PUBLIC
BOY SCOUTS OF THE G.R. No. 177131
PHILIPPINES,
Petitioner,
Promulgated:
- versu
COMMISSION ON June 7, 2011
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
prohibition[1] 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. 99-011[5] on August 19,
1999 (the COA Resolution), with the subject Defining the Commissions 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 letter[9] 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 Commissions 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 BSPs 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 cases 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
1
 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 letter[12] dated July 3, 2000, Director Crescencio S. Sunico, Corporate Audit
Officer (CAO) I of the COA, furnished the BSP with a copy of the Memorandum[13]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 Courts 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 BSPs 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 BSPs 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 BSPs 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]
2

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 COAs 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 COAs 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 Audit[22] 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
BSPs corporate identity in the same way that the governments privatization program
changed PALs, 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 BSPs 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 petitioners third argument, BSPs 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]
3

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 governments policy to stimulate patriotic sentiments and love of
country, the BSPs 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 BSPs funds may not
bar the subsequent exercise of its audit jurisdiction.
The BSP filed its Reply[33] 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 COAs 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 COAs audit jurisdiction.
Thereafter, considering the BSPs claim that it is a private corporation, this
Court, in a Resolution[34] 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 Courts resolution, the parties filed their respective
Comments.
In its Comment[35] 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 COAs 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 BSPs 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
latters own agency or instrumentality to help it in carrying out its
4
 governmental functions, then that corporation is considered public;
otherwise, it is private. x x x.[41]
For its part, in its Comment[42] 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 COAs 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:
Petitioners 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 petitioners 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.
Petitioners 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.[46] The 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
BSPs 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 COAs 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
5
 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
6
 "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 BSPs 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
7
 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
8
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
9
 (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.
10
 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 bills 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
11
 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.
the bill, in the Committee on Government Enterprises:
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 BSPs 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
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 shouldnt it
be, this rhetorical question, shouldnt it be better for this
organization to seek a mandate from, lets 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 thats a rhetorical
question, they may or they may not answer, ano. I dont 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 dont 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, dont take that as an objection, Im
not objecting. Im all for the objectives of these two bills. It just
12
 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 dont
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, thats 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
BSPs 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
dissents 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 COAs Jurisdiction
Regarding the COAs 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.
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:
13

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 COAs 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 dont 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 theres
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.
14
 WHEREFORE, premises considered, the instant petition for prohibition
is DISMISSED. During respondents 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
SO ORDERED. 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:
EN BANC
SEC. 13. No Senator or Member of the House of Representatives may
DANTE V. LIBAN, G.R. No. 175352 hold any other office or employment in the Government, or any
REYNALDO M. BERNARDO, subdivision, agency, or instrumentality thereof, including government-
and SALVADOR M. VIARI, Present: owned or controlled corporations or their subsidiaries, during his
Petitioners, term without forfeiting his seat. Neither shall he be appointed to any
PUNO, C.J., office which may have been created or the emoluments thereof
QUISUMBING, increased during the term for which he was elected.
YNARES-SANTIAGO, Petitioners cite Camporedondo v. NLRC,[2] which held that the PNRC is a government-
CARPIO, owned or controlled corporation. Petitioners claim that in accepting and holding the
CORONA, position of Chairman of the PNRC Board of Governors, respondent has automatically
CARPIO MORALES, forfeited his seat in the Senate, pursuant to Flores v. Drilon,[3] which held that incumbent
CHICO-NAZARIO, national legislators lose their elective posts upon their appointment to another
- versus - VELASCO, JR., government office.
NACHURA,
LEONARDO-DE CASTRO, In his Comment, respondent asserts that petitioners have no standing to file this petition
BRION, which appears to be an action for quo warranto, since the petition alleges that
PERALTA, and respondent committed an act which, by provision of law, constitutes a ground for
BERSAMIN, JJ. 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
RICHARD J. GORDON, an action for quo warranto in his own name. If the petition is one for quo warranto, it is
Respondent. Promulgated: already barred by prescription since under Section 11, Rule 66 of the Rules of Civil
July 15, 2009 Procedure, the action should be commenced within one year after the cause of the public
officers forfeiture of office. In this case, respondent has been working as a Red Cross
x--------------------------------------------------x 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
DECISION 2003 and re-elected in 2005.

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.
Respondent contends that even if the present petition is treated as a taxpayers 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

15
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
taxpayers 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 Courts 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
16
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 taxpayers
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
17
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
chosena 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.
18
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 Presidents 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 Presidents power of control. There is no dispute that the CCP performs
executive, and not legislative, judicial, or quasi-judicial functions.
The Presidents 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.
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 Societys active members must
remain in a large majority in a National Societys 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 P35, P100, P300, P500
or P1,000 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
19
 (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
20
the 2009 General Appropriations Act,[25] the LWUA has a budget amounting
to P400,000,000 for its subsidy requirements.[26] There is no private capital invested WHEREFORE, we declare that the office of the Chairman of the Philippine National Red
in the Local Water Districts. The capital assets and operating funds of the Local Water Cross is not a government office or an office in a government-owned or controlled
Districts all come from the government, either through transfer of assets, loans, subsidies corporation for purposes of the prohibition in Section 13, Article VI of the 1987
or the income from such assets or funds. 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
The government also controls the Local Water Districts because the municipal or city Presidential Decree Nos. 1264 and 1643, are VOID because they create the PNRC as a
mayor, or the provincial governor, appoints all the board directors of the Local Water private corporation or grant it corporate powers.
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. SO ORDERED.
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. DANTE V. LIBAN, G. R.
Just like the Local Water Districts, the PNRC was created through a special REYNALDO M. N
charter. However, unlike the Local Water Districts, the elements of government BERNARDO and o
ownership and control are clearly lacking in the PNRC. Thus, although the PNRC is SALVADOR M. .
created by a special charter, it cannot be considered a government-owned or controlled VIARI,
corporation in the absence of the essential elements of ownership and control by the Petitioners, 1
government. In creating the PNRC as a corporate entity, Congress was in fact creating a 7
private corporation. However, the constitutional prohibition against the creation of - versus - 5
private corporations by special charters provides no exception even for non-profit or 3
charitable corporations. Consequently, the PNRC Charter, insofar as it creates the PNRC 5
as a private corporation and grants it corporate powers,[27] is void for being RICHARD J. 2
unconstitutional. Thus, Sections GORDON,
1,[28] 2,[29] 3,[30] 4(a),[31] 5,[32] 6,[33] 7,[34] 8,[35] 9,[36] 10,[37] 11,[38] 12,[39] and 13[40] of the Respondent.
PNRC Charter, as amended, are void. January 18,
PHILIPPINE 2011
NATIONAL RED
CROSS,
Intervenor.

x--------------------------------------------------x
The other provisions[41] 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, RESOLUTION
exemptions and privileges set forth in the PNRC Charter. The other provisions of the
PNRC Charter implement the Philippine Governments treaty obligations under Article
4(5) of the Statutes of the International Red Cross and Red Crescent Movement, which LEONARDO-DE CASTRO, J.:
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 This resolves the Motion for Clarification and/or for Reconsideration[1] filed on
humanitarian field. August 10, 2009 by respondent Richard J. Gordon (respondent) of
the Decisionpromulgated by this Court on July 15, 2009 (the Decision), the Motion for
In sum, we hold that the office of the PNRC Chairman is not a government office or an Partial Reconsideration[2] filed on August 27, 2009 by movant-intervenor Philippine
office in a government-owned or controlled corporation for purposes of the prohibition National Red Cross (PNRC), and the latters Manifestation and Motion to Admit
in Section 13, Article VI of the 1987 Constitution. However, since the PNRC Charter is Attached Position Paper[3] filed on December 23, 2009.
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 In the Decision,[4] the Court held that respondent did not forfeit his seat in the
it wants to be a private corporation. Senate when he accepted the chairmanship of the PNRC Board of Governors, as the office

21
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.[5] The Decision, however, further declared void the PNRC Charter
insofar as it creates the PNRC as a private corporation and consequently ruled that the
PNRC should incorporate under the Corporation Code and register with the Securities
and Exchange Commission if it wants to be a private corporation.[6] The dispositive
portion of the Decision reads as follows:
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.[7]
In his Motion for Clarification and/or for Reconsideration, respondent raises the
following grounds: (1) as the issue of constitutionality of Republic Act (R.A.) No. 95 was
not raised by the parties, the Court went beyond the case in deciding such issue; and (2)
as the Court decided that Petitioners did not have standing to file the instant Petition, the
pronouncement of the Court on the validity of R.A. No. 95 should be considered obiter.[8]
Respondent argues that the validity of R.A. No. 95 was a non-issue; therefore, it
was unnecessary for the Court to decide on that question. Respondent cites Laurel v.
Garcia,[9] wherein the Court said that it will not pass upon a constitutional question
although properly presented by the record if the case can be disposed of on some other
ground and goes on to claim that since this Court, in the Decision, disposed of the petition
on some other ground, i.e., lack of standing of petitioners, there was no need for it to
delve into the validity of R.A. No. 95, and the rest of the judgment should be
deemed obiter.
In its Motion for Partial Reconsideration, PNRC prays that the Court sustain
the constitutionality of its Charter on the following grounds:
A. THE ASSAILED DECISION DECLARING
UNCONSTITUTIONAL REPUBLIC ACT NO. 95 AS AMENDED
DEPRIVED INTERVENOR PNRC OF ITS CONSTITUTIONAL
RIGHT TO DUE PROCESS.
1. INTERVENOR PNRC WAS NEVER A PARTY TO THE INSTANT
CONTROVERSY.
2. THE CONSTITUTIONALITY OF REPUBLIC ACT NO. 95, AS
AMENDED WAS NEVER AN ISSUE IN THIS CASE.
B. THE CURRENT CHARTER OF PNRC IS PRESIDENTIAL DECREE
NO. 1264 AND NOT REPUBLIC ACT NO. 95. PRESIDENTIAL
DECREE NO. 1264 WAS NOT A CREATION OF CONGRESS.
C. PNRCS STRUCTURE IS SUI GENERIS; IT IS A CLASS OF ITS OWN.
WHILE IT IS PERFORMING HUMANITARIAN FUNCTIONS AS AN
AUXILIARY TO GOVERNMENT, IT IS A NEUTRAL ENTITY
SEPARATE AND INDEPENDENT OF GOVERNMENT CONTROL,
YET IT DOES NOT QUALIFY AS STRICTLY PRIVATE IN
CHARACTER.
In his Comment and Manifestation[10] filed on November 9, 2009, respondent
manifests: (1) that he agrees with the position taken by the PNRC in its Motion for Partial
Reconsideration dated August 27, 2009; and (2) as of the writing of said Comment and
Manifestation, there was pending before the Congress of the Philippines a proposed bill
entitled An Act Recognizing the PNRC as an Independent, Autonomous, Non-
Governmental Organization Auxiliary to the Authorities of the Republic of the Philippines
in the Humanitarian Field, to be Known as The Philippine Red Cross.[11]
After a thorough study of the arguments and points raised by the respondent as well as
those of movant-intervenor in their respective motions, we have reconsidered our
pronouncements in our Decision dated July 15, 2009 with regard to the nature of the
PNRC and the constitutionality of some provisions of the PNRC Charter, R.A. No. 95, as
amended.
As correctly pointed out in respondents Motion, the issue of constitutionality of R.A. No.
95 was not raised by the parties, and was not among the issues defined in the body of the
Decision; thus, it was not the very lis mota of the case. We have reiterated the rule as to
when the Court will consider the issue of constitutionality in Alvarez v. PICOP Resources,
Inc.,[12] thus:
This Court will not touch the issue of unconstitutionality unless it
is the very lis mota. It is a well-established rule that a court
should not pass upon a constitutional question and decide a law
to be unconstitutional or invalid, unless such question is raised
by the parties and that when it is raised, if the record also presents
some other ground upon which the court may [rest] its judgment, that
course will be adopted and the constitutional question will be left for
consideration until such question will be unavoidable.[13]
Under the rule quoted above, therefore, this Court should not have declared void certain
sections of R.A. No. 95, as amended by Presidential Decree (P.D.) Nos. 1264 and 1643, the
PNRC Charter. Instead, the Court should have exercised judicial restraint on this matter,
especially since there was some other ground upon which the Court could have based its
judgment. Furthermore, the PNRC, the entity most adversely affected by this declaration
of unconstitutionality, which was not even originally a party to this case, was being
compelled, as a consequence of the Decision, to suddenly reorganize and incorporate
under the Corporation Code, after more than sixty (60) years of existence in this
country.
22
Its existence as a chartered corporation remained unchallenged on ground of
unconstitutionality notwithstanding that R.A. No. 95 was enacted on March 22, 1947
during the effectivity of the 1935 Constitution, which provided for a proscription against
the creation of private corporations by special law, to wit:
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 and controlled by
the Government or any subdivision or instrumentality thereof. (Art.
XIV, 1935 Constitution.)
Similar provisions are found in Article XIV, Section 4 of the 1973 Constitution and Article
XII, Section 16 of the 1987 Constitution. The latter reads:
SECTION 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.
Since its enactment, the PNRC Charter was amended several times, particularly on June
11, 1953, August 16, 1971, December 15, 1977, and October 1, 1979, by virtue of R.A. No.
855, R.A. No. 6373, P.D. No. 1264, and P.D. No. 1643, respectively. The passage of several
laws relating to the PNRCs corporate existence notwithstanding the effectivity of the
constitutional proscription on the creation of private corporations by law, is a
recognition that the PNRC is not strictly in the nature of a private corporation
contemplated by the aforesaid constitutional ban.
A closer look at the nature of the PNRC would show that there is none like it not
just in terms of structure, but also in terms of history, public service and official status
accorded to it by the State and the international community. There is merit in PNRCs
contention that its structure is sui generis.
The PNRC succeeded the chapter of the American Red Cross which was in
existence in the Philippines since 1917. It was created by an Act of Congress after the
Republic of the Philippines became an independent nation on July 6, 1946 and
proclaimed on February 14, 1947 its adherence to the Convention of Geneva of July 29,
1929 for the Amelioration of the Condition of the Wounded and Sick of Armies in the
Field (the Geneva Red Cross Convention). By that action the Philippines 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 and like
other volunteer organizations established in other countries which have ratified the
Geneva Conventions, to promote the health and welfare of the people in peace and in
war.[14]
The provisions of R.A. No. 95, as amended by R.A. Nos. 855 and 6373, and
further amended by P.D. Nos. 1264 and 1643, show the historical background and legal
basis of the creation of the PNRC by legislative fiat, as a voluntary organization
impressed with public interest. Pertinently R.A. No. 95, as amended by P.D.
1264, provides:
WHEREAS, during the meeting in Geneva, Switzerland, on 22
August 1894, the nations of the world unanimously agreed to
diminish within their power the evils inherent in war;
WHEREAS, more than one hundred forty nations of the
world have ratified or adhered to the Geneva Conventions of August
12, 1949 for the Amelioration of the Condition of the Wounded and
Sick of Armed Forces in the Field and at Sea, The Prisoners of War,
and The Civilian Population in Time of War referred to in this Charter
as the Geneva Conventions;
WHEREAS, the Republic of the Philippines became an
independent nation on July 4, 1946, and proclaimed on February
14, 1947 its adherence to the Geneva Conventions of 1929, and
by the 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 Conventions;
WHEREAS, there existed in the Philippines since 1917 a
chapter of the American National Red Cross which was terminated in
view of the independence of the Philippines; and
WHEREAS, the volunteer organizations established in other
countries which have ratified or adhered to the Geneva
Conventions 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 people of the
world;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of
the Philippines, by virtue of the powers vested in me by the
Constitution as Commander-in-Chief of all the Armed Forces of the
Philippines and pursuant to Proclamation No. 1081 dated September
21, 1972, and General Order No. 1 dated September 22, 1972, do
hereby decree and order that Republic Act No. 95, Charter of the
Philippine National Red Cross (PNRC) as amended by Republic Acts
No. 855 and 6373, be further amended as follows:
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
23
 this Corporation shall be located in Metropolitan
Manila. (Emphasis supplied.)
The significant public service rendered by the PNRC can be gleaned from
Section 3 of its Charter, which provides:
Section 3. That the purposes of this Corporation shall be as
follows:
(a) To provide volunteer aid to the sick and wounded of
armed forces in time of war, in accordance with the spirit of and under
the conditions prescribed by the Geneva Conventions to which the
Republic of the Philippines proclaimed its adherence;
(b) For the purposes mentioned in the preceding sub-
section, to perform all duties devolving upon the Corporation as a
result of the adherence of the Republic of the Philippines to the said
Convention;
(c) To act in matters of voluntary relief and in accordance
with the authorities of the armed forces as a medium of
communication between people of the Republic of the Philippines and
their Armed Forces, in time of peace and in time of war, and to act in
such matters between similar national societies of other governments
and the Governments and people and the Armed Forces of the
Republic of the Philippines;
(d) To establish and maintain a system of national and
international relief in time of peace and in time of war and apply the
same in meeting and emergency needs caused by typhoons, flood,
fires, earthquakes, and other natural disasters and to devise and carry
on measures for minimizing the suffering caused by such disasters;
(e) To devise and promote such other services in time of
peace and in time of war as may be found desirable in improving the
health, safety and welfare of the Filipino people;
(f) To devise such means as to make every citizen and/or
resident of the Philippines a member of the Red Cross.
The PNRC is one of the National Red Cross and Red Crescent Societies, which,
together with the International Committee of the Red Cross (ICRC) and the IFRC and RCS,
make up the International Red Cross and Red Crescent Movement (the Movement). They
constitute a worldwide humanitarian movement, whose mission is:
[T]o prevent and alleviate human suffering wherever it may be found,
to protect life and health and ensure respect for the human being, in
particular in times of armed conflict and other emergencies, to work
for the prevention of disease and for the promotion of health and
social welfare, to encourage voluntary service and a constant
readiness to give help by the members of the Movement, and a
universal sense of solidarity towards all those in need of its protection
and assistance.[15]
The PNRC works closely with the ICRC and has been involved in humanitarian
activities in the Philippines since 1982. Among others, these activities in the country
include:
1. Giving protection and assistance to civilians displaced or otherwise
affected by armed clashes between the government and armed opposition
groups, primarily in Mindanao;
2. Working to minimize the effects of armed hostilities and violence on the
population;
3. Visiting detainees; and
4. Promoting awareness of international humanitarian law in the public and
private sectors.[16]
National Societies such as the PNRC act as auxiliaries to the public authorities
of their own countries in the humanitarian field and provide a range of services including
disaster relief and health and social programmes.
The International Federation of Red Cross (IFRC) and Red Crescent Societies
(RCS) Position Paper,[17] submitted by the PNRC, is instructive with regard to the
elements of the specific nature of the National Societies such as the PNRC, to wit:
National Societies, such as the Philippine National Red Cross
and its sister Red Cross and Red Crescent Societies, have certain
specificities deriving from the 1949 Geneva Convention and the
Statutes of the International Red Cross and Red Crescent Movement
(the Movement). They are also guided by the seven Fundamental
Principles of the Red Cross and Red Crescent Movement: Humanity,
Impartiality, Neutrality, Independence, Voluntary Service, Unity
and Universality.
A National Society partakes of a sui generis character. It
is a protected component of the Red Cross movement under Articles
24 and 26 of the First Geneva Convention, especially in times of armed
conflict. These provisions require that the staff of a National Society
shall be respected and protected in all circumstances. Such protection
is not ordinarily afforded by an international treaty to ordinary
private entities or even non-governmental organisations
(NGOs). This sui generis character is also emphasized by the Fourth
Geneva Convention which holds that an Occupying Power cannot
require any change in the personnel or structure of a National
Society. National societies are therefore organizations that are
24
 directly regulated by international humanitarian law, in contrast
to other ordinary private entities, including NGOs.
xxxx
In addition, National Societies are not only officially
recognized by their public authorities as voluntary aid societies,
auxiliary to the public authorities in the humanitarian field, but also
benefit from recognition at the International level. This is considered
to be an element distinguishing National Societies from other
organisations (mainly NGOs) and other forms of humanitarian
response.
x x x. No other organisation belongs to a world-wide
Movement in which all Societies have equal status and share equal
responsibilities and duties in helping each other. This is considered to
be the essence of the Fundamental Principle of Universality.
Furthermore, the National Societies are considered to
be auxiliaries to the public authorities in the humanitarian field. x x x.
The auxiliary status of [a] Red Cross Society means that it is
at one and the same time a private institution and a public
service organization because the very nature of its work implies
cooperation with the authorities, a link with the State. In carrying
out their major functions, Red Cross Societies give their humanitarian
support to official bodies, in general having larger resources than the
Societies, working towards comparable ends in a given sector.
x x x No other organization has a duty to be its
governments humanitarian partner while remaining
independent.[18] (Emphases ours.)
It is in recognition of this sui generis character of the PNRC that R.A. No. 95 has remained
valid and effective from the time of its enactment in March 22, 1947 under the 1935
Constitution and during the effectivity of the 1973 Constitution and the 1987
Constitution.
The PNRC Charter and its amendatory laws have not been questioned or
challenged on constitutional grounds, not even in this case before the Court now.
In the Decision, the Court, citing Feliciano v. Commission on Audit,[19] explained that the
purpose of the constitutional provision prohibiting Congress from creating private
corporations was to prevent the granting of special privileges to certain individuals,
families, or groups, which were denied to other groups. Based on the above discussion, it
can be seen that the PNRC Charter does not come within the spirit of this constitutional
provision, as it does not grant special privileges to a particular individual, family, or
group, but creates an entity that strives to serve the common good.
Furthermore, a strict and mechanical interpretation of Article XII, Section 16 of the 1987
Constitution will hinder the State in adopting measures that will serve the public good or
national interest. It should be noted that a special law, R.A. No. 9520, the Philippine
Cooperative Code of 2008, and not the general corporation code, vests corporate power
and capacities upon cooperatives which are private corporations, in order to implement
the States avowed policy.
In the Decision of July 15, 2009, the Court recognized the public service
rendered by the PNRC as the governments partner in the observance of its international
commitments, to wit:
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. The PNRC provides six major services:
Blood Services, Disaster Management, Safety Services, Community
Health and Nursing, Social Services and Voluntary Service.
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. x x
x.[20] (Citations omitted.)
So must this Court recognize too the countrys adherence to the Geneva
Convention and respect the unique status of the PNRC in consonance with its treaty
obligations. The Geneva Convention has the force and effect of law.[21] Under the
Constitution, the Philippines adopts the generally accepted principles of international
law as part of the law of the land.[22] This constitutional provision must be reconciled and
harmonized with Article XII, Section 16 of the Constitution, instead of using the latter to
negate the former.
By requiring the PNRC to organize under the Corporation Code just like any
other private corporation, the Decision of July 15, 2009 lost sight of the PNRCs special
status under international humanitarian law and as an auxiliary of the State, designated
to assist it in discharging its obligations under the Geneva Conventions. Although the
PNRC is called to be independent under its Fundamental Principles, it interprets such
independence as inclusive of its duty to be the governments humanitarian partner. To be
recognized in the International Committee, the PNRC must have an autonomous status,
and carry out its humanitarian mission in a neutral and impartial manner.
However, in accordance with the Fundamental Principle of Voluntary Service of
National Societies of the Movement, the PNRC must be distinguished from private and
profit-making entities. It is the main characteristic of National Societies that they are not
inspired by the desire for financial gain but by individual commitment and devotion to a
25
humanitarian purpose freely chosen or accepted as part of the service that National
Societies through its volunteers and/or members render to the Community.[23]
The PNRC, as a National Society of the International Red Cross and Red
Crescent Movement, can neither be classified as an instrumentality of the State, so as not
to lose its character of neutrality as well as its independence, nor strictly as a private
corporation since it is regulated by international humanitarian law and is treated as
an auxiliary of the State.[24]
Based on the above, the sui generis status of the PNRC is now sufficiently
established. Although it is neither a subdivision, agency, or instrumentality of the
government, nor a government-owned or -controlled corporation or a subsidiary thereof,
as succinctly explained in the Decision of July 15, 2009, so much so that respondent,
under the Decision, was correctly allowed to hold his position as Chairman thereof
concurrently while he served as a Senator, such a conclusion does not ipso facto imply
that the PNRC is a private corporation within the contemplation of the provision of the
Constitution, that must be organized under the Corporation Code. As correctly
mentioned by Justice Roberto A. Abad, the sui generis character of PNRC requires us to
approach controversies involving the PNRC on a case-to-case basis.
In sum, the PNRC enjoys a special status as an important ally and auxiliary of
the government in the humanitarian field in accordance with its commitments under
international law. This Court cannot all of a sudden refuse to recognize its existence,
especially since the issue of the constitutionality of the PNRC Charter was never raised
by the parties. It bears emphasizing that the PNRC has responded to almost all national
disasters since 1947, and is widely known to provide a substantial portion of the
countrys blood requirements. Its humanitarian work is unparalleled. The Court should
not shake its existence to the core in an untimely and drastic manner that would not only
have negative consequences to those who depend on it in times of disaster and armed
hostilities but also have adverse effects on the image of the Philippines in the
international community. The sections of the PNRC Charter that were declared void
must therefore stay.
WHEREFORE, premises considered, respondent Richard J. Gordons Motion
for Clarification and/or for Reconsideration and movant-intervenor PNRCs Motion
for Partial Reconsideration of the Decision in G.R. No. 175352 dated July 15, 2009
are GRANTED. The constitutionality of R.A. No. 95, as amended, the charter of the
Philippine National Red Cross, was not raised by the parties as an issue and should not
have been passed upon by this Court. The structure of the PNRC is sui generis being
neither strictly private nor public in nature. R.A. No. 95 remains valid and constitutional
in its entirety. The dispositive portion of the Decision should therefore be MODIFIED by
deleting the second sentence, to now read as follows:
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.
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.1âwphi1.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
26
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 Order 7 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
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.1âwphi1.nêt

