1/30/2018 G.R. No. 178618 | Mindanao Savings and Loan Association, Inc. v.

SECOND DIVISION

[G.R. No. 178618. October 20, 2010.]

MINDANAO SAVINGS AND LOAN ASSOCIATION, INC.,

represented by its Liquidator, THE PHILIPPINE DEPOSIT
INSURANCE CORPORATION, petitioner, vs. EDWARD
WILLKOM; GILDA GO; REMEDIOS UY; MALAYO BANTUAS,
in his capacity as the Deputy Sheriff of Regional Trial
Court, Branch 3, Iligan City; and the REGISTER OF DEEDS
of Cagayan de Oro City, respondents.

DECISION

NACHURA, J : p

This is a petition for review on certiorari under Rule 45 of the Rules

of Court filed by Mindanao Savings and Loan Association, Inc. (MSLAI),
represented by its liquidator, Philippine Deposit Insurance Corporation
(PDIC), against respondents Edward R. Willkom (Willkom); Gilda Go (Go);
Remedios Uy (Uy); Malayo Bantuas (sheriff Bantuas), in his capacity as
sheriff of the Regional Trial Court (RTC), Branch 3 of Iligan City; and the
Register of Deeds of Cagayan de Oro City. MSLAI seeks the reversal and
setting aside of the Court of Appeals 1 (CA) Decision 2 dated March 21,
2007 and Resolution 3 dated June 1, 2007 in CA-G.R. CV No. 58337. SEIcAD

The controversy stemmed from the following facts:

The First Iligan Savings and Loan Association, Inc. (FISLAI) and the
Davao Savings and Loan Association, Inc. (DSLAI) are entities duly
registered with the Securities and Exchange Commission (SEC) under
Registry Nos. 34869 and 32388, respectively, primarily engaged in the
business of granting loans and receiving deposits from the general public,
and treated as banks. 4
Sometime in 1985, FISLAI and DSLAI entered into a merger, with
DSLAI as the surviving corporation. 5 The articles of merger were not
registered with the SEC due to incomplete documentation. 6 On August 12,
1985, DSLAI changed its corporate name to MSLAI by way of an
amendment to Article 1 of its Articles of Incorporation, but the amendment
was approved by the SEC only on April 3, 1987. 7
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Meanwhile, on May 26, 1986, the Board of Directors of FISLAI

passed and approved Board Resolution No. 86-002, assigning its assets in
favor of DSLAI which in turn assumed the former's liabilities. 8
The business of MSLAI, however, failed. Hence, the Monetary Board
of the Central Bank of the Philippines ordered its closure and placed it
under receivership per Monetary Board Resolution No. 922 dated August
31, 1990. The Monetary Board found that MSLAI's financial condition was
one of insolvency, and for it to continue in business would involve probable
loss to its depositors and creditors. On May 24, 1991, the Monetary Board
ordered the liquidation of MSLAI, with PDIC as its liquidator. 9
It appears that prior to the closure of MSLAI, Uy filed with the RTC,
Branch 3 of Iligan City, an action for collection of sum of money against
FISLAI, docketed as Civil Case No. 111-697. On October 19, 1989, the
RTC issued a summary decision in favor of Uy, directing defendants
therein (which included FISLAI) to pay the former the sum of P136,801.70,
plus interest until full payment, 25% as attorney's fees, and the costs of
suit. The decision was modified by the CA by further ordering the third-
party defendant therein to reimburse the payments that would be made by
the defendants. The decision became final and executory on February 21,
1992. A writ of execution was thereafter issued. 10
On April 28, 1993, sheriff Bantuas levied on six (6) parcels of land
owned by FISLAI located in Cagayan de Oro City, and the notice of sale
was subsequently published. During the public auction on May 17, 1993,
Willkom was the highest bidder. A certificate of sale was issued and
eventually registered with the Register of Deeds of Cagayan de Oro City.
Upon the expiration of the redemption period, sheriff Bantuas issued the
sheriff's definite deed of sale. New certificates of title covering the subject
properties were issued in favor of Willkom. On September 20, 1994,
Willkom sold one of the subject parcels of land to Go. 11
On June 14, 1995, MSLAI, represented by PDIC, filed before the
RTC, Branch 41 of Cagayan de Oro City, a complaint for Annulment of
Sheriff's Sale, Cancellation of Title and Reconveyance of Properties
against respondents. 12 MSLAI alleged that the sale on execution of the
subject properties was conducted without notice to it and PDIC; that PDIC
only came to know about the sale for the first time in February 1995 while
discharging its mandate of liquidating MSLAI's assets; that the execution of
the RTC decision in Civil Case No. 111-697 was illegal and contrary to law
and jurisprudence, not only because PDIC was not notified of the
execution sale, but also because the assets of an institution placed under
receivership or liquidation such as MSLAI should be deemed in custodia
legis and should be exempt from any order of garnishment, levy,
attachment, or execution. 13 SEIDAC

