Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 155683 February 16, 2007

PETRON CORPORATION, Petitioner,

vs.
NATIONAL COLLEGE OF BUSINESS AND ARTS, Respondent.

DECISION

CORONA, J.:

The sole question raised in this petition for review on certiorari1 is whether petitioner Petron
Corporation (Petron) should be held liable to pay attorney’s fees and exemplary damages to
respondent National College of Business and Arts (NCBA).

This case, however, is but part of a larger controversy over the lawful ownership of seven parcels of
land2 in the V. Mapa area of Sta. Mesa, Manila (the V. Mapa properties) that arose out of a series of
events that began in 1969.3

Sometime in 1969, the V. Mapa properties, then owned by Felipe and Enrique Monserrat, Jr., were
mortgaged to the Development Bank of the Philippines (DBP) as part of the security for the ₱5.2
million loan of Manila Yellow Taxicab Co., Inc. (MYTC) and Monserrat Enterprises Co. MYTC, for its
part, mortgaged four parcels of land located in Quiapo, Manila.

On March 31, 1975, however, Felipe’s ½ undivided interest in the V. Mapa properties was levied
upon in execution of a money judgment rendered by the Regional Trial Court (RTC) of Manila
in Filoil Marketing Corporation v. MYTC, Felipe Monserrat, and Rosario Vda. De Monserrat (the
Manila case).4 DBP challenged the levy through a third-party claim asserting that the V. Mapa
properties were mortgaged to it and were, for that reason, exempt from levy or attachment. The RTC
quashed it.

On June 18, 1981, MYTC and the Monserrats got DBP to accept a dacion en pago arrangement
whereby MYTC conveyed to the bank the four mortgaged Quiapo properties as full settlement of
their loan obligation. But despite this agreement, DBP did not release the V. Mapa properties from
the mortgage.

On May 21, 1982, Felipe, acting for himself and as Enrique’s attorney-in-fact, sold the V. Mapa
properties to respondent NCBA. Part of the agreement was that Felipe and Enrique would secure
the release of the titles to the properties free of all liens and encumbrances including DBP’s
mortgage lien and Filoil’s levy on or before July 31, 1982. But the Monserrats failed to comply with
this undertaking. Thus, on February 3, 1983, NCBA caused the annotation of an affidavit of adverse
claim on the TCTs covering the V. Mapa properties.

Shortly thereafter, NCBA filed a complaint against Felipe and Enrique for specific performance with
an alternative prayer for rescission and damages in the RTC of Manila. The case was raffled to
Branch 30 and docketed as Civil Case No. 83-16617. On March 30, 1983, NCBA had a notice of lis
pendens inscribed on the TCTs of the V. Mapa properties. A little over two years later, NCBA
impleaded DBP as an additional defendant in order to compel it to release the V. Mapa properties
from mortgage.

On February 28, 1985, during the pendency of Civil Case No. 83-16617, Enrique’s ½ undivided
interest in the V. Mapa properties was levied on in execution of a judgment of the RTC of Makati (the
Makati case)5 holding him liable to Petron (then known as Petrophil Corporation) on a 1972
promissory note. On April 29, 1985, the V. Mapa properties were sold at public auction to satisfy the
judgments in the Manila and Makati cases. Petron, the highest bidder, acquired both Felipe’s and
Enrique’s undivided interests in the property. The final deeds of sale of Enrique’s and Felipe’s
shares in the V. Mapa properties were awarded to Petron in 1986. Sometime later, the Monserrats’
TCTs were cancelled and new ones were issued to Petron. Thus it was that, towards the end of
1987, Petron intervened in NCBA’s suit against Felipe, Enrique and DBP (Civil Case No. 83-16617)
to assert its right to the V. Mapa properties.

The RTC rendered judgment on March 11, 1996.6 It ruled, among other things, that Petron never
acquired valid title to the V. Mapa properties as the levy and sale thereof were void and that NCBA
was now the lawful owner of the properties. Moreover, the RTC held Petron, DBP, Felipe and
Enrique jointly and severally liable to NCBA for exemplary damages and attorney’s fees for the
following reasons:

FELIPE and ENRIQUE had no reason to renege on their undertaking in the Deed of Absolute Sale
"to secure the release of the titles to the properties xxx free from all the liens and encumbrances,
and to cause the lifting of the levy on execution of Commercial Credit Corporation, Industrial Finance
Corporation[,] and Filoil over the V. Mapa [p]roperty. Moreover, ENRIQUE had no reason to
repudiate FELIPE and disavow authority he had [given] the latter to sell his share in the V. Mapa
property.

On the other hand, the mortgage in favor of DBP had been fully extinguished thru dacion en pago as
early as 18 June 1981 but it unjustifiably and whimsically refused to release the mortgage and to
surrender to the buyer (NCBA) the owner’s duplicate copies of Transfer Certificates of Title No[s].
83621 to 83627, thereby preventing NCBA from registering the sale in its favor.

Similarly, [Petron] has absolutely no reason to claim the V. Mapa property. For, as shown above, the
levy in execution and sale of the shares of FELIPE and ENRIQUE in the V. Mapa property were null
and void.

Finally, in their Memorandum of Agreement dated 25 September 1992 with Technical Institute of the
Philippines, [Petron] and DBP attempted to pre-empt this Court’s power to adjudicate on the claim of
ownership stipulating that "to facilitate their defenses and cause of action in Civil Case No. 83-
16617," they agreed on the disposition of the V. Mapa property among themselves. For obvious
reasons, this Court refused to give its imprimatur and denied their prayer for dismissal of the
complaint against DBP.

These acts of defendants and intervenor demonstrate their wanton, fraudulent, reckless, oppressive
and malevolent conduct in their dealings with NCBA. Furthermore, they acted with gross and evident
bad faith in refusing to satisfy NCBA’s plainly valid and demandable claims. Assessment of
exemplary damages and attorney’s fees in the amounts of ₱100,000.00 and ₱150,000.00,
respectively, is therefore in order (Arts. 2208 and 2232, Civil Code).7

Enrique, DBP and Petron appealed to the Court of Appeals (CA). The appeal was docketed as CA–
G.R. CV No. 53466. In a decision dated June 21, 2002,8 the CA affirmed the RTC decision in toto.
On motion for reconsideration, Petron and DBP tried to have the award of exemplary damages and
attorney’s fees deleted for lack of legal and factual basis. The Philippine National Oil Company
(PNOC), which had been allowed to intervene in the appeal as transferee pendente lite of Petron’s
right to the V. Mapa properties, moved for reconsideration of the ruling on ownership. In a resolution
dated October 16, 2002,9 the CA denied these motions for lack of merit. Thereupon, Petron and
PNOC took separate appeals to this Court.

In this appeal, the only issue is Petron’s liability for exemplary damages and attorney’s fees. And on
this matter, we reverse the rulings of the trial and appellate courts.

Article 2208 lays down the rule that in the absence of stipulation, attorney’s fees cannot be
recovered except in the following instances:

(1) When exemplary damages are awarded;

(2) When the defendant’s act or omission has compelled the plaintiff to litigate with third
persons or to incur expense to protect his interest;

(3) In criminal cases of malicious prosecution against the plaintiff;

(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;

(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiff’s plainly valid, just and demandable claim;

(6) In actions for legal support;

(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;

(8) In actions for indemnity under workmen’s compensation and employer’s liability laws;

(9) In a separate civil action to recover civil liability arising from a crime;

(10) When at least double judicial costs are awarded;

(11) In any other case where the court deems it just and equitable that attorney’s fees and
expenses of litigation should be recovered.10

Here, the RTC held Petron liable to NCBA for attorney’s fees under Article 2208(5), which allows
such an award "where the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiff’s plainly valid, just, and demandable claim." However, the only justification given for this
verdict was that Petron had no reason to claim the V. Mapa properties because, in the RTC’s
opinion, the levy and sale thereof were void.11 This was sorely inadequate and it was erroneous for
the CA to have upheld that ruling built on such a flimsy foundation.

Article 2208(5) contemplates a situation where one refuses unjustifiably and in evident bad faith to
satisfy another’s plainly valid, just and demandable claim, compelling the latter needlessly to seek
redress from the courts.12 In such a case, the law allows recovery of money the plaintiff had to spend
for a lawyer’s assistance in suing the defendant – expenses the plaintiff would not have incurred if
not for the defendant’s refusal to comply with the most basic rules of fair dealing. It does not mean,
however, that the losing party should be made to pay attorney’s fees merely because the court finds
his legal position to be erroneous and upholds that of the other party, for that would be an intolerable
transgression of the policy that no one should be penalized for exercising the right to have
contending claims settled by a court of law.13 In fact, even a clearly untenable defense does not
justify an award of attorney’s fees unless it amounts to gross and evident bad faith.14

Petron’s claim to the V. Mapa properties, founded as it was on final deeds of sale on execution, was
far from untenable. No gross and evident bad faith could be imputed to Petron merely for intervening
in NCBA’s suit against DBP and the Monserrats in order to assert what it believed (and had good
reason to believe) were its rights and to have the disputed ownership of the V. Mapa properties
settled decisively in a single lawsuit.

With respect to the award of exemplary damages, the rule in this jurisdiction is that the plaintiff must
show that he is entitled to moral, temperate or compensatory damages before the court may even
consider the question of whether exemplary damages should be awarded.15 In other words, no
exemplary damages may be awarded without the plaintiff’s right to moral, temperate, liquidated or
compensatory damages having first been established. Therefore, in view of our ruling that Petron
cannot be made liable to NCBA for compensatory damages (i.e., attorney’s fees), Petron cannot be
held liable for exemplary damages either.

WHEREFORE, the petition is hereby GRANTED. The imposition of liability on Petron Corporation for
exemplary damages and attorney’s fees is REVOKED. The June 21, 2002 decision and October 16,
2002 resolution of the Court of Appeals in CA–G.R. CV No. 53466 and the March 11, 1996 decision
of the Regional Trial Court of Manila in Civil Case No. 83-16617 are hereby MODIFIED accordingly.

SO ORDERED.

[G.R. No. 121171. December 29, 1998]

ASSET PRIVATIZATION TRUST, petitioner, vs., COURT OF APPEALS,

JESUS S. CABARRUS, SR., JESUS S. CABARRUS, JR., JAIME T.
CABARRUS, JOSE MIGUEL CABARRUS, ALEJANDRO S.
PASTOR, JR., ANTONIO U. MIRANDA, and MIGUEL M.
ANTONIO, as Minority Stock Holders of Marinduque Mining and
Industrial Corporation, respondents.

DECISION
KAPUNAN, J.:

The petition for review on certiorari before us seeks us to reverse and set aside the decision
of the Court of Appeals which denied due course to the petition for certiorari filed by the Asset
Privatization Trust (APT) assailing the order of the Regional Trial Court (RTC) Branch 62,
Makati City. The Makati RTCs order upheld and confirmed the award made by the Arbitration
Committee in favor of Marinduque Mining and Industrial Corporation (MMIC) and against the
Government, represented by herein petitioner APT for damages in the amount of P2.5 BILLION
(or approximately P4.5 BILLION, including interest).
Ironically, the staggering amount of damages was imposed on the Government for
exercising its legitimate right of foreclosure as creditor against the debtor MMIC as a
consequence of the latters failure to pay its overdue and unpaid obligation of P22 billion to the
Philippine National Bank (PNB) and the Development Bank of the Philippines (DBP).

The antecedent facts of the case

The development, exploration and utilization of the mineral deposits in the Surigao Mineral
Reservation have been authorized by Republic Act No. 1828, as amended by Republic Acts No.
2077 and 4167, by virtue of which laws, a Memorandum of Agreement was drawn on July 3,
1968, whereby the Republic of the Philippines thru the Surigao Mineral Reservation Board,
granted MMIC the exclusive right to explore, develop and exploit nickel, cobalt and other
minerals in the Surigao mineral reservation.[1] MMIC is a domestic corporation engaged in
mining with respondents Jesus S. Cabarrus, Sr. as President and among its original stockholders.
The Philippine Government undertook to support the financing of MMIC by purchase of
MMIC debenture and extension of guarantees. Further, the Philippine Government obtained a
firm, commitment from the DBP and/or other government financing institutions to subscribed in
MMIC and issue guarantee/s for foreign loans or deferred payment arrangements secured from
the US Eximbank, Asian Development Bank, Kobe Steel, of amount not exceeding US$100
Million.[2]
DBP approved guarantees in favor of MMIC and subsequent requests for guarantees were
based on the unutilized portion of the Government commitment. Thereafter, the Government
extended accommodations to MMIC in various amounts.
On July 13, 1981, MMIC, PNB and DBP executed a Mortgage Trust Agreement[3] whereby
MMIC, as mortgagor, agreed to constitute a mortgage in favor of PNB and DBP as mortgagees,
over all MMICs assets, subject of real estate and chattel mortgage executed by the mortgagor,
and additional assets described and identified, including assets of whatever kind, nature or
description, which the mortgagor may acquire whether in substitution of, in replenishment, or in
addition thereto.
Article IV of the Mortgage Trust Agreement provides for Events of Default, which
expressly includes the event that the MORTGAGOR shall fail to pay any amount secured by this
Mortgage Trust Agreement when due.[4]
Article V of the Mortgage Trust Agreement prescribes in detail, and in addition to the
enumerated events of defaults, circumstances by which the mortgagor may be declared in
default, the procedure therefor, waiver of period to foreclose, authority of Trustee before, during
and after foreclosure, including taking possession of the mortgaged properties.[5]
In various request for advances/remittances of loans of huge amounts, Deeds of
Undertakings, Promissory Notes, Loans Documents, Deeds of Real Estate Mortgages, MMIC
invariably committed to pay either on demand or under certain terms the loans and
accommodations secured from or guaranteed by both DBP and PNB.
By 1984, DBP and PNBs financial exposure both in loans and in equity in MMIC had
reached tremendous proportions, and MMIC was having a difficult time meeting its financial
obligations. MMIC had an outstanding loan with DBP in the amount of P13,792,607,565.92 as
of August 31, 1984 and in the amount of P8,789,028,249.38 as of July 15, 1984 or a total
Government exposure of Twenty Two Billion Six Hundred Sixty-Eight Million Five Hundred
Thirty-Seven Thousand Seven Hundred Seventy and 05/100 (P22,668,537,770.05), Philippine
Currency.[6] Thus, a financial restructuring plan (FRP) designed to reduce MMIC' interest
expense through debt conversion to equity was drafted by the Sycip Gorres Velayo accounting
firm.[7] On April 30, 1984, the FRP was approved by the Board of Directors of the
MMIC.[8] However, the proposed FRP had never been formally adopted, approved or ratified by
either PNB or DBP.[9]
In August and September 1984, as the various loans and advances made by DBP and PNB to
MMIC had become overdue and since any restructuring program relative to the loans was no
longer feasible, and in compliance with the directive of Presidential Decree No. 385, DBP and
PNB as mortgagees of MMIC assets, decided to exercise their right to extrajudicially foreclose
the mortgages in accordance with the Mortgage Trust Agreement.[10]
The foreclosed assets were sold to PNB as the lone bidder and were assigned to three newly
formed corporations, namely, Nonoc Mining Corporation, Maricalum Mining and Industrial
Corporation, and Island Cement Corporation. In 1986, these assets were transferred to the Asset
Privatization Trust (APT).[11]
On February 28, 1985, Jesus S. Cabarrus, Sr., together with the other stockholders of
MMIC, filed a derivative suit against DBP and PNB before the RTC of Makati, Branch 62, for
Annulment of Foreclosures, Specific Performance and Damages.[12] The suit, docketed as Civil
Case No. 9900, prayed that the court: (1) annul the foreclosure, restore the foreclosed assets to
MMIC, and require the banks to account for their use and operation in the interim; (2) direct the
banks to honor and perform their commitments under the alleged FRP; and (3) pay moral and
exemplary damages, attorneys fees, litigation expenses and costs.
In the course of the trial, private respondents and petitioner APT, as successor of the DBP
and PNBs interest in MMIC, mutually agreed to submit the case to arbitration by entering into a
Compromise and Arbitration Agreement, stipulating, inter alia:

NOW, THEREFORE, for and in consideration of the foregoing premises and the
mutual covenants contain herein, the parties agreed as follows:

1. Withdrawal and Compromise. The parties have agreed to withdraw their respective
claims from the Trial Court and to resolve their dispute through arbitration by praying
to the Trial Court to issue a Compromise Judgment based on this Compromise and
Arbitration Agreement.

In withdrawing their dispute form the court and in choosing to resolve it through
arbitration, the parties have agreed that:
(a) their respective money claims shall be reduced to purely money claims; and

(b) as successor and assignee of the PNB and DBP interest in MMIC and the MMIC
accounts, APT shall likewise succeed to the rights and obligations of PNB and DBP in
respect of the controversy subject of Civil Case No. 9900 to be transferred to
arbitration and any arbitral award/order against either PNB and/or DBP shall be the
responsibility of, be discharged by and be enforceable against APT, the partied having
agreed to drop PNB and DBP from the arbitration.

2. Submission. The parties hereby agree that (a) the controversy in Civil Case No. 9900 shall be
submitted instead to arbitration under RA 876 and (b) the reliefs prayed for in Civil Case No.
9900 shall, with the approval of the Trial Court of this Compromise and Arbitration Agreement,
be transferred and reduced to pure pecuniary/money claims with the parties waiving and
foregoing all other forms of reliefs which they prayed for or should have payed for in Civil Case
No. 9900.[13]

The Compromise and Arbitration Agreement limited the issues to the following:

5. Issues. The issues to be submitted for the Committees resolution shall be: (a) Whether
PLAINTIFFS have the capacity or the personality to institute this derivative suit in behalf of the
MMIC or its directors; (b) Whether or not the actions leading to, and including, the PNB-DBP
foreclosure of the MMIC assets were proper, valid and in good faith.[14]

This agreement was presented for approval to the trial court. On October 14, 1992, the
Makati RTC, Branch 62, issued an order, to wit:

WHEREFORE, this Court orders:

1. Substituting PNB and DBP with the Asset Privatization Trust as party
defendant.

2. Approving the Compromise and Arbitration Agreement dated October 6,

1992, attached as Annex C of the Omnibus Motion.

3. Approving the Transformation of the reliefs prayed for [by] the plaintiffs in
this case into pure money claims; and

4. The Complaint is hereby DISMISSED.[15]

The Arbitration Committee was composed of retired Supreme Court Justice Abraham
Sarmiento as Chairman, Atty. Jose C. Sison and former Court of Appeals Justice Magdangal
Elma as Members. On November 24, 1993, after conducting several hearings, the Arbitration
Committee rendered a majority decision in favor of MMIC, the pertinent portions of which read
as follows:
Since, as this Committee finds, there is no foreclosure at all was not legally and
validly done, the Committee holds and so declares that the loans of PNB and DBP to
MMIC, for the payment and recovery of which the void foreclosure sales were
undertaken, continue to remain outstanding and unpaid. Defendant APT as the
successor-in-interest of PNB and DBP to the said loans is therefore entitled and
retains the right, to collect the same from MMIC pursuant to and based on the loan
documents signed by MMIC, subject to the legal and valid defenses that the latter may
duly and seasonably interpose. Such loans shall, however, be reduced by the amount
which APT may have realized from the sale of the seized assets of MMIC which by
agreement should no longer be returned even if the foreclosure were found to be null
and void.

The documentary evidence submitted and adopted by both parties (Exhibits 3, 3-B;
Exhibits 100; and also Exhibit ZZZ) as their exhibits would show that the total
outstanding obligation due to DBP and PNB as of the date of foreclosure
is P22,668,537,770.05, more or less.

Therefore, defendant APT can, and is still entitled to, collect the outstanding
obligations of MMIC to PNB and DBP amounting to P22,668.537,770.05, more or
less, with interest thereon as stipulated in the loan documents from the date of
foreclosure up to the time they are fully paid less the proportionate liability of DBP as
owner of 87% of the total capitalization of MMIC under the FRP. Simply put, DBP
shall share in the award of damages to, and in obligations of MMIC in proportion to
its 87% equity in the total capital stock of MMIC.

x x x.

As this Committee holds that the FRP is valid, DBPs equity in MMIC is raised to
87%. So pursuant to the above provision of the Compromise and Arbitration
Agreement, the 87% equity of DBP is hereby deducted from the actual damages
of P19,486,118,654.00 resulting in the net actual damages of P2,531,635,425.02 plus
interest.

DISPOSITION

WHEREFORE, premises considered, judgment is hereby rendered:

1. Ordering the defendant to pay to the Marinduque Mining and Industrial

Corporation, except the DBP, the sum of P2,531,635,425.02 with interest thereon at
the legal rate of six per cent (6%) per annumreckoned from August 3, 9, and 24,
1984, pari passu, as and for actual damages. Payment of these actual damages shall be
offset by APT from the outstanding and unpaid loans of the MMIC with DBP and
PNB, which have not been converted into equity. Should there be any balance due to
the MMIC after the offsetting, the same shall be satisfied from the funds representing
the purchase price of the sale of the shares of Island Cement Corporation in the
amount of P503,000,000.00 held under escrow pursuant to the Escrow Agreement
dated April 22, 1988 or to such subsequent escrow agreement that would supercede
[sic] it pursuant to paragraph (9) of the Compromise and Arbitration Agreement;

2. Ordering the defendant to pay to the Marinduque Mining and Industrial

Corporation, except the DBP, the sum of P13,000,000.00 as and for moral and
exemplary damages. Payment of these moral and exemplary damages shall be offset
by APT from the outstanding and unpaid loans of MMIC with DBP and PNB, which
have not been converted into equity. Should there be any balance due to MMIC after
the offsetting, the same shall be satisfied from the funds representing the purchase
price of the sale of the shares of Island Cement Corporation in the of P503,000,000.00
held under escrow pursuant to the Escrow Agreement dated April 22, 1988 or to such
subsequent escrow agreement that would supercede [sic] it pursuant to paragraph (9)
of the Compromise and Arbitration Agreement;

3. Ordering the defendant to pay to the plaintiff, Jesus Cabarrus, Sr., the sum
of P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant
to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow
agreement that would supercede it, pursuant to paragraph (9) of the Compromise and
Arbitration Agreement, as and for moral damages; and

4. Ordering the defendant to pay arbitration costs.

This Decision is FINAL and EXECUTORY.

IT IS SO ORDERED.[16]

Motions for reconsiderations were filed by both parties, but the same were denied.
On October 17, 1994, private respondents filed in the same Civil Case No. 9900 an
Application/Motion for Confirmation of Arbitration Award. Petitioner countered with an
Opposition and Motion to Vacate Judgment raising the following grounds:

1. The plaintiffs Application/Motion is improperly filed with this branch of the Court,
considering that the said motion is neither a part nor the continuation of the
proceedings in Civil Case No. 9900 which was dismissed upon motion of the
parties. In fact, the defendants in the said Civil Case No. 9900 were the Development
Bank of the Philippines and the Philippine National Bank (PNB);
2. Under Section 22 of Rep. Act 876, an arbitration under a contract or submission
shall be deemed a special proceedings and a party to the controversy which was
arbitrated may apply to the court having jurisdiction, (not necessarily with this
Honorable Court) for an order confirming the award;

3. The issues submitted for arbitration have been limited to two: (1) propriety of the
plaintiffs filing the derivative suit and (2) the regularity of the foreclosure
proceedings. The arbitration award sought to be confirmed herein far exceeded the
issues submitted and even granted moral damages to one of the herein plaintiffs;

4. Under Section 24 of Rep. Act 876, the Court must make an order vacating the
award where the arbitrators exceeded their powers, or so imperfectly executed them,
that a mutual final and definite award upon the subject matter submitted to them was
not made.[17]

Private respondents filed a REPLY AND OPPOSITION dated November 10, 1984, arguing
that a dismissal of Civil case No. 9900 was merely a qualified dismissal to pave the way for the
submission of the controversy to arbitration, and operated simply as a mere suspension of the
proceedings. They denied that the Arbitration Committee had exceeded its powers.
In an Order dated November 28, 1994, the trial court confirmed the award of the Arbitration
Committee. The dispositive portion of said order reads:

WHEREFORE, premises considered, and in the light of the parties [sic] Compromise
and Arbitration Agreement dated October 6, 1992, the Decision of the Arbitration
Committee promulgated on November 24, 1993, as affirmed in a Resolution dated
July 26, 1994, and finally settled and clarified in the Separate Opinion dated
September 2, 1994 of Committee Member Elma, and the pertinent provisions of RA
876,also known as the Arbitration Law, this Court GRANTS PLAINTIFFS
APPLICATION AND THUS CONFIRMS THE ARBITRATION AWARD, AND
JUDGMENT IS HEREBY RENDERED:

(a) Ordering the defendant APT to the Marinduque Mining and Industrial Corporation
(MMIC, except the DBP, the sum of P3,811,757,425.00, as and for actual damages,
which shall be partially satisfied from the funds held under escrow in the amount
of P503,000,000.00 pursuant to the Escrow Agreement dated April 22, 1988. The
Balance of the award, after the escrow funds are fully applied, shall be executed
against the APT;

(b) Ordering the defendant to pay to the MMIC, except the DBP, the sum
of P13,000,000.00 as and moral and exemplary damages;
(c) Ordering the defendant to pay to Jesus S. Cabarrus, Sr., the sum of P10,000,000.00
as and for moral damages; and

(d) Ordering the defendant to pay the herein plaintiffs/applicants/movants the sum
of P1,705,410.22 as arbitration costs.

In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8 paragraph 2

of the Compromise and Arbitration Agreement, and the final edict of the Arbitration
Committees decision, and with this Courts Confirmation, the issuance of the
Arbitration Committees Award shall henceforth be final and executory.

SO ORDERED.[18]

On December 27, 1994, petitioner filed its motion for reconsideration of the Order dated
November 28, 1994. Private respondents, in turn, submitted their reply and opposition thereto.
On January 18, 1995, the trial court handed down its order denying APTs motion for
reconsideration for lack of merit and for having been filed out of time. The trial court declared
that considering that the defendant APT through counsel, officially and actually received a copy
of the Order of this Court dated November 28, 1994 on December 6, 1994, the Motion for
Reconsideration thereof filed by the defendant APT on December 27, 1994, or after the lapse of
21 days, was clearly filed beyond the 15-day reglementary period prescribed or provided for by
law for the filing of an appeal from final orders, resolutions, awards, judgments or decisions of
any court in all cases, and by necessary implication for the filling of a motion for reconsideration
thereof.
On February 7, 1995, petitioner received private respondents motion for Execution and
Appointment of Custodian of Proceeds of Execution dated February 6, 1995.
Petitioner thereafter filed with the Court of Appeals a special civil action for certiorari with
temporary restraining order and/or preliminary injunction dated February 13, 1996 to annul and
declare as void the Orders of the RTC-Makati dated November 28, 1994 and January 18, 1995
for having been issued without or in excess of jurisdiction and/or with grave abuse of
discretion.[19] As ground therefor, petitioner alleged that:
I

THE RESPONDENT JUDGE HAS NOT VALIDLY ACQUIRED JURISDICTION

MUCH LESS, HAS THE COURT AUTHORITY, TO CONFIRM THE ARBITRAL
AWARD CONSIDERING THAT THE ORIGINAL CASE, CIVIL CASE NO. 9900,
HAD PREVIOUSLY BEEN DISMISSED.
II

THE RESPONDENT JUDGE COMMITTED GRAVE ABUSE OF DISCRETION

AND ACTED WITHOUT OR IN EXCESS OF JURISDICTION, IN ISSUING THE
QUESTIONED ORDERS CONFIRMING THE ARBITRAL AWARD AND
DENYING THE MOTION FOR RECONSIDERATION OF ORDER OF AWARD.
III

THE RESPONDENT JUDGE GROSSLY ABUSED HIS DISCRETION AND ACTED

WITHOUT OR IN EXCESS OF AND WITHOUT JURISDICTION IN RECKONING THE
COUNTING OF THE PERIOD TO FILE MOTION FOR RECONSIDERATION, NOT FROM
THE DATE OF SERVICE OF THE COURTS COPY CONFIRMING THE AWARD, BUT
FROM RECEIPT OF A XEROX COPY OF WHAT PRESUMABLY IS THE OPPOSING
COUNSELS COPY THEREOF.[20]

On July 12, 1995, the Court of Appeals, through its fifth Division denied due course and
dismissed the petition for certiorari.
Hence, the instant petition for review on certiorari imputing to the Court of Appeals the
following errors.

ASSIGNMENT OF ERRORS
I

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE MAKATI

REGIONAL TRIAL COURT, BRANCH 62 WHICH HAS PREVIOULSY
DISMISSED CIVIL CASE NO. 9900 HAD LOST JURISDICTION TO
CONFIRM THE ARBITRAL AWARD UNDER THE SAME CIVIL CASE
AND IN NOT RULING THAT THE APPLICATION FOR CONFIRMATION
SHOULD HAVE BEEN FILED AS A NEW CASE TO BE RAFFLED OFF
AMONG THE DIFFERENT BRANCHES OF THE RTC.
II

THE COURT OF APPEALS LIKEWISE ERRED IN HOLDING THAT

PETITIONER WAS ESTOPPED FROM QUESTIONING THE ARBITRATION
AWARD, WHEN PETITIONER QUESTIONED THE JURISDICTION OF THE
RTC-MAKATI, BRANCH 62 AND AT THE SAME TIME MOVED TO
VACATE THE ARBITRAL AWARD.
III

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE

RESPONDENT TRIAL COURT SHOULD HAVE EITHER
DISMISSED/DENIED PRIVATE RESPONDENTS MOTION/PETITION FOR
CONFIRMATION OF ARBITRATION AWARD AND/OR SHOULD HAVE
 CONSIDERED THE MERITS OF THE MOTION TO VACATE ARBITRAL
AWARD.
IV

THE COURT OF APPEALS ERRED IN NOT TREATING PETITIONER APTS

PETITION FOR CERTIORARI AS AN APPEAL TAKEN FROM THE ORDER
CONFIRMING THE AWARD
V

THE COURT OF APPEALS ERRED IN NOT RULING ON THE LEGAL ISSUE OF

WHEN TO RECKON THE COUNTING OF THE PERIOD TO FILE A MOTION FOR
RECONSIDERATION.[21]

The petition is impressed with merit.

I

The RTC of Makati, Branch 62, did not have jurisdiction to confirm the arbitral award

The use of the term dismissed is not a mere semantic imperfection. The dispositive portion
of the Order of the trial court dated October 14, 1992 stated in no uncertain terms:
4. The Complaint is hereby DISMISSED.[22]
The term dismiss has a precise definition in law. To dispose of an action suit, or motion without
trial on the issues involved. Conclude, discontinue, terminate, quash.[23]
Admittedly the correct procedure was for the parties to go back to the court where the case
was pending to have the award confirmed by said court. However, Branch 62 made
the fatal mistake of issuing a final order dismissing the case. While Branch 62 should have
merely suspended the case and not dismissed it,[24] neither of the parties questioned said
dismissal. Thus, both parties as well as said court are bound by such error.
It is erroneous then to argue, as private respondents do, that petitioner APT was charged
with the knowledge that the case was merely stayed until arbitration finished, as again, the order
of Branch 62 in very clear terms stated that the complaint was dismissed. By its own action,
Branch 62 had lost jurisdiction over the vase. It could not have validly reacquired jurisdiction
over the said case on mere motion of one of the parties. The Rules of Court is specific on how a
new case may be initiated and such is not done by mere motion in a particular branch of the
RTC. Consequently, as there was no pending action to speak of, the petition to confirm the
arbitral award should have been filed as a new case and raffled accordingly to one of the
branches of the Regional Trial Court.
II
 Petitioner was not estopped from questioning the jurisdiction of Branch 62 of the RTC of Makati.

The Court of Appeals ruled that APT was already estopped to question the jurisdiction of the
RTC to confirm the arbitral award because it sought affirmative relief in said court by asking that
the arbitral award be vacated.
The rule is that Where the court itself clearly has no jurisdiction over the subject matter or
the nature of the action, the invocation of this defense may de done at any time. It is neither for
the courts nor for the parties to violate or disregard that rule, let alone to confer that jurisdiction,
this matter being legislative in character.[25] As a rule the, neither waiver nor estoppel shall apply
to confer jurisdiction upon a court barring highly meritorious and exceptional
circumstances.[26] One such exception was enunciated in Tijam vs. Sibonghanoy,[27] where it was
held that after voluntarily submitting a cause and encountering an adverse decision on the merits,
it is too late for the loser to question the jurisdiction or power of the court."
Petitioners situation is different because from the outset, it has consistently held the position
that the RTC, Branch 62 had no jurisdiction to confirm the arbitral award; consequently, it
cannot be said that it was estopped from questioning the RTCs jurisdiction. Petitioners prayer for
the setting aside of the arbitral award was not inconsistent with its disavowal of the courts
jurisdiction.
III

Appeal of petitioner to the Court of Appeals thru certiorari under Rule 65 was proper.

The Court of Appeals in dismissing APTs petition for certiorari upheld the trial courts
denial of APTs motion for reconsideration of the trial courts order confirming the arbitral award,
on the ground that said motion was filed beyond the 15-day reglementary period; consequently,
the petition for certiorari could not be resorted to as substitute to the lost right of appeal.
We do not agree.
Section 29 of Republic Act No. 876,[28] provides that:

x x x An appeal may be taken from an order made in a proceeding under this Act,
or from a judgment entered upon an award through certiorari proceedings, but
such appeals shall be limited to question of law. x x x.

The aforequoted provision, however, does not preclude a party aggrieved by the arbitral
award from resorting to the extraordinary remedy of certiorari under Rule 65 of the Rules of
Court where, as in this case, the Regional Trial Court to which the award was submitted for
confirmation has acted without jurisdiction, or with grave abuse of discretion and there is no
appeal, nor any plain, speedy remedy in the course of law.
Thus, Section 1 of Rule 65 provides:
SEC 1. Petition for Certiorari: - When any tribunal, board or officer exercising
judicial functions, has acted without or in excess of its or his jurisdiction, or with
grave abuse of discretion and there is no appeal, nor any plain, speedy, and adequate
remedy in the ordinary course of law, a person aggrieved thereby may file a verified
petition in the proper court alleging the facts with certainty and praying that judgment
be rendered annulling or modifying the proceedings, as the law requires, of such
tribunal, board or officer.

In the instant case, the respondent court erred in dismissing the special civil action
for certiorari, it being from the pleadings and the evidence that the trial court lacked jurisdiction
and/or committed grave abuse of discretion in taking cognizance of private respondent motion to
confirm the arbitral award and, worse, in confirming said award which is grossly and patently
not in accord with the arbitration agreement, as will be hereinafter demonstrated.
IV

The nature and limits of the Arbitrators powers.

As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment either as
to the law or as to the facts.[29] Courts are without power to amend or overrule merely because of
disagreement with matters of law or facts determined by the arbitrators.[30] They will not review
the findings of law and fact contained in an award, and will not undertake to substitute their
judgment for that of the arbitrators, since any other rule would make an award the
commencement, not the end, of litigation.[31] Errors of law and fact, or an erroneous decision of
matters submitted to the judgment of the arbitrators, are insufficient to invalidate an award fairly
and honestly made.[32] Judicial review of an arbitration is, thus, more limited than judicial review
of a trial.[33]
Nonetheless, the arbitrators awards is not absolute and without exceptions. The arbitrators
cannot resolve issues beyond the scope of the submission agreement.[34] The parties to such an
agreement are bound by the arbitrators award only to the extent and in the manner prescribed by
the contract and only if the award is rendered in conformity thereto.[35] Thus, Sections 24 and 25
of the Arbitration Law provide grounds for vacating, rescinding or modifying an arbitration
award. Where the conditions described in Articles 2038,[36] 2039[37] and 2040[38] of the Civil Code
applicable to compromises and arbitration are attendant, the arbitration award may also be
annulled.
In Chung Fu Industries (Phils.) vs. Court of Appeals,[39] we held:

x x x. It is stated explicitly under Art. 2044 of the Civil Code that the finality of the
arbitrators awards is not absolute and without exceptions. Where the conditions
described in Articles 2038, 2039, and 2040 applicable to both compromises and
arbitration are obtaining, the arbitrators' award may be annulled or
rescinded. Additionally, under Sections 24 and 25, of the Arbitration Law, there are
grounds for vacating, modifying or rescinding an arbitrators award. Thus, if and when
the factual circumstances referred to in the above-cited provisions are present, judicial
review of the award is properly warranted.

Accordingly, Section 20 of R.A. 876 provides:

SEC. 20. Form and contents of award. The award must be made in writing and signed
and acknowledged by a majority of the arbitrators, if more than one; and by the sole
arbitrator, if there is only one. Each party shall be furnished with a copy of the
award. The arbitrators in their award may grant any remedy or relief which they deem
just and equitable and within the scope of the agreement of the parties, which shall
include, but not be limited to, the specific performance of a contract.

xxx

The arbitrators shall have the power to decide only those matters which have been
submitted to them. The terms of the award shall be confined to such
disputes. (Underscoring ours).

xxx.
Section 24 of the same law enumerating the grounds for vacating an award states:

SEC. 24. Grounds for vacating award. In any one of the following cases, the court
must make an order vacating the award upon the petition of any party to the
controversy when such party proves affirmatively that in the arbitration proceedings:

(a) The award was procured by corruption, fraud, or other undue means; or

(b) That there was evident partiality or corruption in arbitrators or any of them; or

(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing
upon sufficient cause shown, or in refusing to hear evidence pertinent and material to
the controversy; that one or more of the arbitrators was disqualified to act as such
under section nine hereof, and willfully refrained from disclosing such
disqualifications or any other misbehavior by which the rights of any party have been
materially prejudiced; or

(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a
mutual, final and definite award upon the subject matter submitted to them was not
made. (Underscoring ours).

xxx.
Section 25 which enumerates the grounds for modifying the award provides:
SEC. 25. Grounds for modifying or correcting award In anyone of the following
cases, the court must make an order modifying or correcting the award, upon the
application of any party to the controversy which was arbitrated:

(a) Where there was an evident miscalculation of figures, or an evident mistake in the
description of any person, thing or property referred to in the award; or

(b) Where the arbitrators have awarded upon a matter not submitted to them, not
affecting the merits of the decision upon the matter submitted; or

(c) Where the award is imperfect in a matter of form not affecting the merits of the
controversy, and if it had been a commissioners report, the defect could have been
amended or disregarded by the court.

x x x.
Finally, it should be stressed that while a court is precluded from overturning an award for
errors in determination of factual issues, nevertheless, if an examination of the record reveals no
support whatever for the arbitrators determinations, their award must be vacated.[40] In the same
manner, an award must be vacated if it was made in manifest disregard of the law.[41]
Against the backdrop of the foregoing provisions and principles, we find that the arbitrators
came out with an award in excess of their powers and palpably devoid of factual and legal basis.
V

There was no financial structuring program; foreclosure of mortgage was fully justified.

The point need not be belabored that PNB and DBP had the legitimate right to foreclose of
the mortgages of MMIC whose obligations were past due. The foreclosure was not a wrongful
act of the banks and, therefore, could not be the basis of any award of damages. There was no
financial restructuring agreement to speak of that could have constituted an impediment to the
exercise of the banks right to foreclose.
As correctly stated by Mr. Jose C. Sison, a member of the Arbitration Committee who wrote
a separate opinion:

1. The various loans and advances made by DBP and PNB to MMIC have become
overdue and remain unpaid. The fact that a FRP was drawn up is enough to establish
that MMIC has not been complying with the terms of the loan
agreement. Restructuring simply connotes that the obligations are past due that is why
it is restructurable;
2. When MMIC thru its board and the stockholders agreed and adopted the FRP, it
only means that MMIC had been informed or notified that its obligations were past
due and that foreclosure is forthcoming;

3. At that stage, MMIC also knew that PNB-DBP had the option of either approving
the FRP or proceeding with the foreclosure. Cabarrus, who filed this case supposedly
in behalf of MMIC should have insisted on the FRP. Yet Cabarrus himself opposed
the FRP;

4. So when PNB-DBP proceeded with the foreclosure, it was done without bad faith
but with honest and sincere belief that foreclosure was the only alternative; a decision
further explained by Dr. Placido Mapa who testified that foreclosure was, in the
judgment of PNB, the best move to save MMIC itself.

