G.R. No. 193078 - B. Sta. Rita and Co., Inc. vs. Gueco

Case Summary (G.R. No. 193078)

Antecedent Facts and Proceedings

MBTC extended various credit accommodations to Fortuna totaling approximately Php 259,981,915.33, secured by mortgages on Fortuna’s real and movable properties and those of sister companies. Fortuna defaulted on these obligations in 2006, compounded by Manila Electric Company (Meralco) filing a criminal complaint against Fortuna for electricity pilferage, resulting in power disconnections which further affected Fortuna’s operations.

Instead of settling debts, Fortuna filed a Petition for Corporate Rehabilitation with the Regional Trial Court (RTC) of Malabon City in June 2007, accompanied by a Rehabilitation Plan proposing resumption of operations through the entry of an investor and debt restructuring, including a moratorium and interest rate reduction. The plan also included expanding into real estate by developing condominium units on a property owned by Fortuna’s sister company.

RTC Ruling on Rehabilitation Petition

The RTC found the Rehabilitation Petition sufficient and approved the Rehabilitation Plan in December 2007, considering it economically feasible and viable. The RTC emphasized the moratorium and debt restructuring to allow Fortuna to generate sufficient funds to resume operations and noted the real estate development project as a promising income source. A stay order was issued, and a rehabilitation receiver was appointed to oversee implementation.

CA Decision Affirming the RTC

The Court of Appeals (CA) dismissed MBTC’s petition for review, affirming the RTC’s order after determining that Fortuna qualified for rehabilitation and that the Rehabilitation Plan was feasible. The CA noted that opposition from MBTC was manifestly unreasonable given Fortuna’s efforts to restore solvency and its business expansion plans. The CA denied MBTC’s motion for reconsideration in January 2010.

MBTC’s Contentions

MBTC contended that Fortuna was not qualified to file for corporate rehabilitation under the Interim Rules, arguing that only debtors who foresee the impossibility to meet debts (i.e., not yet in default) may petition. MBTC also argued that Fortuna’s Rehabilitation Plan lacked material financial commitments, being based on speculative and contingent promises rather than binding obligations, thus rendering the plan infeasible. MBTC maintained that the law aimed to aid viable but distressed corporations and should not be abused to delay debt payments.

Fortuna’s Position

Fortuna argued that the Interim Rules set minimum qualifications for filing a rehabilitation petition and do not exclude corporations already in default. They maintained that the lower courts have discretion and have properly found the Rehabilitation Plan feasible and sufficient despite creditor opposition, under Section 23, Rule 4 of the Interim Rules.

Mootness of the Petition

MBTC informed the Supreme Court through a Compliance and Motion to Dismiss that rehabilitation proceedings had been terminated by the RTC in November 2011, with the CA affirming the termination in 2013. Fortuna withdrew its motion for reconsideration, effectively rendering the present petition moot and academic, as no practical relief could be granted. The Court recognized the doctrine that courts avoid ruling on moot cases unless to resolve significant legal issues.

Supreme Court’s Analysis on Qualification for Rehabilitation

The Court clarified that under Section 1, Rule 4 of the Interim Rules, any debtor who foresees the impossibility of paying debts or any creditor owning at least 25% of total liabilities may petition for rehabilitation. The provision does not distinguish between debtors already in default and those merely foreseeing default.

The Court cited precedent in Metropolitan Bank and Trust Company v. Liberty Corrugated Boxes Manufacturing Corporation (Liber), where it was held that a corporation in default may still seek rehabilitation, emphasizing that the trigger is the debtor’s inability to pay when due rather than mere debt maturity. The Interim Rules should be liberally construed to enable rehabilitation consistent with its purpose of preserving viable enterprises and maximizing creditor recovery.

Evaluation of the Rehabilitation Plan’s Feasibility and Material Financial Commitment

The Court applied standards laid down in Philippine jurisprudence (notably Bank of the Philippine Islands v. Sarahia Manor Hotel Corporation and Philippine Asset Growth Two, Inc. v. Fastech Synergy Philippines, Inc.) for determining the feasibility of a rehabilitation plan, including:

Existence of assets that can generate cash operationally better than in liquidation;
Liquidity sufficient to sustain operations;
Definitive, legally binding financial commitments supporting the plan; and
A realistic and workable business plan anchored on sound assumptions.

