G.R. No.
L-17587 September 12, 1967 On November 18 the present action was filed in the Court of First Instance
PHILIPPINE BANKING CORPORATION, representing the estate of
JUSTINA SANTOS Y CANON FAUSTINO, deceased, plaintiff-appellant,
vs.
LUI SHE in her own behalf and as administratrix of the intestate
estate of Wong Heng, deceased, defendant-appellant.
CASTRO, J.: Justina Santos y Canon Faustino and her sister Lorenzo
were the owners in common of a piece of land in Manila. This parcel, with
an area of 2,582.30 square meters, is located on Rizal Avenue and opens
into Florentino Torres street at the back and Katubusan street on one side.
In it are two residential houses with entrance on Florentino Torres street
and the Hen Wah Restaurant with entrance on Rizal Avenue. The sisters
lived in one of the houses, while Wong Heng, a Chinese, lived with his
family in the restaurant. Wong had been a long-time lessee of a portion of
the property, paying a monthly rental of P2,620.
On September 22, 1957 Justina Santos became the owner of the entire
property as her sister died with no other heir. Then already well advanced
in years, being at the time 90 years old, blind, crippled and an invalid, she
was left with no other relative to live with. Her only companions in the
house were her 17 dogs and 8 maids. Her otherwise dreary existence was
brightened now and then by the visits of Wong's four children who had
become the joy of her life. Wong himself was the trusted man to whom she
delivered various amounts for safekeeping, including rentals from her
property at the corner of Ongpin and Salazar streets and the rentals which
Wong himself paid as lessee of a part of the Rizal Avenue property. Wong
also took care of the payment; in her behalf, of taxes, lawyers' fees,
funeral expenses, masses, salaries of maids and security guard, and her
household expenses.
"In grateful acknowledgment of the personal services of the lessee to her,"
Justina Santos executed on November 15, 1957 a contract of lease (Plff
Exh. 3) in favor of Wong, covering the portion then already leased to him
and another portion fronting Florentino Torres street. The lease was for 50
years, although the lessee was given the right to withdraw at any time
from the agreement; the monthly rental was P3,120. The contract covered
an area of 1,124 square meters. Ten days later (November 25), the
contract was amended (Plff Exh. 4) so as to make it cover the entire
property, including the portion on which the house of Justina Santos stood,
at an additional monthly rental of P360. For his part Wong undertook to
pay, out of the rental due from him, an amount not exceeding P1,000 a
month for the food of her dogs and the salaries of her maids.
On December 21 she executed another contract (Plff Exh. 7) giving Wong
the option to buy the leased premises for P120,000, payable within ten
years at a monthly installment of P1,000. The option, written in Tagalog,
imposed on him the obligation to pay for the food of the dogs and the
salaries of the maids in her household, the charge not to exceed P1,800 a
month. The option was conditioned on his obtaining Philippine citizenship,
a petition for which was then pending in the Court of First Instance of
Rizal. It appears, however, that this application for naturalization was
withdrawn when it was discovered that he was not a resident of Rizal. On
October 28, 1958 she filed a petition to adopt him and his children on the
erroneous belief that adoption would confer on them Philippine citizenship.
The error was discovered and the proceedings were abandoned.
On November 18, 1958 she executed two other contracts, one (Plff Exh.
5) extending the term of the lease to 99 years, and another (Plff Exh. 6)
fixing the term of the option of 50 years. Both contracts are written in
Tagalog.
In two wills executed on August 24 and 29, 1959 (Def Exhs. 285 & 279),
she bade her legatees to respect the contracts she had entered into with
Wong, but in a codicil (Plff Exh. 17) of a later date (November 4, 1959) she
appears to have a change of heart. Claiming that the various contracts
were made by her because of machinations and inducements practiced by
him, she now directed her executor to secure the annulment of the
contracts.
of Manila. The complaint alleged that the contracts were obtained by
Wong "through fraud, misrepresentation, inequitable conduct, undue
influence and abuse of confidence and trust of and (by) taking advantage
of the helplessness of the plaintiff and were made to circumvent the
constitutional provision prohibiting aliens from acquiring lands in the
Philippines and also of the Philippine Naturalization Laws." The court was
asked to direct the Register of Deeds of Manila to cancel the registration
of the contracts and to order Wong to pay Justina Santos the additional
rent of P3,120 a month from November 15, 1957 on the allegation that the
reasonable rental of the leased premises was P6,240 a month.
In his answer, Wong admitted that he enjoyed her trust and confidence as
proof of which he volunteered the information that, in addition to the sum
of P3,000 which he said she had delivered to him for safekeeping, another
sum of P22,000 had been deposited in a joint account which he had with
one of her maids. But he denied having taken advantage of her trust in
order to secure the execution of the contracts in question. As counterclaim
he sought the recovery of P9,210.49 which he said she owed him for
advances.
Wong's admission of the receipt of P22,000 and P3,000 was the cue for
the filing of an amended complaint. Thus on June 9, 1960, aside from the
nullity of the contracts, the collection of various amounts allegedly
delivered on different occasions was sought. These amounts and the
dates of their delivery are P33,724.27 (Nov. 4, 1957); P7,344.42 (Dec. 1,
1957); P10,000 (Dec. 6, 1957); P22,000 and P3,000 (as admitted in his
answer). An accounting of the rentals from the Ongpin and Rizal Avenue
properties was also demanded.
In the meantime as a result of a petition for guardianship filed in the
Juvenile and Domestic Relations Court, the Security Bank & Trust Co. was
appointed guardian of the properties of Justina Santos, while Ephraim G.
Gochangco was appointed guardian of her person.
In his answer, Wong insisted that the various contracts were freely and
voluntarily entered into by the parties. He likewise disclaimed knowledge
of the sum of P33,724.27, admitted receipt of P7,344.42 and P10,000, but
contended that these amounts had been spent in accordance with the
instructions of Justina Santos; he expressed readiness to comply with any
order that the court might make with respect to the sums of P22,000 in the
bank and P3,000 in his possession.
The case was heard, after which the lower court rendered judgment as
follows:
[A]ll the documents mentioned in the first cause of action, with
the exception of the first which is the lease contract of 15
November 1957, are declared null and void; Wong Heng is
condemned to pay unto plaintiff thru guardian of her property
the sum of P55,554.25 with legal interest from the date of the
filing of the amended complaint; he is also ordered to pay the
sum of P3,120.00 for every month of his occupation as lessee
under the document of lease herein sustained, from 15
November 1959, and the moneys he has consigned since then
shall be imputed to that; costs against Wong Heng.
From this judgment both parties appealed directly to this Court. After the
case was submitted for decision, both parties died, Wong Heng on
October 21, 1962 and Justina Santos on December 28, 1964. Wong was
substituted by his wife, Lui She, the other defendant in this case, while
Justina Santos was substituted by the Philippine Banking Corporation.
Justina Santos maintained — now reiterated by the Philippine Banking
Corporation — that the lease contract (Plff Exh. 3) should have been
annulled along with the four other contracts (Plff Exhs. 4-7) because it
lacks mutuality; because it included a portion which, at the time, was
in custodia legis; because the contract was obtained in violation of the
fiduciary relations of the parties; because her consent was obtained
through undue influence, fraud and misrepresentation; and because the
lease contract, like the rest of the contracts, is absolutely simulated.
Paragraph 5 of the lease contract states that "The lessee may at any time
withdraw from this agreement." It is claimed that this stipulation offends
article 1308 of the Civil Code which provides that "the contract must bind
both contracting parties; its validity or compliance cannot be left to the will
of one of them."
We have had occasion to delineate the scope and application of article
1308 in the early case of Taylor v. Uy Tieng Piao.1 We said in that case:
Article 1256 [now art. 1308] of the Civil Code in our opinion
creates no impediment to the insertion in a contract for
personal service of a resolutory condition permitting the
cancellation of the contract by one of the parties. Such a
stipulation, as can be readily seen, does not make either the
validity or the fulfillment of the contract dependent upon the will
of the party to whom is conceded the privilege of cancellation;
for where the contracting parties have agreed that such option
shall exist, the exercise of the option is as much in the
fulfillment of the contract as any other act which may have
been the subject of agreement. Indeed, the cancellation of a
contract in accordance with conditions agreed upon beforehand
is fulfillment.2
And so it was held in Melencio v. Dy Tiao Lay 3 that a "provision in a lease
contract that the lessee, at any time before he erected any building on the
land, might rescind the lease, can hardly be regarded as a violation of
article 1256 [now art. 1308] of the Civil Code."
The case of Singson Encarnacion v. Baldomar 4 cannot be cited in support
of the claim of want of mutuality, because of a difference in factual setting.
In that case, the lessees argued that they could occupy the premises as
long as they paid the rent. This is of course untenable, for as this Court
said, "If this defense were to be allowed, so long as defendants elected to
continue the lease by continuing the payment of the rentals, the owner
would never be able to discontinue it; conversely, although the owner
should desire the lease to continue the lessees could effectively thwart his
purpose if they should prefer to terminate the contract by the simple
expedient of stopping payment of the rentals." Here, in contrast, the right
of the lessee to continue the lease or to terminate it is so circumscribed by
the term of the contract that it cannot be said that the continuance of the
lease depends upon his will. At any rate, even if no term had been fixed in
the agreement, this case would at most justify the fixing of a period5 but
not the annulment of the contract.
Nor is there merit in the claim that as the portion of the property formerly
owned by the sister of Justina Santos was still in the process of settlement
in the probate court at the time it was leased, the lease is invalid as to
such portion. Justina Santos became the owner of the entire property
upon the death of her sister Lorenzo on September 22, 1957 by force of
article 777 of the Civil Code. Hence, when she leased the property on
November 15, she did so already as owner thereof. As this Court
explained in upholding the sale made by an heir of a property under
judicial administration:
That the land could not ordinarily be levied upon while
in custodia legis does not mean that one of the heirs may not
sell the right, interest or participation which he has or might
have in the lands under administration. The ordinary execution
of property in custodia legis is prohibited in order to avoid
interference with the possession by the court. But the sale
made by an heir of his share in an inheritance, subject to the
result of the pending administration, in no wise stands in the
way of such administration.6
It is next contended that the lease contract was obtained by Wong in
violation of his fiduciary relationship with Justina Santos, contrary to article
1646, in relation to article 1941 of the Civil Code, which disqualifies
"agents (from leasing) the property whose administration or sale may have
been entrusted to them." But Wong was never an agent of Justina Santos.
The relationship of the parties, although admittedly close and confidential,
did not amount to an agency so as to bring the case within the prohibition
of the law.
Just the same, it is argued that Wong so completely dominated her life
and affairs that the contracts express not her will but only his. Counsel for
Justina Santos cites the testimony of Atty. Tomas S. Yumol who said that
he prepared the lease contract on the basis of data given to him by Wong
and that she told him that "whatever Mr. Wong wants must be followed."7
The testimony of Atty. Yumol cannot be read out of context in order to
warrant a finding that Wong practically dictated the terms of the contract.
What this witness said was:
Q Did you explain carefully to your client, Doña Justina, the
contents of this document before she signed it?
A I explained to her each and every one of these conditions
and I also told her these conditions were quite onerous for her,
I don't really know if I have expressed my opinion, but I told her
that we would rather not execute any contract anymore, but to
hold it as it was before, on a verbal month to month contract of
lease.
Q But, she did not follow your advice, and she went with the
contract just the same?
A She agreed first . . .
Q Agreed what?
A Agreed with my objectives that it is really onerous and that I
was really right, but after that, I was called again by her and
she told me to follow the wishes of Mr. Wong Heng.
xxx xxx xxx
Q So, as far as consent is concerned, you were satisfied that
this document was perfectly proper?
xxx xxx xxx
A Your Honor, if I have to express my personal opinion, I would
say she is not, because, as I said before, she told me —
"Whatever Mr. Wong wants must be followed."8
Wong might indeed have supplied the data which Atty. Yumol embodied in
the lease contract, but to say this is not to detract from the binding force of
the contract. For the contract was fully explained to Justina Santos by her
own lawyer. One incident, related by the same witness, makes clear that
she voluntarily consented to the lease contract. This witness said that the
original term fixed for the lease was 99 years but that as he doubted the
validity of a lease to an alien for that length of time, he tried to persuade
her to enter instead into a lease on a month-to-month basis. She was,
however, firm and unyielding. Instead of heeding the advice of the lawyer,
she ordered him, "Just follow Mr. Wong Heng."9 Recounting the incident,
Atty. Yumol declared on cross examination:
Considering her age, ninety (90) years old at the time and her
condition, she is a wealthy woman, it is just natural when she
said "This is what I want and this will be done." In particular
reference to this contract of lease, when I said "This is not
proper," she said — "You just go ahead, you prepare that, I am
the owner, and if there is any illegality, I am the only one that
can question the illegality."10
Atty. Yumol further testified that she signed the lease contract in the
presence of her close friend, Hermenegilda Lao, and her maid, Natividad
Luna, who was constantly by her side.11 Any of them could have testified
on the undue influence that Wong supposedly wielded over Justina
Santos, but neither of them was presented as a witness. The truth is that
even after giving his client time to think the matter over, the lawyer could
not make her change her mind. This persuaded the lower court to uphold
the validity of the lease contract against the claim that it was procured
through undue influence.
Indeed, the charge of undue influence in this case rests on a mere
inference12 drawn from the fact that Justina Santos could not read (as she
was blind) and did not understand the English language in which the
contract is written, but that inference has been overcome by her own
evidence.
Nor is there merit in the claim that her consent to the lease contract, as
well as to the rest of the contracts in question, was given out of a mistaken
sense of gratitude to Wong who, she was made to believe, had saved her
and her sister from a fire that destroyed their house during the liberation of
Manila. For while a witness claimed that the sisters were saved by other
persons (the brothers Edilberto and Mariano Sta. Ana)13 it was Justina
Santos herself who, according to her own witness, Benjamin C. Alonzo,
said "very emphatically" that she and her sister would have perished in the
fire had it not been for Wong.14 Hence the recital in the deed of conditional
option (Plff Exh. 7) that "[I]tong si Wong Heng ang siyang nagligtas sa
aming dalawang magkapatid sa halos ay tiyak na kamatayan", and the
equally emphatic avowal of gratitude in the lease contract (Plff Exh. 3).
As it was with the lease contract (Plff Exh. 3), so it was with the rest of the
contracts (Plff Exhs. 4-7) — the consent of Justina Santos was given
freely and voluntarily. As Atty. Alonzo, testifying for her, said:
[I]n nearly all documents, it was either Mr. Wong Heng or
Judge Torres and/or both. When we had conferences, they
used to tell me what the documents should contain. But, as I
said, I would always ask the old woman about them and
invariably the old woman used to tell me: "That's okay. It's all
right."15
But the lower court set aside all the contracts, with the exception of the
lease contract of November 15, 1957, on the ground that they are contrary
to the expressed wish of Justina Santos and that their considerations are
fictitious. Wong stated in his deposition that he did not pay P360 a month
for the additional premises leased to him, because she did not want him
to, but the trial court did not believe him. Neither did it believe his
statement that he paid P1,000 as consideration for each of the contracts
(namely, the option to buy the leased premises, the extension of the lease
to 99 years, and the fixing of the term of the option at 50 years), but that
the amount was returned to him by her for safekeeping. Instead, the court
relied on the testimony of Atty. Alonzo in reaching the conclusion that the
contracts are void for want of consideration.
Atty. Alonzo declared that he saw no money paid at the time of the
execution of the documents, but his negative testimony does not rule out
the possibility that the considerations were paid at some other time as the
contracts in fact recite. What is more, the consideration need not pass
from one party to the other at the time a contract is executed because the
promise of one is the consideration for the other.16
With respect to the lower court's finding that in all probability Justina
Santos could not have intended to part with her property while she was
alive nor even to lease it in its entirety as her house was built on it, suffice
it to quote the testimony of her own witness and lawyer who prepared the
contracts (Plff Exhs. 4-7) in question, Atty. Alonzo:
The ambition of the old woman, before her death, according to
her revelation to me, was to see to it that these properties be
enjoyed, even to own them, by Wong Heng because Doña
Justina told me that she did not have any relatives, near or far,
and she considered Wong Heng as a son and his children her
grandchildren; especially her consolation in life was when she
would hear the children reciting prayers in Tagalog.17
She was very emphatic in the care of the seventeen (17) dogs
and of the maids who helped her much, and she told me to see
to it that no one could disturb Wong Heng from those
properties. That is why we thought of the ninety-nine (99) years
lease; we thought of adoption, believing that thru adoption
Wong Heng might acquire Filipino citizenship; being the
adopted child of a Filipino citizen.18
This is not to say, however, that the contracts (Plff Exhs. 3-7) are valid.
For the testimony just quoted, while dispelling doubt as to the intention of
Justina Santos, at the same time gives the clue to what we view as a
scheme to circumvent the Constitutional prohibition against the transfer of
lands to aliens. "The illicit purpose then becomes the
illegal causa"19 rendering the contracts void.
Taken singly, the contracts show nothing that is necessarily illegal, but
considered collectively, they reveal an insidious pattern to subvert by
indirection what the Constitution directly prohibits. To be sure, a lease to
an alien for a reasonable period is valid. So is an option giving an alien the
right to buy real property on condition that he is granted Philippine
citizenship. As this Court said in Krivenko v. Register of Deeds:20
[A]liens are not completely excluded by the Constitution from
the use of lands for residential purposes. Since their residence
in the Philippines is temporary, they may be granted temporary
rights such as a lease contract which is not forbidden by the
Constitution. Should they desire to remain here forever and
share our fortunes and misfortunes, Filipino citizenship is not
impossible to acquire.
But if an alien is given not only a lease of, but also an option to buy, a
piece of land, by virtue of which the Filipino owner cannot sell or otherwise
dispose of his property,21 this to last for 50 years, then it becomes clear
that the arrangement is a virtual transfer of ownership whereby the owner
divests himself in stages not only of the right to enjoy the land ( jus
possidendi, jus utendi, jus fruendi and jus abutendi) but also of the right to
dispose of it ( jus disponendi) — rights the sum total of which make up
ownership. It is just as if today the possession is transferred, tomorrow,
the use, the next day, the disposition, and so on, until ultimately all the
rights of which ownership is made up are consolidated in an alien. And yet
this is just exactly what the parties in this case did within the space of one
year, with the result that Justina Santos' ownership of her property was
reduced to a hollow concept. If this can be done, then the Constitutional
ban against alien landholding in the Philippines, as announced in Krivenko
v. Register of Deeds,22 is indeed in grave peril.
It does not follow from what has been said, however, that because the
parties are in pari delicto they will be left where they are, without relief. For
one thing, the original parties who were guilty of a violation of the
fundamental charter have died and have since been substituted by their
administrators to whom it would be unjust to impute their guilt.23 For
another thing, and this is not only cogent but also important, article 1416 of
the Civil Code provides, as an exception to the rule on pari delicto, that
"When the agreement is not illegal per se but is merely prohibited, and the
prohibition by law is designed for the protection of the plaintiff, he may, if
public policy is thereby enhanced, recover what he has paid or delivered."
The Constitutional provision that "Save in cases of hereditary succession,
no private agricultural land shall be transferred or assigned except to
individuals, corporations, or associations qualified to acquire or hold lands
of the public domain in the Philippines"24 is an expression of public policy
to conserve lands for the Filipinos. As this Court said in Krivenko:
It is well to note at this juncture that in the present case we
have no choice. We are construing the Constitution as it is and
not as we may desire it to be. Perhaps the effect of our
construction is to preclude aliens admitted freely into the
Philippines from owning sites where they may build their
homes. But if this is the solemn mandate of the Constitution,
we will not attempt to compromise it even in the name of amity
or equity . . . .
For all the foregoing, we hold that under the Constitution aliens
may not acquire private or public agricultural lands, including
residential lands, and, accordingly, judgment is affirmed,
without costs.25
That policy would be defeated and its continued violation sanctioned if,
instead of setting the contracts aside and ordering the restoration of the
land to the estate of the deceased Justina Santos, this Court should apply
the general rule of pari delicto. To the extent that our ruling in this case
conflicts with that laid down in Rellosa v. Gaw Chee Hun 26 and
subsequent similar cases, the latter must be considered as pro
tanto qualified.
The claim for increased rentals and attorney's fees, made in behalf of
Justina Santos, must be denied for lack of merit.
And what of the various amounts which Wong received in trust from her? It
appears that he kept two classes of accounts, one pertaining to amount
which she entrusted to him from time to time, and another pertaining to
rentals from the Ongpin property and from the Rizal Avenue property,
which he himself was leasing.
With respect to the first account, the evidence shows that he received
P33,724.27 on November 8, 1957 (Plff Exh. 16); P7,354.42 on December
1, 1957 (Plff Exh. 13); P10,000 on December 6, 1957 (Plff Exh. 14) ; and
P18,928.50 on August 26, 1959 (Def. Exh. 246), or a total of P70,007.19.
He claims, however, that he settled his accounts and that the last amount
of P18,928.50 was in fact payment to him of what in the liquidation was
found to be due to him.
He made disbursements from this account to discharge Justina Santos'
obligations for taxes, attorneys' fees, funeral services and security guard
services, but the checks (Def Exhs. 247-278) drawn by him for this
purpose amount to only P38,442.84.27 Besides, if he had really settled his
accounts with her on August 26, 1959, we cannot understand why he still
had P22,000 in the bank and P3,000 in his possession, or a total of
P25,000. In his answer, he offered to pay this amount if the court so
directed him. On these two grounds, therefore, his claim of liquidation and
settlement of accounts must be rejected.
After subtracting P38,442.84 (expenditures) from P70,007.19 (receipts),
there is a difference of P31,564 which, added to the amount of P25,000,
leaves a balance of P56,564.3528 in favor of Justina Santos.
As to the second account, the evidence shows that the monthly income
from the Ongpin property until its sale in Rizal Avenue July, 1959 was
P1,000, and that from the Rizal Avenue property, of which Wong was the
lessee, was P3,120. Against this account the household expenses and
disbursements for the care of the 17 dogs and the salaries of the 8 maids
of Justina Santos were charged. This account is contained in a notebook
(Def. Exh. 6) which shows a balance of P9,210.49 in favor of Wong. But it
is claimed that the rental from both the Ongpin and Rizal Avenue
properties was more than enough to pay for her monthly expenses and
that, as a matter of fact, there should be a balance in her favor. The lower
court did not allow either party to recover against the other. Said the court:
[T]he documents bear the earmarks of genuineness; the
trouble is that they were made only by Francisco Wong and
Antonia Matias, nick-named Toning, — which was the way she
signed the loose sheets, and there is no clear proof that Doña
Justina had authorized these two to act for her in such
liquidation; on the contrary if the result of that was a deficit as
alleged and sought to be there shown, of P9,210.49, that was
not what Doña Justina apparently understood for as the Court
understands her statement to the Honorable Judge of the
Juvenile Court . . . the reason why she preferred to stay in her
home was because there she did not incur in any debts . . . this
being the case, . . . the Court will not adjudicate in favor of
Wong Heng on his counterclaim; on the other hand, while it is
claimed that the expenses were much less than the rentals and
there in fact should be a superavit, . . . this Court must concede
that daily expenses are not easy to compute, for this reason,
the Court faced with the choice of the two alternatives will
choose the middle course which after all is permitted by the
rules of proof, Sec. 69, Rule 123 for in the ordinary course of
things, a person will live within his income so that the
conclusion of the Court will be that there is neither deficit nor
superavit and will let the matter rest here.
Both parties on appeal reiterate their respective claims but we agree with
the lower court that both claims should be denied. Aside from the reasons
given by the court, we think that the claim of Justina Santos totalling
P37,235, as rentals due to her after deducting various expenses, should
be rejected as the evidence is none too clear about the amounts spent by
Wong for food29 masses30 and salaries of her maids.31 His claim for
P9,210.49 must likewise be rejected as his averment of liquidation is
belied by his own admission that even as late as 1960 he still had P22,000
in the bank and P3,000 in his possession.
ACCORDINGLY, the contracts in question (Plff Exhs. 3-7) are annulled
and set aside; the land subject-matter of the contracts is ordered returned
to the estate of Justina Santos as represented by the Philippine Banking
Corporation; Wong Heng (as substituted by the defendant-appellant Lui
She) is ordered to pay the Philippine Banking Corporation the sum of
P56,564.35, with legal interest from the date of the filing of the amended
complaint; and the amounts consigned in court by Wong Heng shall be
applied to the payment of rental from November 15, 1959 until the
premises shall have been vacated by his heirs. Costs against the
defendant-appellant.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P.,
Zaldivar, Sanchez and Angeles, JJ., concur.
Separate Opinions
FERNANDO, J., concurring:
With the able and well-written opinion of Justice Castro, I am in full
agreement. The exposition of the facts leaves nothing to be desired and
the statement of the law is notable for its comprehensiveness and clarity.
This concurring opinion has been written solely to express what I consider
to be the unfortunate and deplorable consequences of applying the pari
delicto concept, as was, to my mind, indiscriminately done, to alien
landholding declared illegal under the Krivenko doctrine in some past
decisions.
It is to be remembered that in Krivenko v. The Register of Deeds of
Manila,1 this Court over strong dissents held
that residential and commercial lots may be considered agricultural within
the meaning of the constitutional provision prohibiting the transfer of any
private agricultural land to individuals, corporations or associations not
qualified to acquire or hold lands of the public domain in the Philippines
save in cases of hereditary succession.
That provision of the Constitution took effect on November 15, 1935 when
the Commonwealth Government was established. The interpretation as
set forth in the Krivenko decision was only handed down on November 15,
1947. Prior to that date there were many who were of the opinion that the
phrase agricultural land should be construed strictly and not be made to
cover residential and commercial lots. Acting on that belief, several
transactions were entered into transferring such lots to alien vendees by
Filipino-vendors.
After the Krivenko decision, some Filipino vendors sought recovery of the
lots in question on the ground that the sales were null and void. No definite
ruling was made by this Court until September of 1953, when on the 29th
of said month, Rellosa v. Gaw Chee Hun,2 Bautista v. Uy Isabelo,3 Talento
v. Makiki,4 Caoile v. Chiao Peng5 were decided.
Of the four decisions in September, 1953, the most extensive discussion
of the question is found in Rellosa v. Gaw Chee Hun, the opinion being
penned by retired Justice Bautista Angelo with the concurrence only of
one Justice, Justice Labrador, also retired. Former Chief Justice Paras as
well as the former Justices Tuason and Montemayor concurred in the
result. The necessary sixth vote for a decision was given by the then
Justice Bengzon, who had a two-paragraph concurring opinion
disagreeing with the main opinion as to the force to be accorded to the two
cases,6 therein cited. There were two dissenting opinions by former
Justices Pablo and Alex Reyes. The doctrine as announced in
the Rellosa case is that while the sale by a Filipino-vendor to an alien-
vendee of a residential or a commercial lot is null and void as held in
the Krivenko case, still the Filipino-vendor has no right to recover under a
civil law doctrine, the parties being in pari delicto. The only remedy to
prevent this continuing violation of the Constitution which the decision
impliedly sanctions by allowing the alien vendees to retain the lots in
question is either escheat or reversion. Thus: "By following either of these
remedies, or by approving an implementary law as above suggested, we
can enforce the fundamental policy of our Constitution regarding our
natural resources without doing violence to the principle of pari delicto."7
Were the parties really in pari delicto? Had the sale by and between
Filipino-vendor and alien-vendee occurred after the decision in
the Krivenko case, then the above view would be correct that both Filipino-
vendor and alien-vendee could not be considered as innocent parties
within the contemplation of the law. Both of them should be held equally
guilty of evasion of the Constitution.
Since, however, the sales in question took place prior to
the Krivenko decision, at a time when the assumption could be honestly
entertained that there was no constitutional prohibition against the sale of
commercial or residential lots by Filipino-vendor to alien-vendee, in the
absence of a definite decision by the Supreme Court, it would not be doing
violence to reason to free them from the imputation of evading the
Constitution. For evidently evasion implies at the very least knowledge of
what is being evaded. The new Civil Code expressly provides: "Mistakes
upon a doubtful or difficult question of law may be the basis of good faith."8
According to the Rellosa opinion, both parties are equally guilty of evasion
of the Constitution, based on the broader principle that "both parties are
presumed to know the law." This statement that the sales entered into
prior to the Krivenko decision were at that time already vitiated by a guilty
knowledge of the parties may be too extreme a view. It appears to ignore
a postulate of a constitutional system, wherein the words of the
Constitution acquire meaning through Supreme Court
adjudication.1awphîl.nèt
Reference may be made by way of analogy to a decision adjudging a
statute void. Under the orthodox theory of constitutional law, the act
having been found unconstitutional was not a law, conferred no rights,
imposed no duty, afforded no protection.9 As pointed out by former Chief
Justice Hughes though in Chicot County Drainage District v. Baxter State
Bank:10 "It is quite clear, however, that such broad statements as to the
effect of a determination of unconstitutionality must be taken with
qualifications. The actual existence of a statute, prior to such a
determination, is an operative fact and may have consequences which
cannot justly be ignored. The past cannot always be erased by a new
judicial declaration. The effect of subsequent ruling as to invalidity may
have to be considered in various aspects, — with respect to particular
relations, individual and corporate, and particular conduct, private and
official. Questions of rights claimed to have become vested, of status, of
prior determinations deemed to have finality and acted upon accordingly,
of public policy in the light of the nature both of the statute and of its
previous application, demand examination."
After the Krivenko decision, there is no doubt that continued possession
by alien-vendee of property acquired before its promulgation is violative of
the Constitution. It is as if an act granting aliens the right to acquire
residential and commercial lots were annulled by the Supreme Court as
contrary to the provision of the Constitution prohibiting aliens from
acquiring private agricultural land.
The question then as now, therefore, was and is how to divest the alien of
such property rights on terms equitable to both parties. That question
should be justly resolved in accordance with the mandates of the
Constitution not by a wholesale condemnation of both parties for entering
into a contract at a time when there was no ban as yet arising from
the Krivenko decision, which could not have been anticipated.
Unfortunately, under the Rellosa case, it was assumed that the parties,
being in pari delicto, would be left in the situation in which they were,
neither being in a position to seek judicial redress.
Would it not have been more in consonance with the Constitution, if
instead the decision compelled the restitution of the property by the alien-
vendee to the Filipino-vendor? Krivenko decision held in clear, explicit and
unambigous language that: "We are deciding the instant case under
section 5 of Article XIII of the Constitution which is more comprehensive
and more absolute in the sense that it prohibits the transfer to aliens of
any private agricultural land including residential land whatever its origin
might have been . . . . This prohibition [Rep. Act No. 133] makes no
distinction between private lands that are strictly agricultural and private
lands that are residential or commercial. The prohibition embraces the
sale of private lands of any kind in favor of aliens, which is again a clear
implementation and a legislative interpretation of the constitutional
prohibition. . . . It is well to note at this juncture that in the present case we
have no choice. We are construing the Constitution as it is and not as we
may desire it to be. Perhaps the effect of our construction is to preclude
aliens, admitted freely into the Philippines, from owning sites where they
may build their homes. But if this is the solemn mandate of the
Constitution, we will not attempt to compromise it even in the name of
amity or equity."11
Alien-vendee is therefore incapacitated or disqualified to acquire and hold
real estate. That incapacity and that disqualification should date from the
adoption of the Constitution on November 15, 1935. That incapacity and
that disqualification, however, was made known to Filipino-vendor and to
alien-vendee only upon the promulgation of the Krivenko decision on
November 15, 1947. Alien-vendee, therefore, cannot be allowed to
continue owning and exercising acts of ownership over said property,
when it is clearly included within the Constitutional prohibition. Alien-
vendee should thus be made to restore the property with its fruits and
rents to Filipino-vendor, its previous owner, if it could be shown that in the
utmost good faith, he transferred his title over the same to alien-vendee,
upon restitution of the purchase price of course.
The Constitution bars alien-vendees from owning the property in question.
By dismissing those suits, the lots remained in alien hands.
Notwithstanding the solution of escheat or reversion offered, they are still
at the moment of writing, for the most part in alien hands. There have
been after almost twenty years no proceedings for escheat or reversion.
Yet it is clear that an alien-vendee cannot consistently with the
constitutional provision, as interpreted in the Krivenko decision, continue
owning and exercising acts of ownership over the real estate in question. It
ought to follow then, if such a continuing violation of the fundamental law
is to be put an end to, that the Filipino-vendor, who in good faith entered
into, a contract with an incapacitated person, transferring ownership of a
piece of land after the Constitution went into full force and effect, should, in
the light of the ruling in the Krivenko case, be restored to the possession
and ownership thereof, where he has filed the appropriate case or
proceeding. Any other construction would defeat the ends and purposes
not only of this particular provision in question but the rest of the
Constitution itself.
The Constitution frowns upon the title remaining in the alien-vendees.
Restoration of the property upon payment of price received by Filipino
vendor or its reasonable equivalent as fixed by the court is the answer. To
give the constitutional provision full force and effect, in consonance with
the dictates of equity and justice, the restoration to Filipino-vendor upon
the payment of a price fixed by the court is the better remedy. He thought
he could transfer the property to an alien and did so. After
the Krivenko case had made clear that he had no right to sell nor an alien-
vendee to purchase the property in question, the obvious solution would
be for him to reacquire the same. That way the Constitution would be
given, as it ought to be given, respect and deference.
It may be said that it is too late at this stage to hope for such a solution,
the Rellosa opinion, although originally concurred in by only one justice,
being too firmly imbedded. The writer however sees a welcome sign in the
adoption by the Court in this case of the concurring opinion of the then
Justice, later Chief Justice, Bengzon. Had it been followed then, the
problem would not be still with us now. Fortunately, it is never too late —
not even in constitutional adjudication.
G.R. No. L-27952 February 15, 1982
TESTATE ESTATE OF JOSE EUGENIO RAMIREZ, MARIA LUISA
PALACIOS, Administratrix, petitioner-appellee,
vs.
MARCELLE D. VDA. DE RAMIREZ, ET AL., oppositors, JORGE and
ROBERTO RAMIREZ, legatees, oppositors- appellants.
ABAD SANTOS, J.:
The main issue in this appeal is the manner of partitioning the testate
estate of Jose Eugenio Ramirez among the principal beneficiaries,
namely: his widow Marcelle Demoron de Ramirez; his two grandnephews
Roberto and Jorge Ramirez; and his companion Wanda de Wrobleski.
The task is not trouble-free because the widow Marcelle is a French who
lives in Paris, while the companion Wanda is an Austrian who lives in
Spain. Moreover, the testator provided for substitutions.
Jose Eugenio Ramirez, a Filipino national, died in Spain on December 11,
1964, with only his widow as compulsory heir. His will was admitted to
probate by the Court of First Instance of Manila, Branch X, on July 27,
1965. Maria Luisa Palacios was appointed administratrix of the estate. In
due time she submitted an inventory of the estate as follows:
INVENTARIO
Una sexta parte (1/6) proindiviso de un te
rreno, con sus mejoras y edificaciones, situadoen
la Escolta, Manila............................................................. P500,000.00
Una sexta parte (1/6) proindiviso de dos
parcelas de terreno situadas en Antipolo, Rizal................... 658.34
Cuatrocientos noventa y uno (491) acciones
de la 'Central Azucarera de la Carlota a P17.00
por accion ................................................................................8,347.00
Diez mil ochocientos seize (10,806) acciones
de la 'Central Luzon Milling Co.', disuelta y en
liquidacion a P0.15 por accion ..............................................1,620.90
Cuenta de Ahorros en el Philippine Trust
Co.............................................................................................. 2,350.73
TOTAL.............................................................. P512,976.97
MENOS:
Deuda al Banco de las Islas Filipinas, garan-
tizada con prenda de las acciones de La Carlota ......... P 5,000,00
VALOR LIQUIDO........................................... P507,976.97
The testamentary dispositions are as follows:
A.—En nuda propiedad, a D. Roberto y D. Jorge Ramirez,
ambas menores de edad, residentes en Manila, I.F., calle
'Alright, No. 1818, Malate, hijos de su sobrino D. Jose Ma.
Ramirez, con sustitucion vulgar a favor de sus respectivos
descendientes, y, en su defecto, con sustitucion vulgar
reciprocal entre ambos.
El precedente legado en nuda propiedad de la participacion
indivisa de la finca Santa Cruz Building, lo ordena el testador a
favor de los legatarios nombrados, en atencion a que dicha
propiedad fue creacion del querido padre del otorgante y por
ser aquellos continuadores del apellido Ramirez,
B.—Y en usufructo a saber: —
a. En cuanto a una tercera parte, a favor de la esposa del
testador, Da. Marcelle Ramirez, domiciliada en IE PECO, calle
del General Gallieni No. 33, Seine Francia, con sustitucion
vulgar u fideicomisaria a favor de Da. Wanda de Wrobleski, de
Palma de Mallorca, Son Rapina Avenida de los Reyes 13,
b.—Y en cuanto a las dos terceras partes restantes, a favor de
la nombrada Da. Wanda de Nrobleski con sustitucion vulgar v
fideicomisaria a saber:—
En cuanto a la mitad de dichas dos terceras partes, a favor de
D. Juan Pablo Jankowski, de Son Rapina Palma de Mallorca; y
encuanto a la mitad restante, a favor de su sobrino, D. Horace
V. Ramirez, San Luis Building, Florida St. Ermita, Manila, I.F.
A pesar de las sustituciones fideiconiisarias precedentemente
ordinadas, las usufiructuarias nombradas conjuntamente con
los nudo propietarios, podran en cualquier memento vender a
tercero los bienes objeto delegado, sin intervencion alguna de
los titulares fideicomisaarios.
On June 23, 1966, the administratrix submitted a project of partition as
follows: the property of the deceased is to be divided into two parts. One
part shall go to the widow 'en pleno dominio" in satisfaction of her legitime;
the other part or "free portion" shall go to Jorge and Roberto Ramirez "en
nuda propriedad." Furthermore, one third (1/3) of the free portion is
charged with the widow's usufruct and the remaining two-thirds (2/3) with a
usufruct in favor of Wanda.
Jorge and Roberto opposed the project of partition on the grounds: (a) that
the provisions for vulgar substitution in favor of Wanda de Wrobleski with
respect to the widow's usufruct and in favor of Juan Pablo Jankowski and
Horacio V. Ramirez, with respect to Wanda's usufruct are invalid because
the first heirs Marcelle and Wanda) survived the testator; (b) that the
provisions for fideicommissary substitutions are also invalid because the
first heirs are not related to the second heirs or substitutes within the first
degree, as provided in Article 863 of the Civil Code; (c) that the grant of a
usufruct over real property in the Philippines in favor of Wanda Wrobleski,
who is an alien, violates Section 5, Article III of the Philippine Constitution;
and that (d) the proposed partition of the testator's interest in the Santa
Cruz (Escolta) Building between the widow Marcelle and the appellants,
violates the testator's express win to give this property to them
Nonetheless, the lower court approved the project of partition in its order
dated May 3, 1967. It is this order which Jorge and Roberto have
appealed to this Court.
1. The widow's legitime.
The appellant's do not question the legality of giving Marcelle one-half of
the estate in full ownership. They admit that the testator's dispositions
impaired his widow's legitime. Indeed, under Art. 900 of the Civil Code "If
the only survivor is the widow or widower, she or he shall be entitled to
one-half of the hereditary estate." And since Marcelle alone survived the
deceased, she is entitled to one-half of his estate over which he could
impose no burden, encumbrance, condition or substitution of any kind
whatsoever. (Art. 904, par. 2, Civil Code.)
It is the one-third usufruct over the free portion which the appellants
question and justifiably so. It appears that the court a quo approved the
usufruct in favor of Marcelle because the testament provides for a usufruct
in her favor of one-third of the estate. The court a quo erred for Marcelle
who is entitled to one-half of the estate "en pleno dominio" as her legitime
and which is more than what she is given under the will is not entitled to
have any additional share in the estate. To give Marcelle more than her
legitime will run counter to the testator's intention for as stated above his
dispositions even impaired her legitime and tended to favor Wanda.
2. The substitutions.
It may be useful to recall that "Substitution is the appoint- judgment of
another heir so that he may enter into the inheritance in default of the heir
originally instituted." (Art. 857, Civil Code. And that there are several kinds
of substitutions, namely: simple or common, brief or compendious,
reciprocal, and fideicommissary (Art. 858, Civil Code.) According to
Tolentino, "Although the Code enumerates four classes, there are really
only two principal classes of substitutions: the simple and
the fideicommissary. The others are merely variations of these two." (111
Civil Code, p. 185 [1973].)
The simple or vulgar is that provided in Art. 859 of the Civil Code which
reads:
 ART. 859. The testator may designate one or more persons to
substitute the heir or heirs instituted in case such heir or heirs
should die before him, or should not wish, or should be
incapacitated to accept the inheritance.
A simple substitution, without a statement of the cases to which
it refers, shall comprise the three mentioned in the preceding
paragraph, unless the testator has otherwise provided.
(b) There is no absolute duty imposed on Wanda to transmit the usufruct
to the substitutes as required by Arts. 865 and 867 of the Civil Code. In
fact, the appellee admits "that the testator contradicts the establishment of
a fideicommissary substitution when he permits the properties subject of
the usufruct to be sold upon mutual agreement of the usufructuaries and
the naked owners." (Brief, p. 26.)
3. The usufruct of Wanda.

