2S CREDIT Case Digests

TOPIC MODULE 8: DISTRIBUTION OF ASSETS OF INSOLVENT: AUTHOR #02_Pagay

CONCURRENCE AND PREFERENCE OF CREDITS

CASE TITLE Manuel D. Yngson, Jr. vs. Philippine National Bank GR NO 171132

TICKLER Preference of Credit DATE August 15, 2012

The right of first preference as regards unpaid wages recognized by Article 110 of the Labor
DOCTRINE Code, does not constitute a lien on the property of the insolvent debtor in favor of workers.
It is but a preference of credit in their favor, a preference in application. It is a method
adopted to determine and specify the order in which credits should be paid in the final
distribution of the proceeds of the insolvent's assets. It is a right to a first preference in the
discharge of the funds of the judgment debtor.

ARCAM & Company, Inc. (ARCAM) is engaged in the operation of a sugar mill in
Pampanga. Between 1991 and 1993, ARCAM applied for and was granted a loan by
respondent Philippine National Bank (PNB). To secure the loan, ARCAM executed a Real
Estate Mortgage over a 350,004-square meter parcel of land and a Chattel Mortgage over
various personal properties consisting of machinery, generators, field transportation and
heavy equipment.|||

ARCAM, however, defaulted on its obligations to PNB. Thus, pursuant to the provisions of
the Real Estate Mortgage and Chattel Mortgage, PNB initiated extrajudicial foreclosure
proceedings.

Then, ARCAM filed before the SEC a Petition for Suspension of Payments,
Appointment of a Management or Rehabilitation Committee, and Approval of
Rehabilitation Plan, with application for issuance of a temporary restraining order (TRO)
and writ of preliminary injunction. The SEC issued a TRO and subsequently a writ of
preliminary injunction, enjoining PNB and the Sheriff of the RTC of Guagua, Pampanga
from proceeding with the foreclosure sale of the mortgaged properties. An interim
management committee was also created.
FACTS
Then, SEC ruled that ARCAM can no longer be rehabilitated. The SEC noted that the
petition for suspension of payment was filed and six years had passed but the potential
"white knight" investor had not infused the much needed capital to bail out ARCAM from
its financial difficulties. Thus, the SEC decreed that ARCAM be dissolved and placed
under liquidation. The SEC Hearing Panel also granted PNB's motion to dissolve the
preliminary injunction and appointed Atty. Manuel D. Yngson, Jr. & Associates as
Liquidator for ARCAM. With this development, PNB revived the foreclosure case and
requested the RTC Clerk of Court to re-schedule the sale at public auction of the
mortgaged properties.

Contending that foreclosure during liquidation was improper, petitioner filed with the
SEC a Motion for the Issuance of a Temporary Restraining Order and/or Writ of
Preliminary Injunction to enjoin the foreclosure sale of ARCAM's assets. The SEC en
banc issued a TRO effective for seventy-two (72) hours, but said TRO lapsed without
any writ of preliminary injunction being issued by the SEC. Consequently, PNB resumed
the proceedings for the extrajudicial foreclosure sale of the mortgaged properties. PNB
emerged as the highest winning bidder in the auction sale, and certificates of sale were
issued in its favor. Petitioner filed with the SEC a motion to nullify the auction sale.
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 2S CREDIT
emerged as the highest winning bidder in the auction sale, and certificates of Case
saleDigests
were
issued in its favor. Petitioner filed with the SEC a motion to nullify the auction sale.

ISSUE/S
Whether or not PNB was not barred from foreclosing on the mortgages; therefore, the
right of first preference for unpaid wages may not be invoked in this case to nullify the
foreclosure sales conducted pursuant to PNB's right as a secured creditor to enforce its
lien on specific properties of its debtor, ARCAM.

YES. In the case of Consuelo Metal Corporation v. Planters Development Bank, which
involved factual antecedents similar to the present case, the court has already settled the
above question and upheld the right of the secured creditor to foreclose the mortgages in
its favor during the liquidation of a debtor corporation.