The Court found Fortuna’s Rehabilitation Plan wanting, principally because:

The entry of the alleged key investor, Polycity Enterprises Ltd. of Hong Kong, was contingent upon multiple conditions, including due diligence and execution of definitive agreements. The provided Letter of Intent explicitly stated no binding commitment existed.
Without legally binding investment commitments, there was no material financial commitment as required by Section 5, Rule 4 of the Interim Rules.
Fortuna’s alternative plan to engage in real estate development via a joint venture with Oroquieta Properties, Inc. was similarly speculative, contingent on future agreements and approvals, and lacked assured funding or timelines.
The liquidation analysis submitted by Fortuna was insufficiently supported, lacking credible market value estimates and detailed explanation, thus impairing the ability of the court to assess whether rehabilitation would result in greater creditor recovery than liquidation.
Fortuna’s financial reports revealed insufficient cash and current assets to meet obligations, raising doubts about liquidity and operational viability.
The proposed acquisition of equipment and settlement of liabilities, while necessary, further challenged cas

Case Syllabus (G.R. No. 193078)

Case Background and Parties Involved

Petitioner Metropolitan Bank and Trust Company (MBTC) is a domestic banking corporation extending substantial credit and loan facilities amounting to approximately Php 259,981,915.33 to respondent Fortuna Paper Mill & Packaging Corporation (Fortuna).
Fortuna was a paper manufacturing corporation producing special and craft papers from scrap materials, serving principally manufacturers of corrugated boxes, cement paper bags, and other stationery products.
Fortuna mortgaged its real and movable properties, including those of its sister companies, to secure its obligations to MBTC.
Fortuna defaulted on its obligations, failing to pay debts, interests, and penalties despite repeated demands by MBTC.
Further financial distress was compounded by issues with Manila Electric Company (MERALCO), which filed a criminal complaint for electricity pilferage, leading to power disconnections and reconnections tied to financial and labor difficulties.

Procedural History

Fortuna filed a Petition for Corporate Rehabilitation with the RTC of Malabon, Branch 74 on June 21, 2007, accompanied by a proposed Rehabilitation Plan.
The RTC found the petition sufficient and issued a Stay Order on June 27, 2007, directing creditors, including MBTC, to file oppositions.
MBTC opposed the petition on grounds that Fortuna was unqualified for rehabilitation, the petition did not meet minimum statutory requirements, and the filing was a delaying tactic.
The RTC appointed Atty. Rafael F. Teston as rehabilitation receiver who recommended approval of the plan subject to benchmarks such as timely investor infusion and commencement of property development.
On December 20, 2007, the RTC approved Fortuna’s Rehabilitation Plan, finding it feasible and noting new business developments in real estate as sources of income.
MBTC appealed the approval to the Court of Appeals (CA), which dismissed MBTC’s petition for review on July 7, 2009 and denied motion for reconsideration on January 4, 2010.
MBTC elevated the case to the Supreme Court via Petition for Review under Rule 45.
MBTC later notified the Court of termination of rehabilitation proceedings by RTC order dated November 21, 2011, affirmed by the CA in 2013, rendering the petition moot.

Core Legal Issue

Whether the CA erred in affirming the Rehabilitation Plan approved by the RTC, specifically:
- Whether Fortuna, being already in default, was qualified to file a Petition for Corporate Rehabilitation under the Interim Rules on Procedure on Corporate Rehabilitation.
- Whether the Rehabilitation Plan complied with minimum requirements, including the existence of material financial commitments and a proper liquidation analysis.
- Whether the Plan was feasible and viable to warrant approval.

Qualifications to File for Corporate Rehabilitation

The Interim Rules, particularly Section 1, Rule 4 states that a debtor who foresees the impossibility of meeting debts as they fall due may petition for rehabilitation.
MBTC contended a debtor must file before default occurs; the law contemplates only debtors not yet in default.
The Supreme Court referred to its prior ruling in MBTC v. Liberty Corrugated Boxes Manufacturing Corporation, where the Court rejected this restrictive interpretation.
It held that corporate rehabilitation aims to restore financially distressed corporations to viability regardless of whether debts have matured or default has occurred.
The Court emphasized the rehabilitation