The fideicommissary substitution is described in the Civil Code as follows:
ART. 863. A fideicommissary substitution by virtue of which the
fiduciary or first heir instituted is entrusted with the obligation to
preserve and to transmit to a second heir the whole or part of
inheritance, shall be valid and shall take effect, provided such
substitution does not go beyond one degree from the heir
originally instituted, and provided further that the fiduciary or
first heir and the second heir are living at time of the death of
the testator.
The appellants claim that the usufruct over real properties of the estate in
favor of Wanda is void because it violates the constitutional prohibition
against the acquisition of lands by aliens.
The 1935 Constitution which is controlling provides as follows:
SEC. 5. Save in cases of hereditary succession, no private
agricultural land shall be transferred or assigned except to
individuals, corporations, or associations qualified to acquire or
hold lands of the public domain in the Philippines. (Art. XIII.)

It will be noted that the testator provided for a vulgar substitution in respect The court a quo upheld the validity of the usufruct given to Wanda on the
of the legacies of Roberto and Jorge Ramirez, the appellants, thus: con ground that the Constitution covers not only succession by operation of
sustitucion vulgar a favor de sus respectivos descendientes, y, en su law but also testamentary succession. We are of the opinion that the
defecto, con substitution vulgar reciprocal entre ambos. Constitutional provision which enables aliens to acquire private lands does
not extend to testamentary succession for otherwise the prohibition will be
The appellants do not question the legality of the substitution so provided. for naught and meaningless. Any alien would be able to circumvent the
The appellants question the sustitucion vulgar y fideicomisaria a favor de prohibition by paying money to a Philippine landowner in exchange for a
Da. Wanda de Wrobleski" in connection with the one-third usufruct over devise of a piece of land.
the estate given to the widow Marcelle However, this question has
become moot because as We have ruled above, the widow is not entitled This opinion notwithstanding, We uphold the usufruct in favor of Wanda
to any usufruct. because a usufruct, albeit a real right, does not vest title to the land in the
usufructuary and it is the vesting of title to land in favor of aliens which is
The appellants also question the sustitucion vulgar y fideicomisaria in proscribed by the Constitution.
connection with Wanda's usufruct over two thirds of the estate in favor of
Juan Pablo Jankowski and Horace v. Ramirez. IN VIEW OF THE FOREGOING, the estate of Jose Eugenio Ramirez is
hereby ordered distributed as follows:
They allege that the substitution in its vulgar aspect as void because
Wanda survived the testator or stated differently because she did not One-half (1/2) thereof to his widow as her legitime;
predecease the testator. But dying before the testator is not the only case
for vulgar substitution for it also includes refusal or incapacity to accept the
inheritance as provided in Art. 859 of the Civil Code, supra. Hence, the One-half (1/2) thereof which is the free portion to Roberto and Jorge
vulgar substitution is valid. Ramirez in naked ownership and the usufruct to Wanda de Wrobleski with
a simple substitution in favor of Juan Pablo Jankowski and Horace V.
Ramirez.
As regards the substitution in its fideicommissary aspect, the appellants
are correct in their claim that it is void for the following reasons:
The distribution herein ordered supersedes that of the court a quo. No
special pronouncement as to costs.
(a) The substitutes (Juan Pablo Jankowski and Horace V. Ramirez) are
not related to Wanda, the heir originally instituted. Art. 863 of the Civil
Code validates a fideicommissary substitution "provided such substitution SO ORDERED.
does not go beyond one degree from the heir originally instituted."
Barredo (Chairman), Concepcion, Jr., De Castro, Ericta and Escolin, JJ.,
What is meant by "one degree" from the first heir is explained by Tolentino concur.
as follows:
Aquino J., took no part.
Scaevola Maura, and Traviesas construe "degree" as
designation, substitution, or transmission. The Supreme Court
of Spain has decidedly adopted this construction. From this
point of view, there can be only one tranmission or substitution,
and the substitute need not be related to the first heir. Manresa,
Morell and Sanchez Roman, however, construe the word
"degree" as generation, and the present Code has obviously
followed this interpretation. by providing that the substitution
shall not go beyond one degree "from the heir originally
instituted." The Code thus clearly indicates that the second heir
must be related to and be one generation from the first heir.

