G.R. No. 172192 December 23, 2008
China Banking Corporation, petitioner, vs. ASB Holdings, Inc., ASB Realty Corp., ASB Development Corp. (formerly Tiffany Tower Realty Corp.), ASB Land, Inc., ASB Finance, Inc., Makati Hope Christian School, Inc., Bel-Air Holdings Corp., Winchester Trading, Inc., VYL Development Corp., Gerick Holdings Corp., and Neighborhood Holdings, Inc., respondents.

FACTS

In 1999, respondent ASB Development Corporation obtained a P35,000,000.00 loan from petitioner China Banking Corporation, secured by a real estate mortgage over two lots in Caloocan City. In 2000, respondent ASB Realty Corporation, an affiliate, obtained a P265,000,000.00 loan from the same bank, secured by mortgages over properties in Makati City. The respondent corporations defaulted on their loan payments. On May 2, 2000, ASB Development Corporation and its affiliates filed a petition for rehabilitation with the Securities and Exchange Commission (SEC), citing total assets of P19.41 billion and total liabilities of P12.7 billion, and attributing their inability to pay to factors like a real estate market glut and decreased investor confidence. They sought suspension of actions against them and approval of a rehabilitation plan. The SEC issued a suspension order and appointed an interim receiver. A rehabilitation plan was submitted, proposing to pay secured creditors in full, including interest up to April 30, 2000, through dacion en pago, but noting that if secured creditors did not agree, obligations would be settled with mortgaged properties at ASB selling prices, without interest, penalties, and charges accruing after the suspension order. The SEC approved the plan on April 26, 2001. Petitioner bank appealed, arguing the plan impaired its contract by compelling it to accept different properties as payment, that the offered properties were insufficient, and that its preference as a secured creditor was rendered illusory. The SEC En Banc denied the appeal. The Court of Appeals dismissed the bank’s petition, ruling the plan did not violate mutuality of contracts as the dacion en pago required creditor agreement, and that the bank’s status as a secured creditor was not obliterated.

ISSUE

Whether the SEC-approved rehabilitation plan violates the constitutional proscription against impairment of contracts and undermines the preference of credits of a secured creditor.

RULING

The Supreme Court denied the petition and affirmed the Court of Appeals Decision. The Court held that the rehabilitation plan does not violate the principle of mutuality of contracts or impair contractual obligations. The plan’s terms recognize the secured creditors’ right to refuse the proposed dacion en pago arrangements; it cannot be implemented without the creditor’s consent. The approval of the plan and appointment of a receiver merely suspend actions and claims against the debtor but do not obliterate the petitioner’s status as a preferred secured creditor. The Court found no reason to disturb the findings of the lower tribunals regarding the valuation of assets and the plan’s viability, noting that majority of the obligations to creditor banks had been paid within two years of the plan’s approval. The state’s intrusion into corporate affairs through rehabilitation aims to promote equitable distribution of wealth and protect investments and the public.