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 THE VETERANS FEDERATION OF G. R. No. 155027
was the administrator of the Surigao del Norte chapter of the PNRC. An audit conducted THE PHILIPPINESrepresented
by a field auditor revealed a shortage in the chapter funds in the sum of P109,000.00. by Esmeraldo R. Acorda,
When required to restitute the amount of P135,927.78, petitioner therein instead Petitioner, February 28, 2006
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 - versus -
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 Hon. ANGELO T. REYES in his
corporation whose employees are embraced by civil service regulation. The labor arbiter capacity as Secretary of National
dismissed the complaint, and the Commission sustained his order. The petitioner Defense; and Hon. EDGARDO E.
assailed the dismissal of his complaint via a petition for certiorari, contending that the BATENGA in his capacity as
PNRC is a private organization and not a government-owned or controlled corporation. Undersecretary for Civil Relations
In dismissing the petition, we ruled thus: and Administration of the
Department of National Defense,
Resolving the issue set out in the opening paragraph of this opinion, we rule Respondents.
that the Philippine National Red Cross (PNRC) is a government owned and x--------------------------------------------------x
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 DECISION
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 CHICO-NAZARIO, J.:
Civil Service Commission, and are compulsory members of the Government
Service Insurance System. The PNRC was not "impliedly converted to a private
27
 Defense, a report of its proceedings for
This is a Petition for Certiorari with Prohibition under Rule 65 of the 1997 the past year, including a full, complete
Rules of Civil Procedure, with a prayer to declare as void Department Circular No. 04 of and itemized report of receipts and
the Department of National Defense (DND), dated 10 June 2002. expenditures of whatever kind.

Petitioner in this case is the Veterans Federation of the Philippines (VFP), a corporate 3. Republic Act 3518 dated 18 June 1963
body organized under Republic Act No. 2640, dated 18 June 1960, as amended, and duly (An Act Creating the Philippine Veterans
registered with the Securities and Exchange Commission. Respondent Angelo T. Reyes Bank, and for Other Purposes) provides in
was the Secretary of National Defense (DND Secretary) who issued the assailed Section 6 that ... the affairs and business of
Department Circular No. 04, dated 10 June 2002. Respondent Edgardo E. Batenga was the Philippine Veterans Bank shall be
the DND Undersecretary for Civil Relations and Administration who was tasked by the directed and its property managed,
respondent DND Secretary to conduct an extensive management audit of the records of controlled and preserved, unless
petitioner. otherwise provided in this Act, by a Board
of Directors consisting of eleven (11)
The factual and procedural antecedents of this case are as follows: members to be composed of three ex
officio members to wit: the Philippine
Petitioner VFP was created under Rep. Act No. 2640,[1] a statute approved on 18 June Veterans Administrator, the President of
1960. the Veterans Federation of the Philippines
and the Secretary of National Defense
On 15 April 2002, petitioners incumbent president received a letter dated 13 x x x.
April 2002 which reads:
It is therefore in the context of clarification and rectification
Col. Emmanuel V. De Ocampo (Ret.) of what should have been done by the DND (Department of National
President Defense) for and about the VFP and PVB that I am requesting
Veterans Federation of the Philippines appropriate information and report about these two corporate bodies.
Makati, Metro Manila
Therefore it may become necessary that a conference with
Dear Col. De Ocampo: your staffs in these two bodies be set.

Please be informed that during the preparation of my briefing before Thank you and anticipating your action on this request.
the Cabinet and the President last March 9, 2002, we came across
some legal bases which tended to show that there is an organizational Very truly yours,
and management relationship between Veterans Federation of (SGD) ANGELO T. REYES
the Philippines and the Philippine Veterans Bank which for many [DND] Secretary
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
On 10 June 2002, respondent DND Secretary issued the assailed DND Department
Circular No. 04 entitled, Further Implementing the Provisions of Sections 1 [2] and 2[3] 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

28
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 Federations 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
29
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, petitioners President received a letter dated 23 August 2002 from
respondent Undersecretary, informing him that Department Order No. 129 dated 23
August 2002directed 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 petitioners 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 petitioners President that the Management
Audit Group headed by the Undersecretary would be paying petitioner a visit on 30
August 2002 for an update on VFPs 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.
30
 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 petitioners 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 Courts 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 Courts time and attention, which are better
devoted to matters within its exclusive jurisdiction, and to prevent
further over-crowding of the Courts 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 Secretarys 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 VFPs governing body?
At the heart of all these issues and all of petitioners prayers and assertions in
this case is petitioners 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 Secretarys 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
31
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 1. The VFP does not possess the elements which would
to see that subordinate officers perform their duties. If the latter fail or neglect to fulfill qualify it as a public office, particularly the possession/delegation of a
them, the former may take such action or step as prescribed by law to make them portion of sovereign power of government to be exercised for the
perform their duties.[14] These definitions are synonymous with the definitions in the benefit of the public;
assailed Department Circular No. 04, while the other provisions of the assailed
department circular are mere consequences of control and supervision as defined. 2. VFP funds are not public funds because
Thus, in order for petitioners premise to be able to support its conclusion, petitioners
should be deemed to imply either of the following: (1) that it is a) No budgetary appropriations or
unconstitutional/impermissible for the law (Rep. Act No. 2640) to grant control and/or government funds have been released to
supervision to the Secretary of National Defense over a private organization, or (2) that the VFP directly or indirectly from the
the control and/or supervision that can be granted to the Secretary of National Defense Department of Budget and Management
over a private organization is limited, and is not as strong as they are defined above. (DBM);

The following provision of the 1935 Constitution, the organic act controlling at the time b) VFP funds come from membership
of the creation of the VFP in 1960, is relevant: dues;

Section 7. The Congress shall not, except by general law, c) The lease rentals raised from the use of
provide for the formation, organization, or regulation of private government lands reserved for the VFP
corporations, unless such corporations are owned and controlled by are private in character and do not belong
the Government or any subdivision or instrumentality thereof.[15] to the government. Said rentals are fruits
of VFPs labor and efforts in managing and
administering the lands for VFP purposes
On the other hand, its counterparts in the 1973 and 1987 constitutions are the and objectives. A close analogy would be
following: any Filipino citizen settling on
government land and who tills the land
for his livelihood and sustenance. The
Section 4. The National Assembly shall not, except by general
fruits of his labor belong to him and not to
law, provide for the formation, organization, or regulation of private
the owner of the land. Such fruits are not
corporations, unless such corporations are owned or controlled by the
public funds.
government or any subdivision or instrumentality thereof.[16]
3. Although the juridical personality of the VFP emanates
Sec. 16. The Congress shall not, except by general law, from a statutory charter, the VFP retains its essential character as a
provide for the formation, organization, or regulation of private private, civilian federation of veterans voluntarily formed by the
corporations. Government-owned and controlled corporations may be veterans themselves to attain a unity of effort, purpose and
created or established by special charters in the interest of the objectives, e.g.
common good and subject to the test of economic viability.[17]
a. The members of the VFP are individual
members and retirees from the public and
From the foregoing, it is crystal clear that our constitutions explicitly prohibit military service;
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 b. Membership in the VFP is voluntary, not
to grant control of the VFP to a public official if it were neither a public corporation, an compulsory;
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 c. The VFP is governed, not by the Civil
mentioned above, but we cannot go into that in this case since there is no challenge to Service Law, the Articles of War nor the
the creation of the VFP in the petition as to permit this Court from considering its nullity. GSIS Law, but by the Labor Code and the
SSS Law;
Petitioner vigorously argues that the VFP is a private non-government
organization, pressing on the following contentions:
32
 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 petitioners 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 petitioners 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 Mechems 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 VFAs 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 justice [25] 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),[27] that 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
33
 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 nations 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. 2640[31] 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 sovereigntys 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 VFPs 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;
(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 VFPs affiliate organizations do not become public funds while
they are still funds of the affiliate organizations. A close reading of Section 1 [35] 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.
34
 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. Desierto[39] 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
Councils 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.
Petitioners 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 Davao[47] can be applied
to DBM:
In any case, it is contended, the ruling of the Bureau of Local
Government Finance (BLGF) that petitioners 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
35
 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 DBMs 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 agencys 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 petitioners 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 VFPs 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 circulars 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
Federations 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.
36

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 Taada 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 Taada.
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 maybe 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 petitioners 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.
37
 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
MANILA INTERNATIONAL G.R. No. 155650 withdrew the exemption from real estate tax granted to MIAA under Section 21 of the
AIRPORT AUTHORITY, MIAA Charter. Thus, MIAA negotiated with respondent City of Paraaque to pay the
Petitioner, Present: real estate tax imposed by the City. MIAA then paid some of the real estate tax
already due.
PANGANIBAN, C.J.,
PUNO, On 28 June 2001, MIAA received Final Notices of Real Estate Tax
QUISUMBING, Delinquency from the City of Paraaque for the taxable years 1992 to
YNARES-SANTIAGO, 2001. MIAAs real estate tax delinquency is broken down as follows:
SANDOVAL-GUTIERREZ,
- versus - CARPIO,
AUSTRIA-MARTINEZ,
CORONA, TAX TAXABLEYE TAX DUE PENALTY TOTAL
CARPIO MORALES, DECLARATI AR
CALLEJO, SR., ON
AZCUNA, E-016- 1992-2001 19,558,160.00 11,201,083.20 30,789,243.20
COURT OF APPEALS, CITY OF TINGA, 01370
PARAAQUE, CITY MAYOR OF CHICO-NAZARIO, E-016- 1992-2001 111,689,424.9 68,149,479.59 179,838,904.4
PARAAQUE, SANGGUNIANG GARCIA, and 01374 0 9
PANGLUNGSOD NG PARAAQUE, VELASCO, JR., JJ. E-016- 1992-2001 20,276,058.00 12,371,832.00 32,647,890.00
CITY ASSESSOR OF PARAAQUE, 01375
and CITY TREASURER OF Promulgated: E-016- 1992-2001 58,144,028.00 35,477,712.00 93,621,740.00
PARAAQUE, 01376
Respondents. July 20, 2006 E-016- 1992-2001 18,134,614.65 11,065,188.59 29,199,803.24
01377
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x E-016- 1992-2001 111,107,950.4 67,794,681.59 178,902,631.9
01378 0 9
D E C I S I ON
E-016- 1992-2001 4,322,340.00 2,637,360.00 6,959,700.00
01379
CARPIO, J.:
E-016- 1992-2001 7,776,436.00 4,744,944.00 12,521,380.00
01380
The Antecedents
*E-016-013- 1998-2001 6,444,810.00 2,900,164.50 9,344,974.50
Petitioner Manila International Airport Authority (MIAA) operates 85
the Ninoy Aquino International Airport (NAIA) Complex in Paraaque City under *E-016- 1998-2001 34,876,800.00 5,694,560.00 50,571,360.00
Executive Order No. 903, otherwise known as the Revised Charter of the Manila 01387
International Airport Authority (MIAA Charter). Executive Order No. 903 was issued *E-016- 1998-2001 75,240.00 33,858.00 109,098.00
on 21 July 1983 by then President Ferdinand E. Marcos. Subsequently, Executive Order 01396
Nos. 909[1] and 298[2] amended the MIAA Charter. GRAND P392,435,861. P232,070,863. P 624,506,725.
TOTAL 95 47 42
As operator of the international airport, MIAA administers the land,
improvements and equipment within the NAIA Complex. The MIAA Charter transferred 1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102
to MIAA approximately 600 hectares of land,[3] including the runways and buildings for P4,207,028.75
(Airport Lands and Buildings) then under the Bureau of Air Transportation.[4] The MIAA #9476101 for P28,676,480.00
Charter further provides that no portion of the land transferred to MIAA shall be #9476103 for P49,115.00[6]
disposed of through sale or any other mode unless specifically approved by the President
of the Philippines.[5]

