Case: Chinabank vs. St. Francis Square, 2022
Ponente: Justice Amy Lazaro-Javier
St. Francis Square Realty Corporation (SFSRC), facing financial difficulties, entered rehabilitation proceedings in 2000, which triggered a stay order against Chinabank’s loan collection; however, Chinabank continued to impose charges and contested property releases, leading to a protracted legal battle.
Before the year 2000, St. Francis loans from Chinabank (P300M), secured by several properties:
• Condominium project known as The Legaspi Place located at Salcedo St., Legaspi Village, Makati City.
• House and lot at No. 34 Constellation St., Bel-Air 2 Village, Makati City.
• Building and lot on 7th Avenue, Caloocan City.
In May 2000, SFSRC files for rehabilitation and a Stay Order was issued.
The rehabilitation proceeding has a Cram-Down Clause. It essentially “crams down” the terms of the plan on dissenting creditors, binding them to the agreed-upon restructuring. A cram-down clause provision allows a rehabilitation court to approve a rehabilitation plan even if the majority of creditors object to it
The rehabilitation plan also provided two options for settling loans: dacion en pago with waived penalties, or disposition of mortgaged properties without interest and penalties after the initial suspension order. Meaning, if Chinabank will choose dacion in pago, it agrees to satisfy the debt without penalties. If it chooses the latter, it can dispose the mortgage properties but must wait until the stay order is lifted.
Chinabank refused to accept the dacion en pago option.
However, Chinabank continued to impose interests, penalties, and other charges on SFSRC’s loans despite the Stay Order issued on May 4, 2000, which SFSRC argued was a violation of the rehabilitation proceedings.
Chinabank challenged the SEC’s authority, arguing that they do no have the power to modify loan terms during rehabilitation.
In 2013, St. Francis filed a motion claiming that the mortgaged properties’ valuations had increased, making the loans over-collateralized and warranting the release of the Bel-Air and Caloocan properties. SEC orders the release of secured properties due to over-collateralization.
In 2017, the Court of Appeals upholds ban on post-Stay Order charges. Chinabank appealed to the Supreme Court assailing the SEC Hearing Panel’s orders.
The core issue before the Supreme Court is whether or not the Rehabilitation Plan can impair a contract of loan.
The Supreme Court held in the affirmative.
In general, Non-Impairment Clause means that contractual agreements should be respected, and their terms upheld.
However, it is not absolute. If a contract is unfair, unconscionable, or contrary to public policy, the prohibition against impairment of contracts does not apply. In such cases, the courts can impair contracts for the greater good.
The Non-Impairment Clause must also yield to the broader goals of a valid corporate rehabilitation plan. Courts will prioritize the welfare of a broader set of people rather than the few interests of creditors to recover. Protecting a corporation’s rehabilitation journey is also important to making it more sustainable and able to fulfill its obligations to creditors.
The purpose of rehabilitation proceedings is to enable the company to gain a new lease on life and thereby allow creditors to be paid their claims from its earnings
For a rehabilitation plan to be valid, it must have a valid “cram-down” clause.
A cram-down clause alters the terms of existing contracts or debt obligations, even if some creditors object. It is necessary to prevent dissenting creditors from derailing a potentially successful rehabilitation and prioritizes long-term viability for all stakeholders over immediate, full recovery for some. Only a valid cram-down clause will cause the approval of a rehabilitation plan.
Requirements of a “Cram-Down”
- Court must ensure that the projected cash flow from the rehabilitation plan allows the closest present value recovery for its creditors. In other words, it must be economically feasible to satisfy the creditors in the earliest time possible.
- The debtor has assets that generates more cash if used in its daily operations than if sold.
- The debtor has a definite source of financing for the proper implementation of a rehabilitation plan that is anchored on realistic assumptions and goals.
In effect, one of the consequences of a valid “cram-down” power is the impairment of contracts.
In summary, the non-impairment clause can be overridden by the goals of corporate rehabilitation. This is established when a cram-down clause is shown to have a feasible and equitable outcome for all stakeholders.
This also means that Chinabank should adhere to the stay order. The rehabilitation plan, including the suspension of interest and penalties, was approved to allow St. Francis to recover financially. Chinabank’s refusal to accept dacion en pago means it must accept the other option which entails the suspension of charges, penalties, and interests from the date of the stay order. Chinabank cannot now insist that it cannot be compelled to waive interests and other charges. Simply put, Chinabank is already in estoppel.
Image source: https://commons.m.wikimedia.org/wiki/File:Chinabank_Makati.jpg#filelinks
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