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In answer, respondents averred that MSLAI had no cause of action

against them or the right to recover the subject properties because MSLAI
is a separate and distinct entity from FISLAI. They further contended that
the "unofficial merger" between FISLAI and DSLAI (now MSLAI) did not
take effect considering that the merging companies did not comply with the
formalities and procedure for merger or consolidation as prescribed by the
Corporation Code of the Philippines. Finally, they claimed that FISLAI is
still a SEC registered corporation and could not have been absorbed by
petitioner. 14
On March 13, 1997, the RTC issued a resolution dismissing the case
for lack of jurisdiction. The RTC declared that it could not annul the
decision in Civil Case No. 111-697, having been rendered by a court of
coordinate jurisdiction. 15
On appeal, MSLAI failed to obtain a favorable decision when the CA
affirmed the RTC resolution. The dispositive portion of the assailed CA
Decision reads:
WHEREFORE, premises considered, the instant appeal is DENIED.
The decision assailed is AFFIRMED.
We REFER Sheriff Malayo B. Bantuas' violation of the Supreme
Court Administrative Circular No. 12 to the Office of the Court
Administrator for appropriate action. The Division Clerk of Court is
hereby DIRECTED to furnish the Office of the Court Administrator a
copy of this decision.

SO ORDERED. 16
The appellate court sustained the dismissal of petitioner's complaint
not because it had no jurisdiction over the case, as held by the RTC, but
on a different ground. Citing Associated Bank v. CA, 17 the CA ruled that
there was no merger between FISLAI and MSLAI (formerly DSLAI) for their
failure to follow the procedure laid down by the Corporation Code for a
valid merger or consolidation. The CA then concluded that the two
corporations retained their separate personalities; consequently, the claim
against FISLAI is warranted, and the subsequent sale of the levied
properties at public auction is valid. The CA went on to say that even if
there had been a de facto merger between FISLAI and MSLAI (formerly
DSLAI), Willkom, having relied on the clean certificates of title, was an
innocent purchaser for value, whose right is superior to that of MSLAI.
Furthermore, the alleged assignment of assets and liabilities executed by
FISLAI in favor of MSLAI was not binding on third parties because it was
not registered. Finally, the CA said that the validity of the auction sale could
not be invalidated by the fact that the sheriff had no authority to conduct
the execution sale. 18

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Petitioner's motion for reconsideration was denied in a Resolution

dated June 1, 2007. Hence, the instant petition anchored on the following
grounds:
THE HONORABLE COURT OF APPEALS, CAGAYAN DE ORO
COMMITTED GRAVE AND REVERSIBLE ERROR WHEN:
(1)
IT PASSED UPON THE EXISTENCE AND STATUS OF DSLAI (now
MSLAI) AS THE SURVIVING ENTITY IN THE MERGER BETWEEN
DSLAI AND FISLAI AS A DEFENSE IN AN ACTION OTHER THAN
IN A QUO WARRANTO PROCEEDING UPON THE INSTITUTION
OF THE SOLICITOR GENERAL AS MANDATED UNDER SECTION
20 OF BATAS PAMBANSA BLG. 68. DHEaTS