38
On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of levy
and warrants of levy on the Airport Lands and Buildings. The Mayor of the City
of Paraaque 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 Paraaque 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 MIAAs 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 Paraaque posted notices of auction sale at
the Barangay Halls of Barangays Vitalez, Sto. Nio, and Tambo, Paraaque City; in the public
market of Barangay La Huerta; and in the main lobby of the Paraaque City Hall. The City
of Paraaque 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 Paraaque 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 Paraaque, City
Mayor of Paraaque, Sangguniang Panglungsod ng Paraaque, City Treasurer of Paraaque,
and the City Assessor of Paraaque (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 Paraaque, 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
corporationsupon 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. Marcos[8] 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 Paraaque, and all
proceedings taken pursuant to such assessments, are void. In such event, the other
issues raised in this petition become moot.
The Courts Ruling
We rule that MIAAs Airport Lands and Buildings are exempt from real estate tax imposed
by local governments.
39
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
Charter[9] 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 Code[10] 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:
40
 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 authority[13] 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 instrumentalities and 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:
41
 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
42
use. Such fees are often termed users 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 users 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 Landsand 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 Paraaque 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 encumber[26] the Airport Lands and Buildings, the President
must first withdraw from public use the 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 mens 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
43
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 MIAAs 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
44
 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 MIAAs 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 AirportLands 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 instrumentalities x 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
45
 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 MIAAs 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]nlessotherwise 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 minoritys 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 minoritys 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,[31]Laguna Lake
Development Authority,[32] Fisheries Development Authority,[33] Bases Conversion
Development Authority,[34] Philippine Ports Authority,[35] Cagayan de Oro Port
Authority,[36] San Fernando Port Authority,[37] Cebu Port Authority,[38] and Philippine
National Railways.[39]
The minoritys 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
46
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 presented a persuasive argument that there is such
a conflict. The minoritys 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.
47
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 minoritys 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 charter[40] 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 charter[41] 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
48
 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 Bank[44] 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 committees
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]
49
 Father Joaquin G. Bernas, a leading member of the Constitutional Commission,
explains in his textbook The 1987 Constitution of the Republic of the
Philippines: ACommentary:
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 fees[47] 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.
50
 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 Paraaque.
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 Paraaque.We
declare VOID all the real estate tax assessments, including the final notices of real estate
tax delinquencies, issued by the City of Paraaque 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.
G.R. No. 193462 February 4, 2014
DENNIS A.B. FUNA, Petitioner,
vs.
MANILA ECONOMIC AND CULTURAL OFFICE and the COMMISSION ON
AUDIT, Respondents.
DECISION
PEREZ, J.:
This is a petition for mandamus1 to compel:
1.) the Commission on Audit (COA) to audit and examine the funds of the
Manila Economic and Cultural Office (MECO), and
51
 2.) the MECO to submit to such audit and examination.
The antecedents:
Prelude
The aftermath of the Chinese civil war2 left the country of China with two (2)
governments in a stalemate espousing competing assertions of sovereignty.3 On one
hand is the communist People’s Republic of China (PROC) which controls the mainland
territories, and on the other hand is the nationalist Republic of China (ROC) which
controls the island of Taiwan. For a better part of the past century, both the PROC and
ROC adhered to a policy of "One China" i.e., the view that there is only one legitimate
government in China, but differed in their respective interpretation as to which that
government is.4
With the existence of two governments having conflicting claims of sovereignty over one
country, came the question as to which of the two is deserving of recognition as that
country’s legitimate government. Even after its relocation to Taiwan, the ROC used to
enjoy diplomatic recognition from a majority of the world’s states, partly due to being a
founding member of the United Nations (UN).5 The number of states partial to the
PROC’s version of the One China policy, however, gradually increased in the 1960s and
70s, most notably after the UN General Assembly adopted the monumental Resolution
2758 in 1971.6 Since then, almost all of the states that had erstwhile recognized the ROC
as the legitimate government of China, terminated their official relations with the said
government, in favor of establishing diplomatic relations with the PROC.7 The Philippines
is one of such states.
The Philippines formally ended its official diplomatic relations with the government in
Taiwan on 9 June 1975, when the country and the PROC expressed mutual recognition
thru the Joint Communiqué of the Government of the Republic of the Philippines and the
Government of the People’s Republic of China (Joint Communiqué).8
Under the Joint Communiqué, the Philippines categorically stated its adherence to the
One China policy of the PROC. The pertinent portion of the Joint Communiqué reads: 9
The Philippine Government recognizes the Government of the People’s Republic of China
as the sole legal government of China, fully understands and respects the position of the
Chinese Government that there is but one China and that Taiwan is an integral part of
Chinese territory, and decides to remove all its official representations from Taiwan
within one month from the date of signature of this communiqué. (Emphasis supplied)
The Philippines’ commitment to the One China policy of the PROC, however, did not
preclude the country from keeping unofficial relations with Taiwan on a "people-to-
people" basis.10 Maintaining ties with Taiwan that is permissible by the terms of the Joint
Communiqué, however, necessarily required the Philippines, and Taiwan, to course any
such relations thru offices outside of the official or governmental organs.
Hence, despite ending their diplomatic ties, the people of Taiwan and of the Philippines
maintained an unofficial relationship facilitated by the offices of the Taipei Economic and
Cultural Office, for the former, and the MECO, for the latter.11
The MECO12 was organized on 16 December 1997 as a non-stock, non-profit corporation
under Batas Pambansa Blg. 68 or the Corporation Code.13 The purposes underlying the
incorporation of MECO, as stated in its articles of incorporation,14 are as follows:
1. To establish and develop the commercial and industrial interests of Filipino
nationals here and abroad, and assist on all measures designed to promote and
maintain the trade relations of the country with the citizens of other foreign
countries;
2. To receive and accept grants and subsidies that are reasonably necessary in
carrying out the corporate purposes provided they are not subject to conditions
defeatist for or incompatible with said purpose;
3. To acquire by purchase, lease or by any gratuitous title real and personal
properties as may be necessary for the use and need of the corporation, and to
dispose of the same in like manner when they are no longer needed or useful;
and
4. To do and perform any and all acts which are deemed reasonably necessary
to carry out the purposes. (Emphasis supplied)
From the moment it was incorporated, the MECO became the corporate entity
"entrusted" by the Philippine government with the responsibility of fostering "friendly"
and "unofficial" relations with the people of Taiwan, particularly in the areas of trade,
economic cooperation, investment, cultural, scientific and educational exchanges.15To
enable it to carry out such responsibility, the MECO was "authorized" by the government
to perform certain "consular and other functions" that relates to the promotion,
protection and facilitation of Philippine interests in Taiwan.16
At present, it is the MECO that oversees the rights and interests of Overseas Filipino
Workers (OFWs) in Taiwan; promotes the Philippines as a tourist and investment
destination for the Taiwanese; and facilitates the travel of Filipinos and Taiwanese from
Taiwan to the Philippines, and vice versa.17
Facts Leading to the Mandamus Petition
On 23 August 2010, petitioner sent a letter18 to the COA requesting for a "copy of the
latest financial and audit report" of the MECO invoking, for that purpose, his
"constitutional right to information on matters of public concern." The petitioner made
the request on the belief that the MECO, being under the "operational supervision" of the
Department of Trade and Industry (DTI), is a government owned and controlled
corporation (GOCC) and thus subject to the audit jurisdiction of the COA.19
52
Petitioner’s letter was received by COA Assistant Commissioner Jaime P. Naranjo, the
following day.
On 25 August 2010, Assistant Commissioner Naranjo issued a memorandum20 referring
the petitioner’s request to COA Assistant Commissioner Emma M. Espina for "further
disposition." In this memorandum, however, Assistant Commissioner Naranjo revealed
that the MECO was "not among the agencies audited by any of the three Clusters of the
Corporate Government Sector."21
On 7 September 2010, petitioner learned about the 25 August 2010 memorandum and
its contents.
Mandamus Petition
Taking the 25 August 2010 memorandum as an admission that the COA had never
audited and examined the accounts of the MECO, the petitioner filed the instant petition
for mandamus on 8 September 2010. Petitioner filed the suit in his capacities as
"taxpayer, concerned citizen, a member of the Philippine Bar and law book author."22 He
impleaded both the COA and the MECO.
Petitioner posits that by failing to audit the accounts of the MECO, the COA is neglecting
its duty under Section 2(1), Article IX-D of the Constitution to audit the accounts of an
otherwise bona fide GOCC or government instrumentality. It is the adamant claim of the
petitioner that the MECO is a GOCC without an original charter or, at least, a government
instrumentality, the funds of which partake the nature of public funds.23
According to petitioner, the MECO possesses all the essential characteristics of a GOCC
and an instrumentality under the Executive Order No. (EO) 292, s. 1987 or the
Administrative Code: it is a non-stock corporation vested with governmental functions
relating to public needs; it is controlled by the government thru a board of directors
appointed by the President of the Philippines; and while not integrated within the
executive departmental framework, it is nonetheless under the operational and policy
supervision of the DTI.24 As petitioner substantiates:
1. The MECO is vested with government functions. It performs functions that
are equivalent to those of an embassy or a consulate of the Philippine
government.25 A reading of the authorized functions of the MECO as found in
EO No. 15, s. 2001, reveals that they are substantially the same functions
performed by the Department of Foreign Affairs (DFA), through its diplomatic
and consular missions, per the Administrative Code.26
2. The MECO is controlled by the government. It is the President of the
Philippines that actually appoints the directors of the MECO, albeit indirectly,
by way of "desire letters" addressed to the MECO’s board of directors.27 An
illustration of this exercise is the assumption by Mr. Antonio Basilio as
chairman of the board of directors of the MECO in 2001, which was
accomplished when former President Gloria Macapagal-Arroyo, through a
memorandum28 dated 20 February 2001, expressed her "desire" to the board of
directors of the MECO for the election of Mr. Basilio as chairman.29
3. The MECO is under the operational and policy supervision of the DTI. The
MECO was placed under the operational supervision of the DTI by EO No. 328,
s. of 2004, and again under the policy supervision of the same department by
EO No. 426, s. 2005.30
To further bolster his position that the accounts of the MECO ought to be audited by the
COA, the petitioner calls attention to the practice, allegedly prevailing in the United
States of America, wherein the American Institute in Taiwan (AIT)—the counterpart
entity of the MECO in the United States—is supposedly audited by that country’s
Comptroller General.31 Petitioner claims that this practice had been confirmed in a
decision of the United States Court of Appeals for the District of Columbia Circuit, in the
case of Wood, Jr., ex rel. United States of America v. The American Institute in Taiwan, et
al.32
The Position of the MECO
The MECO prays for the dismissal of the mandamus petition on procedural and
substantial grounds.
On procedure, the MECO argues that the mandamus petition was prematurely filed.33
The MECO posits that a cause of action for mandamus to compel the performance of a
ministerial duty required by law only ripens once there has been a refusal by the
tribunal, board or officer concerned to perform such a duty.34The MECO claims that there
was, in this case, no such refusal either on its part or on the COA’s because the petitioner
never made any demand for it to submit to an audit by the COA or for the COA to perform
such an audit, prior to filing the instant mandamus petition.35 The MECO further points
out that the only "demand" that the petitioner made was his request to the COA for a
copy of the MECO’s latest financial and audit report— which request was not even finally
disposed of by the time the instant petition was filed.36
On the petition’s merits, the MECO denies the petitioner’s claim that it is a GOCC or a
government instrumentality.37While performing public functions, the MECO maintains
that it is not owned or controlled by the government, and its funds are private
funds.38 The MECO explains:
1. It is not owned or controlled by the government. Contrary to the allegations
of the petitioner, the President of the Philippines does not appoint its board of
directors.39 The "desire letter" that the President transmits is merely
recommendatory and not binding on the corporation.40 As a corporation
organized under the Corporation Code, matters relating to the election of its
directors and officers, as well as its membership, are governed by the
appropriate provisions of the said code, its articles of incorporation and its by-
laws.41 Thus, it is the directors who elect the corporation’s officers; the
53
 members who elect the directors; and the directors who admit the members by
way of a unanimous resolution. All of its officers, directors, and members are
private individuals and are not government officials.42
2. The government merely has policy supervision over it. Policy supervision is a
lesser form of supervision wherein the government’s oversight is limited only
to ensuring that the corporation’s activities are in tune with the country’s
commitments under the One China policy of the PROC.43 The day-to-day
operations of the corporation, however, remain to be controlled by its duly
elected board of directors.44
The MECO emphasizes that categorizing it as a GOCC or a government instrumentality
can potentially violate the country’s commitment to the One China policy of the
PROC.45 Thus, the MECO cautions against applying to the present mandamus petition the
pronouncement in the Wood decision regarding the alleged auditability of the AIT in the
United States.46
The Position of the COA
The COA, on the other hand, advances that the mandamus petition ought to be dismissed
on procedural grounds and on the ground of mootness.
The COA argues that the mandamus petition suffers from the following procedural
defects:
1. The petitioner lacks locus standi to bring the suit. The COA claims that the
petitioner has not shown, at least in a concrete manner, that he had been
aggrieved or prejudiced by its failure to audit the accounts of the MECO.47
2. The petition was filed in violation of the doctrine of hierarchy of courts. The
COA faults the filing of the instant mandamus petition directly with this Court,
when such petition could have very well been presented, at the first instance,
before the Court of Appeals or any Regional Trial Court.48 The COA claims that
the petitioner was not able to provide compelling reasons to justify a direct
resort to the Supreme Court.49
At any rate, the COA argues that the instant petition already became moot when COA
Chairperson Maria Gracia M. Pulido-Tan (Pulido-Tan) issued Office Order No. 2011-
69850 on 6 October 2011.51 The COA notes that under Office Order No. 2011-698,
Chairperson Pulido-Tan already directed a team of auditors to proceed to Taiwan,
specifically for the purpose of auditing the accounts of, among other government
agencies based therein, the MECO.52
In conceding that it has audit jurisdiction over the accounts of the MECO, however, the
COA clarifies that it does not consider the former as a GOCC or a government
instrumentality. On the contrary, the COA maintains that the MECO is a non-
governmental entity.53
The COA argues that, despite being a non-governmental entity, the MECO may still be
audited with respect to the "verification fees" for overseas employment documents that
it collects from Taiwanese employers on behalf of the DOLE.54 The COA claims that,
under Joint Circular No. 3-99,55 the MECO is mandated to remit to the Department of
Labor and Employment (DOLE) a portion of such "verification fees."56 The COA,
therefore, classifies the MECO as a non-governmental entity "required to pay xxx
government share" subject to a partial audit of its accounts under Section 26 of the
Presidential Decree No. 1445 or the State Audit Code of the Philippines (Audit Code). 57
OUR RULING
We grant the petition in part. We declare that the MECO is a non-governmental entity.
However, under existing laws, the accounts of the MECO pertaining to the "verification
fees" it collects on behalf of the DOLE as well as the fees it was authorized to collect
under Section 2(6) of EO No. 15, s. 2001, are subject to the audit jurisdiction of the COA.
Such fees pertain to the government and should be audited by the COA.
I
We begin with the preliminary issues.
Mootness of Petition
The first preliminary issue relates to the alleged mootness of the instant mandamus
petition, occasioned by the COA’s issuance of Office Order No. 2011-698. The COA claims
that by issuing Office Order No. 2011-698, it had already conceded its jurisdiction over
the accounts of the MECO and so fulfilled the objective of the instant petition.58 The COA
thus urges that the instant petition be dismissed for being moot and academic.59
We decline to dismiss the mandamus petition on the ground of mootness.
A case is deemed moot and academic when, by reason of the occurrence of a supervening
event, it ceases to present any justiciable controversy.60 Since they lack an actual
controversy otherwise cognizable by courts, moot cases are, as a rule, dismissible.61
The rule that requires dismissal of moot cases, however, is not absolute. It is subject to
exceptions. In David v. Macapagal-Arroyo,62 this Court comprehensively captured these
exceptions scattered throughout our jurisprudence:
The "moot and academic" principle is not a magical formula that can automatically
dissuade the courts in resolving a case. Courts will decide cases, otherwise moot and
academic, if: first, there is a grave violation of the Constitution;63second, the exceptional
character of the situation and the paramount public interest is involved; 64 third, when
constitutional issue raised requires formulation of controlling principles to guide the
bench, the bar, and the public;65and fourth, the case is capable of repetition yet evading
review.66
54
In this case, We find that the issuance by the COA of Office Order No. 2011-698 indeed
qualifies as a supervening event that effectively renders moot and academic the main
prayer of the instant mandamus petition. A writ of mandamus to compel the COA to audit
the accounts of the MECO would certainly be a mere superfluity, when the former had
already obliged itself to do the same.
Be that as it may, this Court refrains from dismissing outright the petition. We believe
that the mandamus petition was able to craft substantial issues presupposing the
commission of a grave violation of the Constitution and involving paramount public
interest, which need to be resolved nonetheless:
First. The petition makes a serious allegation that the COA had been remiss in its
constitutional or legal duty to audit and examine the accounts of an otherwise auditable
entity in the MECO.
Second. There is paramount public interest in the resolution of the issue concerning the
failure of the COA to audit the accounts of the MECO. The propriety or impropriety of
such a refusal is determinative of whether the COA was able to faithfully fulfill its
constitutional role as the guardian of the public treasury, in which any citizen has an
interest.
Third. There is also paramount public interest in the resolution of the issue regarding the
legal status of the MECO; a novelty insofar as our jurisprudence is concerned. We find
that the status of the MECO—whether it may be considered as a government agency or
not—has a direct bearing on the country’s commitment to the One China policy of the
PROC.67
An allegation as serious as a violation of a constitutional or legal duty, coupled with the
pressing public interest in the resolution of all related issues, prompts this Court to
pursue a definitive ruling thereon, if not for the proper guidance of the government or
agency concerned, then for the formulation of controlling principles for the education of
the bench, bar and the public in general.68 For this purpose, the Court invokes its
symbolic function.69
If the foregoing reasons are not enough to convince, We still add another:
Assuming that the allegations of neglect on the part of the COA were true, Office Order
No. 2011-698 does not offer the strongest certainty that they would not be replicated in
the future. In the first place, Office Order No. 2011-698 did not state any legal
justification as to why, after decades of not auditing the accounts of the MECO, the COA
suddenly decided to do so. Neither does it state any determination regarding the true
status of the MECO. The justifications provided by the COA, in fact, only appears in the
memorandum70 it submitted to this Court for purposes of this case.
Thus, the inclusion of the MECO in Office Order No. 2011-698 appears to be entirely
dependent upon the judgment of the incumbent chairperson of the COA; susceptible of
being undone, with or without reason, by her or even her successor. Hence, the case now
before this Court is dangerously capable of being repeated yet evading review.
Verily, this Court should not dismiss the mandamus petition on the ground of mootness.
Standing of Petitioner
The second preliminary issue is concerned with the standing of the petitioner to file the
instant mandamus petition. The COA claims that petitioner has none, for the latter was
not able to concretely establish that he had been aggrieved or prejudiced by its failure to
audit the accounts of the MECO.71
Related to the issue of lack of standing is the MECO’s contention that petitioner has no
cause of action to file the instant mandamus petition. The MECO faults petitioner for not
making any demand for it to submit to an audit by the COA or for the COA to perform
such an audit, prior to filing the instant petition.72
We sustain petitioner’s standing, as a concerned citizen, to file the instant petition.
The rules regarding legal standing in bringing public suits, or locus standi, are already
well-defined in our case law. Again, We cite David, which summarizes jurisprudence on
this point:73
By way of summary, the following rules may be culled from the cases decided by this
Court.1a\^/phi1 Taxpayers, voters, concerned citizens, and legislators may be accorded
standing to sue, provided that the following requirements are met:
(1) the cases involve constitutional issues;
(2) for taxpayers, there must be a claim of illegal disbursement of public funds
or that the tax measure is unconstitutional;
(3) for voters, there must be a showing of obvious interest in the validity of the
election law in question;
(4) for concerned citizens, there must be a showing that the issues raised are of
transcendental importance which must be settled early; and
(5) for legislators, there must be a claim that the official action complained of
infringes upon their prerogatives as legislators.
We rule that the instant petition raises issues of transcendental importance, involved as
they are with the performance of a constitutional duty, allegedly neglected, by the COA.
Hence, We hold that the petitioner, as a concerned citizen, has the requisite legal
standing to file the instant mandamus petition.
55
To be sure, petitioner does not need to make any prior demand on the MECO or the COA
in order to maintain the instant petition. The duty of the COA sought to be compelled by
mandamus, emanates from the Constitution and law, which explicitly require, or
"demand," that it perform the said duty. To the mind of this Court, petitioner already
established his cause of action against the COA when he alleged that the COA had
neglected its duty in violation of the Constitution and the law.
Principle of Hierarchy of Courts
The last preliminary issue is concerned with the petition’s non-observance of the
principle of hierarchy of courts. The COA assails the filing of the instant mandamus
petition directly with this Court, when such petition could have very well been
presented, at the first instance, before the Court of Appeals or any Regional Trial
Court.74 The COA claims that the petitioner was not able to provide compelling reasons to
justify a direct resort to the Supreme Court.75
In view of the transcendental importance of the issues raised in the mandamus petition,
as earlier mentioned, this Court waives this last procedural issue in favor of a resolution
on the merits.76
II
To the merits of this petition, then.
The single most crucial question asked by this case is whether the COA is, under
prevailing law, mandated to audit the accounts of the MECO. Conversely, are the accounts
of the MECO subject to the audit jurisdiction of the COA?