From this, it follows that the fideicommissary can only be either

a child or a parent of the first heir. These are the only relatives
who are one generation or degree from the fiduciary (Op. cit.,
pp. 193-194.)
G.R. No. 149615 August 29, 2006
IN RE: PETITION FOR SEPARATION OF PROPERTY ELENA
BUENAVENTURA MULLER, Petitioner,
vs.
HELMUT MULLER, Respondent.
DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari 1 assails the February 26, 2001
Decision 2 of the Court of Appeals in CA-G.R. CV No. 59321 affirming with
modification the August 12, 1996 Decision 3 of the Regional Trial Court of
Quezon City, Branch 86 in Civil Case No. Q-94-21862, which terminated
the regime of absolute community of property between petitioner and
respondent, as well as the Resolution 4 dated August 13, 2001 denying
the motion for reconsideration.
The facts are as follows:
Petitioner Elena Buenaventura Muller and respondent Helmut Muller were
married in Hamburg, Germany on September 22, 1989. The couple
resided in Germany at a house owned by respondent’s parents but
decided to move and reside permanently in the Philippines in 1992. By this
time, respondent had inherited the house in Germany from his parents
which he sold and used the proceeds for the purchase of a parcel of land
in Antipolo, Rizal at the cost of P528,000.00 and the construction of a
house amounting to P2,300,000.00. The Antipolo property was registered
in the name of petitioner under Transfer Certificate of Title No. 219438 5 of
the Register of Deeds of Marikina, Metro Manila.
Due to incompatibilities and respondent’s alleged womanizing, drinking,
and maltreatment, the spouses eventually separated. On September 26,
1994, respondent filed a petition 6 for separation of properties before the
Regional Trial Court of Quezon City.
On August 12, 1996, the trial court rendered a decision which terminated
the regime of absolute community of property between the petitioner and
respondent. It also decreed the separation of properties between them
and ordered the equal partition of personal properties located within the
country, excluding those acquired by gratuitous title during the marriage.
With regard to the Antipolo property, the court held that it was acquired
using paraphernal funds of the respondent. However, it ruled that
respondent cannot recover his funds because the property was purchased
in violation of Section 7, Article XII of the Constitution. Thus –
However, pursuant to Article 92 of the Family Code, properties acquired
by gratuitous title by either spouse during the marriage shall be excluded
from the community property. The real property, therefore, inherited by
petitioner in Germany is excluded from the absolute community of property
of the herein spouses. Necessarily, the proceeds of the sale of said real
property as well as the personal properties purchased thereby, belong
exclusively to the petitioner. However, the part of that inheritance used by
the petitioner for acquiring the house and lot in this country cannot be
recovered by the petitioner, its acquisition being a violation of Section 7,
Article XII of the Constitution which provides that "save in cases of
hereditary succession, no private lands shall be transferred or conveyed
except to individuals, corporations or associations qualified to acquire or
hold lands of the public domain." The law will leave the parties in the
situation where they are in without prejudice to a voluntary partition by the
parties of the said real property. x x x
xxxx
As regards the property covered by Transfer Certificate of Title No.
219438 of the Registry of Deeds of Marikina, Metro Manila, situated in
Antipolo, Rizal and the improvements thereon, the Court shall not make
any pronouncement on constitutional grounds. 7
Respondent appealed to the Court of Appeals which rendered the assailed
decision modifying the trial court’s Decision. It held that respondent merely
prayed for reimbursement for the purchase of the Antipolo property, and
not acquisition or transfer of ownership to him. It also considered
petitioner’s ownership over the property in trust for the respondent. As
regards the house, the Court of Appeals ruled that there is nothing in the
Constitution which prohibits respondent from acquiring the same. The
dispositive portion of the assailed decision reads:
WHEREFORE, in view of the foregoing, the Decision of the lower court
dated August 12, 1996 is hereby MODIFIED. Respondent Elena
Buenaventura Muller is hereby ordered to REIMBURSE the petitioner the
amount of P528,000.00 for the acquisition of the land and the amount of
P2,300,000.00 for the construction of the house situated in Atnipolo, Rizal,
deducting therefrom the amount respondent spent for the preservation,
maintenance and development of the aforesaid real property including the
depreciation cost of the house or in the alternative to SELL the house and
lot in the event respondent does not have the means to reimburse the
petitioner out of her own money and from the proceeds thereof, reimburse
the petitioner of the cost of the land and the house deducting the
expenses for its maintenance and preservation spent by the respondent.
Should there be profit, the same shall be divided in proportion to the equity
each has over the property. The case is REMANDED to the lower court for
reception of evidence as to the amount claimed by the respondents for the
preservation and maintenance of the property.
SO ORDERED. 8
Hence, the instant petition for review raising the following issues:
I
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
HOLDING THAT THE RESPONDENT HEREIN IS ENTITLED TO
REIMBURSEMENT OF THE AMOUNT USED TO PURCHASE THE
LAND AS WELL AS THE COSTS FOR THE CONSTRUCTION OF THE
HOUSE, FOR IN SO RULING, IT INDIRECTLY ALLOWED AN ACT
DONE WHICH OTHERWISE COULD NOT BE DIRECTLY x x x DONE,
WITHOUT DOING VIOLENCE TO THE CONSTITUTIONAL
PROSCRIPTION THAT AN ALIEN IS PROHIBITED FROM ACQUIRING
OWNERSHIP OF REAL PROPERTIES LOCATED IN THE PHILIPPINES.
II
THE COURT OF APPEALS GRAVELY ERRED IN SUSTAINING
RESPONDENT’S CAUSE OF ACTION WHICH IS ACTUALLY A
DESPERATE ATTEMPT TO OBTAIN OWNERSHIP OVER THE LOT IN
QUESTION, CLOTHED UNDER THE GUISE OF CLAIMING
REIMBURSEMENT.
Petitioner contends that respondent, being an alien, is disqualified to own
private lands in the Philippines; that respondent was aware of the
constitutional prohibition but circumvented the same; and that
respondent’s purpose for filing an action for separation of property is to
obtain exclusive possession, control and disposition of the Antipolo
property.
Respondent claims that he is not praying for transfer of ownership of the
Antipolo property but merely reimbursement; that the funds paid by him for
the said property were in consideration of his marriage to petitioner; that
the funds were given to petitioner in trust; and that equity demands that
respondent should be reimbursed of his personal funds.
The issue for resolution is whether respondent is entitled to
reimbursement of the funds used for the acquisition of the Antipolo
property.
The petition has merit.
Section 7, Article XII of the 1987 Constitution states:
Save in cases of hereditary succession, no private lands shall be
transferred or conveyed except to individuals, corporations, or
associations qualified to acquire or hold lands of the public domain.
Aliens, whether individuals or corporations, are disqualified from acquiring
lands of the public domain. Hence, they are also disqualified from
acquiring private lands. 9 The primary purpose of the constitutional
provision is the conservation of the national patrimony. In the case of
Krivenko v. Register of Deeds, 10 the Court held:
Under section 1 of Article XIII of the Constitution, "natural resources, with
the exception of public agricultural land, shall not be alienated," and with
respect to public agricultural lands, their alienation is limited to Filipino
citizens. But this constitutional purpose conserving agricultural resources
in the hands of Filipino citizens may easily be defeated by the Filipino
citizens themselves who may alienate their agricultural lands in favor of
aliens. It is partly to prevent this result that section 5 is included in Article
XIII, and it reads as follows:
"Sec. 5. Save in cases of hereditary succession, no private agricultural
land will be transferred or assigned except to individuals, corporations, or
associations qualified to acquire or hold lands of the public domain in the
Philippines."
This constitutional provision closes the only remaining avenue through
which agricultural resources may leak into aliens’ hands. It would certainly
be futile to prohibit the alienation of public agricultural lands to aliens if,
after all, they may be freely so alienated upon their becoming private
agricultural lands in the hands of Filipino citizens. x x x
xxxx
If the term "private agricultural lands" is to be construed as not including
residential lots or lands not strictly agricultural, the result would be that
"aliens may freely acquire and possess not only residential lots and
houses for themselves but entire subdivisions, and whole towns and
cities," and that "they may validly buy and hold in their names lands of any
area for building homes, factories, industrial plants, fisheries, hatcheries,
schools, health and vacation resorts, markets, golf courses, playgrounds,
airfields, and a host of other uses and purposes that are not, in appellant’s
words, strictly agricultural." (Solicitor General’s Brief, p. 6.) That this is
obnoxious to the conservative spirit of the Constitution is beyond question.
Respondent was aware of the constitutional prohibition and expressly
admitted his knowledge thereof to this Court.11 He declared that he had
the Antipolo property titled in the name of petitioner because of the said
prohibition. 12His attempt at subsequently asserting or claiming a right on
the said property cannot be sustained.
The Court of Appeals erred in holding that an implied trust was created
and resulted by operation of law in view of petitioner’s marriage to
respondent. Save for the exception provided in cases of hereditary
succession, respondent’s disqualification from owning lands in the
Philippines is absolute. Not even an ownership in trust is allowed. Besides,
where the purchase is made in violation of an existing statute and in
evasion of its express provision, no trust can result in favor of the party
who is guilty of the fraud. 13 To hold otherwise would allow circumvention
of the constitutional prohibition.
Invoking the principle that a court is not only a court of law but also a court
of equity, is likewise misplaced. It has been held that equity as a rule will
follow the law and will not permit that to be done indirectly which, because
of public policy, cannot be done directly. 14 He who seeks equity must do
equity, and he who comes into equity must come with clean hands. The
latter is a frequently stated maxim which is also expressed in the principle
that he who has done inequity shall not have equity. It signifies that a
litigant may be denied relief by a court of equity on the ground that his
conduct has been inequitable, unfair and dishonest, or fraudulent, or
deceitful as to the controversy in issue. 15
Thus, in the instant case, respondent cannot seek reimbursement on the
ground of equity where it is clear that he willingly and knowingly bought
the property despite the constitutional prohibition.
Further, the distinction made between transfer of ownership as opposed to
recovery of funds is a futile exercise on respondent’s part. To allow
reimbursement would in effect permit respondent to enjoy the fruits of a
property which he is not allowed to own. Thus, it is likewise proscribed by
law. As expressly held in Cheesman v. Intermediate Appellate Court: 16
Finally, the fundamental law prohibits the sale to aliens of residential land.
Section 14, Article XIV of the 1973 Constitution ordains that, "Save in
cases of hereditary succession, no private land shall be transferred or
conveyed except to individuals, corporations, or associations qualified to
acquire or hold lands of the public domain." Petitioner Thomas Cheesman
was, of course, charged with knowledge of this prohibition. Thus,
assuming that it was his intention that the lot in question be purchased by
him and his wife, he acquired no right whatever over the property by virtue
of that purchase; and in attempting to acquire a right or interest in land,
vicariously and clandestinely, he knowingly violated the Constitution; the
sale as to him was null and void. In any event, he had and has no capacity
or personality to question the subsequent sale of the same property by his
wife on the theory that in so doing he is merely exercising the prerogative
of a husband in respect of conjugal property. To sustain such a theory
would permit indirect controversion of the constitutional prohibition. If the
property were to be declared conjugal, this would accord to the alien
husband a not insubstantial interest and right over land, as he would then
have a decisive vote as to its transfer or disposition. This is a right that the
Constitution does not permit him to have.
As already observed, the finding that his wife had used her own money to
purchase the property cannot, and will not, at this stage of the proceedings
be reviewed and overturned. But even if it were a fact that said wife had
used conjugal funds to make the acquisition, the considerations just set
out to militate, on high constitutional grounds, against his recovering and
holding the property so acquired, or any part thereof. And whether in such
an event, he may recover from his wife any share of the money used for
the purchase or charge her with unauthorized disposition or expenditure of
conjugal funds is not now inquired into; that would be, in the premises, a
purely academic exercise. (Emphasis added)
WHEREFORE, in view of the foregoing, the instant petition is GRANTED.
The Decision dated February 26, 2001 of the Court of Appeals in CA-G.R.
CV No. 59321 ordering petitioner Elena Buenaventura Muller to reimburse
respondent Helmut Muller the amount of P528,000 for the acquisition of
the land and the amount of P2,300,000 for the construction of the house in
Antipolo City, and the Resolution dated August 13, 2001 denying
reconsideration thereof, are REVERSED and SET ASIDE. The August 12,
1996 Decision of the Regional Trial Court of Quezon City, Branch 86 in
Civil Case No. Q-94-21862 terminating the regime of absolute community
between the petitioner and respondent, decreeing a separation of property
between them and ordering the partition of the personal properties located
in the Philippines equally, is REINSTATED.
SO ORDERED.
G.R. No. 130115 FELIX TING HO, JR., MERLA TING HO BRADEN, JUANA TING
HO & LYDIA TING HO BELENZO, - versus - VICENTE TENG GUI,
Respondent. July 16, 2008
DECISION
PUNO, C.J.: This is a Petition for Review on Certiorari[1] assailing the Decision[2] of
the Court of Appeals (CA) in CA-G.R. CV No. 42993 which reversed and set aside
the Decision of the Regional Trial Court (RTC) of Olongapo City, Branch 74, in Civil
Case No. 558-0-88.
The instant case traces its origin to an action for partition filed by
petitioners Felix Ting Ho, Jr., Merla Ting Ho Braden, Juana Ting Ho and Lydia Ting
Ho Belenzo against their brother, respondent Vicente Teng Gui, before the RTC,
Branch 74 of Olongapo City. The controversy revolves around a parcel of land, and
the improvements established thereon, which, according to petitioners, should form
part of the estate of their deceased father, Felix Ting Ho, and should be partitioned
equally among each of the siblings.
In their complaint before the RTC, petitioners alleged that their father
Felix Ting Ho died intestate on June 26, 1970, and left upon his death an estate
consisting of the following:
a) A commercial land consisting of 774 square meters, more or less,
located at Nos. 16 and 18 Afable St., East Bajac-Bajac, Olongapo City, covered by
Original Certificate of Title No. P-1064 and Tax Declaration No. 002-2451;
b) A two-storey residential house on the aforesaid lot;
c) A two-storey commercial building, the first floor rented to different
persons and the second floor, Bonanza Hotel, operated by the defendant also located
on the above described lot; and
d) A sari-sari store (formerly a bakery) also located on the above
described lot.[3]
According to petitioners, the said lot and properties were titled and tax declared under
trust in the name of respondent Vicente Teng Gui for the benefit of the deceased
Felix Ting Ho who, being a Chinese citizen, was then disqualified to own public lands
in the Philippines; and that upon the death of Felix Ting Ho, the respondent took
possession of the same for his own exclusive use and benefit to their exclusion and
prejudice.[4]
In his answer, the respondent countered that on October 11, 1958, Felix
Ting Ho sold the commercial and residential buildings to his sister-in-law, Victoria
Cabasal, and the bakery to his brother-in-law, Gregorio Fontela.[5] He alleged that he
acquired said properties from the respective buyers on October 28, 1961 and has
since then been in possession of subject properties in the concept of an owner; and
that on January 24, 1978, Original Certificate of Title No. P-1064 covering the subject
lot was issued to him pursuant to a miscellaneous sales patent granted to him
on January 3, 1978.[6]
The undisputed facts as found by the trial court (RTC), and affirmed by
the appellate court (CA), are as follows:
[T]he plaintiffs and the defendant are all
brothers and sisters, the defendant being the oldest. They
are the only legitimate children of the deceased Spouses
Felix Ting Ho and Leonila Cabasal. Felix Ting Ho died
on June 26, 1970 while the wife Leonila Cabasal died
on December 7, 1978. The defendant Vicente Teng Gui is
the oldest among the children as he was born on April 5,
1943. The father of the plaintiffs and the defendant was a
Chinese citizen although their mother was Filipino. That
sometime in 1947, the father of the plaintiffs and defendant,
Felix Ting Ho, who was already then married to their mother
Leonila Cabasal, occupied a parcel of land identified to (sic)
as Lot No. 18 Brill which was thereafter identified as Lot No.
16 situated at Afable Street, East Bajac-Bajac, Olongapo
City, by virtue of the permission granted him by the then U.S.
Naval Reservation Office, Olongapo, Zambales. The couple
thereafter introduced improvements on the land. They built
a house of strong material at 16 Afable Street which is a
commercial and residential house and another building of
strong material at 18 Afable Street which was a residential
house and a bakery. The couple, as well as their children,
lived and resided in the said properties until their death. The
father, Felix Ting Ho had managed the bakery while the
mother managed the sari-sari store. Long before the death
of Felix Ting Ho, who died on June 26, 1970, he
executed on October 11, 1958 a Deed of
Absolute Sale of a house of strong material located
at 16 Afable Street, Olongapo, Zambales, specifically
described in Tax Dec. No. 5432, in favor of Victoria
Cabasal his sister-in-law (Exh. C). This Deed of Sale
cancelled the Tax Dec. of Felix Ting Ho over the said
building (Exh. C-1) and the building was registered in the
name of the buyer Victoria Cabasal, as per Tax Dec. No.
7579 (Exh. C-2). On the same date, October 11, 1958 the
said Felix Ting Ho also sold a building of strong material
located at 18 Afable Street, described in Tax Dec. No.
5982, in favor of Gregorio Fontela, of legal age, an
American citizen, married (Exh. D).This Deed of Sale, in
effect, cancelled Tax Dec. No. 5982 and the same was
registered in the name of the buyer Gregorio Fontela, as per
Tax Dec. No. 7580 (Exh. D-2). In turn Victoria Cabasal
and her husband Gregorio Fontela sold to Vicente Teng
Gui on October 28, 1961 the buildings which were
bought by them from Felix Ting Ho and their tax
declarations for the building they bought (Exhs. C-2 and
D-2) were accordingly cancelled and the said buildings
were registered in the name of the defendant Vicente
Teng Gui (Exhs. C-3 and D-3). On October 25, 1966 the
father of the parties Felix Ting Ho executed an Affidavit of
Transfer, Relinquishment and Renouncement of Rights and
Interest including Improvements on Land in favor of his
eldest son the defendant Vicente Teng Gui. On the basis of
the said document the defendant who then chose Filipino
citizenship filed a miscellaneous sales application with the
Bureau of Lands. Miscellaneous Sales Patent No. 7457 of
the land which was then identified to be Lot No. 418, Ts-
308 consisting of 774 square meters was issued to the
applicant Vicente Teng Gui and accordingly on the
24th of January, 1978 Original Certificate of Title No. P-
1064 covering the lot in question was issued to the
defendant Vicente Teng Gui. Although the buildings and
improvements on the land in question were sold by Felix
Ting Ho to Victoria Cabasal and Gregorio Fontela in 1958
and who in turn sold the buildings to the defendant in 1961
the said Felix Ting Ho and his wife remained in possession
of the properties as Felix Ting Ho continued to manage the
bakery while the wife Leonila Cabasal continued to manage
the sari-sari store. During all the time that the alleged
buildings were sold to the spouses Victoria Cabasal and
Gregorio Fontela in 1958 and the subsequent sale of the
same to the defendant Vicente Teng Gui in October of 1961
the plaintiffs and the defendant continued to live and were
under the custody of their parents until their father Felix Ting
Ho died in 1970 and their mother Leonila Cabasal died in
1978.[7] (Emphasis supplied)
In light of these factual findings, the RTC found that Felix Ting Ho, being
a Chinese citizen and the father of the petitioners and respondent, resorted to a series
of simulated transactions in order to preserve the right to the lot and the properties
thereon in the hands of the family. As stated by the trial court:
After a serious consideration of the testimonies
given by both one of the plaintiffs and the defendant as well
as the documentary exhibits presented in the case, the
Court is inclined to believe that Felix Ting Ho, the father of
the plaintiffs and the defendant, and the husband of Leonila
Cabasal thought of preserving the properties in question by
transferring the said properties to his eldest son as he
thought that he cannot acquire the properties as he was a
Chinese citizen. To transfer the improvements on the land
to his eldest son the defendant Vicente Teng Gui, he first
executed simulated Deeds of Sales in favor of the sister and
brother-in-law of his wife in 1958 and after three (3) years it
was made to appear that these vendees had sold the
improvements to the defendant Vicente Teng Gui who was
then 18 years old. The Court finds that these transaction
(sic) were simulated and that no consideration was ever
paid by the vendees.
xxxxxxxxx
With regards (sic) to the transfer and
relinquishment of Felix Ting Hos right to the land in question
in favor of the defendant, the Court believes, that although
from the face of the document it is stated in absolute terms
that without any consideration Felix Ting Ho was
transferring and renouncing his right in favor of his son, the
defendant Vicente Teng Gui, still the Court believes that the
transaction was one of implied trust executed by Felix Ting
Ho for the benefit of his family[8]
Notwithstanding such findings, the RTC considered the Affidavit of
Transfer, Relinquishment and Renouncement of Rights and Interests over the land
as a donation which was accepted by the donee, the herein respondent. With respect
to the properties in the lot, the trial court held that although the sales were simulated,
pursuant to Article 1471 of the New Civil Code[9] it can be assumed that the intention
of Felix Ting Ho in such transaction was to give and donate such properties to the
respondent. As a result, it awarded the entire conjugal share of Felix Ting Ho in the
subject lot and properties to the respondent and divided only the conjugal share of
his wife among the siblings. The dispositive portion of the RTC decision decreed:
 WHEREFORE, judgment is hereby rendered in
favor of the plaintiffs and against the defendant as the Court
orders the partition and the adjudication of the subject
properties, Lot 418, Ts-308, specifically described in
original Certificate of Title No. P-1064 and the residential
and commercial houses standing on the lot specifically
described in Tax Decs. Nos. 9179 and 9180 in the name of
Vicente Teng Gui in the following manner, to wit: To the
defendant Vicente Teng Gui is adjudicated an undivided six-
tenth (6/10) of the aforementioned properties and to each of
the plaintiffs Felix Ting Ho, Jr., Merla Ting-Ho Braden,
Juana Ting and Lydia Ting Ho-Belenzo each an undivided
one-tenth (1/10) of the properties[10]
From this decision, both parties interposed their respective appeals. The petitioners
claimed that the RTC erred in awarding respondent the entire conjugal share of their
deceased father in the lot and properties in question contrary to its own finding that
an implied trust existed between the parties. The respondent, on the other hand,
asserted that the RTC erred in not ruling that the lot and properties do not form part
of the estate of Felix Ting Ho and are owned entirely by him.
On appeal, the CA reversed and set aside the decision of the RTC. The appellate
court held that the deceased Felix Ting Ho was never the owner and never claimed
ownership of the subject lot since he is disqualified under Philippine laws from owning
public lands, and that respondent Vicente Teng Gui was the rightful owner over said
lot by virtue of Miscellaneous Sales Patent No. 7457 issued in his favor, viz:
The deceased Felix Ting Ho, plaintiffs and defendants late father,
was never the owner of the subject lot, now identified
as Lot No. 418, Ts-308 covered by OCT No. P-1064 (Exh.
A; Record, p. 104). As stated by Felix Ting Ho no less in
the Affidavit of Transfer, Relinquishment and
Renouncement of Rights and Interest etc. (Exh. B:
Record, p. 107), executed on October 25, 1966 he, the
late Felix Ting Ho, was merely a possessor or occupant
of the subject lot by virtue of a permission granted by
the then U.S. Naval Reservation Office, Olongapo,
Zambales. The late Felix Ting Ho was never the owner and
never claimed ownership of the land. (Emphasis supplied)
The affidavit, Exhibit B, was subscribed and sworn to before a Land
Investigator of the Bureau of Lands and in the said affidavit,
the late Felix Ting Ho expressly acknowledged that because
he is a Chinese citizen he is not qualified to purchase public
lands under Philippine laws for which reason he thereby
transfers, relinquishes and renounces all his rights and
interests in the subject land, including all the improvements
thereon to his son, the defendant Vicente Teng Gui, who is
of legal age, single, Filipino citizen and qualified under the
public land law to acquire lands.
xxxxxxxxx
Defendant Vicente Teng Gui acquired the
subject land by sales patent or purchase from the
government and not from his father, the late Felix Ting
Ho. It cannot be said that he acquired or bought the land in
trust for his father because on December 5, 1977 when the
subject land was sold to him by the government and on
January 3, 1978 when Miscellaneous Sales Patent No. 7457
was issued, the late Felix Ting Ho was already dead, having
died on June 6, 1970 (TSN, January 10, 1990, p. 4).[11]
Regarding the properties erected over the said lot, the CA held that the finding that
the sales of the two-storey commercial and residential buildings and sari-sari store to
Victoria Cabasal and Gregorio Fontela and subsequently to respondent were without
consideration and simulated is supported by evidence, which clearly establishes that
these properties should form part of the estate of the late spouses Felix Ting Ho and
Leonila Cabasal.
Thus, while the appellate court dismissed the complaint for partition with
respect to the lot in question, it awarded the petitioners a four-fifths (4/5) share of the
subject properties erected on the said lot. The dispositive portion of the CA ruling
reads as follows:
WHEREFORE, premises considered, the decision
appealed from is REVERSED and SET ASIDE and NEW
JUDGMENT rendered:
1. DISMISSING plaintiff-appellants complaint with respect
to the subject parcel of land, identified as Lot No. 418, Ts-
308, covered by OCT No. P-1064, in the name of plaintiff-
appellants [should be defendant-appellant];
2. DECLARING that the two-storey commercial building, the
two-storey residential building and sari-sari store (formerly
a bakery), all erected on the subject lot No. 418, Ts-308,
form part of the estate of the deceased spouses Felix Ting
Ho and Leonila Cabasal, and that plaintiff-appellants are
entitled to four-fifths (4/5) thereof, the remaining one-fifth
(1/5) being the share of the defendant-appellant;
3. DIRECTING the court a quo to partition the said two-
storey commercial building, two-storey residential building
and sari-sari store (formerly a bakery) in accordance with
Rule 69 of the Revised Rules of Court and pertinent
provisions of the Civil Code;
4. Let the records of this case be remanded to the court of
origin for further proceedings;
5. Let a copy of this decision be furnished the Office of the
Solicitor General; and
6. There is no pronouncement as to costs.
SO ORDERED.[12]
Both petitioners and respondent filed their respective motions for
reconsideration from this ruling, which were summarily denied by the CA in its
Resolution[13]dated August 5, 1997. Hence, this petition.
According to the petitioners, the CA erred in declaring that Lot No. 418,
Ts-308 does not form part of the estate of the deceased Felix Ting Ho and is owned
alone by respondent. Respondent, on the other hand, contends that he should be
declared the sole owner not only of Lot No. 418, Ts-308 but also of the properties
erected thereon and that the CA erred in not dismissing the complaint for partition
with respect to the said properties.
The primary issue for consideration is whether both Lot No. 418, Ts-308
and the properties erected thereon should be included in the estate of the deceased
Felix Ting Ho.
We affirm the CA ruling.
With regard to Lot No. 418, Ts-308, Article XIII, Section 1 of the 1935
Constitution states:
Section 1. All agricultural timber, and mineral lands of
the public domain, waters, minerals, coal, petroleum, and
other mineral oils, all forces of potential energy and other
natural resources of the Philippines belong to the State,
and their disposition, exploitation, development, or
utilization shall be limited to citizens of the Philippines
or to corporations or associations at least sixty per
centum of the capital of which is owned by such
citizens, subject to any existing right, grant, lease, or
concession at the time of the inauguration of the
Government established under this Constitution (Emphasis
supplied)
Our fundamental law cannot be any clearer. The right to acquire lands of
the public domain is reserved for Filipino citizens or corporations at least sixty percent
of the capital of which is owned by Filipinos. Thus, in Krivenko v. Register of
Deeds,[14] the Court enunciated that:
Perhaps the effect of our construction is to preclude
aliens, admitted freely into the Philippines from owning
sites where they may build their homes. But if this is the
solemn mandate of the Constitution, we will not attempt
to compromise it even in the name of amity or
equity. We are satisfied, however, that aliens are not
completely excluded by the Constitution from the use of
lands for residential purposes. Since their residence in
the Philippines is temporary, they may be granted
temporary rights such as a lease contract which is not
forbidden by the Constitution. Should they desire to remain
here forever and share our fortunes and misfortunes,
Filipino citizenship is not impossible to acquire.[15]
In the present case, the father of petitioners and respondent was a
Chinese citizen; therefore, he was disqualified from acquiring and owning real
property in the Philippines. In fact, he was only occupying the subject lot by virtue of
the permission granted him by the then U.S. Naval Reservation Office of Olongapo,
Zambales. As correctly found by the CA, the deceased Felix Ting Ho was never the
owner of the subject lot in light of the constitutional proscription and the respondent
did not at any instance act as the dummy of his father.
On the other hand, the respondent became the owner of Lot No. 418,
Ts-308 when he was granted Miscellaneous Sales Patent No. 7457 on January 3,
1978, by the Secretary of Natural Resources By Authority of the President of the
Philippines, and when Original Certificate of Title No. P-1064 was correspondingly
issued in his name. The grant of the miscellaneous sales patent by the Secretary of
Natural Resources, and the corresponding issuance of the original certificate of title
in his name, show that the respondent possesses all the qualifications and none of
the disqualifications to acquire alienable and disposable lands of the public
domain. These issuances bear the presumption of regularity in their performance in
the absence of evidence to the contrary.
 to respondent in 1961, the petitioners and respondent, along with their parents,
Registration of grants and patents involving public lands is governed by Section 122 remained in possession and continued to live in said properties.
of Act No. 496, which was subsequently amended by Section 103 of Presidential
Decree No. 1529, viz: However, the trial court concluded that:

