Tag: Non-Performing Loans

Defective Summons Undermines Trustee Appointment: Jurisdictional Limits in Loan Assignments

In Diversified Plastic Film System, Inc. v. Philippine Investment One (SPV-AMC), Inc., the Supreme Court reversed the appointment of Philippine Investment One (PI-One) as trustee, emphasizing the critical importance of proper service of summons for the court to gain jurisdiction over a defendant. The Court held that because Diversified Plastic Film System, Inc. (Diversified) was not properly served a summons, the trial court lacked jurisdiction over Diversified, rendering the trustee appointment invalid. This ruling underscores that procedural missteps can invalidate legal proceedings, even in cases involving complex financial transactions.

Loan Assignments and Trustee Appointments: Did the Court Get It Right?

This case arose from a loan initially granted by Development Bank of the Philippines (DBP) to All Asia Capital and Trust Corporation (All Asia), which All Asia re-lent to Diversified. As security, Diversified executed a Mortgage Trust Indenture (MTI) designating All Asia as trustee. Later, All Asia assigned its rights in the MTI to DBP, who then assigned a portion of the loan to PI-One. When Diversified failed to pay, PI-One sought to foreclose on Diversified’s properties. Diversified then challenged PI-One’s authority to act as trustee, leading to a petition by PI-One to be formally appointed as trustee by the court. The Regional Trial Court (RTC) granted PI-One’s petition, a decision affirmed by the Court of Appeals (CA). The Supreme Court, however, reversed these decisions, focusing primarily on the issue of jurisdiction over Diversified.

The Supreme Court addressed two primary issues: the RTC’s jurisdiction to appoint a trustee and whether the RTC properly acquired jurisdiction over Diversified. Regarding the first issue, the Court agreed with the lower courts that the RTC had the authority to hear PI-One’s petition. Section 7.08 of the MTI allowed any lender to apply to the court for the appointment of a trustee if the borrower and majority lenders failed to do so within two months of a vacancy. Furthermore, because the petition didn’t pertain to a specific sum of money or real property, the Court categorized it as one incapable of pecuniary estimation, placing it within the RTC’s jurisdiction under Section 19 of Batas Pambansa Blg. 129.

However, the Court diverged from the lower courts on the issue of personal jurisdiction over Diversified. The Court found that the service of summons was defective because it was served on Diversified’s receiving officer, not on any of the individuals explicitly listed in Section 11, Rule 14 of the Rules of Court. This section specifies that service must be made on the president, managing partner, general manager, corporate secretary, treasurer, or in-house counsel of the corporation. The Court cited DOLE Philippines, Inc. (Tropifresh Div.) v. Judge Quilala, emphasizing that the enumeration in Section 11 is exclusive, following the principle of expressio unios est exclusio alterius. Thus, the improper service meant that the RTC never gained jurisdiction over Diversified.

Building on this principle, the Court addressed the argument that Diversified’s filing of an Answer Ad Cautelam and Amended Answer Ad Cautelam constituted voluntary submission to the RTC’s jurisdiction. While voluntary appearance generally confers jurisdiction, the Court clarified that a special appearance to challenge jurisdiction is an exception to this rule. Citing Interlink Movie Houses, Inc. v. Court of Appeals, the Court reiterated that a party must unequivocally object to the court’s jurisdiction over their person; otherwise, they are deemed to have submitted to it. Diversified consistently challenged the RTC’s jurisdiction, preserving their objection. It was emphasized that even on appeal before the CA, and in the instant petition, Diversified continued to challenge the RTC’s jurisdiction over its person.

Moreover, Diversified aptly explained that filing the Answer Ad Cautelam was a preemptive measure. The summons warned that failure to answer would result in a default judgment. Consequently, Diversified filed the answer while expressly reserving its jurisdictional objections. Considering these circumstances, the Court concluded that Diversified had met the requirements for a special appearance and that the RTC lacked personal jurisdiction, thus invalidating all proceedings.

