D.M. CONSUNJI, INC., PETITIONER, VS. ANNABELLE ABAYA, ET AL., ROBERT H. BLOCK AND LANDMARK ENTERTAINMENT GROUP, JARVIS YU CO, SPOUSES RAY J. CONCEPCION AND TERESITA CONCEPCION, …

D.M. Consunji versus Abaya

The Case

This is a petition for review brought by D.M. Consunji, Incorporated, which sought to reverse an order of the Regional Trial Court of Mandaluyong City dismissing its petition for the rehabilitation of URPHI. The action is essentially a challenge to the trial court's refusal to give due course to a corporate rehabilitation petition, on the ground that the petition was a scheme to defraud certain creditors and to favor certain creditors. The case matters because it shows how the Supreme Court treats rehabilitation proceedings when the petitioner's own disclosures contradict the financial distress it claims, and because it fixes the rule that a rehabilitation petition may be dismissed outright where the petitioner is not truthful about its financial standing.

Procedural History

D.M. Consunji first filed a petition for the rehabilitation of URPHI before the Regional Trial Court of Mandaluyong City, which was dismissed by that court in an order dated January 19, 2004. D.M. Consunji then filed a second petition for rehabilitation, and the trial court, in its order dated December 9, 2005, dismissed this second petition as well. The trial court found that the petition was a scheme to defraud certain creditors and to favor certain creditors, and it refused to consider the Rehabilitation Receiver's Report and Recommendation because the receiver had acted prematurely, before the petition had been given due course. From that order, D.M. Consunji filed a petition for review under Rule 43 of the 1997 Rules of Civil Procedure, bringing the matter before the Supreme Court.

Facts

URPHI was in financial distress. Its business had deteriorated to the point that it could no longer pay its financial obligations as they fell due, and it had difficulty paying its maturing liabilities over the past three years. D.M. Consunji, a creditor, filed a petition for the rehabilitation of URPHI, alleging that a court-appointed rehabilitation receiver would ensure that D.M. Consunji would be paid. The Rehabilitation Plan called for the infusion of 150,000,000 pesos to jumpstart the rehabilitation, and projected that URPHI could repay a significantly reduced amount of 1,396.85 million pesos over a period of ten years.

Unknown to the trial court at the time, URPHI had settled its obligation to Export and Industry Bank, Incorporated in the amount of 171,000,000 pesos, inclusive of interest and penalties, on January 5, 2004. This payment was made a few days before URPHI filed the rehabilitation petition on January 28, 2004, and about two weeks before the first rehabilitation petition was dismissed on January 19, 2004. The petition for rehabilitation did not allege or reveal this payment.

The trial court dismissed the petition, finding that the payment to Export and Industry Bank was suspicious given the plan's call for a 150,000,000 peso infusion, that the petition was a scheme to defraud and to favor certain creditors, and that the receiver's report was premature because the petition had not yet been given due course. D.M. Consunji brought the matter to the Supreme Court.

Issues

• Whether or not the trial court committed reversible error in dismissing the petition for rehabilitation of URPHI.
• Whether or not the payment by URPHI of 171,000,000 pesos to Export and Industry Bank, undisclosed in the rehabilitation petition, was a sufficient basis to deny the petition.
• Whether or not the Rehabilitation Receiver's Report and Recommendation was properly disregarded for having been filed prematurely.

Applicable Provisions

Rule 4, Section 9, second paragraph of the Rules of Civil Procedure, as quoted by the trial court, provides:

If, after the initial hearing, the court is satisfied that there is merit in the petition, it shall give due course to the petition and immediately refer the petition and its annexes to the Rehabilitation Receiver who shall evaluate the rehabilitation plan and submit his recommendations to the court not later than one hundred twenty (120) days from the date of initial hearing.

This provision bears on the case because it establishes that the receiver's evaluation comes only after the court gives due course to the petition, which is why the trial court held that the receiver's report was premature.

Ruling

On the first issue, the Court held that the trial court committed no reversible error and had sufficient basis in dismissing the petition. The Court noted that the petition alleged URPHI's inability to meet its maturing obligations and its cash flow shortfall, yet URPHI was able to settle its 171,000,000 peso obligation to Export and Industry Bank a few days before filing the rehabilitation petition. The Court held that it was correct for the trial court to deny the petition using this payment as justification, even granting that all the allegations of the petition were correct and could be supported by evidence.

On the second issue, the Court held that the payment was indeed sufficient and enough basis to deny the petition. The Court found that the payment practically negated all the allegations of the petition relating to the financial standing of URPHI. The Court also found that the petition did not state, reveal, or show that URPHI had paid Export and Industry Bank the 171,000,000 pesos. While fraud is an intent of the mind, the Court held that the petitioner's own admission that the data in the petition and the rehabilitation plan were culled from reports and documents submitted by URPHI was more than sufficient to conclude that the petitioner, in not disclosing the payment, did not disclose the true financial standing of URPHI. The Court declared this to be an indication of fraud and found the petitioner not truthful to its cause.

On the third issue, the Court upheld the trial court's finding that the receiver filed his recommendation prematurely, since the court should have first given due course to the petition before referring it to the receiver. The Court agreed that the receiver's report had no basis and should not be given consideration.

Doctrine

A petition for rehabilitation may be dismissed where the petitioner conceals a material payment to a creditor that contradicts its claim of financial distress. The failure to disclose such a payment in the petition and the rehabilitation plan is an indication of fraud, and the petitioner's admission that its data were culled from reports submitted by the company is sufficient to conclude that it did not disclose the true financial standing of the company. A rehabilitation petition that is a scheme to defraud certain creditors and to favor certain creditors is properly dismissed. Finally, under Rule 4, Section 9 of the Rules of Civil Procedure, the Rehabilitation Receiver's evaluation and recommendation come only after the court gives due course to the petition, and a report filed before that stage is premature and without basis.

Disposition

The Supreme Court denied the petition and dismissed it, affirming the trial court's order dismissing the petition for rehabilitation of URPHI.

Remember This

A rehabilitation petition that conceals a material payment to a creditor, contradicting its claim of distress, is a scheme to defraud and to favor certain creditors, and is properly dismissed. Examiners use this case to test the requisites of corporate rehabilitation and the rule that the receiver's recommendation comes only after the court gives due course to the petition.