Sec. 103. Certificate of title pursuant to patents.
Whenever public land is by the Government alienated,
granted or conveyed to any person, the same shall be
brought forthwith under the operation of this Decree. It shall
be the duty of the official issuing the instrument of alienation,
grant, patent or conveyance in behalf of the Government to
cause such instrument to be filed with the Register of Deeds
of the province or city where the land lies, and to be there
registered like other deeds and conveyance, whereupon a
certificate of title shall be entered as in other cases of
registered land, and an owners duplicate issued to the
grantee. The deeds, grant, patent or instrument of
conveyance from the Government to the grantee shall not
take effect as a conveyance or bind the land, but shall
operate only as a contract between the Government and the
grantee and as evidence of authority to the Register of
Deeds to make registration. It is the act of registration that
shall be the operative act to affect and convey the land, and
in all cases under this Decree registration shall be made in
the office of the Register of Deeds of the province or city
where the land lies. The fees for registration shall be paid
by the grantee. After due registration and issuance of the
certificate of title, such land shall be deemed to be
registered land to all intents and purposes under this
Decree.[16] (Emphasis supplied)
Under the law, a certificate of title issued pursuant to any grant or patent involving
public land is as conclusive and indefeasible as any other certificate of title issued to
private lands in the ordinary or cadastral registration proceeding. The effect of the
registration of a patent and the issuance of a certificate of title to the patentee is to
vest in him an incontestable title to the land, in the same manner as if ownership had
been determined by final decree of the court, and the title so issued is absolutely
conclusive and indisputable, and is not subject to collateral attack.[17]
Nonetheless, petitioners invoke equity considerations and claim that the ruling of
the RTC that an implied trust was created between respondent and their father with
respect to the subject lot should be upheld.
In fairness to the defendant, although the Deeds of Sale
executed by Felix Ting Ho regarding the improvements in
favor of Victoria Cabasal and Gregorio Fontela and the
subsequent transfer of the same by Gregorio Fontela and
Victoria Cabasal to the defendant are all simulated,
yet, pursuant to Article 1471 of the New Civil Code it can
be assumed that the intention of Felix Ting Ho in such
transaction was to give and donate the improvements
to his eldest son the defendant Vicente Teng Gui [20]
Its finding was based on Article 1471 of the Civil Code, which provides
that:
Art. 1471. If the price is simulated, the sale is
void, but the act may be shown to have been in reality a
donation, or some other act or contract.[21]
The Court holds that the reliance of the trial court on the provisions of
Article 1471 of the Civil Code to conclude that the simulated sales were a valid
donation to the respondent is misplaced because its finding was based on a mere
assumption when the law requires positive proof.
The respondent was unable to show, and the records are bereft of any
evidence, that the simulated sales of the properties were intended by the deceased
to be a donation to him. Thus, the Court holds that the two-storey residential house,
two-storey residential building and sari-sari store form part of the estate of the late
spouses Felix Ting Ho and Leonila Cabasal, entitling the petitioners to a four-fifths
(4/5) share thereof.
IN VIEW WHEREOF, the petition is DENIED. The assailed Decision
dated December 27, 1996 of the Court of Appeals in CA-G.R. CV No. 42993 is
hereby AFFIRMED.
SO ORDERED.

This contention must fail because the prohibition against an alien from owning lands
of the public domain is absolute and not even an implied trust can be permitted to
arise on equity considerations.

In the case of Muller v. Muller,[18] wherein the respondent, a German

national, was seeking reimbursement of funds claimed by him to be given in trust to
his petitioner wife, a Philippine citizen, for the purchase of a property in Antipolo, the
Court, in rejecting the claim, ruled that:

Respondent was aware of the constitutional

prohibition and expressly admitted his knowledge thereof to
this Court. He declared that he had the Antipolo property
titled in the name of the petitioner because of the said
prohibition. His attempt at subsequently asserting or
claiming a right on the said property cannot be sustained.

The Court of Appeals erred in holding that

an implied trust was created and resulted by operation
of law in view of petitioner's marriage to respondent.
Save for the exception provided in cases of hereditary
succession, respondent's disqualification from owning
lands in the Philippines is absolute. Not even an
ownership in trust is allowed. Besides, where the
purchase is made in violation of an existing statute and in
evasion of its express provision, no trust can result in favor
of the party who is guilty of the fraud. To hold otherwise
would allow circumvention of the constitutional prohibition.

Invoking the principle that a court is not only a

court of law but also a court of equity, is likewise misplaced.
It has been held that equity as a rule will follow the law and
will not permit that to be done indirectly which, because of
public policy, cannot be done directly...[19]

Coming now to the issue of ownership of the properties erected on the

subject lot, the Court agrees with the finding of the trial court, as affirmed by the
appellate court, that the series of transactions resorted to by the deceased were
simulated in order to preserve the properties in the hands of the family. The records
show that during all the time that the properties were allegedly sold to the spouses
Victoria Cabasal and Gregorio Fontela in 1958 and the subsequent sale of the same
G.R. No. L-6776 May 21, 1955
THE REGISTER OF DEEDS OF RIZAL, petitioner-appellee,
vs.
UNG SIU SI TEMPLE, respondent-appellant.
Alejo F. Candido for appellant.
Office of the Solicitor General Querube C. Makalintal and Solicitor Felix V.
Makasiar for appellee.
REYES, J.B.L., J.:
The Register of Deeds for the province of Rizal refused to accept for
record a deed of donation executed in due form on January 22, 1953, by
Jesus Dy, a Filipino citizen, conveying a parcel of residential land, in
Caloocan, Rizal, known as lot No. 2, block 48-D, PSD-4212, G.L.R.O.
Record No. 11267, in favor of the unregistered religious organization "Ung
Siu Si Temple", operating through three trustees all of Chinese nationality.
The donation was duly accepted by Yu Juan, of Chinese nationality,
founder and deaconess of the Temple, acting in representation and in
behalf of the latter and its trustees.
The refusal of the Registrar was elevated en Consultato the IVth Branch of
the Court of First Instance of Manila. On March 14, 1953, the Court upheld
the action of the Rizal Register of Deeds, saying:
The question raised by the Register of Deeds in the above
transcribed consulta is whether a deed of donation of a parcel
of land executed in favor of a religious organization whose
founder, trustees and administrator are Chinese citizens should
be registered or not.
It appearing from the record of the Consulta that UNG SIU SI
TEMPLE is a religious organization whose deaconess, founder,
trustees and administrator are all Chinese citizens, this Court is
of the opinion and so hold that in view of the provisions of the
sections 1 and 5 of Article XIII of the Constitution of the
Philippines limiting the acquisition of land in the Philippines to
its citizens, or to corporations or associations at least sixty per
centum of the capital stock of which is owned by such citizens
adopted after the enactment of said Act No. 271, and the
decision of the Supreme Court in the case of Krivenko vs. the
Register of Deeds of Manila, the deed of donation in question
should not be admitted for admitted for registration. (Printed
Rec. App. pp 17-18).
deemed repealed since the Constitution was enacted, in so far as
incompatible therewith. In providing that, —
Save in cases of hereditary succession, no private agricultural
land shall be transferred or assigned except to individuals,
corporations or associations qualified to acquire or hold lands
of the public domain in the Philippines,
the Constitution makes no exception in favor of religious associations.
Neither is there any such saving found in sections 1 and 2 of Article XIII,
restricting the acquisition of public agricultural lands and other natural
resources to "corporations or associations at least sixty per centum of the
capital of which is owned by such citizens" (of the Philippines).
The fact that the appellant religious organization has no capital stock does
not suffice to escape the Constitutional inhibition, since it is admitted that
its members are of foreign nationality. The purpose of the sixty per centum
requirement is obviously to ensure that corporations or associations
allowed to acquire agricultural land or to exploit natural resources shall be
controlled by Filipinos; and the spirit of the Constitution demands that in
the absence of capital stock, the controlling membership should be
composed of Filipino citizens.
To permit religious associations controlled by non-Filipinos to acquire
agricultural lands would be to drive the opening wedge to revive alien
religious land holdings in this country. We can not ignore the historical fact
that complaints against land holdings of that kind were among the factors
that sparked the revolution of 1896.
As to the complaint that the disqualification under article XIII is violative of
the freedom of religion guaranteed by Article III of the Constitution, we are
by no means convinced (nor has it been shown) that land tenure is
indispensable to the free exercise and enjoyment of religious profession or
worship; or that one may not worship the Deity according to the dictates of
his own conscience unless upon land held in fee simple.
The resolution appealed from is affirmed, with costs against appellant.

Not satisfied with the ruling of the Court of First Instance, counsel for the
donee Uy Siu Si Temple has appealed to this Court, claiming: (1) that the
acquisition of the land in question, for religious purposes, is authorized
and permitted by Act No. 271 of the old Philippine Commission, providing
as follows:

SECTION 1. It shall be lawful for all religious associations, of

whatever sort or denomination, whether incorporated in the
Philippine Islands or in the name of other country, or not
incorporated at all, to hold land in the Philippine Islands upon
which to build churches, parsonages, or educational or
charitable institutions.

SEC. 2. Such religious institutions, if not incorporated, shall

hold the land in the name of three Trustees for the use of such
associations; . . .. (Printed Rec. App. p. 5.)

and (2) that the refusal of the Register of Deeds violates the freedom of
religion clause of our Constitution [Art. III, Sec. 1(7)].

