FRANCISCO SERRANO DE AGBAYANI, plaintiff-appellee, vs.

PHILIPPINE NATIONAL
BANK and THE PROVINCIAL SHERIFF OF PANGASINAN, defendants, PHILIPPINE
NATIONAL BANK, defendant-appellant.
G.R. No. L-23127 April 29, 1971
FACT:

 In 1939, Agbayani borrowed P450 from PNB secured by a realty mortgage, which was
to mature 5 years later.

 1944, the loan matured but PNB could not collect because it was at this time of the war.
- In 1945, President Osmena issued the Debt Moratorium Law (EO #32), suspending
the payment of loans for four years due to the ravages of war.
- In 1948, RA 342 extended the Debt Moratorium Law for another eight years (up to
1956).
 In 1953, SC declared RA 342 as unconstitutional in the case of Rutter v Esteban.
o RA 342 (the debt moratorium law) continued EO 32, suspending the payment of
debts by war sufferers. However RA 342 could not pass the test of validity.
(violates the non-impairment of contractual obligations clause in the constitution).
 On 1959, 15 years later, PNB sought to foreclose the recovery of the balance of the loan
which remain unpaid.
 Agbayani filed a complaint claiming that it was barred by prescription, the mortgage
sought to be foreclosed had long prescribed, fifteen years having elapsed from the date
of maturity. She also claims that she obtained an injunction against the sheriff.
 PNB on the other hand claims that the defense of prescription would not be available if
the period from March 10, 1945, when Executive Order No. 32 1 was issued, to July 26,
1948, when the subsequent legislative act 2 extending the period of moratorium was
declared invalid.
- This period should be deducted from the prescriptive period since during this time
the bank took no legal steps for the recovery of the loan. As such, the action has not
yet prescribed.
 The lower court decided the suit in favor of Agbayani.
ISSUE: WON the period of the effectivity of EO 32 and the Act extending the Moratorium
Law before the same were declared invalid tolled the period of prescription (Effect of the
declaration of Unconstitutionality of a law)
RULING:
The Supreme Court declared the moratorium law unconstitutional but it did not allow to toll
the prescriptive period of the right to foreclose the mortgage. The court adopted the view that
before an act is declared unconstitutional it is an operative fact which can be the source
of rights and duties. (see doctrine below)
The error of the lower court in sustaining plaintiff’s suit is thus manifest. During the 8 year
period that EO 32 and RA 342 were in force, prescription did not run. Thus, the
prescriptive period was tolled in the meantime prior to such adjudication of invalidity.
From July 19, 1944, when her loan matured, to July 13, 1959, when extra-judicial foreclosure
proceedings were started by appellant Bank, the time consumed is six days short of fifteen
years. The prescriptive period was tolled however, from March 10, 1945, the effectivity of
Executive Order No. 32, to May 18, 1953, when the decision of Rutter v. Esteban was
promulgated, covering eight years, two months and eight days. Obviously then, when resort
was had extra-judicially to the foreclosure of the mortgage obligation, there was time to
spare before prescription could be availed of as a defense.
PRINCIPLE APPLIED:
 The “operative fact” doctrine: A legislative or executive act, prior to its being
declared as unconstitutional by the courts, is valid and must be complied with.
The general rule is that an unconstitutional act because it suffers from infirmity, cannot be a
source of legal rights or duties. When the courts declare a law to be inconsistent with the
Constitution, the former shall be void and the latter shall govern.
However, prior to the declaration of nullity of such challenged legislative act must have been
in force and had to be complied with. This is so as until after the judiciary, in an appropriate
case declares its invalidity, it is entitled to obedience and respect. Such legislative act was
in operation and presumed to be valid in all respects. It is now accepted that prior to its
being nullified, its existence as a fact must be reckoned with. This is merely to reflect
the awareness that precisely because the judiciary is the governmental organ which has the
final say on whether a legislative act is valid, a period of time may have elapsed before it can
exercise the power of judicial review that may lead to a declaration of nullity. It would be to
deprive the law of its quality of fairness and justice then, if there be no recognition of what
had transpired prior to such adjudication.

 In the language of an American Supreme Court decision:

“The actual existence of a statute, prior to such a determination [of

unconstitutionality], is an operative fact and may have consequences which cannot
justly be ignored. The past cannot always be erased by a new judicial
declaration. The effect of the subsequent ruling as to invalidity may have to be
considered in various aspects, with respect to particular relations, individual and
corporate, and particular conduct, private and official.”