(2)
IT REFUSED TO RECOGNIZE THE MERGER BETWEEN F[I]SLAI
AND DSLAI WITH DSLAI AS THE SURVIVING CORPORATION.
(3)
IT HELD THAT THE PROPERTIES SUBJECT OF THE CASE ARE
NOT IN CUSTODIA LEGIS AND THEREFORE, EXEMPT FROM
GARNISHMENT, LEVY, ATTACHMENT OR EXECUTION. 19
To resolve this petition, we must address two basic questions: (1)
Was the merger between FISLAI and DSLAI (now MSLAI) valid and
effective; and (2) Was there novation of the obligation by substituting the
person of the debtor?
We answer both questions in the negative.
Ordinarily, in the merger of two or more existing corporations, one of
the corporations survives and continues the combined business, while the
rest are dissolved and all their rights, properties, and liabilities are acquired
by the surviving corporation. 20 Although there is a dissolution of the
absorbed or merged corporations, there is no winding up of their affairs or
liquidation of their assets because the surviving corporation automatically
acquires all their rights, privileges, and powers, as well as their liabilities. 21
The merger, however, does not become effective upon the mere
agreement of the constituent corporations. 22 Since a merger or
consolidation involves fundamental changes in the corporation, as well as
in the rights of stockholders and creditors, there must be an express
provision of law authorizing them. 23
The steps necessary to accomplish a merger or consolidation, as
provided for in Sections 76, 24 77, 25 78, 26 and 79 27 of the Corporation
Code, are:

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(1) The board of each corporation draws up a plan of merger or

consolidation. Such plan must include any amendment, if necessary,
to the articles of incorporation of the surviving corporation, or in case
of consolidation, all the statements required in the articles of
incorporation of a corporation.
(2) Submission of plan to stockholders or members of each
corporation for approval. A meeting must be called and at least two
(2) weeks' notice must be sent to all stockholders or members,
personally or by registered mail. A summary of the plan must be
attached to the notice. Vote of two-thirds of the members or of
stockholders representing two-thirds of the outstanding capital stock
will be needed. Appraisal rights, when proper, must be respected.
(3) Execution of the formal agreement, referred to as the articles
of merger o[r] consolidation, by the corporate officers of each
constituent corporation. These take the place of the articles of
incorporation of the consolidated corporation, or amend the articles of
incorporation of the surviving corporation.
(4) Submission of said articles of merger or consolidation to the
SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all
corporations concerned at least two weeks before. EACTSH

(6) Issuance of certificate of merger or consolidation. 28

Clearly, the merger shall only be effective upon the issuance of a
certificate of merger by the SEC, subject to its prior determination that the
merger is not inconsistent with the Corporation Code or existing laws. 29
Where a party to the merger is a special corporation governed by its own
charter, the Code particularly mandates that a favorable recommendation
of the appropriate government agency should first be obtained. 30
In this case, it is undisputed that the articles of merger between
FISLAI and DSLAI were not registered with the SEC due to incomplete
documentation. Consequently, the SEC did not issue the required
certificate of merger. Even if it is true that the Monetary Board of the
Central Bank of the Philippines recognized such merger, the fact remains
that no certificate was issued by the SEC. Such merger is still incomplete
without the certification.
The issuance of the certificate of merger is crucial because not only
does it bear out SEC's approval but it also marks the moment when the
consequences of a merger take place. By operation of law, upon the
effectivity of the merger, the absorbed corporation ceases to exist but its
rights and properties, as well as liabilities, shall be taken and deemed
transferred to and vested in the surviving corporation. 31