Q : Now in this portion of Exh. L which was marked as Exh. L-1, and we adopted as Exh. 37-A for the
respondent, may I know from you, Dr. Mapa what you meant by that the decision to foreclose
was neither precipitate nor arbitrary?
A : Well, it is not a whimsical decision but rather decision arrived at after weighty considerations of
the information that we have received, and listening to the prospects which reported to us that we
had assumed would be the premises of the financial rehabilitation plan was not materialized nor
expected to materialized.
Q : And this statement that it was premised upon the known fact that means, it was referring to the
decision to foreclose, was premised upon the known fact that the rehabilitation plan earlier
approved by the stockholders was no longer feasible, just what is meant by no longer feasible?
A : Because the revenue that they were counting on to make the rehabilitation plan possible, was not
anymore expected to be forthcoming because it will result in a short fall compared to the prices
that were actually taking place in the market.
Q : And I supposed that was you were referring to when you stated that the production targets and
assumed prices of MMICs products, among other projections, used in the financial reorganization
program that will make it viable were not met nor expected to be met?
A : Yes.
xxx

Which brings me to my last point in this separate opinion. Was PNB and DBP
absolutely unjustified in foreclosing the mortgages?

In this connection, it can readily be seen and it cannot quite be denied that MMIC
accounts in PNB-DBP were past due. The drawing up of the FRP is the best proof of
this. When MMIC adopted a restructuring program for its loan, it only meant that
these loans were already due and unpaid. If these loans were restructurable because
they were already due and unpaid, they are likewise forecloseable. The option is with
the PNB-DBP on what steps to take.
The mere fact that MMIC adopted the FRP does not mean that DBP-PNB lost the option to
foreclose. Neither does it mean that the FRP is legally binding and implementable. It must be
pointed that said FRP will, in effect, supersede the existing and past due loans of MMIC with
PNB-DBP. It will become the new loan agreement between the lenders and the borrowers. As in
all other contracts, there must therefore be a meeting of minds of the parties; the PNB and DBP
must have to validly adopt and ratify such FRP before they can be bound by it; before it can be
implemented. In this case, not an iota of proof has been presented by the PLAINTIFFS showing
that PNB and DBP ratified and adopted the FRP. PLAINTIFFS simply relied on a legal doctrine
of promissory estoppel to support its allegation in this regard.[42]

Moreover, PNB and DBP had to initiate foreclosure proceedings as mandated by P.D. No.
385, which took effect on January 31, 1974. The decree requires government financial
institutions to foreclose collaterals for loans where the arrearages amount to 20% of the total
outstanding obligations. The pertinent provisions of said decree read as follows:

SEC. 1. It shall be mandatory for government financial institutions, after the lapse of
sixty (60) days from the issuance of this Decree to foreclose the collaterals and/or
securities for any loan, credit, accommodations, and/or guarantees granted by them
whenever the arrearages on such account, including accrued interest and other
charges, amount to at least twenty percent (20%) of the total outstanding obligations,
including interest and other charges, as appearing in the books of account and/or
related records of the financial institutions concerned. This shall be without prejudice
to the exercise by the government financial institutions of such rights and/or remedies
available to them under their respective contracts with their debtor, including the right
to foreclosure on loans, credits, accommodations and/or guarantees on which the
arrearages are less than twenty percent (20%).

SEC. 2. No restraining order, temporary or permanent injunction shall be issued by

the court against any government financial institution in any action taken by such
institution in compliance with the mandatory foreclosure provided in Section 1 hereof,
whether such restraining order, temporary or permanent injunction is sought by the
borrower(s) or any third party or parties, except after due hearing in which it is
established by the borrower and admitted by the government financial institution
concerned that twenty percent (20%) of the outstanding arrearages has been paid after
the filing of foreclosure proceedings. (Underscoring supplied.)

Private respondents thesis that the foreclosure proceedings were null and void because of
lack of publication in the newspaper is nothing more than a mere unsubstantiated allegation not
borne out by the evidence. In any case, a disputable presumption exists in favor of petitioner that
official duty has been regularly performed and ordinary course of business has been followed.[43]
VI

Not only was the foreclosure rightfully exercised by the PNB and DBP, but also, from the
facts of the case, the arbitrators in making the award went beyond the arbitration agreement.
 In their complaint filed before the trial court, private respondent Cabarrus, et al. prayed for
judgment in their favor:

1. Declaring the foreclosure effected by the defendants DBP and PNB on the assets of
MMIC null and void and directing said defendants to restore the foreclosed assets to
the possession of MMIC, to render an accounting of their use and/or operation of said
assets and to indemnify MMIC for the loss occasioned by its dispossession or the
deterioration thereof;

2. Directing the defendants DBP and PNB to honor and perform their commitments
under the financial reorganization plan which was approved at the annual stockholders
meeting of MMIC on 30 April 1984;

3. Condemning the defendants DBP and PNB, jointly and severally to pay the
plaintiffs actual damages consisting of the loss of value of their investment amounting
to not less than P80,000,000.00, the damnum emerges and lucrum cessans in such
amount as may be establish during the trial, moral damages in such amount as this
Honorable Court may deem just and equitable in the premises, exemplary damages in
such amount as this Honorable Court may consider appropriate for the purpose of
setting an example for the public good, attorneys fees and litigation expenses in such
amounts as may be proven during the trial, and the costs legally taxable in this
litigation.

Further, Plaintiffs pray for such other reliefs as may be just and equitable in the
premises.[44]

Upon submission for arbitration, the Compromise and Arbitration Agreement of the parties
clearly and explicitly defined and limited the issues to the following:
(a) whether PLAINTIFFS have the capacity or the personality to institute this derivative suit in
behalf of the MMIC or its directors;
(b) whether or not the actions leading to, and including, the PNB-DBP foreclosure of
the MMIC assets were proper, valid and in good faith.[45]
Item No. 8 of the Agreement provides for the period by which the Committee was to render
its decision, as well as the nature thereof:
8. Decision. The committee shall issue a decision on the controversy not later than six (6)
months from the date of its constitution.

In the event the committee finds that PLAINTIFFS have the personality to file this
suit and extra-judicial foreclosure of the MMIC assets wrongful, it shall make an
award in favor of the PLAINTIFFS (excluding DBP), in an amount as may be
established or warranted by the evidence which shall be payable in Philippine Pesos at
the time of the award. Such award shall be paid by the APT or its successor-in-interest
within sixty (60) days from the date of the award in accordance with the provisions of
par. 9 hereunder. x x x. The PLAINTIFFS remedies under this Section shall be in
addition to other remedies that may be available to the PLAINTIFFS, all such
remedies being cumulative and not exclusive of each other.

On the other hand, in case the arbitration committee finds that PLAINTIFFS have no capacity to
sue and/or that the extra-judicial foreclosure is valid and legal, it shall also make an award in
favor of APT based on the counterclaims of DBP and PNB in an amount as may be established
or warranted by the evidence. This decision of the arbitration committee in favor of APT shall
likewise finally settle all issues regarding the foreclosure of the MMIC assets so that the funds
held in escrow mentioned in par. 9 hereunder will thus be released in full in favor of APT.[46]

The clear and explicit terms of the submission notwithstanding, the Arbitration Committee
clearly exceeded its powers or so imperfectly executed them: (a) in ruling on and declaring valid
the FRP; (b) in awarding damages to MMIC which was not a party to the derivative suit; and (c)
in awarding moral damages to Jesus S. Cabarrus, Sr.

The arbiters overstepped their powers by declaring as valid proposed Financial Restructuring Program.

The Arbitration Committee went beyond its mandate and thus acted in excess of its powers
when it ruled on the validity of, and gave effect to, the proposed FRP.
In submitting the case to arbitration, the parties had mutually agreed to limit the issue to the
validity of the foreclosure and to transform the reliefs prayed for therein into pure money claims.
There is absolutely no evidence that the DBP and PNB agreed, expressly or impliedly, to the
proposed FRP. It cannot be overemphasized that a FRP, as a contract, requires the consent of the
parties thereto.[47] The contract must bind both contracting parties.[48] Private respondents even by
their own admission recognized that the FRP had yet not been carried out and that the loans of
MMIC had not yet been converted into equity.[49]
However, the arbitration Committee not only declared the FRP valid and effective, but also
converted the loans of MMIC into equity raising the equity of DBP to 87%.[50]
The Arbitration Committee ruled that there was a commitment to carry out the FRP [51] on the
ground of promissory estoppel.

Similarly, the principle of promissory estoppel applies in the present case considering
as we observed, the fact that the government (that is Alfredo Velayo) was the FRPs
proponent. Although the plaintiffs are agreed that the government executed no formal
agreement, the fact remains that the DBP itself which made representations that the
FRP constituted a way out for MMIC. The Committee believes that although the DBP
did not formally agree (assuming that the board and stockholders approvals were not
formal enough), it is bound nonetheless if only for its conspicuous representations.
Although the DBP sat in the board in a dual capacity-as holder of 36% of MMICs
equity (at that time) and as MMICs creditor-the DBP can not validly renege on its
commitments simply because at the same time, it held interest against the MMIC.

The fact, of course, is that as APT itself asserted, the FRP was being carried out
although apparently, it would supposedly fall short of its targets. Assuming that the
FRP would fail to meet its targets, the DBP-and so this Committee holds-can not, in
any event, brook any denial that it was bound to begin with, and the fact is that
adequate or not (the FRP), the government is still bound by virtue of its acts.

The FRP, of course, did not itself promise a resounding success, although it raised DBPs equity
in MMIC to 87%. It is not excuse, however, for the government to deny its commitments.[52]

Atty. Sison, however, did not agree and correctly observed that:

But the doctrine of promissory estoppel can hardly find application here. The nearest that there
can be said of any estoppel being present in this case is the fact that the board of MMIC was, at
the time the FRP was adopted, mostly composed of PNB and DBP representatives. But those
representatives, singly or collectively, are not themselves PNB or DBP. They are individuals
with personalities separate and distinct from the banks they represent. PNB and DBP have
different boards with different members who may have different decisions. It is unfair to impose
upon them the decision of the board of another company and thus pin them down on the
equitable principle of estoppel. Estoppel is a principle based on equity and it is certainly not
equitable to apply it in this particular situation. Otherwise the rights of entirely separate, distinct
and autonomous legal entities like PNB and DBP with thousands of stockholders will be
suppressed and rendered nugatory.[53]

As a rule, a corporation exercises its powers, including the power to enter into contracts,
through its board of directors. While a corporation may appoint agents to enter into a contract in
its behalf, the agent, should not exceed his authority.[54] In the case at bar, there was no showing
that the representatives of PNB and DBP in MMIC even had the requisite authority to enter into
a debt-for-equity swap. And if they had such authority, there was no showing that the banks,
through their board of directors, had ratified the FRP.
Further, how could the MMIC be entitled to a big amount of moral damages when its credit
reputation was not exactly something to be considered sound and wholesome. Under Article
2217 of the Civil Code, moral damages include besmirched reputation which a corporation may
possibly suffer. A corporation whose overdue and unpaid debts to the Government alone reached
a tremendous amount of P22 Billion Pesos cannot certainly have a solid business reputation to
brag about. As Atty. Sison in his separate opinion persuasively put it:

Besides, it is not yet a well settled jurisprudence that corporations are entitled to moral
damages. While the Supreme Court may have awarded moral damages to a corporation for
besmirched reputation in Mambulao vs. PNB 22 SCRA 359, such ruling cannot find application
in this case. It must be pointed out that when the supposed wrongful act of foreclosure was done,
MMICs credit reputation was no longer a desirable one. The company then was already suffering
from serious financial crisis which definitely projects an image not compatible with good and
wholesome reputation. So it could not be said that there was a reputation besmirches by the act
of foreclosure.[55]

The arbiters exceeded their authority in awarding damages to MMIC, which is not impleaded as a party to the derivative suit.

Civil Code No. 9900 filed before the RTC being a derivative suit, MMIC should have been
impleaded as a party. It was not joined as a party plaintiff or party defendant at any stage of the
proceedings. As it is, the award of damages to MMIC, which was not a party before the
Arbitration Committee, is a complete nullity.
Settled is the doctrine that in a derivative suit, the corporation is the real party in interest
while the stockholder filing suit for the corporations behalf is only nominal party. The
corporation should be included as a party in the suit.

An individual stockholder is permitted to institute a derivative suit on behalf of the corporation

wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In
such actions, the suing stockholder is regarded as a nominal party, with the corporation as the
real party in interest. x x x.[56]

It is a condition sine qua non that the corporation be impleaded as a party because-

x x x. Not only is the corporation an indispensible party, but it is also the present rule that it must
be served with process. The reason given is that the judgment must be made binding upon the
corporation and in order that the corporation may get the benefit of the suit and may not bring a
subsequent suit against the same defendants for the same cause of action. In other words the
corporations must be joined as party because it is its cause of action that is being litigated and
because judgment must be a res ajudicata against it.[57]

The reasons given for not allowing direct individual suit are:

(1) x x x the universally recognized doctrine that a stockholder in a corporation has no

title legal or equitable to the corporate property; that both of these are in the
corporation itself for the benefit of the stockholders. In other words, to allow
shareholders to sue separately would conflict with the separate corporate entity
principle;

(2) x x x that the prior rights of the creditors may be prejudiced. Thus, our Supreme
Court held in the case of Evangelista v. Santos, that the stockholders may not directly
claim those damages for themselves for that would result in the appropriation by, and
the distribution among them of part of the corporate assets before the dissolution of
the corporation and the liquidation of its debts and liabilities, something which cannot
be legally done in view of section 16 of the Corporation Law xxx;
(3) the filing of such suits would conflict with the duty of the management to sue for
the protection of all concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in a ascertaining the effect of partial recovery by an individual on
the damages recoverable by the corporation for the same act.[58]

If at all an award was due MMIC, which it was not, the same should have been
given sans deduction, regardless of whether or not the party liable had equity in the corporation,
in view of the doctrine that a corporation has a personality separate and distinct from its
individual stockholders or members. DBPs alleged equity, even if it were indeed 87%, did not
give it ownership over any corporate property, including the monetary award, its right over said
corporate property being a mere expectancy or inchoate right.[59]Notably, the stipulation even had
the effect of prejudicing the other creditors of MMIC.

The arbiters, likewise, exceeded their authority in awarding moral damages to Jesus Cabarrus, Sr.

It is perplexing how the Arbitration Committee can in one breath rule that the case before it
is a derivative suit, in which the aggrieved party or the real party in interest is supposedly the
MMIC, and at the same time award moral damages to an individual stockholder, to wit:

WHEREFORE, premises considered, judgment is hereby rendered:

xxx.

3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum
of P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant
to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow
agreement that would supersede it, pursuant to paragraph (9), Compromise and
Arbitration Agreement, as and for moral damages; x x x[60]

The majority decision of the Arbitration Committee sought to justify its award of moral
damages to Jesus S. Cabarrus, Sr. by pointing to the fact that among the assets seized by the
government were assets belonging to Industrial Enterprise Inc. (IEI), of which Cabarrus is the
majority stockholder. It then acknowledge that Cabarrus had already recovered said assets in the
RTC, but that he won no more than actual damages. While the Committee cannot possibly speak
for the RTC, there is no doubt that Jesus S. Cabarrus, Sr., suffered moral damages on account of
that specific foreclosure, damages the Committee believes and so holds, he Jesus S. Cabarrus,
Sr., may be awarded in this proceeding.[61]
Cabarrus cause of action for the seizure of the assets belonging to IEI, of which he is the
majority stockholder, having been ventilated in a complaint he previously filed with the RTC,
from which he obtained actual damages, he was barred res judicata from filing a similar case in
another court, this time asking for moral damages which he failed to get from the earlier
case.[62] Worse, private respondents violated the rule against non-forum shopping.
It is a basic postulate that s corporation has a personality separate and distinct from its
stockholders.[63] The properties foreclosed belonged to MMIC, not to its stockholders. Hence, if
wrong was committed in the foreclosure, it was done against the corporation. Another reason is
that Jesus S. Cabarrus, Sr. cannot directly claim those damages for himself that would result in
the appropriation by, and the distribution to, him part of the corporations assets before the
dissolution of the corporation and the liquidation of its debts and liabilities. The Arbitration
Committee, therefore, passed upon matters not submitted to it. Moreover, said cause of action
had already been decided in a separate case. It is thus quite patent that the arbitration committee
exceeded the authority granted to it by the parties Compromise and Arbitration Agreement by
awarding moral damages to Jesus S. Cabarrus, Sr.
Atty. Sison, in his separate opinion, likewise expressed befuddlement to the award of moral
damages to Jesus S. Cabarrus, Sr.:

It is clear and it cannot be disputed therefore that based on these stipulated issues,
the parties themselves have agreed that the basic ingredient of the causes of action in
this case is the wrong committed on the corporation (MMIC) for the alleged illegal
foreclosure of its assets. By agreeing to this stipulation, PLAINTIFFS themselves
(Cabarrus, et al.) admit that the cause of action pertains only to the
corporation (MMIC) and that they are filing this for and in behalf of MMIC.

Perforce this has to be so because it is the basic rule in Corporation Law that the
shareholders have no title, legal or equitable to the property which is owned by the
corporation (13 Am. Jur. 165; Pascual vs. Oresco, 14 Phil. 83). In Ganzon & Sons vs.
Register of Deeds, 6 SCRA 373, the rule has been reiterated that a stockholder is not
the co-owner of corporate property. Since the property or assets foreclosed belongs
[sic] to MMIC, the wrong committed, if any, is done against the corporation. There is
therefore no direct injury or direct violation of the rights of Cabarrus et al. There is no
way, legal or equitable, by which Cabarrus et al. could recover damages in their
personal capacities even assuming or just because the foreclosure is improper or
invalid. The Compromise and Arbitration Agreement itself and the elementary
principles of Corporation Law say so. Therefore, I am constrained to dissent from the
award of moral damages to Cabarrus.[64]

From the foregoing discussions, it is evident that, not only did the arbitration committee
exceed its powers or so imperfectly execute them, but also, its findings and conclusions are
palpably devoid of any factual basis and in manifest disregard of the law.
We do not find it necessary to remand this case to the RTC for appropriate action. The
pleadings and memoranda filed with this Court, as well as in the Court of Appeals, raised and
extensively discussed the issues on the merits. Such being the case, there is sufficient basis for us
to resolve the controversy between the parties anchored on the records and the pleadings before
us.[65]
 WHEREFORE, the Decision of the Court of Appeals dated July 17, 1995, as well as the
Orders of the Regional Trial Court of Makati, Branch 62, dated November 28, 1994 and January
19, 1995, is hereby REVERSED and SET ASIDE, and the decision of the Arbitration Committee
is hereby VACATED.
SO ORDERED

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-22973 January 30, 1968

MAMBULAO LUMBER COMPANY, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK and ANACLETO HERALDO Deputy Provincial Sheriff of
Camarines Norte,defendants-appellees.

Ernesto P. Vilar and Arthur Tordesillas for plaintiff-appellant.

Tomas Besa and Jose B. Galang for defendants-appellees.

ANGELES, J.:

An appeal from a decision, dated April 2, 1964, of the Court of First Instance of Manila in Civil Case
No. 52089, entitled "Mambulao Lumber Company, plaintiff, versus Philippine National Bank and
Anacleto Heraldo, defendants", dismissing the complaint against both defendants and sentencing
the plaintiff to pay to defendant Philippine National Bank (PNB for short) the sum of P3,582.52 with
interest thereon at the rate of 6% per annum from December 22, 1961 until fully paid, and the costs
of suit.

In seeking the reversal of the decision, the plaintiff advances several propositions in its brief which
may be restated as follows:

1. That its total indebtedness to the PNB as of November 21, 1961, was only P56,485.87
and not P58,213.51 as concluded by the court a quo; hence, the proceeds of the foreclosure
sale of its real property alone in the amount of P56,908.00 on that date, added to the sum of
P738.59 it remitted to the PNB thereafter was more than sufficient to liquidate its obligation,
thereby rendering the subsequent foreclosure sale of its chattels unlawful;

2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and the
additional sum of P298.54 as expenses of the foreclosure sale;

3. That the subsequent foreclosure sale of its chattels is null and void, not only because it
had already settled its indebtedness to the PNB at the time the sale was effected, but also
for the reason that the said sale was not conducted in accordance with the provisions of the
Chattel Mortgage Law and the venue agreed upon by the parties in the mortgage contract;

4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its value; and
 5. That for the acts of the PNB in proceeding with the sale of the chattels, in utter disregard
of plaintiff's vigorous opposition thereto, and in taking possession thereof after the sale thru
force, intimidation, coercion, and by detaining its "man-in-charge" of said properties, the PNB
is liable to plaintiff for damages and attorney's fees.

The antecedent facts of the case, as found by the trial court, are as follows:

On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga Branch
of defendant PNB and the former offered real estate, machinery, logging and transportation
equipments as collaterals. The application, however, was approved for a loan of P100,000
only. To secure the payment of the loan, the plaintiff mortgaged to defendant PNB a parcel of
land, together with the buildings and improvements existing thereon, situated in the
poblacion of Jose Panganiban (formerly Mambulao), province of Camarines Norte, and
covered by Transfer Certificate of Title No. 381 of the land records of said province, as well
as various sawmill equipment, rolling unit and other fixed assets of the plaintiff, all situated in
its compound in the aforementioned municipality.

On August 2, 1956, the PNB released from the approved loan the sum of P27,500, for which
the plaintiff signed a promissory note wherein it promised to pay to the PNB the said sum in
five equal yearly installments at the rate of P6,528.40 beginning July 31, 1957, and every
year thereafter, the last of which would be on July 31, 1961.

On October 19, 1956, the PNB made another release of P15,500 as part of the approved
loan granted to the plaintiff and so on the said date, the latter executed another promissory
note wherein it agreed to pay to the former the said sum in five equal yearly installments at
the rate of P3,679.64 beginning July 31, 1957, and ending on July 31, 1961.

The plaintiff failed to pay the amortization on the amounts released to and received by it.
Repeated demands were made upon the plaintiff to pay its obligation but it failed or
otherwise refused to do so. Upon inspection and verification made by employees of the PNB,
it was found that the plaintiff had already stopped operation about the end of 1957 or early
part of 1958.

On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte
requesting him to take possession of the parcel of land, together with the improvements
existing thereon, covered by Transfer Certificate of Title No. 381 of the land records of
Camarines Norte, and to sell it at public auction in accordance with the provisions of Act No.
3135, as amended, for the satisfaction of the unpaid obligation of the plaintiff, which as of
September 22, 1961, amounted to P57,646.59, excluding attorney's fees. In compliance with
the request, on October 16, 1961, the Provincial Sheriff of Camarines Norte issued the
corresponding notice of extra-judicial sale and sent a copy thereof to the plaintiff. According
to the notice, the mortgaged property would be sold at public auction at 10:00 a.m. on
November 21, 1961, at the ground floor of the Court House in Daet, Camarines Norte.

On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte
requesting him to take possession of the chattels mortgaged to it by the plaintiff and sell
them at public auction also on November 21, 1961, for the satisfaction of the sum of
P57,646.59, plus 6% annual interest therefore from September 23, 1961, attorney's fees
equivalent to 10% of the amount due and the costs and expenses of the sale. On the same
day, the PNB sent notice to the plaintiff that the former was foreclosing extrajudicially the
chattels mortgaged by the latter and that the auction sale thereof would be held on
November 21, 1961, between 9:00 and 12:00 a.m., in Mambulao, Camarines Norte, where
the mortgaged chattels were situated.

On November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took possession of the
chattels mortgaged by the plaintiff and made an inventory thereof in the presence of a PC
Sergeant and a policeman of the municipality of Jose Panganiban. On November 9, 1961,
the said Deputy Sheriff issued the corresponding notice of public auction sale of the
mortgaged chattels to be held on November 21, 1961, at 10:00 a.m., at the plaintiff's
compound situated in the municipality of Jose Panganiban, Province of Camarines Norte.

On November 19, 1961, the plaintiff sent separate letters, posted as registered air mail
matter, one to the Naga Branch of the PNB and another to the Provincial Sheriff of
Camarines Norte, protesting against the foreclosure of the real estate and chattel mortgages
on the grounds that they could not be effected unless a Court's order was issued against it
(plaintiff) for said purpose and that the foreclosure proceedings, according to the terms of the
mortgage contracts, should be made in Manila. In said letter to the Naga Branch of the PNB,
it was intimated that if the public auction sale would be suspended and the plaintiff would be
given an extension of ninety (90) days, its obligation would be settled satisfactorily because
an important negotiation was then going on for the sale of its "whole interest" for an amount
more than sufficient to liquidate said obligation.

The letter of the plaintiff to the Naga Branch of the PNB was construed by the latter as a
request for extension of the foreclosure sale of the mortgaged chattels and so it advised the
Sheriff of Camarines Norte to defer it to December 21, 1961, at the same time and place. A
copy of said advice was sent to the plaintiff for its information and guidance.

The foreclosure sale of the parcel of land, together with the buildings and improvements
thereon, covered by Transfer Certificate of Title No. 381, was, however, held on November
21, 1961, and the said property was sold to the PNB for the sum of P56,908.00, subject to
the right of the plaintiff to redeem the same within a period of one year. On the same date,
Deputy Provincial Sheriff Heraldo executed a certificate of sale in favor of the PNB and a
copy thereof was sent to the plaintiff.

In a letter dated December 14, 1961 (but apparently posted several days later), the plaintiff
sent a bank draft for P738.59 to the Naga Branch of the PNB, allegedly in full settlement of
the balance of the obligation of the plaintiff after the application thereto of the sum of
P56,908.00 representing the proceeds of the foreclosure sale of parcel of land described in
Transfer Certificate of Title No. 381. In the said letter, the plaintiff reiterated its request that
the foreclosure sale of the mortgaged chattels be discontinued on the grounds that the
mortgaged indebtedness had been fully paid and that it could not be legally effected at a
place other than the City of Manila.

In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of Camarines
Norte that it had fully paid its obligation to the PNB, and enclosed therewith a copy of its
letter to the latter dated December 14, 1961.

On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the plaintiff
acknowledging the remittance of P738.59 with the advice, however, that as of that date the
balance of the account of the plaintiff was P9,161.76, to which should be added the
expenses of guarding the mortgaged chattels at the rate of P4.00 a day beginning December
19, 1961. It was further explained in said letter that the sum of P57,646.59, which was stated
in the request for the foreclosure of the real estate mortgage, did not include the 10%
 attorney's fees and expenses of the sale. Accordingly, the plaintiff was advised that the
foreclosure sale scheduled on the 21st of said month would be stopped if a remittance of
P9,161.76, plus interest thereon and guarding fees, would be made.

On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at 10:00
a.m. and they were awarded to the PNB for the sum of P4,200 and the corresponding bill of
sale was issued in its favor by Deputy Provincial Sheriff Heraldo.

In a letter dated December 26, 1961, the Manager of the Naga Branch of the PNB advised
the plaintiff giving it priority to repurchase the chattels acquired by the former at public
auction. This offer was reiterated in a letter dated January 3, 1962, of the Attorney of the
Naga Branch of the PNB to the plaintiff, with the suggestion that it exercise its right of
redemption and that it apply for the condonation of the attorney's fees. The plaintiff did not
follow the advice but on the contrary it made known of its intention to file appropriate action
or actions for the protection of its interests.

On May 24, 1962, several employees of the PNB arrived in the compound of the plaintiff in
Jose Panganiban, Camarines Norte, and they informed Luis Salgado, Chief Security Guard
of the premises, that the properties therein had been auctioned and bought by the PNB,
which in turn sold them to Mariano Bundok. Upon being advised that the purchaser would
take delivery of the things he bought, Salgado was at first reluctant to allow any piece of
property to be taken out of the compound of the plaintiff. The employees of the PNB
explained that should Salgado refuse, he would be exposing himself to a litigation wherein
he could be held liable to pay big sum of money by way of damages. Apprehensive of the
risk that he would take, Salgado immediately sent a wire to the President of the plaintiff in
Manila, asking advice as to what he should do. In the meantime, Mariano Bundok was able
to take out from the plaintiff's compound two truckloads of equipment.

In the afternoon of the same day, Salgado received a telegram from plaintiff's President
directing him not to deliver the "chattels" without court order, with the information that the
company was then filing an action for damages against the PNB. On the following day, May
25, 1962, two trucks and men of Mariano Bundok arrived but Salgado did not permit them to
take out any equipment from inside the compound of the plaintiff. Thru the intervention,
however, of the local police and PC soldiers, the trucks of Mariano Bundok were able finally
to haul the properties originally mortgaged by the plaintiff to the PNB, which were bought by
it at the foreclosure sale and subsequently sold to Mariano Bundok.

Upon the foregoing facts, the trial court rendered the decision appealed from which, as stated in the
first paragraph of this opinion, sentenced the Mambulao Lumber Company to pay to the defendant
PNB the sum of P3,582.52 with interest thereon at the rate of 6% per annum from December 22,
1961 (day following the date of the questioned foreclosure of plaintiff's chattels) until fully paid, and
the costs. Mambulao Lumber Company interposed the instant appeal.

We shall discuss the various points raised in appellant's brief in seriatim.

The first question Mambulao Lumber Company poses is that which relates to the amount of its
indebtedness to the PNB arising out of the principal loans and the accrued interest thereon. It is
contended that its obligation under the terms of the two promissory notes it had executed in favor of
the PNB amounts only to P56,485.87 as of November 21, 1961, when the sale of real property was
effected, and not P58,213.51 as found by the trial court.
There is merit to this claim. Examining the terms of the promissory note executed by the appellant in
favor of the PNB, we find that the agreed interest on the loan of P43,000.00 — P27,500.00 released
on August 2, 1956 as per promissory note of even date (Exhibit C-3), and P15,500.00 released on
October 19, 1956, as per promissory note of the same date (Exhibit C-4) — was six per cent (6%)
per annum from the respective date of said notes "until paid". In the statement of account of the
appellant as of September 22, 1961, submitted by the PNB, it appears that in arriving at the total
indebtedness of P57,646.59 as of that date, the PNB had compounded the principal of the loan and
the accrued 6% interest thereon each time the yearly amortizations became due, and on the basis of
these compounded amounts charged additional delinquency interest on them up to September 22,
1961; and to this erroneously computed total of P57,646.59, the trial court added 6% interest per
annum from September 23, 1961 to November 21 of the same year. In effect, the PNB has claimed,
and the trial court has adjudicated to it, interest on accrued interests from the time the various
amortizations of the loan became due until the real estate mortgage executed to secure the loan was
extra-judicially foreclosed on November 21, 1961. This is an error. Section 5 of Act No. 2655
expressly provides that in computing the interest on any obligation, promissory note or other
instrument or contract, compound interest shall not be reckoned, except by agreement, or in default
thereof, whenever the debt is judicially claimed. This is also the clear mandate of Article 2212 of the
new Civil Code which provides that interest due shall earn legal interest only from the time it is
judicially demanded, and of Article 1959 of the same code which ordains that interest due and
unpaid shall not earn interest. Of course, the parties may, by stipulation, capitalize the interest due
and unpaid, which as added principal shall earn new interest; but such stipulation is nowhere to be
found in the terms of the promissory notes involved in this case. Clearly therefore, the trial court fell
into error when it awarded interest on accrued interests, without any agreement to that effect and
before they had been judicially demanded.

Appellant next assails the award of attorney's fees and the expenses of the foreclosure sale in favor
of the PNB. With respect to the amount of P298.54 allowed as expenses of the extra-judicial sale of
the real property, appellant maintains that the same has no basis, factual or legal, and should not
have been awarded. It likewise decries the award of attorney's fees which, according to the
appellant, should not be deducted from the proceeds of the sale of the real property, not only
because there is no express agreement in the real estate mortgage contract to pay attorney's fees in
case the same is extra-judicially foreclosed, but also for the reason that the PNB neither spent nor
incurred any obligation to pay attorney's fees in connection with the said extra-judicial foreclosure
under consideration.

There is reason for the appellant to assail the award of P298.54 as expenses of the sale. In this
respect, the trial court said:

The parcel of land, together with the buildings and improvements existing thereon covered
by Transfer Certificate of Title No. 381, was sold for P56,908. There was, however, no
evidence how much was the expenses of the foreclosure sale although from the pertinent
provisions of the Rules of Court, the Sheriff's fees would be P1 for advertising the sale (par.
k, Sec. 7, Rule 130 of the Old Rules) and P297.54 as his commission for the sale (par. n,
Sec. 7, Rule 130 of the Old Rules) or a total of P298.54.

There is really no evidence of record to support the conclusion that the PNB is entitled to the amount
awarded as expenses of the extra-judicial foreclosure sale. The court below committed error in
applying the provisions of the Rules of Court for purposes of arriving at the amount awarded. It is to
be borne in mind that the fees enumerated under paragraphs k and n, Section 7, of Rule 130 (now
Rule 141) are demandable, only by a sheriff serving processes of the court in connection with
judicial foreclosure of mortgages under Rule 68 of the new Rules, and not in cases of extra-judicial
foreclosure of mortgages under Act 3135. The law applicable is Section 4 of Act 3135 which
provides that the officer conducting the sale is entitled to collect a fee of P5.00 for each day of actual
work performed in addition to his expenses in connection with the foreclosure sale. Admittedly, the
PNB failed to prove during the trial of the case, that it actually spent any amount in connection with
the said foreclosure sale. Neither may expenses for publication of the notice be legally allowed in the
absence of evidence on record to support it. 1 It is true, as pointed out by the appellee bank, that
courts should take judicial notice of the fees provided for by law which need not be proved; but in the
absence of evidence to show at least the number of working days the sheriff concerned actually
spent in connection with the extra-judicial foreclosure sale, the most that he may be entitled to,
would be the amount of P10.00 as a reasonable allowance for two day's work — one for the
preparation of the necessary notices of sale, and the other for conducting the auction sale and
issuance of the corresponding certificate of sale in favor of the buyer. Obviously, therefore, the
award of P298.54 as expenses of the sale should be set aside.

But the claim of the appellant that the real estate mortgage does not provide for attorney's fees in
case the same is extra-judicially foreclosed, cannot be favorably considered, as would readily be
revealed by an examination of the pertinent provision of the mortgage contract. The parties to the
mortgage appear to have stipulated under paragraph (c) thereof, inter alia:

. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints the
Mortgagee his attorney-in-fact to sell the property mortgaged under Act 3135, as amended,
to sign all documents and to perform all acts requisite and necessary to accomplish said
purpose and to appoint its substitute as such attorney-in-fact with the same powers as above
specified. In case of judicial foreclosure, the Mortgagor hereby consents to the appointment
of the Mortgagee or any of its employees as receiver, without any bond, to take charge of the
mortgaged property at once, and to hold possession of the same and the rents, benefits and
profits derived from the mortgaged property before the sale, less the costs and expenses of
the receivership; the Mortgagor hereby agrees further that in all cases, attorney's fees
hereby fixed at Ten Per cent (10%) of the total indebtedness then unpaid which in no case
shall be less than P100.00 exclusive of all fees allowed by law, and the expenses of
collection shall be the obligation of the Mortgagor and shall with priority, be paid to the
Mortgagee out of any sums realized as rents and profits derived from the mortgaged
property or from the proceeds realized from the sale of the said property and this mortgage
shall likewise stand as security therefor. . . .

We find the above stipulation to pay attorney's fees clear enough to cover both cases of foreclosure
sale mentioned thereunder, i.e., judicially or extra-judicially. While the phrase "in all cases" appears
to be part of the second sentence, a reading of the whole context of the stipulation would readily
show that it logically refers to extra-judicial foreclosure found in the first sentence and to judicial
foreclosure mentioned in the next sentence. And the ambiguity in the stipulation suggested and
pointed out by the appellant by reason of the faulty sentence construction should not be made to
defeat the otherwise clear intention of the parties in the agreement.

It is suggested by the appellant, however, that even if the above stipulation to pay attorney's fees
were applicable to the extra-judicial foreclosure sale of its real properties, still, the award of
P5,821.35 for attorney's fees has no legal justification, considering the circumstance that the PNB
did not actually spend anything by way of attorney's fees in connection with the sale. In support of
this proposition, appellant cites authorities to the effect: (1) that when the mortgagee has neither
paid nor incurred any obligation to pay an attorney in connection with the foreclosure sale, the claim
for such fees should be denied; 2 and (2) that attorney's fees will not be allowed when the attorney
conducting the foreclosure proceedings is an officer of the corporation (mortgagee) who receives a
salary for all the legal services performed by him for the corporation. 3 These authorities are indeed
enlightening; but they should not be applied in this case. The very same authority first cited suggests
that said principle is not absolute, for there is authority to the contrary. As to the fact that the
foreclosure proceeding's were handled by an attorney of the legal staff of the PNB, we are reluctant
to exonerate herein appellant from the payment of the stipulated attorney's fees on this ground
alone, considering the express agreement between the parties in the mortgage contract under which
appellant became liable to pay the same. At any rate, we find merit in the contention of the appellant
that the award of P5,821.35 in favor of the PNB as attorney's fees is unconscionable and
unreasonable, considering that all that the branch attorney of the said bank did in connection with
the foreclosure sale of the real property was to file a petition with the provincial sheriff of Camarines
Norte requesting the latter to sell the same in accordance with the provisions of Act 3135.

The principle that courts should reduce stipulated attorney's fees whenever it is found under the
circumstances of the case that the same is unreasonable, is now deeply rooted in this jurisdiction to
entertain any serious objection to it. Thus, this Court has explained:

But the principle that it may be lawfully stipulated that the legal expenses involved in the
collection of a debt shall be defrayed by the debtor does not imply that such stipulations must
be enforced in accordance with the terms, no matter how injurious or oppressive they may
be. The lawful purpose to be accomplished by such a stipulation is to permit the creditor to
receive the amount due him under his contract without a deduction of the expenses caused
by the delinquency of the debtor. It should not be permitted for him to convert such a
stipulation into a source of speculative profit at the expense of the debtor.

Contracts for attorney's services in this jurisdiction stands upon an entirely different footing
from contracts for the payment of compensation for any other services. By express provision
of section 29 of the Code of Civil Procedure, an attorney is not entitled in the absence of
express contract to recover more than a reasonable compensation for his services; and even
when an express contract is made the court can ignore it and limit the recovery to
reasonable compensation if the amount of the stipulated fee is found by the court to be
unreasonable. This is a very different rule from that announced in section 1091 of the Civil
Code with reference to the obligation of contracts in general, where it is said that such
obligation has the force of law between the contracting parties. Had the plaintiff herein made
an express contract to pay his attorney an uncontingent fee of P2,115.25 for the services to
be rendered in reducing the note here in suit to judgment, it would not have been enforced
against him had he seen fit to oppose it, as such a fee is obviously far greater than is
necessary to remunerate the attorney for the work involved and is therefore unreasonable. In
order to enable the court to ignore an express contract for an attorney's fees, it is not
necessary to show, as in other contracts, that it is contrary to morality or public policy (Art.
1255, Civil Code). It is enough that it is unreasonable or unconscionable. 4

Since then this Court has invariably fixed counsel fees on a quantum meruit basis whenever the fees
stipulated appear excessive, unconscionable, or unreasonable, because a lawyer is primarily a court
officer charged with the duty of assisting the court in administering impartial justice between the
parties, and hence, the fees should be subject to judicial control. Nor should it be ignored that sound
public policy demands that courts disregard stipulations for counsel fees, whenever they appear to
be a source of speculative profit at the expense of the debtor or mortgagor. 5 And it is not material
that the present action is between the debtor and the creditor, and not between attorney and client.
As court have power to fix the fee as between attorney and client, it must necessarily have the right
to say whether a stipulation like this, inserted in a mortgage contract, is valid. 6

In determining the compensation of an attorney, the following circumstances should be considered:

the amount and character of the services rendered; the responsibility imposed; the amount of money
or the value of the property affected by the controversy, or involved in the employment; the skill and
experience called for in the performance of the service; the professional standing of the attorney; the
results secured; and whether or not the fee is contingent or absolute, it being a recognized rule that
an attorney may properly charge a much larger fee when it is to be contingent than when it is
not. 7 From the stipulation in the mortgage contract earlier quoted, it appears that the agreed fee is
10% of the total indebtedness, irrespective of the manner the foreclosure of the mortgage is to be
effected. The agreement is perhaps fair enough in case the foreclosure proceedings is prosecuted
judicially but, surely, it is unreasonable when, as in this case, the mortgage was foreclosed extra-
judicially, and all that the attorney did was to file a petition for foreclosure with the sheriff concerned.
It is to be assumed though, that the said branch attorney of the PNB made a study of the case
before deciding to file the petition for foreclosure; but even with this in mind, we believe the amount
of P5,821.35 is far too excessive a fee for such services. Considering the above circumstances
mentioned, it is our considered opinion that the amount of P1,000.00 would be more than sufficient
to compensate the work aforementioned.

