Case Summary (G.R. No. 202052)
Petitioner
Securities and Exchange Commission (SEC) and Insurance Commission (IC) — regulatory agencies that filed the present petition seeking review of the Court of Appeals decision which had nullified certain RTC orders and directed payment from CAP’s trust fund to Smart and FEMI.
Respondent
College Assurance Plan Philippines, Inc. (CAP) — a pre-need company that sold educational plans and established a trust fund to guarantee payment of plan benefits, which suffered a trust fund deficiency and acquired MRT III Bonds as part of a funding scheme to correct the deficiency.
Key Dates and Procedural Milestones
- CAP purchased and assigned MRT III Bonds to its trust fund on August 6, 2002, payable in 60 monthly installments.
- CAP filed a Petition for Rehabilitation on August 23, 2005; a stay order and appointment of an Interim Rehabilitation Receiver followed.
- The Receiver sought and obtained court approval to sell the MRT III Bonds in April 2009; disputes over whether proceeds could be applied to pay CAP’s outstanding obligation to Smart and FEMI arose in April–September 2009 and December 2009–January 2010.
- RTC issued orders on April 29, 2009; September 18, 2009; and January 18, 2010 denying authorization to pay Smart and FEMI from trust proceeds.
- CA issued its decision on June 14, 2011, directing that US$6 million be set aside for payment to Smart and FEMI.
- Supreme Court decision reviewed the CA on certiorari (case before the Supreme Court decided in 2018); the 1987 Constitution is the applicable constitutional framework for cases decided in 1990 or later.
Applicable Law and Regulatory Framework
- 1987 Constitution (applicable constitutional framework).
- Securities Regulation Code (R.A. No. 8799) and the SEC’s New Rules on the Registration and Sale of Pre-Need Plans, particularly Rule 16.4 (Section 16.4, Rule 16 of the New Rules) governing permissible withdrawals from pre-need trust funds.
- Republic Act No. 9829 (Pre-Need Code of the Philippines), specifically Section 30, prescribing the establishment, use, and exclusive beneficiary status of trust funds for planholders.
- Relevant definitions in the New Rules: “benefits” defined as “the money or services which the Pre-Need Company undertakes to deliver in the future to the planholder or his beneficiary.”
Factual Background (summary)
CAP set up an SEC-approved trust fund funded by planholder payments to secure delivery of benefits. After regulatory changes and economic problems, CAP incurred a significant trust fund deficiency. To address this deficiency, CAP purchased MRT III Bonds on installment from Smart and FEMI on August 6, 2002 and assigned the bonds to the trust fund. CAP paid a portion of the purchase price but an unpaid balance remained. The Receiver negotiated sale of the MRT III Bonds to DBP and Land Bank in 2009; the sale was partly consummated and proceeds were credited to CAP’s trust accounts. Smart and FEMI sought payment of the outstanding purchase price; the Receiver sought court authorization to pay them from the proceeds, and the RTC ultimately denied authorization. CA reversed the RTC and allowed set-aside/payment; SEC and IC sought Supreme Court review.
Procedural History (summary)
CAP’s rehabilitation petition proceeded in RTC Branch 149 with an appointed Receiver and an approved rehabilitation plan. The Receiver arranged sale of the MRT III Bonds; disputes on whether obligations to Smart and FEMI could be paid from trust proceeds led to motions and judicial orders. RTC initially approved payment in open court but then withdrew approval and denied the Receiver’s motions to pay. CA granted certiorari relief, found RTC committed grave abuse of discretion, and ordered US$6 million to be set aside for Smart and FEMI. SEC and IC sought Supreme Court review by petition for certiorari.
Issues Presented
- Whether the unpaid purchase-price obligation to Smart and FEMI, representing the balance for the MRT III Bonds, could validly be withdrawn from CAP’s trust fund.
- Whether payment to Smart and FEMI could be classified as an administrative expense and therefore an allowable withdrawal from the trust fund.
- Whether the RTC acted without or in excess of jurisdiction or with grave abuse of discretion when it denied payment of CAP’s obligations to Smart and FEMI from trust-proceeds.
CA’s Reasoning and Rationale (as presented)
The Court of Appeals held that (a) payment to Smart and FEMI constituted “benefits” or “costs of services rendered or property delivered” under Rule 16.4 of the New Rules and Section 30 of the Pre-Need Code, and thus were withdrawable from the trust fund; (b) because the MRT III Bonds were not fully paid, only the paid value would be the trust’s asset and Smart/FEMI were considered contributors to the source of trust assets rather than ordinary creditors; (c) the obligation could be characterized as an administrative expense and an expense to preserve trust assets; and (d) the principle “equality is equity” did not apply because Smart and FEMI materially enabled the sale that benefitted planholders.
