Facts:

The case involves the Bank of the Philippine Islands (BPI) as the petitioner and Sarabia Manor Hotel Corporation (Sarabia) as the respondent. Sarabia, a corporation established on February 22, 1982, operates in Iloilo City, primarily engaged in the hotel and restaurant business. In 1997, Sarabia secured a special loan package amounting to P150,000,000.00 from Far East Bank and Trust Company (FEBTC) to finance the construction of a new hotel building. An additional P20,000,000.00 standby credit line was also approved. These loans were secured by real estate mortgages on several parcels of land owned by Sarabia and a surety agreement signed by its stockholders. Following a merger, BPI assumed FEBTC's rights against Sarabia.

Despite having more assets than liabilities, Sarabia faced cash flow problems due to delays in the construction of the new building, which was completed two years behind schedule. This situation worsened with the end of the grace period for loan repaym...

Facts:

Background of the Parties and Corporate Profile

• Sarabia Manor Hotel Corporation (Sarabia) is a corporation organized under Philippine laws with its principal place of business at 101 General Luna Street, Iloilo City.
• Incorporated on February 22, 1982, it has an authorized capital stock of P10,000,000.00 that is fully subscribed and paid-up.
• Its primary business entails owning, leasing, managing, and/or operating hotels, restaurants, barber shops, beauty parlors, saunas, steam baths, massage parlors, and related establishments.

Loan and Financial Arrangements

• In 1997, Sarabia obtained a special loan package of P150,000,000.00 from Far East Bank and Trust Company (FEBTC) to finance the construction of a five-storey hotel building (New Building).
• An additional P20,000,000.00 standby credit line was approved concurrently.
• The loans were secured by real estate mortgages over several parcels of land owned by Sarabia and a comprehensive surety agreement signed by its stockholders.
• Following a merger, Bank of the Philippine Islands (BPI) assumed all of FEBTC’s rights against Sarabia.

Causes of Financial Distress

• Although Sarabia started paying interest on the loans after the funds were released in October 1997, cash flow problems began to emerge.
• The delayed completion of the New Building—due to the contractor, Santa Ana a AJ Construction Corporation, defaulting and abandoning the project—resulted in completion two years behind the scheduled date.
• Cost overruns and the diversion of funds to cover these overruns, compounded by the end of the grace period for principal payments in 2000, escalated monthly amortizations.
• External events such as the September 11, 2001 terrorist attacks and security issues related to the Abu Sayyaf group further affected the hotel industry and exacerbated Sarabia’s financial difficulties.

Initiation of Corporate Rehabilitation

• Facing imminent default on its obligations, Sarabia filed a Petition for Corporate Rehabilitation on July 26, 2002 with a prayer for the issuance of a stay order to defer creditors’ claims.
• The petition detailed how mismanagement of the construction project, commission of cost overruns, and other external factors led to a skewed revenue projection and subsequent cash flow challenges.
• The Regional Trial Court (RTC) of Iloilo City, Branch 39, found the rehabilitation petition sufficient in form and substance, and on August 2, 2002, issued a Stay Order along with the appointment of Liberty B. Valderrama as Rehabilitation Receiver.

The Proposed Rehabilitation Plan

• Sarabia sought to restructure all outstanding loans by:
• Introducing a uniform escalating interest rate schedule ranging from 7% to 14% p.a. over specified time periods.
• Making annual principal payments starting in 2004 in amounts that would vary in accordance with available cash flow.
• The plan also called for:
• Timely payment of obligations to the government and suppliers to ensure smooth day-to-day operations.
• A conversion of certain payables and advances into stockholders’ equity and deferred credits to improve the debt-to-equity ratio.
• Restrictions on the payment of cash dividends or compensation to stockholders (except for designated full-time employees/consultants) during the rehabilitation period.
• Pre-approval by the RTC for any capital expenditures beyond the condemned cash flow plan.
• The termination of the management contract with Barcelo Gestion Hotelera, S.L. to save on management fees.
• The appointment of a new management team tasked with presenting a viable business plan.
• The establishment of a debt servicing account where excess funds would be deposited for creditor payment.
• The reinstatement of the surety obligations of Sarabia’s stockholders to secure creditor interests.

Proceedings in the Lower Courts

• The RTC approved the rehabilitation plan on August 7, 2003, basing its decision on the feasibility and realism of the proposed terms, the company’s operational track record, and its potential to generate sufficient revenue.
• The Rehabilitation Receiver’s detailed report was pivotal, recommending:
• Restructuring of loans with specified terms including a fixed interest rate of 6.75% p.a.
• Extension of the repayment period and a two-year grace period for principal payment.
• Additional safeguards such as personal liability of stockholders for any deficiency.
• The Court of Appeals (CA) in its April 24, 2006 decision, affirmed the RTC’s approval with a modification—reinstating the surety obligations of Sarabia’s stockholders as an extra layer of security for BPI.
• BPI subsequently challenged the decision via a petition for review on certiorari, which also included allegations of misrepresentations by Sarabia in its rehabilitation petition.

Issue:

Jurisdictional and Procedural Issues

• Whether the petition for review on certiorari filed by BPI under Rule 45 is proper given that it primarily raises questions involving findings of fact rather than purely issues of law.
• Whether the Court should review questions of fact that are generally deemed final and conclusive by the lower courts.

Substantive Issues Regarding the Rehabilitation Plan

• Whether the CA correctly affirmed the RTC’s approval of Sarabia’s rehabilitation plan, particularly with the modification reinstating the surety obligations of Sarabia’s stockholders.
• Whether the rehabilitation plan appropriately balanced and safeguarded the interests of BPI as a secured creditor, specifically with respect to the fixed interest rate set at 6.75% p.a. and the extended loan repayment period.
• Whether BPI’s allegations that Sarabia misrepresented certain facts in its rehabilitation petition warrant a re-examination of the entire plan.

Ruling:

• (Subscriber-Only)

Ratio:

• (Subscriber-Only)

Doctrine:

• (Subscriber-Only)