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The same rule applies to consolidation which becomes effective not

upon mere agreement of the members but only upon issuance of the
certificate of consolidation by the SEC. 32 When the SEC, upon processing
and examining the articles of consolidation, is satisfied that the
consolidation of the corporations is not inconsistent with the provisions of
the Corporation Code and existing laws, it issues a certificate of
consolidation which makes the reorganization official. 33 The new
consolidated corporation comes into existence and the constituent
corporations are dissolved and cease to exist. 34
There being no merger between FISLAI and DSLAI (now MSLAI), for
third parties such as respondents, the two corporations shall not be
considered as one but two separate corporations. A corporation is an
artificial being created by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly
authorized by law or incident to its existence. 35 It has a personality
separate and distinct from the persons composing it, as well as from any
other legal entity to which it may be related. 36 Being separate entities, the
property of one cannot be considered the property of the other.
Thus, in the instant case, as far as third parties are concerned, the
assets of FISLAI remain as its assets and cannot be considered as
belonging to DSLAI and MSLAI, notwithstanding the Deed of Assignment
wherein FISLAI assigned its assets and properties to DSLAI, and the latter
assumed all the liabilities of the former. As provided in Article 1625 of the
Civil Code, "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." The certificates of title of the subject properties
were clean and contained no annotation of the fact of assignment.
Respondents cannot, therefore, be faulted for enforcing their claim against
FISLAI on the properties registered under its name. Accordingly, MSLAI,
as the successor-in-interest of DSLAI, has no legal standing to annul the
execution sale over the properties of FISLAI. With more reason can it not
cause the cancellation of the title to the subject properties of Willkom and
Go. CScTDE

Petitioner cannot also anchor its right to annul the execution sale on
the principle of novation. While it is true that DSLAI (now MSLAI) assumed
all the liabilities of FISLAI, such assumption did not result in novation as
would release the latter from liability, thereby exempting its properties from
execution. Novation is the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent one which
extinguishes or modifies the first, either by changing the object or principal
conditions, by substituting another in place of the debtor, or by subrogating
a third person in the rights of the creditor. 37

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It is a rule that novation by substitution of debtor must always be

made with the consent of the creditor. 38 Article 1293 of the Civil Code is
explicit, thus:
Art. 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.
In this case, there was no showing that Uy, the creditor, gave her
consent to the agreement that DSLAI (now MSLAI) would assume the
liabilities of FISLAI. Such agreement cannot prejudice Uy. Thus, the assets
that FISLAI transferred to DSLAI remained subject to execution to satisfy
the judgment claim of Uy against FISLAI. The subsequent sale of the
properties by Uy to Willkom, and of one of the properties by Willkom to Go,
cannot, therefore, be questioned by MSLAI.
The consent of the creditor to a novation by change of debtor is as
indispensable as the creditor's consent in conventional subrogation in
order that a novation shall legally take place. 39 Since novation implies a
waiver of the right which the creditor had before the novation, such waiver
must be express. 40
WHEREFORE, premises considered, the petition is DENIED. The
Court of Appeals Decision dated March 21, 2007 and Resolution dated
June 1, 2007 in CA-G.R. CV No. 58337 are AFFIRMED.
SO ORDERED. TDcCIS

Carpio, Leonardo-de Castro, * Peralta and Mendoza, JJ., concur.

Footnotes
* Additional member in lieu of Associate Justice Roberto A. Abad per Special
Order No. 905 dated October 5, 2010.
1. Mindanao Station, Cagayan de Oro City.
2. Penned by Associate Justice Teresita Dy-Liacco Flores, with Associate
Justices Rodrigo F. Lim, Jr. and Jane Aurora C. Lantion, concurring; rollo,
pp. 55-68a.
3. Id. at 70-72a.
4. Id. at 56.
5. Id.
6. Id.
7. Id. at 56-57.
8. Id. at 57.
9. Id.
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10. Id. at 57-58.