Supreme Court Holding (disposition)
The Supreme Court granted the petition for review, set aside and reversed the CA decision and reinstated the RTC orders dated April 29, 2009; September 18, 2009; and January 18, 2010. The Supreme Court held that payment of CAP’s outstanding obligation to Smart and FEMI could not be validly withdrawn from the trust fund, and that such payment did not constitute an administrative expense allowable under the New Rules or Section 30 of R.A. No. 9829.
Legal Reasoning — Nature and Exclusivity of the Trust Fund
- The Court reaffirmed that a pre-need trust fund is established for the exclusive and sole benefit of the planholders. Under the New Rules and Section 30 of R.A. No. 9829, trust assets must at all times remain for planholders’ benefit and cannot be used to satisfy claims of the pre-need company’s creditors. The enumerated permissible withdrawals in Rule 16.4 are limited to payments to planholders (benefits), trust fees, bank charges, investment expenses, termination values, annuities, canceled-plan contributions, taxes on trust funds, and reasonable withdrawals for minor repairs and ordinary maintenance of trust assets.
- “Benefits” are legally defined as money or services that the pre-need company undertakes to deliver in the future to planholders; accordingly, permissible withdrawals must be payments or services stipulated in pre-need contracts to planholders. The trust fund’s statutory purpose is to ensure delivery of those guaranteed benefits and services.
- Because the statutory scheme treats the trust fund as separate and distinct from the company’s paid-up capital and corporate assets, obligations of the pre-need company incurred to infuse capital into the trust (i.e., CAP’s unpaid purchase price to Smart and FEMI) remain corporate liabilities and cannot be charged to the trust fund merely because the bonds were assigned to the trust fund. The trust fund cannot be used to satisfy corporate creditors even if the corporate obligation was incurred to correct a trust deficiency.
Analysis of the CA’s Paid-Value and Contributor Reasoning
- The CA’s view that only the paid value of the MRT III Bonds belonged to the trust and that Smart and FEMI were contributors to the source of trust assets was rejected. The Supreme Court emphasized that CAP assigned the bonds to the trust fund pursuant to an agreement and that representations in CAP’s certifications and trust account statements indicated the bonds were infused into the trust without reservation or encumbrance to the trustee. Trust fund balance sheets did not show the unpaid seller’s obligation as a trust liability, and corporate financial statements identified the unpaid obligation as CAP’s loan obligation. Thus, t
Case Syllabus (G.R. No. 202052)
Case Caption and Citation
- G.R. No. 202052, March 07, 2018; Decision penned by Justice BERSAMIN, J.; Third Division.
- Reported: 827 Phil. 339; 114 OG No. 50, 8363 (December 10, 2018).
- Parties: Securities and Exchange Commission (SEC) and Insurance Commission (IC) as petitioners; College Assurance Plan Philippines, Inc. (CAP) as respondent.
Core Legal Question
- Whether respondent CAP’s outstanding obligation to Smart Share Investment, Ltd. (Smart) and Fil-Estate Management, Inc. (FEMI), representing the balance of the purchase price for MRT III Bonds, could validly be paid from CAP’s trust fund assets; alternatively, whether such payment could be characterized as an administrative expense or otherwise be a permissible withdrawal from the trust fund; and whether the rehabilitation court acted without or in excess of jurisdiction or with grave abuse of discretion in denying payment from trust fund proceeds.
Short Answer (Holding)
- The Supreme Court granted the petition for review on certiorari, holding that:
- The obligation to pay Smart and FEMI did not constitute "benefits" or "cost of services rendered or property delivered" under Section 16.4, Rule 16 of the New Rules or Section 30 of R.A. No. 9829, and thus could not be withdrawn from the trust fund.
- Payment to Smart and FEMI did not qualify as an administrative expense that could be taken from the trust fund.
- The Court set aside and reversed the Court of Appeals decision (June 14, 2011; resolution May 21, 2012) and reinstated the RTC orders dated April 29, 2009; September 18, 2009; and January 18, 2010 in SP. No. M-6144. No pronouncement on costs.
Facts — Corporate Purpose, Trust Fund and Investments
- CAP is a duly registered domestic corporation whose primary purpose is selling pre-need educational plans.
- To guarantee payment of benefits under its plans, CAP established a Trust Fund by depositing a percentage of planholder payments.
- The Trust Fund, via trustee banks, was invested in assets and securities intended to yield returns exceeding projected tuition increases.
- Economic and regulatory developments adversely affected CAP and its Trust Fund, including deregulation of private educational institutions (1993), economic crisis and peso devaluation (beginning 1997), and the enactment of the Securities Regulation Code (RA No. 8799) in 2000.