In addition to the jurisdictional issues, the Court also addressed the validity of the assignment from DBP to PI-One, arguing that it violated Section 12 of R.A. No. 9182, also known as the Special Purpose Vehicle Act of 2002. This section requires prior written notice to the borrower and all those with holding prior encumbrances, as well as a prior certification of eligibility, for the transfer of non-performing loans to an SPV. The court in Asset Pool A (SPV-AMC), Inc. v. Court of Appeals stated that, “x x x As the notice requirement under Section 12 of Article III of the SPV law was not amended, the same was still necessary to effect transfer of Non-Performing Loans to an SPV, like petitioner, to be effective.” The Court found no evidence of compliance with these requirements. The letter informing Diversified of the assignment was insufficient because it was executed on the same date as the Deed of Assignment and there was no proof of prior notice or a certificate of eligibility. Therefore, the Court concluded that the assignment was invalid, meaning PI-One did not acquire any rights under the MTI.

Even assuming a valid assignment, the Court stated that PI-One could not automatically be considered the trustee under the MTI. The CA had argued that Section 13 of R.A. No. 9182 meant that any transfer of assets followed the rules on subrogation and assignment of credits under the New Civil Code, where the assignee is subrogated to the assignor’s rights and obligations. This means the assignee is bound by the same conditions as the assignor. The Court has said in Casabuena v. Court of Appeals that, “an assignee cannot acquire a greater right than that pertaining to the assignor. At most, an assignee can only acquire rights duplicating those which his assignor is entitled by law to exercise.”

The MTI required that the trustee be an institution duly authorized to engage in the trust business in Metro Manila. PI-One was not in the trust business and could not comply with this requirement. Thus, PI-One was disqualified from serving as trustee, regardless of any assignment. The Supreme Court, considering all these factors, ultimately ruled that the CA erred in affirming the RTC’s appointment of PI-One as trustee. The court stated that all told, the Court finds that the CA erred when it affirmed the RTC’s appointment of PI-One as the trustee under the MTI.

FAQs

What was the key issue in this case?	The key issue was whether the lower court acquired jurisdiction over Diversified Plastic Film System, Inc. given the improper service of summons. Additionally, the court examined the validity of the loan assignment and PI-One’s qualifications to act as trustee.
What does “service of summons” mean?	Service of summons is the official notification to a defendant that a legal action has been filed against them. It is a crucial step in ensuring due process and allowing the defendant an opportunity to respond.
Why was the service of summons considered improper in this case?	The service was improper because the summons was served on the receiving officer of Diversified, not on any of the specific individuals listed in Rule 14, Section 11 of the Rules of Court, such as the president or general manager.
What is the effect of improper service of summons?	Improper service of summons generally means the court does not acquire jurisdiction over the defendant. Any judgment or order issued against the defendant in such a case may be considered null and void.
What is a Mortgage Trust Indenture (MTI)?	An MTI is a legal document that establishes a mortgage on properties as security for a loan, designating a trustee to act on behalf of the lenders. It outlines the terms and conditions of the mortgage and the rights and responsibilities of all parties involved.
What is the significance of Section 12 of R.A. 9182 (SPV Act)?	Section 12 of the SPV Act sets out the requirements for transferring non-performing loans to a Special Purpose Vehicle (SPV), including prior notice to the borrower and certification of eligibility. Non-compliance can invalidate the transfer.
What qualifications are required to be a trustee under the MTI in this case?	Under the MTI, the trustee must be an institution duly authorized to engage in the trust business in Metro Manila, Philippines. PI-One was not engaged in the trust business, which disqualified it.
What was the main basis for the Supreme Court’s decision?	The Supreme Court primarily based its decision on the lack of personal jurisdiction over Diversified due to the improper service of summons, rendering the lower court’s actions invalid.

