G.R. No. 202052 - Securities and Exchange Commission vs. College Assurance Plan Philippines, Inc.

Case Summary (G.R. No. 202052)

Background and Factual Antecedents

College Assurance Plan Philippines, Inc. (CAP) is engaged in selling pre-need educational plans. To guarantee payment of benefits, CAP established a trust fund into which a portion of each planholder's payments is deposited. This trust fund, managed by trustee banks, is invested to yield returns sufficient to cover future educational plan obligations.

Economic challenges beginning in 1993, including deregulation of private educational institutions and the 1997 economic crisis, adversely affected CAP and its trust fund. The enactment of R.A. No. 8799 in 2000 instituted regulations including the New Rules for pre-need companies, which contributed to CAP's recognition of a trust fund deficiency amounting to ₱3.179 billion as of December 31, 2001.

To remedy this deficiency, CAP purchased MRT III Bonds from Smart and FEMI in 2002, to be assigned to the Trust Fund and paid over five years in monthly installments secured by shares in another company. After partial payment, SEC ordered CAP to cease payments to Smart and FEMI over fund adequacy concerns.

In 2005, CAP sought corporate rehabilitation, which was granted, and an approved rehabilitation plan contemplated selling the MRT III Bonds in 2009 at a discount. Smart demanded full payment of CAP’s obligations or return of the bonds, threatening to enforce a seller’s lien. The sale eventually proceeded after concessions by Smart and FEMI, with proceeds credited to CAP’s trust accounts. However, CAP’s payment to Smart and FEMI was not executed.

Procedural History and Judicial Actions

The RTC initially approved payment to Smart and FEMI but later withdrew the approval pending opposition. The court denied the motion for payment and additional equity infusion, referencing the principle of equality among creditors during rehabilitation, ruling that trust fund assets should benefit all creditors equally.

CAP filed a certiorari petition with the CA, contending the RTC acted without or in excess of jurisdiction and abused discretion, altering agreed terms that harm CAP and its stakeholders. The CA ruled that the RTC abused discretion in denying payment, holding that payments to Smart and FEMI constituted “benefits” or “cost of services rendered or property delivered” from the trust fund, and that the outstanding payments were administrative expenses outside the stay order.

The CA ordered Philippine Veterans Bank and the receiver to set aside $6 million from bond sale proceeds for payment to Smart and FEMI. The SEC and IC (petitioners) moved for reconsideration, which was denied. The case was elevated to the Supreme Court.

Issues Presented

Whether CAP’s outstanding obligation to Smart and FEMI can be validly withdrawn from CAP’s trust fund.
Whether such payment constitutes an administrative expense and allowable withdrawal from the trust fund.
Whether the trial court acted without or in excess of jurisdiction or abused discretion by denying payment from trust fund proceeds.

Petitioners’ Arguments

The petitioners argued the trust fund must remain separate from CAP’s corporate assets and liabilities and is for the sole benefit of planholders. Under Section 30 of R.A. No. 9829, trust fund assets cannot satisfy general company creditors’ claims. They contended the payment to Smart and FEMI was neither a “benefit” nor a “cost of services rendered or property delivered” under applicable rules, but rather an ordinary corporate obligation. Also, payment of the capital infusion cost is not an administrative expense subject to withdrawal from the trust fund.

Respondent’s Counterarguments

CAP argued that paying Smart and FEMI was essential for consummating the MRT III Bonds sale, which benefited planholders. The RTC had initially approved the payment. The rehabilitation court could not modify the agreed sale terms. Payments to Smart and FEMI fell within allowable costs related to converting bonds to cash, a “cost” benefiting planholders, not just ordinary creditors. Denying payment risked protracted litigation and adversely affected rehabilitation prospects.

Supreme Court’s Analysis: Trust Fund’s Nature and Purpose

The Court emphasized the trust fund’s established nature: payments collected from planholders are held in trust expressly for their exclusive benefit, separate and distinct from CAP’s corporate assets and liabilities. Section 16.4, Rule 16 of the New Rules limits withdrawals from the trust fund to planholders’ benefits, costs of services rendered or property delivered to planholders, and certain administrative expenses related to trust fund operations.

“Benefits” are defined as money or services CAP undertakes to deliver to planholders under their contracts. Section 30 of R.A. No. 9829 reiterates that trust fund assets shall never be used to satisfy claims of company creditors. The Court declared that payment to Smart and FEMI, creditors of CAP for an outstanding loan regarding the purchase price of MRT III Bonds, is not among the trust fund’s payable items.