In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, The Supreme

Court held that if rehabilitation is no longer feasible and the assets of the corporation are
finally liquidated, secured creditors shall enjoy preference over unsecured creditors,
subject only to the provisions of the Civil Code on concurrence and preference of
credits. Creditors of secured obligations may pursue their security interest or lien,
or they may choose to abandon the preference and prove their credits as ordinary
claims.

Moreover, Section 2248 of the Civil Code provides:

"Those credits which enjoy preference in relation to specific real property or real rights,
exclude all others to the extent of the value of the immovable or real right to which the
preference refers.”

In this case, Planters Bank, as a secured creditor, enjoys preference over a specific
mortgaged property and has a right to foreclose the mortgage under Section 2248 of the
Civil Code. The creditor-mortgagee has the right to foreclose the mortgage over a specific
real property whether or not the debtor-mortgagor is under insolvency or liquidation
RULING/S proceedings. The right to foreclose such mortgage is merely suspended upon the
appointment of a management committee or rehabilitation receiver or upon the issuance
of a stay order by the trial court. However, the creditor-mortgagee may exercise his right
to foreclose the mortgage upon the termination of the rehabilitation proceedings or upon
the lifting of the stay order.

In this case, PNB elected to maintain its rights under the security or lien; hence, its
right to foreclose the mortgaged properties should be respected, in line with our
pronouncement in Consuelo Metal Corporation.

As to petitioner's argument on the right of first preference as regards unpaid wages,

the Court has elucidated in the case of Development Bank of the Philippines v.
NLRC that a distinction should be made between a preference of credit and a lien. A
preference applies only to claims which do not attach to specific properties. A lien
creates a charge on a particular property. The right of first preference as regards
unpaid wages recognized by Article 110 of the Labor Code, does not constitute a lien
on the property of the insolvent debtor in favor of workers. It is but a preference of
credit in their favor, a preference in application. It is a method adopted to determine
and specify the order in which credits should be paid in the final distribution of the
proceeds of the insolvent's assets. It is a right to a first preference in the discharge of
the funds of the judgment debtor. Consequently, the right of first preference for unpaid
wages may not be invoked in this case to nullify the foreclosure sales conducted
pursuant to PNB's right as a secured creditor to enforce its lien on specific properties

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 2S CREDIT Case Digests
wages may not be invoked in this case to nullify the foreclosure sales conducted
pursuant to PNB's right as a secured creditor to enforce its lien on specific properties
of its debtor, ARCAM.

NOTES
It is worth mentioning that under  Republic Act No. 10142, otherwise known as  the
Financial Rehabilitation and Insolvency Act (FRIA) of 2010, the right of a secured
creditor to enforce his lien during liquidation proceedings is retained. Section 114 of
said law thus provides:

SEC. 114. Rights of Secured Creditors. — The Liquidation Order shall not affect the
right of a secured creditor to enforce his lien in accordance with the applicable
contract or law. A secured creditor may:

(a)  waive his rights under the security or lien, prove his claim in the liquidation
proceedings and share in the distribution of the assets of the debtor; or

(b) maintain his rights under his security or lien;

If the secured creditor maintains his rights under the security or lien:

(1) the value of the property may be fixed in a manner agreed upon by the creditor and
the liquidator. When the value of the property is less than the claim it secures, the
liquidator may convey the property to the secured creditor and the latter will be
admitted in the liquidation proceedings as a creditor for the balance; if its value
exceeds the claim secured, the liquidator may convey the property to the creditor and
waive the debtor's right of redemption upon receiving the excess from the creditor;

(2)  the liquidator may sell the property and satisfy the secured creditor's entire claim
from the proceeds of the sale; or

(3) the secured creditor may enforce the lien or foreclose on the property pursuant to
applicable laws.

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