The Supreme Court’s decision underscores the importance of adhering to procedural rules, especially regarding the service of summons, as it directly affects a court’s jurisdiction over a defendant. Furthermore, the case serves as a reminder of the requirements under the Special Purpose Vehicle Act and the limitations on rights acquired through assignment, ensuring that assignees cannot exceed the rights and obligations of the original assignors. These considerations are crucial in upholding fairness and legality in complex financial transactions.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Diversified Plastic Film System, Inc. v. Philippine Investment One (SPV-AMC), Inc., G.R. No. 236924, March 29, 2023

March 29, 2023

Notice Requirements in the Transfer of Non-Performing Loans: Protecting Borrowers’ Rights

The Supreme Court ruled that when a financial institution transfers non-performing loans (NPLs) to a Special Purpose Vehicle (SPV), the financial institution, not the SPV, bears the responsibility of notifying borrowers about the transfer. This decision reinforces the importance of prior notice to borrowers, ensuring they are informed and can explore options for restructuring their loans. It clarifies the obligations of financial institutions in these transactions, protecting the rights of borrowers facing potential changes in their loan terms and creditors.

The Case of Assigned Debt: Who Is Responsible for Informing the Borrower?

This case revolves around a complaint for a sum of money filed by Allied Bank against TJR Industrial Corporation and its officers (private respondents) due to unpaid loan obligations. Allied Bank subsequently assigned its rights, title, and interest over the non-performing loans (NPLs), including the promissory notes in question, to Grandholdings Investments (SPV-AMC), Inc. (petitioner), a Special Purpose Vehicle (SPV) under Republic Act (R.A.) No. 9182, also known as “The Special Purpose Vehicle Act of 2002”. The central legal issue is whether the SPV, as the assignee of the NPLs, is required to provide prior notice to the borrowers before the transfer of the loans can take effect.

The Court of Appeals (CA) denied the petitioner’s motion for substitution, arguing that the petitioner failed to prove compliance with the notice requirement under Section 12(a) of R.A. No. 9182. This provision mandates that borrowers must be notified before the transfer of NPLs to an SPV can take effect. The petitioner contended that it had substantially complied with the requirements by securing the approval of the Bangko Sentral ng Pilipinas (BSP) for the transfer and by sending a letter-notice to the private respondents informing them of the sale or transfer of the NPLs.

The Supreme Court (SC) disagreed with the CA’s decision, holding that the responsibility of providing prior notice to the borrowers rests with the financial institution (FI) that is transferring the NPLs, in this case, Allied Bank, and not the SPV. According to the Court, Section 12(a) of R.A. No. 9182 explicitly imposes the duty to inform borrowers about the transfer of NPLs on the financial institution concerned. The Court emphasized that this duty is a condition that the transferring financial institution must satisfy for the deed of assignment to fully produce legal effects. It is Allied Bank that carries the burden of proving that its borrowers have been acquainted with the terms of the deed of assignment, as well as the legal effect of the transfer of the NPLs.

The Court looked into whether Allied Bank provided prior notice to its borrowers about the transfer of the NPLs. The SC found that the existence of the certificate of eligibility in favor of Allied Bank supports an affirmative answer. A certificate of eligibility is issued to banks and non-bank financial institutions performing quasi-banking functions (NBQBs) by the appropriate regulatory authority having jurisdiction over their operations as to the eligibility of their NPLs. Before a bank or NBQB can transfer its NPAs to an SPV, it must file an application for eligibility of said NPAs in accordance with SPV Rule 12 of “The Implementing Rules and Regulations of the Special Purpose Vehicle (SPV) Act of 2002.”

The SC gave weight to the procedure for the Transfer of Assets to the SPV:

SPV Rule 12- Notice and Manner of Transfer of Assets

x x x x

(b) Procedures on the Transfer of Assets to the SPV

An FI that intends to transfer its NPAs to an SPV shall file an application for eligibility of said NPAs, in the prescribed format, with the Appropriate Regulatory Authority having jurisdiction over its operations. Said application shall be filed for each transfer of asset/s.

The application by the FI for eligibility of its NPAs proposed to be transferred to an SPV shall be accompanied by a certification from the FI that:

(1)

the assets to be sold/transferred are NPAs as defined under the SPV Act of 2002;

(2)

the proposed sale/transfer of said NPAs is under a True Sale;

(3)

the notification requirement to the borrowers has been complied with; and

(4)

the maximum 90-day period for renegotiation and restructuring has been complied with.

The above certification from the transferring FI shall be signed by a senior officer with a rank of at least Senior Vice President or equivalent provided such officer is duly authorized by the FI’s board of directors; or the Country Head, in the case of foreign banks.