The next issue raised deals with the claim that the proceeds of the sale of the real properties alone
together with the amount it remitted to the PNB later was more than sufficient to liquidate its total
obligation to herein appellee bank. Again, we find merit in this claim. From the foregoing discussion
of the first two errors assigned, and for purposes of determining the total obligation of herein
appellant to the PNB as of November 21, 1961 when the real estate mortgage was foreclosed, we
have the following illustration in support of this conclusion:1äwphï1.ñët

A. -
I. Principal Loan
(a) Promissory note dated August 2, 1956 P27,500.00
(1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961 8,751.78

(b) Promissory note dated October 19, 1956 P15,500.00

(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 1961 4,734.08
II. Sheriff's fees [for two (2) day's work] 10.00

III. Attorney's fee 1,000.00

Total obligation as of Nov. 21, 1961 P57,495.86

B. -
I. Proceeds of the foreclosure sale of the real estate mortgage on Nov. 21, 1961 P56,908.00
II. Additional amount remitted to the PNB on Dec. 18, 1961 738.59

Total amount of Payment made to PNB as of Dec. 18, 1961 P57,646.59

Deduct: Total obligation to the PNB P57,495.86

Excess Payment to the PNB P 150.73

========
From the foregoing illustration or computation, it is clear that there was no further necessity to
foreclose the mortgage of herein appellant's chattels on December 21, 1961; and on this ground
alone, we may declare the sale of appellant's chattels on the said date, illegal and void. But we take
into consideration the fact that the PNB must have been led to believe that the stipulated 10% of the
unpaid loan for attorney's fees in the real estate mortgage was legally maintainable, and in
accordance with such belief, herein appellee bank insisted that the proceeds of the sale of
appellant's real property was deficient to liquidate the latter's total indebtedness. Be that as it may,
however, we still find the subsequent sale of herein appellant's chattels illegal and objectionable on
other grounds.

That appellant vigorously objected to the foreclosure of its chattel mortgage after the foreclosure of
its real estate mortgage on November 21, 1961, can not be doubted, as shown not only by its letter
to the PNB on November 19, 1961, but also in its letter to the provincial sheriff of Camarines Norte
on the same date. These letters were followed by another letter to the appellee bank on December
14, 1961, wherein herein appellant, in no uncertain terms, reiterated its objection to the scheduled
sale of its chattels on December 21, 1961 at Jose Panganiban, Camarines Norte for the reasons
therein stated that: (1) it had settled in full its total obligation to the PNB by the sale of the real estate
and its subsequent remittance of the amount of P738.59; and (2) that the contemplated sale at Jose
Panganiban would violate their agreement embodied under paragraph (i) in the Chattel Mortgage
which provides as follows:

(i) In case of both judicial and extra-judicial foreclosure under Act 1508, as amended, the
parties hereto agree that the corresponding complaint for foreclosure or the petition for sale
should be filed with the courts or the sheriff of the City of Manila, as the case may be; and
that the Mortgagor shall pay attorney's fees hereby fixed at ten per cent (10%) of the total
indebtedness then unpaid but in no case shall it be less than P100.00, exclusive of all costs
and fees allowed by law and of other expenses incurred in connection with the said
foreclosure. [Emphasis supplied]

Notwithstanding the abovequoted agreement in the chattel mortgage contract, and in utter disregard
of the objection of herein appellant to the sale of its chattels at Jose Panganiban, Camarines Norte
and not in the City of Manila as agreed upon, the PNB proceeded with the foreclosure sale of said
chattels. The trial court, however, justified said action of the PNB in the decision appealed from in
the following rationale:

While it is true that it was stipulated in the chattel mortgage contract that a petition for the
extra-judicial foreclosure thereof should be filed with the Sheriff of the City of Manila,
nevertheless, the effect thereof was merely to provide another place where the mortgage
chattel could be sold in addition to those specified in the Chattel Mortgage Law. Indeed, a
stipulation in a contract cannot abrogate much less impliedly repeal a specific provision of
the statute. Considering that Section 14 of Act No. 1508 vests in the mortgagee the choice
where the foreclosure sale should be held, hence, in the case under consideration, the PNB
had three places from which to select, namely: (1) the place of residence of the mortgagor;
(2) the place of the mortgaged chattels were situated; and (3) the place stipulated in the
contract. The PNB selected the second and, accordingly, the foreclosure sale held in Jose
Panganiban, Camarines Norte, was legal and valid.

To the foregoing conclusion, We disagree. While the law grants power and authority to the
mortgagee to sell the mortgaged property at a public place in the municipality where the mortgagor
resides or where the property is situated, 8 this Court has held that the sale of a mortgaged chattel
may be made in a place other than that where it is found, provided that the owner thereof consents
thereto; or that there is an agreement to this effect between the mortgagor and the mortgagee. 9 But
when, as in this case, the parties agreed to have the sale of the mortgaged chattels in the City of
Manila, which, any way, is the residence of the mortgagor, it cannot be rightly said that mortgagee
still retained the power and authority to select from among the places provided for in the law and the
place designated in their agreement over the objection of the mortgagor. In providing that the
mortgaged chattel may be sold at the place of residence of the mortgagor or the place where it is
situated, at the option of the mortgagee, the law clearly contemplated benefits not only to the
mortgagor but to the mortgagee as well. Their right arising thereunder, however, are personal to
them; they do not affect either public policy or the rights of third persons. They may validly be
waived. So, when herein mortgagor and mortgagee agreed in the mortgage contract that in cases of
both judicial and extra-judicial foreclosure under Act 1508, as amended, the corresponding
complaint for foreclosure or the petition for sale should be filed with the courts or the Sheriff of
Manila, as the case may be, they waived their corresponding rights under the law. The correlative
obligation arising from that agreement have the force of law between them and should be complied
with in good faith. 10

By said agreement the parties waived the legal venue, and such waiver is valid and legally
effective, because it, was merely a personal privilege they waived, which is not contrary, to
public policy or to the prejudice of third persons. It is a general principle that a person may
renounce any right which the law gives unless such renunciation is expressly prohibited or
the right conferred is of such nature that its renunciation would be against public policy. 11

On the other hand, if a place of sale is specified in the mortgage and statutory requirements
in regard thereto are complied with, a sale is properly conducted in that place. Indeed, in the
absence of a statute to the contrary, a sale conducted at a place other than that stipulated for
in the mortgage is invalid, unless the mortgagor consents to such sale. 12

Moreover, Section 14 of Act 1508, as amended, provides that the officer making the sale should
make a return of his doings which shall particularly describe the articles sold and the amount
received from each article. From this, it is clear that the law requires that sale be made article by
article, otherwise, it would be impossible for him to state the amount received for each item. This
requirement was totally disregarded by the Deputy Sheriff of Camarines Norte when he sold the
chattels in question in bulk, notwithstanding the fact that the said chattels consisted of no less than
twenty different items as shown in the bill of sale. 13 This makes the sale of the chattels manifestly
objectionable. And in the absence of any evidence to show that the mortgagor had agreed or
consented to such sale in gross, the same should be set aside.

It is said that the mortgagee is guilty of conversion when he sells under the mortgage but not in
accordance with its terms, or where the proceedings as to the sale of foreclosure do not comply with
the statute. 14 This rule applies squarely to the facts of this case where, as earlier shown, herein
appellee bank insisted, and the appellee deputy sheriff of Camarines Norte proceeded with the sale
of the mortgaged chattels at Jose Panganiban, Camarines Norte, in utter disregard of the valid
objection of the mortgagor thereto for the reason that it is not the place of sale agreed upon in the
mortgage contract; and the said deputy sheriff sold all the chattels (among which were a skagit with
caterpillar engine, three GMC 6 x 6 trucks, a Herring Hall Safe, and Sawmill equipment consisting of
a 150 HP Murphy Engine, plainer, large circular saws etc.) as a single lot in violation of the
requirement of the law to sell the same article by article. The PNB has resold the chattels to another
buyer with whom it appears to have actively cooperated in subsequently taking possession of and
removing the chattels from appellant compound by force, as shown by the circumstance that they
had to take along PC soldiers and municipal policemen of Jose Panganiban who placed the chief
security officer of the premises in jail to deprive herein appellant of its possession thereof. To
exonerate itself of any liability for the breach of peace thus committed, the PNB would want us to
believe that it was the subsequent buyer alone, who is not a party to this case, that was responsible
for the forcible taking of the property; but assuming this to be so, still the PNB cannot escape liability
for the conversion of the mortgaged chattels by parting with its interest in the property. Neither would
its claim that it afterwards gave a chance to herein appellant to repurchase or redeem the chattels,
improve its position, for the mortgagor is not under obligation to take affirmative steps to repossess
the chattels that were converted by the mortgagee. 15 As a consequence of the said wrongful acts of
the PNB and the Deputy Sheriff of Camarines Norte, therefore, We have to declare that herein
appellant is entitled to collect from them, jointly and severally, the full value of the chattels in
question at the time they were illegally sold by them. To this effect was the holding of this Court in a
similar situation. 16

The effect of this irregularity was, in our opinion to make the plaintiff liable to the defendant
for the full value of the truck at the time the plaintiff thus carried it off to be sold; and of
course, the burden is on the defendant to prove the damage to which he was thus subjected.
...

This brings us to the problem of determining the value of the mortgaged chattels at the time of their
sale in 1961. The trial court did not make any finding on the value of the chattels in the decision
appealed from and denied altogether the right of the appellant to recover the same. We find enough
evidence of record, however, which may be used as a guide to ascertain their value. The record
shows that at the time herein appellant applied for its loan with the PNB in 1956, for which the
chattels in question were mortgaged as part of the security therefore, herein appellant submitted a
list of the chattels together with its application for the loan with a stated value of P107,115.85. An
official of the PNB made an inspection of the chattels in the same year giving it an appraised value
of P42,850.00 and a market value of P85,700.00. 17 The same chattels with some additional
equipment acquired by herein appellant with part of the proceeds of the loan were reappraised in a
re-inspection conducted by the same official in 1958, in the report of which he gave all the chattels
an appraised value of P26,850.00 and a market value of P48,200.00. 18 Another re-inspection report
in 1959 gave the appraised value as P19,400.00 and the market value at P25,600.00. 19 The said
official of the PNB who made the foregoing reports of inspection and re-inspections testified in court
that in giving the values appearing in the reports, he used a conservative method of appraisal which,
of course, is to be expected of an official of the appellee bank. And it appears that the values were
considerably reduced in all the re-inspection reports for the reason that when he went to herein
appellant's premises at the time, he found the chattels no longer in use with some of the heavier
equipments dismantled with parts thereof kept in the bodega; and finding it difficult to ascertain the
value of the dismantled chattels in such condition, he did not give them anymore any value in his
reports. Noteworthy is the fact, however, that in the last re-inspection report he made of the chattels
in 1961, just a few months before the foreclosure sale, the same inspector of the PNB reported that
the heavy equipment of herein appellant were "lying idle and rusty" but were "with a shed free from
rains" 20 showing that although they were no longer in use at the time, they were kept in a proper
place and not exposed to the elements. The President of the appellant company, on the other hand,
testified that its caterpillar (tractor) alone is worth P35,000.00 in the market, and that the value of its
two trucks acquired by it with part of the proceeds of the loan and included as additional items in the
mortgaged chattels were worth no less than P14,000.00. He likewise appraised the worth of its
Murphy engine at P16,000.00 which, according to him, when taken together with the heavy
equipments he mentioned, the sawmill itself and all other equipment forming part of the chattels
under consideration, and bearing in mind the current cost of equipments these days which he
alleged to have increased by about five (5) times, could safely be estimated at P120,000.00. This
testimony, except for the appraised and market values appearing in the inspection and re-inspection
reports of the PNB official earlier mentioned, stand uncontroverted in the record; but We are not
inclined to accept such testimony at its par value, knowing that the equipments of herein appellant
had been idle and unused since it stopped operating its sawmill in 1958 up to the time of the sale of
the chattels in 1961. We have no doubt that the value of chattels was depreciated after all those
years of inoperation, although from the evidence aforementioned, We may also safely conclude that
the amount of P4,200.00 for which the chattels were sold in the foreclosure sale in question was
grossly unfair to the mortgagor. Considering, however, the facts that the appraised value of
P42,850.00 and the market value of P85,700.00 originally given by the PNB official were admittedly
conservative; that two 6 x 6 trucks subsequently bought by the appellant company had thereafter
been added to the chattels; and that the real value thereof, although depreciated after several years
of inoperation, was in a way maintained because the depreciation is off-set by the marked increase
in the cost of heavy equipment in the market, it is our opinion that the market value of the chattels at
the time of the sale should be fixed at the original appraised value of P42,850.00.

Herein appellant's claim for moral damages, however, seems to have no legal or factual basis.
Obviously, an artificial person like herein appellant corporation cannot experience physical
sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social
humiliation which are basis of moral damages. 21 A corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral damages. The same cannot be
considered under the facts of this case, however, not only because it is admitted that herein
appellant had already ceased in its business operation at the time of the foreclosure sale of the
chattels, but also for the reason that whatever adverse effects of the foreclosure sale of the chattels
could have upon its reputation or business standing would undoubtedly be the same whether the
sale was conducted at Jose Panganiban, Camarines Norte, or in Manila which is the place agreed
upon by the parties in the mortgage contract.

But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines Norte in
proceeding with the sale in utter disregard of the agreement to have the chattels sold in Manila as
provided for in the mortgage contract, to which their attentions were timely called by herein
appellant, and in disposing of the chattels in gross for the miserable amount of P4,200.00, herein
appellant should be awarded exemplary damages in the sum of P10,000.00. The circumstances of
the case also warrant the award of P3,000.00 as attorney's fees for herein appellant.

WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed from should be,
as hereby, it is set aside. The Philippine National Bank and the Deputy Sheriff of the province of
Camarines Norte are ordered to pay, jointly and severally, to Mambulao Lumber Company the total
amount of P56,000.73, broken as follows: P150.73 overpaid by the latter to the PNB, P42,850.00 the
value of the chattels at the time of the sale with interest at the rate of 6% per annum from December
21, 1961, until fully paid, P10,000.00 in exemplary damages, and P3,000.00 as attorney's fees.
Costs against both appellees.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 71229 September 30, 1986

HANIL DEVELOPMENT CO., LTD., petitioner,

vs.
HON. INTERMEDIATE APPELLATE COURT and M. R. ESCOBAR EXPLOSIVES ENGINEERS,
INC., represented by its General Manager, MANUEL R. ESCOBAR, respondents.

M.A. Aguinaldo & Associates for petitioner.

Ponciano H. Gupit for private respondent.

GUTIERREZ, JR., J.:

This is a petition for certiorari, mandamus, and prohibition, with prayer for mandatory injunction and
restraining order from the resolutions of the then Intermediate Appellate Court dated April 30, 1985
and June 20, 1985 in AC-G.R. No. 05055 entitled "Hanil Development Co., Ltd. v. M.R. Escobar
Explosives Engineers, Inc., represented by its General Manager, Manuel R. Escobar."

The present controversy has its origins in a complaint for recovery of a sum of money with damages
filed by private respondent Escobar Explosives Engineers, Inc., against petitioner Hanil
Development Co., Ltd., before the then Court of First Instance of Rizal, Branch XXXI, Pasig, Metro
Manila. The petitioner is a foreign corporation organized under the laws of the Republic of Korea and
doing business in the Philippines pursuant to the Corporation Code and the Foreign Investment Act.
The complaint docketed as Civil Case No. 35966 sought to compel the petitioner to pay for the
blasting services rendered by the private respondent in connection with the former's contract with the
Ministry of Public Highways to construct the 200 Km. Oro-Butuan Road Project in Mindanao.

The trial court, on April 16, 1983, rendered a decision in favor of the private respondent. The
petitioner was ordered to pay the private respondent the sum of P1,341,727.40 corresponding to the
value of the rocks blasted by the private respondent; ten percent (10%) of said amount as attorney's
fees and costs.

On May 6, 1982, the private respondent filed a petition for the issuance of a preliminary attachment.
The motion was set for hearing.

On May 13, 1982, the petitioner filed its notice of appeal and cash appeal bond with the trial court.

On May 24, 1982, the trial court issued an order granting the petition for the issuance of preliminary
attachment.

On May 26, 1982, the private respondent moved for the appointment of Deputy Sheriff Felix
Honoracion as special sheriff to serve the writ of attachment/garnishment.

Consequently, the order dated May 24, 1982 and the writ of attachment dated May 27, 1982 were
enforced by the respondents and the bank accounts of the petitioner were garnished and its
equipment attached.

The petitioner then filed a motion for reconsideration of the May 24, 1982 order. While this motion
was pending, the private respondent filed another motion, this time an "Ex-Parte Motion to Deposit
Cash" praying that an order be issued directing the Finance Manager of the National Power
Corporation (NAPOCOR) to withdraw available funds of the petitioner from the NAPOCOR and
deposit them with the clerk of court of the Court of First Instance of Rizal. This motion was granted in
an order dated June 29, 1982.

In view of this development, the petitioner filed with the then Intermediate Appellate Court a petition
for certiorari with prayer for prohibition, injunction and preliminary restraining order challenging the
orders dated May 24, 1982 and June 29, 1982 of the trial court. The case was docketed as CA-G.R.
No. 14512.
The appellate court temporarily restrained the enforcement of the challenged orders and after a
hearing issued a preliminary injunction enjoining the implementation of said orders upon the filing of
a P50,000.00 cash bond by the petitioner.

In a decision dated February 3, 1983, the appellate court granted the petition and declared the
challenged orders null and void, having been issued with grave abuse of discretion.

While the above-mentioned petition was pending before the appellate court and despite the writ of
injunction issued by it, other developments continued to unfold in the trial court.

In an order dated August 23, 1982, the trial court disapproved the petitioner's amended record on
appeal on the ground that it was "filed beyond the reglementary period and the extension granted."
The appeal was dismissed. The petitioner filed a motion for reconsideration of the dismissal while
the private respondent filed a motion for execution of judgment.

On October 19, 1982, the trial court issued an order denying the petitioner's motion for
reconsideration and at the same time granting the private respondent's motion for execution of
judgment.

The petitioner filed a petition for certiorari and mandamus with prayer for prohibition with the
Intermediate Appellate Court assailing the trial court's orders dated August 23, 1982 and October 19,
1982. The case was docketed as AC-G.R. No. 15050.

The appellate court granted the petition. The challenged orders were set aside and declared null and
void. Hence, the petitioner's appeal in Civil Case No. 35966 was reinstated and the trial court was
ordered to elevate the entire records of the case to the appellate court.

A petition for review of the decision in AC-G.R. No. 15050 was filed by the private respondent before
this Court, but was denied for lack of merit.

After transmittal of the records, the appellate court on February 11, 1985, sent a notice to the
petitioner to file appellant's brief within forty-five (45) days from receipt. The petitioner received the
notice on February 25, 1985.

On March 13, 1985, and within the reglementary period to file appellant's brief, the petitioner filed an
"Application for Judgment against Attachment Bond" and "Motion to Defer Filing of Appellant's Brief"
praying for a hearing before the appellate court so it could prove the damages it sustained as a
result of the illegal writ of attachment issued by the trial court. It wanted a judgment against the
attachment bond posted by the private respondent and its insurer Sanpiro Insurance Corporation to
be included in the final decision in the main case, Civil Case No. 35966, now pending before the
appellate court.

Acting on the petitioner's motions, the appellate court issued a resolution directing the private
respondent to comment on these motions.

The private respondent filed its "Comment" with a "Motion to Dismiss Appeal" for the petitioner's
alleged failure to file its appellant's brief.

In a resolution dated April 30, 1985, the appellate court denied the petitioner's application for
judgment against the attachment bond and the motion to defer filing of appellant's brief, granted the
private respondent's motion to dismiss the appeal, and dismissed the appeal. The petitioner filed a
motion for reconsideration but this was denied in a resolution dated June 20, 1985.

Hence, this petition.

In a resolution dated July 17, 1985, we issued a temporary restraining order to enjoin the
respondents from proceeding with the execution of the decision in Civil Case No. 35966.

The petitioner now asserts that the April 30, 1985 and June 20, 1985 resolutions were issued by the
appellate court with grave abuse of discretion.

The questioned April 30, 1985 minute resolution of the appellate court states:

Acting upon (1) the application for judgment against attachment bond, etc. filed by
counsel for defendant-appellant on March 13, 1985; (2) the comment thereto; (3) the
motion to dismiss appeal filed by counsel for plaintiff-appellee on April 24, 1985; and
the docket report dated April 25, 1985, the COURT RESOLVED: (a) to DENY the
application for judgment against attachment bond and the motion to defer filing of
appellant's brief; and (b) to GRANT the motion to dismiss appeal and to dismiss the
instant appeal.

The issues to be resolved in the instant petition are: (1) whether or not the petitioner's application for
judgment against the attachment bond and its motion to defer filing of appellant's brief were correctly
denied by the appellate court and (2) whether or not the same court rightly dismissed the petitioner's
appeal.

Anent the first issue, the petitioner contends that its application for judgment against the attachment
bond was pursuant to Section 20, Rule 57 of the Revised Rules of Court.

Section 20, Rule 57 of the Revised Rules of Court provides for the claim of damages on account of
illegal attachment, to wit:

Claim for damages on account of illegal attachment. — If the judgment on the motion
be in favor of the party against whom attachment was issued, he may recover, upon
the bond given or deposit made by the attaching creditor, any damages resulting
from the attachment. Such damages may be awarded only upon application and after
proper hearing, and shall be included in the final judgment. The application must be
filed before the trial or before appeal is perfected or before the judgment becomes
executory, with notice to the attaching creditor and his surety or sureties, setting forth
the facts showing his right to damages and the amount thereof.

If the judgment of the appellate court be favorable to the party against whom the
attachment was issued, he must claim damages sustained during the pendency of
the appeal by filing an application with notice to the party in whose favor the
attachment was issued or his surety or sureties, before the judgment of the appellate
court becomes executory. The appellate court may allow the application to be heard
and decided by the trial court.

In the instant case, the initial writ of attachment issued by the trial court in the main case — Civil
Case No. 35966 which is the subject of appeal was declared null and void by the appellate court in
CA-G.R. No. 14512. This present writ of attachment was issued and subsequently enforced after the
trial court's decision in Civil Case No. 35966 had been rendered and after the petitioner had already
perfected its appeal. The petitioner, therefore, argues that the application for judgment against the
attachment bond was properly lodged with the appellate court pursuant to Section 9, of the Judiciary
Reorganization Act of 1980 (Batas Pambansa Blg. 129) which grants the Intermediate Appellate
Court "power to try cases and conduct hearings, receive evidence and perform any and all acts
necessary to resolve factual issues ... ." It contends that it is only in the appellate court that these
damages could well be ventilated because they occurred during the pendency of the appeal in AC-
G.R. No. 15050.

The petitioner's arguments are well-taken.

The application for judgment against attachment bond was filed to prove the damages sustained by
the petitioner as a result of the illegal writ of attachment issued by the trial court so that the judgment
against the attachment bond posted by the private respondent and its insurer could be included in
the final judgment of the main case. The assessment and award of such damages could not have
been made in CA-G.R. No. 14512 as alleged by the private respondent because the question therein
was whether or not the writ of attachment in Civil Case No. 35966 should have been issued.

The object was to set aside the preliminary attachment immediately. It was a preventive measure.

The private respondent, in its petition for writ of attachment filed with the trial court, posted an
attachment bond issued by the Sanpiro Insurance Corporation in the amount of P1,341,727.40, the
relevant portion of which reads:

WHEREFORE, WE, M.R. ESCOBAR EXPLOSIVE ENGINEERS as PRINCIPAL, and

the SANPIRO INSURANCE CORPORATION, a corporation duly organized and
existing under and by virtue of the laws of the Philippines, as SURETY, in
consideration of the above and of the levying of said attachment, hereby jointly and
severally bind ourselves in the sum of PESOS: ONE MILLION THREE HUNDRED
FORTY ONE THOUSAND SEVEN HUNDRED TWENTY SEVEN & 40/100
(P1,341,727.40), Philippine Currency, under the condition that we will pay all the
costs which may be adjudged to said defendant/s and all damages which said
defendant/s may sustain by reason of the attachment, if the Court shall finally
adjudge that plaintiff/s was/were not entitled thereto.

Contrary to the claim of the private respondent, this writ of attachment issued by the trial court was
executed. The petitioner's equipment and bank accounts were garnished pursuant to the writ. In fact,
the private respondent's opposition to the petitioner's motion for reconsideration of the trial court's
order which issued the writ of attachment stated that the same should be denied for being moot and
academic "because the writ of attachment and/or garnishment have already been executed."

Considering that the writ of attachment was declared null and void, the petitioner had the right to ask
for whatever damages it may have incurred as a result of its issuance pursuant to Section 20, Rule
57 of the Revised Rules of Court.

Malayan Insurance Co., Inc. v. Salas (90 SCRA 252), lays down the procedure regarding claims for
damages against an illegal attachment. It states:

Under section 20, in order to recover damages on a replevin bond (or on a bond for
preliminary attachment, injunction or receivership) it is necessary (1) that the
defendant-claimant has secured a favorable judgment in the main action, meaning
that the plaintiff has no cause of action and was not, therefore, entitled to the
 provisional remedy of replevin; (2) that the application for damages, showing
claimant's right thereto and the amount thereof, be filed in the same action before
trial or before appeal is perfected or before the judgment becomes executory; (3) that
due notice be given to the other party and his surety or sureties, notice to the
principal not being sufficient and (4) that there should be a proper hearing and the
award for damages should be included in the final judgment (Luneta Motor Co. v.
Menendez, 117 Phil. 970, 974; 3 Moran's Comments on the Rules of Court, 1970
Ed., pp. 54-56. See Cruz v. Manila Surety & Fidelity Co., Inc., 92 Phil. 699).

xxx xxx xxx

As may be gathered from section 20 of Rule 57, the application for damages against
the surety must be filed (with notice to the surety) in the Court of First Instance
before the trial or before appeal is perfected or before the judgment becomes
executory.

If an appeal is taken, the application must be filed in the appellate court but always
before the judgment of that court becomes executory so that the award may be
included in its judgment (Luneta Motor Co. v. Menendez, supra).

But it is not always mandatory that the appellate court should include in its judgment
the award of damages against the surety. Thus, it was held that where the
application for damages against the surety is seasonably made in the appellate
court, 'the latter must either proceed to hear and decide the application or refer 'it' to
the trial court and allow it to hear and decide the same' (Rivera v. Talavera, 112 Phil.
209, 219).

xxx xxx xxx

Note that under the second paragraph of section 20, Rule 57 of the present Rules of
Court, the damages suffered during the pendency of an appeal in a case where the
writs of attachment, injunction and replevin or an order of receivership were issued
should be claimed in the appellate court.

xxx xxx xxx

In the instant case, the application for judgment against the attachment bond was filed under the
following circumstances: (1) the writ of attachment was issued by the trial court after it had rendered
its decision and after the petitioner had already perfected its appeal; (2) the private respondent
posted a surety bond to answer for any damages that may be adjudged to the petitioner if the writ is
later found to be illegal; (3) the writ of attachment was declared illegal; and (4) the application for
judgment against the attachment bond was made with notice to the insurer, Sanpiro Insurance
Corporation.

Applying the principles laid down in the Malayan case to the circumstances surrounding the
application for judgment against attachment bond in this case, the appellate court committed grave
abuse of discretion in denying the application for judgment against attachment bond. The appellate
court's error in this case is more pronounced considering that under Section 9 of the Judiciary
Reorganization Act of 1980 (Batas Pambansa Blg. 129) the Intermediate Appellate Court is now
empowered to try cases and conduct hearings, receive evidence and perform acts necessary to
resolve factual issues in cases falling within its original and appellate jurisdiction. Certainly, the
amount of damages, if any, suffered by the petitioner as a result of the issuance of the illegal
attachment during the pendency of the appeal is a factual issue.

Moreover, the application for judgment against the bond seasonably filed by the petitioner in the
appellate court would avoid multiplicity of suits. We have earlier ruled that "the explicit provision of
Section 20 of Rule 57, Revised Rules of Court that the judgment against the surety should be
included in the final judgment is to avoid additional proceedings. (Cruz v. Manila Surety & Fidelity
Co., Inc. et al., 92 Phil. 699; (Japco v. City of Manila, 48 Phil. 851, 855 cited in Malayan insurance
Corporation v. Salas, supra).

Consequently, the appellate court also committed a grave abuse of discretion in denying the motion
to defer filing of appellant's brief. The petitioner filed this motion for the purpose of first settling the
issue on damages against the attachment bond so that such issue would be discussed and included
in the appellant's brief and ultimately in the final judgment thereby avoiding multiplicity of suits.

Needless to say, the appellate court should not have dismissed the petitioner's appeal.

We take notice of the circumstances under which the appellate court dismissed the appeal. Granting
that the petitioner's application for judgment against attachment bond was not meritorious, the
appellate court's dismissal of the appeal would still be unwarranted.

The record shows that in response to the petitioner's application for judgment against the attachment
bond and motion to defer filing of the appellant's brief which was filed on March 13, 1985 and within
the 45-day reglementary period to fife appellant's brief, the appellate court issued a resolution
directing the private respondent to comment on the motion within ten (10) days from notice. Upon
motion ' of the private respondent, the appellate court issued another resolution granting an
extension of ten (10) days from April 13, 1985 to file comment on the said motions of the petitioner.
The extension granted meant that the private respondent had until April 24, 1985 to file its comment.
In addition to the comment, the private respondent filed on April 24, 1985 a motion to dismiss appeal
contending that the petitioner had not filed its appellant's brief within the 45-day reglementary period.
Upon verification from its docket decision that no appellant's brief was filed as of April 25, 1985, the
appellate court dismissed the appeal.

Under these circumstances, the dismissal of the appeal by the appellate court due to the failure to
file the appellant's brief within the 45-day reglementary period counted from February 25, 1985 to
April 25, 1985 without allowing any interruption gave undue advantage to the private respondent.
This is so, because the private respondent after having been given ten (10) days from receipt of
notice to comment on the twin motions of the petitioner was again granted a ten-day extension or
until April 24, 1985 to file its comment thereto. This, in effect, removed a substantial number of days
from the 45-day period of the petitioner to file its brief, through no fault of its own.

The procedure adopted by the appellate court in interpreting the 45-day reglementary period to file
appellant's brief was unfair. When the appellate court issued the resolution requiring the private
respondent to comment on the petitioner's application for judgment against the attachment bond and
motion to defer appellant's brief the 45-day period should be deemed to have stopped, and the
period to commence again after denial of the motions.

The notice to "file appellant's brief within 45 days from receipt" was received by the petitioner on
February 25, 1985. The petitioner filed the application for judgment against the attachment bond and
motion to defer filing of appellant's brief on March 13, 1985. Thus, the petitioner filed its motions on
the 16th day after receipt of the notice to file appellant's brief and within the 45-day reglementary
period. On March 26, 1985, the appellate court issued its resolution directing the private respondent
to file its comment on the motions of the petitioner. At this point, counting from February 25, 1985 to
March 26, 1985, a total number of 29 days had lapsed. Hence, the petitioner still had 16 days within
the 45-day reglementary period to file its appellant's brief in the event that its motions were denied.

It is likewise the practise in the Court of Appeals, after granting an initial period of 45 days,
to routinely grant a motion for extension of another 45 days for the filing of an appellant's brief.
Considering the amount involved in this litigation and the nature of the defenses raised by the
petitioner, the appellate court was unduly severe when it peremptorily dismissed the appeal.

Therefore, we have to set aside the appellate court's action in simultaneously denying the
application for judgment against the attachment bond and the motion to defer the filing of appellant's
brief and in dismissing the appeal. Since the petitioner's two motions were denied on April 30, 1985,
the petitioner still had 16 days from notice of the denial to file its appellant's brief. In short, the
petitioner's 45-day period within which to file its appellant's brief had not yet lapsed when the
appellate court dismissed the appeal. The brief could have been filed or a motion for extension of
time requested.

WHEREFORE, the instant petition is GRANTED. The questioned resolutions dated April 30, 1985
and June 20, 1985 of the then Intermediate Appellate Court are hereby REVERSED and SET
ASIDE. The Court of Appeals is directed to conduct hearings on the application for judgment against
attachment bond filed by the petitioner and to reinstate the appeal. The temporary restraining order
dated July 17, 1985 is made PERMANENT.

SO ORDERED.

[G.R. No. L-32409. February 27, 1971.]

BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, Petitioners, v. HON. JUDGE VIVENCIO
M. RUIZ, MISAEL P. VERA, in his capacity as Commissioner of Internal Revenue, ARTURO
LOGRONIO, RODOLFO DE LEON, GAVINO VELASQUEZ, MIMIR DELLOSA, NICANOR ALCORDO,
JOHN DOE, JOHN DOE, JOHN DOE, and JOHN DOE, Respondents.

San Juan, Africa, Gonzales & San Agustin, for Petitioners.

Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin V . Bautista, Solicitor Pedro
A. Ramirez and Special Attorney Jaime M. Maza for Respondents.

DECISION

VILLAMOR, J.:

This is an original action of certiorari, prohibition and mandamus, with prayer for a writ of preliminary
mandatory and prohibitory injunction. In their petition Bache & Co. (Phil.), Inc., a corporation duly organized
and existing under the laws of the Philippines, and its President, Frederick E. Seggerman, pray this Court to
declare null and void Search Warrant No. 2-M-70 issued by respondent Judge on February 25, 1970; to
order respondents to desist from enforcing the same and/or keeping the documents, papers and effects
seized by virtue thereof, as well as from enforcing the tax assessments on petitioner corporation alleged by
petitioners to have been made on the basis of the said documents, papers and effects, and to order the
return of the latter to petitioners. We gave due course to the petition but did not issue the writ of
preliminary injunction prayed for therein.

The pertinent facts of this case, as gathered from record, are as follows: chanro b1es vi rtua l 1aw lib ra ry
On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue, wrote a letter
addressed to respondent Judge Vivencio M. Ruiz requesting the issuance of a search warrant against
petitioners for violation of Section 46(a) of the National Internal Revenue Code, in relation to all other
pertinent provisions thereof, particularly Sections 53, 72, 73, 208 and 209, and authorizing Revenue
Examiner Rodolfo de Leon, one of herein respondents, to make and file the application for search warrant
which was attached to the letter.

In the afternoon of the following day, February 25, 1970, respondent De Leon and his witness, respondent
Arturo Logronio, went to the Court of First Instance of Rizal. They brought with them the following papers:
respondent Vera’s aforesaid letter-request; an application for search warrant already filled up but still
unsigned by respondent De Leon; an affidavit of respondent Logronio subscribed before respondent De
Leon; a deposition in printed form of respondent Logronio already accomplished and signed by him but not
yet subscribed; and a search warrant already accomplished but still unsigned by respondent Judge.

At that time respondent Judge was hearing a certain case; so, by means of a note, he instructed his Deputy
Clerk of Court to take the depositions of respondents De Leon and Logronio. After the session had
adjourned, respondent Judge was informed that the depositions had already been taken. The stenographer,
upon request of respondent Judge, read to him her stenographic notes; and thereafter, respondent Judge
asked respondent Logronio to take the oath and warned him that if his deposition was found to be false and
without legal basis, he could be charged for perjury. Respondent Judge signed respondent de Leon’s
application for search warrant and respondent Logronio’s deposition, Search Warrant No. 2-M-70 was then
sign by respondent Judge and accordingly issued.

Three days later, or on February 28, 1970, which was a Saturday, the BIR agents served the search warrant
petitioners at the offices of petitioner corporation on Ayala Avenue, Makati, Rizal. Petitioners’ lawyers
protested the search on the ground that no formal complaint or transcript of testimony was attached to the
warrant. The agents nevertheless proceeded with their search which yielded six boxes of documents.

On March 3, 1970, petitioners filed a petition with the Court of First Instance of Rizal praying that the search
warrant be quashed, dissolved or recalled, that preliminary prohibitory and mandatory writs of injunction be
issued, that the search warrant be declared null and void, and that the respondents be ordered to pay
petitioners, jointly and severally, damages and attorney’s fees. On March 18, 1970, the respondents, thru
the Solicitor General, filed an answer to the petition. After hearing, the court, presided over by respondent
Judge, issued on July 29, 1970, an order dismissing the petition for dissolution of the search warrant. In the
meantime, or on April 16, 1970, the Bureau of Internal Revenue made tax assessments on petitioner
corporation in the total sum of P2,594,729.97, partly, if not entirely, based on the documents thus seized.
Petitioners came to this Court.

The petition should be granted for the following reasons: chan rob1es v irt ual 1aw l ibra ry

1. Respondent Judge failed to personally examine the complainant and his witness.

The pertinent provisions of the Constitution of the Philippines and of the Revised Rules of Court are: jgc:chanroble s.com. ph

"(3) The right of the people to be secure in their persons, houses, papers and effects against unreasonable
searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, to be
determined by the judge after examination under oath or affirmation of the complainant and the witnesses
he may produce, and particularly describing the place to be searched, and the persons or things to be
seized." (Art. III, Sec. 1, Constitution.)

"SEC. 3. Requisites for issuing search warrant. — A search warrant shall not issue but upon probable cause
in connection with one specific offense to be determined by the judge or justice of the peace after
examination under oath or affirmation of the complainant and the witnesses he may produce, and
particularly describing the place to be searched and the persons or things to be seized.

"No search warrant shall issue for more than one specific offense.

"SEC. 4. Examination of the applicant. — The judge or justice of the peace must, before issuing the warrant,
personally examine on oath or affirmation the complainant and any witnesses he may produce and take
their depositions in writing, and attach them to the record, in addition to any affidavits presented to him."
(Rule 126, Revised Rules of Court.)
The examination of the complainant and the witnesses he may produce, required by Art. III, Sec. 1, par. 3,
of the Constitution, and by Secs. 3 and 4, Rule 126 of the Revised Rules of Court, should be conducted by
the judge himself and not by others. The phrase "which shall be determined by the judge after examination
under oath or affirmation of the complainant and the witnesses he may produce," appearing in the said
constitutional provision, was introduced by Delegate Francisco as an amendment to the draft submitted by
the Sub-Committee of Seven. The following discussion in the Constitutional Convention (Laurel, Proceedings
of the Philippine Constitutional Convention, Vol. III, pp. 755-757) is enlightening: jgc: chan robles .com. ph

"SR. ORENSE. Vamos a dejar compañero los piropos y vamos al grano.

En los casos de una necesidad de actuar inmediatamente para que no se frusten los fines de la justicia
mediante el registro inmediato y la incautacion del cuerpo del delito, no cree Su Señoria que causaria cierta
demora el procedimiento apuntado en su enmienda en tal forma que podria frustrar los fines de la justicia o
si Su Señoria encuentra un remedio para esto casos con el fin de compaginar los fines de la justicia con los
derechos del individuo en su persona, bienes etcetera, etcetera.

"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su Señoria pregunta por la siguiente
razon: el que solicita un mandamiento de registro tiene que hacerlo por escrito y ese escrito no aparecer en
la Mesa del Juez sin que alguien vaya el juez a presentar ese escrito o peticion de sucuestro. Esa persona
que presenta el registro puede ser el mismo denunciante o alguna persona que solicita dicho mandamiento
de registro. Ahora toda la enmienda en esos casos consiste en que haya peticion de registro y el juez no se
atendra solamente a sea peticion sino que el juez examiner a ese denunciante y si tiene testigos tambin
examiner a los testigos.

"SR. ORENSE. No cree Su Señoria que el tomar le declaracion de ese denunciante por escrito siempre
requeriria algun tiempo?.

"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado minimizamos en todo lo posible las
vejaciones injustas con la expedicion arbitraria de los mandamientos de registro. Creo que entre dos males
debemos escoger. el menor.

x x x

"MR. LAUREL. . . . The reason why we are in favor of this amendment is because we are incorporating in our
constitution something of a fundamental character. Now, before a judge could issue a search warrant, he
must be under the obligation to examine personally under oath the complainant and if he has any witness,
the witnesses that he may produce . . ." cralaw virtua1aw l ibra ry

The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic and candid, for it
requires the judge, before issuing a search warrant, to "personally examine on oath or affirmation the
complainant and any witnesses he may produce . . ." cralaw virtua 1aw lib rary

Personal examination by the judge of the complainant and his witnesses is necessary to enable him to
determine the existence or non-existence of a probable cause, pursuant to Art. III, Sec. 1, par. 3, of the
Constitution, and Sec. 3, Rule 126 of the Revised Rules of Court, both of which prohibit the issuance of
warrants except "upon probable cause." The determination of whether or not a probable cause exists calls
for the exercise of judgment after a judicial appraisal of facts and should not be allowed to be delegated in
the absence of any rule to the contrary.

