Bank of the Philippine Islands vs. Securities and Exchange Commission

A rehabilitation plan that proposes dacion en pago does not impair a secured creditor’s contractual rights or constitutional protection, because the dacion remains a voluntary contract that cannot be perfected without the creditor’s consent; the creditor who declines the proposal may either accept settlement at the mortgaged properties’ selling prices or await liquidation and enforce its preference over unsecured creditors, and the SEC’s approval of the plan as a quasi‑judicial body is not within the reach of the non‑impairment clause, which restrains legislative, not adjudicatory, power.

ASB Group of Companies obtained credit accommodations from Far East Bank and Trust Company (BPI’s predecessor) aggregating ₱86,800,000.00, secured by a real estate mortgage over two properties on Eisenhower and Annapolis Streets in Greenhills, San Juan. In May 2000, ASB Group filed for rehabilitation and suspension of payments with the SEC. The interim receiver’s rehabilitation plan proposed that ASB invoke a dacion en pago over the Eisenhower property at ASB’s selling value of ₱84,000,000.00 in full satisfaction of the entire obligation to BPI, requesting release of the Annapolis property to the asset pool for other creditors. BPI opposed the plan, arguing that it was being compelled to accept a settlement that extinguished its secured claim on terms dictated solely by the debtor.

• The Loan and Security: BPI’s predecessor-in‑interest, Far East Bank and Trust Company (FEBTC), extended credit facilities to the ASB Group of Companies with a total outstanding principal of ₱86,800,000.00, secured by a real estate mortgage over two parcels of land on Eisenhower Street and Annapolis Street in Greenhills, San Juan.

• The Rehabilitation Petition: On 2 May 2000, the ASB Group filed a petition for rehabilitation and suspension of payments before the SEC, which was docketed as SEC Case No. 05‑00‑6609. An interim receiver was appointed and subsequently submitted the Proposed Rehabilitation Plan.

• The Rehabilitation Plan’s Dacion Provision: The plan proposed that ASB invoke a dacion en pago for the Eisenhower property at ASB’s selling value of ₱84,000,000.00 against the total exposure to BPI. The dacion would constitute full payment of the entire obligation, as the balance was to be considered waived. In return, ASB requested the release of the Annapolis property to be placed in the creditors’ asset pool. The plan further stated that if the secured creditor did not agree to the dacion, the obligation would be settled with mortgaged properties at ASB’s selling prices, without interest, penalties, and related charges accruing after the initial suspension order.

• BPI’S Opposition: BPI opposed the plan and moved for dismissal of the petition, contending that the proposed dacion effectively compelled it to enter into an involuntary contract, unilaterally fixed the selling price of the mortgaged property, and deprived it of its preferential right as a secured creditor. BPI asserted that the plan violated its freedom to contract and constituted an impairment of its security.

• Approval of the Plan: Despite BPI’s opposition, the SEC hearing panel approved the rehabilitation plan on 26 April 2001 and appointed a rehabilitation receiver. The SEC En Banc affirmed the approval, finding no grave abuse of discretion. BPI challenged the En Banc ruling before the Court of Appeals, which upheld the plan’s validity.

• Impairment of Contractual Rights: Petitioner maintained that the approved rehabilitation plan compelled it to accept a dacion en pago against its will, in violation of its freedom and right to contract. The dacion was a mode of payment favorable only to the ASB Group and effectively impaired the mortgage agreements between the parties.

• Coercion and Unilateral Benefit: Petitioner argued that the plan sanctioned a settlement at selling prices unilaterally determined by the debtor, rendering its status as a preferred creditor illusory. By imposing conditions rather than allowing the parties to agree, the plan lacked the express and free consent required for a valid dacion en pago.

• Discriminatory and Indefinite Terms: Petitioner claimed that the plan provided no feasible repayment scheme for secured creditors who rejected the dacion, making the arrangement discriminatory. The interference with secured creditors’ rights was so indefinite and open-ended as to effectively deprive them of their security.

• Lack of Valuation Mechanism: Petitioner further asserted that no effort was made to resolve the impasse on valuation of the mortgaged properties, leaving secured creditors with no adequate protection for their claims.

• No Compulsion; Dacion Requires Consent: Respondents, through the Office of the Solicitor General, countered that the dacion en pago could only proceed upon mutual agreement of the parties, and thus BPI’s allegation of coercion was unfounded. The plan merely proposed the arrangement; it did not mandate acceptance.

• Preservation of Secured Creditor’s Preference: Respondents argued that BPI, as a secured creditor, retained its preference over unsecured creditors. If the dacion failed to materialize, the plan contemplated settlement with mortgaged properties at selling prices, and ultimately BPI could enforce its preferred right upon liquidation of the ASB Group’s assets.

• Non‑Impairment Clause Inapplicable: The ASB Group stressed that the constitutional non‑impairment clause is a limitation on legislative power, not on judicial or quasi‑judicial power. The SEC’s approval of the rehabilitation plan was an exercise of adjudicatory authority by an administrative agency and thus did not trigger the clause.

• Unreasonableness of BPI’s Objection: Respondents additionally argued that BPI failed to submit any alternative valuation of the mortgaged properties to support its objection, rendering its challenge baseless.

• Impairment of Contract: Whether the SEC’s approval of a rehabilitation plan containing a dacion en pago provision violated BPI’s constitutional right against impairment of contracts.

• Compulsion and Prejudice: Whether the rehabilitation plan compelled BPI to accept the dacion en pago against its will and thereby deprived it of its rights as a secured creditor.

