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Justice Must be Part of Urban’s Rehab
(Article published in the May 14, 2001 issue of TODAY, Business Section)

For most depositors and investors in the failed Urban Bank Inc. and Urbancorp Investments, Inc., a very important aspect of the rehabilitation plan proposed by The National Association of Urban Bank, Inc. and Urbancorp Investments, Inc. Depositors and Creditors (NAUD) and the Export & Industry Bank (EIB) is how and when, if at all, they will get their money back. The short answer is; some of it, soon after Urban Bank is reopened; the rest is to be paid over three years. Maybe.

Here are some of the rehab’s plan, details where the devil is said to be. Practically all claimants are, as an initial requirement, asked to convert 10% of their claims into equity in the bank that would result from the planned merger of Urban Bank, Inc. and Export & Industry Bank. The surviving entity is Urban Bank, Inc., whose shares are listed (although at the moment under suspended trading) with the Philippine Stock Exchange. The expectation is that soon after Urban Bank reopens, the trading suspension will be lifted, and the shares acquired under the conversion can then be sold in the market.

The unknown variables in this conversion requirement are the price at which the shares of the merged entity will be issued to the claimants and the price at which the public will be willing to buy the merged bank’s shares. Why anybody at this time would want to buy those shares at all escapes many analysts. But at least, the optimist can hope that some day those shares will be worth something. After all, some projections in the past have come true, and there is always the possibility that dreams come real.

The servicing of the remaining 90 percent will be as follows: P500,000 (minus what has been paid by PDIC) will be paid within 30 days of the bank opening; then 30 percent (inclusive of the P500,000 at the opening) will be recovered at the end of the first year; another 30 percent at the end of the second year; and the balance of 40 percent at the end of the third year. The unpaid balances will earn a fixed rate of 6 percent per annum for those claims denominated in pesos and 2 percent for dollar claims.

Therefore, in three years, assuming the 10 percent in shares is sold in the stock market, the entire claim, plus 6 percent or 2-percent interest on dimishing balance, will be recovered by the claimant. That is, if the merged bank does not earlier meet the fate of the old Urban Bank.

It is a bitter pill to swallow but swallow it the claimants must, since that is the only rehabilitation plan on the table. The recent expressions of continuing interest by the Bank of Commerce should be disregarded as outlandish. Not only is it too late in the day. That it is expressed at this time when Naud has succeeded in galvanizing the claimants smacks of opportunism.

However, a few justice-driven enhancements – designed to castigate at least symbolically the managers of Urban Bank Inc, and Urbancorp Investments Inc., whose mismanagement and breach of fiduciary duty brought the institutions down - would certainly help the Naud-EIB rehab plan go down the claimants’ throats a bit easier.

All the shares in the merged bank that will be issued to the stockholders of the old Urban Bank, Inc., whether as a replacement of shares in the old bank because of the merger or as new issues as a result of the conversion of some of their claims, if any, as depositors or investors, should be locked up in a trust (with an unrelated bank as trustee) for as long as the other depositors and investors are not paid in full. The former owners should not be able to exercise any stockholder rights pertaining to the locked-up shares; the right to vote must be irrevocably vested for the duration of the lock-up in the trustee who will be asked to vote with management. The establishment of any encumbrance or lien should be prohibited, and transfers should be allowed only in cases of testate or intestate succession. In any case, the restrictions on the shares of the old owners should follow the shares in the hands of transferees.

All unpaid subscriptions to Urban Bank, Inc. and Urbancorp Investments, Inc. and their subsidiaries should be called. They constitute under the law a trust fund in favor of creditors. It must not be forgotten that the Urban Bank Management Incentive Plan, or its beneficiaries, upon orders of Teodoro C. Borlongan, picked up on 19 April 2000 - six days before Urban Bank voluntarily declared its bank holiday - the obligation to pay the Php 197,157,318.75 - subscription of Mr. William Gatchalian. That unpaid subscription should be called and the shares, if and when paid, should be similarly locked up.

Acceptance of the rehabilitation plan by the depositors and claimants should not preclude any claimant, who thinks he has been injured by the management of Urban Bank, and Urbancorp Investments from suing for damages. These are resulting from bank officials’ negligence, reckless imprudence, and self-dealing, particularly in those instances where the placements and deposits of senior officers, particularly of Messrs. Teodoro C. Borlongan and Arsenio M. Bartolome III, and/or their immediate families were withdrawn within the last 10 days of Urban Bank.

We leave it to the stockholders of the old Urban Bank, Inc. who did not have an active role in the management of the bank and Urbancorp Investments, Inc. to take their own recourse against their fellow stockholders whom they, after all, elected into management of their enterprise. But certainly, in the merged bank, absolutely no role should be given to whose who lead the old Urban Bank to ruin.