G.R. No. 210316, 28 November 2016

FACTS:

Herein respondent CJH Development Corporation (CJHDC) is a duly­ organized domestic corporation which is engaged in the acquisition, development, sale, lease and management of real estate and any improvements thereon or any interest and right therein. CJHDC entered into a Lease Agreement (Agreement) with the Bases Conversion and Development Authority (BCDA) for the development into a public tourism complex, multiple-use forest watershed and human resource development center, of a 247-hectare property within the John Hay Special Economic Zone in Baguio City. Subsequently, CJHDC came up with a development plan and put it into effect. Part of such development plan was the construction of two condominium-hotels (condotels) which it named as “The Manor” and “The Suites”. The residential units in these condotels were then offered for sale to the general public by means of two schemes. The first is a straight purchase and sale contract, and the second scheme involved the sale of the unit with an added option to avail of a “leaseback” or a “money-back” arrangement.

The buyers who opt for the “leaseback” arrangement will receive either a proportionate share in seventy percent (70%) of the annual income derived from the hotel operation of the pooled rooms or a guaranteed eight percent (8%) return on their investment. The BCDA requested the SEC to conduct an investigation into the operations of CJHDC and CJHSC on the belief that the “leaseback” or “money-back” arrangements they are offering to the public is, in essence, investment contracts which are considered as securities under Republic Act No. 8799, otherwise known as the Securities Regulation Code (SRC). Subsequently, the SEC’s Corporation Finance Department (CFD) issued a Memorandum indicating its opinion that the “leaseback” arrangements offered by respondents to the public are investment contracts.

ISSUE:

Whether the respondents failed to exhaust all administrative remedies available to them and that the leaseback or money-scheme involves a question of fact which is within the jurisdiction of the SEC.

RULING:

The sale of “The Manor” or “The Suites” units to the general public under the “leaseback” or “money-back” scheme is a form of investment contract or sale of securities, which is not a pure question of law. On the contrary, it involves a question of fact that falls under the primary jurisdiction of the SEC. Under the doctrine of primary administrative jurisdiction, courts will not determine a controversy where the issues for resolution demand the exercise of sound administrative discretion requiring the special knowledge, experience, and services of the administrative tribunal to determine technical and intricate matters of fact, which under a regulatory scheme have been placed within the special competence of such tribunal or agency.

In other words, if a case is such that its determination requires the expertise, specialized training, and knowledge of an administrative body, relief must first be obtained in an administrative proceeding before resort to the court is had even if the matter may well be within the latter’s proper jurisdiction. The objective of the doctrine of primary jurisdiction is to guide the court in determining whether it should refrain from exercising its jurisdiction until after an administrative agency has determined some question or some aspect of some question arising in the proceeding before the court.

In the instant case, the resolution of the issue as to whether respondents’ scheme of selling the subject condotel units is tantamount to an investment contract and/or sale of securities, as defined under the SRC, requires the expertise and technical knowledge of the SEC being the government agency which is tasked to enforce and implement the provisions of the said Code as well as its implementing rules and regulations. In fact, after the issuance of the CDO, the SEC is yet to hear from respondents and receive evidence from them regarding this issue. Nonetheless, respondents prematurely filed an appeal with the CA, which erroneously gave due course to it in disregard of the doctrines of exhaustion of administrative remedies and primary jurisdiction.

Furthermore, as mentioned above, the SEC through its EPD, conducted an investigation upon request of the BCDA. The EPD dispatched a team of SEC employees, who posed as representatives of interested buyers, to the John Hay Special Economic Zone in Baguio City. There, the team members were able to talk to CJHDC’s Director of Sales, who, not only explained to them the straight and leaseback agreements, but also gave the team copies of marketing material, as well as sample contracts, indicating that respondents are indeed selling the subject units either on a straight purchase or leaseback agreement.

Lastly, the Court neither agrees with the ruling of the CA that there is nothing in the assailed CDO which shows that the acts sought to be restrained therein operate as a fraud on investors. The SEC arrived at a preliminary finding that respondents are engaged in the business of selling securities without the proper registration issued by the Commission. Based on this initial finding, respondents’ act of selling unregistered securities would necessarily operate as a fraud on investors as it deceives the investing public by making it appear that respondents have authority to deal on such securities. As correctly cited by the SEC, Section 8.1 of the SRC clearly states that securities shall not be sold or offered for sale or distribution within the Philippines without a registration statement duly filed with and approved by the SEC and that prior to such sale, information on the securities, in such form and with such substance as the SEC may prescribe, shall be made available to each prospective buyer. The Court agrees with the SEC that the purpose of this provision is to afford the public protection from investing in worthless securities.

*Case Digest by Meriam Rika R. Wong, JD – 4, Andres Bonifacio College, SY 2019-2020