Law, of course, identifies which accounts of what entities are subject to the audit
jurisdiction of the COA.
Under Section 2(1) of Article IX-D of the Constitution,77 the COA was vested with the
"power, authority and duty" to "examine, audit and settle" the "accounts" of the following
entities:
1. The government, or any of its subdivisions, agencies and instrumentalities;
2. GOCCs with original charters;
3. GOCCs without original charters;
4. Constitutional bodies, commissions and offices that have been granted fiscal
autonomy under the Constitution; and
5. Non-governmental entities receiving subsidy or equity, directly or indirectly,
from or through the government, which are required by law or the granting
institution to submit to the COA for audit as a condition of subsidy or equity.78
The term "accounts" mentioned in the subject constitutional provision pertains to the
"revenue," "receipts," "expenditures" and "uses of funds and property" of the foregoing
entities.79
Complementing the constitutional power of the COA to audit accounts of "non-
governmental entities receiving subsidy or equity xxx from or through the government"
is Section 29(1)80 of the Audit Code, which grants the COA visitorial authority over the
following non-governmental entities:
1. Non-governmental entities "subsidized by the government";
2. Non-governmental entities "required to pay levy or government share";
3. Non-governmental entities that have "received counterpart funds from the
government"; and
4. Non-governmental entities "partly funded by donations through the
government."
Section 29(1) of the Audit Code, however, limits the audit of the foregoing non-
governmental entities only to "funds xxx coming from or through the
government."81 This section of the Audit Code is, in turn, substantially reproduced in
Section 14(1), Book V of the Administrative Code.82
In addition to the foregoing, the Administrative Code also empowers the COA to examine
and audit "the books, records and accounts" of public utilities "in connection with the
fixing of rates of every nature, or in relation to the proceedings of the proper regulatory
agencies, for purposes of determining franchise tax."83
Both petitioner and the COA claim that the accounts of the MECO are within the audit
jurisdiction of the COA, but vary on the extent of the audit and on what type of auditable
entity the MECO is. The petitioner posits that all accounts of the MECO are auditable as
the latter is a bona fide GOCC or government instrumentality.84 On the other hand, the
COA argues that only the accounts of the MECO that pertain to the "verification fees" it
collects on behalf of the DOLE are auditable because the former is merely a non-
governmental entity "required to pay xxx government share" per the Audit Code.85
We examine both contentions.
The MECO Is Not a GOCC or
Government Instrumentality
56
We start with the petitioner’s contention.
Petitioner claims that the accounts of the MECO ought to be audited by the COA because
the former is a GOCC or government instrumentality. Petitioner points out that the MECO
is a non-stock corporation "vested with governmental functions relating to public
needs"; it is "controlled by the government thru a board of directors appointed by the
President of the Philippines"; and it operates "outside of the departmental framework,"
subject only to the "operational and policy supervision of the DTI."86 The MECO thus
possesses, petitioner argues, the essential characteristics of a bona fide GOCC and
government instrumentality.87
We take exception to petitioner’s characterization of the MECO as a GOCC or government
instrumentality. The MECO is not a GOCC or government instrumentality.
Government instrumentalities are agencies of the national government that, by reason of
some "special function or jurisdiction" they perform or exercise, are allotted "operational
autonomy" and are "not integrated within the department framework."88 Subsumed
under the rubric "government instrumentality" are the following entities:89
1. regulatory agencies,
2. chartered institutions,
3. government corporate entities or government instrumentalities with
corporate powers (GCE/GICP),90 and
4. GOCCs
The Administrative Code defines a GOCC:91
(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: x x x.
The above definition is, in turn, replicated in the more recent Republic Act No. 10149 or
the GOCC Governance Act of 2011, to wit:92
(o) Government-Owned or -Controlled Corporation (GOCC) 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 of
the Republic of the Philippines directly or through its instrumentalities either wholly or,
where applicable as in the case of stock corporations, to the extent of at least a majority
of its outstanding capital stock: x x x.
GOCCs, therefore, are "stock or non-stock" corporations "vested with functions relating
to public needs" that are "owned by the Government directly or through its
instrumentalities."93 By definition, three attributes thus make an entity a GOCC: first, its
organization as stock or non-stock corporation;94 second, the public character of its
function; and third, government ownership over the same.
Possession of all three attributes is necessary to deem an entity a GOCC.
In this case, there is not much dispute that the MECO possesses the first and second
attributes. It is the third attribute, which the MECO lacks.
The MECO Is Organized as a Non-Stock Corporation
The organization of the MECO as a non-stock corporation cannot at all be denied.
Records disclose that the MECO was incorporated as a non-stock corporation under the
Corporation Code on 16 December 1977.95 The incorporators of the MECO were Simeon
R. Roxas, Florencio C. Guzon, Manuel K. Dayrit, Pio K. Luz and Eduardo B. Ledesma, who
also served as the corporation’s original members and directors.96
The purposes for which the MECO was organized also establishes its non-profit
character, to wit:97
1. To establish and develop the commercial and industrial interests of Filipino
nationals here and abroad and assist on all measures designed to promote and
maintain the trade relations of the country with the citizens of other foreign
countries;
2. To receive and accept grants and subsidies that are reasonably necessary in
carrying out the corporate purposes provided they are not subject to conditions
defeatist for or incompatible with said purpose;
3. To acquire by purchase, lease or by any gratuitous title real and personal
properties as may be necessary for the use and need of the corporation, and in
like manner when they are
4. To do and perform any and all acts which are deemed reasonably necessary
to carry out the purposes. (Emphasis supplied)
The purposes for which the MECO was organized are somewhat analogous to those of a
trade, business or industry chamber,98 but only on a much larger scale i.e., instead of
furthering the interests of a particular line of business or industry within a local sphere,
the MECO seeks to promote the general interests of the Filipino people in a foreign land.
Finally, it is not disputed that none of the income derived by the MECO is distributable as
dividends to any of its members, directors or officers.
57
Verily, the MECO is organized as a non-stock corporation.
The MECO Performs Functions with a Public Aspect.
The public character of the functions vested in the MECO cannot be doubted either.
Indeed, to a certain degree, the functions of the MECO can even be said to partake of the
nature of governmental functions. As earlier intimated, it is the MECO that, on behalf of
the people of the Philippines, currently facilitates unofficial relations with the people in
Taiwan.
Consistent with its corporate purposes, the MECO was "authorized" by the Philippine
government to perform certain "consular and other functions" relating to the promotion,
protection and facilitation of Philippine interests in Taiwan.99The full extent of such
authorized functions are presently detailed in Sections 1 and 2 of EO No. 15, s. 2001:
SECTION 1. Consistent with its corporate purposes and subject to the conditions stated
in Section 3 hereof, MECO is hereby authorized to assist in the performance of the
following functions:
1. Formulation and implementation of a program to attract and promote
investments from Taiwan to Philippine industries and businesses, especially in
manufacturing, tourism, construction and other preferred areas of investments;
2. Promotion of the export of Philippine products and Filipino manpower
services, including Philippine management services, to Taiwan;
3. Negotiation and/or assistance in the negotiation and conclusion of
agreements or other arrangements concerning trade, investment, economic
cooperation, technology transfer, banking and finance, scientific, cultural,
educational and other modes of cooperative endeavors between the Philippines
and Taiwan, on a people-to-people basis, in accordance with established rules
and regulations;
4. Reporting on, and identification of, employment and business opportunities
in Taiwan for the promotion of Philippine exports, manpower and management
services, and tourism;
5. Dissemination in Taiwan of information on the Philippines, especially in the
fields of trade, tourism, labor, economic cooperation, and cultural, educational
and scientific endeavors;
6. Conduct of periodic assessment of market conditions in Taiwan, including
submission of trade statistics and commercial reports for use of Philippine
industries and businesses; and
7. Facilitation, fostering and cultivation of cultural, sports, social, and
educational exchanges between the peoples of the Philippines and Taiwan.
SECTION 2. In addition to the above-mentioned authority and subject to the conditions
stated in Section 3 hereof, MECO, through its branch offices in Taiwan, is hereby
authorized to perform the following functions:
1. Issuance of temporary visitors’ visas and transit and crew list visas, and such
other visa services as may be authorized by the Department of Foreign Affairs;
2. Issuance, renewal, extension or amendment of passports of Filipino citizens
in accordance with existing regulations, and provision of such other passport
services as may be required under the circumstances;
3. Certification or affirmation of the authenticity of documents submitted for
authentication;
4. Providing translation services;
5. Assistance and protection to Filipino nationals and other legal/juridical
persons working or residing in Taiwan, including making representations to
the extent allowed by local and international law on their behalf before civil
and juridical authorities of Taiwan; and
6. Collection of reasonable fees on the first four (4) functions enumerated above
to defray the cost of its operations.
A perusal of the above functions of the MECO reveals its uncanny similarity to some of
the functions typically performed by the DFA itself, through the latter’s diplomatic and
consular missions.100 The functions of the MECO, in other words, are of the kind that
would otherwise be performed by the Philippines’ own diplomatic and consular organs,
if not only for the government’s acquiescence that they instead be exercised by the
MECO.
Evidently, the functions vested in the MECO are impressed with a public aspect.
The MECO Is Not Owned or Controlled by the Government Organization as a non-stock
corporation and the mere performance of functions with a public aspect, however, are
not by themselves sufficient to consider the MECO as a GOCC. In order to qualify as a
GOCC, a corporation must also, if not more importantly, be owned by the government.
The government owns a stock or non-stock corporation if it has controlling interest in
the corporation. In a stock corporation, the controlling interest of the government is
assured by its ownership of at least fifty-one percent (51%) of the corporate capital
stock.101 In a non-stock corporation, like the MECO, jurisprudence teaches that the
controlling interest of the government is affirmed when "at least majority of the
58
members are government officials holding such membership by appointment or
designation"102 or there is otherwise "substantial participation of the government in the
selection" of the corporation’s governing board.103
In this case, the petitioner argues that the government has controlling interest in the
MECO because it is the President of the Philippines that indirectly appoints the directors
of the corporation.104 The petitioner claims that the President appoints directors of the
MECO thru "desire letters" addressed to the corporation’s board.105 As evidence, the
petitioner cites the assumption of one Mr. Antonio Basilio as chairman of the board of
directors of the MECO in 2001, which was allegedly accomplished when former
President Macapagal-Arroyo, through a memorandum dated 20 February 2001,
expressed her "desire" to the board of directors of the MECO for the election of Mr.
Basilio as chairman.106
The MECO, however, counters that the "desire letters" that the President transmits are
merely recommendatory and not binding on it.107 The MECO maintains that, as a
corporation organized under the Corporation Code, matters relating to the election of its
directors and officers, as well as its membership, are ultimately governed by the
appropriate provisions of the said code, its articles of incorporation and its by-laws.108
As between the contrasting arguments, We find the contention of the MECO to be the one
more consistent with the law.
The fact of the incorporation of the MECO under the Corporation Code is key. The MECO
was correct in postulating that, as a corporation organized under the Corporation Code,
it is governed by the appropriate provisions of the said code, its articles of incorporation
and its by-laws. In this case, it is the by-laws109 of the MECO that stipulates that its
directors are elected by its members; its officers are elected by its directors; and its
members, other than the original incorporators, are admitted by way of a unanimous
board resolution, to wit:
SECTION II. MEMBERSHIP
Article 2. Members shall be classified as (a) Regular and (b) Honorary.
(a) Regular members – shall consist of the original incorporators and such
other members who, upon application for membership, are unanimously
admitted by the Board of Directors.
(b) Honorary member – A person of distinction in business who as sympathizer
of the objectives of the corporation, is invited by the Board to be an honorary
member.
SECTION III. BOARD OF DIRECTORS
Article 3. At the first meeting of the regular members, they shall organize and constitute
themselves as a Board composed of five (5) members, including its Chairman, each of
whom as to serve until such time as his own successor shall have been elected by the
regular members in an election called for the purpose. The number of members of the
Board shall be increased to seven (7) when circumstances so warrant and by means of a
majority vote of the Board members and appropriate application to and approval by the
Securities and Exchange Commission. Unless otherwise provided herein or by law, a
majority vote of all Board members present shall be necessary to carry out all Board
resolutions.
During the same meeting, the Board shall also elect its own officers, including the
designation of the principal officer who shall be the Chairman. In line with this, the
Chairman shall also carry the title Chief Executive Officer. The officer who shall head the
branch or office for the agency that may be established abroad shall have the title of
Director and Resident Representative. He will also be the Vice-Chairman. All other
members of the Board shall have the title of Director.
xxxx
SECTION IV. EXECUTIVE COMMITTEE
Article 5. There shall be established an Executive Committee composed of at least three
(3) members of the Board. The members of the Executive Committee shall be elected by
the members of the Board among themselves.
xxxx
SECTION VI. OFFICERS: DUTIES, COMPENSATION
Article 8. The officers of the corporation shall consist of a Chairman of the Board, Vice-
Chairman, Chief Finance Officer, and a Secretary. Except for the Secretary, who is
appointed by the Chairman of the Board, other officers and employees of the corporation
shall be appointed by the Board.
The Deputy Representative and other officials and employees of a branch office or
agency abroad are appointed solely by the Vice Chairman and Resident Representative
concerned. All such appointments however are subject to ratification by the Board.
It is significant to note that none of the original incorporators of the MECO were shown
to be government officials at the time of the corporation’s organization. Indeed, none of
the members, officers or board of directors of the MECO, from its incorporation up to the
present day, were established as government appointees or public officers designated by
reason of their office. There is, in fact, no law or executive order that authorizes such an
appointment or designation. Hence, from a strictly legal perspective, it appears that the
presidential "desire letters" pointed out by petitioner—if such letters even exist outside
of the case of Mr. Basilio—are, no matter how strong its persuasive effect may be, merely
recommendatory.
59
The MECO Is Not a Government Instrumentality; It Is a Sui Generis Entity.
The categorical exclusion of the MECO from a GOCC makes it easier to exclude the same
from any other class of government instrumentality. The other government
instrumentalities i.e., the regulatory agencies, chartered institutions and GCE/GICP are
all, by explicit or implicit definition, creatures of the law.110 The MECO cannot be any
other instrumentality because it was, as mentioned earlier, merely incorporated under
the Corporation Code.
Hence, unless its legality is questioned, and in this case it was not, the fact that the MECO
is operating under the policy supervision of the DTI is no longer a relevant issue to be
reckoned with for purposes of this case.
For whatever it is worth, however, and without justifying anything, it is easy enough for
this Court to understand the rationale, or necessity even, of the executive branch placing
the MECO under the policy supervision of one of its agencies.
It is evident, from the peculiar circumstances surrounding its incorporation, that the
MECO was not intended to operate as any other ordinary corporation. And it is not.
Despite its private origins, and perhaps deliberately so, the MECO was "entrusted" 111 by
the government with the "delicate and precarious"112 responsibility of pursuing
"unofficial"113 relations with the people of a foreign land whose government the
Philippines is bound not to recognize. The intricacy involved in such undertaking is the
possibility that, at any given time in fulfilling the purposes for which it was incorporated,
the MECO may find itself engaged in dealings or activities that can directly contradict the
Philippines’ commitment to the One China policy of the PROC. Such a scenario can only
truly be avoided if the executive department exercises some form of oversight, no matter
how limited, over the operations of this otherwise private entity.
Indeed, from hindsight, it is clear that the MECO is uniquely situated as compared with
other private corporations. From its over-reaching corporate objectives, its special duty
and authority to exercise certain consular functions, up to the oversight by the executive
department over its operations—all the while maintaining its legal status as a non-
governmental entity—the MECO is, for all intents and purposes, sui generis.
Certain Accounts of the MECO May
Be Audited By the COA.
We now come to the COA’s contention.
The COA argues that, despite being a non-governmental entity, the MECO may still be
audited with respect to the "verification fees" for overseas employment documents that
the latter collects from Taiwanese employers on behalf of the DOLE.114 The COA claims
that, under Joint Circular No. 3-99, the MECO is mandated to remit to the national
government a portion of such "verification fees."115 The COA, therefore, classifies the
MECO as a non-governmental entity "required to pay xxx government share" per the
Audit Code.116
We agree that the accounts of the MECO pertaining to its collection of "verification fees"
is subject to the audit jurisdiction of the COA. However, We digress from the view that
such accounts are the only ones that ought to be audited by the COA. Upon careful
evaluation of the information made available by the records vis-à-vis the spirit and the
letter of the laws and executive issuances applicable, We find that the accounts of the
MECO pertaining to the fees it was authorized to collect under Section 2(6) of EO No. 15,
s. 2001, are likewise subject to the audit jurisdiction of the COA.
Verification Fees Collected by the MECO
In its comment,117 the MECO admitted that roughly 9% of its income is derived from its
share in the "verification fees" for overseas employment documents it collects on behalf
of the DOLE.
The "verification fees" mentioned here refers to the "service fee for the verification of
overseas employment contracts, recruitment agreement or special powers of attorney"
that the DOLE was authorized to collect under Section 7 of EO No. 1022,118 which was
issued by President Ferdinand E. Marcos on 1 May 1985. These fees are supposed to be
collected by the DOLE from the foreign employers of OFWs and are intended to be used
for "the promotion of overseas employment and for welfare services to Filipino workers
within the area of jurisdiction of [concerned] foreign missions under the administration
of the [DOLE]."119
Joint Circular 3-99 was issued by the DOLE, DFA, the Department of Budget Management,
the Department of Finance and the COA in an effort to implement Section 7 of Executive
Order No. 1022.120 Thus, under Joint Circular 3-99, the following officials have been
tasked to be the "Verification Fee Collecting Officer" on behalf of the DOLE:121
1. The labor attaché or duly authorized overseas labor officer at a given foreign
post, as duly designated by the DOLE Secretary;
2. In foreign posts where there is no labor attaché or duly authorized overseas
labor officer, the finance officer or collecting officer of the DFA duly deputized
by the DOLE Secretary as approved by the DFA Secretary;
3. In the absence of such finance officer or collecting officer, the alternate duly
designated by the head of the foreign post.
Since the Philippines does not maintain an official post in Taiwan, however, the DOLE
entered into a "series" of Memorandum of Agreements with the MECO, which made the
latter the former’s collecting agent with respect to the "verification fees" that may be due
from Taiwanese employers of OFWs.122 Under the 27 February 2004 Memorandum of
Agreement between DOLE and the MECO, the "verification fees" to be collected by the
latter are to be allocated as follows: (a) US$ 10 to be retained by the MECO as
administrative fee, (b) US $10 to be remitted to the DOLE, and (c) US$ 10 to be
constituted as a common fund of the MECO and DOLE.123
60
Evidently, the entire "verification fees" being collected by the MECO are receivables of
the DOLE.124 Such receipts pertain to the DOLE by virtue of Section 7 of EO No. 1022.
Consular Fees Collected by the MECO
Aside from the DOLE "verification fees," however, the MECO also collects "consular fees,"
or fees it collects from the exercise of its delegated consular functions.
The authority behind "consular fees" is Section 2(6) of EO No. 15, s. 2001. The said
section authorizes the MECO to collect "reasonable fees" for its performance of the
following consular functions:
1. Issuance of temporary visitors’ visas and transit and crew list visas, and such
other visa services as may be authorized by the DFA;
2. Issuance, renewal, extension or amendment of passports of Filipino citizens
in accordance with existing regulations, and provision of such other passport
services as may be required under the circumstances;
3. Certification or affirmation of the authenticity of documents submitted for
authentication; and
4. Providing translation services.
Evidently, and just like the peculiarity that attends the DOLE "verification fees," there is
no consular office for the collection of the "consular fees." Thus, the authority for the
MECO to collect the "reasonable fees," vested unto it by the executive order.
The "consular fees," although held and expended by the MECO by virtue of EO No. 15, s.
2001, are, without question, derived from the exercise by the MECO of consular
functions—functions it performs by and only through special authority from the
government. There was never any doubt that the visas, passports and other documents
that the MECO issues pursuant to its authorized functions still emanate from the
Philippine government itself.
Such fees, therefore, are received by the MECO to be used strictly for the purpose set out
under EO No. 15, s. 2001. They must be reasonable as the authorization requires. It is the
government that has ultimate control over the disposition of the "consular fees," which
control the government did exercise when it provided in Section 2(6) of EO No. 15, s.
2001 that such funds may be kept by the MECO "to defray the cost of its operations."
The Accounts of the MECO Pertaining to the Verification Fees and Consular Fees May Be
Audited by the COA.
Section 14(1), Book V of the Administrative Code authorizes the COA to audit accounts of
non-governmental entities "required to pay xxx or have government share" but only with
respect to "funds xxx coming from or through the government." This provision of law
perfectly fits the MECO:
First. The MECO receives the "verification fees" by reason of being the collection agent of
the DOLE—a government agency. Out of its collections, the MECO is required, by
agreement, to remit a portion thereof to the DOLE. Hence, the MECO is accountable to the
government for its collections of such "verification fees" and, for that purpose, may be
audited by the COA.
Second. Like the "verification fees," the "consular fees" are also received by the MECO
through the government, having been derived from the exercise of consular functions
entrusted to the MECO by the government. Hence, the MECO remains accountable to the
government for its collections of "consular fees" and, for that purpose, may be audited by
the COA.
Tersely put, the 27 February 2008 Memorandum of Agreement between the DOLE and
the MECO and Section 2(6) of EO No. 15, s. 2001, vis-à-vis, respectively, the "verification
fees" and the "consular fees," grant and at the same time limit the authority of the MECO
to collect such fees. That grant and limit require the audit by the COA of the collections
thereby generated.
Conclusion
The MECO is not a GOCC or government instrumentality. It is a sui generis private entity
especially entrusted by the government with the facilitation of unofficial relations with
the people in Taiwan without jeopardizing the country’s faithful commitment to the One
China policy of the PROC. However, despite its non-governmental character, the MECO
handles government funds in the form of the "verification fees" it collects on behalf of the
DOLE and the "consular fees" it collects under Section 2(6) of EO No. 15, s. 2001. Hence,
under existing laws, the accounts of the MECO pertaining to its collection of such
"verification fees" and "consular fees" should be audited by the COA.
WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Manila
Economic and Cultural Office is hereby declared a non-governmental entity. However,
the accounts of the Manila Economic and Cultural Office pertaining to: the verification
fees contemplated by Section 7 of Executive Order No. 1022 issued 1 May 1985, that the
former collects on behalf of the Department of Labor and Employment, and the fees it
was authorized to collect under Section 2(6) of Executive Order No. 15 issued 16 May
2001, are subject to the audit jurisdiction of the COA.
No costs.
SO ORDERED.
PRIVATE
61
 1808 11-21-80 02-19-81 P370,332.52 200 pcs. ingot moulds

