RAMON E. REYES AND CLARA R. PASTOR, PETITIONERS, VS. BANCOM DEVELOPMENT CORP., RESPONDENT.

Reyes versus Bancom Development

The Case

This is a petition for review on certiorari brought by Ramon E. Reyes and Clara R. Pastor against Bancom Development Corporation. The petitioners were sued as guarantors of loans extended by Bancom to Marbella Realty, Incorporated, and they ask the Supreme Court to overturn the ruling of the Court of Appeals that held them solidarily liable. The case matters for two reasons: it settles what happens to a pending suit when the corporation that filed it loses its certificate of registration, and it restates the binding force of a plain and unconditional guaranty.

Procedural History

Bancom filed a complaint for sum of money with prayer for damages before the Regional Trial Court of Makati, against Marbella as principal debtor and the members of the Reyes Group as guarantors. In a decision dated 8 April 1991, the trial court held Marbella and the Reyes Group solidarily liable, ordering them to pay the amounts on the promissory notes plus interest from the date of demand, penalties, and attorney's fees.

Marbella and the Reyes Group appealed to the Court of Appeals. During the appeal, the law firm representing Bancom moved to withdraw its appearance, saying it had totally lost contact with its client. The Court of Appeals granted the withdrawal. In a decision dated 25 June 2009, the appellate court denied the appeal, holding that the obligations under the promissory notes and the continuing guaranty were clear and had the force of law. Only the two petitioners moved for reconsideration, raising for the first time the abatement of the suit because Bancom's certificate of registration had been revoked by the Securities and Exchange Commission. The Court of Appeals denied reconsideration in a resolution dated 9 November 2009.

Petitioners then filed the present petition for review before the Supreme Court. The Court ordered Bancom to comment, but the copy of the resolution sent to its address on record was returned unserved with the notation that the address was non-existent, so the Court deemed the filing of a comment waived.

Facts

In March 1979, the Reyes Group, composed of Angel E. Reyes, Senior, Florencio Reyes, Junior, Rosario R. Du, Olivia Arevalo, and the two petitioners, executed a Continuing Guaranty in favor of Bancom. Under that instrument, they guaranteed the full and due payment of the obligations incurred by Marbella under an underwriting agreement, including promissory notes issued on 24 May 1979 for the aggregate amount of 2,828,140 pesos and 32 centavos.

Marbella failed to pay at maturity. It issued a second set of notes for a higher amount, then a third and a fourth set, each time defaulting. Because Marbella still refused to pay despite repeated demands, Bancom sued on 7 July 1981 for the total sum of 4,300,247 pesos and 35 centavos.

Marbella and the Reyes Group defended by claiming that they had been forced to sign the notes and the guaranty against their will, and that these instruments should be read together with earlier contracts for a condominium project called Marbella II. Those contracts involved Bancom, the Reyes Group as landowners, and Fereit Realty Development Corporation, a sister company of Bancom, as developer. The project met financial difficulties, and the Reyes Group claimed it was compelled to assume part of Fereit's loans. The trial and appellate courts found no merit in these defenses.

Issues

• Whether or not the present suit should be deemed abated by the revocation by the Securities and Exchange Commission of the certificate of registration issued to Bancom.
• Whether or not the Court of Appeals correctly ruled that petitioners are liable to Bancom for the payment of the loan amounts indicated on the promissory notes issued by Marbella, and for attorney's fees.

Applicable Provisions

Section 122 of the Corporation Code provides:

Section 122. Corporate Liquidation. Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established.

This provision fixes the three-year winding-up period and is the starting point for asking whether a dissolved corporation may still sue or be sued.

Section 145 of the Corporation Code provides:

Section 145. Amendment or repeal. No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof.

This provision preserves Bancom's right to collect and, by consequence, keeps the debtors' liability subsisting despite dissolution.

Ruling

On the first issue, the Court held that the revocation of Bancom's certificate of registration does not justify abatement. Section 122 allows a corporation to continue as a body corporate for three years for the purpose of prosecuting and defending suits, and after that period a defunct corporation generally loses the right to sue and be sued in its name. But jurisprudence recognizes an exception: a receiver, an assignee, or a trustee may institute suits or continue pending actions on behalf of the corporation even after the winding-up period. The Court recalled its ruling in Sumera versus Valencia, and added that a receiver or assignee need not even be appointed, because the board of directors of a corporation may be considered trustees by legal implication for the purpose of winding up its affairs. Since Bancom's directors are deemed trustees, the failure to convey its assets to a receiver or assignee was of no consequence. The Court also stressed that the dissolution of a creditor corporation does not extinguish any right or remedy in its favor, and that the corresponding liability of its debtors must likewise subsist, for to rule otherwise would sanction the unjust enrichment of the debtor.

On the second issue, the Court affirmed the finding of liability. Petitioners did not challenge the genuineness and due execution of the promissory notes, nor did they deny nonpayment. Their sole defense was that the funds released were not loans but additional financing, a defense the Court rejected. The obligations under the notes and the guaranty are plain and unqualified, and the Court quoted the amendment of the memorandum of agreement:

Bancom hereby agrees to grant the additional financing requested by Marbella II in the principal amount of TWO MILLION EIGHT HUNDRED TWENTY EIGHT THOUSAND ONE HUNDRED FORTY & 32/100 (P2,828,140.32), Philippine Currency, payable by Marbella II within three (3) years, under such terms and conditions as may be mutually agreed upon by Bancom and Marbella II.

Even reading the earlier agreements together, the result is the same: Marbella obligated itself to pay Bancom unconditionally, while its right to reimbursement ran against Fereit, an entirely distinct entity. The Court also found the award of 500,000 pesos in attorney's fees in order, but modified the interest to conform to prevailing jurisprudence.

Doctrine

First, the mere revocation of a corporation's charter does not abate a pending suit. Under Section 122, the corporation continues for three years for the prosecution and defense of suits, and beyond that period a receiver, an assignee, or a trustee, including the board of directors as trustees by legal implication, may continue the action. Second, under Section 145, the dissolution of a creditor corporation neither extinguishes its rights nor impairs the liabilities of its debtors. Third, a guaranty that is plain and unqualified binds the guarantor solidarily with the principal debtor, and the clear terms of a contract cannot be negated by self-serving testimony.

Disposition

The petition was denied, and the decision and resolution of the Court of Appeals were affirmed with modification, holding petitioners jointly and severally liable with Marbella and the other guarantors for the principal amount, legal interest, penalties, attorney's fees, and interest on all monetary awards until full payment.

Remember This

Memorize this line: the dissolution of a corporation does not abate a pending suit, because its directors act as trustees by legal implication, and the dissolution of a creditor corporation does not extinguish the debtor's liability. Examiners use this case in corporation law on the three-year winding-up period and the trustee exception, and in civil law on the solidary liability of guarantors under a plain and unconditional guaranty.