Items 3 and 4 above shall not apply if the NPL has become a ROPOA after June 30, 2002.

The application may also be accompanied by a certification from an independent auditor acceptable to the Commission in cases of financing companies and investment houses under [Rule 3(a)(3)] or from the Commission on Audit in the case of GFIs or GOCCs, that the assets to be sold or transferred are NPAs as defined under the Act.

Furthermore, the Supreme Court noted that the certificate of eligibility shall only be issued upon compliance with the requirements laid down in the IRR and in Memorandum No. M 2006-001, one of which is that the application must be accompanied by a certification signed by the duly authorized officer of the bank or the NBQB that: 1) the assets to be transferred are NPAs; 2) the proposed transfer is under a true sale; 3) prior notice has been given to the borrowers; and that 4) the borrowers were given 90 days to restructure the loan with the bank or NBQB. Therefore, the Court inferred that with the issuance of the certificate of eligibility, Allied Bank had complied with all the conditions, including the prior written notice requirement.

The SC clarified that while the substitution of parties on account of a transfer of interest is not mandatory under Section 19, Rule 3 of the Rules of Court, the discretionary nature of allowing the substitution or joinder by the transferee demands that the court’s determination must be well-within the sphere of law. In this case, the court found that the CA committed grave abuse of discretion in denying the petitioner’s motion for substitution. In conclusion, the Court granted the petition and reversed the CA’s resolutions, allowing Grandholdings Investments (SPV-AMC), Inc. to be substituted as party-plaintiff.

FAQs

What was the key issue in this case?	The key issue was determining which party, the financial institution or the SPV, is responsible for providing prior notice to borrowers when non-performing loans are transferred.
What does SPV stand for?	SPV stands for Special Purpose Vehicle. It is a legal entity created to fulfill specific or temporary objectives, often used for asset securitization or risk management.
What is a non-performing loan (NPL)?	A non-performing loan (NPL) is a loan in which the borrower has not made scheduled payments for a specified period, usually 90 days, indicating a high risk of default.
What is a certificate of eligibility in the context of SPV Act?	A certificate of eligibility is a document issued by the BSP certifying that certain assets qualify as non-performing assets (NPAs) and are eligible for transfer to an SPV under the SPV Act of 2002.
Who is responsible for notifying the borrower when a non-performing loan is transferred to an SPV?	The Supreme Court clarified that the responsibility of providing prior notice to the borrower lies with the financial institution (Allied Bank), not the SPV (Grandholdings Investments).
What is the significance of the Certificate of Eligibility issued by the BSP?	The Certificate of Eligibility is significant because it confirms that the financial institution has complied with all the requirements, including providing prior notice to the borrowers, before transferring the NPLs to the SPV.
What is the implication of this ruling for borrowers?	This ruling ensures that borrowers are properly informed when their loans are transferred to an SPV, giving them the opportunity to restructure or renegotiate the loan terms.
What was the basis for the Court of Appeals’ decision?	The Court of Appeals initially denied the motion for substitution because the SPV did not provide evidence of compliance with the prior notice requirement to the borrowers, as mandated by R.A. No. 9182.
How did the Supreme Court differ in its interpretation of the notice requirement?	The Supreme Court interpreted that the responsibility to provide prior notice rests with the transferring financial institution, not the SPV, and that the Certificate of Eligibility implies that the financial institution has already complied with this requirement.

This case clarifies the responsibilities of financial institutions and SPVs in the transfer of non-performing loans, emphasizing the protection of borrowers’ rights through proper notification. This decision reinforces the need for transparency and adherence to legal requirements in financial transactions, ensuring fair treatment for all parties involved.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

June 19, 2019

Corporate Rehabilitation: Separate Juridical Personality Prevails Over Third-Party Mortgages

In a ruling that underscores the importance of respecting corporate legal structures, the Supreme Court held that a corporation’s rehabilitation cannot be based on the assets of its stockholders. Furthermore, the Court clarified that a stay order in corporate rehabilitation proceedings does not suspend foreclosure actions against properties mortgaged by third parties to secure the corporation’s debts. This means creditors can still pursue foreclosure on these properties, even during rehabilitation. These principles ensure that creditors’ rights are protected and that rehabilitation efforts are focused on the actual assets and liabilities of the corporation itself.

