Memorandum Decision re Philippine Airlines, Inc.

DO NOT PUBLISH

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA

In re: No. 98-3-2705-TC Ancillary Proceeding Ancillary Petition regarding PHILIPPINE AIRLINES, INC., a Philippine corporation, Debtor. __________________________________/

MEMORANDUM DECISION

On September 9 and 10, 1998, this court conducted a trial regarding the objections of Aviation Sales Leasing Company, General Electric Company, and The Boeing Company to the ancillary proceeding petition filed by Philippine Airlines, Inc. Frederick D. Holden, Jr., Timothy A. Meltzer, and Jeffrey K. Garfinkle appeared for Petitioner. Steven G. Polard, Michael I. Sorochinsky, Steven M. Hedberg, and Jay L. Westbrook appeared for The Boeing Company. D. Farrington Yates and Carrie Beth Lesser appeared for Aviation Sales Leasing Company. David B. Haber and Richard A. Rogan appeared for General Electric Company. For the reasons stated below, the court grants the relief requested by the petitioner.

FACTS

Philippine Airlines, Inc. (PAL), a Philippine corporation, is the national airline of the Republic of the Philippines. On June 19, 1998, PAL filed a petition for the suspension of payments and corporate rehabilitation with the Philippine Securities and Exchange Commission (PSEC). On June 22, 1998, PAL filed a petition for a case ancillary to a foreign proceeding in this court. On the same date, Judge Newsome issued a temporary restraining order in the ancillary proceeding prohibiting anywhere in the United States: (a) the commencement or continuation of any legal action against PAL; (b) any act to seize or assert a lien against property of PAL or terminate any interest of PAL; and (c) any act to collect a claim against PAL or exercise setoff or recoupment rights against PAL. On June 23, 1998, the PSEC appointed Antonio V. Ocampo, Henry So Uy, Jaime J. Bautista, Mario M. Aguas and Ramon A. Cruz collectively as receiver for PAL (Receiver). On July 2, 1998, this court issued a preliminary injunction in the ancillary proceeding. The preliminary injunction continued the restraints imposed in the temporary restraining order, subject to modifications for the benefit of certain creditors.(1)

ANALYSIS

A. Legal Standard

Section 304 of the Bankruptcy Code authorizes a United States Bankruptcy Court to grant relief designed to further the efficient administration of a foreign bankruptcy proceeding. Specifically, the bankruptcy court may prohibit commencement or continuation of legal actions against the foreign debtor, may prohibit acts against property involved in the foreign proceeding, and may order additional relief that the court determines is appropriate. 11 U.S.C. § 304(b).

Section 304 affords the bankruptcy court broad discretion both in determining whether to grant relief, and in determining what relief to grant. The Bankruptcy Code does, however, provide the following criteria to guide the bankruptcy court in exercising its discretion.

(c) In determining whether to grant relief under subsection (b) of this section, the court shall be guided by what will best assure an economical and expeditious administration of such estate, consistent with -

(1) just treatment of all holders of claims against or interests in such estate;

(2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding;

(3) prevention of preferential or fraudulent dispositions of property of such estate;

(4) distribution of proceeds such estate substantially in accordance with the order prescribed by this title;

(5) comity; and

(6) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns.

11 U.S.C. § 304(c).

Published decisions state that the criteria identified in section 304(c) authorize the bankruptcy court to grant relief in furtherance of principles of comity if the applicable foreign law provides fundamental fairness to United States creditors.

These factors are not requirements but are, rather, guideline criteria by which the bankruptcy court should measure the extent to which foreign law is compatible with U.S. practice. . . . [T]he Second Circuit read the provisions of § 304 to permit, "federal courts [to] recognize foreign bankruptcy proceedings provided the foreign laws comport with due process and fairly treat claims of local creditors." Victrix S.S. Co. v. Salen Dry Cargo A.B., 825 F.2d 709, 714 (2d Cir. 1987) (citations omitted).