Facts — Trust Fund Deficiency and MRT III Bonds Transaction
- Adoption of the Pre-Need Uniform Chart of Accounts and valuation rules caused CAP to incur a trust fund deficiency of P3.179 billion as of December 31, 2001.
- SEC directed CAP to submit a funding scheme to correct the deficiency. CAP proposed, among other things, to purchase MRT III Bonds and assign them to the Trust Fund.
- On August 6, 2002, CAP purchased MRT III Bonds (present value then US$14 million) from Smart and FEMI and assigned them to the Trust Fund. Purchase price payable by CAP in sixty (60) monthly installments (five years). The obligation was secured by a deed of chattel mortgage over 9,762,982 common shares of Comprehensive Annuity Plans & Pension Corporation owned by CAP.
- By 2003, after CAP had paid US$6,536,405.01 of the purchase price, SEC Oversight Board ordered CAP to stop paying Smart/FEMI due to perceived inadequacy of CAP's funds.
Facts — Rehabilitation Proceedings and Sale of Bonds
- On August 23, 2005, CAP filed a Petition for Rehabilitation; a Stay Order was issued; Mr. Mamerto Marcelo, Jr. was appointed Interim Rehabilitation Receiver.
- The trial court gave due course (December 16, 2005) and approved a Revised Business Plan (November 8, 2006). Under the plan, CAP intended to sell MRT Bonds in 2009 at 60% of face value of US$81.2 million.
- Smart demanded payment of CAP’s outstanding balance (US$10,680,045.25 as of February 28, 2009) and threatened to demand return of the MRT III Bonds if CAP insisted on holding them rather than selling.
- Receiver sought court approval for sale of MRT III Bonds "at the best possible price" (Manifestation, April 13, 2009); public respondent approved sale on April 15, 2009.
- Smart threatened to annotate a notice of unpaid seller’s lien with Deutsche Bank (custodian) but refrained and offered assistance in finding a buyer provided its seller’s lien of US$9.5 million would be settled subject to rehabilitation court approval.
- Receiver filed Manifestation with Motion (April 22, 2009) seeking approval to pay obligations to Smart and FEMI partly from sale proceeds.
Facts — Sale Proceeds and Post-Sale Status
- MRT III Bonds were sold to DBP and Land Bank for US$21,501,760.
- Buyers purchased at a premium of 3.30% made possible by: Smart’s desistance from enforcing seller’s lien; FEMI relinquishing four board seats with MRTC; swap arrangement of FEMI shares held by CAP to liquidate US$3.5 million of the obligation; and a US$1.2 million discount from CAP's liabilities.
- Sale contract partly consummated: FEMI gave up board seats; bonds delivered to buyers; buyers paid US$21,501,760 to CAP, credited to its trust accounts with Philippine Veterans Bank (PVB).
- CAP’s payment to Smart and FEMI remained to be executed.
RTC Proceedings and Orders
- Receiver moved for payment to Smart and FEMI; RTC approved the motion in open court on April 24, 2009.
- On April 29, 2009, RTC withdrew that approval and ordered submission of replies to opposition.
- After pleadings, RTC issued joint order dated September 18, 2009 denying the motion to approve payment to Smart and denying motion to approve CAP’s additional equity infusion in CAP General Insurance.
- CAP received summons from Hong Kong Court of First Instance directing it to satisfy Smart and FEMI or to indicate intention to contest; CAP filed motion (Dec 21, 2009) in RTC seeking authorization to pay Smart and FEMI, citing risk of buyers rescinding contract and demanding return of purchase price.
- On January 18, 2010, RTC denied CAP’s motion and held that, under the principle "equality is equity" in rehabilitation, CAP’s assets should be held in trust for equal benefit of all creditors; motion denied for "utter lack of merit."
CA Proceedings and Ruling (June 14, 2011)
- CAP petitioned the Court of Appeals (CA), alleging RTC acted without or in excess of jurisdiction and modified sale terms, and that denial of payment was detrimental to CAP and stakeholders.
- On August 17, 2010, CA directed Philippine Veterans Bank and the receiver to set aside US$6 million from sale proceeds pending suit.
- On June 14, 2011, CA found that RTC committed grave abuse of discretion in disapproving payment to Smart and FEMI from sale proceeds.
- CA’s reasoning included:
- Payment to Smart and FEMI constituted "benefits" under Rule 16.4 of the New Rules in relation to Section 30 of R.A. No. 9829.
- Because MRT III Bonds had not been fully paid, unpaid portion of the purchase price could not be trust fund assets; with unpaid seller’s lien, Smart and FEMI were contributors to source of trust assets rather than ordinary creditors.
- Respondent’s outstanding obligation could be considered