11. Id. at 58-59.
12. Id. at 59-60.
13. Id. at 60.
14. Id.
15. Id. at 60a.
16. Id. at 68a.
17. 353 Phil. 702 (1998).
18. Rollo, pp. 61-68.
19. Id. at 34-35.
20. Poliand Industrial Limited v. National Development Co., 505 Phil. 27, 50-51
(2005); Associated Bank v. CA, supra note 17, at 712.
21. Associated Bank v. CA, supra, at 712.
22. Poliand Industrial Limited v. National Development Co., supra note 20, at
51; PNB v. Andrada Electric & Engineering Company, 430 Phil. 882, 899
(2002); Associated Bank v. CA, supra, at 712.
23. PNB v. Andrada Electric & Engineering Company, supra at 899.
24. Sec. 76. Plan of merger or consolidation. — Two or more corporations may
merge into a single corporation which shall be one of the constituent
corporations or may consolidate into a new single corporation which shall be
the consolidated corporation.
The board of directors or trustees of each corporation, party to the merger or
consolidation, shall approve a plan of merger or consolidation setting forth
the following:
1. The names of the corporations proposing to merge or consolidate,
hereinafter referred to as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the
same into effect;
3. A statement of the changes, if any, in the articles of incorporation of
the surviving corporation in case of merger; and, with respect to the
consolidated corporation in case of consolidation, all the statements
required to be set forth in the articles of incorporation for corporations
organized under this Code; and
4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable.
25. Sec. 77. Stockholder's or member's approval. — Upon approval by
majority vote of each of the board of directors or trustees of the constituent
corporations of the plan of merger or consolidation, the same shall be
submitted for approval by the stockholders or members of each of such
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corporations at separate corporate meetings duly called for the purpose.

Notice of such meetings shall be given to all stockholders or members of the
respective corporations, at least two (2) weeks prior to the date of the
meeting, either personally or by registered mail. Said notice shall state the
purpose of the meeting and shall include a copy or a summary of the plan of
merger or consolidation. The affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock of each corporation in
the case of stock corporations or at least two-thirds (2/3) of the members in
the case of non-stock corporations shall be necessary for the approval of
such plan. Any dissenting stockholder in stock corporations may exercise
his appraisal right in accordance with the Code: Provided, That if after the
approval by the stockholders of such plan, the board of directors decides to
abandon the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made,
provided such amendment is approved by majority vote of the respective
boards of directors or trustees of all the constituent corporations and ratified
by the affirmative vote of stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of two-thirds (2/3) of the members of each
of the constituent corporations. Such plan, together with any amendment,
shall be considered as the agreement of merger or consolidation.
26. Sec. 78. Articles of merger or consolidation. — After the approval by the
stockholders or members as required by the preceding section, articles of
merger or articles of consolidation shall be executed by each of the
constituent corporations, to be signed by the president or vice-president and
certified by the secretary or assistant secretary of each corporation setting
forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the
case of non-stock corporations, the number of members; and
3. As to each corporation, the number of shares or members voting for
and against such plan, respectively.
27. Sec. 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.

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If, upon investigation, the Securities and Exchange Commission has reason to
believe that the proposed merger or consolidation is contrary to or
inconsistent with the provisions of this Code or existing laws, it shall set a
hearing to give the corporations concerned the opportunity to be heard.
Written notice of the date, time and place of hearing shall be given to each
constituent corporation at least two (2) weeks before said hearing. The
Commission shall thereafter proceed as provided in this Code.
28. The Corporation Code, Comments, Notes and Selected Cases by Jose
Campos, Jr., Vol. II, pp. 446-447.
29. Poliand Industrial Limited v. National Development Co., supra note 20, at
51.
30. Id.
31. Id. at 51-52.
32. Lozano v. De los Santos, G.R. No. 125221, June 19, 1997, 274 SCRA
452, 458.
33. Id.
34. Id.
35. PNB v. Andrada Electric & Engineering Company, supra note 22, at 894.
36. Id.
37. Phil. Savings Bank v. Sps. Mañalac, Jr., 496 Phil. 671, 686 (2005); Garcia
v. Llamas, 462 Phil. 779, 788 (2003); Agro Conglomerates, Inc. v. Court of
Appeals, 401 Phil. 644, 655 (2000).
38. Chuidan v. Sandiganbayan, 402 Phil. 795, 819 (2001); Reyes v. Court of
Appeals, G.R. No. 120817, November 4, 1996, 264 SCRA 35, 47.
39. Reyes v. Court of Appeals, supra at 47.
40. Garcia v. Llamas, supra note 37, at 791.

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