In the case at bar, no personal examination at all was conducted by respondent Judge of the complainant
(respondent De Leon) and his witness (respondent Logronio). While it is true that the complainant’s
application for search warrant and the witness’ printed-form deposition were subscribed and sworn to before
respondent Judge, the latter did not ask either of the two any question the answer to which could possibly
be the basis for determining whether or not there was probable cause against herein petitioners. Indeed, the
participants seem to have attached so little significance to the matter that notes of the proceedings before
respondent Judge were not even taken. At this juncture it may be well to recall the salient facts. The
transcript of stenographic notes (pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken at the hearing of
this case in the court below shows that per instruction of respondent Judge, Mr. Eleodoro V. Gonzales,
Special Deputy Clerk of Court, took the depositions of the complainant and his witness, and that
stenographic notes thereof were taken by Mrs. Gaspar. At that time respondent Judge was at the sala
hearing a case. After respondent Judge was through with the hearing, Deputy Clerk Gonzales, stenographer
Gaspar, complainant De Leon and witness Logronio went to respondent Judge’s chamber and informed the
Judge that they had finished the depositions. Respondent Judge then requested the stenographer to read to
him her stenographic notes. Special Deputy Clerk Gonzales testified as follows: jgc:cha nrob les.co m.ph

"A And after finishing reading the stenographic notes, the Honorable Judge requested or instructed them,
requested Mr. Logronio to raise his hand and warned him if his deposition will be found to be false and
without legal basis, he can be charged criminally for perjury. The Honorable Court told Mr. Logronio whether
he affirms the facts contained in his deposition and the affidavit executed before Mr. Rodolfo de Leon.

"Q And thereafter?

"A And thereafter, he signed the deposition of Mr. Logronio.

"Q Who is this he?

"A The Honorable Judge.

"Q The deposition or the affidavit?

"A The affidavit, Your Honor." cralaw virt ua1aw lib ra ry

Thereafter, respondent Judge signed the search warrant.

The participation of respondent Judge in the proceedings which led to the issuance of Search Warrant No. 2-
M-70 was thus limited to listening to the stenographer’s readings of her notes, to a few words of warning
against the commission of perjury, and to administering the oath to the complainant and his witness. This
cannot be consider a personal examination. If there was an examination at all of the complainant and his
witness, it was the one conducted by the Deputy Clerk of Court. But, as stated, the Constitution and the
rules require a personal examination by the judge. It was precisely on account of the intention of the
delegates to the Constitutional Convention to make it a duty of the issuing judge to personally examine the
complainant and his witnesses that the question of how much time would be consumed by the judge in
examining them came up before the Convention, as can be seen from the record of the proceedings quoted
above. The reading of the stenographic notes to respondent Judge did not constitute sufficient compliance
with the constitutional mandate and the rule; for by that manner respondent Judge did not have the
opportunity to observe the demeanor of the complainant and his witness, and to propound initial and follow-
up questions which the judicial mind, on account of its training, was in the best position to conceive. These
were important in arriving at a sound inference on the all-important question of whether or not there was
probable cause.

2. The search warrant was issued for more than one specific offense.

Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the National Internal Revenue Code
in relation to all other pertinent provisions thereof particularly Secs. 53, 72, 73, 208 and 209." The question
is: Was the said search warrant issued "in connection with one specific offense," as required by Sec. 3, Rule
126?

To arrive at the correct answer it is essential to examine closely the provisions of the Tax Code referred to
above. Thus we find the following: chan rob 1es vi rtual 1aw lib rary

Sec. 46(a) requires the filing of income tax returns by corporations.

Sec. 53 requires the withholding of income taxes at source.

Sec. 72 imposes surcharges for failure to render income tax returns and for rendering false and fraudulent
returns.

Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to supply the information
required under the Tax Code.

Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds, or manufactures any article
subject to a specific tax, without having paid the privilege tax therefore, or who aids or abets in the conduct
of illicit distilling, rectifying, compounding, or illicit manufacture of any article subject to specific tax . . .,"
and provides that in the case of a corporation, partnership, or association, the official and/or employee who
caused the violation shall be responsible.

Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross value of output
removed, or to pay the tax due thereon.

The search warrant in question was issued for at least four distinct offenses under the Tax Code. The first is
the violation of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of income tax returns), which are interrelated.
The second is the violation of Sec. 53 (withholding of income taxes at source). The third is the violation of
Sec. 208 (unlawful pursuit of business or occupation); and the fourth is the violation of Sec. 209 (failure to
make a return of receipts, sales, business or gross value of output actually removed or to pay the tax due
thereon). Even in their classification the six above-mentioned provisions are embraced in two different titles:
Secs. 46(a), 53, 72 and 73 are under Title II (Income Tax); while Secs. 208 and 209 are under Title V
(Privilege Tax on Business and Occupation).

Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19, 1967 (20 SCRA 383), is not
applicable, because there the search warrants were issued for "violation of Central Bank Laws, Internal
Revenue (Code) and Revised Penal Code;" whereas, here Search Warrant No 2-M-70 was issued for violation
of only one code, i.e., the National Internal Revenue Code. The distinction more apparent than real, because
it was precisely on account of the Stonehill incident, which occurred sometime before the present Rules of
Court took effect on January 1, 1964, that this Court amended the former rule by inserting therein the
phrase "in connection with one specific offense," and adding the sentence "No search warrant shall issue for
more than one specific offense," in what is now Sec. 3, Rule 126. Thus we said in Stonehill: jg c:chan rob les.com. ph

"Such is the seriousness of the irregularities committed in connection with the disputed search warrants,
that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court that ‘a search
warrant shall not issue but upon probable cause in connection with one specific offense.’ Not satisfied with
this qualification, the Court added thereto a paragraph, directing that ‘no search warrant shall issue for more
than one specific offense.’"

3. The search warrant does not particularly describe the things to be seized.

The documents, papers and effects sought to be seized are described in Search Warrant No. 2-M-70 in this
manner: jgc:chanro bles. com.ph

"Unregistered and private books of accounts (ledgers, journals, columnars, receipts and disbursements
books, customers ledgers); receipts for payments received; certificates of stocks and securities; contracts,
promissory notes and deeds of sale; telex and coded messages; business communications, accounting and
business records; checks and check stubs; records of bank deposits and withdrawals; and records of foreign
remittances, covering the years 1966 to 1970." cralaw virtua1aw l ib rary

The description does not meet the requirement in Art III, Sec. 1, of the Constitution, and of Sec. 3, Rule 126
of the Revised Rules of Court, that the warrant should particularly describe the things to be seized.

In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion, said: jgc:chan roble s.com. ph

"The grave violation of the Constitution made in the application for the contested search warrants was
compounded by the description therein made of the effects to be searched for and seized, to wit: chan rob1es v irt ual 1aw l ibra ry

‘Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios, credit
journals, typewriters, and other documents and/or paper showing all business transactions including
disbursement receipts, balance sheets and related profit and loss statements.’

"Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions
of petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned
the seizure of all records of the petitioners and the aforementioned corporations, whatever their nature, thus
openly contravening the explicit command of our Bill of Rights — that the things to be seized be particularly
described — as well as tending to defeat its major objective: the elimination of general warrants." cralaw virt ua1aw lib ra ry

While the term "all business transactions" does not appear in Search Warrant No. 2-M-70, the said warrant
nevertheless tends to defeat the major objective of the Bill of Rights, i.e., the elimination of general
warrants, for the language used therein is so all-embracing as to include all conceivable records of petitioner
corporation, which, if seized, could possibly render its business inoperative.

In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had occasion to explain the
purpose of the requirement that the warrant should particularly describe the place to be searched and the
things to be seized, to wit:jgc: chan roble s. com.ph

". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically require that a search
warrant should particularly describe the place to be searched and the things to be seized. The evident
purpose and intent of this requirement is to limit the things to be seized to those, and only those,
particularly described in the search warrant — to leave the officers of the law with no discretion regarding
what articles they shall seize, to the end that ‘unreasonable searches and seizures’ may not be made, —
that abuses may not be committed. That this is the correct interpretation of this constitutional provision is
borne out by American authorities." cra law virt ua1aw li bra ry

The purpose as thus explained could, surely and effectively, be defeated under the search warrant issued in
this case.

A search warrant may be said to particularly describe the things to be seized when the description therein is
as specific as the circumstances will ordinarily allow (People v. Rubio; 57 Phil. 384); or when the description
expresses a conclusion of fact — not of law — by which the warrant officer may be guided in making the
search and seizure (idem., dissent of Abad Santos, J.,); or when the things described are limited to those
which bear direct relation to the offense for which the warrant is being issued (Sec. 2, Rule 126, Revised
Rules of Court). The herein search warrant does not conform to any of the foregoing tests. If the articles
desired to be seized have any direct relation to an offense committed, the applicant must necessarily have
some evidence, other than those articles, to prove the said offense; and the articles subject of search and
seizure should come in handy merely to strengthen such evidence. In this event, the description contained
in the herein disputed warrant should have mentioned, at least, the dates, amounts, persons, and other
pertinent data regarding the receipts of payments, certificates of stocks and securities, contracts,
promissory notes, deeds of sale, messages and communications, checks, bank deposits and withdrawals,
records of foreign remittances, among others, enumerated in the warrant.

Respondents contend that certiorari does not lie because petitioners failed to file a motion for
reconsideration of respondent Judge’s order of July 29, 1970. The contention is without merit. In the first
place, when the questions raised before this Court are the same as those which were squarely raised in and
passed upon by the court below, the filing of a motion for reconsideration in said court before certiorari can
be instituted in this Court is no longer a prerequisite. (Pajo, etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In the
second place, the rule requiring the filing of a motion for reconsideration before an application for a writ
of certiorari can be entertained was never intended to be applied without considering the circumstances.
(Matutina v. Buslon, Et Al., 109 Phil., 140.) In the case at bar time is of the essence in view of the tax
assessments sought to be enforced by respondent officers of the Bureau of Internal Revenue against
petitioner corporation, On account of which immediate and more direct action becomes necessary. (Matute
v. Court of Appeals, Et Al., 26 SCRA 768.) Lastly, the rule does not apply where, as in this case, the
deprivation of petitioners’ fundamental right to due process taints the proceeding against them in the court
below not only with irregularity but also with nullity. (Matute v. Court of Appeals, Et Al., supra.)

It is next contended by respondents that a corporation is not entitled to protection against unreasonable
search and seizures. Again, we find no merit in the contention.

"Although, for the reasons above stated, we are of the opinion that an officer of a corporation which is
charged with a violation of a statute of the state of its creation, or of an act of Congress passed in the
exercise of its constitutional powers, cannot refuse to produce the books and papers of such corporation, we
do not wish to be understood as holding that a corporation is not entitled to immunity, under the 4th
Amendment, against unreasonable searches and seizures. A corporation is, after all, but an association of
individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body
it waives no constitutional immunities appropriate to such body. Its property cannot be taken without
compensation. It can only be proceeded against by due process of law, and is protected, under the 14th
Amendment, against unlawful discrimination . . ." (Hale v. Henkel, 201 U.S. 43, 50 L. ed. 652.)

"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a different rule applied to
a corporation, the ground that it was not privileged from producing its books and papers. But the rights of a
corporation against unlawful search and seizure are to be protected even if the same result might have been
achieved in a lawful way." (Silverthorne Lumber Company, Et. Al. v. United States of America, 251 U.S. 385,
64 L. ed. 319.)

In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized the right of a corporation to
object against unreasonable searches and seizures, thus: jgc:chan roble s.com.p h

"As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of
the contested warrants and of the seizures made in pursuance thereof, for the simple reason that said
corporations have their respective personalities, separate and distinct from the personality of herein
petitioners, regardless of the amount of shares of stock or the interest of each of them in said corporations,
whatever, the offices they hold therein may be. Indeed, it is well settled that the legality of a seizure can be
contested only by the party whose rights have been impaired thereby, and that the objection to an unlawful
search and seizure is purely personal and cannot be availed of by third parties. Consequently, petitioners
herein may not validly object to the use in evidence against them of the documents, papers and things
seized from the offices and premises of the corporations adverted to above, since the right to object to the
admission of said papers in evidence belongs exclusively to the corporations, to whom the seized effects
belong, and may not be invoked by the corporate officers in proceedings against them in their individual
capacity . . ."
cralaw virtua1aw l ib rary

In the Stonehill case only the officers of the various corporations in whose offices documents, papers and
effects were searched and seized were the petitioners. In the case at bar, the corporation to whom the
seized documents belong, and whose rights have thereby been impaired, is itself a petitioner. On that score,
petitioner corporation here stands on a different footing from the corporations in Stonehill.

The tax assessments referred to earlier in this opinion were, if not entirely — as claimed by petitioners — at
least partly — as in effect admitted by respondents — based on the documents seized by virtue of Search
Warrant No. 2-M-70. Furthermore, the fact that the assessments were made some one and one-half months
after the search and seizure on February 25, 1970, is a strong indication that the documents thus seized
served as basis for the assessments. Those assessments should therefore not be enforced.

PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2-M-70 issued by
respondent Judge is declared null and void; respondents are permanently enjoined from enforcing the said
search warrant; the documents, papers and effects seized thereunder are ordered to be returned to
petitioners; and respondent officials the Bureau of Internal Revenue and their representatives are
permanently enjoined from enforcing the assessments mentioned in Annex "G" of the present petition, as
well as other assessments based on the documents, papers and effects seized under the search warrant
herein nullified, and from using the same against petitioners in any criminal or other proceeding. No
pronouncement as to costs.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-31061 August 17, 1976

SULO NG BAYAN INC., plaintiff-appellant,

vs.
GREGORIO ARANETA, INC., PARADISE FARMS, INC., NATIONAL WATERWORKS &
SEWERAGE AUTHORITY, HACIENDA CARETAS, INC, and REGISTER OF DEEDS OF
BULACAN, defendants-appellees.

Hill & Associates Law Offices for appellant.

Araneta, Mendoza & Papa for appellee Gregorio Araneta, Inc.

Carlos, Madarang, Carballo & Valdez for Paradise Farms, Inc.

Leopoldo M. Abellera, Arsenio J. Magpale & Raul G. Bernardo, Office of the Government Corporate
Counsel for appellee National Waterworks & Sewerage Authority.

Candido G. del Rosario for appellee Hacienda Caretas, Inc.

ANTONIO, J.:

The issue posed in this appeal is whether or not plaintiff corporation (non- stock may institute an
action in behalf of its individual members for the recovery of certain parcels of land allegedly owned
by said members; for the nullification of the transfer certificates of title issued in favor of defendants
appellees covering the aforesaid parcels of land; for a declaration of "plaintiff's members as absolute
owners of the property" and the issuance of the corresponding certificate of title; and for damages.

On April 26, 1966, plaintiff-appellant Sulo ng Bayan, Inc. filed an accion de revindicacion with the
Court of First Instance of Bulacan, Fifth Judicial District, Valenzuela, Bulacan, against defendants-
appellees to recover the ownership and possession of a large tract of land in San Jose del Monte,
Bulacan, containing an area of 27,982,250 square meters, more or less, registered under the
Torrens System in the name of defendants-appellees' predecessors-in-interest. 1 The complaint, as
amended on June 13, 1966, specifically alleged that plaintiff is a corporation organized and existing
under the laws of the Philippines, with its principal office and place of business at San Jose del
Monte, Bulacan; that its membership is composed of natural persons residing at San Jose del
Monte, Bulacan; that the members of the plaintiff corporation, through themselves and their
predecessors-in-interest, had pioneered in the clearing of the fore-mentioned tract of land, cultivated
the same since the Spanish regime and continuously possessed the said property openly and public
under concept of ownership adverse against the whole world; that defendant-appellee Gregorio
Araneta, Inc., sometime in the year 1958, through force and intimidation, ejected the members of the
plaintiff corporation fro their possession of the aforementioned vast tract of land; that upon
investigation conducted by the members and officers of plaintiff corporation, they found out for the
first time in the year 1961 that the land in question "had been either fraudelently or erroneously
included, by direct or constructive fraud, in Original Certificate of Title No. 466 of the Land of
Records of the province of Bulacan", issued on May 11, 1916, which title is fictitious, non-existent
and devoid of legal efficacy due to the fact that "no original survey nor plan whatsoever" appears to
have been submitted as a basis thereof and that the Court of First Instance of Bulacan which issued
the decree of registration did not acquire jurisdiction over the land registration case because no
notice of such proceeding was given to the members of the plaintiff corporation who were then in
actual possession of said properties; that as a consequence of the nullity of the original title, all
subsequent titles derived therefrom, such as Transfer Certificate of Title No. 4903 issued in favor of
Gregorio Araneta and Carmen Zaragoza, which was subsequently cancelled by Transfer Certificate
of Title No. 7573 in the name of Gregorio Araneta, Inc., Transfer Certificate of Title No. 4988 issued
in the name of, the National Waterworks & Sewerage Authority (NWSA), Transfer Certificate of Title
No. 4986 issued in the name of Hacienda Caretas, Inc., and another transfer certificate of title in the
name of Paradise Farms, Inc., are therefore void. Plaintiff-appellant consequently prayed (1) that
Original Certificate of Title No. 466, as well as all transfer certificates of title issued and derived
therefrom, be nullified; (2) that "plaintiff's members" be declared as absolute owners in common of
said property and that the corresponding certificate of title be issued to plaintiff; and (3) that
defendant-appellee Gregorio Araneta, Inc. be ordered to pay to plaintiff the damages therein
specified.
On September 2, 1966, defendant-appellee Gregorio Araneta, Inc. filed a motion to dismiss the
amended complaint on the grounds that (1) the complaint states no cause of action; and (2) the
cause of action, if any, is barred by prescription and laches. Paradise Farms, Inc. and Hacienda
Caretas, Inc. filed motions to dismiss based on the same grounds. Appellee National Waterworks &
Sewerage Authority did not file any motion to dismiss. However, it pleaded in its answer as special
and affirmative defenses lack of cause of action by the plaintiff-appellant and the barring of such
action by prescription and laches.

During the pendency of the motion to dismiss, plaintiff-appellant filed a motion, dated October 7,
1966, praying that the case be transferred to another branch of the Court of First Instance sitting at
Malolos, Bulacan, According to defendants-appellees, they were not furnished a copy of said motion,
hence, on October 14, 1966, the lower court issued an Order requiring plaintiff-appellant to furnish
the appellees copy of said motion, hence, on October 14, 1966, defendant-appellant's motion dated
October 7, 1966 and, consequently, prayed that the said motion be denied for lack of notice and for
failure of the plaintiff-appellant to comply with the Order of October 14, 1966. Similarly, defendant-
appellee paradise Farms, Inc. filed, on December 2, 1966, a manifestation information the court that
it also did not receive a copy of the afore-mentioned of appellant. On January 24, 1967, the trial
court issued an Order dismissing the amended complaint.

On February 14, 1967, appellant filed a motion to reconsider the Order of dismissal on the grounds
that the court had no jurisdiction to issue the Order of dismissal, because its request for the transfer
of the case from the Valenzuela Branch of the Court of First Instance to the Malolos Branch of the
said court has been approved by the Department of Justice; that the complaint states a sufficient
cause of action because the subject matter of the controversy in one of common interest to the
members of the corporation who are so numerous that the present complaint should be treated as a
class suit; and that the action is not barred by the statute of limitations because (a) an action for the
reconveyance of property registered through fraud does not prescribe, and (b) an action to impugn a
void judgment may be brought any time. This motion was denied by the trial court in its Order dated
February 22, 1967. From the afore-mentioned Order of dismissal and the Order denying its motion
for reconsideration, plaintiff-appellant appealed to the Court of Appeals.

On September 3, 1969, the Court of Appeals, upon finding that no question of fact was involved in
the appeal but only questions of law and jurisdiction, certified this case to this Court for resolution of
the legal issues involved in the controversy.

Appellant contends, as a first assignment of error, that the trial court acted without authority and
jurisdiction in dismissing the amended complaint when the Secretary of Justice had already
approved the transfer of the case to any one of the two branches of the Court of First Instance of
Malolos, Bulacan.

Appellant confuses the jurisdiction of a court and the venue of cases with the assignment of cases in
the different branches of the same Court of First Instance. Jurisdiction implies the power of the court
to decide a case, while venue the place of action. There is no question that respondent court has
jurisdiction over the case. The venue of actions in the Court of First Instance is prescribed in Section
2, Rule 4 of the Revised Rules of Court. The laying of venue is not left to the caprice of plaintiff, but
must be in accordance with the aforesaid provision of the rules. 2 The mere fact that a request for the
transfer of a case to another branch of the same court has been approved by the Secretary of
Justice does not divest the court originally taking cognizance thereof of its jurisdiction, much less
does it change the venue of the action. As correctly observed by the trial court, the indorsement of
the Undersecretary of Justice did not order the transfer of the case to the Malolos Branch of the
Bulacan Court of First Instance, but only "authorized" it for the reason given by plaintiff's counsel that
the transfer would be convenient for the parties. The trial court is not without power to either grant or
deny the motion, especially in the light of a strong opposition thereto filed by the defendant. We hold
that the court a quo acted within its authority in denying the motion for the transfer the case to
Malolos notwithstanding the authorization" of the same by the Secretary of Justice.

II

Let us now consider the substantive aspect of the Order of dismissal.

In dismissing the amended complaint, the court a quo said:

The issue of lack of cause of action raised in the motions to dismiss refer to the lack
of personality of plaintiff to file the instant action. Essentially, the term 'cause of
action' is composed of two elements: (1) the right of the plaintiff and (2) the violation
of such right by the defendant. (Moran, Vol. 1, p. 111). For these reasons, the rules
require that every action must be prosecuted and defended in the name of the real
party in interest and that all persons having an interest in the subject of the action
and in obtaining the relief demanded shall be joined as plaintiffs (Sec. 2, Rule 3). In
the amended complaint, the people whose rights were alleged to have been violated
by being deprived and dispossessed of their land are the members of the corporation
and not the corporation itself. The corporation has a separate. and distinct
personality from its members, and this is not a mere technicality but a matter of
substantive law. There is no allegation that the members have assigned their rights
to the corporation or any showing that the corporation has in any way or manner
succeeded to such rights. The corporation evidently did not have any rights violated
by the defendants for which it could seek redress. Even if the Court should find
against the defendants, therefore, the plaintiff corporation would not be entitled to the
reliefs prayed for, which are recoveries of ownership and possession of the land,
issuance of the corresponding title in its name, and payment of damages. Neither
can such reliefs be awarded to the members allegedly deprived of their land, since
they are not parties to the suit. It appearing clearly that the action has not been filed
in the names of the real parties in interest, the complaint must be dismissed on the
ground of lack of cause of action. 3

Viewed in the light of existing law and jurisprudence, We find that the trial court correctly dismissed
the amended complaint.

It is a doctrine well-established and obtains both at law and in equity that a corporation is a distinct
legal entity to be considered as separate and apart from the individual stockholders or members who
compose it, and is not affected by the personal rights, obligations and transactions of its
stockholders or members. 4 The property of the corporation is its property and not that of the
stockholders, as owners, although they have equities in it. Properties registered in the name of the
corporation are owned by it as an entity separate and distinct from its members. 5 Conversely, a
corporation ordinarily has no interest in the individual property of its stockholders unless transferred
to the corporation, "even in the case of a one-man corporation. 6 The mere fact that one is president
of a corporation does not render the property which he owns or possesses the property of the
corporation, since the president, as individual, and the corporation are separate
similarities. 7 Similarly, stockholders in a corporation engaged in buying and dealing in real estate
whose certificates of stock entitled the holder thereof to an allotment in the distribution of the land of
the corporation upon surrender of their stock certificates were considered not to have such legal or
equitable title or interest in the land, as would support a suit for title, especially against parties other
than the corporation. 8

It must be noted, however, that the juridical personality of the corporation, as separate and distinct
from the persons composing it, is but a legal fiction introduced for the purpose of convenience and to
subserve the ends of justice. 9This separate personality of the corporation may be disregarded, or
the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for fraud or
illegality, or to work -an injustice, or where necessary to achieve equity. 10

Thus, when "the notion of legal entity is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, ... the law will regard the corporation as an association of persons, or in the
case of two corporations, merge them into one, the one being merely regarded as part or
instrumentality of the other. 11 The same is true where a corporation is a dummy and serves no
business purpose and is intended only as a blind, or an alter ego or business conduit for the sole
benefit of the stockholders. 12 This doctrine of disregarding the distinct personality of the corporation
has been applied by the courts in those cases when the corporate entity is used for the evasion of
taxes 13 or when the veil of corporate fiction is used to confuse legitimate issue of employer-
employee relationship, 14 or when necessary for the protection of creditors, in which case the veil of
corporate fiction may be pierced and the funds of the corporation may be garnished to satisfy the
debts of a principal stockholder. 15 The aforecited principle is resorted to by the courts as a measure
protection for third parties to prevent fraud, illegality or injustice. 16

It has not been claimed that the members have assigned or transferred whatever rights they may
have on the land in question to the plaintiff corporation. Absent any showing of interest, therefore, a
corporation, like plaintiff-appellant herein, has no personality to bring an action for and in behalf of its
stockholders or members for the purpose of recovering property which belongs to said stockholders
or members in their personal capacities.

It is fundamental that there cannot be a cause of action 'without an antecedent primary legal right
conferred' by law upon a person. 17 Evidently, there can be no wrong without a corresponding right,
and no breach of duty by one person without a corresponding right belonging to some other
person. 18 Thus, the essential elements of a cause of action are legal right of the plaintiff, correlative
obligation of the defendant, an act or omission of the defendant in violation of the aforesaid legal
right. 19 Clearly, no right of action exists in favor of plaintiff corporation, for as shown heretofore it
does not have any interest in the subject matter of the case which is material and, direct so as to
entitle it to file the suit as a real party in interest.

III

Appellant maintains, however, that the amended complaint may be treated as a class suit, pursuant
to Section 12 of Rule 3 of the Revised Rules of Court.

In order that a class suit may prosper, the following requisites must be present: (1) that the subject
matter of the controversy is one of common or general interest to many persons; and (2) that the
parties are so numerous that it is impracticable to bring them all before the court. 20

Under the first requisite, the person who sues must have an interest in the controversy, common
with those for whom he sues, and there must be that unity of interest between him and all such other
persons which would entitle them to maintain the action if suit was brought by them jointly. 21

As to what constitutes common interest in the subject matter of the controversy, it has been
explained in Scott v. Donald 22 thus:
 The interest that will allow parties to join in a bill of complaint, or that will enable the
court to dispense with the presence of all the parties, when numerous, except a
determinate number, is not only an interest in the question, but one in common in the
subject Matter of the suit; ... a community of interest growing out of the nature and
condition of the right in dispute; for, although there may not be any privity between
the numerous parties, there is a common title out of which the question arises, and
which lies at the foundation of the proceedings ... [here] the only matter in common
among the plaintiffs, or between them and the defendants, is an interest in the
Question involved which alone cannot lay a foundation for the joinder of parties.
There is scarcely a suit at law, or in equity which settles a Principle or applies a
principle to a given state of facts, or in which a general statute is interpreted, that
does not involved a Question in which other parties are interested. ... (Emphasis
supplied )

Here, there is only one party plaintiff, and the plaintiff corporation does not even have an interest in
the subject matter of the controversy, and cannot, therefore, represent its members or stockholders
who claim to own in their individual capacities ownership of the said property. Moreover, as correctly
stated by the appellees, a class suit does not lie in actions for the recovery of property where several
persons claim Partnership of their respective portions of the property, as each one could alleged and
prove his respective right in a different way for each portion of the land, so that they cannot all be
held to have Identical title through acquisition prescription. 23

Having shown that no cause of action in favor of the plaintiff exists and that the action in the lower
court cannot be considered as a class suit, it would be unnecessary and an Idle exercise for this
Court to resolve the remaining issue of whether or not the plaintiffs action for reconveyance of real
property based upon constructive or implied trust had already prescribed.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 177131 June 7, 2011

BOY SCOUTS OF THE PHILIPPINES, Petitioner,

vs.
COMMISSION ON AUDIT, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

The jurisdiction of the Commission on Audit (COA) over the Boy Scouts of the Philippines (BSP) is
the subject matter of this controversy that reached us via petition for prohibition1 filed by the BSP
under Rule 65 of the 1997 Rules of Court. In this petition, the BSP seeks that the COA be prohibited
from implementing its June 18, 2002 Decision,2 its February 21, 2007 Resolution,3 as well as all
other issuances arising therefrom, and that all of the foregoing be rendered null and void. 4

Antecedent Facts and Background of the Case

This case arose when the COA issued Resolution No. 99-0115 on August 19, 1999 ("the COA
Resolution"), with the subject "Defining the Commission’s policy with respect to the audit of the Boy
Scouts of the Philippines." In its whereas clauses, the COA Resolution stated that the BSP was
created as a public corporation under Commonwealth Act No. 111, as amended by Presidential
Decree No. 460 and Republic Act No. 7278; that in Boy Scouts of the Philippines v. National Labor
Relations Commission,6 the Supreme Court ruled that the BSP, as constituted under its charter, was
a "government-controlled corporation within the meaning of Article IX(B)(2)(1) of the Constitution";
and that "the BSP is appropriately regarded as a government instrumentality under the 1987
Administrative Code."7 The COA Resolution also cited its constitutional mandate under Section 2(1),
Article IX (D). Finally, the COA Resolution reads:

NOW THEREFORE, in consideration of the foregoing premises, the COMMISSION PROPER HAS
RESOLVED, AS IT DOES HEREBY RESOLVE, to conduct an annual financial audit of the Boy
Scouts of the Philippines in accordance with generally accepted auditing standards, and express an
opinion on whether the financial statements which include the Balance Sheet, the Income Statement
and the Statement of Cash Flows present fairly its financial position and results of operations.

xxxx

BE IT RESOLVED FURTHERMORE, that for purposes of audit supervision, the Boy Scouts of the
Philippines shall be classified among the government corporations belonging to the Educational,
Social, Scientific, Civic and Research Sector under the Corporate Audit Office I, to be audited,
similar to the subsidiary corporations, by employing the team audit approach.8 (Emphases supplied.)

The BSP sought reconsideration of the COA Resolution in a letter9 dated November 26, 1999 signed
by the BSP National President Jejomar C. Binay, who is now the Vice President of the Republic,
wherein he wrote:

It is the position of the BSP, with all due respect, that it is not subject to the Commission’s jurisdiction
on the following grounds:

1. We reckon that the ruling in the case of Boy Scouts of the Philippines vs. National Labor
Relations Commission, et al. (G.R. No. 80767) classifying the BSP as a government-
controlled corporation is anchored on the "substantial Government participation" in the
National Executive Board of the BSP. It is to be noted that the case was decided when the
BSP Charter is defined by Commonwealth Act No. 111 as amended by Presidential Decree
460.

However, may we humbly refer you to Republic Act No. 7278 which amended the BSP’s charter
after the cited case was decided. The most salient of all amendments in RA No. 7278 is the
alteration of the composition of the National Executive Board of the BSP.

The said RA virtually eliminated the "substantial government participation" in the National Executive
Board by removing: (i) the President of the Philippines and executive secretaries, with the exception
of the Secretary of Education, as members thereof; and (ii) the appointment and confirmation power
of the President of the Philippines, as Chief Scout, over the members of the said Board.

The BSP believes that the cited case has been superseded by RA 7278. Thereby weakening the
case’s conclusion that the BSP is a government-controlled corporation (sic). The 1987
Administrative Code itself, of which the BSP vs. NLRC relied on for some terms, defines
government-owned and controlled corporations as agencies organized as stock or non-stock
corporations which the BSP, under its present charter, is not.
Also, the Government, like in other GOCCs, does not have funds invested in the BSP. What RA
7278 only provides is that the Government or any of its subdivisions, branches, offices, agencies
and instrumentalities can from time to time donate and contribute funds to the BSP.

xxxx

Also the BSP respectfully believes that the BSP is not "appropriately regarded as a government
instrumentality under the 1987 Administrative Code" as stated in the COA resolution. As defined by
Section 2(10) of the said code, instrumentality refers to "any agency of the National Government, not
integrated within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter."

The BSP is not an entity administering special funds. It is not even included in the DECS National
Budget. x x x

It may be argued also that the BSP is not an "agency" of the Government. The 1987 Administrative
Code, merely referred the BSP as an "attached agency" of the DECS as distinguished from an
actual line agency of departments that are included in the National Budget. The BSP believes that
an "attached agency" is different from an "agency." Agency, as defined in Section 2(4) of the
Administrative Code, is defined as any of the various units of the Government including a
department, bureau, office, instrumentality, government-owned or controlled corporation or local
government or distinct unit therein.

Under the above definition, the BSP is neither a unit of the Government; a department which refers
to an executive department as created by law (Section 2[7] of the Administrative Code); nor a
bureau which refers to any principal subdivision or unit of any department (Section 2[8],
Administrative Code).10

Subsequently, requests for reconsideration of the COA Resolution were also made separately by
Robert P. Valdellon, Regional Scout Director, Western Visayas Region, Iloilo City and Eugenio F.
Capreso, Council Scout Executive of Calbayog City.11

In a letter12 dated July 3, 2000, Director Crescencio S. Sunico, Corporate Audit Officer (CAO) I of the
COA, furnished the BSP with a copy of the Memorandum13 dated June 20, 2000 of Atty. Santos M.
Alquizalas, the COA General Counsel. In said Memorandum, the COA General Counsel opined that
Republic Act No. 7278 did not supersede the Court’s ruling in Boy Scouts of the Philippines v.
National Labor Relations Commission, even though said law eliminated the substantial government
participation in the selection of members of the National Executive Board of the BSP. The
Memorandum further provides:

Analysis of the said case disclosed that the substantial government participation is only one (1) of
the three (3) grounds relied upon by the Court in the resolution of the case. Other considerations
include the character of the BSP’s purposes and functions which has a public aspect and the
statutory designation of the BSP as a "public corporation". These grounds have not been deleted by
R.A. No. 7278. On the contrary, these were strengthened as evidenced by the amendment made
relative to BSP’s purposes stated in Section 3 of R.A. No. 7278.

On the argument that BSP is not appropriately regarded as "a government instrumentality" and
"agency" of the government, such has already been answered and clarified. The Supreme Court has
elucidated this matter in the BSP case when it declared that BSP is regarded as, both a
"government-controlled corporation with an original charter" and as an "instrumentality" of the
Government. Likewise, it is not disputed that the Administrative Code of 1987 designated the BSP
as one of the attached agencies of DECS. Being an attached agency, however, it does not change
its nature as a government-controlled corporation with original charter and, necessarily, subject to
COA audit jurisdiction. Besides, Section 2(1), Article IX-D of the Constitution provides that COA shall
have the power, authority, and duty to examine, audit and settle all accounts pertaining to the
revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by,
or pertaining to, the Government, or any of its subdivisions, agencies or instrumentalities, including
government-owned or controlled corporations with original charters.14

Based on the Memorandum of the COA General Counsel, Director Sunico wrote:

In view of the points clarified by said Memorandum upholding COA Resolution No. 99-011, we have
to comply with the provisions of the latter, among which is to conduct an annual financial audit of the
Boy Scouts of the Philippines.15

In a letter dated November 20, 2000 signed by Director Amorsonia B. Escarda, CAO I, the COA
informed the BSP that a preliminary survey of its organizational structure, operations and accounting
system/records shall be conducted on November 21 to 22, 2000.16

Upon the BSP’s request, the audit was deferred for thirty (30) days. The BSP then filed a Petition for
Review with Prayer for Preliminary Injunction and/or Temporary Restraining Order before the COA.
This was denied by the COA in its questioned Decision, which held that the BSP is under its audit
jurisdiction. The BSP moved for reconsideration but this was likewise denied under its questioned
Resolution.17

This led to the filing by the BSP of this petition for prohibition with preliminary injunction and
temporary restraining order against the COA.

The Issue

As stated earlier, the sole issue to be resolved in this case is whether the BSP falls under the COA’s
audit jurisdiction.

The Parties’ Respective Arguments

The BSP contends that Boy Scouts of the Philippines v. National Labor Relations Commission is
inapplicable for purposes of determining the audit jurisdiction of the COA as the issue therein was
the jurisdiction of the National Labor Relations Commission over a case for illegal dismissal and
unfair labor practice filed by certain BSP employees.18

While the BSP concedes that its functions do relate to those that the government might otherwise
completely assume on its own, it avers that this alone was not determinative of the COA’s audit
jurisdiction over it. The BSP further avers that the Court in Boy Scouts of the Philippines v. National
Labor Relations Commission "simply stated x x x that in respect of functions, the BSP is akin to a
public corporation" but this was not synonymous to holding that the BSP is a government corporation
or entity subject to audit by the COA. 19

The BSP contends that Republic Act No. 7278 introduced crucial amendments to its charter; hence,
the findings of the Court in Boy Scouts of the Philippines v. National Labor Relations Commission
are no longer valid as the government has ceased to play a controlling influence in it. The BSP
claims that the pronouncements of the Court therein must be taken only within the context of that
case; that the Court had categorically found that its assets were acquired from the Boy Scouts of
America and not from the Philippine government, and that its operations are financed chiefly from
membership dues of the Boy Scouts themselves as well as from property rentals; and that "the BSP
may correctly be characterized as non-governmental, and hence, beyond the audit jurisdiction of the
COA." It further claims that the designation by the Court of the BSP as a government agency or
instrumentality is mere obiter dictum.20

The BSP maintains that the provisions of Republic Act No. 7278 suggest that "governance of BSP
has come to be overwhelmingly a private affair or nature, with government participation restricted to
the seat of the Secretary of Education, Culture and Sports."21 It cites Philippine Airlines Inc. v.
Commission on Audit22 wherein the Court declared that, "PAL, having ceased to be a government-
owned or controlled corporation is no longer under the audit jurisdiction of the COA."23 Claiming that
the amendments introduced by Republic Act No. 7278 constituted a supervening event that changed
the BSP’s corporate identity in the same way that the government’s privatization program changed
PAL’s, the BSP makes the case that the government no longer has control over it; thus, the COA
cannot use the Boy Scouts of the Philippines v. National Labor Relations Commission as its basis for
the exercise of its jurisdiction and the issuance of COA Resolution No. 99-011.24 The BSP further
claims as follows:

It is not far-fetched, in fact, to concede that BSP’s funds and assets are private in character. Unlike
ordinary public corporations, such as provinces, cities, and municipalities, or government-owned and
controlled corporations, such as Land Bank of the Philippines and the Development Bank of the
Philippines, the assets and funds of BSP are not derived from any government grant. For its
operations, BSP is not dependent in any way on any government appropriation; as a matter of fact, it
has not even been included in any appropriations for the government. To be sure, COA has not
alleged, in its Resolution No. 99-011 or in the Memorandum of its General Counsel, that BSP
received, receives or continues to receive assets and funds from any agency of the government. The
foregoing simply point to the private nature of the funds and assets of petitioner BSP.

xxxx

As stated in petitioner’s third argument, BSP’s assets and funds were never acquired from the
government. Its operations are not in any way financed by the government, as BSP has never been
included in any appropriations act for the government. Neither has the government invested funds
with BSP. BSP, has not been, at any time, a user of government property or funds; nor have
properties of the government been held in trust by BSP. This is precisely the reason why, until this
time, the COA has not attempted to subject BSP to its audit jurisdiction. x x x.25

To summarize its other arguments, the BSP contends that it is not a government-owned or
controlled corporation; neither is it an instrumentality, agency, or subdivision of the government.

In its Comment,26 the COA argues as follows:

1. The BSP is a public corporation created under Commonwealth Act No. 111 dated October
31, 1936, and whose functions relate to the fostering of public virtues of citizenship and
patriotism and the general improvement of the moral spirit and fiber of the youth. The
manner of creation and the purpose for which the BSP was created indubitably prove that it
is a government agency.