G. R. No. 164317 February 6, 2006 2042 01-30-81 04-30-81 P469,669.29 High Fired Refractory
Nozzle Bricks
ALFREDO CHING, Petitioner,
vs. 1801 11-21-80 02-19-81 P2,001,715.17 Synthetic Graphite
THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS- Electrode [with]
VILLAVERT, JUDGE EDGARDO SUDIAM of the Regional Trial Court, Manila, Branch tapered pitch filed
52; RIZAL COMMERCIAL BANKING CORP. and THE PEOPLE OF THE nipples
PHILIPPINES, Respondents.
1857 12-09-80 03-09-81 P197,843.61 3,000 pcs. (15 bundles
calorized lance pipes
DECISION
[)]

CALLEJO, SR., J.: 1895 12-17-80 03-17-81 P67,652.04 Spare parts for
Spectrophotometer
Before the Court is a petition for review on certiorari of the Decision1 of the Court of
Appeals (CA) in CA-G.R. SP No. 57169 dismissing the petition for certiorari, prohibition 1911 12-22-80 03-20-81 P91,497.85 50 pcs. Ingot moulds
and mandamus filed by petitioner Alfredo Ching, and its Resolution2 dated June 28, 2004
denying the motion for reconsideration thereof. 2041 01-30-81 04-30-81 P91,456.97 50 pcs. Ingot moulds

2099 02-10-81 05-11-81 P66,162.26 8 pcs. Kubota Rolls for

Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI).
rolling mills
Sometime in September to October 1980, PBMI, through petitioner, applied with the
Rizal Commercial Banking Corporation (respondent bank) for the issuance of
2100 02-10-81 05-12-81 P210,748.00 Spare parts for
commercial letters of credit to finance its importation of assorted goods.3
Lacolaboratory
Equipment5
Respondent bank approved the application, and irrevocable letters of credit were issued
in favor of petitioner. The goods were purchased and delivered in trust to PBMI.
Petitioner signed 13 trust receipts4 as surety, acknowledging delivery of the following Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with
goods: authority to sell but not by way of conditional sale, pledge or otherwise; and in case such
goods were sold, to turn over the proceeds thereof as soon as received, to apply against
T/R Date Maturity Principal Description of Goods
the relative acceptances and payment of other indebtedness to respondent bank. In case
Nos. Granted Date
the goods remained unsold within the specified period, the goods were to be returned to
respondent bank without any need of demand. Thus, said "goods, manufactured products
1845 12-05-80 03-05-81 P1,596,470.05 79.9425 M/T "SDK"
or proceeds thereof, whether in the form of money or bills, receivables, or accounts
Brand Synthetic
separate and capable of identification" were respondent bank’s property.
Graphite Electrode

1853 12-08-80 03-06-81 P198,150.67 3,000 pcs. (15 When the trust receipts matured, petitioner failed to return the goods to respondent
bundles) Calorized bank, or to return their value amounting to ₱6,940,280.66 despite demands. Thus, the
Lance Pipes bank filed a criminal complaint for estafa6 against petitioner in the Office of the City
Prosecutor of Manila.
1824 11-28-80 02-26-81 P707,879.71 One Lot High Fired
Refractory Tundish After the requisite preliminary investigation, the City Prosecutor found probable cause
Bricks estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to
Presidential Decree (P.D.) No. 115, otherwise known as the Trust Receipts Law. Thirteen
1798 11-21-80 02-19-81 P835,526.25 5 cases spare parts for (13) Informations were filed against the petitioner before the Regional Trial Court (RTC)
CCM