We are of the opinion that the Court below has correctly held that in view
of the absolute terms of section 5, Title XIII, of the Constitution, the
provisions of Act No. 271 of the old Philippine Commission must be
JG SUMMIT HOLDINGS, INC., petitioner, vs. COURT OF APPEALS,
COMMITTEE ON PRIVATIZATION, its Chairman and Members;
ASSET PRIVATIZATION TRUST and PHILYARDS
HOLDINGS, INC., respondents.
RESOLUTION
PUNO, J.:
The core issue posed by the Motions for Reconsideration is whether a
shipyard is a public utility whose capitalization must be sixty percent (60%)
owned by Filipinos. Our resolution of this issue will determine the fate of the
shipbuilding and ship repair industry. It can either spell the industrys demise or
breathe new life to the struggling but potentially healthy partner in the countrys
bid for economic growth. It can either kill an initiative yet in its infancy, or harness
creativity in the productive disposition of government assets.
The facts are undisputed and can be summarized briefly as follows:
On January 27, 1977, the National Investment and Development
Corporation (NIDC), a government corporation, entered into a Joint Venture
Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan
(KAWASAKI) for the construction, operation and management of the Subic
National Shipyard, Inc. (SNS) which subsequently became the Philippine
Shipyard and Engineering Corporation (PHILSECO). Under the JVA, the NIDC
and KAWASAKI will contribute P330 million for the capitalization of PHILSECO
in the proportion of 60%-40% respectively.[1] One of its salient features is the
grant to the parties of the right of first refusal should either of them decide to
sell, assign or transfer its interest in the joint venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part of its interest in
SNS [PHILSECO] to any third party without giving the other under the same
terms the right of first refusal. This provision shall not apply if the transferee is
a corporation owned or controlled by the GOVERNMENT or by a KAWASAKI
affiliate.[2]
On November 25, 1986, NIDC transferred all its rights, title and interest
in PHILSECO to the Philippine National Bank (PNB). Such interests were
subsequently transferred to the National Government pursuant to Administrative
Order No. 14. On December 8, 1986, President Corazon C. Aquino issued
Proclamation No. 50 establishing the Committee on Privatization (COP) and the
Asset Privatization Trust (APT) to take title to, and possession of, conserve,
manage and dispose of non-performing assets of the National
Government. Thereafter, on February 27, 1987, a trust agreement was entered
into between the National Government and the APT wherein the latter was
named the trustee of the National Governments share in PHILSECO. In 1989,
as a result of a quasi-reorganization of PHILSECO to settle its huge obligations
to PNB, the National Governments shareholdings in PHILSECO increased to
97.41% thereby reducing KAWASAKIs shareholdings to 2.59%.[3]
In the interest of the national economy and the government, the COP and
the APT deemed it best to sell the National Governments share in PHILSECO
to private entities. After a series of negotiations between the APT and
KAWASAKI, they agreed that the latters right of first refusal under the JVA be
exchanged for the right to top by five percent (5%) the highest bid for the said
shares. They further agreed that KAWASAKI would be entitled to name a
company in which it was a stockholder, which could exercise the right to top. On
September 7, 1990, KAWASAKI informed APT that Philyards Holdings, Inc.
(PHI) would exercise its right to top.[4]
At the pre-bidding conference held on September 18, 1993, interested
bidders were given copies of the JVA between NIDC and KAWASAKI, and of
the Asset Specific Bidding Rules (ASBR) drafted for the National Governments
87.6% equity share in PHILSECO.[5] The provisions of the ASBR were explained
to the interested bidders who were notified that the bidding would be held on
December 2, 1993. A portion of the ASBR reads:
1.0 The subject of this Asset Privatization Trust (APT) sale through public
bidding is the National Governments equity in PHILSECO consisting of
896,869,942 shares of stock (representing 87.67% of PHILSECOs outstanding
capital stock), which will be sold as a whole block in accordance with the rules
herein enumerated.
...
2.0 The highest bid, as well as the buyer, shall be subject to the final approval
of both the APT Board of Trustees and the Committee on Privatization (COP).
2.1 APT reserves the right in its sole discretion, to reject any or all bids.
3.0 This public bidding shall be on an Indicative Price Bidding basis. The
Indicative price set for the National Governments 87.67% equity in PHILSECO
is PESOS: ONE BILLION THREE HUNDRED MILLION (P1,300,000,000.00).
...
6.0 The highest qualified bid will be submitted to the APT Board of Trustees at
its regular meeting following the bidding, for the purpose of determining
whether or not it should be endorsed by the APT Board of Trustees to the
COP, and the latter approves the same. The APT shall advise Kawasaki
Heavy Industries, Inc. and/or its nominee, Philyards Holdings, Inc., that the
highest bid is acceptable to the National Government. Kawasaki Heavy
Industries, Inc. and/or Philyards Holdings, Inc. shall then have a period of thirty
(30) calendar days from the date of receipt of such advice from APT within
which to exercise their Option to Top the Highest Bid by offering a bid
equivalent to the highest bid plus five (5%) percent thereof.
6.1 Should Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc.
exercise their Option to Top the Highest Bid, they shall so notify the APT about
such exercise of their option and deposit with APT the amount equivalent to
ten percent (10%) of the highest bid plus five percent (5%) thereof within the
thirty (30)-day period mentioned in paragraph 6.0 above. APT will then serve
notice upon Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc.
declaring them as the preferred bidder and they shall have a period of ninety
(90) days from the receipt of the APTs notice within which to pay the balance
of their bid price.
6.2 Should Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc. fail
to exercise their Option to Top the Highest Bid within the thirty (30)-day period,
APT will declare the highest bidder as the winning bidder.
...
12.0 The bidder shall be solely responsible for examining with appropriate care
these rules, the official bid forms, including any addenda or amendments
thereto issued during the bidding period. The bidder shall likewise be
responsible for informing itself with respect to any and all conditions
concerning the PHILSECO Shares which may, in any manner, affect the
bidders proposal. Failure on the part of the bidder to so examine and inform
itself shall be its sole risk and no relief for error or omission will be given by
APT or COP. . ..[6]
At the public bidding on the said date, petitioner J.G. Summit Holdings,
Inc. submitted a bid of Two Billion and Thirty Million Pesos (P2,030,000,000.00)
with an acknowledgement of KAWASAKI/Philyards right to top, viz:
4. I/We understand that the Committee on Privatization (COP) has up to thirty
(30) days to act on APTs recommendation based on the result of this bidding.
Should the COP approve the highest bid, APT shall advise Kawasaki Heavy
Industries, Inc. and/or its nominee, Philyards Holdings, Inc. that the highest bid
is acceptable to the National Government. Kawasaki Heavy Industries, Inc.
and/or Philyards Holdings, Inc. shall then have a period of thirty (30) calendar
days from the date of receipt of such advice from APT within which to exercise
their Option to Top the Highest Bid by offering a bid equivalent to the highest
bid plus five (5%) percent thereof.[7]
As petitioner was declared the highest bidder, the COP approved the sale
on December 3, 1993 subject to the right of Kawasaki Heavy Industries,
Inc./Philyards Holdings, Inc. to top JGSMIs bid by 5% as specified in the bidding
rules.[8]
On December 29, 1993, petitioner informed APT that it was protesting
the offer of PHI to top its bid on the grounds that: (a) the KAWASAKI/PHI
consortium composed of Kawasaki, Philyards, Mitsui, Keppel, SM Group, ICTSI
and Insular Life violated the ASBR because the last four (4) companies were the
losing bidders thereby circumventing the law and prejudicing the weak winning
bidder; (b) only KAWASAKI could exercise the right to top; (c) giving the same
option to top to PHI constituted unwarranted benefit to a third party; (d) no right
of first refusal can be exercised in a public bidding or auction sale; and (e) the
JG Summit consortium was not estopped from questioning the proceedings.[9]
On February 2, 1994, petitioner was notified that PHI had fully paid the
balance of the purchase price of the subject bidding. On February 7, 1994, the
APT notified petitioner that PHI had exercised its option to top the highest bid
and that the COP had approved the same on January 6, 1994. On February 24,
1994, the APT and PHI executed a Stock Purchase
Agreement.[10] Consequently, petitioner filed with this Court a Petition for
Mandamus under G.R. No. 114057. On May 11, 1994, said petition was referred
to the Court of Appeals. On July 18, 1995, the Court of Appeals denied the same
for lack of merit. It ruled that the petition for mandamus was not the proper
remedy to question the constitutionality or legality of the right of first refusal and
the right to top that was exercised by KAWASAKI/PHI, and that the matter must
be brought by the proper party in the proper forum at the proper time and
threshed out in a full blown trial. The Court of Appeals further ruled that the right
of first refusal and the right to top are prima facie legal and that the petitioner,
by participating in the public bidding, with full knowledge of the right to top
granted to KASAWASAKI/Philyards is . . .estopped from questioning the validity
of the award given to Philyards after the latter exercised the right to top and had
paid in full the purchase price of the subject shares, pursuant to the ASBR.
Petitioner filed a Motion for Reconsideration of said Decision which was denied
on March 15, 1996. Petitioner thus filed a Petition for Certiorari with this
Court alleging grave abuse of discretion on the part of the appellate court.[11]
On November 20, 2000, this Court rendered the now assailed
Decision ruling among others that the Court of Appeals erred when it dismissed
the petition on the sole ground of the impropriety of the special civil action
of mandamus because the petition was also one of certiorari.[12] It further ruled
that a shipyard like PHILSECO is a public utility whose capitalization must be
sixty percent (60%) Filipino-owned.[13] Consequently, the right to top granted
to KAWASAKI under the Asset Specific Bidding Rules (ASBR) drafted for the
sale of the 87.67% equity of the National Government in PHILSECO is illegal---
not only because it violates the rules on competitive bidding--- but more so,
because it allows foreign corporations to own more than 40% equity in the
shipyard.[14] It also held that although the petitioner had the opportunity to
examine the ASBR before it participated in the bidding, it cannot be estopped
from questioning the unconstitutional, illegal and inequitable provisions
thereof.[15] Thus, this Court voided the transfer of the national governments
87.67% share in PHILSECO to Philyard Holdings, Inc., and upheld the right of
JG Summit, as the highest bidder, to take title to the said shares, viz:
WHEREFORE, the instant petition for review on certiorari is GRANTED. The
assailed Decision and Resolution of the Court of Appeals are REVERSED and
SET ASIDE. Petitioner is ordered to pay to APT its bid price of Two Billion
Thirty Million Pesos (P2,030,000,000.00 ), less its bid deposit plus interests
upon the finality of this Decision. In turn, APT is ordered to:
(a) accept the said amount of P2,030,000,000.00 less bid deposit and interests
from petitioner;
(b) execute a Stock Purchase Agreement with petitioner;
(c) cause the issuance in favor of petitioner of the certificates of stocks
representing 87.6% of PHILSECOs total capitalization;
(d) return to private respondent PHGI the amount of Two Billion One Hundred
Thirty-One Million Five Hundred Thousand Pesos
(P2,131,500,000.00); and
(e) cause the cancellation of the stock certificates issued to PHI.
SO ORDERED.[16]
In separate Motions for Reconsideration,[17] respondents submit three
basic issues for our resolution: (1) Whether PHILSECO is a public utility; (2)
Whether under the 1977 JVA, KAWASAKI can exercise its right of first refusal
only up to 40% of the total capitalization of PHILSECO; and (3) Whether the right
to top granted to KAWASAKI violates the principles of competitive bidding.
I.
Whether PHILSECO is a Public Utility.
After carefully reviewing the applicable laws and jurisprudence, we hold
that PHILSECO is not a public utility for the following reasons:
First. By nature, a shipyard is not a public utility.
A public utility is a business or service engaged in regularly supplying
the public with some commodity or service of public consequence such as
electricity, gas, water, transportation, telephone or telegraph service.[18] To
constitute a public utility, the facility must be necessary for the maintenance of
life and occupation of the residents. However, the fact that a business offers
services or goods that promote public good and serve the interest of the public
does not automatically make it a public utility. Public use is not synonymous with
public interest. As its name indicates, the term public utility implies public
use and service to the public. The principal determinative characteristic of
a public utility is that of service to, or readiness to serve, an indefinite public or
portion of the public as such which has a legal right to demand and receive its
services or commodities. Stated otherwise, the owner or person in control of a
public utility must have devoted it to such use that the public generally or that
part of the public which has been served and has accepted the service, has the
right to demand that use or service so long as it is continued, with reasonable
efficiency and under proper charges.[19] Unlike a private enterprise which
independently determines whom it will serve, a public utility holds out generally
and may not refuse legitimate demand for service.[20] Thus, in Iloilo Ice and
Cold Storage Co. vs. Public Utility Board,[21] this Court defined public use, viz:
Public use means the same as use by the public. The essential feature of the
public use is that it is not confined to privileged individuals, but is open to the
indefinite public. It is this indefinite or unrestricted quality that gives it its public
character. In determining whether a use is public, we must look not only to the
character of the business to be done, but also to the proposed mode of doing
it. If the use is merely optional with the owners, or the public benefit is merely
incidental, it is not a public use, authorizing the exercise of jurisdiction of the
public utility commission. There must be, in general, a right which the law
compels the owner to give to the general public. It is not enough that the
general prosperity of the public is promoted. Public use is not synonymous with
public interest. The true criterion by which to judge the character of the
use is whether the public may enjoy it by right or only by
permission.[22] (emphasis supplied)
Applying the criterion laid down in Iloilo to the case at bar, it is crystal
clear that a shipyard cannot be considered a public utility.
A shipyard is a place or enclosure where ships are built or repaired.[23] Its
nature dictates that it serves but a limited clientele whom it may choose to serve
at its discretion. While it offers its facilities to whoever may wish to avail of its
services, a shipyard is not legally obliged to render its services
indiscriminately to the public. It has no legal obligation to render the services
sought by each and every client. The fact that it publicly offers its services does
not give the public a legal right to demand that such services be rendered.
There can be no disagreement that the shipbuilding and ship repair
industry is imbued with public interest as it involves the maintenance of the
seaworthiness of vessels dedicated to the transportation of either persons or
goods. Nevertheless, the fact that a business is affected with public interest does
not imply that it is under a duty to serve the public. While the business may be
regulated for public good, the regulation cannot justify the classification of a
purely private enterprise as a public utility. The legislature cannot, by its mere
declaration, make something a public utility which is not in fact such; and a
private business operated under private contracts with selected
customers and not devoted to public use cannot, by legislative fiat or by
order of a public service commission, be declared a public utility, since that
would be taking private property for public use without just compensation, which
cannot be done consistently with the due process clause.[24]
It is worthy to note that automobile and aircraft manufacturers, which are
of similar nature to shipyards, are not considered public utilities despite the fact
that their operations greatly impact on land and air transportation. The reason is
simple. Unlike commodities or services traditionally regarded as public utilities
such as electricity, gas, water, transportation, telephone or telegraph service,
automobile and aircraft manufacturing---and for that matter ship building and
ship repair--- serve the public only incidentally.
Second. There is no law declaring a shipyard as a public utility.
History provides us hindsight and hindsight ought to give us a better view
of the intent of any law. The succession of laws affecting the status of shipyards
ought not to obliterate, but rather, give us full picture of the intent of the
legislature. The totality of the circumstances, including the contemporaneous
interpretation accorded by the administrative bodies tasked with the
enforcement of the law all lead to a singular conclusion: that shipyards are not
public utilities.
Since the enactment of Act No. 2307 which created the Public Utility
Commission (PUC) until its repeal by Commonwealth Act No. 146, establishing
the Public Service Commission (PSC), a shipyard, by legislative declaration, has
been considered a public utility.[25] A Certificate of Public Convenience (CPC)
from the PSC to the effect that the operation of the said service and the
authorization to do business will promote the public interests in a proper and
suitable manner is required before any person or corporation may operate a
shipyard.[26] In addition, such persons or corporations should abide by the
citizenship requirement provided in Article XIII, section 8 of the 1935
Constitution,[27] viz:
Sec. 8. No franchise, certificate, or any other form or authorization for the
operation of a public utility shall be granted except to citizens of the Philippines
or to corporations or other entities organized under the laws of the
Philippines, sixty per centum of the capital of which is owned by citizens
of the Philippines, nor shall such franchise, certificate or authorization be
exclusive in character or for a longer period than fifty years. No franchise or
right shall be granted to any individual, firm or corporation, except under the
condition that it shall be subject to amendment, alteration, or repeal by the
National Assembly when the public interest so requires. (emphasis supplied)
To accelerate the development of shipbuilding and ship repair industry,
former President Ferdinand E. Marcos issued P.D. No. 666 granting the
following incentives:
SECTION 1. Shipbuilding and ship repair yards duly registered with the
Maritime Industry Authority shall be entitled to the following incentive benefits:
(a) Exemption from import duties and taxes.- The importation of machinery,
equipment and materials for shipbuilding, ship repair and/or alteration,
including indirect import, as well as replacement and spare parts for the repair
and overhaul of vessels such as steel plates, electrical machinery and
electronic parts, shall be exempt from the payment of customs duty and
compensating tax: Provided, however, That the Maritime Industry Authority
certifies that the item or items imported are not produced locally in sufficient
quantity and acceptable quality at reasonable prices, and that the importation
is directly and actually needed and will be used exclusively for the
construction, repair, alteration, or overhaul of merchant vessels, and other
watercrafts; Provided, further, That if the above machinery, equipment,
materials and spare parts are sold to non-tax exempt persons or entities, the
corresponding duties and taxes shall be paid by the original
importer; Provided, finally, That local dealers and/or agents who sell
machinery, equipment, materials and accessories to shipyards for shipbuilding
and ship repair are entitled to tax credits, subject to approval by the total tariff
duties and compensating tax paid for said machinery, equipment, materials
and accessories.
(b) Accelerated depreciation.- Industrial plant and equipment may, at the
option of the shipbuilder and ship repairer, be depreciated for any number of
years between five years and expected economic life.
(c) Exemption from contractors percentage tax.- The gross receipts derived by
shipbuilders and ship repairers from shipbuilding and ship repairing activities
shall be exempt from the Contractors Tax provided in Section 91 of the
National Internal Revenue Code during the first ten years from registration with
the Maritime Industry Authority, provided that such registration is effected not
later than the year 1990; Provided, That any and all amounts which would
otherwise have been paid as contractors tax shall be set aside as a separate
fund, to be known as Shipyard Development Fund, by the contractor for the
purpose of expansion, modernization and/or improvement of the contractors
own shipbuilding or ship repairing facilities; Provided, That, for this purpose,
the contractor shall submit an annual statement of its receipts to the Maritime
Industry Authority; and Provided, further, That any disbursement from such
fund for any of the purposes hereinabove stated shall be subject to approval by
the Maritime Industry Authority.
In addition, P.D. No. 666 removed the shipbuilding and ship repair
industry from the list of public utilities, thereby freeing the industry from the 60%
citizenship requirement under the Constitution and from the need to obtain
Certificate of Public Convenience pursuant to section 15 of C.A No. 146. Section
1 (d) of P.D. 666 reads:
(d) Registration required but not as a Public Utility.- The business of
constructing and repairing vessels or parts thereof shall not be
considered a public utility and no Certificate of Public Convenience shall
be required therefor. However, no shipyard, graving dock, marine railway or
marine repair shop and no person or enterprise shall engage in construction
and/or repair of any vessel, or any phase or part thereof, without a valid
Certificate of Registration and license for this purpose from the Maritime
Industry Authority, except those owned or operated by the Armed Forces of the
Philippines or by foreign governments pursuant to a treaty or agreement.
(emphasis supplied)
Any law, decree, executive order, or rules and regulations inconsistent
with P.D. No. 666 were repealed or modified accordingly.[28] Consequently,
sections 13 (b) and 15 of C.A. No. 146 were repealed in so far as the former law
included shipyards in the list of public utilities and required the certificate of
public convenience for their operation. Simply stated, the repeal was due to
irreconcilable inconsistency, and by definition, this kind of repeal falls under the
category of an implied repeal.[29]
On April 28, 1983, Batas Pambansa Blg. 391, also known as the
Investment Incentive Policy Act of 1983, was enacted. It laid down the general
policy of the government to encourage private domestic and foreign investments
in the various sectors of the economy, to wit:
Sec. 2. Declaration of Investment Policy.- It is the policy of the State to
encourage private domestic and foreign investments in industry, agriculture,
mining and other sectors of the economy which shall: provide significant
employment opportunities relative to the amount of the capital being invested;
increase productivity of the land, minerals, forestry, aquatic and other
resources of the country, and improve utilization of the products thereof;
improve technical skills of the people employed in the enterprise; provide a
foundation for the future development of the economy; accelerate development
of less developed regions of the country; and result in increased volume and
value of exports for the economy.
It is the policy of the State to extend to projects which will significantly
contribute to the attainment of these objectives, fiscal incentives without
which said projects may not be established in the locales, number and/or pace
required for optimum national economic development. Fiscal incentive
systems shall be devised to compensate for market imperfections,
reward performance of making contributions to economic development,
cost-efficient and be simple to administer.
The fiscal incentives shall be extended to stimulate establishment and assist
initial operations of the enterprise, and shall terminate after a period of not
more than 10 years from registration or start-up of operation unless a special
period is otherwise stated.
The foregoing declaration shall apply to all investment incentive
schemes and in particular will supersede article 2 of Presidential Decree No.
1789. (emphases supplied)
With the new investment incentive regime, Batas Pambansa Blg. 391
repealed the following laws, viz:
Sec. 20. The following provisions are hereby repealed:
1) Section 53, P.D. 463 (Mineral Resources Development Decree);
2.) Section 1, P.D. 666 (Shipbuilding and Ship Repair Industry);
3) Section 6, P.D. 1101 (Radioactive Minerals);
4) LOI 508 extending P.D. 791 and P.D. 924 (Sugar); and
5) The following articles of Presidential Decree 1789: 2, 18, 19, 22, 28, 30, 39,
49 (d), 62, and 77. Articles 45, 46 and 48 are hereby amended only with
respect to domestic and export producers.
All other laws, decrees, executive orders, administrative orders, rules and
regulations or parts thereof which are inconsistent with the provisions of this
Act are hereby repealed, amended or modified accordingly.
All other incentive systems which are not in any way affected by the provisions
of this Act may be restructured by the President so as to render them cost-
efficient and to make them conform with the other policy guidelines in the
declaration of policy provided in Section 2 of this Act. (emphasis supplied)
From the language of the afore-quoted provision, the whole of P.D. No.
666, section 1 was expressly and categorically repealed. As a consequence, the
provisions of C.A. No. 146, which were impliedly repealed by P.D. No. 666,
section 1 were revived.[30] In other words, with the enactment of Batas
Pambansa Blg. 391, a shipyard reverted back to its status as a public utility and
as such, requires a CPC for its operation.
The crux of the present controversy is the effect of the express repeal of
Batas Pambansa Blg. 391 by Executive Order No. 226 issued by former
President Corazon C. Aquino under her emergency powers.
We rule that the express repeal of Batas Pambansa Blg. 391 by E.O. No.
226 did not revive Section 1 of P.D. No. 666. But more importantly, it also put a
period to the existence of sections 13 (b) and 15 of C.A. No. 146. It bears
emphasis that sections 13 (b) and 15 of C.A. No. 146, as originally written, owed
their continued existence to Batas Pambansa Blg. 391. Had the latter not
repealed P.D. No. 666, the former should have been modified accordingly and
shipyards effectively removed from the list of public utilities. Ergo, with the
express repeal of Batas Pambansa Blg. 391 by E.O. No. 226, the revival of
sections 13 (b) and 15 of C.A. No. 146 had no more leg to stand on. A law that
has been expressly repealed ceases to exist and becomes inoperative from the
moment the repealing law becomes effective.[31] Hence, there is simply no basis
in the conclusion that shipyards remain to be a public utility. A repealed statute
cannot be the basis for classifying shipyards as public utilities.
In view of the foregoing, there can be no other conclusion than to hold
that a shipyard is not a pubic utility. A shipyard has been considered a public
utility merely by legislative declaration. Absent this declaration, there is no more
reason why it should continuously be regarded as such. The fact that the
legislature did not clearly and unambiguously express its intention to include
shipyards in the list of public utilities indicates that that it did not intend to do so.
Thus, a shipyard reverts back to its status as non-public utility prior to the
enactment of the Public Service Law.
This interpretation is in accord with the uniform interpretation placed upon
it by the Board of Investments (BOI), which was entrusted by the legislature with
the preparation of annual Investment Priorities Plan (IPPs). The BOI has
consistently classified shipyards as part of the manufacturing sector and not of
the public utilities sector. The enactment of Batas Pambansa Blg. 391 did not
alter the treatment of the BOI on shipyards. It has been, as at present, classified
as part of the manufacturing and not of the public utilities sector.[32]
Furthermore, of the 441 Ship Building and Ship Repair (SBSR) entities
registered with the MARINA,[33] none appears to have an existing franchise. If
we continue to hold that a shipyard is a pubic utility, it is a necessary
consequence that all these entities should have obtained a franchise as was the
rule prior to the enactment of P.D. No. 666. But MARINA remains without
authority, pursuant to P.D. No. 474[34] to issue franchises for the operation of
shipyards. Surely,
the legislature did not intend to create a vacuum by continuously treating
a shipyard as a public utility without giving MARINA the power to issue a
Certificate of Public Convenience (CPC) or a Certificate of Public Convenience
and Necessity (CPCN) as required by section 15 of C.A. No. 146.
II.
Whether under the 1977 Joint Venture Agreement,
KAWASAKI can purchase only a maximum of 40%
of PHILSECOs total capitalization.
A careful reading of the 1977 Joint Venture Agreement reveals that there
is nothing that prevents KAWASAKI from acquiring more than 40% of
PHILSECOs total capitalization. Section 1 of the 1977 JVA states:
1.3 The authorized capital stock of Philseco shall be P330 million. The parties
shall thereafter increase their subscription in Philseco as may be necessary
and as called by the Board of Directors, maintaining a proportion of 60%-40%
for NIDC and KAWASAKI respectively, up to a total subscribed and paid-up
capital stock of P312 million.
1.4 Neither party shall sell, transfer or assign all or any part of its interest in
SNS [renamed PHILSECO] to any third party without giving the other under the
same terms the right of first refusal. This provision shall not apply if the
transferee is a corporation owned and controlled by the GOVERMENT [of the
Philippines] or by a Kawasaki affiliate.
1.5 The By-Laws of SNS [PHILSECO] shall grant the parties preemptive rights
to unissued shares of SNS [PHILSECO].[35]
Under section 1.3, the parties agreed to the amount of P330 million as