2. Being a government agency, the funds and property owned or held in trust by the BSP are
subject to the audit authority of respondent Commission on Audit pursuant to Section 2 (1),
Article IX-D of the 1987 Constitution.
 3. Republic Act No. 7278 did not change the character of the BSP as a government-owned
or controlled corporation and government instrumentality.27

The COA maintains that the functions of the BSP that include, among others, the teaching to the
youth of patriotism, courage, self-reliance, and kindred virtues, are undeniably sovereign functions
enshrined under the Constitution and discussed by the Court in Boy Scouts of the Philippines v.
National Labor Relations Commission. The COA contends that any attempt to classify the BSP as a
private corporation would be incomprehensible since no less than the law which created it had
designated it as a public corporation and its statutory mandate embraces performance of sovereign
functions.28

The COA claims that the only reason why the BSP employees fell within the scope of the Civil
Service Commission even before the 1987 Constitution was the fact that it was a government-owned
or controlled corporation; that as an attached agency of the Department of Education, Culture and
Sports (DECS), the BSP is an agency of the government; and that the BSP is a chartered institution
under Section 1(12) of the Revised Administrative Code of 1987, embraced under the term
government instrumentality.29

The COA concludes that being a government agency, the funds and property owned or held by the
BSP are subject to the audit authority of the COA pursuant to Section 2(1), Article IX (D) of the 1987
Constitution.

In support of its arguments, the COA cites The Veterans Federation of the Philippines (VFP) v.
Reyes,30 wherein the Court held that among the reasons why the VFP is a public corporation is that
its charter, Republic Act No. 2640, designates it as one. Furthermore, the COA quotes the Court as
saying in that case:

In several cases, we have dealt with the issue of whether certain specific activities can be classified
as sovereign functions. These cases, which deal with activities not immediately apparent to be
sovereign functions, upheld the public sovereign nature of operations needed either to promote
social justice or to stimulate patriotic sentiments and love of country.

xxxx

Petitioner claims that its funds are not public funds because no budgetary appropriations or
government funds have been released to the VFP directly or indirectly from the DBM, and because
VFP funds come from membership dues and lease rentals earned from administering government
lands reserved for the VFP.

The fact that no budgetary appropriations have been released to the VFP does not prove that it is a
private corporation. The DBM indeed did not see it fit to propose budgetary appropriations to the
VFP, having itself believed that the VFP is a private corporation. If the DBM, however, is mistaken as
to its conclusion regarding the nature of VFP's incorporation, its previous assertions will not prevent
future budgetary appropriations to the VFP. The erroneous application of the law by public officers
does not bar a subsequent correct application of the law.31(Citations omitted.)

The COA points out that the government is not precluded by law from extending financial support to
the BSP and adding to its funds, and that "as a government instrumentality which continues to
perform a vital function imbued with public interest and reflective of the government’s policy to
stimulate patriotic sentiments and love of country, the BSP’s funds from whatever source are public
funds, and can be used solely for public purpose in pursuance of the provisions of Republic Act No.
[7278]."32
The COA claims that the fact that it has not yet audited the BSP’s funds may not bar the subsequent
exercise of its audit jurisdiction.

The BSP filed its Reply33 on August 29, 2007 maintaining that its statutory designation as a "public
corporation" and the public character of its purpose and functions are not determinative of the COA’s
audit jurisdiction; reiterating its stand that Boy Scouts of the Philippines v. National Labor Relations
Commission is not applicable anymore because the aspect of government ownership and control
has been removed by Republic Act No. 7278; and concluding that the funds and property that it
either owned or held in trust are not public funds and are not subject to the COA’s audit jurisdiction.

Thereafter, considering the BSP’s claim that it is a private corporation, this Court, in a
Resolution34 dated July 20, 2010, required the parties to file, within a period of twenty (20) days from
receipt of said Resolution, their respective comments on the issue of whether Commonwealth Act
No. 111, as amended by Republic Act No. 7278, is constitutional.

In compliance with the Court’s resolution, the parties filed their respective Comments.

In its Comment35 dated October 22, 2010, the COA argues that the constitutionality of
Commonwealth Act No. 111, as amended, is not determinative of the resolution of the present
controversy on the COA’s audit jurisdiction over petitioner, and in fact, the controversy may be
resolved on other grounds; thus, the requisites before a judicial inquiry may be made, as set forth in
Commissioner of Internal Revenue v. Court of Tax Appeals,36 have not been fully met.37 Moreover,
the COA maintains that behind every law lies the presumption of constitutionality.38 The COA
likewise argues that contrary to the BSP’s position, repeal of a law by implication is not
favored.39 Lastly, the COA claims that there was no violation of Section 16, Article XII of the 1987
Constitution with the creation or declaration of the BSP as a government corporation. Citing
Philippine Society for the Prevention of Cruelty to Animals v. Commission on Audit,40 the COA further
alleges:

The true criterion, therefore, to determine whether a corporation is public or private is found in the
totality of the relation of the corporation to the State. If the corporation is created by the State as the
latter’s own agency or instrumentality to help it in carrying out its governmental functions, then that
corporation is considered public; otherwise, it is private. x x x.41

For its part, in its Comment42 filed on December 3, 2010, the BSP submits that its charter,
Commonwealth Act No. 111, as amended by Republic Act No. 7278, is constitutional as it does not
violate Section 16, Article XII of the Constitution. The BSP alleges that "while [it] is not a public
corporation within the purview of COA’s audit jurisdiction, neither is it a private corporation created
by special law falling within the ambit of the constitutional prohibition x x x."43 The BSP further
alleges:

Petitioner’s purpose is embodied in Section 3 of C.A. No. 111, as amended by Section 1 of R.A. No.
7278, thus:

xxxx

A reading of the foregoing provision shows that petitioner was created to advance the interest of the
youth, specifically of young boys, and to mold them into becoming good citizens. Ultimately, the
creation of petitioner redounds to the benefit, not only of those boys, but of the public good or
welfare. Hence, it can be said that petitioner’s purpose and functions are more of a public rather than
a private character. Petitioner caters to all boys who wish to join the organization without any
distinction. It does not limit its membership to a particular class of boys. Petitioner’s members are
trained in scoutcraft and taught patriotism, civic consciousness and responsibility, courage, self-
reliance, discipline and kindred virtues, and moral values, preparing them to become model citizens
and outstanding leaders of the country.44

The BSP reiterates its stand that the public character of its purpose and functions do not place it
within the ambit of the audit jurisdiction of the COA as it lacks the government ownership or control
that the Constitution requires before an entity may be subject of said jurisdiction.45 It avers that it
merely stated in its Reply that the withdrawal of government control is akin to privatization, but it
does not necessarily mean that petitioner is a private corporation.46The BSP claims that it has a
unique characteristic which "neither classifies it as a purely public nor a purely private
corporation";47 that it is not a quasi-public corporation; and that it may belong to a different class
altogether.48

The BSP claims that assuming arguendo that it is a private corporation, its creation is not contrary to
the purpose of Section 16, Article XII of the Constitution; and that the evil sought to be avoided by
said provision is inexistent in the enactment of the BSP’s charter,49 as, (i) it was not created for any
pecuniary purpose; (ii) those who will primarily benefit from its creation are not its officers but its
entire membership consisting of boys being trained in scoutcraft all over the country; (iii) it caters to
all boys who wish to join the organization without any distinction; and (iv) it does not limit its
membership to a particular class or group of boys. Thus, the enactment of its charter confers no
special privilege to particular individuals, families, or groups; nor does it bring about the danger of
granting undue favors to certain groups to the prejudice of others or of the interest of the country,
which are the evils sought to be prevented by the constitutional provision involved.50

Finally, the BSP states that the presumption of constitutionality of a legislative enactment prevails
absent any clear showing of its repugnancy to the Constitution.51

The Ruling of the Court

After looking at the legislative history of its amended charter and carefully studying the applicable
laws and the arguments of both parties, we find that the BSP is a public corporation and its funds are
subject to the COA’s audit jurisdiction.

The BSP Charter (Commonwealth Act No. 111, approved on October 31, 1936), entitled "An Act to
Create a Public Corporation to be Known as the Boy Scouts of the Philippines, and to Define its
Powers and Purposes" created the BSP as a "public corporation" to serve the following public
interest or purpose:

Sec. 3. The purpose of this corporation shall be to promote through organization and cooperation
with other agencies, the ability of boys to do useful things for themselves and others, to train them in
scoutcraft, and to inculcate in them patriotism, civic consciousness and responsibility, courage, self-
reliance, discipline and kindred virtues, and moral values, using the method which are in common
use by boy scouts.

Presidential Decree No. 460, approved on May 17, 1974, amended Commonwealth Act No. 111 and
provided substantial changes in the BSP organizational structure. Pertinent provisions are quoted
below:

Section II. Section 5 of the said Act is also amended to read as follows:

The governing body of the said corporation shall consist of a National Executive Board composed of
(a) the President of the Philippines or his representative; (b) the charter and life members of the Boy
Scouts of the Philippines; (c) the Chairman of the Board of Trustees of the Philippine Scouting
Foundation; (d) the Regional Chairman of the Scout Regions of the Philippines; (e) the Secretary of
Education and Culture, the Secretary of Social Welfare, the Secretary of National Defense, the
Secretary of Labor, the Secretary of Finance, the Secretary of Youth and Sports, and the Secretary
of Local Government and Community Development; (f) an equal number of individuals from the
private sector; (g) the National President of the Girl Scouts of the Philippines; (h) one Scout of
Senior age from each Scout Region to represent the boy membership; and (i) three representatives
of the cultural minorities. Except for the Regional Chairman who shall be elected by the Regional
Scout Councils during their annual meetings, and the Scouts of their respective regions, all members
of the National Executive Board shall be either by appointment or cooption, subject to ratification and
confirmation by the Chief Scout, who shall be the Head of State. Vacancies in the Executive Board
shall be filled by a majority vote of the remaining members, subject to ratification and confirmation by
the Chief Scout. The by-laws may prescribe the number of members of the National Executive Board
necessary to constitute a quorum of the board, which number may be less than a majority of the
whole number of the board. The National Executive Board shall have power to make and to amend
the by-laws, and, by a two-thirds vote of the whole board at a meeting called for this purpose, may
authorize and cause to be executed mortgages and liens upon the property of the corporation.

Subsequently, on March 24, 1992, Republic Act No. 7278 further amended Commonwealth Act No.
111 "by strengthening the volunteer and democratic character" of the BSP and reducing government
representation in its governing body, as follows:

Section 1. Sections 2 and 3 of Commonwealth Act. No. 111, as amended, is hereby amended to
read as follows:

"Sec. 2. The said corporation shall have the powers of perpetual succession, to sue and be sued; to
enter into contracts; to acquire, own, lease, convey and dispose of such real and personal estate,
land grants, rights and choses in action as shall be necessary for corporate purposes, and to accept
and receive funds, real and personal property by gift, devise, bequest or other means, to conduct
fund-raising activities; to adopt and use a seal, and the same to alter and destroy; to have offices
and conduct its business and affairs in Metropolitan Manila and in the regions, provinces, cities,
municipalities, and barangays of the Philippines, to make and adopt by-laws, rules and regulations
not inconsistent with this Act and the laws of the Philippines, and generally to do all such acts and
things, including the establishment of regulations for the election of associates and successors, as
may be necessary to carry into effect the provisions of this Act and promote the purposes of said
corporation: Provided, That said corporation shall have no power to issue certificates of stock or to
declare or pay dividends, its objectives and purposes being solely of benevolent character and not
for pecuniary profit of its members.

"Sec. 3. The purpose of this corporation shall be to promote through organization and cooperation
with other agencies, the ability of boys to do useful things for themselves and others, to train them in
scoutcraft, and to inculcate in them patriotism, civic consciousness and responsibility, courage, self-
reliance, discipline and kindred virtues, and moral values, using the method which are in common
use by boy scouts."

Sec. 2. Section 4 of Commonwealth Act No. 111, as amended, is hereby repealed and in lieu
thereof, Section 4 shall read as follows:

"Sec. 4. The President of the Philippines shall be the Chief Scout of the Boy Scouts of the
Philippines."
Sec. 3. Sections 5, 6, 7 and 8 of Commonwealth Act No. 111, as amended, are hereby amended to
read as follows:

"Sec. 5. The governing body of the said corporation shall consist of a National Executive Board, the
members of which shall be Filipino citizens of good moral character. The Board shall be composed
of the following:

"(a) One (1) charter member of the Boy Scouts of the Philippines who shall be elected by the
members of the National Council at its meeting called for this purpose;

"(b) The regional chairmen of the scout regions who shall be elected by the representatives
of all the local scout councils of the region during its meeting called for this purpose:
Provided, That a candidate for regional chairman need not be the chairman of a local scout
council;

"(c) The Secretary of Education, Culture and Sports;

"(d) The National President of the Girl Scouts of the Philippines;

"(e) One (1) senior scout, each from Luzon, Visayas and Mindanao areas, to be elected by
the senior scout delegates of the local scout councils to the scout youth forums in their
respective areas, in its meeting called for this purpose, to represent the boy scout
membership;

"(f) Twelve (12) regular members to be elected by the members of the National Council in its
meeting called for this purpose;

"(g) At least ten (10) but not more than fifteen (15) additional members from the private
sector who shall be elected by the members of the National Executive Board referred to in
the immediately preceding paragraphs (a), (b), (c), (d), (e) and (f) at the organizational
meeting of the newly reconstituted National Executive Board which shall be held immediately
after the meeting of the National Council wherein the twelve (12) regular members and the
one (1) charter member were elected.

xxxx

"Sec. 8. Any donation or contribution which from time to time may be made to the Boy Scouts of the
Philippines by the Government or any of its subdivisions, branches, offices, agencies or
instrumentalities or by a foreign government or by private, entities and individuals shall be expended
by the National Executive Board in pursuance of this Act.

The BSP as a Public Corporation under Par. 2, Art. 2 of the Civil Code

There are three classes of juridical persons under Article 44 of the Civil Code and the BSP, as
presently constituted under Republic Act No. 7278, falls under the second classification. Article 44
reads:

Art. 44. The following are juridical persons:

(1) The State and its political subdivisions;

 (2) Other corporations, institutions and entities for public interest or purpose created
by law; their personality begins as soon as they have been constituted according to
law;

(3) Corporations, partnerships and associations for private interest or purpose to which the
law grants a juridical personality, separate and distinct from that of each shareholder, partner
or member. (Emphases supplied.)

The BSP, which is a corporation created for a public interest or purpose, is subject to the law
creating it under Article 45 of the Civil Code, which provides:

Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are governed by
the laws creating or recognizing them.

Private corporations are regulated by laws of general application on the subject.

Partnerships and associations for private interest or purpose are governed by the provisions of this
Code concerning partnerships. (Emphasis and underscoring supplied.)

The purpose of the BSP as stated in its amended charter shows that it was created in order to
implement a State policy declared in Article II, Section 13 of the Constitution, which reads:

ARTICLE II - DECLARATION OF PRINCIPLES AND STATE POLICIES

Section 13. The State recognizes the vital role of the youth in nation-building and shall promote and
protect their physical, moral, spiritual, intellectual, and social well-being. It shall inculcate in the youth
patriotism and nationalism, and encourage their involvement in public and civic affairs.

Evidently, the BSP, which was created by a special law to serve a public purpose in pursuit of a
constitutional mandate, comes within the class of "public corporations" defined by paragraph 2,
Article 44 of the Civil Code and governed by the law which creates it, pursuant to Article 45 of the
same Code.

The BSP’s Classification Under the Administrative Code of 1987

The public, rather than private, character of the BSP is recognized by the fact that, along with the
Girl Scouts of the Philippines, it is classified as an attached agency of the DECS under Executive
Order No. 292, or the Administrative Code of 1987, which states:

TITLE VI – EDUCATION, CULTURE AND SPORTS

Chapter 8 – Attached Agencies

SEC. 20. Attached Agencies. – The following agencies are hereby attached to the Department:

xxxx

(12) Boy Scouts of the Philippines;

(13) Girl Scouts of the Philippines.

The administrative relationship of an attached agency to the department is defined in the
Administrative Code of 1987 as follows:

BOOK IV
THE EXECUTIVE BRANCH

Chapter 7 – ADMINISTRATIVE RELATIONSHIP

SEC. 38. Definition of Administrative Relationship. – Unless otherwise expressly stated in the Code
or in other laws defining the special relationships of particular agencies, administrative relationships
shall be categorized and defined as follows:

xxxx

(3) Attachment. – (a) This refers to the lateral relationship between the department or its equivalent
and the attached agency or corporation for purposes of policy and program coordination. The
coordination may be accomplished by having the department represented in the governing board of
the attached agency or corporation, either as chairman or as a member, with or without voting rights,
if this is permitted by the charter; having the attached corporation or agency comply with a system of
periodic reporting which shall reflect the progress of programs and projects; and having the
department or its equivalent provide general policies through its representative in the board, which
shall serve as the framework for the internal policies of the attached corporation or agency.
(Emphasis ours.)

As an attached agency, the BSP enjoys operational autonomy, as long as policy and program
coordination is achieved by having at least one representative of government in its governing board,
which in the case of the BSP is the DECS Secretary. In this sense, the BSP is not under government
control or "supervision and control." Still this characteristic does not make the attached chartered
agency a private corporation covered by the constitutional proscription in question.

Art. XII, Sec. 16 of the Constitution refers to "private corporations" created by government for
proprietary or economic/business purposes

At the outset, it should be noted that the provision of Section 16 in issue is found in Article XII of the
Constitution, entitled "National Economy and Patrimony." Section 1 of Article XII is quoted as follows:

SECTION 1. The goals of the national economy are a more equitable distribution of opportunities,
income, and wealth; a sustained increase in the amount of goods and services produced by the
nation for the benefit of the people; and an expanding productivity as the key to raising the quality of
life for all, especially the underprivileged.

The State shall promote industrialization and full employment based on sound agricultural
development and agrarian reform, through industries that make full and efficient use of human and
natural resources, and which are competitive in both domestic and foreign markets. However, the
State shall protect Filipino enterprises against unfair foreign competition and trade practices.

In the pursuit of these goals, all sectors of the economy and all regions of the country shall be given
optimum opportunity to develop. Private enterprises, including corporations, cooperatives, and
similar collective organizations, shall be encouraged to broaden the base of their ownership.
The scope and coverage of Section 16, Article XII of the Constitution can be seen from the
aforementioned declaration of state policies and goals which pertains to national economy and
patrimony and the interests of the people in economic development.

Section 16, Article XII deals with "the formation, organization, or regulation of private
corporations,"52 which should be done through a general law enacted by Congress, provides for an
exception, that is: if the corporation is government owned or controlled; its creation is in the interest
of the common good; and it meets the test of economic viability. The rationale behind Article XII,
Section 16 of the 1987 Constitution was explained in Feliciano v. Commission on Audit,53 in the
following manner:

The Constitution emphatically prohibits the creation of private corporations except by a general law
applicable to all citizens. The purpose of this constitutional provision is to ban private corporations
created by special charters, which historically gave certain individuals, families or groups special
privileges denied to other citizens.54 (Emphasis added.)

It may be gleaned from the above discussion that Article XII, Section 16 bans the creation of "private
corporations" by special law. The said constitutional provision should not be construed so as to
prohibit the creation of public corporations or a corporate agency or instrumentality of the
government intended to serve a public interest or purpose, which should not be measured on the
basis of economic viability, but according to the public interest or purpose it serves as envisioned by
paragraph (2), of Article 44 of the Civil Code and the pertinent provisions of the Administrative Code
of 1987.

The BSP is a Public Corporation Not Subject to the Test of Government Ownership or Control and
Economic Viability

The BSP is a public corporation or a government agency or instrumentality with juridical personality,
which does not fall within the constitutional prohibition in Article XII, Section 16, notwithstanding the
amendments to its charter. Not all corporations, which are not government owned or controlled, are
ipso facto to be considered private corporations as there exists another distinct class of corporations
or chartered institutions which are otherwise known as "public corporations." These corporations are
treated by law as agencies or instrumentalities of the government which are not subject to the tests
of ownership or control and economic viability but to different criteria relating to their public
purposes/interests or constitutional policies and objectives and their administrative relationship to the
government or any of its Departments or Offices.

Classification of Corporations Under Section 16, Article XII of the Constitution on National Economy
and Patrimony

The dissenting opinion of Associate Justice Antonio T. Carpio, citing a line of cases, insists that the
Constitution recognizes only two classes of corporations: private corporations under a general law,
and government-owned or controlled corporations created by special charters.

We strongly disagree. Section 16, Article XII should not be construed so as to prohibit Congress
from creating public corporations. In fact, Congress has enacted numerous laws creating public
corporations or government agencies or instrumentalities vested with corporate powers. Moreover,
Section 16, Article XII, which relates to National Economy and Patrimony, could not have tied the
hands of Congress in creating public corporations to serve any of the constitutional policies or
objectives.
In his dissent, Justice Carpio contends that this ponente introduces "a totally different species of
corporation, which is neither a private corporation nor a government owned or controlled
corporation" and, in so doing, is missing the fact that the BSP, "which was created as a non-stock,
non-profit corporation, can only be either a private corporation or a government owned or controlled
corporation."

Note that in Boy Scouts of the Philippines v. National Labor Relations Commission, the BSP, under
its former charter, was regarded as both a government owned or controlled corporation with original
charter and a "public corporation." The said case pertinently stated:

While the BSP may be seen to be a mixed type of entity, combining aspects of both public and
private entities, we believe that considering the character of its purposes and its functions, the
statutory designation of the BSP as "a public corporation" and the substantial participation of the
Government in the selection of members of the National Executive Board of the BSP, the BSP, as
presently constituted under its charter, is a government-controlled corporation within the meaning of
Article IX (B) (2) (1) of the Constitution.

We are fortified in this conclusion when we note that the Administrative Code of 1987 designates the
BSP as one of the attached agencies of the Department of Education, Culture and Sports ("DECS").
An "agency of the Government" is defined as referring to any of the various units of the Government
including a department, bureau, office, instrumentality, government-owned or -controlled corporation,
or local government or distinct unit therein. "Government instrumentality" is in turn defined in the
1987 Administrative Code in the following manner:

Instrumentality - refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy usually
through a charter. This term includes regulatory agencies, chartered institutions and government-
owned or controlled corporations.

The same Code describes a "chartered institution" in the following terms:

Chartered institution - refers to any agency organized or operating under a special charter, and
vested by law with functions relating to specific constitutional policies or objectives. This term
includes the state universities and colleges, and the monetary authority of the State.

We believe that the BSP is appropriately regarded as "a government instrumentality" under the 1987
Administrative Code.

It thus appears that the BSP may be regarded as both a "government controlled corporation with an
original charter" and as an "instrumentality" of the Government within the meaning of Article IX (B)
(2) (1) of the Constitution. x x x.55(Emphases supplied.)

The existence of public or government corporate or juridical entities or chartered institutions by

legislative fiat distinct from private corporations and government owned or controlled corporation is
best exemplified by the 1987 Administrative Code cited above, which we quote in part:

Sec. 2. General Terms Defined. – Unless the specific words of the text, or the context as a whole, or
a particular statute, shall require a different meaning:

xxxx
(10) "Instrumentality" refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter. This term includes regulatory agencies, chartered institutions and government-
owned or controlled corporations. 


xxxx

(12) "Chartered institution" refers to any agency organized or operating under a special charter, and
vested by law with functions relating to specific constitutional policies or objectives. This term
includes the state universities and colleges and the monetary authority of the State.

(13) "Government-owned or controlled corporation" refers to any agency organized as a stock or

non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or through its instrumentalities either
wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one
(51) per cent of its capital stock: Provided, That government-owned or controlled corporations may
be further categorized by the Department of the Budget, the Civil Service Commission, and the
Commission on Audit for purposes of the exercise and discharge of their respective powers,
functions and responsibilities with respect to such corporations.

Assuming for the sake of argument that the BSP ceases to be owned or controlled by the
government because of reduction of the number of representatives of the government in the BSP
Board, it does not follow that it also ceases to be a government instrumentality as it still retains all
the characteristics of the latter as an attached agency of the DECS under the Administrative Code.
Vesting corporate powers to an attached agency or instrumentality of the government is not
constitutionally prohibited and is allowed by the above-mentioned provisions of the Civil Code and
the 1987 Administrative Code.

Economic Viability and Ownership and Control Tests Inapplicable to Public Corporations

As presently constituted, the BSP still remains an instrumentality of the national government. It is a
public corporation created by law for a public purpose, attached to the DECS pursuant to its Charter
and the Administrative Code of 1987. It is not a private corporation which is required to be owned or
controlled by the government and be economically viable to justify its existence under a special law.

The dissent of Justice Carpio also submits that by recognizing "a new class of public corporation(s)"
created by special charter that will not be subject to the test of economic viability, the constitutional
provision will be circumvented.

However, a review of the Record of the 1986 Constitutional Convention reveals the intent of the
framers of the highest law of our land to distinguish between government corporations performing
governmental functions and corporations involved in business or proprietary functions:

THE PRESIDENT. Commissioner Foz is recognized.

MR. FOZ. Madam President, I support the proposal to insert "ECONOMIC VIABILITY" as one of the
grounds for organizing government corporations. x x x.

MR. OPLE. Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the test of
economic performance. We know what happened in the past. If a government corporation loses,
then it makes its claim upon the taxpayers’ money through new equity infusions from the
government and what is always invoked is the common good. x x x

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common good,"
this becomes a restraint on future enthusiasts for state capitalism to excuse themselves from the
responsibility of meeting the market test so that they become viable. x x x.

xxxx

THE PRESIDENT. Commissioner Quesada is recognized.

MS. QUESADA. Madam President, may we be clarified by the committee on what is meant by
economic viability?

THE PRESIDENT. Please proceed.

MR. MONSOD. Economic viability normally is determined by cost-benefit ratio that takes into
consideration all benefits, including economic external as well as internal benefits. These are what
they call externalities in economics, so that these are not strictly financial criteria. Economic viability
involves what we call economic returns or benefits of the country that are not quantifiable in financial
terms. x x x.

xxxx

MS. QUESADA. So, would this particular formulation now really limit the entry of government
corporations into activities engaged in by corporations?

MR. MONSOD. Yes, because it is also consistent with the economic philosophy that this
Commission approved – that there should be minimum government participation and intervention in
the economy.

MS. QUESDA. Sometimes this Commission would just refer to Congress to provide the particular
requirements when the government would get into corporations. But this time around, we specifically
mentioned economic viability. x x x.

MR. VILLEGAS. Commissioner Ople will restate the reason for his introducing that amendment.

MR. OPLE. I am obliged to repeat what I said earlier in moving for this particular amendment jointly
with Commissioner Foz. During the past three decades, there had been a proliferation of
government corporations, very few of which have succeeded, and many of which are now
earmarked by the Presidential Reorganization Commission for liquidation because they failed the
economic test. x x x.

xxxx

MS. QUESADA. But would not the Commissioner say that the reason why many of the government-
owned or controlled corporations failed to come up with the economic test is due to the management
of these corporations, and not the idea itself of government corporations? It is a problem of efficiency
and effectiveness of management of these corporations which could be remedied, not by eliminating
government corporations or the idea of getting into state-owned corporations, but improving
management which our technocrats should be able to do, given the training and the experience.

MR. OPLE. That is part of the economic viability, Madam President.

MS. QUESADA. So, is the Commissioner saying then that the Filipinos will benefit more if these
government-controlled corporations were given to private hands, and that there will be more goods
and services that will be affordable and within the reach of the ordinary citizens?

MR. OPLE. Yes. There is nothing here, Madam President, that will prevent the formation of a
government corporation in accordance with a special charter given by Congress. However, we are
raising the standard a little bit so that, in the future, corporations established by the government will
meet the test of the common good but within that framework we should also build a certain standard
of economic viability.

xxxx

THE PRESIDENT. Commissioner Padilla is recognized.

MR. PADILLA. This is an inquiry to the committee. With regard to corporations created by a special
charter for government-owned or controlled corporations, will these be in the pioneer fields or in
places where the private enterprise does not or cannot enter? Or is this so general that these
government corporations can compete with private corporations organized under a general law?

MR. MONSOD. Madam President, x x x. There are two types of government corporations – those
that are involved in performing governmental functions, like garbage disposal, Manila waterworks,
and so on; and those government corporations that are involved in business functions. As we said
earlier, there are two criteria that should be followed for corporations that want to go into business.
First is for government corporations to first prove that they can be efficient in the areas of their
proper functions. This is one of the problems now because they go into all kinds of activities but are
not even efficient in their proper functions. Secondly, they should not go into activities that the
private sector can do better.

MR. PADILLA. There is no question about corporations performing governmental functions or

functions that are impressed with public interest. But the question is with regard to matters that are
covered, perhaps not exhaustively, by private enterprise. It seems that under this provision the only
qualification is economic viability and common good, but shall government, through government-
controlled corporations, compete with private enterprise?

MR. MONSOD. No, Madam President. As we said, the government should not engage in activities
that private enterprise is engaged in and can do better. x x x.56 (Emphases supplied.)

Thus, the test of economic viability clearly does not apply to public corporations dealing with
governmental functions, to which category the BSP belongs. The discussion above conveys the
constitutional intent not to apply this constitutional ban on the creation of public corporations where
the economic viability test would be irrelevant. The said test would only apply if the corporation is
engaged in some economic activity or business function for the government.

It is undisputed that the BSP performs functions that are impressed with public interest. In fact,
during the consideration of the Senate Bill that eventually became Republic Act No. 7278, which
amended the BSP Charter, one of the bill’s sponsors, Senator Joey Lina, described the BSP as
follows:

Senator Lina. Yes, I can only think of two organizations involving the masses of our youth, Mr.
President, that should be given this kind of a privilege – the Boy Scouts of the Philippines and the
Girl Scouts of the Philippines. Outside of these two groups, I do not think there are other groups
similarly situated.

The Boy Scouts of the Philippines has a long history of providing value formation to our young, and
considering how huge the population of the young people is, at this point in time, and also
considering the importance of having an organization such as this that will inculcate moral
uprightness among the young people, and further considering that the development of these young
people at that tender age of seven to sixteen is vital in the development of the country producing
good citizens, I believe that we can make an exception of the Boy Scouting movement of the
Philippines from this general prohibition against providing tax exemption and privileges.57

Furthermore, this Court cannot agree with the dissenting opinion which equates the changes
introduced by Republic Act No. 7278 to the BSP Charter as clear manifestation of the intent of
Congress "to return the BSP to the private sector." It was not the intent of Congress in enacting
Republic Act No. 7278 to give up all interests in this basic youth organization, which has been its
partner in forming responsible citizens for decades.

In fact, as may be seen in the deliberation of the House Bills that eventually resulted to Republic Act
No. 7278, Congress worked closely with the BSP to rejuvenate the organization, to bring it back to
its former glory reached under its original charter, Commonwealth Act No. 111, and to correct the
perceived ills introduced by the amendments to its Charter under Presidential Decree No. 460. The
BSP suffered from low morale and decrease in number because the Secretaries of the different
departments in government who were too busy to attend the meetings of the BSP’s National
Executive Board ("the Board") sent representatives who, as it turned out, changed from meeting to
meeting. Thus, the Scouting Councils established in the provinces and cities were not in touch with
what was happening on the national level, but they were left to implement what was decided by the
Board.58

A portion of the legislators’ discussion is quoted below to clearly show their intent:

HON. DEL MAR. x x x I need not mention to you the value and the tremendous good that the Boy
Scout Movement has done not only for the youth in particular but for the country in general. And that
is why, if we look around, our past and present national leaders, prominent men in the various fields
of endeavor, public servants in government offices, and civic leaders in the communities all over the
land, and not only in our country but all over the world many if not most of them have at one time or
another been beneficiaries of the Scouting Movement. And so, it is along this line, Mr. Chairman,
that we would like to have the early approval of this measure if only to pay back what we owe much
to the Scouting Movement. Now, going to the meat of the matter, Mr. Chairman, if I may just – the
Scouting Movement was enacted into law in October 31, 1936 under Commonwealth Act No. 111. x
x x [W]e were acknowledged as the third biggest scouting organization in the world x x x. And to our
mind, Mr. Chairman, this erratic growth and this decrease in membership [number] is because of the
bad policy measures that were enunciated with the enactment or promulgation by the President
before of Presidential Decree No. 460 which we feel is the culprit of the ills that is flagging the Boy
Scout Movement today. And so, this is specifically what we are attacking, Mr. Chairman, the
disenfranchisement of the National Council in the election of the national board. x x x. And so, this is
what we would like to be appraised of by the officers of the Boy [Scouts] of the Philippines whom we
are also confident, have the best interest of the Boy Scout Movement at heart and it is in this spirit,
Mr. Chairman, that we see no impediment towards working together, the Boy Scout of the
Philippines officers working together with the House of Representatives in coming out with a
measure that will put back the vigor and enthusiasm of the Boy Scout Movement. x x x.59 (Emphasis
ours.)

The following is another excerpt from the discussion on the House version of the bill, in the
Committee on Government Enterprises:

HON. AQUINO: x x x Well, obviously, the two bills as well as the previous laws that have created the
Boy Scouts of the Philippines did not provide for any direct government support by way of
appropriation from the national budget to support the activities of this organization. The point here is,
and at the same time they have been subjected to a governmental intervention, which to their mind
has been inimical to the objectives and to the institution per se, that is why they are seeking
legislative fiat to restore back the original mandate that they had under Commonwealth Act 111.
Such having been the experience in the hands of government, meaning, there has been negative
interference on their part and inasmuch as their mandate is coming from a legislative fiat, then
shouldn’t it be, this rhetorical question, shouldn’t it be better for this organization to seek a mandate
from, let’s say, the government the Corporation Code of the Philippines and register with the SEC as
non-profit non-stock corporation so that government intervention could be very very minimal. Maybe
that’s a rhetorical question, they may or they may not answer, ano. I don’t know what would be the
benefit of a charter or a mandate being provided for by way of legislation versus a registration with
the SEC under the Corporation Code of the Philippines inasmuch as they don’t get anything from the
government anyway insofar as direct funding. In fact, the only thing that they got from government
was intervention in their affairs. Maybe we can solicit some commentary comments from the
resource persons. Incidentally, don’t take that as an objection, I’m not objecting. I’m all for the
objectives of these two bills. It just occurred to me that since you have had very bad experience in
the hands of government and you will always be open to such possible intervention even in the
future as long as you have a legislative mandate or your mandate or your charter coming from
legislative action.

xxxx

MR. ESCUDERO: Mr. Chairman, there may be a disadvantage if the Boy Scouts of the Philippines
will be required to register with the SEC. If we are registered with the SEC, there could be a danger
of proliferation of scout organization. Anybody can organize and then register with the SEC. If there
will be a proliferation of this, then the organization will lose control of the entire organization. Another
disadvantage, Mr. Chairman, anybody can file a complaint in the SEC against the Boy Scouts of the
Philippines and the SEC may suspend the operation or freeze the assets of the organization and
hamper the operation of the organization. I don’t know, Mr. Chairman, how you look at it but there
could be a danger for anybody filing a complaint against the organization in the SEC and the SEC
might suspend the registration permit of the organization and we will not be able to operate.

HON. AQUINO: Well, that I think would be a problem that will not be exclusive to corporations
registered with the SEC because even if you are government corporation, court action may be taken
against you in other judicial bodies because the SEC is simply another quasi-judicial body. But, I
think, the first point would be very interesting, the first point that you raised. In effect, what you are
saying is that with the legislative mandate creating your charter, in effect, you have been given some
sort of a franchise with this movement.

MR. ESCUDERO: Yes.

HON. AQUINO: Exclusive franchise of that movement?

MR. ESCUDERO: Yes.

HON. AQUINO: Well, that’s very well taken so I will proceed with other issues, Mr. Chairman. x x
x.60 (Emphases added.)

Therefore, even though the amended BSP charter did away with most of the governmental presence
in the BSP Board, this was done to more strongly promote the BSP’s objectives, which were not
supported under Presidential Decree No. 460. The BSP objectives, as pointed out earlier, are
consistent with the public purpose of the promotion of the well-being of the youth, the future leaders
of the country. The amendments were not done with the view of changing the character of the BSP
into a privatized corporation. The BSP remains an agency attached to a department of the
government, the DECS, and it was not at all stripped of its public character.

The ownership and control test is likewise irrelevant for a public corporation like the BSP. To
reiterate, the relationship of the BSP, an attached agency, to the government, through the DECS, is
defined in the Revised Administrative Code of 1987. The BSP meets the minimum statutory
requirement of an attached government agency as the DECS Secretary sits at the BSP Board ex
officio, thus facilitating the policy and program coordination between the BSP and the DECS.

Requisites for Declaration of Unconstitutionality Not Met in this Case

The dissenting opinion of Justice Carpio improperly raised the issue of unconstitutionality of certain
provisions of the BSP Charter. Even if the parties were asked to Comment on the validity of the BSP
charter by the Court, this alone does not comply with the requisites for judicial review, which were
clearly set forth in a recent case:

When questions of constitutional significance are raised, the Court can exercise its power of judicial
review only if the following requisites are present: (1) the existence of an actual and appropriate
case; (2) the existence of personal and substantial interest on the part of the party raising the
constitutional question; (3) recourse to judicial review is made at the earliest opportunity; and (4) the
constitutional question is the lis mota of the case.61(Emphasis added.)

Thus, when it comes to the exercise of the power of judicial review, the constitutional issue should
be the very lis mota, or threshold issue, of the case, and that it should be raised by either of the
parties. These requirements would be ignored under the dissent’s rather overreaching view of how
this case should have been decided. True, it was the Court that asked the parties to comment, but
the Court cannot be the one to raise a constitutional issue. Thus, the Court chooses to once more
exhibit restraint in the exercise of its power to pass upon the validity of a law.

Re: the COA’s Jurisdiction

Regarding the COA’s jurisdiction over the BSP, Section 8 of its amended charter allows the BSP to
receive contributions or donations from the government. Section 8 reads:

Section 8. Any donation or contribution which from time to time may be made to the Boy Scouts of
the Philippines by the Government or any of its subdivisions, branches, offices, agencies or
instrumentalities shall be expended by the Executive Board in pursuance of this Act. lawph!1

The sources of funds to maintain the BSP were identified before the House Committee on
Government Enterprises while the bill was being deliberated, and the pertinent portion of the
discussion is quoted below:
MR. ESCUDERO. Yes, Mr. Chairman. The question is the sources of funds of the organization.
First, Mr. Chairman, the Boy Scouts of the Philippines do not receive annual allotment from the
government. The organization has to raise its own funds through fund drives and fund campaigns or
fund raising activities. Aside from this, we have some revenue producing projects in the organization
that gives us funds to support the operation. x x x From time to time, Mr. Chairman, when we have
special activities we request for assistance or financial assistance from government agencies, from
private business and corporations, but this is only during special activities that the Boy Scouts of the
Philippines would conduct during the year. Otherwise, we have to raise our own funds to support the
organization.62

The nature of the funds of the BSP and the COA’s audit jurisdiction were likewise brought up in said
congressional deliberations, to wit:

HON. AQUINO: x x x Insofar as this organization being a government created organization, in fact, a
government corporation classified as such, are your funds or your finances subjected to the COA
audit?

MR. ESCUDERO: Mr. Chairman, we are not. Our funds is not subjected. We don’t fall under the
jurisdiction of the COA.

HON. AQUINO: All right, but before were you?

MR. ESCUDERO: No, Mr. Chairman.

MR. JESUS: May I? As historical backgrounder, Commonwealth Act 111 was written by then
Secretary Jorge Vargas and before and up to the middle of the Martial Law years, the BSP was
receiving a subsidy in the form of an annual… a one draw from the Sweepstakes. And, this was the
case also with the Girl Scouts at the Anti-TB, but then this was… and the Boy Scouts then because
of this funding partly from government was being subjected to audit in the contributions being made
in the part of the Sweepstakes. But this was removed later during the Martial Law years with the
creation of the Human Settlements Commission. So the situation right now is that the Boy Scouts
does not receive any funding from government, but then in the case of the local councils and this
legislative charter, so to speak, enables the local councils even the national headquarters in view of
the provisions in the existing law to receive donations from the government or any of its
instrumentalities, which would be difficult if the Boy Scouts is registered as a private corporation with
the Securities and Exchange Commission. Government bodies would be estopped from making
donations to the Boy Scouts, which at present is not the case because there is the Boy Scouts
charter, this Commonwealth Act 111 as amended by PD 463.

xxxx

HON. AMATONG: Mr. Chairman, in connection with that.

THE CHAIRMAN: Yeah, Gentleman from Zamboanga.

HON. AMATONG: There is no auditing being made because there’s no money put in the
organization, but how about donated funds to this organization? What are the remedies of the
donors of how will they know how their money are being spent?

MR. ESCUDERO: May I answer, Mr. Chairman?

THE CHAIRMAN: Yes, gentleman.