Haarhuis v. Kunnan Enterprises, Ltd., 223 B.R. 252, 255-56 (D.D.C. 1998). See also In re Hourani, 180 B.R. 58, 64 (Bankr. S.D.N.Y. 1995)("Deference should only be given to those insolvency proceedings that provide a reasonable degree of certainty that the consideration of all parties' rights will be fair and impartial.")

B. The Parties' Arguments

Objecting creditors argue that the PAL suspension of payments proceeding before the PSEC does not provide the creditor protection necessary for this court to grant relief under section 304. Notably, objecting creditors do not argue that Philippine insolvency law differs materially from United States law.(2) Rather, their sole argument is that the PSEC, which has jurisdiction over the proceeding, is not subject to Philippine insolvency law. In 1981, by decree of then President Ferdinand Marcos, jurisdiction over suspension of payments proceedings was transferred from the Philippine courts to the PSEC. Because the Presidential Decree did not incorporate the insolvency law, objecting creditors argue, the PSEC is not bound by any substantive or procedural rules. This argument is unpersuasive.

C. Similarity of Philippine Law to U.S. Law

I conclude that Philippine insolvency law provides creditors protections similar to those found under United States bankruptcy law and satisfies the criteria of § 304(c).

The law governing Philippine suspension of payments proceedings is not integrated into a single code. The substantive provisions governing reorganization and liquidation are found in the Insolvency Act (Act No. 1956), which was enacted by the Philippine legislature in 1909, when the Philippines were a territory of the United States. The provisions governing priority of claims are found in the Civil Code. The provisions defining the jurisdiction and power of the PSEC are found in Presidential Decree 902-A (PD 902-A). The PSEC has promulgated its own rules of procedure. The statutory provisions governing appellate review of PSEC decisions are published in a volume entitled Rules of Court.

Chapter II of the Insolvency Act governs suspension of payments. It provides that a debtor whose assets exceed liabilities, but who is unable to pay debts as they come due, may petition the court for suspension of payments. Act No. 1956, section 2. The debtor is required to attach to the petition a list of assets and liabilities and "the proposed agreement" he requests of his creditors. Id., section 2. The court then sets a meeting of creditors and enjoins the debtor from transferring property or paying debts out of the ordinary course of business without court permission. Id., section 3. All listed creditors are provided notice of the meeting of creditors and may attend that meeting. Id., sections 4 and 5. Virtually all unsecured creditors are enjoined from attempting to collect claims from debtor. Id., section 6. The court counts the votes at the meeting of creditors to see whether the creditors approve debtor's plan. Id., section 8. The plan is approved if two-thirds in number and three-fifths in amount of creditors vote to accept. Id., section 8. Secured creditors who reject the plan are not bound by the plan and may proceed to enforce their rights. Id., section 9. If creditors reject the plan, the proceeding is terminated and the creditors are free to enforce their rights. Id., section 11. If the plan is approved, but debtor fails to perform, creditors are free to enforce their rights. Id., section 13.

Other sections of the Insolvency Act contain additional provisions similar to those of the United States Bankruptcy Code. Section 48 provides that upon filing, property of the debtor is held in trust for creditors. Section 53 adopts a broad definition of claims that includes disputed, contingent and unliquidated claims.(3) Section 55 permits the court to estimate contingent claims. Section 58 preserves rights of setoff. Section 59 provides that claims are considered partially secured where the debt exceeds the value of the collateral. Section 61 provides that the claim of a creditor who received a preferential transfer is disallowed until the preference is returned. Section 62 provides for examination of the debtor. Section 70 provides for the recovery of preferences and fraudulent transfers.(4)

The Philippine Civil Code governs priority of creditors of an insolvent debtor. Section 2241 recognizes numerous types of liens on personal property, including tax liens, mortgages, claims for misappropriation of the property, claims for the purchase price for the property, hotelkeepers liens, claims for transportation, salvage and repair of the property, and crop liens. Section 2242 recognizes various types of liens on real property, including tax liens, mortgages, mechanics liens, and judgment liens. Sections 2246-50 provide that property shall be used to satisfy first those creditors who have a lien against the property, and that lien-holders shall be paid pro rata if the value of the property is insufficient to pay all lienholders in full. Section 2244 fixes the priority among unsecured creditors. Some of the priorities recognized are similar to those set forth in the Bankruptcy Code: unpaid wages, costs of administration, and taxes. Other priorities recognized in section 2244 are not recognized in the Bankruptcy Code: funeral expenses, costs of last illness, living expenses during the year before filing, wrongful death and personal injury claims, charitable pledges, and fines. Section 2251 provides that general unsecured creditors are paid pro rata from any remaining assets. All the expert witnesses agreed that Philippine law treats foreign and domestic creditors alike.