the total capitalization of their joint venture. There was no mention of the amount
of their initial subscription. What is clear is that they are to infuse the needed
capital from time to time until the total subscribed and paid-up capital
reaches P312 million. The phrase maintaining a proportion of 60%-40% refers
to their respective share of the burden each time the Board of Directors decides
to increase the subscription to reach the target paid-up capital of P312 million.
It does not bind the parties to maintain the sharing scheme all throughout the
existence of their partnership.
The parties likewise agreed to arm themselves with protective
mechanisms to preserve their respective interests in the partnership in the event
that (a) one party decides to sell its shares to third parties; and (b) new Philseco
shares are issued. Anent the first situation, the non-selling party is given
the right of first refusal under section 1.4 to have a preferential right to buy or
to refuse the selling partys shares. The right of first refusal is meant to protect
the original or remaining joint venturer(s) or shareholder(s) from the entry of third
persons who are not acceptable to it as co-venturer(s) or co-shareholder(s). The
joint venture between the Philippine Government and KAWASAKI is in the
nature of a partnership[36] which, unlike an ordinary corporation, is based
on delectus personae.[37] No one can become a member of the partnership
association without the consent of all the other associates. The right of first
refusal thus ensures that the parties are given control over who may become a
new partner in substitution of or in addition to the original partners. Should the
selling partner decide to dispose all its shares, the non-selling partner may
acquire all these shares and terminate the partnership. No person or corporation
can be compelled to remain or to continue the partnership. Of course, this
presupposes that there are no other restrictions in the maximum allowable share
that the non-selling partner may acquire such as the constitutional restriction on
foreign ownership in public utility. The theory that KAWASAKI can acquire, as a
maximum, only 40% of PHILSECOs shares is correct only if a shipyard is a
public utility. In such instance, the non-selling partner who is an alien can acquire
only a maximum of 40% of the total capitalization of a public utility despite the
grant of first refusal. The partners cannot, by mere agreement, avoid the
constitutional proscription. But as afore-discussed, PHILSECO is not a public
utility and no other restriction is present that would limit the right of KAWASAKI
to purchase the Governments share to 40% of Philsecos total capitalization.
Furthermore, the phrase under the same terms in section 1.4 cannot be
given an interpretation that would limit the right of KAWASAKI to purchase
PHILSECO shares only to the extent of its original proportionate contribution of
40% to the total capitalization of the PHILSECO. Taken together with the whole
of section 1.4, the phrase under the same terms means that a partner to the
joint venture that decides to sell its shares to a third party shall make a
similar offer to the non-selling partner. The selling partner cannot make a
different or a more onerous offer to the non-selling partner.
The exercise of first refusal presupposes that the non-selling partner is
aware of the terms of the conditions attendant to the sale for it to have a guided
choice. While the right of first refusal protects the non-selling partner from the
entry of third persons, it cannot also deprive the other partner the right to sell its
shares to third persons if, under the same offer, it does not buy the shares.
Apart from the right of first refusal, the parties also have preemptive
rights under section 1.5 in the unissued shares of Philseco. Unlike the former,
this situation does not contemplate transfer of a partners shares to third parties
but the issuance of new Philseco shares. The grant of preemptive rights
preserves the proportionate shares of the original partners so as not to dilute
their respective interests with the issuance of the new shares. Unlike the right of
first refusal, a preemptive right gives a partner a preferential right over the newly
issued shares only to the extent that it retains its original proportionate share in
the joint venture.
The case at bar does not concern the issuance of new shares but the
transfer of a partners share in the joint venture. Verily, the operative protective
mechanism is the right of first refusal which does not impose any limitation in
the maximum shares that the non-selling partner may acquire.
III.
Whether the right to top granted to KAWASAKI
in exchange for its right of first refusal violates
the principles of competitive bidding.
We also hold that the right to top granted to KAWASAKI and exercised
by private respondent did not violate the rules of competitive bidding.
The word bidding in its comprehensive sense means making an offer or
an invitation to prospective contractors whereby the government manifests its
intention to make proposals for the purpose of supplies, materials and
equipment for official business or public use, or for public works or repair.[38] The
three principles of public bidding are: (1) the offer to the public; (2) an opportunity
for competition; and (3) a basis for comparison of bids.[39] As long as these three
principles are complied with, the public bidding can be considered valid and
legal. It is not necessary that the highest bid be automatically accepted. The
bidding rules may specify other conditions or the bidding process be subjected
to certain reservation or qualification such as when the owner reserves to himself
openly at the time of the sale the right to bid upon the property, or openly
announces a price below which the property will not be sold. Hence, where the
seller reserves the right to refuse to accept any bid made, a binding sale is not
consummated between the seller and the bidder until the seller accepts the bid.
Furthermore, where a right is reserved in the seller to reject any and all bids
received, the owner may exercise the right even after the auctioneer has may be known. It is only after the public bidding that the Government will have
accepted a bid, and this applies to the auction of public as well as private a basis with which to offer KAWASAKI the option to buy or forego the shares.
property. [40] Thus:
Assuming that the parties did not swap KAWASAKIs right of first refusal
with the right to top, KAWASAKI would have been able to buy the National
It is a settled rule that where the invitation to bid contains a reservation for the Governments shares in PHILSECO under the same terms as offered by the
Government to reject any or all bids, the lowest or the highest bidder, as the highest bidder. Stated otherwise, by exercising its right of first refusal,
case may be, is not entitled to an award as a matter of right for it does not KAWASAKI could have bought the shares for only P2.03 billion and not the
become a ministerial duty of the Government to make such an award. Thus, it higher amount of P2.1315 billion. There is, thus, no basis in the submission that
has been held that where the right to reject is so reserved, the lowest bid or the right to top unfairly favored KAWASAKI. In fact, with the right to top,
any bid for that matter may be rejected on a mere technicality, that all bids may KAWASAKI stands to pay higher than it should had it settled with its right of first
be rejected, even if arbitrarily and unwisely, or under a mistake, and that in the refusal. The obvious beneficiary of the scheme is the National Government.
exercise of a sound discretion, the award may be made to another than the
lowest bidder. And so, where the Government as advertiser, availing itself of If at all, the obvious consideration for the exchange of the right of first
that right, makes its choice in rejecting any or all bids, the losing bidder has no refusal with the right to top is that KAWASAKI can name a nominee, which it is
cause to complain nor right to dispute that choice, unless an unfairness or a shareholder, to exercise the right to top. This is a valid contractual stipulation;
injustice is shown. Accordingly, he has no ground of action to compel the the right to top is an assignable right and both parties are aware of the full legal
Government to award the contract in his favor, nor compel it to accept his consequences of its exercise. As aforesaid, all bidders were aware of the
bid.[41] existence of the right to top, and its possible effects on the result of the public
bidding was fully disclosed to them. The petitioner, thus, cannot feign ignorance
In the instant case, the sale of the Government shares in PHILSECO was nor can it be allowed to repudiate its acts and question the proceedings it had
publicly known. All interested bidders were welcomed. The basis for comparing fully adhered to.[43]
the bids were laid down. All bids were accepted sealed and were opened and The fact that the losing bidder, Keppel Consortium (composed of Keppel,
read in the presence of the COAs official representative and before all interested SM Group, Insular Life Assurance, Mitsui and ICTSI), has joined Philyards in the
bidders. The only question that remains is whether or not the existence of latters effort to raise P2.131 billion necessary in exercising the right to top is not
KAWASAKIs right to top destroys the essence of competitive bidding so as to contrary to law, public policy or public morals. There is nothing in the ASBR that
say that the bidders did not have an opportunity for competition. We hold that it bars the losing bidders from joining either the winning bidder (should the right to
does not. top is not exercised) or KAWASAKI/PHI (should it exercise its right to top as it
The essence of competition in public bidding is that the bidders are did), to raise the purchase price. The petitioner did not allege, nor was it shown
placed on equal footing. This means that all qualified bidders have an equal by competent evidence, that the participation of the losing bidders in the public
chance of winning the auction through their bids. In the case at bar, all of the bidding was done with fraudulent intent. Absent any proof of fraud, the formation
bidders were exposed to the same risk and were subjected to the same by Philyards of a consortium is legitimate in a free enterprise system. The
condition, i.e., the existence of KAWASAKIs right to top. Under the ASBR, the appellate court is thus correct in holding the petitioner estopped from questioning
Government expressly reserved the right to reject any or all bids, and manifested the validity of the transfer of the National Governments shares in PHILSECO to
its intention not to accept the highest bid should KAWASAKI decide to exercise respondent.
its right to top under the ABSR. This reservation or qualification was made Finally, no factual basis exists to support the view that the drafting of the
known to the bidders in a pre-bidding conference held on September 28, 1993. ASBR was illegal because no prior approval was given by the COA for it,
They all expressly accepted this condition in writing without any qualification. specifically the provision on the right to top the highest bidder and that the public
Furthermore, when the Committee on Privatization notified petitioner of the auction on December 2, 1993 was not witnessed by a COA representative. No
approval of the sale of the National Government shares of stock in PHILSECO, evidence was proffered to prove these allegations and the Court cannot make
it specifically stated that such approval was subject to the right of KAWASAKI legal conclusions out of mere allegations. Regularity in the performance of
Heavy Industries, Inc./Philyards Holdings, Inc. to top JGSMIs bid by 5% as official duties is presumed[44] and in the absence of competent evidence to rebut
specified in the bidding rules. Clearly, the approval of the sale was a conditional this presumption, this Court is duty bound to uphold this presumption.
one. Since Philyards eventually exercised its right to top petitioners bid by 5%,
the sale was not consummated. Parenthetically, it cannot be argued that the IN VIEW OF THE FOREGOING, the Motion for Reconsideration is
existence of the right to top set for naught the entire public bidding. Had hereby GRANTED. The impugned Decision and Resolution of the Court of
Philyards Holdings, Inc. failed or refused to exercise its right to top, the sale Appeals are AFFIRMED.
between the petitioner and the National Government would have been
consummated. In like manner, the existence of the right to top cannot be likened SO ORDERED.
to a second bidding, which is countenanced, except when there is failure to bid
as when there is only one bidder or none at all. A prohibited second bidding
presupposes that based on the terms and conditions of the sale, there is already
a highest bidder with the right to demand that the seller accept its bid. In the
instant case, the highest bidder was well aware that the acceptance of its bid
was conditioned upon the non-exercise of the right to top.
To be sure, respondents did not circumvent the requirements for bidding
by granting KAWASAKI, a non-bidder, the right to top the highest bidder. The
fact that KAWASAKIs nominee to exercise the right to top has among its
stockholders some losing bidders cannot also be deemed unfair.
It must be emphasized that none of the parties questions the existence
of KAWASAKIs right of first refusal, which is concededly the basis for the grant
of the right to top. Under KAWASAKIs right of first refusal, the National
Government is under the obligation to give preferential right to KAWASAKI in
the event it decides to sell its shares in PHILSECO. It has to offer to KAWASAKI
the shares and give it the option to buy or refuse under the same terms for
which it is willing to sell the said shares to third parties. KAWASAKI is not a mere
non-bidder. It is a partner in the joint venture; the incidents of which are governed
by the law on contracts and on partnership.
It is true that properties of the National Government, as a rule, may be
sold only after a public bidding is held. Public bidding is the accepted method in
arriving at a fair and reasonable price and ensures that overpricing, favoritism
and other anomalous practices are eliminated or minimized.[42] But the
requirement for public bidding does not negate the exercise of the right of first
refusal. In fact, public bidding is an essential first step in the exercise of the right
of first refusal because it is only after the public bidding that the terms upon
which the Government may be said to be willing to sell its shares to third parties
G.R. No. 178158 December 4, 2009
STRATEGIC ALLIANCE DEVELOPMENT CORPORATION, Petitioner,
vs.
RADSTOCK SECURITIES LIMITED and PHILIPPINE NATIONAL
CONSTRUCTION CORPORATION,Respondents.
ASIAVEST MERCHANT BANKERS BERHAD, Intervenor.
G.R. No. 180428
LUIS SISON, Petitioner,
vs.
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION and
RADSTOCK SECURITIES LIMITED,Respondents.
DECISION
CARPIO, J.:
Prologue
This case is an anatomy of a ₱6.185 billion1 pillage of the public coffers
that ranks among one of the most brazen and hideous in the history of this
country. This case answers the questions why our Government perennially
runs out of funds to provide basic services to our people, why the great
masses of the Filipino people wallow in poverty, and why a very select few
amass unimaginable wealth at the expense of the Filipino people.
On 1 May 2007, the 30-year old franchise of Philippine National
Construction Corporation (PNCC) under Presidential Decree No. 1113
(PD 1113), as amended by Presidential Decree No. 1894 (PD 1894),
expired. During the 13th Congress, PNCC sought to extend its franchise.
PNCC won approval from the House of Representatives, which passed
House Bill No. 57492 renewing PNCC’s franchise for another 25 years.
However, PNCC failed to secure approval from the Senate, dooming the
extension of PNCC’s franchise. Led by Senator Franklin M. Drilon, the
Senate opposed PNCC’s plea for extension of its franchise.3 Senator
Drilon’s privilege speech4 explains why the Senate chose not to renew
PNCC’s franchise:
I repeat, Mr. President. PNCC has agreed in a compromise agreement
dated 17 August 2006 to transfer to Radstock Securities Limited
₱17,676,063,922, no small money, Mr. President, my dear colleagues,
₱17.6 billion.
What does it consist of? It consists of the following: 19 pieces of real
estate properties with an appraised value of ₱5,993,689,000. Do we know
what is the bulk of this? An almost 13-hectare property right here in the
Financial Center. As we leave the Senate, as we go out of this Hall, as we
drive thru past the GSIS, we will see on the right a vacant lot, that is
PNCC property. As we turn right on Diosdado Macapagal, we see on our
right new buildings, these are all PNCC properties. That is 12.9 hectares
of valuable asset right in this Financial Center that is worth
₱5,993,689.000.
What else, Mr. President? The 20% of the outstanding capital stock of
PNCC with a par value of ₱2,300,000,000-- I repeat, 20% of the
outstanding capital stock of PNCC worth ₱2,300 billion-- was assigned to
Radstock.
In addition, Mr. President and my dear colleagues, please hold on to your
seats because part of the agreement is 50% of PNCC’s 6% share in the
gross toll revenue of the Manila North Tollways Corporation for 27 years,
from 2008 to 2035, is being assigned to Radstock. How much is this
worth? It is worth ₱9,382,374,922. I repeat, ₱9,382,374,922.
xxxx
Mr. President, ₱17,676,000,000, however, was made to appear in the
agreement to be only worth ₱6,196,156,488. How was this achieved? How
was an aggregate amount of ₱17,676,000,000 made to appear to be only
₱6,196,156,488? First, the 19 pieces of real estate worth ₱5,993,689,000
were only assigned a value of ₱4,195,000,000 or only 70% of their
appraised value.
Second, the PNCC shares of stock with a par value of ₱2.3 billion were
marked to market and therefore were valued only at ₱713 million.
Third, the share of the toll revenue assigned was given a net present value
of only ₱1,287,000,000 because of a 15% discounted rate that was
applied.
In other words, Mr. President, the toll collection of ₱9,382,374,922 for 27
years was given a net present value of only ₱1,287,000,000 so that it is
made to appear that the compromise agreement is only worth
₱6,196,000,000.
Mr. President, my dear colleagues, this agreement will substantially wipe
out all the assets of PNCC. It will be left with nothing else except,
probably, the collection for the next 25 years or so from the North Luzon
Expressway. This agreement brought PNCC to the cleaners and literally
cleaned the PNCC of all its assets. They brought PNCC to the cleaners
and cleaned it to the tune of ₱17,676,000,000.
xxxx
Mr. President, are we not entitled, as members of the Committee, to know
who is Radstock Securities Limited?
Radstock Securities Limited was allegedly incorporated under the laws of
the British Virgin Islands. It has no known board of directors, except for its
recently appointed attorney-in-fact, Mr. Carlos Dominguez.
Mr. President, are the members of the Committee not entitled to know why
20 years after the account to Marubeni Corporation, which gave rise to the
compromise agreement 20 years after the obligation was allegedly
incurred, PNCC suddenly recognized this obligation in its books when in
fact this obligation was not found in its books for 20 years?
In other words, Mr. President, for 20 years, the financial statements of
PNCC did not show any obligation to Marubeni, much less, to Radstock.
Why suddenly on October 20, 2000, ₱10 billion in obligation was
recognized? Why was it recognized?
During the hearing on December 18, Mr. President, we asked this
question to the Asset Privatization Trust (APT) trustee, Atty. Raymundo
Francisco, and he was asked: "What is the basis of your recommendation
to recognize this?" He said: "I based my recommendation on a legal
opinion of Feria and Feria." I asked him: "Who knew of this opinion?" He
said: "Only me and the chairman of PNCC, Atty. Renato Valdecantos." I
asked him: "Did you share this opinion with the members of the board who
recognized the obligation of ₱10 billion?" He said: "No." "Can you produce
this opinion now?" He said: "I have no copy."
Mysteriously, Mr. President, an obligation of ₱10 billion based on a legal
opinion which, even Mr. Arthur Aguilar, the chairman of PNCC, is not
aware of, none of the members of the PNCC board on October 20, 2000
who recognized this obligation had seen this opinion. It is mysterious.
Mr. President, are the members of our Committee not entitled to know why
Radstock Securities Limited is given preference over all other creditors
notwithstanding the fact that this is an unsecured obligation? There is no
mortgage to secure this obligation.
More importantly, Mr. President, equally recognized is the obligation of
PNCC to the Philippine government to the tune of ₱36 billion. PNCC owes
the Philippine government ₱36 billion recognized in its books, apart from
₱3 billion in taxes. Why in the face of all of these is Radstock given
preference? Why is it that Radstock is given preference to claim ₱17.676
billion of the assets of PNCC and give it superior status over the claim of
the Philippine government, of the Filipino people to the extent of ₱36
billion and taxes in the amount of P3 billion? Why, Mr. President? Why is
Radstock given preference not only over the Philippine government claims
of ₱39 billion but also over other creditors including a certain best
merchant banker in Asia, which has already a final and executory
judgment against PNCC for about ₱300 million? Why, Mr. President? Are
we not entitled to know why the compromise agreement assigned ₱17.676
billion to Radstock? Why was it executed?5 (Emphasis supplied)
Aside from Senator Drilon, Senator Sergio S. Osmeña III also saw
irregularities in the transactions involving the Marubeni loans, thus:
SEN. OSMEÑA. Ah okay. Good.
Now, I'd like to point out to the Committee that – it seems that this was a
politically driven deal like IMPSA. Because the acceptance of the 10 billion
or 13 billion debt came in October 2000 and the Radstock assignment was
January 10, 2001. Now, why would Marubeni sell for $2 million three
months after there was a recognition that it was owed ₱10 billion. Can you
explain that, Mr. Dominguez?
MR. DOMINGUEZ. Your Honor, I am not aware of the decision making
process of Marubeni. But my understanding was, the Japanese culture is
not a litigious one and they didn't want to get into a, you know, a court
situation here in the Philippines having a lot of other interest, et cetera.
SEN. OSMEÑA. Well, but that is beside the point, Mr. Dominguez. All I am
asking is does it stand to reason that after you get an acceptance by a
debtor that he owes you 10 billion, you sell your note for 100 million.
Now, if that had happened a year before, maybe I would have understood
why he sold for such a low amount. But right after, it seems that this was
part of an orchestrated deal wherein with certain powerful interest would
be able to say, "Yes, we will push through. We'll fix the courts. We'll fix the
board. We'll fix the APT. And we will be able to do it, just give us 55
percent of whatever is recovered," am I correct?
MR. DOMINGUEZ. As I said, Your Honor, I am not familiar with the
decision making process of Marubeni. But my understanding was, as I
said, they didn't want to get into a …
SEN. OSMEÑA. All right.
MR. DOMINGUEZ. ...litigious situation.6
xxxx
SEN. OSMEÑA. All of these financial things can be arranged. They can
hire a local bank, Filipino, to be trustee for the real estate. So ...
SEN. DRILON. Well, then, that’s a dummy relationship.
SEN. OSMEÑA. In any case, to me the main point here is that a third
party, Radstock, whoever owns it, bought Marubeni’s right for $2 million or
₱100 million. Then, they are able to go through all these legal
machinations and get awarded with the consent of PNCC of 6 billion.
That’s a 100 million to 6 billion. Now, Mr. Aguilar, you have been in the
business for such a long time. I mean, this hedge funds whether it’s
Radstock or New Bridge or Texas Pacific Group or Carlyle or Avenue
Capital, they look at their returns. So if Avenue Capital buys something for
$2 million and you give him $4 million in one year, it’s a 100 percent
return. They’ll walk away and dance to their stockholders. So here in this
particular case, if you know that Radstock only bought it for $2 million, I
would have gotten board approval and say, "Okay, let’s settle this for $4
million." And Radstock would have jumped up and down. So what looks to
me is that this was already a scheme. Marubeni wrote it off already.
Marubeni wrote everything off. They just got a $2 million and they probably
have no more residual rights or maybe there’s a clause there, a secret
clause, that says, "I want 20 percent of whatever you’re able to eventually
collect." So $2 million. But whatever it is, Marubeni practically wrote it off.
Radstock’s liability now or exposure is only $2 million plus all the lawyer
fees, under-the-table, etcetera. All right. Okay. So it’s pretty obvious to me
that if anybody were using his brain, I would have gone up to Radstock
and say, "Here’s $4 million. Here’s P200 million. Okay." They would have
walked away. But evidently, the "ninongs" of Radstock – See, I don’t care
who owns Radstock. I want to know who is the ninong here who stands to
make a lot of money by being able to get to courts, the government
agencies, OGCC, or whoever else has been involved in this, to agree to 6
billion or whatever it was. That’s a lot of money. And believe me, Radstock
will probably get one or two billion and four billion will go into somebody
else’s pocket. Or Radstock will turn around, sell that claim for ₱4 billion
and let the new guy just collect the payments over the years.
x x x x7
SEN. OSMEÑA. x x x I just wanted to know is CDCP Mining a 100 percent
subsidiary of PNCC?
MR. AGUILAR. Hindi ho. Ah, no.
SEN. OSMEÑA. If they’re not a 100 percent, why would they sign jointly
and severally? I just want to plug the loopholes.
MR. AGUILAR. I think it was – if I may just speculate. It was just common
ownership at that time.
SEN. OSMEÑA. Al right. Now – Also, the ...
MR. AGUILAR. Ah, 13 percent daw, Your Honor.
SEN. OSMEÑA. Huh?
MR. AGUILAR. Thirteen percent ho.
SEN. OSMEÑA. What’s 13 percent?
MR. AGUILAR. We owned ...
xxxx
SEN. OSMEÑA. x x x CDCP Mining, how many percent of the equity of
CDCP Mining was owned by PNCC, formerly CDCP?
MS. PASETES. Thirteen percent.
SEN. OSMEÑA. Thirteen. And as a 13 percent owner, they agreed to sign
jointly and severally?
MS. PASETES. Yes.
SEN. OSMEÑA. One-three? So poor PNCC and CDCP got taken to the
cleaners here. They sign for a 100 percent and they only own 13 percent.
x x x x8 (Emphasis supplied)
I.
The Case
Before this Court are the consolidated petitions for review9 filed by
Strategic Alliance Development Corporation (STRADEC) and Luis Sison
(Sison), with a motion for intervention filed by Asiavest Merchant Bankers
Berhad (Asiavest), challenging the validity of the Compromise Agreement
between PNCC and Radstock. The Court of Appeals approved the
Compromise Agreement in its Decision of 25 January 200710 in CA-G.R.
CV No. 87971.
II.
The Antecedents
PNCC was incorporated in 1966 for a term of fifty years under the
Corporation Code with the name Construction Development Corporation
of the Philippines (CDCP).11 PD 1113, issued on 31 March 1977, granted
CDCP a 30-year franchise to construct, operate and maintain toll facilities
in the North and South Luzon Tollways. PD 1894, issued on 22 December
1983, amended PD 1113 to include in CDCP’s franchise the Metro Manila
Expressway, which would "serve as an additional artery in the
transportation of trade and commerce in the Metro Manila area."
Sometime between 1978 and 1981, Basay Mining Corporation (Basay
Mining), an affiliate of CDCP, obtained loans from Marubeni Corporation of
Japan (Marubeni) amounting to 5,460,000,000 yen and US$5 million. A
CDCP official issued letters of guarantee for the loans, committing CDCP
to pay solidarily for the full amount of the 5,460,000,000 yen loan and to
the extent of ₱20 million for the US$5 million loan. However, there was no
CDCP Board Resolution authorizing the issuance of the letters of
guarantee. Later, Basay Mining changed its name to CDCP Mining
Corporation (CDCP Mining). CDCP Mining secured the Marubeni loans
when CDCP and CDCP Mining were still privately owned and managed.
Subsequently in 1983, CDCP changed its corporate name to PNCC to
reflect the extent of the Government's equity investment in the company,
which arose when government financial institutions converted their loans
to PNCC into equity following PNCC’s inability to pay the loans.12 Various
government financial institutions held a total of seventy-seven point forty-
eight percent (77.48%) of PNCC’s voting equity, most of which were later
transferred to the Asset Privatization Trust (APT) under Administrative
Orders No. 14 and 64, series of 1987 and 1988, respectively.13 Also, the
Presidential Commission on Good Government holds some 13.82% of
PNCC’s voting equity under a writ of sequestration and through the
voluntary surrender of certain PNCC shares. In fine, the Government owns
90.3% of the equity of PNCC and only 9.70% of PNCC’s voting equity is
under private ownership.14
Meanwhile, the Marubeni loans to CDCP Mining remained unpaid. On 20
October 2000, during the short-lived Estrada Administration, the PNCC
Board of Directors15 (PNCC Board) passed Board Resolution No. BD-092-
2000 admitting PNCC’s liability to Marubeni for ₱10,743,103,388 as of 30
September 1999. PNCC Board Resolution No. BD-092-2000 reads as
follows:
RESOLUTION NO. BD-092-2000
RESOLVED, That the Board recognizes, acknowledges and confirms
PNCC’s obligations as of September 30, 1999 with the following entities,
exclusive of the interests and other charges that may subsequently accrue
and still become due therein, to wit:
a). the Government of the Republic of the Philippines in the
amount of ₱36,023,784,751.00; and
b). Marubeni Corporation in the amount of ₱10,743,103,388.00.
(Emphasis supplied)
This was the first PNCC Board Resolution admitting PNCC’s liability for
the Marubeni loans. Previously, for two decades the PNCC Board
consistently refused to admit any liability for the Marubeni loans.
Less than two months later, or on 22 November 2000, the PNCC Board
passed Board Resolution No. BD-099-2000 amending Board Resolution
No. BD-092-2000. PNCC Board Resolution No. BD-099-2000 reads as
follows:
RESOLUTION NO. BD-099-2000
RESOLVED, That the Board hereby amends its Resolution No. BD-092-
2000 dated October 20, 2000 so as to read as follows:
RESOLVED, That the Board recognizes, acknowledges and confirms its
obligations as of September 30, 1999 with the following entities, exclusive
of the interests and other charges that may subsequently accrue and still
due thereon, subject to the final determination by the Commission on Audit
(COA) of the amount of obligation involved, and subject further to the
declaration of the legality of said obligations by the Office of the
Government Corporate Counsel (OGCC), to wit:
a). the Government of the Republic of the Philippines in the
amount of ₱36,023,784,751.00; and
b). Marubeni Corporation in the amount of ₱10,743,103,388.00.
(Emphasis supplied)
In January 2001, barely three months after the PNCC Board first admitted
liability for the Marubeni loans, Marubeni assigned its entire credit to
