular property. The right of first preference as regards unpaid wages recognized by Article 110 of the Labor Code, does not constitute a lien on the property of the insolvent debtor in favor of workers. It is but a preference of credit in their favor, a preference in application.” (Development Bank of the Philippines v. NLRC)

• Consuelo Metal Corporation v. Planters Development Bank, G.R. No. 152580, June 26, 2008, 555 SCRA 465 — Followed as controlling precedent. It established that a secured creditor may foreclose its mortgage during liquidation once the stay order is lifted and rehabilitation proceedings have terminated.
• Development Bank of the Philippines v. NLRC, G.R. No. 86227, January 19, 1994, 229 SCRA 350 — Followed. Distinguished a preference of credit from a lien, holding that the Article 110 Labor Code preference for unpaid wages does not create a charge on specific property and cannot defeat a secured creditor’s foreclosure right.

• Section 5(d), Presidential Decree No. 902-A — Vested the SEC with jurisdiction over suspension of payments and rehabilitation; the Court interpreted its framework as suspending claims during rehabilitation but not impeding a secured creditor’s right to enforce its lien after liquidation.
• Section 114, Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act of 2010) — Although not yet in effect at the time of the foreclosure, was cited as reflective of the consistent rule that a liquidation order does not impair a secured creditor’s right to enforce its lien; the secured creditor may maintain its security and foreclose pursuant to applicable laws.
• Article 110, Labor Code — The workers’ preference for unpaid wages was interpreted as a mere preference in the distribution of the debtor’s general assets and not a lien on specific property, preventing it from defeating PNB’s mortgage.
• Articles 2241, 2242, 2243, 2247, 2248, 2249, Civil Code — On concurrence and preference of credits. Article 2248 provides that credits enjoying preference in relation to specific real property exclude all others to the extent of the property’s value, reinforcing the secured creditor’s right.
• Rule 46, Section 3, 1997 Rules of Civil Procedure — Requirement to attach material portions of the record; found satisfied by the annexation of the assailed SEC resolution and the order appointing the liquidator.

ANTONIO T. CARPIO (Senior Associate Justice, designated Acting Member per Special Order No. 1284), TERESITA J. LEONARDO-DE CASTRO (Associate Justice, Acting Chairperson per Special Order No. 1226), LUCAS P. BERSAMIN, MARIANO C. DEL CASTILLO. No separate concurring opinions.