PD 902-A transferred jurisdiction over certain suspensions of payment proceedings filed from the courts to the PSEC. Section 5 provides that the PSEC "shall have original and exclusive jurisdiction to hear and decide" cases involving suspension of payments petitions filed by corporations and partnerships. Section 6 authorizes the PSEC to issue injunctions, issue writs, appoint receivers, appoint management committees for partnerships and corporations, punish contempt, and issue subpoenas. Section 12 provides: "All laws, executive orders, decrees, rules and regulations or parts thereof, contrary to or inconsistent with the provisions of this Decree are hereby repealed, amended or modified accordingly." PD 902-A does not specify the substantive rules to govern suspension of payments proceedings or authorize the PSEC to promulgate substantive law. All the expert witnesses agree that PD 902-A should be considered an exercise of legislative power by the President and should be interpreted in the same way as a statute.

The PSEC has issued two sets of rules. The Revised Rules of Procedure in the Securities and Exchange Commission, As Amended, fix rules of procedure governing all types of proceedings before the PSEC and are very similar to the Federal Rules of Civil Procedure used by United States Courts. The Proposed Rules of Procedure of the Securities and Exchange Commission for Suspension of Payments would establish rules applicable only in suspension of payments cases. Those proposed rules adopt official forms that specify in detail the schedules debtor must file, and specify how certain proceedings are to be conducted. These proposed rules are consistent with the provisions of the Insolvency Act.(5)

All decisions of PSEC are subject to review by the Philippine Court of Appeals and by the Philippine Supreme Court. See Figueroa v. Securities and Exchange Commission, 162 S.C.R.A. 689, 690 (Phil. Sup. Ct. 1988); Lim v. Securities and Exchange Commission, Republic of the Philippines Court of Appeal CA-G.R. SP-Nos. 32404, 32469, and 32483 (1995).

D. Philippine Insolvency Law Applies in PSEC Proceedings

I further conclude that the PSEC is bound by the Insolvency Act and the relevant provisions of the Civil Code. The most obvious reading of PD 902-A is that it only transferred jurisdiction over suspension of payments proceedings from one tribunal to another. The decree did not set forth the substantive rules to apply in such proceedings or authorize the PSEC to establish substantive rules. The decree purported to repeal prior laws only to the extent inconsistent with the decree. The Philippine Supreme Court has stated "[t]he SEC, like any other administrative body, is a tribunal of limited jurisdiction and as such, could wield only such powers as are specifically granted to it by its enabling statute." Ching v. Land Bank of the Philippines, 201 S.C.R.A. 190, 198 (Phil. Sup. Ct. 1991)(footnote omitted). The court also stated "[a] well-recognized rule in statutory construction is that repeals by implication are not favored and will not be so declared unless it be manifest that the legislature so intended." Id. at 202 (footnote omitted). Under these rules of statutory construction, it is reasonable to conclude that PD 902-A intended that the PSEC would be governed by the Insolvency Act and Civil Code, in light of the fact that the decree neither repealed those laws nor authorized the PSEC to promulgate replacement laws.

