Case Digest (G.R. No. L-42449)
Facts:
The case involves C & C Commercial Corporation (now known as Asbestos Cements Products Phil. Inc., or ACPPI) and its controlling stockholder, Clara Reyes Pastor, as petitioners against the Philippine National Bank (PNB), the National Investment Development Corporation (NIDC), the Provincial Sheriff of Rizal, the City Sheriff of Manila, and Hon. Judge Augusto Valencia, as respondents. The events leading to this case began between February 27, 1957, and December 20, 1960, when ACPPI opened seven letters of credit with PNB to import machinery and equipment. By January 31, 1968, ACPPI had failed to pay its obligations amounting to P5,451,851.83, prompting PNB to file a collection suit against ACPPI and Clara Reyes Pastor on March 13, 1968. However, the suit was dismissed without prejudice after the parties entered into a Voting Trust Agreement on March 5, 1969, allowing PNB and NIDC to manage ACPPI for five years.
During this period, ACPPI executed a chattel mortgage in fa...
Case Digest (G.R. No. L-42449)
Facts:
Background of the Case
- The case involves petitioner C & C Commercial Corporation (now Asbestos Cements Products Phil. Inc., or ACPPI) and respondent Philippine National Bank (PNB), along with its subsidiary, the National Investment Development Corporation (NIDC).
- Between February 27, 1957, and December 20, 1960, ACPPI opened seven letters of credit with PNB to import machinery and equipment for its plant. The total obligations under these letters of credit amounted to P5,451,851.83 as of January 31, 1968.
Voting Trust Agreement
- Due to ACPPI's failure to pay its obligations, PNB filed a collection suit on March 13, 1968, against ACPPI and Clara Reyes Pastor, a joint and solidary debtor and controlling stockholder.
- Instead of pursuing the collection suit, PNB entered into a Voting Trust Agreement with ACPPI on March 5, 1969, granting PNB and NIDC full authority to manage ACPPI for five years.
Management and Financial Issues
- During the Voting Trust Agreement period, ACPPI executed a chattel mortgage on September 6, 1971, in favor of NIDC to secure a P700,000 loan for plant repairs and export production.
- An audit report by Sycip, Gorres, and Velayo on August 27, 1973, revealed that PNB/NIDC's management of ACPPI was a "complete and disastrous failure," leading to significant losses.
Legal Proceedings
- On October 16, 1973, ACPPI and its stockholders filed a complaint (Civil Case No. Q-18176) to terminate the Voting Trust Agreement and sought damages of P27 million, alleging gross mismanagement by PNB/NIDC.
- On November 27, 1973, PNB and NIDC countered, stating ACPPI's total indebtedness to PNB was P11,538,029.63 and to NIDC was P1,219,982.00 as of 1973.
- On January 22, 1974, the court appointed a receiver for ACPPI, later converting it into a joint receivership.
Foreclosure Proceedings
- On December 19, 1973, the Development Bank of the Philippines (DBP) assigned its rights under two real estate mortgages to PNB.
- On March 11, 1974, PNB filed for an extrajudicial foreclosure sale under Act 3135, seeking to recover not only the secured loans (P490,000 and P796,000) but also unsecured advances totaling P14,571,736.87.
- ACPPI opposed the foreclosure, and on September 22, 1975, filed Civil Case No. 22047 to nullify the foreclosure and sought an injunction. The court issued a temporary restraining order on September 30, 1975.
- NIDC also initiated foreclosure of the chattel mortgage, leading to another lawsuit (Civil Case No. 22133) by ACPPI on October 3, 1975. The court issued another restraining order.
Dismissal of Cases
- On December 17, 1975, the Court of First Instance dismissed Civil Cases Nos. 22047 and 22133, citing procedural issues and ACPPI's lack of capacity to sue due to receivership.
- On January 5, 1976, ACPPI filed a supplemental complaint in Civil Case No. Q-18176, seeking an injunction against the foreclosure sales. The court denied the injunction, citing Presidential Decree No. 385 (P.D. 385), which prohibits injunctions against foreclosure by government financial institutions.
Supreme Court Intervention
- ACPPI filed a special civil action for certiorari with the Supreme Court, challenging the denial of the injunction. The Court issued a temporary restraining order on January 20, 1976, halting the foreclosure sales.
Issue:
- (Unlock)
Ruling:
- (Unlock)
Ratio:
- Applicability of P.D. 385: The Court held that P.D. 385, which mandates foreclosure by government financial institutions, does not apply when the foreclosure includes unsecured obligations. The law only covers secured loans, and the inclusion of unsecured debts in the foreclosure sale was a material defect.
- Unsecured Obligations: The Court ruled that unsecured obligations cannot be tacked onto a mortgage foreclosure without the mortgagor's consent. The DBP-assigned mortgage only secured specific obligations, and PNB's attempt to include unsecured advances was invalid.
- Mismanagement Allegations: The Court found that allegations of mismanagement and misappropriation of loan proceeds by NIDC warranted an injunction against the foreclosure sale. The issues of mismanagement and failure of consideration must first be resolved before foreclosure can proceed.
The Court emphasized that P.D. 385 was not intended to protect government financial institutions from liability for mismanagement or misappropriation of funds. The foreclosure sales were enjoined to prevent undue prejudice to ACPPI and its stakeholders.