62
of Manila. The cases were docketed as Criminal Cases No. 86-42169 to 86-42181, raffled
to Branch 31 of said court.
Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice.
The appeal was dismissed in a Resolution7 dated March 17, 1987, and petitioner moved
for its reconsideration. On December 23, 1987, the Minister of Justice granted the
motion, thus reversing the previous resolution finding probable cause against
petitioner.8 The City Prosecutor was ordered to move for the withdrawal of the
Informations.
This time, respondent bank filed a motion for reconsideration, which, however, was
denied on February 24, 1988.9The RTC, for its part, granted the Motion to Quash the
Informations filed by petitioner on the ground that the material allegations therein did
not amount to estafa.10
In the meantime, the Court rendered judgment in Allied Banking Corporation v.
Ordoñez,11 holding that the penal provision of P.D. No. 115 encompasses any act violative
of an obligation covered by the trust receipt; it is not limited to transactions involving
goods which are to be sold (retailed), reshipped, stored or processed as a component of a
product ultimately sold. The Court also ruled that "the non-payment of the amount
covered by a trust receipt is an act violative of the obligation of the entrustee to pay."12
On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against
petitioner before the Office of the City Prosecutor of Manila. The case was docketed as I.S.
No. 95B-07614.
Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that
there was no probable cause to charge petitioner with violating P.D. No. 115, as
petitioner’s liability was only civil, not criminal, having signed the trust receipts as
surety.13 Respondent bank appealed the resolution to the Department of Justice (DOJ) via
petition for review, alleging that the City Prosecutor erred in ruling:
1. That there is no evidence to show that respondent participated in the
misappropriation of the goods subject of the trust receipts;
2. That the respondent is a mere surety of the trust receipts; and
3. That the liability of the respondent is only civil in nature.14
On July 13, 1999, the Secretary of Justice issued Resolution No. 25015 granting the
petition and reversing the assailed resolution of the City Prosecutor. According to the
Justice Secretary, the petitioner, as Senior Vice-President of PBMI, executed the 13 trust
receipts and as such, was the one responsible for the offense. Thus, the execution of said
receipts is enough to indict the petitioner as the official responsible for violation of P.D.
No. 115. The Justice Secretary also declared that petitioner could not contend that P.D.
No. 115 covers only goods ultimately destined for sale, as this issue had already been
settled in Allied Banking Corporation v. Ordoñez,16 where the Court ruled that P.D. No.
115 is "not limited to transactions in goods which are to be sold (retailed), reshipped,
stored or processed as a component of a product ultimately sold but covers failure to
turn over the proceeds of the sale of entrusted goods, or to return said goods if unsold or
not otherwise disposed of in accordance with the terms of the trust receipts."
The Justice Secretary further stated that the respondent bound himself under the terms
of the trust receipts not only as a corporate official of PBMI but also as its surety; hence,
he could be proceeded against in two (2) ways: first, as surety as determined by the
Supreme Court in its decision in Rizal Commercial Banking Corporation v. Court of
Appeals;17 and second, as the corporate official responsible for the offense under P.D. No.
115, via criminal prosecution. Moreover, P.D. No. 115 explicitly allows the prosecution of
corporate officers "without prejudice to the civil liabilities arising from the criminal
offense." Thus, according to the Justice Secretary, following Rizal Commercial Banking
Corporation, the civil liability imposed is clearly separate and distinct from the criminal
liability of the accused under P.D. No. 115.
Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13
Informations against petitioner for violation of P.D. No. 115 before the RTC of Manila.
The cases were docketed as Criminal Cases No. 99-178596 to 99-178608 and
consolidated for trial before Branch 52 of said court. Petitioner filed a motion for
reconsideration, which the Secretary of Justice denied in a Resolution 18 dated January 17,
2000.
Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA,
assailing the resolutions of the Secretary of Justice on the following grounds:
1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT,
ARE ACTING OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY
ALLOWED HIS PROSECUTION DESPITE THE FACT THAT NO EVIDENCE HAD
BEEN PRESENTED TO PROVE HIS PARTICIPATION IN THE ALLEGED
TRANSACTIONS.
2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE
ABUSE OF DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN THEY
CONTINUED PROSECUTION OF THE PETITIONER DESPITE THE LENGTH OF
TIME INCURRED IN THE TERMINATION OF THE PRELIMINARY
INVESTIGATION THAT SHOULD JUSTIFY THE DISMISSAL OF THE INSTANT
CASE.
3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY
PROSECUTOR ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN
EXCESS OF JURISDICTION WHEN THEY CONTINUED THE PROSECUTION OF
THE PETITIONER DESPITE LACK OF SUFFICIENT BASIS.19
In his petition, petitioner incorporated a certification stating that "as far as this Petition
is concerned, no action or proceeding in the Supreme Court, the Court of Appeals or
different divisions thereof, or any tribunal or agency. It is finally certified that if the
63
affiant should learn that a similar action or proceeding has been filed or is pending
before the Supreme Court, the Court of Appeals, or different divisions thereof, of any
other tribunal or agency, it hereby undertakes to notify this Honorable Court within five
(5) days from such notice."20
In its Comment on the petition, the Office of the Solicitor General alleged that -
A.
THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT
PETITIONER ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE
OFFENSE CHARGED AND THAT THE ACTS OF PETITIONER FALL WITHIN THE
AMBIT OF VIOLATION OF P.D. [No.] 115 IN RELATION TO ARTICLE 315, PAR.
1(B) OF THE REVISED PENAL CODE.
B.
THERE IS NO MERIT IN PETITIONER’S CONTENTION THAT EXCESSIVE DELAY
HAS MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE
CASE, JUSTIFYING ITS DISMISSAL.
C.
THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND
MANDAMUS IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION
OF THE DEPARTMENT OF JUSTICE. THE PRESENT PETITION MUST
THEREFORE BE DISMISSED.21
On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit,
and on procedural grounds. On the procedural issue, it ruled that (a) the certification of
non-forum shopping executed by petitioner and incorporated in the petition was
defective for failure to comply with the first two of the three-fold undertakings
prescribed in Rule 7, Section 5 of the Revised Rules of Civil Procedure; and (b) the
petition for certiorari, prohibition and mandamus was not the proper remedy of the
petitioner.
On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of
Justice were correctly issued for the following reasons: (a) petitioner, being the Senior
Vice-President of PBMI and the signatory to the trust receipts, is criminally liable for
violation of P.D. No. 115; (b) the issue raised by the petitioner, on whether he violated
P.D. No. 115 by his actuations, had already been resolved and laid to rest in Allied Bank
Corporation v. Ordoñez;22 and (c) petitioner was estopped from raising the
City Prosecutor’s delay in the final disposition of the preliminary investigation because
he failed to do so in the DOJ.
Thus, petitioner filed the instant petition, alleging that:
I
THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE
GROUND THAT THE CERTIFICATION OF NON-FORUM SHOPPING
INCORPORATED THEREIN WAS DEFECTIVE.
II
THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS
COMMITTED BY THE SECRETARY OF JUSTICE IN COMING OUT WITH THE
ASSAILED RESOLUTIONS.23
The Court will delve into and resolve the issues seriatim.
The petitioner avers that the CA erred in dismissing his petition on a mere technicality.
He claims that the rules of procedure should be used to promote, not frustrate,
substantial justice. He insists that the Rules of Court should be construed liberally
especially when, as in this case, his substantial rights are adversely affected; hence, the
deficiency in his certification of non-forum shopping should not result in the dismissal of
his petition.
The Office of the Solicitor General (OSG) takes the opposite view, and asserts that
indubitably, the certificate of non-forum shopping incorporated in the petition before the
CA is defective because it failed to disclose essential facts about pending actions
concerning similar issues and parties. It asserts that petitioner’s failure to comply with
the Rules of Court is fatal to his petition. The OSG cited Section 2, Rule 42, as well as the
ruling of this Court in Melo v. Court of Appeals.24
We agree with the ruling of the CA that the certification of non-forum shopping
petitioner incorporated in his petition before the appellate court is defective. The
certification reads:
It is further certified that as far as this Petition is concerned, no action or proceeding in
the Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal or
agency.
It is finally certified that if the affiant should learn that a similar action or proceeding has
been filed or is pending before the Supreme Court, the Court of Appeals, or different
divisions thereof, of any other tribunal or agency, it hereby undertakes to notify this
Honorable Court within five (5) days from such notice.25
64
Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition
should be accompanied by a sworn certification of non-forum shopping, as provided in
the third paragraph of Section 3, Rule 46 of said Rules. The latter provision reads in part:
SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. —
The petition shall contain the full names and actual addresses of all the petitioners and
respondents, a concise statement of the matters involved, the factual background of the
case and the grounds relied upon for the relief prayed for.
xxx
The petitioner shall also submit together with the petition a sworn certification that he
has not theretofore commenced any other action involving the same issues in the
Supreme Court, the Court of Appeals or different divisions thereof, or any other tribunal
or agency; if there is such other action or proceeding, he must state the status of the
same; and if he should thereafter learn that a similar action or proceeding has been filed
or is pending before the Supreme Court, the Court of Appeals, or different divisions
thereof, or any other tribunal or agency, he undertakes to promptly inform the aforesaid
courts and other tribunal or agency thereof within five (5) days therefrom. xxx
Compliance with the certification against forum shopping is separate from and
independent of the avoidance of forum shopping itself. The requirement is mandatory.
The failure of the petitioner to comply with the foregoing requirement shall be sufficient
ground for the dismissal of the petition without prejudice, unless otherwise provided.26
Indubitably, the first paragraph of petitioner’s certification is incomplete and
unintelligible. Petitioner failed to certify that he "had not heretofore commenced any
other action involving the same issues in the Supreme Court, the Court of Appeals or the
different divisions thereof or any other tribunal or agency" as required by paragraph 4,
Section 3, Rule 46 of the Revised Rules of Court.
We agree with petitioner’s contention that the certification is designed to promote and
facilitate the orderly administration of justice, and therefore, should not be interpreted
with absolute literalness. In his works on the Revised Rules of Civil Procedure, former
Supreme Court Justice Florenz Regalado states that, with respect to the contents of the
certification which the pleader may prepare, the rule of substantial compliance may be
availed of.27However, there must be a special circumstance or compelling reason which
makes the strict application of the requirement clearly unjustified. The instant petition
has not alleged any such extraneous circumstance. Moreover, as worded, the certification
cannot even be regarded as substantial compliance with the procedural requirement.
Thus, the CA was not informed whether, aside from the petition before it, petitioner had
commenced any other action involving the same issues in other tribunals.
On the merits of the petition, the CA ruled that the petitioner failed to establish that the
Secretary of Justice committed grave abuse of discretion in finding probable cause
against the petitioner for violation of estafa under Article 315, paragraph 1(b) of the
Revised Penal Code, in relation to P.D. No. 115. Thus, the appellate court ratiocinated:
Be that as it may, even on the merits, the arguments advanced in support of the petition
are not persuasive enough to justify the desired conclusion that respondent Secretary of
Justice gravely abused its discretion in coming out with his assailed Resolutions.
Petitioner posits that, except for his being the Senior Vice-President of the PBMI, there is
no iota of evidence that he was a participes crimines in violating the trust receipts sued
upon; and that his liability, if at all, is purely civil because he signed the said trust
receipts merely as a xxx surety and not as the entrustee. These assertions are, however,
too dull that they cannot even just dent the findings of the respondent Secretary, viz:
"x x x it is apropos to quote section 13 of PD 115 which states in part, viz:
‘xxx If the violation or offense is committed by a corporation, partnership, association or
other judicial entities, the penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein responsible for the
offense, without prejudice to the civil liabilities arising from the criminal offense.’
"There is no dispute that it was the respondent, who as senior vice-president of PBM,
executed the thirteen (13) trust receipts. As such, the law points to him as the official
responsible for the offense. Since a corporation cannot be proceeded against criminally
because it cannot commit crime in which personal violence or malicious intent is
required, criminal action is limited to the corporate agents guilty of an act amounting to a
crime and never against the corporation itself (West Coast Life Ins. Co. vs. Hurd, 27 Phil.
401; Times, [I]nc. v. Reyes, 39 SCRA 303). Thus, the execution by respondent of said
receipts is enough to indict him as the official responsible for violation of PD 115.
"Parenthetically, respondent is estopped to still contend that PD 115 covers only goods
which are ultimately destined for sale and not goods, like those imported by PBM, for use
in manufacture. This issue has already been settled in the Allied Banking Corporation
case, supra, where he was also a party, when the Supreme Court ruled that PD 115 is ‘not
limited to transactions in goods which are to be sold (retailed), reshipped, stored or
processed as a component or a product ultimately sold’ but ‘covers failure to turn over
the proceeds of the sale of entrusted goods, or to return said goods if unsold or disposed
of in accordance with the terms of the trust receipts.’
"In regard to the other assigned errors, we note that the respondent bound himself
under the terms of the trust receipts not only as a corporate official of PBM but also as its
surety. It is evident that these are two (2) capacities which do not exclude the other.
Logically, he can be proceeded against in two (2) ways: first, as surety as determined by
the Supreme Court in its decision in RCBC vs. Court of Appeals, 178 SCRA 739; and,
secondly, as the corporate official responsible for the offense under PD 115, the present
case is an appropriate remedy under our penal law.
"Moreover, PD 115 explicitly allows the prosecution of corporate officers ‘without
prejudice to the civil liabilities arising from the criminal offense’ thus, the civil liability
imposed on respondent in RCBC vs. Court of Appeals case is clearly separate and distinct
from his criminal liability under PD 115.’"28
65
Petitioner asserts that the appellate court’s ruling is erroneous because (a) the
transaction between PBMI and respondent bank is not a trust receipt transaction; (b) he
entered into the transaction and was sued in his capacity as PBMI Senior Vice-President;
(c) he never received the goods as an entrustee for PBMI, hence, could not have
committed any dishonesty or abused the confidence of respondent bank; and (d) PBMI
acquired the goods and used the same in operating its machineries and equipment and
not for resale.
The OSG, for its part, submits a contrary view, to wit:
34. Petitioner further claims that he is not a person responsible for the offense allegedly
because "[b]eing charged as the Senior Vice-President of Philippine Blooming Mills
(PBM), petitioner cannot be held criminally liable as the transactions sued upon were
clearly entered into in his capacity as an officer of the corporation" and that [h]e never
received the goods as an entrustee for PBM as he never had or took possession of the
goods nor did he commit dishonesty nor "abuse of confidence in transacting with RCBC."
Such argument is bereft of merit.
35. Petitioner’s being a Senior Vice-President of the Philippine Blooming Mills does not
exculpate him from any liability. Petitioner’s responsibility as the corporate official of
PBM who received the goods in trust is premised on Section 13 of P.D. No. 115, which
provides:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the
sale of the goods, documents or instruments covered by a trust receipt to the extent of
the amount owing to the entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or disposed of in accordance with
the terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered
Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised
Penal Code. If the violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense. (Emphasis supplied)
36. Petitioner having participated in the negotiations for the trust receipts and having
received the goods for PBM, it was inevitable that the petitioner is the proper corporate
officer to be proceeded against by virtue of the PBM’s violation of P.D. No. 115. 29
The ruling of the CA is correct.
In Mendoza-Arce v. Office of the Ombudsman (Visayas),30 this Court held that the acts of
a quasi-judicial officer may be assailed by the aggrieved party via a petition for certiorari
and enjoined (a) when necessary to afford adequate protection to the constitutional
rights of the accused; (b) when necessary for the orderly administration of justice; (c)
when the acts of the officer are without or in excess of authority; (d) where the charges
are manifestly false and motivated by the lust for vengeance; and (e) when there is
clearly no prima facie case against the accused.31 The Court also declared that, if the
officer conducting a preliminary investigation (in that case, the Office of the
Ombudsman) acts without or in excess of his authority and resolves to file an
Information despite the absence of probable cause, such act may be nullified by a writ of
certiorari.32
Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure,33 the
Information shall be prepared by the Investigating Prosecutor against the respondent
only if he or she finds probable cause to hold such respondent for trial. The Investigating
Prosecutor acts without or in excess of his authority under the Rule if the Information is
filed against the respondent despite absence of evidence showing probable cause
therefor.34 If the Secretary of Justice reverses the Resolution of the Investigating
Prosecutor who found no probable cause to hold the respondent for trial, and orders
such prosecutor to file the Information despite the absence of probable cause, the
Secretary of Justice acts contrary to law, without authority and/or in excess of authority.
Such resolution may likewise be nullified in a petition for certiorari under Rule 65 of the
Revised Rules of Civil Procedure.35
A preliminary investigation, designed to secure the respondent against hasty, malicious
and oppressive prosecution, is an inquiry to determine whether (a) a crime has been
committed; and (b) whether there is probable cause to believe that the accused is guilty
thereof. It is a means of discovering the person or persons who may be reasonably
charged with a crime. Probable cause need not be based on clear and convincing
evidence of guilt, as the investigating officer acts upon probable cause of reasonable
belief. Probable cause implies probability of guilt and requires more than bare suspicion
but less than evidence which would justify a conviction. A finding of probable cause
needs only to rest on evidence showing that more likely than not, a crime has been
committed by the suspect.36
However, while probable cause should be determined in a summary manner, there is a
need to examine the evidence with care to prevent material damage to a potential
accused’s constitutional right to liberty and the guarantees of freedom and fair play 37 and
to protect the State from the burden of unnecessary expenses in prosecuting alleged
offenses and holding trials arising from false, fraudulent or groundless charges.38
In this case, petitioner failed to establish that the Secretary of Justice committed grave
abuse of discretion in issuing the assailed resolutions. Indeed, he acted in accord with
law and the evidence.
Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:
Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within
the meaning of this Decree, is any transaction by and between a person referred to in this
Decree as the entruster, and another person referred to in this Decree as entrustee,
whereby the entruster, who owns or holds absolute title or security interests over
certain specified goods, documents or instruments, releases the same to the possession
of the entrustee upon the latter’s execution and delivery to the entruster of a signed
66
document called a "trust receipt" wherein the entrustee binds himself to hold the
designated goods, documents or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or instruments with the obligation to turn
over to the entruster the proceeds thereof to the extent of the amount owing to the
entruster or as appears in the trust receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed of, in accordance with the terms
and conditions specified in the trust receipt, or for other purposes substantially
equivalent to any of the following:
1. In case of goods or documents, (a) to sell the goods or procure their sale; or
(b) to manufacture or process the goods with the purpose of ultimate sale;
Provided, That, in the case of goods delivered under trust receipt for the
purpose of manufacturing or processing before its ultimate sale, the entruster
shall retain its title over the goods whether in its original or processed form
until the entrustee has complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or otherwise deal with them in a manner
preliminary or necessary to their sale; or
2. In the case of instruments a) to sell or procure their sale or exchange; or b) to
deliver them to a principal; or c) to effect the consummation of some
transactions involving delivery to a depository or register; or d) to effect their
presentation, collection or renewal.
The sale of goods, documents or instruments by a person in the business of selling goods,
documents or instruments for profit who, at the outset of the transaction, has, as against
the buyer, general property rights in such goods, documents or instruments, or who sells
the same to the buyer on credit, retaining title or other interest as security for the
payment of the purchase price, does not constitute a trust receipt transaction and is
outside the purview and coverage of this Decree.
An entrustee is one having or taking possession of goods, documents or instruments
under a trust receipt transaction, and any successor in interest of such person for the
purpose of payment specified in the trust receipt agreement.39 The entrustee is obliged
to: (1) hold the goods, documents or instruments in trust for the entruster and shall
dispose of them strictly in accordance with the terms and conditions of the trust receipt;
(2) receive the proceeds in trust for the entruster and turn over the same to the
entruster to the extent of the amount owing to the entruster or as appears on the trust
receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or
other casualties; (4) keep said goods or proceeds thereof whether in money or whatever
form, separate and capable of identification as property of the entruster; (5) return the
goods, documents or instruments in the event of non-sale or upon demand of the
entruster; and (6) observe all other terms and conditions of the trust receipt not
contrary to the provisions of the decree.40
The entruster shall be entitled to the proceeds from the sale of the goods, documents or
instruments released under a trust receipt to the entrustee to the extent of the amount
owing to the entruster or as appears in the trust receipt, or to the return of the goods,
documents or instruments in case of non-sale, and to the enforcement of all other rights
conferred on him in the trust receipt; provided, such are not contrary to the provisions of
the document.41
In the case at bar, the transaction between petitioner and respondent bank falls under
the trust receipt transactions envisaged in P.D. No. 115. Respondent bank imported the
goods and entrusted the same to PBMI under the trust receipts signed by petitioner, as
entrustee, with the bank as entruster. The agreement was as follows:
And in consideration thereof, I/we hereby agree to hold said goods in trust for the said
BANK as its property with liberty to sell the same within ____days from the date of the
execution of this Trust Receipt and for the Bank’s account, but without authority to make
any other disposition whatsoever of the said goods or any part thereof (or the proceeds)
either by way of conditional sale, pledge or otherwise.
I/we agree to keep the said goods insured to their full value against loss from fire, theft,
pilferage or other casualties as directed by the BANK, the sum insured to be payable in
case of loss to the BANK, with the understanding that the BANK is, not to be chargeable
with the storage premium or insurance or any other expenses incurred on said goods.
In case of sale, I/we further agree to turn over the proceeds thereof as soon as received
to the BANK, to apply against the relative acceptances (as described above) and for the
payment of any other indebtedness of mine/ours to the BANK. In case of non-sale within
the period specified herein, I/we agree to return the goods under this Trust Receipt to
the BANK without any need of demand.
I/we agree to keep the said goods, manufactured products or proceeds thereof, whether
in the form of money or bills, receivables, or accounts separate and capable of
identification as property of the BANK.42
It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a
matter of public policy, the failure of person to turn over the proceeds of the sale of the
goods covered by a trust receipt or to return said goods, if not sold, is a public nuisance
to be abated by the imposition of penal sanctions.43
The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions
involving goods procured as a component of a product ultimately sold has been resolved
in the affirmative in Allied Banking Corporation v. Ordoñez.44 The law applies to goods
used by the entrustee in the operation of its machineries and equipment. The non-
payment of the amount covered by the trust receipts or the non-return of the goods
covered by the receipts, if not sold or otherwise not disposed of, violate the entrustee’s
obligation to pay the amount or to return the goods to the entruster.
In Colinares v. Court of Appeals,45 the Court declared that there are two possible
situations in a trust receipt transaction. The first is covered by the provision which refers
to money received under the obligation involving the duty to deliver it (entregarla) to the
owner of the merchandise sold. The second is covered by the provision which refers to
merchandise received under the obligation to return it (devolvera) to the owner.46 Thus,
67
failure of the entrustee to turn over the proceeds of the sale of the goods covered by the
trust receipts to the entruster or to return said goods if they were not disposed of in
accordance with the terms of the trust receipt is a crime under P.D. No. 115, without
need of proving intent to defraud. The law punishes dishonesty and abuse of confidence
in the handling of money or goods to the prejudice of the entruster, regardless of
whether the latter is the owner or not. A mere failure to deliver the proceeds of the sale
of the goods, if not sold, constitutes a criminal offense that causes prejudice, not only to
another, but more to the public interest.47
The Court rules that although petitioner signed the trust receipts merely as Senior Vice-
President of PBMI and had no physical possession of the goods, he cannot avoid
prosecution for violation of P.D. No. 115.
The penalty clause of the law, Section 13 of P.D. No. 115 reads:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the
sale of the goods, documents or instruments covered by a trust receipt to the extent of
the amount owing to the entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or disposed of in accordance with
the terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered
Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised
Penal Code.1âwphi1 If the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty provided for in this
Decree shall be imposed upon the directors, officers, employees or other officials or
persons therein responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.
The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under
paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence.
It may be committed by a corporation or other juridical entity or by natural persons.
However, the penalty for the crime is imprisonment for the periods provided in said
Article 315, which reads:
ARTICLE 315. Swindling (estafa). – Any person who shall defraud another by any of the
means mentioned hereinbelow shall be punished by:
1st. The penalty of prision correccional in its maximum period to prision mayor
in its minimum period, if the amount of the fraud is over 12,000 pesos but does
not exceed 22,000 pesos; and if such amount exceeds the latter sum, the
penalty provided in this paragraph shall be imposed in its maximum period,
adding one year for each additional 10,000 pesos; but the total penalty which
may be imposed shall not exceed twenty years. In such cases, and in connection
with the accessory penalties which may be imposed and for the purpose of the
other provisions of this Code, the penalty shall be termed prision mayor or
reclusion temporal, as the case may be;
2nd. The penalty of prision correccional in its minimum and medium periods, if
the amount of the fraud is over 6,000 pesos but does not exceed 12,000 pesos;
3rd. The penalty of arresto mayor in its maximum period to prision
correccional in its minimum period, if such amount is over 200 pesos but does
not exceed 6,000 pesos; and
4th. By arresto mayor in its medium and maximum periods, if such amount does not
exceed 200 pesos, provided that in the four cases mentioned, the fraud be committed by
any of the following means; xxx
Though the entrustee is a corporation, nevertheless, the law specifically makes the
officers, employees or other officers or persons responsible for the offense, without
prejudice to the civil liabilities of such corporation and/or board of directors, officers, or
other officials or employees responsible for the offense. The rationale is that such officers
or employees are vested with the authority and responsibility to devise means necessary
to ensure compliance with the law and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in the violations of the law.48
If the crime is committed by a corporation or other juridical entity, the directors, officers,
employees or other officers thereof responsible for the offense shall be charged and
penalized for the crime, precisely because of the nature of the crime and the penalty
therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized
for a crime punishable by imprisonment.49 However, a corporation may be charged and
prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both
fine and imprisonment as penalty, a corporation may be prosecuted and, if found guilty,
may be fined.50
A crime is the doing of that which the penal code forbids to be done, or omitting to do
what it commands. A necessary part of the definition of every crime is the designation of
the author of the crime upon whom the penalty is to be inflicted. When a criminal statute
designates an act of a corporation or a crime and prescribes punishment therefor, it
creates a criminal offense which, otherwise, would not exist and such can be committed
only by the corporation. But when a penal statute does not expressly apply to
corporations, it does not create an offense for which a corporation may be punished. On
the other hand, if the State, by statute, defines a crime that may be committed by a
corporation but prescribes the penalty therefor to be suffered by the officers, directors,
or employees of such corporation or other persons responsible for the offense, only such
individuals will suffer such penalty.51Corporate officers or employees, through whose
act, default or omission the corporation commits a crime, are themselves individually
guilty of the crime.52
The principle applies whether or not the crime requires the consciousness of
wrongdoing. It applies to those corporate agents who themselves commit the crime and
to those, who, by virtue of their managerial positions or other similar relation to the
corporation, could be deemed responsible for its commission, if by virtue of their
relationship to the corporation, they had the power to prevent the act.53 Moreover, all
parties active in promoting a crime, whether agents or not, are principals.54 Whether
68
such officers or employees are benefited by their delictual acts is not a touchstone of
their criminal liability. Benefit is not an operative fact.
In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind
the cloak of the separate corporate personality of PBMI. In the words of Chief Justice Earl
Warren, a corporate officer cannot protect himself behind a corporation where he is the
actual, present and efficient actor.55
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against
the petitioner.
SO ORDERED.
[G.R. No. 141994. January 17, 2005]
FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO MEDICAL AND
EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE, (AMEC-
BCCM) and ANGELITA F. AGO, respondents.
DECISION
CARPIO, J.:
The Case
This petition for review[1] assails the 4 January 1999 Decision[2] and 26 January
2000 Resolution of the Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals
affirmed with modification the 14 December 1992 Decision [3] of the Regional Trial Court
