MANILA - Before Legacy Group, Pacific Plans, and other failed pre-need firms, there was College Assurance Plan (CAP).

And the fate of CAP plan holders, who have battled it out in the courts for years, was sealed in a recent Supreme Court decision.

In a 32-page decision penned by Associate Justice Diosdado Peralta, the high court's third division affirmed a lower court's previous decisions allowing CAP to go under rehabilitation. In 2005, the Makati Regional Trial Court previously nullified in 2 rulings the petition filed by several of CAP's plan holders questioning the pre-need firm's application for corporate rehabilitation.

The High Tribunal's decision essentially means CAP can put off paying its obligations to plan holders while it is being rehabilitated.

If CAP's rehabilitation plan proves unsuccessful, the pre-need firm's assets will be divided among the claimants.

CAP filed for corporate rehabilitation in September 2005, almost year after regulator Securities and Exchange Commission (SEC) barred it from selling new plans. At the time, CAP was having difficulty meeting obligations to plan holders. Many of them bought plans to finance the future and current education of their children.

This new development is a landmark in the pre-need industry, which was once the most successful retail financial investment instrument in the country since it hinged on the dreams of Filipinos' for good education.

CAP was one of the leading and most agressive pre-need firms for decades. It had over 700,000 plan holders. (Read: Broken Promises)

Decision

The High Court explained that "all assets of a corporation under receivership are held in trust for the equal benefit of all creditors to preclude one from obtaining an advantage or preference over another." It cited a previous ruling in Negros Navigation Co. Inc. versus Court of Appeals.

The high court further stressed that "once a corporation threatened by bankruptcy is taken over by a receiver, all the creditors ought to stand on equal footing and that not one of them should be paid ahead of the others."

It also held that Judge Romeo Barza of the Makati RTC Branch 61 did not commit grave abuse of discretion when he ordered the suspension of the payment of CAP's obligations, saying this is allowed under the Interim Rules of Procedure on Corporate Rehabilitation of 2000.

"Absent any provision (in the rules) exempting claims arising from pre-need contracts from a court order staying enforcement of all claims against the debtor/pre-need company, the court holds that respondent judge did not commit grave abuse of discretion in enforcing the stay order against petitioners," the SC said.

Lower court jurisdiction

In its ruling, the SC did not give credence to the claim of plan holders that the Makati court acted without jurisdiction in giving due course to CAP's petition for rehabilitation since there was a pending case for receivership filed before the SEC.

Under Section 5 of Presidential Decree No. 902-A, the SEC had jurisdiction to hear and decide on "petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts, but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities."

However, the High Court said Republic Act 8799, which took effect in August 2000, transfered SEC's jurisdiction over all cases under PD 902-A to "the courts of general jurisdiction or the appropriate regional trial court."

Furthermore, the SC said the Interim Rules of Procedure on Corporate Rehabilitation also applies to CAP's petition.

The SC noted that Section 1, Rule 4 of the rules provides that "any debtor who foresees the impossibility of meeting its debts when they respectively fall due, or any creditor or creditors holding at least 25% of the debtor's total liabilities, may petition the proper regional trial court to have the debtor placed under rehabilitation."

"The interim does not distinguish whether a pre-need corporation like CAP cannot file a petition for rehabilitation before the RTC," the SC said.

In 2005, CAP wiggled away from the supervision of pre-need regulator Securities and Exchange Commission (SEC) when it sought refuge from the local courts.

CAP blamed SEC for the collapse of its pre-need business. SEC then required CAP to submit a plan on how it would plug the deficit or the gap between how much it had and should have set aside in its trust funds to cover obligations to its about one million education, pension and memorial plan holders.

CAP was adamant that the deficit was not real but a result of SEC's strict implementation of an accounting standard that even the accounting industry association said was prudent.

CAP's collapse

Owned by the Sobrepena family, CAP was incorporated in February 1980 to engage in the sale of pre-need educational plans.

It initially sold open-ended plans, which guaranteed the payment of tuition and other standard school fees to a plan holder irrespective of the cost at the time of the availment.

Many of those who availed of CAP's offerings were middle-class parents who expected that by the time they had fully paid for the plans, CAP would take care of their children's college education.

However, CAP was unable to maintain payments of claims since its P25 billion trust fund, which was supposed to cover future obligations to clients, was depleted. Bulk of plan holders' premium payments were invested by CAP into other businesses of the Sobrepenas, including real estate projects under the Fil-Estate brand, and stakes in Camp John Hay Development Corp and MRT 3 Corp.

The 1997 Asian financial crisis burst the property bubble then, resulting in cash-flow problems for over-landbanked Fil-Estate and for other Sobrepena-controlled ventures.

Years after CAP's collapse, the pre-need industry is again facing rough times brought about by the global economic crisis and controversies surrounding the failed Legacy Group of Companies.