Radstock for US$2 million or less than ₱100 million. In short, Radstock
paid Marubeni less than 10% of the ₱10.743 billion admitted amount.
Radstock immediately sent a notice and demand letter to PNCC.
On 15 January 2001, Radstock filed an action for collection and damages
against PNCC before the Regional Trial Court of Mandaluyong City,
Branch 213 (trial court). In its order of 23 January 2001, the trial court
issued a writ of preliminary attachment against PNCC. The trial court
ordered PNCC’s bank accounts garnished and several of its real
properties attached. On 14 February 2001, PNCC moved to set aside the
23 January 2001 Order and to discharge the writ of attachment. PNCC
also filed a motion to dismiss the case. The trial court denied both
motions. PNCC filed motions for reconsideration, which the trial court also
denied. PNCC filed a petition for certiorari before the Court of Appeals,
docketed as CA-G.R. SP No. 66654, assailing the denial of the motion to
dismiss. On 30 August 2002, the Court of Appeals denied PNCC’s
petition. PNCC filed a motion for reconsideration, which the Court of
Appeals also denied in its 22 January 2003 Resolution. PNCC filed a
petition for review before this Court, docketed as G.R. No. 156887.
Meanwhile, on 19 June 2001, at the start of the Arroyo Administration, the
PNCC Board, under a new President and Chairman, revoked Board
Resolution No. BD-099-2000.
The trial court continued to hear the main case. On 10 December 2002,
the trial court ruled in favor of Radstock, as follows:
WHEREFORE, premises considered, judgment is hereby rendered in
favor of the plaintiff and the defendant is directed to pay the total amount
of Thirteen Billion One Hundred Fifty One Million Nine Hundred Fifty Six
thousand Five Hundred Twenty Eight Pesos (₱13,151,956,528.00) with
interest from October 15, 2001 plus Ten Million Pesos (₱10,000,000.00)
as attorney’s fees.
SO ORDERED.16
PNCC appealed the trial court’s decision to the Court of Appeals,
docketed as CA-G.R. CV No. 87971.
On 19 March 2003, this Court issued a temporary restraining order in G.R.
No. 156887 forbidding the trial court from implementing the writ of
preliminary attachment and ordering the suspension of the proceedings
before the trial court and the Court of Appeals. In its 3 October 2005
Decision, this Court ruled as follows:
WHEREFORE, the petition is partly GRANTED and insofar as the Motion
to Set Aside the Order and/or Discharge the Writ of Attachment is
concerned, the Decision of the Court of Appeals on August 30, 2002 and
its Resolution of January 22, 2003 in CA-G.R. SP No. 66654 are
REVERSED and SET ASIDE. The attachments over the properties by the
writ of preliminary attachment are hereby ordered LIFTED effective upon
the finality of this Decision. The Decision and Resolution of the Court of
Appeals are AFFIRMED in all other respects. The Temporary Restraining
Order is DISSOLVED immediately and the Court of Appeals is directed to
PROCEED forthwith with the appeal filed by PNCC.
No costs.
SO ORDERED.17
On 17 August 2006, PNCC and Radstock entered into the Compromise
Agreement where they agreed to reduce PNCC’s liability to Radstock,
supposedly from ₱17,040,843,968, to ₱6,185,000,000. PNCC and
Radstock submitted the Compromise Agreement to this Court for
approval. In a Resolution dated 4 December 2006 in G.R. No. 156887, this
Court referred the Compromise Agreement to the Commission on Audit
(COA) for comment. The COA recommended approval of the Compromise
Agreement. In a Resolution dated 22 November 2006, this Court noted the
Compromise Agreement and referred it to the Court of Appeals in CA-G.R.
CV No. 87971. In its 25 January 2007 Decision, the Court of Appeals
approved the Compromise Agreement.
STRADEC moved for reconsideration of the 25 January 2007 Decision.
STRADEC alleged that it has a claim against PNCC as a bidder of the
National Government’s shares, receivables, securities and interests in
PNCC. The matter is subject of a complaint filed by STRADEC against
PNCC and the Privatization and Management Office (PMO) for the
issuance of a Notice of Award of Sale to Dong-A Consortium of which
STRADEC is a partner. The case, docketed as Civil Case No. 05-882, is
pending before the Regional Trial Court of Makati, Branch 146 (RTC
Branch 146).
The Court of Appeals treated STRADEC’s motion for reconsideration as a
motion for intervention and denied it in its 31 May 2007 Resolution.
STRADEC filed a petition for review before this Court, docketed as G.R.
No. 178158.
Rodolfo Cuenca (Cuenca), a stockholder and former PNCC President and
Board Chairman, filed an intervention before the Court of Appeals. Cuenca
alleged that PNCC had no obligation to pay Radstock. The Court of
Appeals also denied Cuenca’s motion for intervention in its Resolution of
31 May 2007. Cuenca did not appeal the denial of his motion.
On 2 July 2007, this Court issued an order directing PNCC and Radstock,
their officers, agents, representatives, and other persons under their
control, to maintain the status quo ante.
Meanwhile, on 20 February 2007, Sison, also a stockholder and former
PNCC President and Board Chairman, filed a Petition for Annulment of
Judgment Approving Compromise Agreement before the Court of
Appeals. The case was docketed as CA-G.R. SP No. 97982.
Asiavest, a judgment creditor of PNCC, filed an Urgent Motion for Leave to
Intervene and to File the Attached Opposition and Motion-in-Intervention
before the Court of Appeals in CA-G.R. SP No. 97982.
In a Resolution dated 12 June 2007, the Court of Appeals dismissed
Sison’s petition on the ground that it had no jurisdiction to annul a final and
executory judgment also rendered by the Court of Appeals. In the same
resolution, the Court of Appeals also denied Asiavest’s urgent motion.
Asiavest filed its Urgent Motion for Leave to Intervene and to File the
Attached Opposition and Motion-in-Intervention in G.R. No. 178158.18
Sison filed a motion for reconsideration. In its 5 November 2007
Resolution, the Court of Appeals denied Sison’s motion.
On 26 November 2007, Sison filed a petition for review before this Court,
docketed as G.R. No. 180428.
In a Resolution dated 18 February 2008, this Court consolidated G.R. Nos.
178158 and 180428.
On 13 January 2009, the Court held oral arguments on the following
issues:
1. Does the Compromise Agreement violate public policy?
2. Does the subject matter involve an assumption by the
government of a private entity’s obligation in violation of the law
and/or the Constitution? Is the PNCC Board Resolution of 20
October 2000 defective or illegal?
3. Is the Compromise Agreement viable in the light of the non-
renewal of PNCC’s franchise by Congress and its inclusion of
all or substantially all of PNCC’s assets?
4. Is the Decision of the Court of Appeals annullable even if
final and executory on grounds of fraud and violation of public
policy and the Constitution?
III.
Propriety of Actions
The Court of Appeals denied STRADEC’s motion for intervention on the
ground that the motion was filed only after the Court of Appeals and the
trial court had promulgated their respective decisions.
Section 2, Rule 19 of the 1997 Rules of Civil Procedure provides:
SECTION 2. Time to intervene.– The motion to intervene may be filed at
any time before rendition of judgment by the trial court. A copy of the
pleading-in-intervention shall be attached to the motion and served on the
original parties.
The rule is not absolute. The rule on intervention, like all other rules of
procedure, is intended to make the powers of the Court completely
available for justice.19 It is aimed to facilitate a comprehensive adjudication
of rival claims, overriding technicalities on the timeliness of the filing of the
claims.20 This Court has ruled:
[A]llowance or disallowance of a motion for intervention rests on the sound
discretion of the court after consideration of the appropriate
circumstances. Rule 19 of the Rules of Court is a rule of procedure whose
object is to make the powers of the court fully and completely available for
justice. Its purpose is not to hinder or delay but to facilitate and promote
the administration of justice. Thus, interventions have been allowed even
beyond the prescribed period in the Rule in the higher interest of justice.
Interventions have been granted to afford indispensable parties, who have
not been impleaded, the right to be heard even after a decision has been
rendered by the trial court, when the petition for review of the judgment
was already submitted for decision before the Supreme Court, and even
where the assailed order has already become final and executory. In Lim
v. Pacquing (310 Phil. 722 (1995)], the motion for intervention filed by the
Republic of the Philippines was allowed by this Court to avoid grave
injustice and injury and to settle once and for all the substantive issues
raised by the parties.21
In Collado v. Court of Appeals,22 this Court reiterated that exceptions to
Section 2, Rule 12 could be made in the interest of substantial justice.
Citing Mago v. Court of Appeals,23 the Court stated:
It is quite clear and patent that the motions for intervention filed by the
movants at this stage of the proceedings where trial had already been
concluded x x x and on appeal x x x the same affirmed by the Court of
Appeals and the instant petition for certiorari to review said judgments is
already submitted for decision by the Supreme Court, are obviously and,
manifestly late, beyond the period prescribed under x x x Section 2, Rule
12 of the Rules of Court.
But Rule 12 of the Rules of Court, like all other Rules therein promulgated,
is simply a rule of procedure, the whole purpose and object of which is to
make the powers of the Court fully and completely available for justice.
The purpose of procedure is not to thwart justice. Its proper aim is to
facilitate the application of justice to the rival claims of contending parties.
It was created not to hinder and delay but to facilitate and promote the
administration of justice. It does not constitute the thing itself which courts
are always striving to secure to litigants. It is designed as the means best
adopted to obtain that thing. In other words, it is a means to an end.
Concededly, STRADEC has no legal interest in the subject matter of the
Compromise Agreement. Section 1, Rule 19 of the 1997 Rules of Civil
Procedure states:
SECTION 1. Who may intervene. - A person who has a legal interest in
the matter in litigation, or in the success of either of the parties, or an
interest against both, or is so situated as to be adversely affected by a
distribution or other disposition of property in the custody of the court or of
an officer thereof may, with leave of court, be allowed to intervene in the
action. The Court shall consider whether or not the intervention will unduly
delay or prejudice the adjudication of the rights of the original parties, and
whether or not the intervenor’s rights may be fully protected in a separate
proceeding.
STRADEC’s interest is dependent on the outcome of Civil Case No. 05-
882. Unless STRADEC can show that RTC Branch 146 had already
decided in its favor, its legal interest is simply contingent and expectant.
However, Asiavest has a direct and material interest in the approval or
disapproval of the Compromise Agreement. Asiavest is a judgment
creditor of PNCC in G.R. No. 110263 and a court has already issued a writ
of execution in its favor. Asiavest’s interest is actual and material, direct
and immediate characterized by either gain or loss from the judgment that
this Court may render.24 Considering that the Compromise Agreement
involves the disposition of all or substantially all of the assets of PNCC,
Asiavest, as PNCC’s judgment creditor, will be greatly prejudiced if the
Compromise Agreement is eventually upheld.
Sison has legal standing to challenge the Compromise Agreement.
Although there was no allegation that Sison filed the case as a derivative
suit in the name of PNCC, it could be fairly deduced that Sison was
assailing the Compromise Agreement as a stockholder of PNCC. In such
a situation, a stockholder of PNCC can sue on behalf of PNCC to annul
the Compromise Agreement.
A derivative action is a suit by a stockholder to enforce a corporate cause
of action.25 Under the Corporation Code, where a corporation is an injured
party, its power to sue is lodged with its board of directors or
trustees.26 However, an individual stockholder may file a derivative suit on
behalf of the corporation to protect or vindicate corporate rights whenever
the officials of the corporation refuse to sue, or are the ones to be sued, or
hold control of the corporation.27 In such actions, the corporation is the real
party-in-interest while the suing stockholder, on behalf of the corporation,
is only a nominal party.28
In this case, the PNCC Board cannot conceivably be expected to attack
the validity of the Compromise Agreement since the PNCC Board itself
approved the Compromise Agreement. In fact, the PNCC Board
steadfastly defends the Compromise Agreement for allegedly being
advantageous to PNCC.
Besides, the circumstances in this case are peculiar. Sison, as former
PNCC President and Chairman of the PNCC Board, was responsible for
the approval of the Board Resolution issued on 19 June 2001 revoking the
previous Board Resolution admitting PNCC’s liability for the Marubeni
loans.29 Such revocation, however, came after Radstock had filed an
action for collection and damages against PNCC on 15 January 2001.
Then, when the trial court rendered its decision on 10 December 2002 in
favor of Radstock, Sison was no longer the PNCC President and
Chairman, although he remains a stockholder of PNCC.
When the case was on appeal before the Court of Appeals, there was no
need for Sison to avail of any remedy, until PNCC and Radstock entered
into the Compromise Agreement, which disposed of all or substantially all
of PNCC’s assets. Sison came to know of the Compromise Agreement
only in December 2006. PNCC and Radstock submitted the Compromise
Agreement to the Court of Appeals for approval on 10 January 2007. The
Court of Appeals approved the Compromise Agreement on 25 January
2007. To require Sison at this stage to exhaust all the remedies within the
corporation will render such remedies useless as the Compromise
Agreement had already been approved by the Court of Appeals. PNCC’s
assets are in danger of being dissipated in favor of a private foreign
corporation. Thus, Sison had no recourse but to avail of an extraordinary
remedy to protect PNCC’s assets.
Besides, in the interest of substantial justice and for compelling reasons,
such as the nature and importance of the issues raised in this case,30 this
Court must take cognizance of Sison’s action. This Court should exercise
its prerogative to set aside technicalities in the Rules, because after all,
the power of this Court to suspend its own rules whenever the interest of
justice requires is well recognized.31 In Solicitor General v. The
Metropolitan Manila Authority,32 this Court held:
Unquestionably, the Court has the power to suspend procedural rules in
the exercise of its inherent power, as expressly recognized in the
Constitution, to promulgate rules concerning ‘pleading, practice and
procedure in all courts.’ In proper cases, procedural rules may be relaxed
or suspended in the interest of substantial justice, which otherwise may be
miscarried because of a rigid and formalistic adherence to such rules. x x
x
We have made similar rulings in other cases, thus:
Be it remembered that rules of procedure are but mere tools designed to
facilitate the attainment of justice. Their strict and rigid application, which
would result in technicalities that tend to frustrate rather than promote
substantial justice, must always be avoided. x x x Time and again, this
Court has suspended its own rules and excepted a particular case from
their operation whenever the higher interests of justice so require.
IV.
The PNCC Board Acted in Bad Faith and with Gross Negligence
in Directing the Affairs of PNCC
In this jurisdiction, the members of the board of directors have a three-fold
duty: duty of obedience, duty of diligence, and duty of
loyalty.33 Accordingly, the members of the board of directors (1) shall
direct the affairs of the corporation only in accordance with the purposes
for which it was organized;34 (2) shall not willfully and knowingly vote
for or assent to patently unlawful acts of the corporation or act in
bad faith or with gross negligence in directing the affairs of the
corporation;35 and (3) shall not acquire any personal or pecuniary interest
in conflict with their duty as such directors or trustees.36
In the present case, the PNCC Board blatantly violated its duty of diligence
as it miserably failed to act in good faith in handling the affairs of PNCC.
First. For almost two decades, the PNCC Board had consistently refused
to admit liability for the Marubeni loans because of the absence of a PNCC
Board resolution authorizing the issuance of the letters of guarantee.
There is no dispute that between 1978 and 1980, Marubeni Corporation
extended two loans to Basay Mining (later renamed CDCP Mining): (1)
US$5 million to finance the purchase of copper concentrates by Basay
Mining; and (2) Y5.46 billion to finance the completion of the expansion
project of Basay Mining including working capital.
There is also no dispute that it was only on 20 October 2000 when the
PNCC Board approved a resolution expressly admitting PNCC’s liability
for the Marubeni loans. This was the first Board Resolution admitting
liability for the Marubeni loans, for PNCC never admitted liability for these
debts in the past. Even Radstock admitted that PNCC’s 1994 Financial
Statements did not reflect the Marubeni loans.37 Also, former PNCC
Chairman Arthur Aguilar stated during the Senate hearings that "the
Marubeni claim was never in the balance sheet x x x nor was it in a
contingent account."38 Miriam M. Pasetes, SVP Finance of PNCC, and
Atty. Herman R. Cimafranca of the Office of the Government Corporate
Counsel, confirmed this fact, thus:
SEN. DRILON. x x x And so, PNCC itself did not recognize this as an
obligation but the board suddenly recognized it as an obligation. It was on
that basis that the case was filed, is that correct? In fact, the case hinges
on – they knew that this claim has prescribed but because of that board
resolution which recognized the obligation they filed their complaint, is that
correct?
MR. CIMAFRANCA. Apparently, it's like that, Senator, because the filing of
the case came after the acknowledgement.
SEN. DRILON. Yes. In fact, the filing of the case came three months after
the acknowledgement.
MR. CIMAFRANCA. Yes. And that made it difficult to handle on our part.
SEN. DRILON. That is correct. So, that it was an obligation which was
not recognized in the financial statements of PNCC but revived – in
the financial statements because it has prescribed but revived by the
board effectively. That's the theory, at least, of the plaintiff. Is that
correct? Who can answer that?
Ms. Pasetes, yes.
MS. PASETES. It is not an obligation of PNCC that is why it is not
reflected in the financial statements.39 (Emphasis supplied)
In short, after two decades of consistently refuting its liability for the
Marubeni loans, the PNCC Board suddenly and inexplicably reversed itself
by admitting in October 2000 liability for the Marubeni loans. Just three
months after the PNCC Board recognized the Marubeni loans, Radstock
acquired Marubeni's receivable and filed the present collection case.
Second. The PNCC Board admitted liability for the Marubeni loans despite
PNCC’s total liabilities far exceeding its assets. There is no dispute that
the Marubeni loans, once recognized, would wipe out the assets of PNCC,
"virtually emptying the coffers of the PNCC."40 While PNCC insists that it
remains financially viable, the figures in the COA Audit Reports tell
otherwise.41 For 2006 and 2005, "the Corporation has incurred
negative gross margin of ₱84.531 Million and ₱80.180 Million,
respectively, and net losses that had accumulated in a deficit of
₱14.823 Billion as of 31 December 2006."42 The COA even opined
that "unless [PNCC] Management addresses the issue on net losses
in its financial rehabilitation plan, x x x the Corporation may not be
able to continue its operations as a going concern."
Notably, during the oral arguments before this Court, the Government
Corporate Counsel admitted the PNCC’s huge negative net worth, thus:
JUSTICE CARPIO
x x x what is the net worth now of PNCC? Negative what? Negative 6
Billion at least[?]
ATTY. AGRA
Yes, your Honor.43 (Emphasis supplied)
Clearly, the PNCC Board’s admission of liability for the Marubeni loans,
given PNCC’s huge negative net worth of at least ₱6 billion as admitted by
PNCC’s counsel, or ₱14.823 billion based on the 2006 COA Audit Report,
would leave PNCC an empty shell, without any assets to pay its biggest
creditor, the National Government with an admitted receivable of ₱36
billion from PNCC.
Third. In a debilitating self-inflicted injury, the PNCC Board revived what
appeared to have been a dead claim by abandoning one of PNCC’s strong
defenses, which is the prescription of the action to collect the Marubeni
loans.
Settled is the rule that actions prescribe by the mere lapse of time fixed by
law.44 Under Article 1144 of the Civil Code, an action upon a written
contract, such as a loan contract, must be brought within ten years from
the time the right of action accrues. The prescription of such an action is
interrupted when the action is filed before the court, when there is a written
extrajudicial demand by the creditor, or when there is any written
acknowledgment of the debt by the debtor.45
In this case, Basay Mining obtained the Marubeni loans sometime
between 1978 and 1981. While Radstock claims that numerous demand
letters were sent to PNCC, based on the records, the extrajudicial
demands to pay the loans appear to have been made only in 1984 and
1986. Meanwhile, the written acknowledgment of the debt, in the form of
Board Resolution No. BD-092-2000, was issued only on 20 October 2000.
Thus, more than ten years would have already lapsed between Marubeni’s
extrajudicial demands in 1984 and 1986 and the acknowledgment by the
PNCC Board of the Marubeni loans in 2000. However, the PNCC Board
suddenly passed Board Resolution No. BD-092-2000 expressly admitting
liability for the Marubeni loans. In short, the PNCC Board admitted liability
for the Marubeni loans despite the fact that the same might no longer be
judicially collectible. Although the legal advantage was obviously on its
side, the PNCC Board threw in the towel even before the fight could begin.
During the Senate hearings, the matter of prescription was discussed,
thus:
SEN. DRILON. ... the prescription period is 10 years and there were no
payments – the last demands were made, when? The last demands for
payment?
MS. OGAN. It was made January 2001 prior to the filing of the case.
SEN. DRILON. Yes, all right. Before that, when was the last demand
made? By the time they filed the complaint more than 10 years already
lapsed.
MS. OGAN. On record, Mr. Chairman, we have demands starting from - -
a series of demands which started from May 23, 1984, letter from
Marubeni to PNCC, demand payment. And we also have the letter of
September 3, 1986, letter of Marubeni to then PNCC Chair Mr. Jaime. We
have the June 24, 1986 letter from Marubeni to the PNCC Chairman. Also
the March 4, 1988 letter...
SEN. DRILON. The March 4, 1988 letter is not a demand letter.
MS. OGAN. It is exactly addressed to the Asset Privatization Trust.
SEN. DRILON. It is not a demand letter? Okay.
MS. OGAN. And we have also...
SEN. DRILON. Anyway...
THE CHAIRMAN. Please answer when you are asked, Ms. Ogan. We
want to put it on the record whether it is "yes" or "no".
MS. OGAN. Yes, sir.
SEN. DRILON. So, even assuming that all of those were demand letters,
the 10 years prescription set in and it should have prescribed in 1998,
whatever is the date, or before the case was filed in 2001.
MR. CIMAFRANCA. The 10-year period for – if the contract is written, it's
10 years and it should have prescribed in 10 years and we did raise that in
our answer, in our motion to dismiss.
SEN. DRILON. I know. You raised this in your motion to dismiss and you
raised this in your answer. Now, we are not saying that you were negligent
in not raising that. What we are just putting on the record that indeed there
is basis to argue that these claims have prescribed.
Now, the reason why there was a colorable basis on the complaint filed in
2001 was that somehow the board of PNCC recognized the obligation in a
special board meeting on October 20, 2000. Hindi ba ganoon 'yon?
MS. OGAN. Yes, that is correct.
SEN. DRILON. Why did the PNCC recognize this obligation in 2000 when
it was very clear that at that point more than 10 years have lapsed since
the last demand letter?
MR. AGUILAR. May I volunteer an answer?
SEN. DRILON. Please.
MR. AGUILAR. I looked into that, Mr. Chairman, Your Honor. It was as a
result of and I go to the folder letter "N." In our own demand research it
was not period, Your Honor, that Punongbayan in the big folder, sir, letter
"N" it was the period where PMO was selling PNCC and Punongbayan
and Araullo Law Office came out with an investment brochure that
indicated liabilities both to national government and to Marubeni/Radstock.
So, PMO said, "For good order, can you PNCC board confirm that by
board resolution?" That's the tone of the letter.
SEN. DRILON. Confirm what? Confirm the liabilities that are contained in
the Punongbayan investment prospectus both to the national government
and to PNCC. That is the reason at least from the record, Your Honor,
how the PNCC board got to deliberate on the Marubeni.
THE CHAIRMAN. What paragraph? Second to the last paragraph?
MR. AGUILAR. Yes. Yes, Mr. Chairman. Ito po 'yong – that"s to our
recollection, in the records, that was the reason.
SEN. DRILON. Is that the only reason why ...
MR. AGUILAR. From just the records, Mr. Chairman, and then interviews
with people who are still around.
SEN. DRILON. You mean, you acknowledged a prescribed obligation
because of this paragraph?
MR. AGUILAR. I don’t know what legal advice we were following at that
time, Mr. Chairman.46 (Emphasis supplied)
Besides prescription, the Office of the Government Corporate Counsel
(OGCC) originally believed that PNCC had another formidable legal
weapon against Radstock, that is, the lack of authority of Alfredo
Asuncion, then Executive Vice-President of PNCC, to sign the letter of
guarantee on behalf of CDCP. During the Senate hearings, the following
exchange reveals the OGCC’s original opinion:
THE CHAIRMAN. What was the opinion of the Office of the Government
Corporate Counsel?
MS. OGAN. The opinion of the Office of the Government Corporate
Counsel is that PNCC should exhaust all means to resist the case using
all defenses available to a guarantee and a surety that there is a valid
ground for PNCC's refusal to honor or make good the alleged guarantee
obligation. It appearing that from the documents submitted to the OGCC
that there is no board authority in favor or authorizing Mr. Asuncion, then
EVP, to sign or execute the letter of guarantee in behalf of CDCP and that
said letter of guarantee is not legally binding upon or enforceable against
CDCP as principals, your Honors.47
xxxx
SEN. DRILON. Now that we have read this, what was the opinion of the
Government Corporate Counsel, Mr. Cimafranca?
MR. CIMAFRANCA. Yes, Senator, we did issue an opinion upon the
request of PNCC and our opinion was that there was no valid obligation,
no valid guarantee. And we incorporated that in our pleadings in
court.48 (Emphasis supplied)
Clearly, PNCC had strong defenses against the collection suit filed by
Radstock, as originally opined by the OGCC. It is quite puzzling, therefore,
that the PNCC Board, which had solid grounds to refute the legitimacy of
the Marubeni loans, admitted its liability and entered into a Compromise
Agreement that is manifestly and grossly prejudicial to PNCC.
Fourth. The basis for the admission of liability for the Marubeni loans,
which was an opinion of the Feria Law Office, was not even shown to the
PNCC Board.
Atty. Raymundo Francisco, the APT trustee overseeing the proposed
privatization of PNCC at the time, was responsible for recommending to
the PNCC Board the admission of PNCC’s liability for the Marubeni loans.
Atty. Francisco based his recommendation solely on a mere alleged
opinion of the Feria Law Office. Atty. Francisco did not bother to show this
"Feria opinion" to the members of the PNCC Board, except to Atty. Renato
Valdecantos, who as the then PNCC Chairman did not also show the
"Feria opinion" to the other PNCC Board members. During the Senate
hearings, Atty. Francisco could not produce a copy of the "Feria opinion."
The Senators grilled Atty. Francisco on his recommendation to recognize
PNCC’s liability for the Marubeni loans, thus:
THE CHAIRMAN. x x x You were the one who wrote this letter or rather
this memorandum dated 17 October 2000 to Atty. Valdecantos. Can you
tell us the background why you wrote the letter acknowledging a debt
which is non-existent?
MR. FRANCISCO. I was appointed as the trustee in charge of the
privatization of the PNCC at that time, sir. And I was tasked to do a study
and engage the services of financial advisors as well as legal advisors to
do a legal audit and financial study on the position of PNCC. I bidded out
these engagements, the financial advisership went to Punongbayan and
Araullo. The legal audit went to the Feria Law Offices.
THE CHAIRMAN. Spell it. Boy Feria?
MR. FRANCISCO. Feria-- Feria.
THE CHAIRMAN. Lugto?
MR. FRANCISCO. Yes. Yes, Your Honor. And this was the findings of the
Feria Law Office – that the Marubeni account was a legal obligation.
So, I presented this to our board. Based on the findings of the legal audit
conducted by the Ferial Law Offices, sir.
THE CHAIRMAN. Why did you not ask the government corporate
counsel? Why did you have to ask for the opinion of an outside counsel?
MR. FRANCISCO. That was the – that was the mandate given to us, sir,
that we have to engage the ...
THE CHAIRMAN. Mandate given by whom?
MR. FRANCISCO. That is what we usually do, sir, in the APT.
THE CHAIRMAN. Ah, you get outside counsel?
MR. FRANCISCO. Yes, we...
THE CHAIRMAN. Not necessarily the government corporate counsel?
MR. FRANCISCO. No, sir.
THE CHAIRMAN. So, on the basis of the opinion of outside counsel,
private, you proceeded to, in effect, recognize an obligation which is not
even entered in the books of the PNCC? You probably resuscitated a non-
existing obligation anymore?
MR. FRANCISCO. Sir, I just based my recommendation on the
professional findings of the law office that we engaged, sir.
THE CHAIRMAN. Did you not ask for the opinion of the government
corporate counsel?
MR. FRANCISCO. No, sir.
THE CHAIRMAN. Why?
MR. FRANCISCO. I felt that the engagements of the law office was
sufficient, anyway we were going to raise it to the Committee on
Privatization for their approval or disapproval, sir.
THE CHAIRMAN. The COP?
MR. FRANCISCO. Yes, sir.
THE CHAIRMAN. That’s a cabinet level?
MR. FRANCISCO. Yes, sir. And we did that, sir.
THE CHAIRMAN. Now... So you sent your memo to Atty. Renato B.
Valdecantos, who unfortunately is not here but I think we have to get his
response to this. And as part of the minutes of special meeting with the
board of directors on October 20, 2000, the board resolved in its Board
Resolution No. 092-2000, the board resolved to recognize, acknowledge
and confirm PNCC’s obligations as of September 30, 1999, etcetera,
etcetera. (A), or rather (B), Marubeni Corporation in the amount of
