Court of Appeals freezes $6-million CAP bonds in MRT 3

MANILA, Philippines - The Court of Appeals (CA) has frozen $6 million in proceeds from the sale of MRT 3 bonds to the government by the collapsed College Assurance Plan (CAP).

In an eight-page resolution released yesterday, the Ninth Division of the appellate court ordered Philippine Veterans Bank (PVB) to set aside the amount pending its decision on the bid of the pre-need firm to have the amount awarded to two companies also owned by the Sobrepeña family as payment for its debt.

It was learned that CAP owed Smart Share Investments Ltd. and Fil-Estate Management Inc. (FEMI) some $10.68 million in unpaid balance for the purchase price of bonds issued by the Metro Rail Transit Corp., which operates the MRT 3.

The CA affirmed CAP’s argument that should PVB touch the fund, it would make the pending petition in the CA moot and nugatory.

“Should this court grant the petition ordering the payment to Smart and FEMI, CAP would in all likelihood not be able to comply with such order, as it would be, in the meantime, forced to use the entire proceeds thereof to maturing benefits of planholders,” the CA explained.

The CA likewise ordered the Securities and Exchange Commission (SEC) and a group of planholders, represented by the Syquia and Syquia Law Offices, to comment on the CAP petition within 10 days from receipt of the resolution and to “show cause why the order to set aside the $6 million issued should be lifted.”

CAP had already sold the subject MRT bonds for $21.502 million to the government, through the Development Bank of the Philippines and Land Bank of the Philippines.

Proceeds of the sale are kept with the PVB as ordered by the Makati RTC as a condition in its approval of CAP’s rehabilitation in November 2006. The RTC had also assigned Mamerto Marcelo Jr. as the CAP rehabilitation receiver.

The proceeds of the sale of CAP’s most liquid asset in the trust fund were supposed to be used to pay educational benefits to its more than 700,000 planholders.

CAP claimed it has already used more than P616.12 million of the sales proceeds to pay planholders’ benefits and is continuing to pay the planholders out of the remaining proceeds.

Still, it sought relief from CA to allow it to pay its obligation to Smart and FEMI.

Court records showed that in 1997, CAP incurred a trust fund deficiency of P3.179 billion as of Dec. 31, 2001.

In compliance with the directive of the SEC to submit a funding scheme to correct the deficiency, CAP, among others, proposed to purchase MRT bonds and assign the same to the trust fund.

On Aug. 6, 2002, CAP purchased the MRT bonds, with a present value then of $14 million, from Smart and FEMI, and assigned the same to the trust fund.

The purchase price was to be paid by CAP in 60 monthly installments payable over five years. In 2003, after having paid $6.54 million of the total purchase price, CAP was ordered by the SEC Oversight Board to stop paying Smart and FEMI due its perceived inadequacy of CAP’s funds.

In August 2005, CAP filed a petition for rehabilitation which was given due course by the Makati court. Under the rehabilitation plan, CAP intended to sell in 2009, the MRT bonds at 60 percent of their face value of $81.9 million.

While negotiations to effect the sale were ongoing, Smart demanded CAP to settle its outstanding balance of $10.68 million and warned that should CAP insist on holding on to the MRT bonds instead of selling them, Smart would demand the immediate return of the bonds as full and final settlement of CAP’s outstanding obligation.

Last year, the Makati court denied a motion to approve payment of CAP’s obligation to Smart filed by the receiver as well as the motion to approve the company’s additional equity infusion in CAP General Insurance.

With no payment to Smart and FEMI, CAP received summons from the High Court of Hong Kong Special Administrative Region, Court of First Instance, directing it to either satisfy the claim of the two firms, or to return the “Acknowledgment of Service,” stating whether it intends to contest the proceedings or to make an admission.

This prompted CAP to again file a motion with the Makati court for approval of payment to Smart and FEMI since the institution of the action in Hong Kong presented a real threat that the Philippine government would rescind the contract with CAP and demand a return of the purchase price of $21.5 million.

Last Jan. 18, the Makati court issued an order disapproving the payment of CAP’s liability to Smart and FEMI, in keeping with the principle of “equality is equity” in rehabilitation proceedings.

CAP, in its petition before the CA, claimed the trial court committed grave abuse of discretion amounting to lack or excess of jurisdiction.

The beleaguered pre-need firm argued that the Makati court knew that the settlement of its obligation to Smart and FEMI “was a necessary condition of the sale of the MRT bonds and the disapproval thereof amounted to a modification of the contract of sale as agreed upon by the parties and the creation of a new contract which the courts have no power to do.”

It also contended that the sale of the MRT bonds benefited CAP and its stakeholders and this would have not been possible without the concessions of Smart and FEMI and allowing the sale to proceed without question.

The disapproval of the settlement, it added, would result to protracted litigation involving CAP, the government, and Smart and FEMI, as well as the eventual return of the proceeds of the sale to government.