MR. ESCUDERO: The Boy Scouts of the Philippines has an external auditor and by the charter we
are required to submit a financial report at the end of each year to the National Executive Board. So
all the funds donated or otherwise is accounted for at the end of the year by our external auditor. In
this case the SGV.63

Historically, therefore, the BSP had been subjected to government audit in so far as public funds had
been infused thereto. However, this practice should not preclude the exercise of the audit jurisdiction
of COA, clearly set forth under the Constitution, which pertinently provides:

Section 2. (1) The Commission on Audit shall have the power, authority, and duty to examine, audit,
and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds
and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions,
agencies, or instrumentalities, including government-owned and controlled corporations with original
charters, and on a post-audit basis: (a) constitutional bodies, commissions and offices that have
been granted fiscal autonomy under this Constitution; (b) autonomous state colleges and
universities; (c) other government-owned or controlled corporations with original charters and their
subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or
indirectly, from or through the Government, which are required by law of the granting institution to
submit to such audit as a condition of subsidy or equity. x x x. 64

Since the BSP, under its amended charter, continues to be a public corporation or a government
instrumentality, we come to the inevitable conclusion that it is subject to the exercise by the COA of
its audit jurisdiction in the manner consistent with the provisions of the BSP Charter.

WHEREFORE, premises considered, the instant petition for prohibition is DISMISSED.

SO ORDERED.

G.R. No. 175352

DANTE V. LIBAN, REYNALDO M. BERNARDO, and SALVADOR M. VIARI, Petitioners,

vs.
RICHARD J. GORDON, Respondent.

DECISION

CARPIO, J.:

The Case

This is a petition to declare Senator Richard J. Gordon (respondent) as having forfeited his seat in
the Senate.

The Facts

Petitioners Dante V. Liban, Reynaldo M. Bernardo, and Salvador M. Viari (petitioners) filed with this
Court a Petition to Declare Richard J. Gordon as Having Forfeited His Seat in the Senate.
Petitioners are officers of the Board of Directors of the Quezon City Red Cross Chapter while
respondent is Chairman of the Philippine National Red Cross (PNRC) Board of Governors.
During respondent’s incumbency as a member of the Senate of the Philippines,1 he was elected
Chairman of the PNRC during the 23 February 2006 meeting of the PNRC Board of Governors.
Petitioners allege that by accepting the chairmanship of the PNRC Board of Governors, respondent
has ceased to be a member of the Senate as provided in Section 13, Article VI of the Constitution,
which reads:

SEC. 13. No Senator or Member of the House of Representatives may hold any other office or
employment in the Government, or any subdivision, agency, or instrumentality thereof, including
government-owned or controlled corporations or their subsidiaries, during his term without forfeiting
his seat. Neither shall he be appointed to any office which may have been created or the
emoluments thereof increased during the term for which he was elected.

Petitioners cite Camporedondo v. NLRC,2 which held that the PNRC is a government-owned or
controlled corporation. Petitioners claim that in accepting and holding the position of Chairman of the
PNRC Board of Governors, respondent has automatically forfeited his seat in the Senate, pursuant
to Flores v. Drilon,3 which held that incumbent national legislators lose their elective posts upon their
appointment to another government office.

In his Comment, respondent asserts that petitioners have no standing to file this petition which
appears to be an action for quo warranto, since the petition alleges that respondent committed an
act which, by provision of law, constitutes a ground for forfeiture of his public office. Petitioners do
not claim to be entitled to the Senate office of respondent. Under Section 5, Rule 66 of the Rules of
Civil Procedure, only a person claiming to be entitled to a public office usurped or unlawfully held by
another may bring an action for quo warranto in his own name. If the petition is one for quo warranto,
it is already barred by prescription since under Section 11, Rule 66 of the Rules of Civil Procedure,
the action should be commenced within one year after the cause of the public officer’s forfeiture of
office. In this case, respondent has been working as a Red Cross volunteer for the past 40 years.
Respondent was already Chairman of the PNRC Board of Governors when he was elected Senator
in May 2004, having been elected Chairman in 2003 and re-elected in 2005.

Respondent contends that even if the present petition is treated as a taxpayer’s suit, petitioners
cannot be allowed to raise a constitutional question in the absence of any claim that they suffered
some actual damage or threatened injury as a result of the allegedly illegal act of respondent.
Furthermore, taxpayers are allowed to sue only when there is a claim of illegal disbursement of
public funds, or that public money is being diverted to any improper purpose, or where petitioners
seek to restrain respondent from enforcing an invalid law that results in wastage of public funds.

Respondent also maintains that if the petition is treated as one for declaratory relief, this Court would
have no jurisdiction since original jurisdiction for declaratory relief lies with the Regional Trial Court.

Respondent further insists that the PNRC is not a government-owned or controlled corporation and
that the prohibition under Section 13, Article VI of the Constitution does not apply in the present case
since volunteer service to the PNRC is neither an office nor an employment.

In their Reply, petitioners claim that their petition is neither an action for quo warranto nor an action
for declaratory relief. Petitioners maintain that the present petition is a taxpayer’s suit questioning the
unlawful disbursement of funds, considering that respondent has been drawing his salaries and
other compensation as a Senator even if he is no longer entitled to his office. Petitioners point out
that this Court has jurisdiction over this petition since it involves a legal or constitutional issue which
is of transcendental importance.

The Issues
Petitioners raise the following issues:

1. Whether the Philippine National Red Cross (PNRC) is a government- owned or controlled
corporation;

2. Whether Section 13, Article VI of the Philippine Constitution applies to the case of
respondent who is Chairman of the PNRC and at the same time a Member of the Senate;

3. Whether respondent should be automatically removed as a Senator pursuant to Section

13, Article VI of the Philippine Constitution; and

4. Whether petitioners may legally institute this petition against respondent.4

The substantial issue boils down to whether the office of the PNRC Chairman is a government office
or an office in a government-owned or controlled corporation for purposes of the prohibition in
Section 13, Article VI of the Constitution.

The Court’s Ruling

We find the petition without merit.

Petitioners Have No Standing to File this Petition

A careful reading of the petition reveals that it is an action for quo warranto. Section 1, Rule 66 of the
Rules of Court provides:

Section 1. Action by Government against individuals. – An action for the usurpation of a public office,
position or franchise may be commenced by a verified petition brought in the name of the Republic
of the Philippines against:

(a) A person who usurps, intrudes into, or unlawfully holds or exercises a public office,
position or franchise;

(b) A public officer who does or suffers an act which by provision of law, constitutes a ground
for the forfeiture of his office; or

(c) An association which acts as a corporation within the Philippines without being legally
incorporated or without lawful authority so to act. (Emphasis supplied)

Petitioners allege in their petition that:

4. Respondent became the Chairman of the PNRC when he was elected as such during the
First Regular Luncheon-Meeting of the Board of Governors of the PNRC held on February
23, 2006, the minutes of which is hereto attached and made integral part hereof as Annex
"A."

5. Respondent was elected as Chairman of the PNRC Board of Governors, during his
incumbency as a Member of the House of Senate of the Congress of the Philippines, having
been elected as such during the national elections last May 2004.
 6. Since his election as Chairman of the PNRC Board of Governors, which position he duly
accepted, respondent has been exercising the powers and discharging the functions and
duties of said office, despite the fact that he is still a senator.

7. It is the respectful submission of the petitioner[s] that by accepting the chairmanship of the
Board of Governors of the PNRC, respondent has ceased to be a Member of the House of
Senate as provided in Section 13, Article VI of the Philippine Constitution, x x x

xxxx

10. It is respectfully submitted that in accepting the position of Chairman of the Board of
Governors of the PNRC on February 23, 2006, respondent has automatically forfeited his
seat in the House of Senate and, therefore, has long ceased to be a Senator, pursuant to the
ruling of this Honorable Court in the case of FLORES, ET AL. VS. DRILON AND GORDON,
G.R. No. 104732, x x x

11. Despite the fact that he is no longer a senator, respondent continues to act as such and
still performs the powers, functions and duties of a senator, contrary to the constitution, law
and jurisprudence.

12. Unless restrained, therefore, respondent will continue to falsely act and represent himself
as a senator or member of the House of Senate, collecting the salaries, emoluments and
other compensations, benefits and privileges appertaining and due only to the legitimate
senators, to the damage, great and irreparable injury of the Government and the Filipino
people.5 (Emphasis supplied)

Thus, petitioners are alleging that by accepting the position of Chairman of the PNRC Board of
Governors, respondent has automatically forfeited his seat in the Senate. In short, petitioners filed
an action for usurpation of public office against respondent, a public officer who allegedly committed
an act which constitutes a ground for the forfeiture of his public office. Clearly, such an action is for
quo warranto, specifically under Section 1(b), Rule 66 of the Rules of Court.

Quo warranto is generally commenced by the Government as the proper party plaintiff. However,
under Section 5, Rule 66 of the Rules of Court, an individual may commence such an action if he
claims to be entitled to the public office allegedly usurped by another, in which case he can bring the
action in his own name. The person instituting quo warranto proceedings in his own behalf must
claim and be able to show that he is entitled to the office in dispute, otherwise the action may be
dismissed at any stage.6 In the present case, petitioners do not claim to be entitled to the Senate
office of respondent. Clearly, petitioners have no standing to file the present petition.

Even if the Court disregards the infirmities of the petition and treats it as a taxpayer’s suit, the
petition would still fail on the merits.

PNRC is a Private Organization Performing Public Functions

On 22 March 1947, President Manuel A. Roxas signed Republic Act No. 95,7 otherwise known as
the PNRC Charter. The PNRC is a non-profit, donor-funded, voluntary, humanitarian organization,
whose mission is to bring timely, effective, and compassionate humanitarian assistance for the most
vulnerable without consideration of nationality, race, religion, gender, social status, or political
affiliation.8 The PNRC provides six major services: Blood Services, Disaster Management, Safety
Services, Community Health and Nursing, Social Services and Voluntary Service.9
The Republic of the Philippines, adhering to the Geneva Conventions, established the PNRC as a
voluntary organization for the purpose contemplated in the Geneva Convention of 27 July
1929.10 The Whereas clauses of the PNRC Charter read:

WHEREAS, there was developed at Geneva, Switzerland, on August 22, 1864, a convention by
which the nations of the world were invited to join together in diminishing, so far lies within their
power, the evils inherent in war;

WHEREAS, more than sixty nations of the world have ratified or adhered to the subsequent revision
of said convention, namely the "Convention of Geneva of July 29 [sic], 1929 for the Amelioration of
the Condition of the Wounded and Sick of Armies in the Field" (referred to in this Charter as the
Geneva Red Cross Convention);

WHEREAS, the Geneva Red Cross Convention envisages the establishment in each country of a
voluntary organization to assist in caring for the wounded and sick of the armed forces and to furnish
supplies for that purpose;

WHEREAS, the Republic of the Philippines became an independent nation on July 4, 1946 and
proclaimed its adherence to the Geneva Red Cross Convention on February 14, 1947, and by that
action indicated its desire to participate with the nations of the world in mitigating the suffering
caused by war and to establish in the Philippines a voluntary organization for that purpose as
contemplated by the Geneva Red Cross Convention;

WHEREAS, there existed in the Philippines since 1917 a Charter of the American National Red
Cross which must be terminated in view of the independence of the Philippines; and

WHEREAS, the volunteer organizations established in the other countries which have ratified or
adhered to the Geneva Red Cross Convention assist in promoting the health and welfare of their
people in peace and in war, and through their mutual assistance and cooperation directly and
through their international organizations promote better understanding and sympathy among the
peoples of the world. (Emphasis supplied)

The PNRC is a member National Society of the International Red Cross and Red Crescent
Movement (Movement), which is composed of the International Committee of the Red Cross (ICRC),
the International Federation of Red Cross and Red Crescent Societies (International Federation),
and the National Red Cross and Red Crescent Societies (National Societies). The Movement is
united and guided by its seven Fundamental Principles:

1. HUMANITY – The International Red Cross and Red Crescent Movement, born of a desire
to bring assistance without discrimination to the wounded on the battlefield, endeavors, in its
international and national capacity, to prevent and alleviate human suffering wherever it may
be found. Its purpose is to protect life and health and to ensure respect for the human being.
It promotes mutual understanding, friendship, cooperation and lasting peace amongst all
peoples.

2. IMPARTIALITY – It makes no discrimination as to nationality, race, religious beliefs, class

or political opinions. It endeavors to relieve the suffering of individuals, being guided solely
by their needs, and to give priority to the most urgent cases of distress.

3. NEUTRALITY – In order to continue to enjoy the confidence of all, the Movement may not
take sides in hostilities or engage at any time in controversies of a political, racial, religious or
ideological nature.
 4. INDEPENDENCE – The Movement is independent. The National Societies, while
auxiliaries in the humanitarian services of their governments and subject to the laws of their
respective countries, must always maintain their autonomy so that they may be able at all
times to act in accordance with the principles of the Movement.

5. VOLUNTARY SERVICE – It is a voluntary relief movement not prompted in any manner

by desire for gain.

6. UNITY – There can be only one Red Cross or one Red Crescent Society in any one
country. It must be open to all. It must carry on its humanitarian work throughout its territory.

7. UNIVERSALITY – The International Red Cross and Red Crescent Movement, in which all
Societies have equal status and share equal responsibilities and duties in helping each
other, is worldwide. (Emphasis supplied)

The Fundamental Principles provide a universal standard of reference for all members of the
Movement. The PNRC, as a member National Society of the Movement, has the duty to uphold the
Fundamental Principles and ideals of the Movement. In order to be recognized as a National
Society, the PNRC has to be autonomous and must operate in conformity with the Fundamental
Principles of the Movement.11

The reason for this autonomy is fundamental. To be accepted by warring belligerents as neutral
workers during international or internal armed conflicts, the PNRC volunteers must not be seen as
belonging to any side of the armed conflict. In the Philippines where there is a communist insurgency
and a Muslim separatist rebellion, the PNRC cannot be seen as government-owned or controlled,
and neither can the PNRC volunteers be identified as government personnel or as instruments of
government policy. Otherwise, the insurgents or separatists will treat PNRC volunteers as enemies
when the volunteers tend to the wounded in the battlefield or the displaced civilians in conflict areas.

Thus, the PNRC must not only be, but must also be seen to be, autonomous, neutral and
independent in order to conduct its activities in accordance with the Fundamental Principles. The
PNRC must not appear to be an instrument or agency that implements government policy;
otherwise, it cannot merit the trust of all and cannot effectively carry out its mission as a National
Red Cross Society.12 It is imperative that the PNRC must be autonomous, neutral, and independent
in relation to the State.

To ensure and maintain its autonomy, neutrality, and independence, the PNRC cannot be owned or
controlled by the government. Indeed, the Philippine government does not own the PNRC. The
PNRC does not have government assets and does not receive any appropriation from the Philippine
Congress.13 The PNRC is financed primarily by contributions from private individuals and private
entities obtained through solicitation campaigns organized by its Board of Governors, as provided
under Section 11 of the PNRC Charter:

SECTION 11. As a national voluntary organization, the Philippine National Red Cross shall be
financed primarily by contributions obtained through solicitation campaigns throughout the year
which shall be organized by the Board of Governors and conducted by the Chapters in their
respective jurisdictions. These fund raising campaigns shall be conducted independently of other
fund drives by other organizations. (Emphasis supplied)

The government does not control the PNRC. Under the PNRC Charter, as amended, only six of the
thirty members of the PNRC Board of Governors are appointed by the President of the Philippines.
Thus, twenty-four members, or four-fifths (4/5), of the PNRC Board of Governors are not appointed
by the President. Section 6 of the PNRC Charter, as amended, provides:

SECTION 6. The governing powers and authority shall be vested in a Board of Governors composed
of thirty members, six of whom shall be appointed by the President of the Philippines, eighteen shall
be elected by chapter delegates in biennial conventions and the remaining six shall be selected by
the twenty-four members of the Board already chosen. x x x.

Thus, of the twenty-four members of the PNRC Board, eighteen are elected by the chapter
delegates of the PNRC, and six are elected by the twenty-four members already chosen — a select
group where the private sector members have three-fourths majority. Clearly, an overwhelming
majority of four-fifths of the PNRC Board are elected or chosen by the private sector members of the
PNRC.

The PNRC Board of Governors, which exercises all corporate powers of the PNRC, elects the
PNRC Chairman and all other officers of the PNRC. The incumbent Chairman of PNRC, respondent
Senator Gordon, was elected, as all PNRC Chairmen are elected, by a private sector-controlled
PNRC Board four-fifths of whom are private sector members of the PNRC. The PNRC Chairman is
not appointed by the President or by any subordinate government official.

Under Section 16, Article VII of the Constitution,14 the President appoints all officials and employees
in the Executive branch whose appointments are vested in the President by the Constitution or by
law. The President also appoints those whose appointments are not otherwise provided by law.
Under this Section 16, the law may also authorize the "heads of departments, agencies,
commissions, or boards" to appoint officers lower in rank than such heads of departments, agencies,
commissions or boards.15 In Rufino v. Endriga,16 the Court explained appointments under Section 16
in this wise:

Under Section 16, Article VII of the 1987 Constitution, the President appoints three groups of
officers. The first group refers to the heads of the Executive departments, ambassadors, other public
ministers and consuls, officers of the armed forces from the rank of colonel or naval captain, and
other officers whose appointments are vested in the President by the Constitution. The second
group refers to those whom the President may be authorized by law to appoint. The third group
refers to all other officers of the Government whose appointments are not otherwise provided by law.

Under the same Section 16, there is a fourth group of lower-ranked officers whose appointments
Congress may by law vest in the heads of departments, agencies, commissions, or boards. x x x

xxx

In a department in the Executive branch, the head is the Secretary. The law may not authorize the
Undersecretary, acting as such Undersecretary, to appoint lower-ranked officers in the Executive
department. In an agency, the power is vested in the head of the agency for it would be
preposterous to vest it in the agency itself. In a commission, the head is the chairperson of the
commission. In a board, the head is also the chairperson of the board. In the last three situations,
the law may not also authorize officers other than the heads of the agency, commission, or board to
appoint lower-ranked officers.

xxx
The Constitution authorizes Congress to vest the power to appoint lower-ranked officers specifically
in the "heads" of the specified offices, and in no other person. The word "heads" refers to the
chairpersons of the commissions or boards and not to their members, for several reasons.

The President does not appoint the Chairman of the PNRC. Neither does the head of any
department, agency, commission or board appoint the PNRC Chairman. Thus, the PNRC Chairman
is not an official or employee of the Executive branch since his appointment does not fall under
Section 16, Article VII of the Constitution. Certainly, the PNRC Chairman is not an official or
employee of the Judiciary or Legislature. This leads us to the obvious conclusion that the PNRC
Chairman is not an official or employee of the Philippine Government. Not being a government
official or employee, the PNRC Chairman, as such, does not hold a government office or
employment.

Under Section 17, Article VII of the Constitution,17 the President exercises control
over all government offices in the Executive branch. If an office is legally not under the control of
the President, then such office is not part of the Executive branch. In Rufino v. Endriga,18 the
Court explained the President’s power of control over all government offices as follows:

Every government office, entity, or agency must fall under the Executive, Legislative, or Judicial
branches, or must belong to one of the independent constitutional bodies, or must be a quasi-judicial
body or local government unit. Otherwise, such government office, entity, or agency has no legal
and constitutional basis for its existence.

The CCP does not fall under the Legislative or Judicial branches of government. The CCP is also
not one of the independent constitutional bodies. Neither is the CCP a quasi-judicial body nor a local
government unit. Thus, the CCP must fall under the Executive branch. Under the Revised
Administrative Code of 1987, any agency "not placed by law or order creating them under any
specific department" falls "under the Office of the President."

Since the President exercises control over "all the executive departments, bureaus, and offices," the
President necessarily exercises control over the CCP which is an office in the Executive branch. In
mandating that the President "shall have control of all executive . . . offices," Section 17, Article VII of
the 1987 Constitution does not exempt any executive office — one performing executive functions
outside of the independent constitutional bodies — from the President’s power of control. There is no
dispute that the CCP performs executive, and not legislative, judicial, or quasi-judicial functions.

The President’s power of control applies to the acts or decisions of all officers in the Executive
branch. This is true whether such officers are appointed by the President or by heads of
departments, agencies, commissions, or boards. The power of control means the power to revise or
reverse the acts or decisions of a subordinate officer involving the exercise of discretion.

In short, the President sits at the apex of the Executive branch, and exercises "control of all the
executive departments, bureaus, and offices." There can be no instance under the Constitution
where an officer of the Executive branch is outside the control of the President. The Executive
branch is unitary since there is only one President vested with executive power exercising control
over the entire Executive branch. Any office in the Executive branch that is not under the control of
the President is a lost command whose existence is without any legal or constitutional basis.
(Emphasis supplied)

An overwhelming four-fifths majority of the PNRC Board are private sector individuals elected to the
PNRC Board by the private sector members of the PNRC. The PNRC Board exercises all corporate
powers of the PNRC. The PNRC is controlled by private sector individuals. Decisions or actions of
the PNRC Board are not reviewable by the President. The President cannot reverse or modify the
decisions or actions of the PNRC Board. Neither can the President reverse or modify the decisions
or actions of the PNRC Chairman. It is the PNRC Board that can review, reverse or modify the
decisions or actions of the PNRC Chairman. This proves again that the office of the PNRC Chairman
is a private office, not a government office.
1avv phi 1

Although the State is often represented in the governing bodies of a National Society, this can be
justified by the need for proper coordination with the public authorities, and the government
representatives may take part in decision-making within a National Society. However, the freely-
elected representatives of a National Society’s active members must remain in a large majority in a
National Society’s governing bodies.19

The PNRC is not government-owned but privately owned. The vast majority of the thousands of
PNRC members are private individuals, including students. Under the PNRC Charter, those who
contribute to the annual fund campaign of the PNRC are entitled to membership in the PNRC for one
year. Thus, any one between 6 and 65 years of age can be a PNRC member for one year upon
contributing ₱35, ₱100, ₱300, ₱500 or ₱1,000 for the year.20 Even foreigners, whether residents or
not, can be members of the PNRC. Section 5 of the PNRC Charter, as amended by Presidential
Decree No. 1264,21 reads:

SEC. 5. Membership in the Philippine National Red Cross shall be open to the entire population in
the Philippines regardless of citizenship. Any contribution to the Philippine National Red Cross
Annual Fund Campaign shall entitle the contributor to membership for one year and said contribution
shall be deductible in full for taxation purposes.

Thus, the PNRC is a privately owned, privately funded, and privately run charitable organization. The
PNRC is not a government-owned or controlled corporation.

Petitioners anchor their petition on the 1999 case of Camporedondo v. NLRC,22 which ruled that the
PNRC is a government-owned or controlled corporation. In ruling that the PNRC is a government-
owned or controlled corporation, the simple test used was whether the corporation was created by
its own special charter for the exercise of a public function or by incorporation under the general
corporation law. Since the PNRC was created under a special charter, the Court then ruled that it is
a government corporation. However, the Camporedondo ruling failed to consider the definition of a
government-owned or controlled corporation as provided under Section 2(13) of the Introductory
Provisions of the Administrative Code of 1987:

SEC. 2. General Terms Defined. – x x x

(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-
stock corporation, vested with functions relating to public needs whether governmental or proprietary
in nature, and owned by the Government directly or through its instrumentalities either wholly, or
where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent
of its capital stock: Provided, That government-owned or controlled corporations may be further
categorized by the Department of the Budget, the Civil Service Commission, and the Commission on
Audit for purposes of the exercise and discharge of their respective powers, functions and
responsibilities with respect to such corporations.(Boldfacing and underscoring supplied)

A government-owned or controlled corporation must be owned by the government, and in the case
of a stock corporation, at least a majority of its capital stock must be owned by the government. In
the case of a non-stock corporation, by analogy at least a majority of the members must be
government officials holding such membership by appointment or designation by the government.
Under this criterion, and as discussed earlier, the government does not own or control PNRC.

The PNRC Charter is Violative of the Constitutional Proscription against the Creation of Private
Corporations by Special Law

The 1935 Constitution, as amended, was in force when the PNRC was created by special charter on
22 March 1947. Section 7, Article XIV of the 1935 Constitution, as amended, reads:

SEC. 7. The Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations, unless such corporations are owned or controlled by the
Government or any subdivision or instrumentality thereof.

The subsequent 1973 and 1987 Constitutions contain similar provisions prohibiting Congress from
creating private corporations except by general law. Section 1 of the PNRC Charter, as amended,
creates the PNRC as a "body corporate and politic," thus:

SECTION 1. There is hereby created in the Republic of the Philippines a body corporate and politic
to be the voluntary organization officially designated to assist the Republic of the Philippines in
discharging the obligations set forth in the Geneva Conventions and to perform such other duties as
are inherent upon a National Red Cross Society. The national headquarters of this Corporation shall
be located in Metropolitan Manila. (Emphasis supplied)

In Feliciano v. Commission on Audit,23 the Court explained the constitutional provision prohibiting
Congress from creating private corporations in this wise:

We begin by explaining the general framework under the fundamental law. The Constitution
recognizes two classes of corporations. The first refers to private corporations created under a
general law. The second refers to government-owned or controlled corporations created by special
charters. Section 16, Article XII of the Constitution provides:

Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations. Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good and subject to the test of
economic viability.

The Constitution emphatically prohibits the creation of private corporations except by general law
applicable to all citizens. The purpose of this constitutional provision is to ban private corporations
created by special charters, which historically gave certain individuals, families or groups special
privileges denied to other citizens.

In short, Congress cannot enact a law creating a private corporation with a special charter. Such
legislation would be unconstitutional. Private corporations may exist only under a general law. If the
corporation is private, it must necessarily exist under a general law. Stated differently, only
corporations created under a general law can qualify as private corporations. Under existing laws,
the general law is the Corporation Code, except that the Cooperative Code governs the
incorporation of cooperatives.

The Constitution authorizes Congress to create government-owned or controlled corporations

through special charters. Since private corporations cannot have special charters, it follows that
Congress can create corporations with special charters only if such corporations are government-
owned or controlled.24 (Emphasis supplied)

In Feliciano, the Court held that the Local Water Districts are government-owned or controlled
corporations since they exist by virtue of Presidential Decree No. 198, which constitutes their special
charter. The seed capital assets of the Local Water Districts, such as waterworks and sewerage
facilities, were public property which were managed, operated by or under the control of the city,
municipality or province before the assets were transferred to the Local Water Districts. The Local
Water Districts also receive subsidies and loans from the Local Water Utilities Administration
(LWUA). In fact, under the 2009 General Appropriations Act,25 the LWUA has a budget amounting to
₱400,000,000 for its subsidy requirements.26 There is no private capital invested in the Local
Water Districts.The capital assets and operating funds of the Local Water Districts all come from
the government, either through transfer of assets, loans, subsidies or the income from such assets
or funds.

The government also controls the Local Water Districts because the municipal or city mayor, or the
provincial governor, appoints all the board directors of the Local Water Districts. Furthermore, the
board directors and other personnel of the Local Water Districts are government employees subject
to civil service laws and anti-graft laws. Clearly, the Local Water Districts are considered
government-owned or controlled corporations not only because of their creation by special charter
but also because the government in fact owns and controls the Local Water Districts.

Just like the Local Water Districts, the PNRC was created through a special charter. However, unlike
the Local Water Districts, the elements of government ownership and control are clearly lacking in
the PNRC. Thus, although the PNRC is created by a special charter, it cannot be considered a
government-owned or controlled corporation in the absence of the essential elements of ownership
and control by the government. In creating the PNRC as a corporate entity, Congress was in fact
creating a private corporation. However, the constitutional prohibition against the creation of private
corporations by special charters provides no exception even for non-profit or charitable corporations.
Consequently, the PNRC Charter, insofar as it creates the PNRC as a private corporation and grants
it corporate powers,27 is void for being unconstitutional. Thus, Sections
1,28 2,29 3,30 4(a),31 5,32 6,33 7,34 8,35 9,3610,37 11,38 12,39 and 1340 of the PNRC Charter, as amended,
are void.

The other provisions41 of the PNRC Charter remain valid as they can be considered as a recognition
by the State that the unincorporated PNRC is the local National Society of the International Red
Cross and Red Crescent Movement, and thus entitled to the benefits, exemptions and privileges set
forth in the PNRC Charter. The other provisions of the PNRC Charter implement the Philippine
Government’s treaty obligations under Article 4(5) of the Statutes of the International Red Cross and
Red Crescent Movement, which provides that to be recognized as a National Society, the Society
must be "duly recognized by the legal government of its country on the basis of the Geneva
Conventions and of the national legislation as a voluntary aid society, auxiliary to the public
authorities in the humanitarian field."

In sum, we hold that the office of the PNRC Chairman is not a government office or an office in a
government-owned or controlled corporation for purposes of the prohibition in Section 13, Article VI
of the 1987 Constitution. However, since the PNRC Charter is void insofar as it creates the PNRC as
a private corporation, the PNRC should incorporate under the Corporation Code and register with
the Securities and Exchange Commission if it wants to be a private corporation.

WHEREFORE, we declare that the office of the Chairman of the Philippine National Red Cross is
not a government office or an office in a government-owned or controlled corporation for purposes of
the prohibition in Section 13, Article VI of the 1987 Constitution. We also declare that Sections 1, 2,
3, 4(a), 5, 6, 7, 8, 9, 10, 11, 12, and 13 of the Charter of the Philippine National Red Cross, or
Republic Act No. 95, as amended by Presidential Decree Nos. 1264 and 1643, are VOID because
they create the PNRC as a private corporation or grant it corporate powers.

SO ORDERED.

G.R. No. 136374 February 9, 2000

FRANCISCA S. BALUYOT, petitioner,

vs.
PAUL E. HOLGANZA and the OFFICE OF THE OMBUDSMAN (VISAYAS) represented by its
Deputy Ombudsman for the Visayas ARTURO C. MOJICA, Director VIRGINIA PALANCA-
SANTIAGO, and Graft Investigation Officer I ANNA MARIE P. MILITANTE, respondents.

DE LEON, JR., J.:

Before us is a special civil action for certiorari, seeking the reversal of the Orders dated August 21,
1998 and October 28, 1998 issued by the Office of the Ombudsman, which denied petitioner's
motion to dismiss and motion for reconsideration, respectively. 1âwphi 1.nêt

The facts are:

During a spot audit conducted on March 21, 1977 by a team of auditors from the Philippine National
Red Cross (PNRC) headquarters, a cash shortage of P154,350.13 was discovered in the funds of its
Bohol chapter. The chapter administrator, petitioner Francisca S. Baluyot, was held accountable for
the shortage. Thereafter, on January 8, 1998, private respondent Paul E. Holganza, in his capacity
as a member of the board of directors of the Bohol chapter, filed an affidavit-complaint1 before the
Office of the Ombudsman charging petitioner of malversation under Article 217 of the Revised Penal
Code. The complaint was docketed as OMB-VIS-CRIM-98-0022. However, upon recommendation
by respondent Anna Marie P. Militante, Graft Investigation Officer I, an administrative docket for
dishonesty was also opened against petitioner; hence, OMB-VIS-ADM-98-0063.2

On February 6, 1998, public respondent issued an Order3 requiring petitioner to file her counter-
affidavit to the charges of malversation and dishonesty within ten days from notice, with a warning
that her failure to comply would be construed as a waiver on her part to refute the charges, and that
the case would be resolved based on the evidence on record. On March 14, 1998, petitioner filed
her counter-affidavit,4 raising principally the defense that public respondent had no jurisdiction over
the controversy. She argued that the Ombudsman had authority only over government-owned or
controlled corporations, which the PNRC was not, or so she claimed.

On August 21, 1998, public respondent issued the first assailed Order5 denying petitioner's motion to
dismiss. It further scheduled a clarificatory hearing on the criminal aspect of the complaint and a
preliminary conference on its administrative aspect on September 2, 1998. Petitioner received the
order on August 26, 1998 and she filed a motion for reconsideration6 the next day.

On October 28, 1998, public respondent issued the second assailed Order7 denying petitioner's
motion for reconsideration. Hence, this recourse.

We dismiss the petition.

Petitioner contends that the Ombudsman has no jurisdiction over the subject matter of the
controversy since the PNRC is allegedly a private voluntary organization. The following
circumstances, she insists, are indicative of the private character of the organization: (1) the PNRC
does not receive any budgetary support from the government, and that all money given to it by the
latter and its instrumentalities become private funds of the organization; (2) funds for the payment of
personnel's salaries and other emoluments come from yearly fund campaigns, private contributions
and rentals from its properties; and (3) it is not audited by the Commission on Audit. Petitioner states
that the PNRC falls under the International Federation of Red Cross, a Switzerland-based
organization, and that the power to discipline employees accused of misconduct, malfeasance, or
immorality belongs to the PNRC Secretary General by virtue of Section "G", Article IX of its by-
laws.8 She threatens that "to classify the PNRC as a government-owned or controlled corporation
would create a dangerous precedent as it would lose its neutrality, independence and impartiality . . .
.9

Practically the same issue was addressed in Camporedondo v. National Labor Relations
Commission, et. al.,10where an almost identical set of facts obtained. Petitioner therein was the
administrator of the Surigao del Norte chapter of the PNRC. An audit conducted by a field auditor
revealed a shortage in the chapter funds in the sum of P109,000.00. When required to restitute the
amount of P135,927.78, petitioner therein instead applied for early retirement, which was denied by
the Secretary General of the PNRC. Subsequently, the petitioner filed a complaint for illegal
dismissal and damages against PNRC before the National Labor Relations Commission. In turn,
PNRC moved to dismiss the complaint on the ground of lack of jurisdiction, averring that PNRC was
a government corporation whose employees are embraced by civil service regulation. The labor
arbiter dismissed the complaint, and the Commission sustained his order. The petitioner assailed the
dismissal of his complaint via a petition for certiorari, contending that the PNRC is a private
organization and not a government-owned or controlled corporation. In dismissing the petition, we
ruled thus:

Resolving the issue set out in the opening paragraph of this opinion, we rule that the
Philippine National Red Cross (PNRC) is a government owned and controlled corporation,
with an original charter under Republic Act No. 95, as amended. The test to determine
whether a corporation is government owned or controlled, or private in nature is simple. Is it
created by its own charter for the exercise of a public function, or by incorporation under the
general corporation law? Those with special charters are government corporations subject to
its provisions, and its employees are under the jurisdiction of the Civil Service Commission,
and are compulsory members of the Government Service Insurance System. The PNRC was
not "impliedly converted to a private corporation" simply because its charter was amended to
vest in it the authority to secure loans, be exempted from payment of all duties, taxes, fees
and other charges of all kinds on all importations and purchases for its exclusive use, on
donations for its disaster relief work and other services and in its benefits and fund raising
drives, and be allotted one lottery draw a year by the Philippine Charity Sweepstakes Office
for the support of its disaster relief operation in addition to its existing lottery draws for blood
program.

Clearly then, public respondent has jurisdiction over the matter, pursuant to Section 13, of Republic
Act No. 6770, otherwise known as "The Ombudsman Act of 1989", to wit:

Sec. 13. Mandate. — The Ombudsman and his Deputies, as protectors of the people, shall
act promptly on complaints filed in any form or manner against officers or employees of the
Government, or of any subdivision, agency or instrumentality thereof, including government-
owned or controlled corporations, and enforce their administrative, civil and criminal liability
in ever case where the evidence warrants in order to promote efficient service by the
Government to the people.11
WHEREFORE, the petition for certiorari is hereby DISMISSED. Costs against petitioner.

SO ORDERED. 1âw phi 1.nêt

G. R. No. 155027 February 28, 2006

THE VETERANS FEDERATION OF THE PHILIPPINES represented by Esmeraldo R.

Acorda, Petitioner,
vs.
Hon. ANGELO T. REYES in his capacity as Secretary of National Defense; and Hon.
EDGARDO E. BATENGA in his capacity as Undersecretary for Civil Relations and
Administration of the Department of National Defense, Respondents.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Certiorari with Prohibition under Rule 65 of the 1997 Rules of Civil Procedure,
with a prayer to declare as void Department Circular No. 04 of the Department of National Defense
(DND), dated 10 June 2002.

Petitioner in this case is the Veterans Federation of the Philippines (VFP), a corporate body
organized under Republic Act No. 2640, dated 18 June 1960, as amended, and duly registered with
the Securities and Exchange Commission. Respondent Angelo T. Reyes was the Secretary of
National Defense (DND Secretary) who issued the assailed Department Circular No. 04, dated 10
June 2002. Respondent Edgardo E. Batenga was the DND Undersecretary for Civil Relations and
Administration who was tasked by the respondent DND Secretary to conduct an extensive
management audit of the records of petitioner.

The factual and procedural antecedents of this case are as follows:

Petitioner VFP was created under Rep. Act No. 2640,1 a statute approved on 18 June 1960.

On 15 April 2002, petitioner’s incumbent president received a letter dated 13 April 2002 which reads:

Col. Emmanuel V. De Ocampo (Ret.)

President

Veterans Federation of the Philippines

Makati, Metro Manila

Dear Col. De Ocampo:

Please be informed that during the preparation of my briefing before the Cabinet and the President
last March 9, 2002, we came across some legal bases which tended to show that there is an
organizational and management relationship between Veterans Federation of the Philippines and
the Philippine Veterans Bank which for many years have been inadvertently overlooked.
I refer to Republic Act 2640 creating the body corporate known as the VFP and Republic Act 3518
creating the Phil. Vets [sic] Bank.

1. RA 2640 dated 18 June 60 Section 1 ... "hereby created a body corporate, under the
control and supervision of the Secretary of National Defense."

2. RA 2640 Section 12 ... "On or before the last day of the month following the end of each
fiscal year, the Federation shall make and transmit to the President of the Philippines or to
the Secretary of National Defense, a report of its proceedings for the past year, including a
full, complete and itemized report of receipts and expenditures of whatever kind."

3. Republic Act 3518 dated 18 June 1963 (An Act Creating the Philippine Veterans Bank,
and for Other Purposes) provides in Section 6 that ... "the affairs and business of the
Philippine Veterans Bank shall be directed and its property managed, controlled and
preserved, unless otherwise provided in this Act, by a Board of Directors consisting of eleven
(11) members to be composed of three ex officio members to wit: the Philippine Veterans
Administrator, the President of the Veteran’s Federation of the Philippines and the Secretary
of National Defense x x x.

It is therefore in the context of clarification and rectification of what should have been done by the
DND (Department of National Defense) for and about the VFP and PVB that I am requesting
appropriate information and report about these two corporate bodies.

Therefore it may become necessary that a conference with your staffs in these two bodies be set.

Thank you and anticipating your action on this request.

Very truly yours,

(SGD) ANGELO T. REYES

[DND] Secretary

On 10 June 2002, respondent DND Secretary issued the assailed DND Department Circular No. 04
entitled, "Further Implementing the Provisions of Sections 12 and 23 of Republic Act No. 2640," the
full text of which appears as follows:

Department of National Defense

Department Circular No. 04

Subject: Further Implementing the Provisions of Sections 1 & 2 of

Republic Act No. 2640

Authority: Republic Act No. 2640

Executive Order No. 292 dated July 25, 1987

Section 1
These rules shall govern and apply to the management and operations of the Veterans Federation of
the Philippines (VFP) within the context provided by EO 292 s-1987.

Section 2 – DEFINITION OF TERMS – for the purpose of these rules, the terms, phrases or words
used herein shall, unless the context indicates otherwise, mean or be understood as follows:

Supervision and Control – it shall include authority to act directly whenever a specific function is
entrusted by law or regulation to a subordinate; direct the performance of a duty; restrain the
commission of acts; approve, reverse or modify acts and decisions of subordinate officials or units;
determine priorities in the execution of plans and programs; and prescribe standards, guidelines,
plans and programs.

Power of Control – power to alter, modify, nullify or set aside what a subordinate officer had done in
the performance of his duties and to substitute the judgment of the former to that of the latter.

Supervision – means overseeing or the power of an officer to see to it that their subordinate officers
perform their duties; it does not allow the superior to annul the acts of the subordinate.

Administrative Process – embraces matter concerning the procedure in the disposition of both
routine and contested matters, and the matter in which determinations are made, enforced or
reviewed.

Government Agency – as defined under PD 1445, a government agency or agency of government or

"agency" refers to any department, bureau or office of the national government, or any of its
branches or instrumentalities, of any political subdivision, as well as any government owned or
controlled corporation, including its subsidiaries, or other self-governing board or commission of the
government.

Government Owned and Controlled Corporation (GOCC) – refer to any agency organized as a stock
or non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the government directly or through its instrumentalities wholly or,
where applicable as in the case of stock corporations, to the extent of at least 50% of its capital
stock.

Fund – sum of money or other resources set aside for the purpose of carrying out specific activities
or attaining certain objectives in accordance with special regulations, restrictions or limitations and
constitutes an independent, fiscal and accounting entity.