In asserting that the PSEC has unfettered discretion in suspension of payments proceedings, objecting creditors rely on the following evidence: (1) the testimony of their expert witness; (2) a newspaper article in which a member of the PSEC is quoted as saying that the PSEC could confirm a plan in the PAL case without creditor consent; and (3) decisions of the PSEC and Philippine courts that allegedly ignore the requirements of the Insolvency Act. This evidence is unpersuasive. First, the testimony of the experts was inconclusive. Mr. Catindig testified that the PSEC was not bound by the Insolvency Act. Mr. Lim testified that the PSEC was "guided" by the Insolvency Act. Mr. Nolasco testified that the PSEC was required to apply the Insolvency Act. Second, I do not judge the newspaper article to be an authoritative expression of either the position of the PSEC or of Philippine law. Third, while a few decisions of the PSEC do appear not to enforce some creditor protections in the Insolvency Act,(6) the same criticism could be justly applied to some decisions of United States courts. No published decision states that the PSEC is not bound by the Insolvency Act or Civil Code. Furthermore, having read every PSEC decision and Philippine court decision submitted by the parties, I conclude that the PSEC applies the Insolvency Act and Civil Code with reasonable reliability and is not at all the lawless agency objecting creditors portray it to be.

CONCLUSION

The ancillary petition is granted. The preliminary injunction shall remain in effect, subject to the limitations stipulated to by Petitioner. Petitioner's counsel shall prepare and circulate a proposed form of order.

Dated:  ____________________ 
_____________________________

Thomas E. Carlson
United States Bankruptcy Judge

1. The court transferred to the United States District Court for the Southern District of New York all section 304 issues related to a breach of contract action brought in that court by Aviation Sales Leasing Company. The court permitted The Boeing Company to attempt to resell aircraft PAL had contracted to purchase, and permitted Boeing to hold the deposit PAL made toward that purchase. PAL stipulated with the Export-Import Bank and First Security Bank that the preliminary injunction would not prohibit any creditor action permitted by orders of the PSEC. PAL also stipulated that the preliminary injunction did not affect any rights or remedies under collective bargaining agreements, did not eliminate any rights of setoff or recoupment, and did not require turnover of property by any party who has a lien dependent upon possession of the property.

2. Aviation Sales Leasing Company, for instance, expressly acknowledges "the [Philippine] law generally applicable to insolvency, Act No. 1956[,] . . . generally provides for the restructuring of debt or the liquidation of entities in a manner analogous to that provided by the United States Bankruptcy Code." Trial Brief of Aviation Sales Leasing Company at 11.

3. The Philippine Supreme Court held that the PSEC has jurisdiction to determine claims and adopted the following broad definition of "claims," which is very similar to the definition of claim in section 101(5) of the Bankruptcy Code.

Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, unsecured.

Finasia Investments and Finance Corp. v. Courts of Appeals, 237 S.C.R.A. 446, 450 (Phil. Sup. Ct. 1994).

4. Section 70 permits the recovery of a transfer made by the debtor within 30 days before the petition and while the debtor is insolvent if the transfer was made for the purpose of giving a creditor a preference and the party receiving the transfer had reason to know of that purpose. Section 70 also permits recovery of all transfers made by the debtor within one month before the petition date for which the transferee did not pay valuable consideration in good faith. The PSEC has stated that section 70 applies in suspension of payment proceedings before the PSEC. See November 3, 1997 letter ruling of Perfecto R. Yasay, Jr. (Chairman of PSEC).

5. Proposed rule 18(g) is inconsistent with the Insolvency Act. The proposed rule specifies that the requisite majority vote for acceptance of a plan is two-thirds in number and three-fourths in amount. Section 8 of the Insolvency Act specifies two-thirds in number and three-fifths in amount. In light of the fact that the proposed rule has not yet been adopted, and the rules elsewhere state the intent to be consistent with the Insolvency Act (see "Items not included in draft recommendations to SEC on Suspension of payments"), it is most appropriate to determine that proposed rule 18(g) simply contains a not-yet-corrected mistake.

6. See, e.g., Ruby Industrial Corporation v. Court of Appeals, Republic of the Philippines Supreme Court G.R. No. 124185-87 (1998)(PSEC orders confirming plan despite rejection by unsecured creditors, reversed on appeal on other grounds); In re BF Holmes Incorporated, PSEC Hearing Panel Order, dated February 2, 1988 (plan confirmed by over objection of secured creditors who were also required to accept replacement collat