of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of Appeals held Filipinas
Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima
liable for libel and ordered them to solidarily pay Ago Medical and Educational Center-
Bicol Christian College of Medicine moral damages, attorneys fees and costs of suit.
The Antecedents
Expos is a radio documentary[4] program hosted by Carmelo Mel Rima (Rima) and
Hermogenes Jun Alegre (Alegre).[5] Expos is aired every morning over DZRC-AM which is
owned by Filipinas Broadcasting Network, Inc. (FBNI). Expos is heard over Legazpi City,
the Albay municipalities and other Bicol areas.[6]
In the morning of 14 and 15 December 1989, Rima and Alegre exposed various
alleged complaints from students, teachers and parents against Ago Medical and
Educational Center-Bicol Christian College of Medicine (AMEC) and its administrators.
Claiming that the broadcasts were defamatory, AMEC and Angelita Ago (Ago), as Dean of
AMECs College of Medicine, filed a complaint for damages[7] against FBNI, Rima and
Alegre on 27 February 1990. Quoted are portions of the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking medical course at
AMEC-BCCM, advise them to pass all subjects because if they fail in any subject they
will repeat their year level, taking up all subjects including those they have passed
already. Several students had approached me stating that they had consulted with the
DECS which told them that there is no such regulation. If [there] is no such regulation
why is AMEC doing the same?
xxx
Second: Earlier AMEC students in Physical Therapy had complained that the course
is not recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if the subject does
not have an instructor - such greed for money on the part of AMECs administration.
Take the subject Anatomy: students would pay for the subject upon enrolment because it
is offered by the school. However there would be no instructor for such subject. Students
would be informed that course would be moved to a later date because the school is still
searching for the appropriate instructor.
xxx
It is a public knowledge that the Ago Medical and Educational Center has survived and
has been surviving for the past few years since its inception because of funds support
from foreign foundations. If you will take a look at the AMEC premises youll find out that
the names of the buildings there are foreign soundings. There is a McDonald Hall. Why
not Jose Rizal or Bonifacio Hall? That is a very concrete and undeniable evidence that the
support of foreign foundations for AMEC is substantial, isnt it? With the report which is
the basis of the expose in DZRC today, it would be very easy for detractors and enemies
of the Ago family to stop the flow of support of foreign foundations who assist the
medical school on the basis of the latters purpose. But if the purpose of the institution
(AMEC) is to deceive students at cross purpose with its reason for being it is possible for
these foreign foundations to lift or suspend their donations temporarily.[8]
xxx
On the other hand, the administrators of AMEC-BCCM, AMEC Science High School
and the AMEC-Institute of Mass Communication in their effort to minimize
expenses in terms of salary are absorbing or continues to accept rejects. For
example how many teachers in AMEC are former teachers of Aquinas University but
were removed because of immorality? Does it mean that the present administration of
AMEC have the total definite moral foundation from catholic administrator of Aquinas
University. I will prove to you my friends, that AMEC is a dumping ground, garbage,
69
not merely of moral and physical misfits. Probably they only qualify in terms of
intellect. The Dean of Student Affairs of AMEC is Justita Lola, as the family name implies.
She is too old to work, being an old woman. Is the AMEC administration exploiting the
very [e]nterprising or compromising and undemanding Lola? Could it be that AMEC is
just patiently making use of Dean Justita Lola were if she is very old. As in atmospheric
situation zero visibility the plane cannot land, meaning she is very old, low pay follows.
By the way, Dean Justita Lola is also the chairman of the committee on scholarship in
AMEC. She had retired from Bicol University a long time ago but AMEC has patiently
made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral and physically
misfit people. What does this mean? Immoral and physically misfits as teachers.
May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that your
are no longer fit to teach. You are too old. As an aviation, your case is zero visibility. Dont
insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship
committee at that. The reason is practical cost saving in salaries, because an old person is
not fastidious, so long as she has money to buy the ingredient of beetle juice. The elderly
can get by thats why she (Lola) was taken in as Dean.
xxx
xxx On our end our task is to attend to the interests of students. It is likely that the
students would be influenced by evil. When they become members of society outside
of campus will be liabilities rather than assets. What do you expect from a doctor
who while studying at AMEC is so much burdened with unreasonable imposition? What
do you expect from a student who aside from peculiar problems because not all students
are rich in their struggle to improve their social status are even more burdened with
false regulations. xxx[9] (Emphasis supplied)
The complaint further alleged that AMEC is a reputable learning institution. With
the supposed exposs, FBNI, Rima and Alegre transmitted malicious imputations, and as
such, destroyed plaintiffs (AMEC and Ago) reputation. AMEC and Ago included FBNI as
defendant for allegedly failing to exercise due diligence in the selection and supervision
of its employees, particularly Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an
Answer[10] alleging that the broadcasts against AMEC were fair and true. FBNI, Rima and
Alegre claimed that they were plainly impelled by a sense of public duty to report the
goings-on in AMEC, [which is] an institution imbued with public interest.
Thereafter, trial ensued. During the presentation of the evidence for the defense,
Atty. Edmundo Cea, collaborating counsel of Atty. Lozares, filed a Motion to Dismiss[11] on
FBNIs behalf. The trial court denied the motion to dismiss. Consequently, FBNI filed a
separate Answer claiming that it exercised due diligence in the selection and supervision
of Rima and Alegre. FBNI claimed that before hiring a broadcaster, the broadcaster
should (1) file an application; (2) be interviewed; and (3) undergo an apprenticeship and
training program after passing the interview. FBNI likewise claimed that it always
reminds its broadcasters to observe truth, fairness and objectivity in their broadcasts
and to refrain from using libelous and indecent language. Moreover, FBNI requires all
broadcasters to pass the Kapisanan ng mga Brodkaster sa Pilipinas (KBP) accreditation
test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a Decision[12] finding FBNI and
Alegre liable for libel except Rima. The trial court held that the broadcasts are
libelous per se. The trial court rejected the broadcasters claim that their utterances were
the result of straight reporting because it had no factual basis. The broadcasters did not
even verify their reports before airing them to show good faith. In holding FBNI liable for
libel, the trial court found that FBNI failed to exercise diligence in the selection and
supervision of its employees.
In absolving Rima from the charge, the trial court ruled that Rimas only
participation was when he agreed with Alegres expos. The trial court found Rimas
statement within the bounds of freedom of speech, expression, and of the press. The
dispositive portion of the decision reads:
WHEREFORE, premises considered, this court finds for the plaintiff. Considering the
degree of damages caused by the controversial utterances, which are not found by
this court to be really very serious and damaging, and there being no showing that
indeed the enrollment of plaintiff school dropped, defendants Hermogenes Jun
Alegre, Jr. and Filipinas Broadcasting Network (owner of the radio station DZRC), are
hereby jointly and severally ordered to pay plaintiff Ago Medical and Educational Center-
Bicol Christian College of Medicine (AMEC-BCCM) the amount of P300,000.00 moral
damages, plus P30,000.00 reimbursement of attorneys fees, and to pay the costs of suit.
SO ORDERED. [13] (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on
the other, appealed the decision to the Court of Appeals. The Court of Appeals affirmed
the trial courts judgment with modification. The appellate court made Rima solidarily
liable with FBNI and Alegre. The appellate court denied Agos claim for damages and
attorneys fees because the broadcasts were directed against AMEC, and not against her.
The dispositive portion of the Court of Appeals decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the
modification that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I]
and Hermo[g]enes Alegre.
SO ORDERED.[14]
70
 FBNI, Rima and Alegre filed a motion for reconsideration which the Court of
Appeals denied in its 26 January 2000 Resolution.
Hence, FBNI filed this petition.[15]
The Ruling of the Court of Appeals
The Court of Appeals upheld the trial courts ruling that the questioned broadcasts
are libelous per se and that FBNI, Rima and Alegre failed to overcome the legal
presumption of malice. The Court of Appeals found Rima and Alegres claim that they
were actuated by their moral and social duty to inform the public of the students gripes
as insufficient to justify the utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMECs administrators, the
Court of Appeals ruled that the broadcasts were made with reckless disregard as to
whether they were true or false. The appellate court pointed out that FBNI, Rima and
Alegre failed to present in court any of the students who allegedly complained against
AMEC. Rima and Alegre merely gave a single name when asked to identify the students.
According to the Court of Appeals, these circumstances cast doubt on the veracity of the
broadcasters claim that they were impelled by their moral and social duty to inform the
public about the students gripes.
The Court of Appeals found Rima also liable for libel since he remarked that (1)
AMEC-BCCM is a dumping ground for morally and physically misfit teachers; (2) AMEC
obtained the services of Dean Justita Lola to minimize expenses on its employees
salaries; and (3) AMEC burdened the students with unreasonable imposition and false
regulations.[16]
The Court of Appeals held that FBNI failed to exercise due diligence in the selection
and supervision of its employees for allowing Rima and Alegre to make the radio
broadcasts without the proper KBP accreditation. The Court of Appeals denied Agos
claim for damages and attorneys fees because the libelous remarks were directed against
AMEC, and not against her. The Court of Appeals adjudged FBNI, Rima and Alegre
solidarily liable to pay AMEC moral damages, attorneys fees and costs of suit.
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR
PAYMENT OF MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.
The Courts Ruling
We deny the petition.
This is a civil action for damages as a result of the allegedly defamatory remarks of
Rima and Alegre against AMEC.[17] While AMEC did not point out clearly the legal basis
for its complaint, a reading of the complaint reveals that AMECs cause of action is based
on Articles 30 and 33 of the Civil Code. Article 30[18] authorizes a separate civil action to
recover civil liability arising from a criminal offense. On the other hand, Article
33[19] particularly provides that the injured party may bring a separate civil action for
damages in cases of defamation, fraud, and physical injuries. AMEC also invokes Article
19[20] of the Civil Code to justify its claim for damages. AMEC cites Articles 2176 [21] and
2180[22] of the Civil Code to hold FBNI solidarily liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel[23] is a public and malicious imputation of a crime, or of a vice or defect, real
or imaginary, or any act or omission, condition, status, or circumstance tending to cause
the dishonor, discredit, or contempt of a natural or juridical person, or to blacken the
memory of one who is dead.[24]
There is no question that the broadcasts were made public and imputed to AMEC
defects or circumstances tending to cause it dishonor, discredit and contempt. Rima and
Alegres remarks such as greed for money on the part of AMECs administrators; AMEC is
a dumping ground, garbage of xxx moral and physical misfits; and AMEC students who
graduate will be liabilities rather than assets of the society are libelous per se. Taken as a
whole, the broadcasts suggest that AMEC is a money-making institution where physically
and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that
Rima and Alegre were plainly impelled by their civic duty to air the students gripes. FBNI
alleges that there is no evidence that ill will or spite motivated Rima and Alegre in
making the broadcasts. FBNI further points out that Rima and Alegre exerted efforts to
obtain AMECs side and gave Ago the opportunity to defend AMEC and its administrators.
FBNI concludes that since there is no malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious.[25] Rima and Alegre failed to
show adequately their good intention and justifiable motive in airing the supposed
gripes of the students. As hosts of a documentary or public affairs program, Rima and
Alegre should have presented the public issues free from inaccurate and misleading
information.[26] Hearing the students alleged complaints a month before the
expos,[27] they had sufficient time to verify their sources and information. However, Rima
and Alegre hardly made a thorough investigation of the students alleged gripes. Neither
did they inquire about nor confirm the purported irregularities in AMEC from the
Department of Education, Culture and Sports. Alegre testified that he merely went to
AMEC to verify his report from an alleged AMEC official who refused to disclose any
information. Alegre simply relied on the words of the students because they were many
71
and not because there is proof that what they are saying is true.[28] This plainly shows
Rima and Alegres reckless disregard of whether their report was true or not.
Contrary to FBNIs claim, the broadcasts were not the result of straight reporting.
Significantly, some courts in the United States apply the privilege of neutral reportage in
libel cases involving matters of public interest or public figures. Under this privilege, a
republisher who accurately and disinterestedly reports certain defamatory statements
made against public figures is shielded from liability, regardless of the republishers
subjective awareness of the truth or falsity of the accusation.[29] Rima and Alegre cannot
invoke the privilege of neutral reportage because unfounded comments abound in the
broadcasts. Moreover, there is no existing controversy involving AMEC when the
broadcasts were made. The privilege of neutral reportage applies where the defamed
person is a public figure who is involved in an existing controversy, and a party to that
controversy makes the defamatory statement.[30]
However, FBNI argues vigorously that malice in law does not apply to this case.
Citing Borjal v. Court of Appeals,[31] FBNI contends that the broadcasts fall within the
coverage of qualifiedly privileged communications for being commentaries on matters of
public interest. Such being the case, AMEC should prove malice in fact or actual malice.
Since AMEC allegedly failed to prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the
doctrine of fair comment, thus:
[F]air commentaries on matters of public interest are privileged and constitute a valid
defense in an action for libel or slander. The doctrine of fair comment means that while
in general every discreditable imputation publicly made is deemed false, because every
man is presumed innocent until his guilt is judicially proved, and every false imputation
is deemed malicious, nevertheless, when the discreditable imputation is directed against
a public person in his public capacity, it is not necessarily actionable. In order that such
discreditable imputation to a public official may be actionable, it must either be a
false allegation of fact or a comment based on a false supposition. If the comment
is an expression of opinion, based on established facts, then it is immaterial that the
opinion happens to be mistaken, as long as it might reasonably be inferred from the
facts.[32] (Emphasis supplied)
True, AMEC is a private learning institution whose business of educating students
is genuinely imbued with public interest. The welfare of the youth in general and AMECs
students in particular is a matter which the public has the right to know. Thus, similar to
the newspaper articles in Borjal, the subject broadcasts dealt with matters of public
interest. However, unlike in Borjal, the questioned broadcasts are not based
on established facts. The record supports the following findings of the trial court:
xxx Although defendants claim that they were motivated by consistent reports of
students and parents against plaintiff, yet, defendants have not presented in court, nor
even gave name of a single student who made the complaint to them, much less present
written complaint or petition to that effect. To accept this defense of defendants is too
dangerous because it could easily give license to the media to malign people and
establishments based on flimsy excuses that there were reports to them although they
could not satisfactorily establish it. Such laxity would encourage careless and
irresponsible broadcasting which is inimical to public interests.
Secondly, there is reason to believe that defendant radio broadcasters, contrary to the
mandates of their duties, did not verify and analyze the truth of the reports before they
aired it, in order to prove that they are in good faith.
Alegre contended that plaintiff school had no permit and is not accredited to offer
Physical Therapy courses. Yet, plaintiff produced a certificate coming from DECS that as
of Sept. 22, 1987 or more than 2 years before the controversial broadcast, accreditation
to offer Physical Therapy course had already been given the plaintiff, which certificate is
signed by no less than the Secretary of Education and Culture herself, Lourdes R.
Quisumbing (Exh. C-rebuttal). Defendants could have easily known this were they careful
enough to verify. And yet, defendants were very categorical and sounded too positive
when they made the erroneous report that plaintiff had no permit to offer Physical
Therapy courses which they were offering.
The allegation that plaintiff was getting tremendous aids from foreign foundations like
Mcdonald Foundation prove not to be true also. The truth is there is no Mcdonald
Foundation existing. Although a big building of plaintiff school was given the name
Mcdonald building, that was only in order to honor the first missionary in Bicol of
plaintiffs religion, as explained by Dr. Lita Ago. Contrary to the claim of defendants over
the air, not a single centavo appears to be received by plaintiff school from the
aforementioned McDonald Foundation which does not exist.
Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that
when medical students fail in one subject, they are made to repeat all the other
subject[s], even those they have already passed, nor their claim that the school charges
laboratory fees even if there are no laboratories in the school. No evidence was
presented to prove the bases for these claims, at least in order to give semblance of good
faith.
As for the allegation that plaintiff is the dumping ground for misfits, and immoral
teachers, defendant[s] singled out Dean Justita Lola who is said to be so old, with zero
visibility already. Dean Lola testified in court last Jan. 21, 1991, and was found to be 75
years old. xxx Even older people prove to be effective teachers like Supreme Court
Justices who are still very much in demand as law professors in their late years. Counsel
for defendants is past 75 but is found by this court to be still very sharp and effective. So
is plaintiffs counsel.
Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally
infirmed, but is still alert and docile.
The contention that plaintiffs graduates become liabilities rather than assets of our
society is a mere conclusion. Being from the place himself, this court is aware that
majority of the medical graduates of plaintiffs pass the board examination easily and
become prosperous and responsible professionals.[33]
72
 Had the comments been an expression of opinion based on established facts, it is
immaterial that the opinion happens to be mistaken, as long as it might reasonably be
inferred from the facts.[34] However, the comments of Rima and Alegre were not backed
up by facts. Therefore, the broadcasts are not privileged and remain libelous per se.
The broadcasts also violate the Radio Code[35] of the Kapisanan ng mga Brodkaster
sa Pilipinas, Ink. (Radio Code). Item I(B) of the Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues free from personal
bias, prejudice and inaccurate and misleading information. x x x
Furthermore, the station shall strive to present balanced discussion of
issues. x x x.
xxx
7. The station shall be responsible at all times in the supervision of public
affairs, public issues and commentary programs so that they conform to
the provisions and standards of this code.
8. It shall be the responsibility of the newscaster, commentator, host and
announcer to protect public interest, general welfare and good order in
the presentation of public affairs and public issues.[36](Emphasis
supplied)
The broadcasts fail to meet the standards prescribed in the Radio Code, which lays
down the code of ethical conduct governing practitioners in the radio broadcast industry.
The Radio Code is a voluntary code of conduct imposed by the radio broadcast industry
on its own members. The Radio Code is a public warranty by the radio broadcast
industry that radio broadcast practitioners are subject to a code by which their conduct
are measured for lapses, liability and sanctions.
The public has a right to expect and demand that radio broadcast practitioners live
up to the code of conduct of their profession, just like other professionals. A professional
code of conduct provides the standards for determining whether a person has acted
justly, honestly and with good faith in the exercise of his rights and performance of his
duties as required by Article 19[37] of the Civil Code. A professional code of conduct also
provides the standards for determining whether a person who willfully causes loss or
injury to another has acted in a manner contrary to morals or good customs under
Article 21[38] of the Civil Code.
II.
Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral damages because it is a
corporation.[39]
A juridical person is generally not entitled to moral damages because, unlike a
natural person, it cannot experience physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral shock.[40] The Court of Appeals
cites Mambulao Lumber Co. v. PNB, et al.[41] to justify the award of moral damages.
However, the Courts statement in Mambulao that a corporation may have a good
reputation which, if besmirched, may also be a ground for the award of moral damages is
an obiter dictum.[42]
Nevertheless, AMECs claim for moral damages falls under item 7 of Article
2219[43] of the Civil Code. This provision expressly authorizes the recovery of moral
damages in cases of libel, slander or any other form of defamation. Article 2219(7) does
not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical
person such as a corporation can validly complain for libel or any other form of
defamation and claim for moral damages.[44]
Moreover, where the broadcast is libelous per se, the law implies damages.[45] In
such a case, evidence of an honest mistake or the want of character or reputation of the
party libeled goes only in mitigation of damages.[46] Neither in such a case is the plaintiff
required to introduce evidence of actual damages as a condition precedent to the
recovery of some damages.[47] In this case, the broadcasts are libelous per se. Thus, AMEC
is entitled to moral damages.
However, we find the award of P300,000 moral damages unreasonable. The record
shows that even though the broadcasts were libelous per se, AMEC has not suffered any
substantial or material damage to its reputation. Therefore, we reduce the award of
moral damages from P300,000 to P150,000.
III.
Whether the award of attorneys fees is proper
FBNI contends that since AMEC is not entitled to moral damages, there is no basis
for the award of attorneys fees. FBNI adds that the instant case does not fall under the
enumeration in Article 2208[48] of the Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify
satisfactorily its claim for attorneys fees. AMEC did not adduce evidence to warrant the
award of attorneys fees. Moreover, both the trial and appellate courts failed to explicitly
state in their respective decisions the rationale for the award of attorneys
fees.[49] In Inter-Asia Investment Industries, Inc. v. Court of Appeals,[50] we held that:
[I]t is an accepted doctrine that the award thereof as an item of damages is the exception
rather than the rule, and counsels fees are not to be awarded every time a party wins a
suit. The power of the court to award attorneys fees under Article 2208 of the Civil
Code demands factual, legal and equitable justification, without which the award is
a conclusion without a premise, its basis being improperly left to speculation and
conjecture. In all events, the court must explicitly state in the text of the decision, and
not only in the decretal portion thereof, the legal reason for the award of attorneys
fees.[51](Emphasis supplied)
73
 While it mentioned about the award of attorneys fees by stating that it lies within
the discretion of the court and depends upon the circumstances of each case, the Court of
Appeals failed to point out any circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre
for moral damages, attorneys fees
and costs of suit
FBNI contends that it is not solidarily liable with Rima and Alegre for the payment
of damages and attorneys fees because it exercised due diligence in the selection and
supervision of its employees, particularly Rima and Alegre. FBNI maintains that its
broadcasters, including Rima and Alegre, undergo a very regimented process before they
are allowed to go on air. Those who apply for broadcaster are subjected to interviews,
examinations and an apprenticeship program.
FBNI further argues that Alegres age and lack of training are irrelevant to his
competence as a broadcaster. FBNI points out that the minor deficiencies in the KBP
accreditation of Rima and Alegre do not in any way prove that FBNI did not exercise the
diligence of a good father of a family in selecting and supervising them. Rimas
accreditation lapsed due to his non-payment of the KBP annual fees while Alegres
accreditation card was delayed allegedly for reasons attributable to the KBP Manila
Office. FBNI claims that membership in the KBP is merely voluntary and not required by
any law or government regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and severally
liable for the tort which they commit.[52] Joint tort feasors are all the persons who
command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet
the commission of a tort, or who approve of it after it is done, if done for their
benefit.[53] Thus, AMEC correctly anchored its cause of action against FBNI on Articles
2176 and 2180 of the Civil Code.
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable
to pay for damages arising from the libelous broadcasts. As stated by the Court of
Appeals, recovery for defamatory statements published by radio or television may be
had from the owner of the station, a licensee, the operator of the station, or a person
who procures, or participates in, the making of the defamatory statements. [54] An
employer and employee are solidarily liable for a defamatory statement by the employee
within the course and scope of his or her employment, at least when the employer
authorizes or ratifies the defamation.[55] In this case, Rima and Alegre were clearly
performing their official duties as hosts of FBNIs radio program Expos when they aired
the broadcasts. FBNI neither alleged nor proved that Rima and Alegre went beyond the
scope of their work at that time. There was likewise no showing that FBNI did not
authorize and ratify the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due
diligence in the selection and supervision of its employees, particularly Rima and
Alegre. FBNI merely showed that it exercised diligence in the selection of its
broadcasters without introducing any evidence to prove that it observed the same
diligence in the supervision of Rima and Alegre. FBNI did not show how it exercised
diligence in supervising its broadcasters. FBNIs alleged constant reminder to its
broadcasters to observe truth, fairness and objectivity and to refrain from using libelous
and indecent language is not enough to prove due diligence in the supervision of its
broadcasters. Adequate training of the broadcasters on the industrys code of conduct,
sufficient information on libel laws, and continuous evaluation of the broadcasters
performance are but a few of the many ways of showing diligence in the supervision of
broadcasters.
FBNI claims that it has taken all the precaution in the selection of Rima and Alegre
as broadcasters, bearing in mind their qualifications. However, no clear and convincing
evidence shows that Rima and Alegre underwent FBNIs regimented process of
application. Furthermore, FBNI admits that Rima and Alegre had deficiencies in their
KBP accreditation,[56] which is one of FBNIs requirements before it hires a broadcaster.
Significantly, membership in the KBP, while voluntary, indicates the broadcasters strong
commitment to observe the broadcast industrys rules and regulations. Clearly, these
circumstances show FBNIs lack of diligence in selecting and supervising Rima and
Alegre. Hence, FBNI is solidarily liable to pay damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January
1999 and Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151
with the MODIFICATION that the award of moral damages is reduced from P300,000
to P150,000 and the award of attorneys fees is deleted. Costs against petitioner.
SO ORDERED.
petron v ncpa
[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
74
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.
75
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;
76
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.
77
 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 AWARD AND/OR SHOULD HAVE CONSIDERED THE MERITS OF THE MOTION TO
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
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]
78
 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]
79
 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.
80
 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.)
81
 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
82
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
83
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,
84
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
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.
85
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
86
 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
87
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
88
 is made the court can ignore it and limit the recovery to reasonable sufficient to liquidate its total obligation to herein appellee bank. Again, we find merit in
compensation if the amount of the stipulated fee is found by the court to be this claim. From the foregoing discussion of the first two errors assigned, and for
unreasonable. This is a very different rule from that announced in section 1091 purposes of determining the total obligation of herein appellant to the PNB as of
of the Civil Code with reference to the obligation of contracts in general, where November 21, 1961 when the real estate mortgage was foreclosed, we have the following
it is said that such obligation has the force of law between the contracting illustration in support of this conclusion:1äwphï1.ñët
parties. Had the plaintiff herein made an express contract to pay his attorney an
A. -
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 I. Principal Loan
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 (a) Promissory note dated August 2, 1956 P27,500.00
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 (1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961 8,751.78
contrary to morality or public policy (Art. 1255, Civil Code). It is enough that it
is unreasonable or unconscionable. 4 (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
Since then this Court has invariably fixed counsel fees on a quantum meruit basis
whenever the fees stipulated appear excessive, unconscionable, or unreasonable, II. Sheriff's fees [for two (2) day's work] 10.00
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 III. Attorney's fee 1,000.00
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 Total obligation as of Nov. 21, 1961 P57,495.86
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 B. -
necessarily have the right to say whether a stipulation like this, inserted in a mortgage
contract, is valid. 6 Proceeds of the foreclosure sale of the real estate mortgage on Nov.
I. P56,908.00
21, 1961
In determining the compensation of an attorney, the following circumstances should be II. Additional amount remitted to the PNB on Dec. 18, 1961 738.59
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 Total amount of Payment made to PNB as of Dec. 18, 1961 P57,646.59
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 Deduct: Total obligation to the PNB P57,495.86
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 Excess Payment to the PNB P 150.73
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 From the foregoing illustration or computation, it is clear that there was no further
petition for foreclosure; but even with this in mind, we believe the amount of P5,821.35 necessity to foreclose the mortgage of herein appellant's chattels on December 21, 1961;
is far too excessive a fee for such services. Considering the above circumstances and on this ground alone, we may declare the sale of appellant's chattels on the said date,
mentioned, it is our considered opinion that the amount of P1,000.00 would be more illegal and void. But we take into consideration the fact that the PNB must have been led
than sufficient to compensate the work aforementioned. 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
The next issue raised deals with the claim that the proceeds of the sale of the real liquidate the latter's total indebtedness. Be that as it may, however, we still find the
properties alone together with the amount it remitted to the PNB later was more than subsequent sale of herein appellant's chattels illegal and objectionable on other grounds.