Supreme Court’s Analysis: MRT III Bonds and Trust Fund Assets

The Court rejected the CA’s view that only the paid value of the MRT III Bonds belonged to the trust fund, treating Smart and FEMI as contributors to the trust assets and not ordinary creditors. The details of the trust fund agreements and financial statements revealed that the MRT III Bonds were assigned to the trust fund free from any encumbrances, and the outstanding obligation to Smart and FEMI was CAP’s separate liability, not part of the trust fund.

Therefore, proceeds from the sale of these bonds were trust fund assets, even though the purchase price was unpaid. The outstanding debt to Smart and FEMI was a corporate liability and could not be paid from the trust fund.

Supreme Court’s Analysis: Administrative Expenses

The Court held that administrative expenses eligible for withdrawal from the trust fund are limited to trust fees, bank charges, investment expenses, taxes, and reasonable costs for minor repairs and maintenance of trust fund assets. The bond purchase price or related outstanding debt does not constitute an admin

Case Syllabus (G.R. No. 202052)

Facts and Procedural History

College Assurance Plan Philippines, Inc. (CAP) is a duly registered pre-need corporation primarily engaged in selling pre-need educational plans.
To guarantee the payment of benefits, CAP set up a Trust Fund into which a certain percentage of amounts collected from planholders were deposited.
The Trust Fund was managed by trustee banks, invested in assets and securities intending to yield returns exceeding projected tuition fee increases.
Economic developments, including deregulation in 1993 and the 1997 economic crisis with peso devaluation, adversely affected CAP and its Trust Fund.
CAP incurred a trust fund deficiency of PHP 3.179 billion as of December 31, 2001, partly due to adoption of new accounting rules and valuation under then-enacted Securities Regulation Code (R.A. No. 8799).
To correct the deficiency, CAP purchased MRT III Bonds valued at $14 million on August 6, 2002, from Smart Share Investment, Ltd. (Smart) and Fil-Estate Management, Inc. (FEMI) on installment over five years, assigning these bonds to the Trust Fund.
CAP had paid about US$6.536 million by 2003 but was ordered by the SEC Oversight Board to stop payments due to financial concerns.
In 2005, CAP filed a Petition for Rehabilitation, which was granted, and a rehabilitation receiver was appointed.
The rehabilitation plan included selling the MRT III Bonds in 2009 at 60% of face value (approx. US$81.2 million).
Smart demanded settlement of CAP’s outstanding balance of US$10,680,045.25 and threatened to enforce seller’s lien if not paid.
The Receiver sought court approval (April 2009) to sell MRT III Bonds and to pay obligations to Smart and FEMI partly from sale proceeds.
The MRT III Bonds were sold for US$21,501,760 to Development Bank of the Philippines and Land Bank.
The RTC initially approved payment to Smart and FEMI but later withdrew approval and ultimately denied motions authorizing payment amidst opposition.
Respondent filed a petition for certiorari to the Court of Appeals (CA).
The CA nullified the RTC orders and directed payment of US$6 million to Smart and FEMI from the Trust Fund proceeds.
The petitioners moved for reconsideration, which the CA denied.
The petitioners (SEC and IC) filed the present appeal before the Supreme Court.

Issues Presented for Resolution

Whether the payment of the respondent’s outstanding obligation to Smart and FEMI, representing the balance of the purchase price of the MRT III Bonds, can be validly withdrawn from the respondent’s Trust Fund.
Whether payment of the said obligation can be considered an administrative expense and therefore allowable withdrawal from the Trust Fund.
Whether the trial court (RTC) acted without or in excess of jurisdiction or with grave abuse of discretion in denying payment of the respondent’s obligation to Smart and FEMI from the Trust Fund proceeds.

Legal Framework Governing the Trust Fund and Pre-Need Plans

The Trust Fund is constituted for the sole benefit of the planholders and is separate and distinct from the paid-up capital and corporate assets of the pre-need company.
Section 16.4, Rule 16 of the New Rules on the Registration and Sale of Pre-Need Plans (promulgated under Section 16 of the Securities Regulation Code) prescribes strict limitations on withdrawals from the Trust Fund, permitting only payments of benefits (e.g., monetary consideration, cost of services rendered, property delivered), trust fees, bank charges, investment expenses, termination values payable to planholders, annuities, contributions of canceled plans, taxes, and reasonable withdrawals for minor repairs and ordinary maintenance.
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