Case Summary (G.R. No. 210316)
Corporate Background and Property Lease Agreement
CJHDC is a domestic corporation engaged in real estate activities and holds a lease from the Bases Conversion and Development Authority (BCDA) for a 247-hectare property within the John Hay Special Economic Zone in Baguio City. This lease, effective for 50 years until 2046, allowed CJHDC to develop and manage the property with set rental payments linked to gross revenues. CJHSC is a wholly-owned subsidiary created to manage hospitality operations including hotels and related businesses.
Development and Sale Schemes for Condotel Units
Pursuant to the lease, CJHDC developed two condotel projects named “The Manor” and “The Suites,” offering residential units for sale through two payment schemes. The first scheme was a straightforward purchase granting full ownership rights, subject to maintenance and utilities. The second involved a “leaseback” or “money-back” arrangement: buyers would pay for the units but surrender possession for hotel management by CJHDC or CJHSC, pooling these units for hotel use. Under these schemes, buyers received either a share of income generated from hotel operations or a guaranteed 8% return and were entitled to 30 days of personal use annually. Additionally, these buyers were exempt from monthly dues and utilities.
BCDA’s Involvement and Request for SEC Investigation
In 2010, CJHDC restructured its financial obligations to BCDA, transferring ownership of some condotel units to BCDA under a dacion en pago arrangement, which also included a leaseback provision. Subsequently, BCDA learned of the sale arrangements and requested the SEC to investigate, suspecting that the “leaseback” and “money-back” offers constituted investment contracts, thus securities under the Securities Regulation Code (SRC).
SEC’s Investigation and Cease and Desist Order
The SEC's Enforcement and Prosecution Department conducted an investigation, gathering information from CJHDC, CJHSC, and condotel buyers. The Corporation Finance Department of the SEC opined that the leaseback arrangements qualify as investment contracts. With this basis, the SEC filed a motion for the issuance of a Cease and Desist Order on May 16, 2012, which the SEC En Banc issued on June 7, 2012, ordering respondents to cease selling securities without registration as mandated by Section 8 of the SRC.
Judicial Proceedings Before the Court of Appeals
CJHDC and CJHSC challenged the SEC’s CDO by filing a petition for review with the Court of Appeals (CA), which issued a temporary restraining order and later a writ of preliminary injunction, effectively enjoining enforcement of the CDO during the pendency of the case. The CA ultimately ruled in favor of the respondents, annulling the CDO and dismissing the SEC's case, holding that the order did not operate as a fraud on investors and prematurely addressed the merits of the case.
Grounds for Petition for Review Before the Supreme Court
The SEC petitioned the Supreme Court, raising three main grounds: (1) the CA erred in allowing an appeal of the interlocutory CDO, (2) the CA disregarded the SEC’s primary jurisdiction and failed to require exhaustion of administrative remedies, and (3) the CA wrongly annulled the CDO and dismissed the case on the merits.
Interlocutory Nature of the Cease and Desist Order
The Supreme Court held that the CDO is an interlocutory, provisional order intended to address urgent matters without finally resolving the entire controversy. The CDO reflects only a prima facie finding, which is by definition subject to refutation by contrary evidence. As an interlocutory order, it is not appealable until a final decision is rendered. This non-appealability is enshrined under Section 10-8 of the SEC’s 2006 Rules of Procedure, which explicitly prohibits appeals against CDOs but allows for certain administrative remedies within the SEC.
Requirement to Exhaust Administrative Remedies
The Court emphasized the doctrine of exhaustion of administrative remedies, stating that before judicial intervention may be sought, all administrative remedies must be exhausted. Respondents failed to file a motion to lift the CDO as provided under Sections 64.3 of the SRC and 10-3 of the SEC Rules, which would have triggered a hearing and opportunity to present evidence before the SEC. The Court reiterated this requirement is meant to minimize litigation costs, reduce judicial interference, and respect administrative agency expertise.
Doctrine of Primary Administrative Jurisdiction
The case involves complex factual determinations that require the expertise of the SEC in characterizing the respondents' schemes as investment contracts or securities. Under the doctrine of primary jurisdiction, judicial bodies should defer to the administrative agency when specialized or technical issues arise, allowing the agency to exercise its discretionary functions. The Supreme Court noted that the SEC had yet to conduct the full hearing contemplated under the administrative rules.
No Violation of Due Process in S
...continue readingCase Syllabus (G.R. No. 210316)
Background and Parties
- Petitioners include the Securities and Exchange Commission’s Chairperson and Commissioners, as well as the SEC Enforcement and Prosecution Department.
- Respondents are CJH Development Corporation (CJHDC), a domestic corporation involved in real estate development and management, and its wholly-owned subsidiary, CJH Suites Corporation (CJHSC), which manages hospitality businesses.
- CJHDC leased a 247-hectare property from the Bases Conversion and Development Authority (BCDA) in John Hay Special Economic Zone, Baguio City, for fifty years starting October 1996.
- As part of its development, CJHDC constructed two condominium-hotels named "The Manor" and "The Suites," offering residential units for sale under two schemes: (1) straight purchase and sale, and (2) sale with a "leaseback" or "money-back" option where the units are pooled and managed for hotel billeting.
Facts of the Case
- The lease agreement allowed CJHDC to sub-lease and manage the property but required reversion to BCDA upon expiration.
- Under the "leaseback" scheme, buyers surrender possession of their units for hotel management, receiving income shares or guaranteed returns.
- Under the "money-back" scheme, buyers are entitled to a return of the purchase price by lease expiry.
- Buyers may use units for thirty days annually, exempted from dues and utilities.
- In May 2010, CJHDC restructured financial obligations with BCDA, transferring certain units to the latter by dacion en pago, also subject to leaseback.
- BCDA, upon discovering the sale schemes, requested SEC investigation, believing the arrangements may constitute unregistered investment contracts (securities) under the Securities Regulation Code (SRC).
SEC Investigation and Proceedings
- The SEC Enforcement and Prosecution Department (EPD) conducted an investigation, consulting buyers and gathering evidence on leaseback schemes.
- The SEC Corporation Finance Department opined that the leaseback arrangements are investment contracts.
- On May 16, 2012, the SEC filed a Motion for Issuance of Cease and Desist Order (CDO) to halt sales of such investment contracts without proper registration.
- On June 7, 2012, the SEC En Banc issued a CDO finding prima facie evidence of illegal sale of securities without registration, ordering respondents and affiliates to cease such activity immediately.
- Respondents filed a Petition for Review with the Court of Appeals (CA), which issued a temporary restraining order and later a writ of preliminary injunction to enjoin SEC from enforcing the CDO.
- The CA, in its decision dated June 7, 2013, annulled the CDO and dismissed the SEC’s case. The CA also denied the SEC’s motion for reconsideration.
Issues Presented in the Petition for Review
- Whether the Court of Appeals erred in considering