89
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
90
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.
91
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.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and Fernando, JJ.,
concur.
Bengzon, J.P. J., took no part.
haneo v ca 362 s 1
[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:chanrob1es
virtual 1aw library
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.
92
The petition should be granted for the following reasons:chanrob1es virtual 1aw library
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:chanrobles.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:chanrobles.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 library
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 virtua1aw library
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
93
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:chanrobles.com.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 virtua1aw library
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:chanrob1es virtual 1aw library
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:jgc:chanrobles.com.ph
"Such is the seriousness of the irregularities committed in connection with the disputed
94
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:chanrobles.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 library
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:chanrobles.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:chanrob1es virtual 1aw library
‘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 virtua1aw library
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:chanrobles.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."cralaw virtua1aw library
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.)
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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:chanrobles.com.ph
"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 library
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.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee and Makasiar, JJ.,
concur.
Reyes, J.B.L., J., concurs with Mr. Justice Barredo.
Castro, J., concurs in the result.
Separate Opinions
BARREDO, J., concurring:chanrob1es virtual 1aw library
I concur.
I agree with the ruling that the search warrants in question violates the specific
injunction of Section 3, Rule 126 that "No search warrant shall issue for more than one
specific offense." There is no question in my mind that, as very clearly pointed out by Mr.
Justice Villamor, the phrase "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" refers to more than one specific offense, considering that the
violation of Section 53 which refers to withholding of income taxes at the sources,
Section 208 which punishes pursuit of business or occupation without payment of the
corresponding specific or privilege taxes, and Section 209 which penalizes failure to
make a return of receipts sales, business or gross value output actually removed or to
pay the taxes thereon in connection with Title V on Privilege Taxes on Business and
Occupation can hardly be absorbed in a charge of alleged violation of Section 46(a),
which merely requires the filing of income tax returns by corporations, so as to
constitute with it a single offense. I perceive here the danger that the result of the search
applied for may be used as basis not only for a charge of violating Section 46(a) but also
and separately of Section 53, 208 and 209. Of course, it is to be admitted that Sections 72
and 73, also mentioned in the application, are really directly related to Section 46(a)
because Section 72 provides for surcharges for failure to render, returns and for
rendering false and fraudulent returns and Section 73 refers to the penalty for failure to
file returns or to pay the corresponding tax. Taken together, they constitute one single
offense penalized under Section 73. I am not and cannot be in favor of any scheme which
96
amounts to an indirect means of achieving that which not allowed to be done directly. By
merely saying that a party is being charged with violation of one section of the code in
relation to a number of other sections thereof which in truth have no clear or direct
bearing with the first is to me condemnable because it is no less than a shotgun device
which trenches on the basic liberties intended to be protected by the unequivocal
limitations imposed by the Constitution and the Rules of Court on the privilege to secure
a search warrant with the aggravating circumstance of being coupled with an attempt to
mislead the judge before whom the application for its issuance is presented.
I cannot close this brief concurrence without expressing my vehement disapproval of the
action taken by respondent internal revenue authorities in using the documents and
papers secured during the search, the legality of which was pending resolution by the
court, as basis of an assessment, no matter how highly motivated such action might have
been. This smacks of lack of respect, if not contempt for the court and is certainly
intolerable. At the very least, it appears as an attempt to render the court proceedings
moot and academic, and dealing as this case does with constitutionally protected rights
which are part and parcel of the basic concepts of individual liberty and democracy, the
government agents should have been the first ones to refrain from trying to make a farce
of these court proceedings. Indeed, it is to be regretted that the government agents and
the court have acted irregularly, for it is highly doubtful if it would be consistent with the
sacredness of the rights herein found to have been violated to permit the filing of another
application which complies with the constitutional requirements above discussed and
the making of another search upon the return of the papers and documents now in their
illegal possession. This could be an instance wherein taxes properly due the State will
probably remain unassessed and unpaid only because the ones in charge of the execution
of the laws did not know how to respect basic constitutional rights and liberties.
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
97
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.
I manner succeeded to such rights. The corporation evidently did not
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
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
98
 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
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 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.

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