Coastal Pacific Trading, Inc. vs. Southern Rolling Mills Co.

G.R. No. 118692 July 28, 2006

FACTS: Southern Rolling Mills was renamed into Visayan Integrated Steel Corp (VISCO). On Dec. 11,
1961-VISCO obtained a loan from DBP amounting to P836,000. It was secured by a Real Estate
Mortgage covering VISCO's 3 parcels of land including the machinery and equipments therein. Second
Loan: VISCO entered a Loan Agreement with respondent banks ( referred as "Consortium") to finance
its importation for various raw materials. VISCO executed a second mortgage over the previous
properties mentioned, however they were unrecorded VISCO was unable to pay its second mortgage with
the consortium, which resulted in the latter acquiring 90% of the equity of VISCO giving the Consortium
the control and management of VISCO. Despite the acquisition, VISCO still remained indebted to the
Consortium.

Transaction to Coastal: Between 1964 to 1965, VISCO entered a processing agreement with Coastal
wherein Coastal delivered 3,000 metric tons of hot rolled steel coils which VISCO would process into
block iron sheets. However, VISCO was only able to return 1,600 metric tons of those sheets.

On the loan to DBP: To pay its first mortgage with DBP, VISCO sold 2 of its generators to FILMAG
Phils, Inc. DBP executed a Deed of Assignment of the mortgage in favor of the consortium. The
Consortium foreclosed the mortgage and was the highest bidder in an auction sale of VISCO's properties.
The Consortium later sold the properties in favor of National Steel Corporation.

Coastal files a civil action for Annulment or Rescission of Sale, Damages with Preliminary Injunction.
Coastal imputes bad faith on the action of the Consortium, the latter being able to sell the properties of
VISCO despite the attachment of the properties, placing them beyond the reach of VISCO's other
creditors.

The lower court ruled in favor of VISCO, declaring the sale valid and legal. The CA affirmed this.

ISSUE 1: Whether the consortium disposed VISCO's assets in fraud of creditors?

HELD: Yes. What the consortium did was to pay to them the proceeds from the sale of the generator sets
which in turn they used to pay DBP. Due to the Deed of Assignment issued by DBP, the respondent banks
recovered what they remitted to DBP & it allowed the Consortium to acquire DBP's primary lien on the
mortgaged properties. Allowing them as unsecured creditors ( as the mortgage was unrecorded) to
foreclose on the assets of the corporation without regard to inferior claims

ISSUE 2: Whether petitioner is entitled to moral damages?

No. As a rule, a corporation is not entitled to moral damages because, not being a natural person, it
cannot experience physical suffering or sentiments like wounded feelings, serious anxiety, mental anguish
and moral shock. The only exception to this rule is when the corporation has a good reputation that is
debased, resulting in its humiliation in the business realm. In the present case, the records do not show
any evidence that the name or reputation of petitioner has been sullied as a result of the Consortium's
fraudulent acts. Accordingly, moral damages are not warranted.

Petitioner was able to recover exemplary damages.