• Impairment of Contract: The non‑impairment clause under the Constitution limits the exercise of legislative power, not judicial or quasi‑judicial power. The SEC hearing panel that approved the rehabilitation plan was acting as a quasi‑judicial body; its order cannot constitute an impairment of the obligation of contracts. Moreover, the mere proposal of a dacion en pago does not, by itself, impair contractual rights because dacion en pago is a special mode of payment akin to a sale, requiring consent, object certain, and cause — none of which can be supplied unilaterally. Without the creditor’s acceptance, no contract is perfected and no existing obligation is altered.

• Compulsion and Prejudice: No element of compulsion attended the dacion en pago provision. The plan was not the only solution presented; it explicitly provided that if the dacion did not materialize for lack of secured creditor agreement, the obligation would be settled with the mortgaged properties at ASB’s selling prices. Should BPI reject both alternatives, it retained full liberty to assert its rights in the eventual liquidation and distribution of the ASB Group’s assets. As a secured creditor, BPI would continue to enjoy preference over unsecured creditors when the assets are finally liquidated. The rehabilitation proceedings merely suspended the enforcement of claims to give the distressed corporation an opportunity to reorganize; they did not extinguish BPI’s secured status.

• Non‑Impairment Clause — Limited to Legislative Acts — The constitutional prohibition against impairment of the obligation of contracts is a restraint on the exercise of legislative power; it does not apply to the adjudicatory acts of judicial or quasi‑judicial bodies. The approval of a rehabilitation plan by the SEC in the exercise of its quasi‑judicial functions does not fall within the ambit of the clause.

• Dacion en Pago — Nature and Requisites — Dacion en pago is a special mode of payment by which the debtor offers another thing to the creditor, who accepts it as equivalent of payment of an outstanding debt. The undertaking partakes of the nature of a sale, requiring the essential elements of consent, object certain, and cause or consideration. As a contract, it cannot be perfected without the mutual consent of the parties.

• Rehabilitation — Suspension of Claims and Protection of Secured Creditors — Corporate rehabilitation under P.D. No. 902‑A aims to preserve the going‑concern value of a distressed business and afford it a fresh start while ensuring equitable treatment of creditors. The approval of a rehabilitation plan and the appointment of a receiver merely suspends actions for claims against the corporation; it does not compel secured creditors to accept proposed settlement arrangements. Secured creditors may reject a proposed dacion en pago and subsequently enforce their preference when the assets are liquidated should rehabilitation prove unfeasible.

• Rehabilitation Proposals Are Not Coercive — A rehabilitation plan’s dacion en pago provision is merely a proposal. If the creditor does not accept it, the plan may provide alternative modes of settlement, such as payment at the mortgaged properties’ selling prices. The creditor who rejects both options retains its preferred right in the distribution of the debtor’s assets upon liquidation and does not lose its status as a secured creditor.

• “The non-impairment clause is a limit on the exercise of legislative power and not of judicial or quasi-judicial power. The SEC, through the hearing panel that heard the petition for approval of the Rehabilitation Plan, was acting as a quasi-judicial body and thus, its order approving the plan cannot constitute an impairment of the right and the freedom to contract.” — This passage grounds the ruling in the limited reach of the constitutional clause, distinguishing legislative from adjudicatory action.

• “Dacion en pago is a special mode of payment where the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. … Being a form of contract, the dacion en pago agreement cannot be perfected without the consent of the parties involved.” — The Court emphasized that the voluntary character of dacion precludes any finding of compulsion.

• “We find no element of compulsion in the dacion en pago provision of the Rehabilitation Plan. It was not the only solution presented by the ASB to pay its creditors.” — The Court rejected the argument that the plan coerced BPI into accepting the settlement, pointing to alternative remedies available under the plan and in liquidation.

• Metropolitan Bank & Trust Company v. ASB Holdings, et al., G.R. No. 166197, 27 February 2007 — Earlier case involving the same rehabilitation plan and identical legal issues raised by another secured creditor. The Court ruled that the plan did not impair contractual rights and that secured creditors retained preference in liquidation. Applied as controlling precedent and direct authority for resolving the present petition.

• Rizal Commercial Banking Corporation v. Intermediate Appellate Court, 378 Phil. 10 (1999) — Cited for the principle that a secured creditor enjoys preference over unsecured creditors and retains this right when a distressed corporation’s assets are eventually liquidated.

• Lim v. Secretary of Agriculture, 34 SCRA 751 (1970) — Authority for the rule that the constitutional prohibition against impairment of obligations of contracts is directed against legislative enactments, not judicial or quasi‑judicial decisions.

• Uy v. Sandiganbayan, et al., G.R. No. 111544, 6 July 2004, 433 SCRA 424 — Provided the definition of dacion en pago as a special mode of payment.

• Philippine Lawin Bus, et al. v. Court of Appeals, 425 Phil. 146 (2002) — Cited for the essential elements of dacion en pago as akin to a contract of sale: consent, object, and cause.

• Section 10, Article III, 1987 Constitution (Non‑Impairment Clause) — Invoked by BPI but held inapplicable because the clause limits only legislative power, not the quasi‑judicial action of the SEC approving a rehabilitation plan.

• Presidential Decree No. 902‑A (Reorganization of the SEC and Transfer of Jurisdiction) — The statute under which the SEC exercised jurisdiction over rehabilitation and suspension of payments. The Court relied on its policy objective “to effect a feasible and viable rehabilitation” by preserving a business as a going concern, recognizing that assets are often more valuable when maintained than when liquidated.

Chief Justice Puno and Justices Quisumbing, Ynares‑Santiago, Sandoval‑Gutierrez, Austria‑Martinez, Corona, Carpio‑Morales, Azcuna, Velasco, Jr., Nachura, Reyes, and Leonardo‑De Castro concurred. Justice Chico‑Nazario certified that she concurred with the Decision. Justice Carpio was on leave.