Government Fund – includes public monies of every sort and other resources pertaining to any
agency of the government.

Veteran – any person who rendered military service in the land, sea or air forces of the Philippines
during the revolution against Spain, the Philippine American War, World War II, including Filipino
citizens who served in Allied Forces in the Philippine territory and foreign nationals who served in
Philippine forces; the Korean campaign, the Vietnam campaign, the Anti-dissidence campaign, or
other wars or military campaigns; or who rendered military service in the Armed Forces of the
Philippines and has been honorably discharged or separated after at least six (6) years total
cumulative active service or sooner separated due to the death or disability arising from a wound or
injury received or sickness or disease incurred in line of duty while in the active service.

Section 3 – Relationship Between the DND and the VFP

3.1 Sec 1 of RA 3140 provides "... the following persons (heads of various veterans associations and
organizations in the Philippines) and their associates and successors are hereby created a body
corporate, under the control and supervision of the Secretary of National Defense, under the name,
style and title of "Veterans Federation of the Philippines ..."

The Secretary of National Defense shall be charged with the duty of supervising the veterans and
allied program under the jurisdiction of the Department. It shall also have the responsibility of
overseeing and ensuring the judicious and effective implementation of veterans assistance, benefits,
and utilization of VFP assets.

3.2 To effectively supervise and control the corporate affairs of the Federation and to safeguard the
interests and welfare of the veterans who are also wards of the State entrusted under the protection
of the DND, the Secretary may personally or through a designated representative, require the
submission of reports, documents and other papers regarding any or all of the Federation’s business
transactions particularly those relating to the VFP functions under Section 2 of RA 2640.

The Secretary or his representative may attend conferences of the supreme council of the VFP and
such other activities he may deem relevant.

3.3 The Secretary shall from time to time issue guidelines, directives and other orders governing vital
government activities including, but not limited to, the conduct of elections; the acquisition,
management and dispositions of properties, the accounting of funds, financial interests, stocks and
bonds, corporate investments, etc. and such other transactions which may affect the interests of the
veterans.

3.4 Financial transactions of the Federation shall follow the provisions of the government auditing
code (PD 1445) i.e. government funds shall be spent or used for public purposes; trust funds shall
be available and may be spent only for the specific purpose for which the trust was created or the
funds received; fiscal responsibility shall, to the greatest extent, be shared by all those exercising
authority over the financial affairs, transactions, and operations of the federation; disbursements or
dispositions of government funds or property shall invariably bear the approval of the proper officials.

Section 4 – Records of the FEDERATION

As a corporate body and in accordance with appropriate laws, it shall keep and carefully preserve
records of all business transactions, minutes of meetings of stockholders/members of the board of
directors reflecting all details about such activity.

All such records and minutes shall be open to directors, trustees, stockholders, and other members
for inspection and copies of which may be requested.

As a body corporate, it shall submit the following: annual report; proceedings of council meetings;
report of operations together with financial statement of its assets and liabilities and fund balance per
year; statement of revenues and expenses per year; statement of cash flows per year as certified by
the accountant; and other documents/reports as may be necessary or required by the SND.

Section 5 – Submission of Annual and Periodic Report

As mandated under appropriate laws, the following reports shall be submitted to the SND, to wit:
 a. Annual Report to be submitted not later than every January 31 of the following year. Said
report shall consist of the following:

1. Financial Report of the Federation, signed by the Treasurer General and Auditor
General;

2. Roster of Members of the Supreme Council;

3. Roster of Members of the Executive Board and National Officers; and

4. Current listing of officers and management of VFP.

b. Report on the proceedings of each Supreme Council Meeting to be submitted not later
than one month after the meeting;

c. Report of the VFP President as may be required by SND or as may be found necessary by
the President of the Federation;

d. Resolutions passed by the Executive Board and the Supreme Council for confirmation to
be submitted not later than one month after the approval of the resolution;

e. After Operation/Activity Reports to be submitted not later than one month after such
operation or activity;

Section 6 – Penal Sanctions

As an attached agency to a regular department of the government, the VFP and all its
instrumentalities, officials and personnel shall be subject to the penal provisions of such laws, rules
and regulations applicable to the attached agencies of the government.

In a letter dated 6 August 2002 addressed to the President of petitioner, respondent DND Secretary
reiterated his instructions in his earlier letter of 13 April 2002.

Thereafter, petitioner’s President received a letter dated 23 August 2002 from respondent
Undersecretary, informing him that Department Order No. 129 dated 23 August 2002 directed "the
conduct of a Management Audit of the Veterans Federation of the Philippines."4 The letter went on to
state that respondent DND Secretary "believes that the mandate given by said law can be
meaningfully exercised if this department can better appreciate the functions, responsibilities and
situation on the ground and this can be done by undertaking a thorough study of the organization."5

Respondent Undersecretary also requested both for a briefing and for documents on personnel,
ongoing projects and petitioner’s financial condition. The letter ended by stating that, after the
briefing, the support staff of the Audit Committee would begin their work to meet the one-month
target within which to submit a report.

A letter dated 28 August 2003 informed petitioner’s President that the Management Audit Group
headed by the Undersecretary would be paying petitioner a visit on 30 August 2002 for an update on
VFP’s different affiliates and the financial statement of the Federation.

Subsequently, the Secretary General of the VFP sent an undated letter to respondent DND
Secretary, with notice to respondent Undersecretary for Civil Relations and Administration,
complaining about the alleged broadness of the scope of the management audit and requesting the
suspension thereof until such time that specific areas of the audit shall have been agreed upon.

The request was, however, denied by the Undersecretary in a letter dated 4 September 2002 on the
ground that a specific timeframe had been set for the activity.

Petitioner thus filed this Petition for Certiorari with Prohibition under Rule 65 of the 1997 Rules of
Civil Procedure, praying for the following reliefs:

1. For this Court to issue a temporary restraining order and a writ of preliminary prohibitory
and mandatory injunction to enjoin respondent Secretary and all those acting under his
discretion and authority from: (a) implementing DND Department Circular No. 04; and (b)
continuing with the ongoing management audit of petitioner’s books of account;

2. After hearing the issues on notice –

a. Declare DND Department Circular No. 04 as null and void for being ultra vires;

b. Convert the writ of prohibition, preliminary prohibitory and mandatory injunction

into a permanent one.6

GIVING DUE COURSE TO THE PETITION

Petitioner asserts that, although cases which question the constitutionality or validity of
administrative issuances are ordinarily filed with the lower courts, the urgency and substantive
importance of the question on hand and the public interest attendant to the subject matter of the
petition justify its being filed with this Court directly as an original action.7

It is settled that the Regional Trial Court and the Court of Appeals also exercise original jurisdiction
over petitions for certiorari and prohibition. As we have held in numerous occasions, however, such
concurrence of original jurisdiction does not mean that the party seeking extraordinary writs has the
absolute freedom to file his petition in the court of his choice.8 Thus, in Commissioner of Internal
Revenue v. Leal,9 we held that:

Such concurrence of original jurisdiction among the Regional Trial Court, the Court of Appeals and
this Court, however, does not mean that the party seeking any of the extraordinary writs has the
absolute freedom to file his petition in the court of his choice. The hierarchy of courts in our judicial
system determines the appropriate forum for these petitions. Thus, petitions for the issuance of the
said writs against the first level (inferior) courts must be filed with the Regional Trial Court and those
against the latter, with the Court of Appeals. A direct invocation of this Court’s original jurisdiction to
issue these writs should be allowed only where there are special and important reasons therefor,
specifically and sufficiently set forth in the petition. This is the established policy to prevent inordinate
demands upon the Court’s time and attention, which are better devoted to matters within its
exclusive jurisdiction, and to prevent further over-crowding of the Court’s docket. Thus, it was proper
for petitioner to institute the special civil action for certiorari with the Court of Appeals assailing the
RTC order denying his motion to dismiss based on lack of jurisdiction.

The petition itself, in this case, does not specifically and sufficiently set forth the special and
important reasons why the Court should give due course to this petition in the first instance, hereby
failing to fulfill the conditions set forth in Commissioner of Internal Revenue v. Leal.10 While we
reiterate the policies set forth in Leal and allied cases and continue to abhor the propensity of a
number of litigants to disregard the principle of hierarchy of courts in our judicial system, we,
however, resolve to take judicial notice of the fact that the persons who stand to lose in a possible
protracted litigation in this case are war veterans, many of whom have precious little time left to
enjoy the benefits that can be conferred by petitioner corporation. This bickering for the power over
petitioner corporation, an entity created to represent and defend the interests of Filipino veterans,
should be resolved as soon as possible in order for it to once and for all direct its resources to its
rightful beneficiaries all over the country. All these said, we hereby resolve to give due course to this
petition.

ISSUES

Petitioner mainly alleges that the rules and guidelines laid down in the assailed Department Circular
No. 04 expanded the scope of "control and supervision" beyond what has been laid down in Rep.
Act No. 2640.11 Petitioner further submits the following issues to this Court:

1. Was the challenged department circular passed in the valid exercise of the respondent
Secretary’s "control and supervision"?

2. Could the challenged department circular validly lay standards classifying the VFP, an
essentially civilian organization, within the ambit of statutes only applying to government
entities?

3. Does the department circular, which grants respondent direct management control on the
VFP, unduly encroach on the prerogatives of VFP’s governing body?

At the heart of all these issues and all of petitioner’s prayers and assertions in this case is
petitioner’s claim that it is a private non-government corporation.

CENTRAL ISSUE:

IS THE VFP A PRIVATE CORPORATION?

Petitioner claims that it is not a public nor a governmental entity but a private organization, and
advances this claim to prove that the issuance of DND Department Circular No. 04 is an invalid
exercise of respondent Secretary’s control and supervision.12

This Court has defined the power of control as "the power of an officer to alter or modify or nullify or
set aside what a subordinate has done in the performance of his duties and to substitute the
judgment of the former to that of the latter."13 The power of supervision, on the other hand, means
"overseeing, or the power or authority of an officer to see that subordinate officers perform their
duties. If the latter fail or neglect to fulfill them, the former may take such action or step as prescribed
by law to make them perform their duties."14 These definitions are synonymous with the definitions in
the assailed Department Circular No. 04, while the other provisions of the assailed department
circular are mere consequences of control and supervision as defined.

Thus, in order for petitioner’s premise to be able to support its conclusion, petitioners should be
deemed to imply either of the following: (1) that it is unconstitutional/impermissible for the law (Rep.
Act No. 2640) to grant control and/or supervision to the Secretary of National Defense over a private
organization, or (2) that the control and/or supervision that can be granted to the Secretary of
National Defense over a private organization is limited, and is not as strong as they are defined
above.
The following provision of the 1935 Constitution, the organic act controlling at the time of the creation
of the VFP in 1960, is relevant:

Section 7. The Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations, unless such corporations are owned and controlled by the
Government or any subdivision or instrumentality thereof.15

On the other hand, its counterparts in the 1973 and 1987 constitutions are the following:

Section 4. The National Assembly shall not, except by general law, provide for the formation,
organization, or regulation of private corporations, unless such corporations are owned or controlled
by the government or any subdivision or instrumentality thereof.16

Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations. Government-owned and controlled corporations may be created
or established by special charters in the interest of the common good and subject to the test of
economic viability.17

From the foregoing, it is crystal clear that our constitutions explicitly prohibit the regulation by special
laws of private corporations, with the exception of government-owned or controlled corporations
(GOCCs). Hence, it would be impermissible for the law to grant control of the VFP to a public official
if it were neither a public corporation, an unincorporated governmental entity, nor a GOCC.18 Said
constitutional provisions can even be read to prohibit the creation itself of the VFP if it were neither
of the three mentioned above, but we cannot go into that in this case since there is no challenge to
the creation of the VFP in the petition as to permit this Court from considering its nullity.

Petitioner vigorously argues that the VFP is a private non-government organization, pressing on the
following contentions:

1. The VFP does not possess the elements which would qualify it as a public office,
particularly the possession/delegation of a portion of sovereign power of government to be
exercised for the benefit of the public;

2. VFP funds are not public funds because –

a) No budgetary appropriations or government funds have been released to the VFP

directly or indirectly from the Department of Budget and Management (DBM);

b) VFP funds come from membership dues;

c) The lease rentals raised from the use of government lands reserved for the VFP
are private in character and do not belong to the government. Said rentals are fruits
of VFP’s labor and efforts in managing and administering the lands for VFP purposes
and objectives. A close analogy would be any Filipino citizen settling on government
land and who tills the land for his livelihood and sustenance. The fruits of his labor
belong to him and not to the owner of the land. Such fruits are not public funds.

3. Although the juridical personality of the VFP emanates from a statutory charter, the VFP
retains its essential character as a private, civilian federation of veterans voluntarily formed
by the veterans themselves to attain a unity of effort, purpose and objectives, e.g. –
 a. The members of the VFP are individual members and retirees from the public and
military service;

b. Membership in the VFP is voluntary, not compulsory;

c. The VFP is governed, not by the Civil Service Law, the Articles of War nor the
GSIS Law, but by the Labor Code and the SSS Law;

d. The VFP has its own Constitution and By-Laws and is governed by a Supreme
Council who are elected from and by the members themselves;

4. The Administrative Code of 1987 does not provide that the VFP is an attached agency,
nor does it provide that it is an entity under the control and supervision of the DND in the
context of the provisions of said code.

5. The DBM declared that the VFP is a non-government organization and issued a certificate
that the VFP has not been a direct recipient of any funds released by the DBM.

These arguments of petitioner notwithstanding, we are constrained to rule that petitioner is in fact a
public corporation. Before responding to petitioner’s allegations one by one, here are the more
evident reasons why the VFP is a public corporation:

(1) Rep. Act No. 2640 is entitled "An Act to Create a Public Corporation to be Known as the
Veterans Federation of the Philippines, Defining its Powers, and for Other Purposes."

(2) Any action or decision of the Federation or of the Supreme Council shall be subject to the
approval of the Secretary of Defense.19

(3) The VFP is required to submit annual reports of its proceedings for the past year,
including a full, complete and itemized report of receipts and expenditures of whatever kind,
to the President of the Philippines or to the Secretary of National Defense.20

(4) Under Executive Order No. 37 dated 2 December 1992, the VFP was listed as among the
government-owned and controlled corporations that will not be privatized.

(5) In Ang Bagong Bayani – OFW Labor Party v. COMELEC,21 this Court held in a minute
resolution that the "VFP [Veterans Federation Party] is an adjunct of the government, as it is
merely an incarnation of the Veterans Federation of the Philippines.

And now to answer petitioner’s reasons for insisting that it is a private corporation:

1. Petitioner claims that the VFP does not possess the elements which would qualify it as a public
office, particularly the possession/delegation of a portion of sovereign power of government to be
exercised for the benefit of the public;

In Laurel v. Desierto,22 we adopted the definition of Mechem of a public office, that it is "the right,
authority and duty, created and conferred by law, by which, for a given period, either fixed by law or
enduring at the pleasure of the creating power, an individual is invested with some portion of the
sovereign functions of the government, to be exercised by him for the benefit of the public."
In the same case, we went on to adopt Mechem’s view that the delegation to the individual of some
of the sovereign functions of government is "[t]he most important characteristic" in determining
whether a position is a public office or not.23 Such portion of the sovereignty of the country, either
legislative, executive or judicial, must attach to the office for the time being, to be exercised for the
public benefit. Unless the powers conferred are of this nature, the individual is not a public officer.
The most important characteristic which distinguishes an office from an employment or contract is
that the creation and conferring of an office involves a delegation to the individual of some of the
sovereign functions of government, to be exercised by him for the benefit of the public; – that some
portion of the sovereignty of the country, either legislative, executive or judicial, attaches, for the time
being, to be exercised for the public benefit. Unless the powers conferred are of this nature, the
individual is not a public officer.24 The issue, therefore, is whether the VFA’s officers have been
delegated some portion of the sovereignty of the country, to be exercised for the public benefit.

In several cases, we have dealt with the issue of whether certain specific activities can be classified
as sovereign functions. These cases, which deal with activities not immediately apparent to be
sovereign functions, upheld the public sovereign nature of operations needed either to promote
social justice25 or to stimulate patriotic sentiments and love of country.26

As regards the promotion of social justice as a sovereign function, we held in Agricultural Credit and
Cooperative Financing Administration (ACCFA) v. Confederation of Unions in Government
Corporations and Offices (CUGCO),27that the compelling urgency with which the Constitution speaks
of social justice does not leave any doubt that land reform is not an optional but a compulsory
function of sovereignty. The same reason was used in our declaration that socialized housing is
likewise a sovereign function.28 Highly significant here is the observation of former Chief Justice
Querube Makalintal:

The growing complexities of modern society, however, have rendered this traditional classification of
the functions of government [into constituent and ministrant functions] quite unrealistic, not to say
obsolete. The areas which used to be left to private enterprise and initiative and which the
government was called upon to enter optionally, and only "because it was better equipped to
administer for the public welfare than is any private individual or group of individuals," continue to
lose their well-defined boundaries and to be absorbed within activities that the government must
undertake in its sovereign capacity if it is to meet the increasing social challenges of the times.
Here[,] as almost everywhere else[,] the tendency is undoubtedly towards a greater socialization of
economic forces. Here, of course, this development was envisioned, indeed adopted as a national
policy, by the Constitution itself in its declaration of principle concerning the promotion of social
justice.29 (Emphasis supplied.)

It was, on the other hand, the fact that the National Centennial Celebrations was calculated to
arouse and stimulate patriotic sentiments and love of country that it was considered as a sovereign
function in Laurel v. Desierto.30 In Laurel, the Court then took its cue from a similar case in the United
States involving a Fourth of July fireworks display. The holding of the Centennial Celebrations was
held to be an executive function, as it was intended to enforce Article XIV of the Constitution which
provides for the conservation, promotion and popularization of the nation’s historical and cultural
heritage and resources, and artistic relations.

In the case at bar, the functions of petitioner corporation enshrined in Section 4 of Rep. Act No.
264031 should most certainly fall within the category of sovereign functions. The protection of the
interests of war veterans is not only meant to promote social justice, but is also intended to reward
patriotism. All of the functions in Section 4 concern the well-being of war veterans, our countrymen
who risked their lives and lost their limbs in fighting for and defending our nation. It would be injustice
of catastrophic proportions to say that it is beyond sovereignty’s power to reward the people who
defended her.

Like the holding of the National Centennial Celebrations, the functions of the VFP are executive
functions, designed to implement not just the provisions of Rep. Act No. 2640, but also, and more
importantly, the Constitutional mandate for the State to provide immediate and adequate care,
benefits and other forms of assistance to war veterans and veterans of military campaigns, their
surviving spouses and orphans.32

2. Petitioner claims that VFP funds are not public funds.

Petitioner claims that its funds are not public funds because no budgetary appropriations or
government funds have been released to the VFP directly or indirectly from the DBM, and because
VFP funds come from membership dues and lease rentals earned from administering government
lands reserved for the VFP.

The fact that no budgetary appropriations have been released to the VFP does not prove that it is a
private corporation. The DBM indeed did not see it fit to propose budgetary appropriations to the
VFP, having itself believed that the VFP is a private corporation.33 If the DBM, however, is mistaken
as to its conclusion regarding the nature of VFP’s incorporation, its previous assertions will not
prevent future budgetary appropriations to the VFP. The erroneous application of the law by public
officers does not bar a subsequent correct application of the law.34

Nevertheless, funds in the hands of the VFP from whatever source are public funds, and can be
used only for public purposes. This is mandated by the following provisions of Rep. Act No. 2640:

(1) Section 2 provides that the VFP can only "invest its funds for the exclusive benefit of the
Veterans of the Philippines;"

(2) Section 2 likewise provides that "(a)ny action or decision of the Federation or of the
Supreme Council shall be subject to the approval of the Secretary of National Defense."
Hence, all activities of the VFP to which the Supreme Council can apply its funds are subject
to the approval of the Secretary of National Defense;

(3) Section 4 provides that "the Federation shall exist solely for the purposes of a benevolent
character, and not for the pecuniary benefit of its members;" 1avv phil.net

(4) Section 6 provides that all funds of the VFP in excess of operating expenses are
"reserved for disbursement, as the Supreme Council may authorize, for the purposes stated
in Section two of this Act;"

(5) Section 10 provides that "(a)ny donation or contribution which from time to time may be
made to the Federation by the Government of the Philippines or any of its subdivisions,
branches, offices, agencies or instrumentalities shall be expended by the Supreme Council
only for the purposes mentioned in this Act."; and finally,

(6) Section 12 requires the submission of annual reports of VFP proceedings for the past
year, including a full, complete and itemized report of receipts and expenditures of whatever
kind, to the President of the Philippines or to the Secretary of National Defense.
It is important to note here that the membership dues collected from the individual members of
VFP’s affiliate organizations do not become public funds while they are still funds of the affiliate
organizations. A close reading of Section 135 of Rep. Act No. 2640 reveals that what has been
created as a body corporate is not the individual membership of the affiliate organizations, but
merely the aggregation of the heads of the affiliate organizations. Thus, only the money remitted by
the affiliate organizations to the VFP partake in the public nature of the VFP funds.

In Republic v. COCOFED,36 we held that the Coconut Levy Funds are public funds because, inter
alia, (1) they were meant to be for the benefit of the coconut industry, one of the major industries
supporting the national economy, and its farmers; and (2) the very laws governing coconut levies
recognize their public character. The same is true with regard to the VFP funds. No less public is the
use for the VFP funds, as such use is limited to the purposes of the VFP which we have ruled to be
sovereign functions. Likewise, the law governing VFP funds (Rep. Act No. 2640) recognizes the
public character of the funds as shown in the enumerated provisions above.

We also observed in the same COCOFED case that "(e)ven if the money is allocated for a special
purpose and raised by special means, it is still public in character."37 In the case at bar, some of the
funds were raised by even more special means, as the contributions from affiliate organizations of
the VFP can hardly be regarded as enforced contributions as to be considered taxes. They are more
in the nature of donations which have always been recognized as a source of public funding. Affiliate
organizations of the VFP cannot complain of their contributions becoming public funds upon the
receipt by the VFP, since they are presumed aware of the provisions of Rep. Act No. 2640 which not
only specifies the exclusive purposes for which VFP funds can be used, but also provides for the
regulation of such funds by the national government through the Secretary of National Defense.
There is nothing wrong, whether legally or morally, from raising revenues through non-traditional
methods. As remarked by Justice Florentino Feliciano in his concurring opinion in Kilosbayan,
Incorporated v. Guingona, Jr.38 where he explained that the funds raised by the On-line Lottery
System were also public in nature, thus:

x x x [T]he more successful the government is in raising revenues by non-traditional methods such
as PAGCOR operations and privatization measures, the lesser will be the pressure upon the
traditional sources of public revenues, i.e., the pocket books of individual taxpayers and importers.

Petitioner additionally harps on the inapplicability of the case of Laurel v. Desierto39 which was cited
by Respondents. Petitioner claims that among the reasons National Centennial Commission Chair
Salvador Laurel was considered a public officer was the fact that his compensation was derived from
public funds. Having ruled that VFP funds from whatever source are public funds, we can safely
conclude that the Supreme Council’s compensation, taken as they are from VFP funds under the
term "operating expenses" in Section 6 of Rep. Act No. 2640, are derived from public funds. The
particular nomenclature of the compensation taken from VFP funds is not even of relevance here. As
we said in Laurel concerning compensation as an element of public office:

Under particular circumstances, "compensation" has been held to include allowance for personal
expenses, commissions, expenses, fees, an honorarium, mileage or traveling expenses, payments
for services, restitution or a balancing of accounts, salary, and wages.40

3. Petitioner argues that it is a civilian federation where membership is voluntary.

Petitioner claims that the Secretary of National Defense "historically did not indulge in the direct or
‘micromanagement’ of the VFP precisely because it is essentially a civilian organization where
membership is voluntary."41 This reliance of petitioner on what has "historically" been done is
erroneous, since laws are not repealed by disuse, custom, or practice to the contrary.42 Furthermore,
as earlier stated, the erroneous application of the law by public officers does not bar a subsequent
correct application of the law.43

Neither is the civilian nature of VFP relevant in this case. The Constitution does not contain any
prohibition, express or implied, against the grant of control and/or supervision to the Secretary of
National Defense over a civilian organization. The Office of the Secretary of National Defense is
itself a civilian office, its occupant being an alter ego of the civilian Commander-in-Chief. This set-up
is the manifestation of the constitutional principle that civilian authority is, at all times, supreme over
the military.44 There being no such constitutional prohibition, the creation of a civilian public
organization by Rep. Act No. 2640 is not rendered invalid by its being placed under the control and
supervision of the Secretary of National Defense.

Petitioner’s stand that the VFP is a private corporation because membership thereto is voluntary is
likewise erroneous. As stated above, the membership of the VFP is not the individual membership of
the affiliate organizations, but merely the aggregation of the heads of such affiliate organizations.
These heads forming the VFP then elect the Supreme Council and the other officers,45 of this public
corporation.

4. Petitioner claims that the Administrative Code of 1987 does not provide that the VFP is an
attached agency, and nor does it provide that it is an entity under the control and supervision of the
DND in the context of the provisions of said code.

The Administrative Code, by giving definitions of the various entities covered by it, acknowledges
that its enumeration is not exclusive. The Administrative Code could not be said to have repealed
nor enormously modified Rep. Act No. 2640 by implication, as such repeal or enormous modification
by implication is not favored in statutory construction.46

5. Petitioner offers as evidence the DBM opinion that the VFP is a non-government organization in
its certification that the VFP "has not been a direct recipient of any funds released by the DBM."

Respondents claim that the supposed declaration of the DBM that petitioner is a non-government
organization is not persuasive, since DBM is not a quasi-judicial agency. They aver that what we
have said of the Bureau of Local Government Finance (BLGF) in Philippine Long Distance
Telephone Company (PLDT) v. City of Davao47 can be applied to DBM:

In any case, it is contended, the ruling of the Bureau of Local Government Finance (BLGF) that
petitioner’s exemption from local taxes has been restored is a contemporaneous construction of
Section 23 [of R.A. No. 7925 and, as such, is entitled to great weight.

The ruling of the BLGF has been considered in this case. But unlike the Court of Tax Appeals, which
is a special court created for the purpose of reviewing tax cases, the BLGF was created merely to
provide consultative services and technical assistance to local governments and the general public
on local taxation and other related matters. Thus, the rule that the "Court will not set aside
conclusions rendered by the CTA, which is, by the very nature of its function, dedicated exclusively
to the study and consideration of tax problems and has necessarily developed an expertise on the
subject, unless there has been an abuse or improvident exercise of authority" cannot apply in the
case of the BLGF.

On this score, though, we disagree with respondents and hold that the DBM’s appraisal is
considered persuasive. Respondents misread the PLDT case in asserting that only quasi-judicial
agencies’ determination can be considered persuasive. What the PLDT case points out is that, for
an administrative agency’s opinion to be persuasive, the administrative agency involved (whether it
has quasi-judicial powers or not) must be an expert in the field they are giving their opinion on.

The DBM is indeed an expert on determining what the various government agencies and
corporations are. This determination is necessary for the DBM to fulfill its mandate:

Sec. 2. Mandate. - The Department shall be responsible for the formulation and implementation of
the National Budget with the goal of attaining our national socio-economic plans and objectives.

The Department shall be responsible for the efficient and sound utilization of government funds and
revenues to effectively achieve our country's development objectives.48

The persuasiveness of the DBM opinion has, however, been overcome by all the previous
explanations we have laid so far. It has also been eclipsed by another similarly persuasive opinion,
that of the Department of National Defense embodied in Department Circular No. 04. The DND is
clearly more of an expert with respect to the determination of the entities under it, and its
Administrative Rules and Regulations are entitled to great respect and have in their favor the
presumption of legality.49

The DBM opinion furthermore suffers from its lack of explanation and justification in the "certification
of non-receipt" where said opinion was given. The DBM has not furnished, in said certification or
elsewhere, an explanation for its opinion that VFP is a non-government organization.

THE FATE OF DEPARTMENT CIRCULAR NO. 04

Our ruling that petitioner is a public corporation is determinative of whether or not we should grant
petitioner’s prayer to declare Department Circular No. 04 void.

Petitioner assails Department Circular No. 04 on the ground that it expanded the scope of control
and supervision beyond what has been laid down in Rep. Act No. 2640. Petitioner alleges that "(t)he
equation of the meaning of `control’ and `supervision’ of the Administrative Code of 1987 as the
same `control and supervision’ under Rep. Act No. 2640, takes out the context of the original
legislative intent from the peculiar surrounding circumstances and conditions that brought about the
creation of the VFP."50 Petitioner claims that the VFP "was intended as a self-governing autonomous
body with a Supreme Council as governing authority," and that the assailed circular "pre-empts
VFP’s original self-governance and autonomy (in) representing veterans organizations, and
substitutes government discretion and decisions to that of the veterans’ own
determination."51 Petitioner says that the circular’s provisions practically render the Supreme Council
inutile, despite its being the statutory governing body of the VFP.52

As previously mentioned, this Court has defined the power of control as "the power of an officer to
alter or modify or nullify or set aside what a subordinate has done in the performance of his duties
and to substitute the judgment of the former to that of the latter."53 The power of supervision, on the
other hand, means "overseeing, or the power or authority of an officer to see that subordinate
officers perform their duties."54 Under the Administrative Code of 1987:55

Supervision and control shall include the authority to act directly whenever a specific function is
entrusted by law or regulation to a subordinate; direct the performance of duty; restrain the
commission of acts; review, approve, reverse or modify acts and decisions of subordinate officials or
units; determine priorities in the execution of plans and programs; and prescribe standards,
guidelines, plans and programs. x x x
The definition of the power of control and supervision under Section 2 of the assailed Department
Circular are synonymous with the foregoing definitions. Consequently, and considering that
petitioner is a public corporation, the provisions of the assailed Department Circular No. 04 did not
supplant nor modify the provisions of Republic Act No. 2640, thus not violating the settled rule that
"all such (administrative) issuances must not override, but must remain consistent and in harmony
with the law they seek to apply or implement. Administrative rules and regulations are intended to
carry out, neither to supplant nor to modify, the law."56

Section 3.2 of the assailed department circular, which authorizes the Secretary of National Defense
to "x x x personally or through a designated representative, require the submission of reports,
documents and other papers regarding any or all of the Federation’s business functions, x x x."

as well as Section 3.3 which allows the Secretary of DND to

x x x [F]rom time to time issue guidelines, directives and other orders governing vital government
activities including, but not limited to, the conduct of elections, the acquisition, management and
dispositions of properties, the accounting of funds, financial interests, stocks and bonds, corporate
investments, etc. and such other transactions which may affect the interests of the veterans.

are merely consequences of both the power of control and supervision granted by Rep. Act No.
2640. The power to alter or modify or nullify or set aside what a subordinate has done in the
performance of his duties, or to see to it that subordinate officers perform their duties in accordance
with law, necessarily requires the ability of the superior officer to monitor, as closely as it desires, the
acts of the subordinate.

The same is true with respect to Sections 4 and 5 of the assailed Department Circular No. 04, which
requires the preservation of the records of the Federation and the submission to the Secretary of
National Defense of annual and periodic reports.

Petitioner likewise claims that the assailed DND Department Circular No. 04 was never published,
and hence void.57 Respondents deny such non-publication.58

We have put forth both the rule and the exception on the publication of administrative rules and
regulations in the case of Tañada v. Tuvera:59

x x x Administrative rules and regulations must also be published if their purpose is to enforce or
implement existing law pursuant also to a valid delegation.

Interpretative regulations and those merely internal in nature, that is, regulating only the personnel of
the administrative agency and not the public, need not be published. Neither is publication required
of the so-called letters of instructions issued by administrative superiors concerning the rules on
guidelines to be followed by their subordinates in the performance of their duties.

Even assuming that the assailed circular was not published, its validity is not affected by such non-
publication for the reason that its provisions fall under two of the exceptions enumerated in Tañada.

Department Circular No. 04 is an internal regulation. As we have ruled, they are meant to regulate a
public corporation under the control of DND, and not the public in general. As likewise discussed
above, what has been created as a body corporate by Rep. Act No. 2640 is not the individual
membership of the affiliate organizations of the VFP, but merely the aggregation of the heads of the
affiliate organizations. Consequently, the individual members of the affiliate organizations, who are
not public officers, are beyond the regulation of the circular.

Sections 2, 3 and 6 of the assailed circular are additionally merely interpretative in nature. They add
nothing to the law. They do not affect the substantial rights of any person, whether party to the case
at bar or not. In Sections 2 and 3, control and supervision are defined, mentioning actions that can
be performed as consequences of such control and supervision, but without specifying the particular
actions that shall be rendered to control and supervise the VFP. Section 6, in the same vein, merely
state what the drafters of the circular perceived to be consequences of being an attached agency to
a regular department of the government, enumerating sanctions and remedies provided by law that
may be availed of whenever desired.

Petitioner then objects to the implementation of Sec. 3.4 of the assailed Department Circular, which
provides that –

3.4 Financial transactions of the Federation shall follow the provisions of the government auditing
code (PD 1445) i.e. government funds shall be spent or used for public purposes; trust funds shall
be available and may be spent only for the specific purpose for which the trust was created or the
funds received; fiscal responsibility shall, to the greatest extent, be shared by all those exercising
authority over the financial affairs, transactions, and operations of the federation; disbursements or
dispositions of government funds or property shall invariably bear the approval of the proper officials.

Since we have also previously determined that VFP funds are public funds, there is likewise no
reason to declare this provision invalid. Section 3.4 is correct in requiring the VFP funds to be used
for public purposes, but only insofar the term "public purposes" is construed to mean "public
purposes enumerated in Rep. Act No. 2640."

Having in their possession public funds, the officers of the VFP, especially its fiscal officers, must
indeed share in the fiscal responsibility to the greatest extent.

As to petitioner’s allegation that VFP was intended as a self-governing autonomous body with a
Supreme Council as governing authority, we find that the provisions of Rep. Act No. 2640
concerning the control and supervision of the Secretary of National Defense clearly withholds from
the VFP complete autonomy. To say, however, that such provisions render the VFP inutile is an
exaggeration. An office is not rendered inutile by the fact that it is placed under the control of a
higher office. These subordinate offices, such as the executive offices under the control of the
President, exercise discretion at the first instance. While their acts can be altered or even set aside
by the superior, these acts are effective and are deemed the acts of the superior until they are
modified. Surely, we cannot say that the offices of all the Department Secretaries are worthless
positions.

In sum, the assailed DND Department Circular No. 04 does not supplant nor modify and is, on the
contrary, perfectly in consonance with Rep. Act No. 2640. Petitioner VFP is a public corporation. As
such, it can be placed under the control and supervision of the Secretary of National Defense, who
consequently has the power to conduct an extensive management audit of petitioner corporation.

WHEREFORE, the Petition is hereby DISMISSED for lack of merit. The validity of the Department of
National Defense Department Circular No. 04 is AFFIRMED.

SO ORDERED.

G.R. No. 155650 July 20, 2006

MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,
vs.
COURT OF APPEALS, CITY OF PARAÑAQUE, CITY MAYOR OF PARAÑAQUE,
SANGGUNIANG PANGLUNGSOD NG PARAÑAQUE, CITY ASSESSOR OF PARAÑAQUE, and
CITY TREASURER OF PARAÑAQUE, respondents.

DECISION

CARPIO, J.:

The Antecedents

Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino International
Airport (NAIA) Complex in Parañaque City under Executive Order No. 903, otherwise known as
the Revised Charter of the Manila International Airport Authority ("MIAA Charter"). Executive Order
No. 903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Subsequently,
Executive Order Nos. 9091 and 2982 amended the MIAA Charter.

As operator of the international airport, MIAA administers the land, improvements and equipment
within the NAIA Complex. The MIAA Charter transferred to MIAA approximately 600 hectares of
land,3 including the runways and buildings ("Airport Lands and Buildings") then under the Bureau of
Air Transportation.4 The MIAA Charter further provides that no portion of the land transferred to
MIAA shall be disposed of through sale or any other mode unless specifically approved by the
President of the Philippines.5

On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion No.
061. The OGCC opined that the Local Government Code of 1991 withdrew the exemption from real
estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA negotiated with
respondent City of Parañaque to pay the real estate tax imposed by the City. MIAA then paid some
of the real estate tax already due.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of
Parañaque for the taxable years 1992 to 2001. MIAA's real estate tax delinquency is broken down as
follows:

TAX
TAXABLE YEAR TAX DUE PENALTY TOTAL
DECLARATION
E-016-01370 1992-2001 19,558,160.00 11,201,083.20 30,789,243.20
E-016-01374 1992-2001 111,689,424.90 68,149,479.59 179,838,904.49
E-016-01375 1992-2001 20,276,058.00 12,371,832.00 32,647,890.00
E-016-01376 1992-2001 58,144,028.00 35,477,712.00 93,621,740.00
E-016-01377 1992-2001 18,134,614.65 11,065,188.59 29,199,803.24
E-016-01378 1992-2001 111,107,950.40 67,794,681.59 178,902,631.99
E-016-01379 1992-2001 4,322,340.00 2,637,360.00 6,959,700.00
E-016-01380 1992-2001 7,776,436.00 4,744,944.00 12,521,380.00
*E-016-013-85 1998-2001 6,444,810.00 2,900,164.50 9,344,974.50
*E-016-01387 1998-2001 34,876,800.00 5,694,560.00 50,571,360.00
*E-016-01396 1998-2001 75,240.00 33,858.00 109,098.00
 GRAND TOTAL P392,435,861.95 P232,070,863.47 P 624,506,725.42

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75

#9476101 for P28,676,480.00

#9476103 for P49,115.006

On 17 July 2001, the City of Parañaque, through its City Treasurer, issued notices of levy and
warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Parañaque threatened
to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the real estate tax
delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061.

On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The OGCC
pointed out that Section 206 of the Local Government Code requires persons exempt from real
estate tax to show proof of exemption. The OGCC opined that Section 21 of the MIAA Charter is the
proof that MIAA is exempt from real estate tax.

On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition and
injunction, with prayer for preliminary injunction or temporary restraining order. The petition sought to
restrain the City of Parañaque from imposing real estate tax on, levying against, and auctioning for
public sale the Airport Lands and Buildings. The petition was docketed as CA-G.R. SP No. 66878.

On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond the
60-day reglementary period. The Court of Appeals also denied on 27 September 2002 MIAA's
motion for reconsideration and supplemental motion for reconsideration. Hence, MIAA filed on 5
December 2002 the present petition for review.7

Meanwhile, in January 2003, the City of Parañaque posted notices of auction sale at the Barangay
Halls of Barangays Vitalez, Sto. Niño, and Tambo, Parañaque City; in the public market of Barangay
La Huerta; and in the main lobby of the Parañaque City Hall. The City of Parañaque published the
notices in the 3 and 10 January 2003 issues of the Philippine Daily Inquirer, a newspaper of general
circulation in the Philippines. The notices announced the public auction sale of the Airport Lands and
Buildings to the highest bidder on 7 February 2003, 10:00 a.m., at the Legislative Session Hall
Building of Parañaque City.

A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this Court an
Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining Order. The
motion sought to restrain respondents — the City of Parañaque, City Mayor of
Parañaque, Sangguniang Panglungsod ng Parañaque, City Treasurer of Parañaque, and the City
Assessor of Parañaque ("respondents") — from auctioning the Airport Lands and Buildings.

On 7 February 2003, this Court issued a temporary restraining order (TRO) effective immediately.
The Court ordered respondents to cease and desist from selling at public auction the Airport Lands
and Buildings. Respondents received the TRO on the same day that the Court issued it. However,
respondents received the TRO only at 1:25 p.m. or three hours after the conclusion of the public
auction.

On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.
On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the directive
issued during the hearing, MIAA, respondent City of Parañaque, and the Solicitor General
subsequently submitted their respective Memoranda.

MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in the
name of MIAA. However, MIAA points out that it cannot claim ownership over these properties since
the real owner of the Airport Lands and Buildings is the Republic of the Philippines. The MIAA
Charter mandates MIAA to devote the Airport Lands and Buildings for the benefit of the general
public. Since the Airport Lands and Buildings are devoted to public use and public service, the
ownership of these properties remains with the State. The Airport Lands and Buildings are thus
inalienable and are not subject to real estate tax by local governments.

MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the
payment of real estate tax. MIAA insists that it is also exempt from real estate tax under Section 234
of the Local Government Code because the Airport Lands and Buildings are owned by the Republic.
To justify the exemption, MIAA invokes the principle that the government cannot tax itself. MIAA
points out that the reason for tax exemption of public property is that its taxation would not inure to
any public advantage, since in such a case the tax debtor is also the tax creditor.

Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the tax
exemption privileges of "government-owned and-controlled corporations" upon the effectivity of
the Local Government Code. Respondents also argue that a basic rule of statutory construction is
that the express mention of one person, thing, or act excludes all others. An international airport is
not among the exceptions mentioned in Section 193 of the Local Government Code. Thus,
respondents assert that MIAA cannot claim that the Airport Lands and Buildings are exempt from
real estate tax.

Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos8 where we
held that the Local Government Code has withdrawn the exemption from real estate tax granted to
international airports. Respondents further argue that since MIAA has already paid some of the real
estate tax assessments, it is now estopped from claiming that the Airport Lands and Buildings are
exempt from real estate tax.

The Issue

This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are
exempt from real estate tax under existing laws. If so exempt, then the real estate tax assessments
issued by the City of Parañaque, and all proceedings taken pursuant to such assessments, are void.
In such event, the other issues raised in this petition become moot.

The Court's Ruling

We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local
governments.

First, MIAA is not a government-owned or controlled corporation but an instrumentality of the

National Government and thus exempt from local taxation. Second, the real properties of MIAA
are owned by the Republic of the Philippines and thus exempt from real estate tax.

1. MIAA is Not a Government-Owned or Controlled Corporation

Respondents argue that MIAA, being a government-owned or controlled corporation, is not exempt
from real estate tax. Respondents claim that the deletion of the phrase "any government-owned or
controlled so exempt by its charter" in Section 234(e) of the Local Government Code withdrew the
real estate tax exemption of government-owned or controlled corporations. The deleted phrase
appeared in Section 40(a) of the 1974 Real Property Tax Code enumerating the entities exempt
from real estate tax.

There is no dispute that a government-owned or controlled corporation is not exempt from real
estate tax. However, MIAA is not a government-owned or controlled corporation. Section 2(13) of the
Introductory Provisions of the Administrative Code of 1987 defines a government-owned or
controlled corporation as follows:

SEC. 2. General Terms Defined. – x x x x

(13) Government-owned or controlled corporation refers to any agency organized as a

stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as in the case of stock corporations, to
the extent of at least fifty-one (51) percent of its capital stock: x x x. (Emphasis supplied)

A government-owned or controlled corporation must be "organized as a stock or non-stock

corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or
voting shares. Section 10 of the MIAA Charter9 provides:

SECTION 10. Capital. — The capital of the Authority to be contributed by the National
Government shall be increased from Two and One-half Billion (P2,500,000,000.00) Pesos to
Ten Billion (P10,000,000,000.00) Pesos to consist of:

(a) The value of fixed assets including airport facilities, runways and equipment and such
other properties, movable and immovable[,] which may be contributed by the National
Government or transferred by it from any of its agencies, the valuation of which shall be
determined jointly with the Department of Budget and Management and the Commission on
Audit on the date of such contribution or transfer after making due allowances for
depreciation and other deductions taking into account the loans and other liabilities of the
Authority at the time of the takeover of the assets and other properties;

(b) That the amount of P605 million as of December 31, 1986 representing about seventy
percentum (70%) of the unremitted share of the National Government from 1983 to 1986 to
be remitted to the National Treasury as provided for in Section 11 of E. O. No. 903 as
amended, shall be converted into the equity of the National Government in the Authority.
Thereafter, the Government contribution to the capital of the Authority shall be provided in
the General Appropriations Act.

Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.

Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock is
divided into shares and x x x authorized to distribute to the holders of such shares dividends
x x x." MIAA has capital but it is not divided into shares of stock. MIAA has no stockholders or voting
shares. Hence, MIAA is not a stock corporation.
MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation
Code defines a non-stock corporation as "one where no part of its income is distributable as
dividends to its members, trustees or officers." A non-stock corporation must have members. Even if
we assume that the Government is considered as the sole member of MIAA, this will not make MIAA
a non-stock corporation. Non-stock corporations cannot distribute any part of their income to their
members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual gross
operating income to the National Treasury.11 This prevents MIAA from qualifying as a non-stock
corporation.

Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific,
social, civil service, or similar purposes, like trade, industry, agriculture and like chambers." MIAA is
not organized for any of these purposes. MIAA, a public utility, is organized to operate an
international and domestic airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a government-
owned or controlled corporation. What then is the legal status of MIAA within the National
Government?

MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only difference is that
MIAA is vested with corporate powers. Section 2(10) of the Introductory Provisions of the
Administrative Code defines a government "instrumentality" as follows:

SEC. 2. General Terms Defined. –– x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. x x x (Emphasis supplied)

When the law vests in a government instrumentality corporate powers, the instrumentality does not
become a corporation. Unless the government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only governmental but also
corporate powers. Thus, MIAA exercises the governmental powers of eminent domain,12 police
authority13 and the levying of fees and charges.14 At the same time, MIAA exercises "all the powers
of a corporation under the Corporation Law, insofar as these powers are not inconsistent with the
provisions of this Executive Order."15

Likewise, when the law makes a government instrumentality operationally autonomous, the
instrumentality remains part of the National Government machinery although not integrated with the
department framework. The MIAA Charter expressly states that transforming MIAA into a "separate
and autonomous body"16 will make its operation more "financially viable."17

Many government instrumentalities are vested with corporate powers but they do not become stock
or non-stock corporations, which is a necessary condition before an agency or instrumentality is
deemed a government-owned or controlled corporation. Examples are the Mactan International
Airport Authority, the Philippine Ports Authority, the University of the Philippines and Bangko Sentral
ng Pilipinas. All these government instrumentalities exercise corporate powers but they are not
organized as stock or non-stock corporations as required by Section 2(13) of the Introductory
Provisions of the Administrative Code. These government instrumentalities are sometimes loosely
called government corporate entities. However, they are not government-owned or controlled
corporations in the strict sense as understood under the Administrative Code, which is the governing
law defining the legal relationship and status of government entities.

A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code,
which states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalitiesand local government units.(Emphasis and underscoring supplied)

Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While the
1987 Constitution now includes taxation as one of the powers of local governments, local
governments may only exercise such power "subject to such guidelines and limitations as the
Congress may provide."18

When local governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax is never presumed and
there must be clear language in the law imposing the tax. Any doubt whether a person, article or
activity is taxable is resolved against taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities.

Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government instrumentality
from local taxation, such exemption is construed liberally in favor of the national government
instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:

The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely
to reduce the amount of money that has to be handled by government in the course of its
operations. For these reasons, provisions granting exemptions to government agencies may
be construed liberally, in favor of non tax-liability of such agencies.19

There is, moreover, no point in national and local governments taxing each other, unless a sound
and compelling policy requires such transfer of public funds from one government pocket to another.

There is also no reason for local governments to tax national government instrumentalities for
rendering essential public services to inhabitants of local governments. The only exception is
when the legislature clearly intended to tax government instrumentalities for the delivery of
essential public services for sound and compelling policy considerations. There must be
express language in the law empowering local governments to tax national government
instrumentalities. Any doubt whether such power exists is resolved against local governments.

Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the
Code, local governments cannot tax national government instrumentalities. As this Court held
in Basco v. Philippine Amusements and Gaming Corporation:
 The states have no power by taxation or otherwise, to retard, impede, burden or in
any manner control the operation of constitutional laws enacted by Congress to carry
into execution the powers vested in the federal government. (MC Culloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the "supremacy" of the National Government over local
governments.

"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them."
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination of
what local authorities may perceive to be undesirable activities or enterprise using the power
to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the "power to destroy" (Mc Culloch
v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very
entity which has the inherent power to wield it. 20

2. Airport Lands and Buildings of MIAA are Owned by the Republic

a. Airport Lands and Buildings are of Public Dominion

The Airport Lands and Buildings of MIAA are property of public dominion and therefore owned by
the State or the Republic of the Philippines. The Civil Code provides:

ARTICLE 419. Property is either of public dominion or of private ownership.

ARTICLE 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)

ARTICLE 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.

ARTICLE 422. Property of public dominion, when no longer intended for public use or for
public service, shall form part of the patrimonial property of the State.

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like
"roads, canals, rivers, torrents, ports and bridges constructed by the State," are owned by the
State. The term "ports" includes seaports and airports. The MIAA Airport Lands and Buildings
constitute a "port" constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport
Lands and Buildings are properties of public dominion and thus owned by the State or the Republic
of the Philippines.

The Airport Lands and Buildings are devoted to public use because they are used by the public for
international and domestic travel and transportation. The fact that the MIAA collects terminal
fees and other charges from the public does not remove the character of the Airport Lands and
Buildings as properties for public use. The operation by the government of a tollway does not
change the character of the road as one for public use. Someone must pay for the maintenance of
the road, either the public indirectly through the taxes they pay the government, or only those among
the public who actually use the road through the toll fees they pay upon using the road. The tollway
system is even a more efficient and equitable manner of taxing the public for the maintenance of
public roads.

The charging of fees to the public does not determine the character of the property whether it is of
public dominion or not. Article 420 of the Civil Code defines property of public dominion as one
"intended for public use." Even if the government collects toll fees, the road is still "intended for
public use" if anyone can use the road under the same terms and conditions as the rest of the public.
The charging of fees, the limitation on the kind of vehicles that can use the road, the speed
restrictions and other conditions for the use of the road do not affect the public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines,
constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees
does not change the character of MIAA as an airport for public use. Such fees are often termed
user's tax. This means taxing those among the public who actually use a public facility instead of
taxing all the public including those who never use the particular public facility. A user's tax is more
equitable — a principle of taxation mandated in the 1987 Constitution.21

The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the
Philippines for both international and domestic air traffic,"22 are properties of public dominion
because they are intended for public use. As properties of public dominion, they indisputably
belong to the State or the Republic of the Philippines.

b. Airport Lands and Buildings are Outside the Commerce of Man

The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of public
dominion. As properties of public dominion, the Airport Lands and Buildings are outside the
commerce of man. The Court has ruled repeatedly that properties of public dominion are outside
the commerce of man. As early as 1915, this Court already ruled in Municipality of Cavite v.
Rojas that properties devoted to public use are outside the commerce of man, thus:

According to article 344 of the Civil Code: "Property for public use in provinces and in towns
comprises the provincial and town roads, the squares, streets, fountains, and public waters,
the promenades, and public works of general service supported by said towns or provinces."

The said Plaza Soledad being a promenade for public use, the municipal council of Cavite
could not in 1907 withdraw or exclude from public use a portion thereof in order to lease it for
the sole benefit of the defendant Hilaria Rojas. In leasing a portion of said plaza or public
place to the defendant for private use the plaintiff municipality exceeded its authority in the
exercise of its powers by executing a contract over a thing of which it could not dispose, nor
is it empowered so to do.
 The Civil Code, article 1271, prescribes that everything which is not outside the commerce of
man may be the object of a contract, and plazas and streets are outside of this commerce,
as was decided by the supreme court of Spain in its decision of February 12, 1895, which
says: "Communal things that cannot be sold because they are by their very nature
outside of commerce are those for public use, such as the plazas, streets, common
lands, rivers, fountains, etc." (Emphasis supplied) 23

Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion are
outside the commerce of man:

xxx Town plazas are properties of public dominion, to be devoted to public use and to be
made available to the public in general. They are outside the commerce of man and
cannot be disposed of or even leased by the municipality to private parties. While in case of
war or during an emergency, town plazas may be occupied temporarily by private
individuals, as was done and as was tolerated by the Municipality of Pozorrubio, when the
emergency has ceased, said temporary occupation or use must also cease, and the town
officials should see to it that the town plazas should ever be kept open to the public and free
from encumbrances or illegal private constructions.24 (Emphasis supplied)

The Court has also ruled that property of public dominion, being outside the commerce of man,
cannot be the subject of an auction sale.25

Properties of public dominion, being for public use, are not subject to levy, encumbrance or
disposition through public or private sale. Any encumbrance, levy on execution or auction sale of any
property of public dominion is void for being contrary to public policy. Essential public services will
stop if properties of public dominion are subject to encumbrances, foreclosures and auction sale.
This will happen if the City of Parañaque can foreclose and compel the auction sale of the 600-
hectare runway of the MIAA for non-payment of real estate tax.

Before MIAA can encumber26 the Airport Lands and Buildings, the President must first withdraw
from public usethe Airport Lands and Buildings. Sections 83 and 88 of the Public Land Law or
Commonwealth Act No. 141, which "remains to this day the existing general law governing the
classification and disposition of lands of the public domain other than timber and mineral
lands,"27 provide:

SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural
Resources, the President may designate by proclamation any tract or tracts of land of the
public domain as reservations for the use of the Republic of the Philippines or of any of its
branches, or of the inhabitants thereof, in accordance with regulations prescribed for this
purposes, or for quasi-public uses or purposes when the public interest requires it, including
reservations for highways, rights of way for railroads, hydraulic power sites, irrigation
systems, communal pastures or lequas communales, public parks, public quarries, public
fishponds, working men's village and other improvements for the public benefit.

SECTION 88. The tract or tracts of land reserved under the provisions of Section
eighty-three shall be non-alienable and shall not be subject to occupation, entry, sale,
lease, or other disposition until again declared alienable under the provisions of this
Act or by proclamation of the President. (Emphasis and underscoring supplied)

Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings from
public use, these properties remain properties of public dominion and are inalienable. Since the
Airport Lands and Buildings are inalienable in their present status as properties of public dominion,
they are not subject to levy on execution or foreclosure sale. As long as the Airport Lands and
Buildings are reserved for public use, their ownership remains with the State or the Republic of the
Philippines.

The authority of the President to reserve lands of the public domain for public use, and to withdraw
such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the Administrative Code of
1987, which states:

SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government. —
(1) The President shall have the power to reserve for settlement or public use, and for
specific public purposes, any of the lands of the public domain, the use of which is
not otherwise directed by law. The reserved land shall thereafter remain subject to the
specific public purpose indicated until otherwise provided by law or proclamation;

x x x x. (Emphasis supplied)

There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by law or
presidential proclamation from public use, they are properties of public dominion, owned by the
Republic and outside the commerce of man.

c. MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic. Section 48,
Chapter 12, Book I of the Administrative Code allows instrumentalities like MIAA to hold title to
real properties owned by the Republic, thus:

SEC. 48. Official Authorized to Convey Real Property. — Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be executed
in behalf of the government by the following:

(1) For property belonging to and titled in the name of the Republic of the Philippines, by the
President, unless the authority therefor is expressly vested by law in another officer.

(2) For property belonging to the Republic of the Philippines but titled in the name of
any political subdivision or of any corporate agency or instrumentality, by the
executive head of the agency or instrumentality. (Emphasis supplied)

In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer because
even its executive head cannot sign the deed of conveyance on behalf of the Republic. Only the
President of the Republic can sign such deed of conveyance.28

d. Transfer to MIAA was Meant to Implement a Reorganization

The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and Buildings
from the Bureau of Air Transportation of the Department of Transportation and Communications.
The MIAA Charter provides:

SECTION 3. Creation of the Manila International Airport Authority. — x x x x

The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned
 to the ownership and administration of the Authority, subject to existing rights, if any.
The Bureau of Lands and other appropriate government agencies shall undertake an actual
survey of the area transferred within one year from the promulgation of this Executive Order
and the corresponding title to be issued in the name of the Authority. Any portion thereof
shall not be disposed through sale or through any other mode unless specifically
approved by the President of the Philippines. (Emphasis supplied)

SECTION 22. Transfer of Existing Facilities and Intangible Assets. — All existing public
airport facilities, runways, lands, buildings and other property, movable or immovable,
belonging to the Airport, and all assets, powers, rights, interests and privileges belonging to
the Bureau of Air Transportation relating to airport works or air operations, including all
equipment which are necessary for the operation of crash fire and rescue facilities, are
hereby transferred to the Authority. (Emphasis supplied)

SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau of Air
Transportation and Transitory Provisions. — The Manila International Airport including the
Manila Domestic Airport as a division under the Bureau of Air Transportation is hereby
abolished.

x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic
receiving cash, promissory notes or even stock since MIAA is not a stock corporation.

The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport Lands
and Buildings to MIAA, thus:

WHEREAS, the Manila International Airport as the principal airport of the Philippines for both
international and domestic air traffic, is required to provide standards of airport
accommodation and service comparable with the best airports in the world;

WHEREAS, domestic and other terminals, general aviation and other facilities, have to be
upgraded to meet the current and future air traffic and other demands of aviation in Metro
Manila;

WHEREAS, a management and organization study has indicated that the objectives of
providing high standards of accommodation and service within the context of a
financially viable operation, will best be achieved by a separate and autonomous
body; and

WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No.
1772, the President of the Philippines is given continuing authority to reorganize the
National Government, which authority includes the creation of new entities, agencies
and instrumentalities of the Government[.] (Emphasis supplied)

The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA was
not meant to transfer beneficial ownership of these assets from the Republic to MIAA. The purpose
was merely to reorganize a division in the Bureau of Air Transportation into a separate and
autonomous body. The Republic remains the beneficial owner of the Airport Lands and Buildings.
MIAA itself is owned solely by the Republic. No party claims any ownership rights over MIAA's
assets adverse to the Republic.
The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be disposed
through sale or through any other mode unless specifically approved by the President of the
Philippines." This only means that the Republic retained the beneficial ownership of the Airport
Lands and Buildings because under Article 428 of the Civil Code, only the "owner has the right to x x
x dispose of a thing." Since MIAA cannot dispose of the Airport Lands and Buildings, MIAA does not
own the Airport Lands and Buildings.

At any time, the President can transfer back to the Republic title to the Airport Lands and Buildings
without the Republic paying MIAA any consideration. Under Section 3 of the MIAA Charter, the
President is the only one who can authorize the sale or disposition of the Airport Lands and
Buildings. This only confirms that the Airport Lands and Buildings belong to the Republic.

e. Real Property Owned by the Republic is Not Taxable

Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal property
owned by the Republic of the Philippines." Section 234(a) provides:

SEC. 234. Exemptions from Real Property Tax. — The following are exempted from
payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;

x x x. (Emphasis supplied)

This exemption should be read in relation with Section 133(o) of the same Code, which prohibits
local governments from imposing "[t]axes, fees or charges of any kind on the National Government,
its agencies and instrumentalitiesx x x." The real properties owned by the Republic are titled either
in the name of the Republic itself or in the name of agencies or instrumentalities of the National
Government. The Administrative Code allows real property owned by the Republic to be titled in the
name of agencies or instrumentalities of the national government. Such real properties remain
owned by the Republic and continue to be exempt from real estate tax.

The Republic may grant the beneficial use of its real property to an agency or instrumentality of the
national government. This happens when title of the real property is transferred to an agency or
instrumentality even as the Republic remains the owner of the real property. Such arrangement does
not result in the loss of the tax exemption. Section 234(a) of the Local Government Code states that
real property owned by the Republic loses its tax exemption only if the "beneficial use thereof has
been granted, for consideration or otherwise, to a taxable person." MIAA, as a government
instrumentality, is not a taxable person under Section 133(o) of the Local Government Code. Thus,
even if we assume that the Republic has granted to MIAA the beneficial use of the Airport Lands and
Buildings, such fact does not make these real properties subject to real estate tax.

However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not
exempt from real estate tax. For example, the land area occupied by hangars that MIAA leases to
private corporations is subject to real estate tax. In such a case, MIAA has granted the beneficial use
of such land area for a consideration to a taxable person and therefore such land area is subject to
real estate tax. In Lung Center of the Philippines v. Quezon City, the Court ruled:

Accordingly, we hold that the portions of the land leased to private entities as well as those
parts of the hospital leased to private individuals are not exempt from such taxes. On the
 other hand, the portions of the land occupied by the hospital and portions of the hospital
used for its patients, whether paying or non-paying, are exempt from real property taxes.29

3. Refutation of Arguments of Minority

The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of the
Local Government Code of 1991 withdrew the tax exemption of "all persons, whether natural or
juridical" upon the effectivity of the Code. Section 193 provides:

SEC. 193. Withdrawal of Tax Exemption Privileges – Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and
non-profit hospitals and educational institutions are hereby withdrawn upon effectivity of this
Code. (Emphasis supplied)

The minority states that MIAA is indisputably a juridical person. The minority argues that since the
Local Government Code withdrew the tax exemption of all juridical persons, then MIAA is not
exempt from real estate tax. Thus, the minority declares:

It is evident from the quoted provisions of the Local Government Code that the
withdrawn exemptions from realty tax cover not just GOCCs, but all persons. To
repeat, the provisions lay down the explicit proposition that the withdrawal of realty tax
exemption applies to all persons. The reference to or the inclusion of GOCCs is only
clarificatory or illustrative of the explicit provision.

The term "All persons" encompasses the two classes of persons recognized under
our laws, natural and juridical persons. Obviously, MIAA is not a natural person. Thus,
the determinative test is not just whether MIAA is a GOCC, but whether MIAA is a
juridical person at all. (Emphasis and underscoring in the original)

The minority posits that the "determinative test" whether MIAA is exempt from local taxation is its
status — whether MIAA is a juridical person or not. The minority also insists that "Sections 193 and
234 may be examined in isolation from Section 133(o) to ascertain MIAA's claim of exemption."

The argument of the minority is fatally flawed. Section 193 of the Local Government Code expressly
withdrew the tax exemption of all juridical persons "[u]nless otherwise provided in this Code."
Now, Section 133(o) of the Local Government Code expressly provides otherwise,
specifically prohibiting local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)
By express mandate of the Local Government Code, local governments cannot impose any kind of
tax on national government instrumentalities like the MIAA. Local governments are devoid of power
to tax the national government, its agencies and instrumentalities. The taxing powers of local
governments do not extend to the national government, its agencies and instrumentalities, "[u]nless
otherwise provided in this Code" as stated in the saving clause of Section 133. The saving clause
refers to Section 234(a) on the exception to the exemption from real estate tax of real property
owned by the Republic.

The minority, however, theorizes that unless exempted in Section 193 itself, all juridical persons are
subject to tax by local governments. The minority insists that the juridical persons exempt from local
taxation are limited to the three classes of entities specifically enumerated as exempt in Section 193.
Thus, the minority states:

x x x Under Section 193, the exemption is limited to (a) local water districts; (b) cooperatives
duly registered under Republic Act No. 6938; and (c) non-stock and non-profit hospitals and
educational institutions. It would be belaboring the obvious why the MIAA does not fall within
any of the exempt entities under Section 193. (Emphasis supplied)

The minority's theory directly contradicts and completely negates Section 133(o) of the Local
Government Code. This theory will result in gross absurdities. It will make the national government,
which itself is a juridical person, subject to tax by local governments since the national government is
not included in the enumeration of exempt entities in Section 193. Under this theory, local
governments can impose any kind of local tax, and not only real estate tax, on the national
government.

Under the minority's theory, many national government instrumentalities with juridical personalities
will also be subject to any kind of local tax, and not only real estate tax. Some of the national
government instrumentalities vested by law with juridical personalities are: Bangko Sentral ng
Pilipinas,30 Philippine Rice Research Institute,31Laguna Lake

Development Authority,32 Fisheries Development Authority,33 Bases Conversion Development

Authority,34Philippine Ports Authority,35 Cagayan de Oro Port Authority,36 San Fernando Port
Authority,37 Cebu Port Authority,38 and Philippine National Railways.39

The minority's theory violates Section 133(o) of the Local Government Code which expressly
prohibits local governments from imposing any kind of tax on national government instrumentalities.
Section 133(o) does not distinguish between national government instrumentalities with or without
juridical personalities. Where the law does not distinguish, courts should not distinguish. Thus,
Section 133(o) applies to all national government instrumentalities, with or without juridical
personalities. The determinative test whether MIAA is exempt from local taxation is not whether
MIAA is a juridical person, but whether it is a national government instrumentality under Section
133(o) of the Local Government Code. Section 133(o) is the specific provision of law prohibiting local
governments from imposing any kind of tax on the national government, its agencies and
instrumentalities.

Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise
provided in this Code." This means that unless the Local Government Code grants an express
authorization, local governments have no power to tax the national government, its agencies and
instrumentalities. Clearly, the rule is local governments have no power to tax the national
government, its agencies and instrumentalities. As an exception to this rule, local governments may
tax the national government, its agencies and instrumentalities only if the Local Government Code
expressly so provides.
The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of the
Code, which makes the national government subject to real estate tax when it gives the beneficial
use of its real properties to a taxable entity. Section 234(a) of the Local Government Code provides:

SEC. 234. Exemptions from Real Property Tax – The following are exempted from payment
of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person.

x x x. (Emphasis supplied)

Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The
exception to this exemption is when the government gives the beneficial use of the real property to a
taxable entity.

The exception to the exemption in Section 234(a) is the only instance when the national government,
its agencies and instrumentalities are subject to any kind of tax by local governments. The exception
to the exemption applies only to real estate tax and not to any other tax. The justification for the
exception to the exemption is that the real property, although owned by the Republic, is not devoted
to public use or public service but devoted to the private gain of a taxable person.

The minority also argues that since Section 133 precedes Section 193 and 234 of the Local
Government Code, the later provisions prevail over Section 133. Thus, the minority asserts:

x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an
accepted rule of construction, in case of conflict the subsequent provisions should prevail.
Therefore, MIAA, as a juridical person, is subject to real property taxes, the general
exemptions attaching to instrumentalities under Section 133(o) of the Local Government
Code being qualified by Sections 193 and 234 of the same law. (Emphasis supplied)

The minority assumes that there is an irreconcilable conflict between Section 133 on one hand, and
Sections 193 and 234 on the other. No one has urged that there is such a conflict, much less has
any one presenteda persuasive argument that there is such a conflict. The minority's assumption of
an irreconcilable conflict in the statutory provisions is an egregious error for two reasons.

First, there is no conflict whatsoever between Sections 133 and 193 because Section 193 expressly
admits its subordination to other provisions of the Code when Section 193 states "[u]nless otherwise
provided in this Code." By its own words, Section 193 admits the superiority of other provisions of
the Local Government Code that limit the exercise of the taxing power in Section 193. When a
provision of law grants a power but withholds such power on certain matters, there is no conflict
between the grant of power and the withholding of power. The grantee of the power simply cannot
exercise the power on matters withheld from its power.

Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local Government
Units." Section 133 limits the grant to local governments of the power to tax, and not merely the
exercise of a delegated power to tax. Section 133 states that the taxing powers of local governments
"shall not extend to the levy" of any kind of tax on the national government, its agencies and
instrumentalities. There is no clearer limitation on the taxing power than this.
Since Section 133 prescribes the "common limitations" on the taxing powers of local governments,
Section 133 logically prevails over Section 193 which grants local governments such taxing powers.
By their very meaning and purpose, the "common limitations" on the taxing power prevail over the
grant or exercise of the taxing power. If the taxing power of local governments in Section 193
prevails over the limitations on such taxing power in Section 133, then local governments can
impose any kind of tax on the national government, its agencies and instrumentalities — a gross
absurdity.

Local governments have no power to tax the national government, its agencies and
instrumentalities, except as otherwise provided in the Local Government Code pursuant to the
saving clause in Section 133 stating "[u]nless otherwise provided in this Code." This exception —
which is an exception to the exemption of the Republic from real estate tax imposed by local
governments — refers to Section 234(a) of the Code. The exception to the exemption in Section
234(a) subjects real property owned by the Republic, whether titled in the name of the national
government, its agencies or instrumentalities, to real estate tax if the beneficial use of such property
is given to a taxable entity.

The minority also claims that the definition in the Administrative Code of the phrase "government-
owned or controlled corporation" is not controlling. The minority points out that Section 2 of the
Introductory Provisions of the Administrative Code admits that its definitions are not controlling when
it provides:

SEC. 2. General Terms Defined. — Unless the specific words of the text, or the context as a
whole, or a particular statute, shall require a different meaning:

xxxx

The minority then concludes that reliance on the Administrative Code definition is "flawed."

The minority's argument is a non sequitur. True, Section 2 of the Administrative Code recognizes
that a statute may require a different meaning than that defined in the Administrative Code.
However, this does not automatically mean that the definition in the Administrative Code does not
apply to the Local Government Code. Section 2 of the Administrative Code clearly states that
"unless the specific words x x x of a particular statute shall require a different meaning," the definition
in Section 2 of the Administrative Code shall apply. Thus, unless there is specific language in the
Local Government Code defining the phrase "government-owned or controlled corporation"
differently from the definition in the Administrative Code, the definition in the Administrative Code
prevails.

The minority does not point to any provision in the Local Government Code defining the phrase
"government-owned or controlled corporation" differently from the definition in the Administrative
Code. Indeed, there is none. The Local Government Code is silent on the definition of the phrase
"government-owned or controlled corporation." The Administrative Code, however, expressly defines
the phrase "government-owned or controlled corporation." The inescapable conclusion is that the
Administrative Code definition of the phrase "government-owned or controlled corporation" applies to
the Local Government Code.

The third whereas clause of the Administrative Code states that the Code "incorporates in a unified
document the major structural, functional and procedural principles and rules of governance." Thus,
the Administrative Code is the governing law defining the status and relationship of government
departments, bureaus, offices, agencies and instrumentalities. Unless a statute expressly provides
for a different status and relationship for a specific government unit or entity, the provisions of the
Administrative Code prevail.

The minority also contends that the phrase "government-owned or controlled corporation" should
apply only to corporations organized under the Corporation Code, the general incorporation law, and
not to corporations created by special charters. The minority sees no reason why government
corporations with special charters should have a capital stock. Thus, the minority declares:

I submit that the definition of "government-owned or controlled corporations" under the

Administrative Code refer to those corporations owned by the government or its
instrumentalities which are created not by legislative enactment, but formed and organized
under the Corporation Code through registration with the Securities and Exchange
Commission. In short, these are GOCCs without original charters.

xxxx

It might as well be worth pointing out that there is no point in requiring a capital structure for
GOCCs whose full ownership is limited by its charter to the State or Republic. Such GOCCs
are not empowered to declare dividends or alienate their capital shares.

The contention of the minority is seriously flawed. It is not in accord with the Constitution and
existing legislations. It will also result in gross absurdities.

First, the Administrative Code definition of the phrase "government-owned or controlled corporation"
does not distinguish between one incorporated under the Corporation Code or under a special
charter. Where the law does not distinguish, courts should not distinguish.

Second, Congress has created through special charters several government-owned corporations
organized as stock corporations. Prime examples are the Land Bank of the Philippines and the
Development Bank of the Philippines. The special charter40 of the Land Bank of the Philippines
provides:

SECTION 81. Capital. — The authorized capital stock of the Bank shall be nine billion pesos,
divided into seven hundred and eighty million common shares with a par value of ten pesos
each, which shall be fully subscribed by the Government, and one hundred and twenty
million preferred shares with a par value of ten pesos each, which shall be issued in
accordance with the provisions of Sections seventy-seven and eighty-three of this Code.
(Emphasis supplied)

Likewise, the special charter41 of the Development Bank of the Philippines provides:

SECTION 7. Authorized Capital Stock – Par value. — The capital stock of the Bank shall be
Five Billion Pesos to be divided into Fifty Million common shares with par value of P100 per
share. These shares are available for subscription by the National Government. Upon the
effectivity of this Charter, the National Government shall subscribe to Twenty-Five Million
common shares of stock worth Two Billion Five Hundred Million which shall be deemed paid
for by the Government with the net asset values of the Bank remaining after the transfer of
assets and liabilities as provided in Section 30 hereof. (Emphasis supplied)

Other government-owned corporations organized as stock corporations under their special charters
are the Philippine Crop Insurance Corporation,42 Philippine International Trading Corporation,43 and
the Philippine National Bank44 before it was reorganized as a stock corporation under the
Corporation Code. All these government-owned corporations organized under special charters as
stock corporations are subject to real estate tax on real properties owned by them. To rule that they
are not government-owned or controlled corporations because they are not registered with the
Securities and Exchange Commission would remove them from the reach of Section 234 of the
Local Government Code, thus exempting them from real estate tax.

Third, the government-owned or controlled corporations created through special charters are those
that meet the two conditions prescribed in Section 16, Article XII of the Constitution. The first
condition is that the government-owned or controlled corporation must be established for the
common good. The second condition is that the government-owned or controlled corporation must
meet the test of economic viability. Section 16, Article XII of the 1987 Constitution provides:

SEC. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the common
good and subject to the test of economic viability. (Emphasis and underscoring supplied)

The Constitution expressly authorizes the legislature to create "government-owned or controlled

corporations" through special charters only if these entities are required to meet the twin conditions
of common good and economic viability. In other words, Congress has no power to create
government-owned or controlled corporations with special charters unless they are made to comply
with the two conditions of common good and economic viability. The test of economic viability
applies only to government-owned or controlled corporations that perform economic or commercial
activities and need to compete in the market place. Being essentially economic vehicles of the State
for the common good — meaning for economic development purposes — these government-owned
or controlled corporations with special charters are usually organized as stock corporations just like
ordinary private corporations.

In contrast, government instrumentalities vested with corporate powers and performing

governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every modern
State must provide its citizens. These instrumentalities need not be economically viable since the
government may even subsidize their entire operations. These instrumentalities are not the
"government-owned or controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.

Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested with
corporate powers provided these instrumentalities perform essential government functions or public
services. However, when the legislature creates through special charters corporations that perform
economic or commercial activities, such entities — known as "government-owned or controlled
corporations" — must meet the test of economic viability because they compete in the market place.

This is the situation of the Land Bank of the Philippines and the Development Bank of the Philippines
and similar government-owned or controlled corporations, which derive their income to meet
operating expenses solely from commercial transactions in competition with the private sector. The
intent of the Constitution is to prevent the creation of government-owned or controlled corporations
that cannot survive on their own in the market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:

MR. OPLE: Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the
test of economic performance. We know what happened in the past. If a government
corporation loses, then it makes its claim upon the taxpayers' money through new equity
infusions from the government and what is always invoked is the common good. That is the
reason why this year, out of a budget of P115 billion for the entire government, about P28
billion of this will go into equity infusions to support a few government financial institutions.
And this is all taxpayers' money which could have been relocated to agrarian reform, to
social services like health and education, to augment the salaries of grossly underpaid public
employees. And yet this is all going down the drain.

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common
good," this becomes a restraint on future enthusiasts for state capitalism to excuse
themselves from the responsibility of meeting the market test so that they become viable.
And so, Madam President, I reiterate, for the committee's consideration and I am glad that I
am joined in this proposal by Commissioner Foz, the insertion of the standard of
"ECONOMIC VIABILITY OR THE ECONOMIC TEST," together with the common good.45

Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:

The second sentence was added by the 1986 Constitutional Commission. The significant
addition, however, is the phrase "in the interest of the common good and subject to the test
of economic viability." The addition includes the ideas that they must show capacity to
function efficiently in business and that they should not go into activities which the private
sector can do better. Moreover, economic viability is more than financial viability but also
includes capability to make profit and generate benefits not quantifiable in financial
terms.46(Emphasis supplied)

Clearly, the test of economic viability does not apply to government entities vested with corporate
powers and performing essential public services. The State is obligated to render essential public
services regardless of the economic viability of providing such service. The non-economic viability of
rendering such essential public service does not excuse the State from withholding such essential
services from the public.

However, government-owned or controlled corporations with special charters, organized essentially

for economic or commercial objectives, must meet the test of economic viability. These are the
government-owned or controlled corporations that are usually organized under their special charters
as stock corporations, like the Land Bank of the Philippines and the Development Bank of the
Philippines. These are the government-owned or controlled corporations, along with government-
owned or controlled corporations organized under the Corporation Code, that fall under the definition
of "government-owned or controlled corporations" in Section 2(10) of the Administrative Code.

The MIAA need not meet the test of economic viability because the legislature did not create MIAA
to compete in the market place. MIAA does not compete in the market place because there is no
competing international airport operated by the private sector. MIAA performs an essential public
service as the primary domestic and international airport of the Philippines. The operation of an
international airport requires the presence of personnel from the following government agencies:
 1. The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold
departure orders;

2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;

3. The quarantine office of the Department of Health, to enforce health measures against the
spread of infectious diseases into the country;

4. The Department of Agriculture, to enforce measures against the spread of plant and
animal diseases into the country;

5. The Aviation Security Command of the Philippine National Police, to prevent the entry of
terrorists and the escape of criminals, as well as to secure the airport premises from terrorist
attack or seizure;

6. The Air Traffic Office of the Department of Transportation and Communications, to

authorize aircraft to enter or leave Philippine airspace, as well as to land on, or take off from,
the airport; and

7. The MIAA, to provide the proper premises — such as runway and buildings — for the
government personnel, passengers, and airlines, and to manage the airport operations.

All these agencies of government perform government functions essential to the operation of an
international airport.

MIAA performs an essential public service that every modern State must provide its citizens. MIAA
derives its revenues principally from the mandatory fees and charges MIAA imposes on passengers
and airlines. The terminal fees that MIAA charges every passenger are regulatory or administrative
fees47 and not income from commercial transactions.

MIAA falls under the definition of a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code, which provides:

SEC. 2. General Terms Defined. – x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed with
some if not all corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. x x x (Emphasis supplied)

The fact alone that MIAA is endowed with corporate powers does not make MIAA a government-
owned or controlled corporation. Without a change in its capital structure, MIAA remains a
government instrumentality under Section 2(10) of the Introductory Provisions of the Administrative
Code. More importantly, as long as MIAA renders essential public services, it need not comply with
the test of economic viability. Thus, MIAA is outside the scope of the phrase "government-owned or
controlled corporations" under Section 16, Article XII of the 1987 Constitution.

The minority belittles the use in the Local Government Code of the phrase "government-owned or
controlled corporation" as merely "clarificatory or illustrative." This is fatal. The 1987 Constitution
prescribes explicit conditions for the creation of "government-owned or controlled corporations." The
Administrative Code defines what constitutes a "government-owned or controlled corporation." To
belittle this phrase as "clarificatory or illustrative" is grave error.

To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13) of

the Introductory Provisions of the Administrative Code because it is not organized as a stock or non-
stock corporation. Neither is MIAA a government-owned or controlled corporation under Section 16,
Article XII of the 1987 Constitution because MIAA is not required to meet the test of economic
viability. MIAA is a government instrumentality vested with corporate powers and performing
essential public services pursuant to Section 2(10) of the Introductory Provisions of the
Administrative Code. As a government instrumentality, MIAA is not subject to any kind of tax by local
governments under Section 133(o) of the Local Government Code. The exception to the exemption
in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity under the Local
Government Code. Such exception applies only if the beneficial use of real property owned by the
Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus are
properties of public dominion. Properties of public dominion are owned by the State or the Republic.
Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)

The term "ports x x x constructed by the State" includes airports and seaports. The Airport Lands
and Buildings of MIAA are intended for public use, and at the very least intended for public service.
Whether intended for public use or public service, the Airport Lands and Buildings are properties of
public dominion. As properties of public dominion, the Airport Lands and Buildings are owned by the
Republic and thus exempt from real estate tax under Section 234(a) of the Local Government Code.

4. Conclusion

Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which
governs the legal relation and status of government units, agencies and offices within the entire
government machinery, MIAA is a government instrumentality and not a government-owned or
controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a government
instrumentality is not a taxable person because it is not subject to "[t]axes, fees or charges of any
kind" by local governments. The only exception is when MIAA leases its real property to a "taxable
person" as provided in Section 234(a) of the Local Government Code, in which case the specific real
property leased becomes subject to real estate tax. Thus, only portions of the Airport Lands and
Buildings leased to taxable persons like private parties are subject to real estate tax by the City of
Parañaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to public
use, are properties of public dominion and thus owned by the State or the Republic of the
Philippines. Article 420 specifically mentions "ports x x x constructed by the State," which includes
public airports and seaports, as properties of public dominion and owned by the Republic. As
properties of public dominion owned by the Republic, there is no doubt whatsoever that the Airport
Lands and Buildings are expressly exempt from real estate tax under Section 234(a) of the Local
Government Code. This Court has also repeatedly ruled that properties of public dominion are not
subject to execution or foreclosure sale.

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court of
Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878. We DECLARE the
Airport Lands and Buildings of the Manila International Airport Authority EXEMPT from the real
estate tax imposed by the City of Parañaque. We declare VOID all the real estate tax assessments,
including the final notices of real estate tax delinquencies, issued by the City of Parañaque on the
Airport Lands and Buildings of the Manila International Airport Authority, except for the portions that
the Manila International Airport Authority has leased to private parties. We also declare VOID the
assailed auction sale, and all its effects, of the Airport Lands and Buildings of the Manila
International Airport Authority.

No costs.

SO ORDERED.