The Chua Family’s Complex: Can Corporate Debts Be Dodged Through Rehabilitation?

The case revolves around Situs Development Corporation, Daily Supermarket, Inc., and Color Lithographic Press, Inc., all owned by the Chua family. To finance the Metrolane Complex, the corporations obtained loans from several banks, with the loans secured by real estate mortgages over properties owned by Tony Chua and his wife, Siok Lu Chua. When the corporations faced financial difficulties, they filed a petition for rehabilitation, seeking a stay order to prevent creditors from foreclosing on the mortgaged properties. The creditor banks, however, argued that the stay order should not apply to properties owned by the Chua spouses, as these were not corporate assets. The Regional Trial Court initially approved the rehabilitation plan, but the Court of Appeals reversed this decision, leading to the Supreme Court case.

At the heart of the matter is the fundamental principle of separate juridical personality. This principle dictates that a corporation is a distinct legal entity, separate and apart from its stockholders, officers, and directors. Because of this, the assets and liabilities of the corporation are not those of its owners, and vice versa. The Supreme Court has consistently upheld this doctrine, recognizing its importance in maintaining the integrity of corporate law. In the case of Siochi Fishery Enterprises, Inc. v. Bank of the Philippine Islands, the Supreme Court reiterated this principle, emphasizing the independence of a corporation from its owners.

Building on this principle, the Supreme Court found that the properties mortgaged to secure the loans were owned by the Chua spouses, not by the corporations themselves. While the properties were used as collateral for the corporate debts, they remained under the ownership of the Chua spouses. The court emphasized that “when a debtor mortgages his property, he merely subjects it to a lien but ownership thereof is not parted with,” citing Sps. Lee v. Bangkok Bank Public Co., Ltd. Thus, these properties could not be considered part of the corporations’ assets for the purpose of rehabilitation. This distinction is crucial because it prevents corporations from using the personal assets of their owners to artificially inflate their asset base during rehabilitation proceedings.

The Court also addressed the scope of the stay order, which is a key component of corporate rehabilitation. The stay order suspends all actions or claims against the debtor corporation, allowing it time to reorganize and restructure its finances. The Interim Rules of Procedure on Corporate Rehabilitation specify that a stay order covers the “enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily liable with the debtor.” The critical issue here is whether the foreclosure proceedings against the Chua spouses’ properties constituted a claim against the debtor corporations.

The Supreme Court ruled that the stay order did not apply to the foreclosure proceedings because the claims were directed against the Chua spouses, not against the corporations themselves. The spouses acted as third-party mortgagors, offering their properties as security for the debts of the corporations. This arrangement is akin to an accommodation mortgage, where a party mortgages their property to secure the debt of another. The Court cited Pacific Wide Realty and Development Corporation v. Puerto Azul Land, Inc., where it was held that a stay order does not suspend the foreclosure of accommodation mortgages. The rationale behind this is that the stay order is intended to protect the debtor corporation’s assets, not to shield third parties who have provided security for the corporation’s debts.

Moreover, even if the stay order were applicable, the Court noted that the foreclosure proceedings had already commenced before the stay order was issued. The auction sales for the properties mortgaged to Allied Bank and Metrobank took place before the corporations filed their petition for rehabilitation. In Rizal Commercial Banking Corporation v. Intermediate Appellate Court and BF Homes, Inc., the Supreme Court held that the operative act that suspends all actions or claims against a distressed corporation is the appointment of a management committee, rehabilitation receiver, board or body. Since the auction sales occurred before the appointment of the Rehabilitation Receiver, the execution of the Certificate of Sale could not be suspended.

