MINDANAO SAVINGS AND LOAN ASSOCIATION, INC., REPRESENTED BY ITS LIQUIDATOR, THE PHILIPPINE DEPOSIT INSURANCE CORPORATION, PETITIONER, VS. EDWARD WILLKOM; GILDA GO; REMEDIOS UY; …

Mindanao Savings and Loan Association versus Willkom

The Case

This is a petition for review on certiorari brought by Mindanao Savings and Loan Association, represented by its liquidator, the Philippine Deposit Insurance Corporation, against Edward Willkom, Gilda Go, Remedios Uy, the sheriff of Iligan City, and the Register of Deeds of Cagayan de Oro City. The petitioner seeks to annul a sheriff's sale of six parcels of land that had been registered in the name of the First Iligan Savings and Loan Association, and to cancel the titles later issued to Willkom and Go. The case matters because it settles two questions every commercial law and civil law examinee must know: when does a corporate merger take effect, and when does an assumption of liabilities amount to a novation by substitution of debtor.

Procedural History

The petitioner filed a complaint for annulment of sheriff's sale, cancellation of title, and reconveyance before the Regional Trial Court of Cagayan de Oro City. The trial court dismissed the case for lack of jurisdiction, reasoning that it could not annul a decision rendered by a court of coordinate jurisdiction, namely the Iligan City court that had issued the judgment in the collection suit. The petitioner appealed to the Court of Appeals, which affirmed the dismissal but on a different ground. The appellate court held that there was no valid merger between the First Iligan Savings and Loan Association and the Davao Savings and Loan Association, so the two corporations retained separate personalities, the claim against the First Iligan corporation was warranted, and the auction sale was valid. It added that Willkom was an innocent purchaser for value, and that the unregistered assignment of assets was not binding on third parties. The petitioner's motion for reconsideration was denied, so it came to the Supreme Court by petition for review on certiorari under Rule 45.

Facts

The First Iligan Savings and Loan Association and the Davao Savings and Loan Association were entities registered with the Securities and Exchange Commission, engaged in granting loans and receiving deposits, and treated as banks. In 1985 they entered into a merger, with the Davao association as the surviving corporation, but the articles of merger were never registered with the Commission because the documentation was incomplete. The Davao association then changed its corporate name to Mindanao Savings and Loan Association, an amendment approved by the Commission only in 1987. In May 1986, the board of the First Iligan association assigned its assets in favor of the Davao association, which in turn assumed its liabilities.

The business of the petitioner failed. The Monetary Board of the Central Bank ordered its closure and placed it under receivership in August 1990, finding it insolvent, and in May 1991 ordered its liquidation with the Philippine Deposit Insurance Corporation as liquidator. Earlier, before the closure, Remedios Uy had sued the First Iligan association for collection of a sum of money. In October 1989 the Iligan court rendered a summary decision in her favor, which became final and executory in February 1992, and a writ of execution issued.

In April 1993 the sheriff levied on six parcels of land owned by the First Iligan association, and the notice of sale was published. At the public auction in May 1993, Edward Willkom was the highest bidder. A certificate of sale was issued and registered, and after the redemption period expired, a definite deed of sale was issued and new titles were placed in Willkom's name. In September 1994 Willkom sold one of the parcels to Gilda Go. In June 1995 the petitioner, through the deposit insurer, filed the complaint, claiming the sale was conducted without notice to it and that the assets of an institution under liquidation are in custodia legis, that is, in the custody of the law, and exempt from levy and execution.

Issues

• Whether or not the merger between the First Iligan Savings and Loan Association and the Davao Savings and Loan Association, now the petitioner, was valid and effective.
• Whether or not the assumption by the Davao association of the liabilities of the First Iligan association resulted in a novation by substitution of debtor that released the latter from liability.

Applicable Provisions

Section 79 of the Corporation Code provides:

Section 79. Effectivity of merger or consolidation. The articles of merger or of consolidation, signed and certified as herein above required, shall be submitted to the Securities and Exchange Commission in quadruplicate for its approval; Provided, That in the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. If the Commission is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be effective.

This provision fixes the exact moment a merger takes effect, which is the issuance of the certificate by the Commission, and it is the provision on which the entire first issue turns.

Article 1625 of the Civil Code provides:

An assignment of credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property.

This provision explains why the unregistered assignment of assets in favor of the Davao association could not bind the respondents, since the certificates of title were clean and bore no annotation of the assignment.

Article 1293 of the Civil Code provides:

Article 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237.

This provision governs the second issue, because the creditor's consent is the indispensable element of a novation by change of debtor.

Ruling

On the first issue, the Court held that there was no valid merger. A merger does not become effective upon the mere agreement of the constituent corporations. The Court laid out the steps required by the Corporation Code: the board of each corporation draws up a plan of merger; the plan is submitted to the stockholders or members, with at least two weeks' notice, and approved by stockholders representing at least two thirds of the outstanding capital stock; the articles of merger are executed by the corporate officers; the articles are submitted to the Securities and Exchange Commission for approval; the Commission may set a hearing; and the Commission issues a certificate of merger. The Court stressed that the issuance of the certificate is crucial, because it bears out the Commission's approval and marks the moment when the consequences of the merger take place. Here, the articles of merger were never registered because the documentation was incomplete, and no certificate of merger was ever issued. Even the recognition of the merger by the Monetary Board could not cure this defect. Without a merger, the two corporations remained separate entities as to third parties, and the property of one could not be considered the property of the other. The unregistered assignment of assets did not bind third parties under Article 1625, and the respondents could not be faulted for enforcing their claim against the First Iligan association on properties registered in its name. The petitioner therefore had no legal standing to annul the sale or cancel the titles of Willkom and Go.

On the second issue, the Court held that there was no novation. While the Davao association assumed all the liabilities of the First Iligan association, that assumption did not release the latter from liability. Novation by substitution of debtor requires the consent of the creditor, and there was no showing that Uy consented to the agreement. The Court quoted Article 1293 and added that the creditor's consent is as indispensable as it is in conventional subrogation, and that since novation implies a waiver of a right the creditor had before, such waiver must be express. The assets transferred to the Davao association therefore remained subject to execution to satisfy Uy's judgment claim, and the later sales to Willkom and to Go could not be questioned.

Doctrine

First, a merger or consolidation does not become effective upon the mere agreement of the constituent corporations. It takes effect only upon the issuance of a certificate of merger or consolidation by the Securities and Exchange Commission, and where a party is a special corporation governed by its own charter, the favorable recommendation of the appropriate government agency must first be obtained. Until that certificate issues, the corporations remain separate and distinct entities as to third persons, and the property of one cannot be treated as the property of the other.

Second, an assignment of assets and liabilities between corporations produces no effect against third persons unless it appears in a public instrument or is recorded in the Registry of Property, following Article 1625 of the Civil Code. A clean certificate of title with no annotation of the assignment protects those who deal with the registered owner.

Third, novation by substitution of debtor requires the consent of the creditor, under Article 1293 of the Civil Code. The assumption by one corporation of another's liabilities does not release the original debtor absent the creditor's express consent, since novation implies a waiver of the creditor's right.

Disposition

The petition was denied, and the decision and resolution of the Court of Appeals were affirmed, so the petitioner lost and the auction sale and the titles of Willkom and Go stood.

Remember This

Memorize this line: no certificate of merger from the Securities and Exchange Commission, no merger, and no consent from the creditor, no novation by substitution of debtor. Examiners use this case to test the effectivity of mergers under Section 79 of the Corporation Code and the requisites of novation under Article 1293 of the Civil Code.