Dear Atty. Gab,

Musta Atty! I’m writing to you today because I’m in a really confusing situation and need some legal advice. My family owns a small business that’s been struggling financially lately. We decided to file for corporate rehabilitation to try and get back on our feet. However, my uncle, being the kind soul he is, used one of his properties as collateral for our business loans.

Now, one of the banks is trying to foreclose on his property, even though we have a stay order in place as part of the rehabilitation proceedings. I’m not sure if the stay order covers my uncle’s property since it’s not directly owned by our company. Does the stay order protect my uncle’s property? I’m worried about him losing his property because of our business’s debts.

I’m really confused about our rights and obligations in this situation. Any guidance you can provide would be greatly appreciated. Thank you!

Sincerely,
Sofia Javier

Dear Sofia,

Musta Sofia! I understand your concern regarding the foreclosure of your uncle’s property amidst your company’s rehabilitation proceedings. The key issue here is whether the stay order issued during corporate rehabilitation extends to properties not owned by the debtor company but used as collateral for its debts. As mentioned, this will affect your uncle’s financial security and the future of your business.

Accommodation Mortgages: Understanding Third-Party Security

In your situation, it is important to understand the concept of an accommodation mortgage, where someone mortgages their property as security for another’s debt. The protection afforded by a stay order in rehabilitation typically applies to the debtor’s assets. However, it usually does not directly extend to properties owned by third parties, like your uncle, who provided their property as collateral.

The law recognizes the distinction between the debtor and the third-party mortgagor. As a corporation, the business is a juridical entity separate from its owners and relatives. Therefore, properties registered under the name of your uncle generally cannot be considered part of the corporate assets, even if they were mortgaged to secure corporate debts. The Supreme Court emphasizes this principle, stating:

“It is a fundamental principle in corporate law that a corporation is a juridical entity with a legal personality separate and distinct from the people comprising it. Hence, the rule is that assets of stockholders may not be considered as assets of the corporation, and vice-versa.”

Applying this, ownership of the mortgaged properties remains with your uncle unless or until foreclosed. This leads to the conclusion that despite the mortgage, the real properties belong to your uncle and should not be automatically considered assets of the company undergoing rehabilitation. Note that,

“when a debtor mortgages his property, he merely subjects it to a lien but ownership thereof is not parted with.”

Further, the purpose of rehabilitation proceedings is to restore the company, not to provide relief at the expense of third parties who have extended security. The Supreme Court has clearly stated the intent of the law:

“rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. However, if the continued existence of the corporation is no longer viable, rehabilitation can no longer be an option. The purpose of rehabilitation proceedings is to enable the company to gain a new lease on life, and not to prolong its inevitable demise.”

Thus, the stay order’s primary aim is to protect the debtor’s assets and provide a conducive environment for rehabilitation. That being said, this protection typically does not extend to the properties of third-party mortgagors unless explicitly provided by law or jurisprudence. The exception is when the property owner is also a guarantor who is not solidarily liable, where they might be entitled to the benefit of excussion. Nevertheless, the burden of proof rests on the debtor to demonstrate their viability and the necessity of including third-party properties under the umbrella of the stay order. Thus,

“the stay order shall not cover foreclosure by a creditor of property not belonging to a debtor under corporate rehabilitation; provided, however, that where the owner of such property sought to be foreclosed is also a guarantor or one who is not solidarily liable, said owner shall be entitled to the benefit of excussion as such guarantor[.]”

Practical Advice for Your Situation

• Review the Stay Order: Carefully examine the specific terms of the stay order issued by the court. Check if it explicitly includes properties mortgaged by third parties.
• Consult with Legal Counsel: Your uncle should seek independent legal advice to understand his rights and options. He should understand how to potentially protect his property from foreclosure.
• Negotiate with the Bank: Explore the possibility of negotiating with the bank for alternative arrangements, such as restructuring the loan or providing additional collateral.
• Consider Legal Action: If the bank insists on foreclosure, your uncle might consider legal action to challenge the foreclosure proceedings, especially if he believes the stay order should apply to his property.
• Segregation of Assets: Ensure that the inventory of assets for the rehabilitation plan only includes assets legally owned by the company. Avoid including properties owned by third parties.
• Rehabilitation Plan: Develop a robust rehabilitation plan that clearly demonstrates the company’s viability and ability to meet its obligations. This can strengthen your case for obtaining favorable terms from creditors.
• Understand the Implications: Make sure your uncle understands the potential risks and benefits of allowing his property to be used as collateral. This includes the possibility of foreclosure if the company fails to rehabilitate.

Your situation is complex, and the specific details of your case will determine the outcome. Proper legal guidance and proactive measures are essential to navigate these challenges effectively.

Sincerely,
Atty. Gabriel Ablola

For more specific legal assistance related to your situation, please contact me through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This correspondence is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please schedule a formal consultation.