Finally, the Court dismissed the petitioners’ claim that they had a right to redeem the credit transferred by Metrobank to Cameron Granville II Asset Management, Inc. by reimbursing the transferee. The petitioners relied on Section 13 of the SPV Act of 2002, in conjunction with Art. 1634 of the Civil Code, which provides a debtor with the right to extinguish a credit in litigation by reimbursing the assignee. However, the Court found that this issue was raised belatedly and was not properly threshed out in the proceedings below. Furthermore, the credit owed by the corporations to Metrobank had already been extinguished when the bank foreclosed on the mortgaged property. What was transferred to Cameron was ownership of the foreclosed property, not a credit in litigation.

Furthermore, Article 1634 of the Civil Code applies to credits in litigation; it does not extend to real properties acquired by a financial institution. The court then cited R.A. No. 9182 or the Special Purpose Vehicle (SPV) Act of 2002, particularly Sec. 3 (h) and (i), that what was transferred to Cameron was more properly a real property acquired by a financial institution in settlement of a loan (ROPOA). The Court also emphasized that the issuance of a Certificate of Sale should not have been restrained, as the rehabilitation court lacked jurisdiction to suspend foreclosure proceedings over a third-party mortgage.

FAQs

What was the key issue in this case?	The central issue was whether a stay order in corporate rehabilitation proceedings could prevent the foreclosure of properties mortgaged by third parties to secure the corporation’s debts.
Did the Supreme Court uphold the rehabilitation plan?	No, the Supreme Court denied the rehabilitation plan, ruling that the lower courts erred in including the assets of the shareholders as part of the assets of the corporation.
What is the principle of separate juridical personality?	This principle means that a corporation is a distinct legal entity from its stockholders, with its own assets and liabilities, separate from those of its owners.
What is a stay order in corporate rehabilitation?	A stay order is a court order that suspends all actions and claims against a debtor corporation to give it time to reorganize and restructure its finances.
What is an accommodation mortgage?	An accommodation mortgage is when a party mortgages their property to secure the debt of another, acting as a third-party mortgagor.
Does a stay order prevent the foreclosure of accommodation mortgages?	No, the Supreme Court has ruled that a stay order does not prevent the foreclosure of accommodation mortgages, as the stay order only protects the debtor corporation’s assets.
What is an NPL as it pertains to this case?	Non-Performing Loans or NPLs refers to loans and receivables such as mortgage loans, unsecured loans, consumption loans, trade receivables, lease receivables, credit card receivables and all registered and unregistered security and collateral instruments, including but not limited to, real estate mortgages, chattel mortgages, pledges, and antichresis, whose principal and/or interest have remained unpaid for at least one hundred eighty (180) days after they have become past due or any of the events of default under the loan agreement has occurred.
What is a ROPOA?	ROPOAs refers to real and other properties owned or acquired by an [financial institution] in settlement of loans and receivables, including real properties, shares of stocks, and chattels formerly constituting collaterals for secured loans which have been acquired by way of dation in payment (dacion en pago) or judicial or extra-judicial foreclosure or execution of judgment.
Can a debtor redeem a credit transferred by a bank to a special purpose vehicle (SPV) by reimbursing the SPV?	The Court ruled that since the obligation was already extinguished and foreclosed, what was transferred to the SPV was the real property already.

This case highlights the importance of adhering to the principle of separate juridical personality and respecting the rights of creditors in corporate rehabilitation proceedings. The ruling reinforces the idea that rehabilitation should be based on the actual assets and liabilities of the corporation and not on the personal assets of its owners or third parties. It also clarifies the scope of stay orders, ensuring that they do not unduly prejudice the rights of creditors who have obtained security for corporate debts.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Situs Development Corporation, Daily Supermarket, Inc. And Color Lithographic Press, Inc., Petitioners, vs. Asiatrust Bank, Allied Banking Corporation, Metropolitan Bank And Trust Company, And Cameron Granville II Asset Management, Inc. (Cameron), Respondents., G.R. No. 180036, July 25, 2012

July 25, 2012

(1)	the assets to be sold/transferred are NPAs as defined under the SPV Act of 2002;

(2)	the proposed sale/transfer of said NPAs is under a True Sale;

(3)	the notification requirement to the borrowers has been complied with; and

(4)	the maximum 90-day period for renegotiation and restructuring has been complied with.