₱10,740,000.
Now, we asked to be here because the franchise of PNCC is hanging in a
balance because of the – on the questions on this acknowledgement. So
we want to be educated.
Now, the paper trail starts with your letter. So, that’s it – that’s my kuwan,
Frank.
Yes, Senator Drilon.
SEN. DRILON. Thank you, Mr. Chairman.
Yes, Atty. Francisco, you have a copy of the minutes of October 20, 2000?
MR. FRANCISCO. I’m sorry, sir, we don’t have a copy.
SEN. DRILON. May we ask the corporate secretary of PNCC to provide us
with a copy?
Okay naman andiyan siya.
(Ms. Ogan handing the document to Mr. Francisco.)
You have familiarized yourselves with the minutes, Atty. Francisco?
MR. FRANCISCO. Yes, sir.
SEN. DRILON. Now, mention is made of a memorandum here on line 8,
page 3 of this board’s minutes. It says, "Director Francisco has prepared a
memorandum requesting confirmation, acknowledgement, and ratification
of this indebtedness of PNCC to the national government which was
determined by Bureau of Treasury as of September 30, 1999 is
36,023,784,751. And with respect to PNCC’s obligation to Marubeni, this
has been determined to be in the total amount of 10,743,103,388, also as
of September 30, 1999; that there is need to ratify this because there has
already been a representation made with respect to the review of the
financial records of PNCC by Punongbayan and Araullo, which have been
included as part of the package of APT’s disposition to the national
government’s interest in PNCC."
You recall having made this representation as found in the minutes, I
assume, Atty. Francisco?
MR. FRANCISCO. Yes, sir. But I’d like to be refreshed on the
memorandum, sir, because I don’t have a copy.
SEN. DRILON. Yes, this memorandum was cited earlier by Senator
Arroyo, and maybe the secretary can give him a copy? Give him a copy?
MS. OGAN. (Handing the document to Mr. Francisco.)
MR. FRANCISCO. Your Honor, I have here a memorandum to the PNCC
board through Atty. Valdecantos, which says that – in the last paragraph, if
I may read? "May we request therefore, that a board resolution be
adopted, acknowledging and confirming the aforementioned PNCC
obligations with the national government and Marubeni as borne out by
the due diligence audit."
SEN. DRILON. This is the memorandum referred to in these minutes. This
memorandum dated 17 October 2000 is the memorandum referred to in
the minutes.
MR. FRANCISCO. I would assume, Mr. Chairman.
SEN. DRILON. Right.
Now, the Punongbayan representative who was here yesterday, Mr...
THE CHAIRMAN. Navarro.
SEN. DRILON. ... Navarro denied that he made this recommendation.
THE CHAIRMAN. He asked for opinion, legal opinion.
SEN. DRILON. He said that they never made this representation and the
transcript will bear us out. They said that they never made this
representation that the account of Marubeni should be recognized.
MR. FRANCISCO. Mr. Chairman, in the memorandum, I only mentioned
here the acknowledgement and confirmation of the PNCC obligations. I
was not asking for a ratification. I never mentioned ratification in the
memorandum. I just based my memo based on the due diligence audit of
the Feria Law Offices.
SEN. DRILON. Can you say that again? You never asked for a
ratification...
MR. FRANCISCO. No. I never mentioned in my memorandum that I was
asking for a ratification. I was just – in my memo it says, "acknowledging
and confirming the PNCC obligation." This was what ...
SEN. DRILON. Isn’t it the same as ratification? I mean, what’s the
difference?
MR. FRANCISCO. I – well, my memorandum was meant really just to
confirm the findings of the legal audit as ...
SEN. DRILON. In your mind as a lawyer, Atty. Francisco, there’s a
difference between ratification and – what’s your term? -- acknowledgment
and confirmation?
MR. FRANCISCO. Well, I guess there’s no difference, Mr. Chairman.
SEN. DRILON. Right.
Anyway, just of record, the Punongbayan representatives here yesterday
said that they never made such representation.
In any case, now you’re saying it’s the Feria Law Office who rendered that
opinion? Can we – you know, yesterday we were asking for a copy of this
opinion but we were never furnished one. The ... no less than the
Chairman of this Committee was asking for a copy.
THE CHAIRMAN. Well, copy of the opinion...
MS. OGAN. Yes, Mr. Chairman, we were never furnished a copy of this
opinion because it’s opinion rendered for the Asset Privatization Trust
which is its client, not the PNCC, Mr. Chairman.
THE CHAIRMAN. All right. The question is whether – but you see, this is a
memorandum of Atty. Francisco to the Chairman of the Asset Privatization
Trust. You say now that you were never furnished a copy because that’s
supposed to be with the Asset ...
MS. OGAN. Yes, Mr. Chairman.
THE CHAIRMAN. ... but yet the action of – or rather the opinion of the
Feria Law Offices was in effect adopted by the board of directors of PNCC
in its minutes of October 20, 2000 where you are the corporate secretary,
Ms. Ogan.
MS. OGAN. Yes, Mr. Chairman.
THE CHAIRMAN. So, what I am saying is that this opinion or rather the
opinion of the Feria Law Offices of which you don’t have a copy?
MS. OGAN. Yes, sir.
THE CHAIRMAN. And the reason being that, it does not concern the
PNCC because that’s an opinion rendered for APT and not for the PNCC.
MS. OGAN. Yes, Mr. Chairman, that was what we were told although we
made several requests to the APT, sir.
THE CHAIRMAN. All right. Now, since it was for the APT and not for the
PNCC, I ask the question why did PNCC adopt it? That was not for the
consumption of PNCC. It was for the consumption of the Asset
Privatization Trust. And that is what Atty. Francisco says and it’s confirmed
by you saying that this was a memo – you don’t have a copy because this
was sought for by APT and the Feria Law Offices just provided an opinion
– provided the APT with an opinion. So, as corporate secretary, the board
of directors of PNCC adopted it, recognized the Marubeni Corporation.
You read the minutes of the October 20, 2000 meeting of the board of
directors on Item V. The resolution speaks of .. so, go ahead.
MS. OGAN. I gave my copies. Yes, sir.
THE CHAIRMAN. In effect the Feria Law Offices’ opinion was for the
consumption of the APT.
MS. OGAN. That was what we were told, Mr. Chairman.
THE CHAIRMAN. And you were not even provided with a copy.
THE CHAIRMAN. Yet you adopted it.
MS. OGAN. Yes, sir.
SEN DRILON. Considering you were the corporate secretary.
THE CHAIRMAN. She was the corporate secretary.
SEN. DRILON. She was just recording the minutes.
THE CHAIRMAN. Yes, she was recording.
Now, we are asking you now why it was taken up?
MS. OGAN. Yes, sir, Mr. Chairman, this was mentioned in the
memorandum of Atty. Francisco, memorandum to the board.
SEN. DRILON. Mr. Chairman, Mr. Francisco represented APT in the board
of PNCC. And is that correct, Mr. Francisco?
THE CHAIRMAN. You’re an ex-officio member.
SEN. DRILON. Yes.
MR. FRANCISCO. Ex-officio member only, sir, as trustee in charge of the
privatization of PNCC.
SEN. DRILON. With the permission of Mr. Chair, may I ask a question...
THE CHAIRMAN. Oh, yes, Senator Drilon.
SEN. DRILON. Atty. Francisco, you sat in the PNCC board as APT
representative, you are a lawyer, there was a legal opinion of Feria, Feria,
Lugto, Lao Law Offices which you cited in your memorandum. Did you
discuss – first, did you give a copy of this opinion to PNCC?
MR. FRANCISCO. I gave a copy of this opinion, sir, to our chairman who
was also a member of the board of PNCC, Mr. Valdecantos, sir.
SEN. DRILON. And because he was...
MR. FRANCISCO. Because he was my immediate boss in the APT.
SEN. DRILON. Apparently, [it] just ended up in the personal possession of
Mr. Valdecantos because the corporate secretary, Glenda Ogan, who is
supposed to be the custodian of the records of the board never saw a
copy of this.
MR. FRANCISCO. Well, sir, my – the copy that I gave was to Mr.
Valdecantos because he was the one sitting in the PNCC board, sir.
SEN. DRILON. No, you sit in the board.
MR. FRANCISCO. I was just an ex-officio member. And all my reports
were coursed through our Chairman, Mr. Valdecantos, sir.
SEN. DRILON. Now, did you ever tell the board that there is a legal
position taken or at least from the documents it is possible that the claim
has prescribed?
MR. FRANCISCO. I took this up in the board meeting of the PNCC at that
time and I told them about this matter, sir.
SEN. DRILON. No, you told them that the claim could have, under the law,
could have prescribed?
MR. FRANCISCO. No, sir.
SEN. DRILON. Why? You mean, you didn’t tell the board that it is possible
that this liability is no longer a valid liability because it has prescribed?
MR. FRANCISCO. I did not dwell into the findings anymore, sir, because I
found the professional opinion of the Feria Law Office to be
sufficient.49 (Emphasis supplied)
Atty. Francisco’s act of recommending to the PNCC Board the
acknowledgment of the Marubeni loans based only on an opinion of a
private law firm, without consulting the OGCC and without showing this
opinion to the members of the PNCC Board except to Atty. Valdecantos,
reflects how shockingly little his concern was for PNCC, contrary to his
claim that "he only had the interest of PNCC at heart." In fact, if what was
involved was his own money, Atty. Francisco would have preferred not just
two, but at least three different opinions on how to deal with the matter,
and he would have maintained his non-liability.
SEN. OSMEÑA. x x x
All right. And lastly, just to clear our minds, there has always been this
finger-pointing, of course, whenever – this is typical Filipino. When they're
caught in a bind, they always point a finger, they pretend they don't know.
And it just amazes me that you have been appointed trustees, meaning,
representatives of the Filipino people, that's what you were at APT, right?
You were not Erap's representatives, you were representative of the
Filipino people and you were tasked to conserve the assets that that had
been confiscated from various cronies of the previous administration. And
here, you are asked to recognize the P10 billion debt and you point only to
one law firm. If you have cancer, don't you to a second opinion, a second
doctor or a third doctor? This is just a question. I am just asking you for
your opinion if you would take the advice of the first doctor who tells you
that he's got to open you up.
MR. FRANCISCO. I would go to three or more doctors, sir.
SEN. OSMEÑA. Three or more. Yeah, that's right. And in this case the
APT did not do so.
MR. FRANCISCO. We relied on the findings of the …
SEN. OSMEÑA. If these were your money, would you have gone also to
obtain a second, third opinion from other law firms. Kung pera mo itong 10
billion na ito. Siguro you're not gonna give it up that easily ano, 'di ba?
MR. FRANCISCO. Yes, sir.
SEN. OSMEÑA. You'll probably keep it in court for the next 20 years.
x x x x50 (Emphasis supplied)
This is a clear admission by Atty. Francisco of bad faith in directing the
affairs of PNCC - that he would not have recognized the Marubeni loans if
his own funds were involved or if he were the owner of PNCC.
The PNCC Board admitted liability for the ₱10.743 billion Marubeni loans
without seeing, reading or discussing the "Feria opinion" which was the
sole basis for its admission of liability. Such act surely goes against
ordinary human nature, and amounts to gross negligence and utter bad
faith, even bordering on fraud, on the part of the PNCC Board in directing
the affairs of the corporation. Owing loyalty to PNCC and its stockholders,
the PNCC Board should have exercised utmost care and diligence in
admitting a gargantuan debt of ₱10.743 billion that would certainly force
PNCC into insolvency, a debt that previous PNCC Boards in the last two
decades consistently refused to admit.
Instead, the PNCC Board admitted PNCC’s liability for the Marubeni loans
relying solely on a mere opinion of a private law office, which opinion the
PNCC Board members never saw, except for Atty. Valdecantos and Atty.
Francisco. The PNCC Board knew that PNCC, as a government owned
and controlled corporation (GOCC), must rely "exclusively" on the opinion
of the OGCC. Section 1 of Memorandum Circular No. 9 dated 27 August
1998 issued by the President states:
SECTION 1. All legal matters pertaining to government-owned or
controlled corporations, their subsidiaries, other corporate off-springs and
government acquired asset corporations (GOCCs) shall be exclusively
referred to and handled by the Office of the Government Corporate
Counsel (OGCC). (Emphasis supplied)
The PNCC Board acted in bad faith in relying on the opinion of a private
lawyer knowing that PNCC is required to rely "exclusively" on the OGCC’s
opinion. Worse, the PNCC Board, in admitting liability for ₱10.743 billion,
relied on the recommendation of a private lawyer whose opinion the
PNCC Board members have not even seen.
During the oral arguments, Atty. Sison explained to the Court that the
intention of APT was for the PNCC Board merely to disclose the claim of
Marubeni as part of APT's full disclosure policy to prospective buyers of
PNCC. Atty. Sison stated that it was not the intention of APT for the PNCC
Board to admit liability for the Marubeni loans, thus:
x x x It was the Asset Privatization Trust A-P-T that was tasked to sell the
company. The A-P-T, for purposes of disclosure statements, tasked the
Feria Law Office to handle the documentation and the study of all legal
issues that had to be resolved or clarified for the information of prospective
bidders and or buyers. In the performance of its assigned task the Feria
Law Office came upon the Marubeni claim and mentioned that the APTC
and/or PNCC must disclose that there is a claim by Marubeni against
PNCC for purposes of satisfying the requirements of full disclosure. This
seemingly innocent statement or requirement made by the Feria Law
Office was then taken by two officials of the Asset Privatization Trust and
with malice aforethought turned it into the basis for a multi-billion peso
debt by the now government owned and/or controlled PNCC. x x
x.51 (Emphasis supplied)
While the PNCC Board passed Board Resolution No. BD-099-2000
amending Board Resolution No. BD-092-2000, such amendment merely
added conditions for the recognition of the Marubeni loans, namely,
subjecting the recognition to a final determination by COA of the amount
involved and to the declaration by OGCC of the legality of PNCC’s liability.
However, the PNCC Board reiterated and stood firm that it "recognizes,
acknowledges and confirms its obligations" for the Marubeni loans.
Apparently, Board Resolution No. BD-099-2000 was a futile attempt to
"revoke" Board Resolution No. BD-092-2000. Atty. Alfredo Laya, Jr., a
former PNCC Director, spoke on his protests against Board Resolution
No. BD-092-2000 at the Senate hearings, thus:
MR. LAYA. Mr. Chairman, if I can …
THE CHAIRMAN. Were you also at the board?
MR. LAYA. At that time, yes, sir.
THE CHAIRMAN. Okay, go ahead.
MR. LAYA. That's why if – maybe this can help clarify the sequence.
There was this meeting on October 20. This matter of the Marubeni liability
or account was also discussed. Mr. Macasaet, if I may try to refresh. And
there was some discussion, sir, and in fact, they were saying even at that
stage that there should be a COA or an OGCC audit. Now, that was during
the discussion of October 20. Later on, the minutes came out. The
practice, then, sir, was for the minutes to come out at the start of the
meeting of the subsequent. So the minutes of October 20 came out on
November 22 and then we were going over it. And that is in the
subsequent minutes of the meeting …
THE CHAIRMAN. May I interrupt. You were taking up in your November
22 meeting the October 20 minutes?
MR. LAYA. Yes, sir.
THE CHAIRMAN. This minutes that we have?
MR. LAYA. Yes, sir.
THE CHAIRMAN. All right, go ahead.
MR. LAYA. Now, in the November 22 meeting, we noticed this resolution
already for confirmation of the board – proceedings of October 20. So
immediately we made – actually, protest would be a better term for that –
we protested the wording of the resolution and that's why we came up with
this resolution amending the October 20 resolution.
SEN. DRILON. So you are saying, Mr. Laya, that the minutes of October
20 did not accurately reflect the decisions that you made on October 20
because you were saying that this recognition should be subject to OGCC
and COA? You seem to imply and we want to make it – and I want to get
that for the record. You seem to imply that there was no decision to
recognize the obligation during that meeting because you wanted it to
subject it to COA and OGCC, is that correct?
MR. LAYA. Yes, your Honor.
SEN. DRILON. So how did...
MR. LAYA. That's my understanding of the proceedings at that time, that's
why in the subsequent November 22 meeting, we raised this point about
obtaining a COA and OGCC opinion.
SEN. DRILON. Yes. But you know, the November 22 meeting repeated
the wording of the resolution previously adopted only now you are saying
subject to final determination which is completely of different import from
what you are saying was your understanding of the decision arrived at on
October 20.
MR. LAYA. Yes, sir. Because our thinking then...
SEN. DRILON. What do you mean, yes, sir?
MR. LAYA. It's just a claim under discussion but then the way it is
translated, as the minutes of October 20 were not really verbatim.
SEN. DRILON. So, you never intended to recognize the obligation.
MR. LAYA. I think so, sir. That was our – personally, that was my position.
SEN. DRILON. How did it happen, Corporate Secretary Ogan, that the
minutes did not reflect what the board …
THE CHAIRMAN. Ms. Pasetes …
MS. PASETES. Yes, Mr. Chairman.
THE CHAIRMAN. … you are the chief financial officer of PNCC.
MS. PASETES. Your Honor, before that November 22 board meeting,
management headed by Mr. Rolando Macasaet, myself and Atty. Ogan
had a discussion about the recognition of the obligations of 10 billion of
Marubeni and 36 billion of the national government on whether to
recognize this as an obligation in our books or recognize it as an obligation
in the pro forma financial statement to be used for the privatization of
PNCC because recognizing both obligations in the books of PNCC would
defeat our going concern status and that is where the position of the
president then, Mr. Macasaet, stemmed from and he went back to the
board and moved to reconsider the position of October 20, 2000, Mr.
Chair.52 (Emphasis supplied)
In other words, despite Atty. Laya’s objections to PNCC’s admitting liability
for the Marubeni loans, the PNCC Board still admitted the same and
merely imposed additional conditions to temper somehow the devastating
effects of Board Resolution No. BD-092-2000.
The act of the PNCC Board in issuing Board Resolution No. BD-092-2000
expressly admitting liability for the Marubeni loans demonstrates the
PNCC Board’s gross and willful disregard of the requisite care and
diligence in managing the affairs of PNCC, amounting to bad faith and
resulting in grave and irreparable injury to PNCC and its stockholders.
This reckless and treacherous move on the part of the PNCC Board
clearly constitutes a serious breach of its fiduciary duty to PNCC and its
stockholders, rendering the members of the PNCC Board liable under
Section 31 of the Corporation Code, which provides:
SEC. 31. Liability of directors, trustees or officers. -- Directors or trustees
who willfully and knowingly vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom suffered by
the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in
violation of his duty, any interest adverse to the corporation in respect of
any matter which has been reposed in him in confidence, as to which
equity imposes a disability upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation.
Soon after the short-lived Estrada Administration, the PNCC Board
revoked its previous admission of liability for the Marubeni loans. During
the oral arguments, Atty. Sison narrated to the Court:
x x x After President Estrada was ousted, I was appointed as President
and Chairman of PNCC in April of 2001, this particular board resolution
was brought to my attention and I immediately put the matter before the
board. I had no problem in convincing them to reverse the recognition as it
was illegal and had no basis in fact. The vote to overturn that resolution
was unanimous. Strange to say that some who voted to overturn the
recognition were part of the old board that approved it. Stranger still,
Renato Valdecantos who was still a member of the Board voted in favor of
reversing the resolution he himself instigated and pushed. Some of the
board members who voted to recognize the obligation of Marubeni even
came to me privately and said "pinilit lang kami." x x x.53 (Emphasis
supplied)
In approving PNCC Board Resolution Nos. BD-092-2000 and BD-099-
2000, the PNCC Board caused undue injury to the Government and gave
unwarranted benefits to Radstock, through manifest partiality, evident bad
faith or gross inexcusable negligence of the PNCC Board. Such acts are
declared under Section 3(e) of RA 3019 or the Anti-Graft and Corrupt
Practices Act, as "corrupt practices xxx and xxx unlawful." Being unlawful
and criminal acts, these PNCC Board Resolutions are void ab initio and
cannot be implemented or in any way given effect by the Executive or
Judicial branch of the Government.
Not content with forcing PNCC to commit corporate suicide with the
admission of liability for the Marubeni loans under Board Resolution Nos.
BD-092-2000 and BD-099-2000, the PNCC Board drove the last nail on
PNCC’s coffin when the PNCC Board entered into the manifestly and
grossly disadvantageous Compromise Agreement with Radstock. This
time, the OGCC, headed by Agnes DST Devanadera, reversed itself and
recommended approval of the Compromise Agreement to the PNCC
Board. As Atty. Sison explained to the Court during the oral arguments:
x x x While the case was pending in the Court of Appeals, Radstock in a
rare display of extreme generosity, conveniently convinced the Board of
PNCC to enter into a compromise agreement for ½ the amount of the
judgment rendered by the RTC or ₱6.5 Billion Pesos. This time the
OGCC, under the leadership of now Solicitor General Agnes Devanadera,
approved the compromise agreement abandoning the previous OGCC
position that PNCC had a meritorious case and would be hard press to
lose the case. What is strange is that although the compromise agreement
we seek to stop ostensibly is for ₱6.5 Billion only, truth and in fact, the
agreement agrees to convey to Radstock all or substantially all of the
assets of PNCC worth ₱18 Billion Pesos. There are three items that are
undervalued here, the real estate that was turned over as a result of the
controversial agreement, the toll revenues that were being assigned and
the value of the new shares of PNCC the difference is about ₱12 Billion
Pesos. x x x (Emphasis supplied)
V.
The Compromise Agreement is Void
for Being Contrary to the Constitution,
Existing Laws, and Public Policy
For a better understanding of the present case, the pertinent terms and
conditions of the Compromise Agreement between PNCC and Radstock
are quoted below:
COMPROMISE AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement made and entered into this 17th day of August 2006, in
Mandaluyong City, Metro Manila, Philippines, by and between:
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, a
government acquired asset corporation, created and existing under the
laws of the Republic of the Philippines, with principal office address at
EDSA corner Reliance Street, Mandaluyong City, Philippines, duly
represented herein by its Chairman ARTHUR N. AGUILAR, pursuant to a
Board Resolution attached herewith as Annex "A" and made an integral
part hereof, hereinafter referred to as PNCC;
- and -
RADSTOCK SECURITIES LIMITED, a private corporation incorporated in
the British Virgin Islands, with office address at Suite 1402 1 Duddell
Street, Central Hongkong duly-represented herein by its Director,
CARLOS G. DOMINGUEZ, pursuant to a Board Resolution attached
herewith as Annex "B" and made an integral part hereof, hereinafter
referred to as RADSTOCK.
WITNESSETH:
WHEREAS, on January 15, 2001, RADSTOCK, as assignee of Marubeni
Corporation, filed a complaint for sum of money and damages with
application for a writ of preliminary attachment with the Regional Trial
Court (RTC), Mandaluyong City, docketed as Civil Case No. MC-01-1398,
to collect on PNCC’s guarantees on the unpaid loan obligations of CDCP
Mining Corporation as provided under an Advance Payment Agreement
and Loan Agreement;
WHEREAS, on December 10, 2002, the RTC of Mandaluyong rendered a
decision in favor of plaintiff RADSTOCK directing PNCC to pay the total
amount of Thirteen Billion One Hundred Fifty One Million Nine Hundred
Fifty-Six Thousand Five Hundred Twenty-Eight Pesos
(₱13,151,956,528.00) with interest from October 15, 2001 plus Ten Million
Pesos (₱10,000,000.00) as attorney's fees.
WHEREAS, PNCC had elevated the case to the Court of Appeals (CA-
G.R. SP No. 66654) on Certiorari and thereafter, to the Supreme Court
(G.R. No. 156887) which Courts have consistently ruled that the RTC did
not commit grave abuse of discretion when it denied PNCC’s Motion to
Dismiss which sets forth similar or substantially the same grounds or
defenses as those raised in PNCC's Answer;
WHEREAS, the case has remained pending for almost six (6) years even
after the main action was appealed to the Court of Appeals;
WHEREAS, on the basis of the RTC Decision dated December 10, 2002,
the current value of the judgment debt against PNCC stands at
₱17,040,843,968.00 as of July 31, 2006 (the "Judgment Debt");
WHEREAS, RADSTOCK is willing to settle the case at the reduced
Compromise Amount of Six Billion One Hundred Ninety-Six Million Pesos
(₱6,196,000,000.00) which may be paid by PNCC, either in cash or in kind
to avoid the trouble and inconvenience of further litigation as a gesture of
goodwill and cooperation;
WHEREAS, it is an established legal policy or principle that litigants in civil
cases should be encouraged to compromise or amicably settle their claims
not only to avoid litigation but also to put an end to one already
commenced (Articles 2028 and 2029, Civil Code);
WHEREAS, this Compromise Agreement has been approved by the
respective Board of Directors of both PNCC and RADSTOCK, subject to
the approval of the Honorable Court;
NOW, THEREFORE, for and in consideration of the foregoing premises,
and the mutual covenants, stipulations and agreements herein contained,
PNCC and RADSTOCK have agreed to amicably settle the above
captioned Radstock case under the following terms and conditions:
1. RADSTOCK agrees to receive and accept from PNCC in full
and complete settlement of the Judgment Debt, the reduced
amount of Six Billion, One Hundred Ninety-Six Million Pesos
(₱6,196,000,000.00) (the "Compromise Amount").
2. This Compromise Amount shall be paid by PNCC to
RADSTOCK in the following manner:
a. PNCC shall assign to a third party assignee to be designated by
RADSTOCK all its rights and interests to the following real properties
provided the assignee shall be duly qualified to own real properties in the
Philippines;
(1) PNCC’s rights over that parcel of land located in Pasay City
with a total area of One Hundred Twenty-Nine Thousand Five
Hundred Forty-Eight (129,548) square meters, more or less,
and which is covered by and more particularly described in
Transfer Certificate of Title No. T-34997 of the Registry of
Deeds for Pasay City. The transfer value is ₱3,817,779,000.00.
PNCC’s rights and interests in Transfer Certificate of Title No.
T-34997 of the Registry of Deeds for Pasay City is defined and
delineated by Administrative Order No. 397, Series of 1998,
and RADSTOCK is fully aware and recognizes that PNCC has
an undertaking to cede at least 2 hectares of this property to its
creditor, the Philippine National Bank; and that furthermore, the
Government Service Insurance System has also a current and
existing claim in the nature of boundary conflicts, which
undertaking and claim will not result in the diminution of area or
value of the property. Radstock recognizes and acknowledges
the rights and interests of GSIS over the said property.
(2) T-452587 (T-23646) - Parañaque (5,123 sq. m.) subject to
the clarification of the Privatization and Management Office
(PMO) claims thereon. The transfer value is ₱45,000,900.00.
(3) T-49499 (529715 including T-68146-G (S-29716) (1,9747-
A)-Parañaque (107 sq. m.) (54 sq. m.) subject to the
 clarification of the Privatization and Management Office (PMO)
claims thereon. The transfer value is ₱1,409,100.00.
(4) 5-29716-Parañaque (27,762 sq. m.) subject to the
clarification of the Privatization and Management Office (PMO)
claims thereon. The transfer value is ₱242,917,500.00.
(5) P-169 - Tagaytay (49,107 sq. m.). The transfer value is
₱13,749,400.00.
(6) P-170 - Tagaytay (49,100 sq. m.). The transfer value is
₱13,749,400.00.
(7) N-3320 - Town and Country Estate, Antipolo (10,000 sq.
m.). The transfer value is ₱16,800,000.00.
(8) N-7424 - Antipolo (840 sq. m.). The transfer value is
₱940,800.00.
(9) N-7425 - Antipolo (850 sq. m.). The transfer value is
₱952,000.00.
(10) N-7426 - Antipolo (958 sq. m.). The transfer value is
₱1,073,100.00.
(11) T-485276 - Antipolo (741 sq. m.). The transfer value is
₱830,200.00.
(12) T-485277 - Antipolo (680 sq. m.). The transfer value is
₱761,600.00.
(13) T-485278 - Antipolo (701 sq. m.). The transfer value is
₱785,400.00.
(14) T-131500 - Bulacan (CDCP Farms Corp.) (4,945 sq, m.).
The transfer value is ₱6,475,000.00.
(15) T-131501 - Bulacan (678 sq. m.). The transfer value is
₱887,600.00.
(16) T-26,154 (M) - Bocaue, Bulacan (2,841 sq. m.). The
transfer value is ₱3,779,300.00.
(17) T-29,308 (M) - Bocaue, Bulacan (733 sq. m.). The transfer
value is ₱974,400.00.
(18) T-29,309 (M) Bocaue, Bulacan (1,141 sq. m.). The transfer
value is ₱1,517,600.00.
(19) T-260578 (R. Bengzon) Sta. Rita, Guiguinto, Bulacan
(20,000 sq. m.). The transfer value is ₱25,200,000.00.
The transfer values of the foregoing properties are based on 70% of the
appraised value of the respective properties.
b. PNCC shall issue to RADSTOCK or its assignee common shares of the
capital stock of PNCC issued at par value which shall comprise 20% of the
outstanding capital stock of PNCC after the conversion to equity of the
debt exposure of the Privatization Management Office (PMO) and the
National Development Company (NDC) and other government agencies
and creditors such that the total government holdings shall not fall below
70% voting equity subject to the approval of the Securities and Exchange
Commission (SEC) and ratification of PNCC’s stockholders, if necessary.
The assigned value of the shares issued to RADSTOCK is ₱713 Million
based on the approximate last trading price of PNCC shares in the
Philippine Stock Exchange as the date of this agreement, based further on
current generally accepted accounting standards which stipulates the
valuation of shares to be based on the lower of cost or market value.
Subject to the procurement of any and all necessary approvals from the
relevant governmental authorities, PNCC shall deliver to RADSTOCK an
instrument evidencing an undertaking of the Privatization and
Management Office (PMO) to give RADSTOCK or its assignee the right to
match any offer to buy the shares of the capital stock and debts of PNCC
held by PMO, in the event the same shares and debt are offered for
privatization.
c. PNCC shall assign to RADSTOCK or its assignee 50% of the PNCC's
6% share in the gross toll revenue of the Manila North Tollways
Corporation (MNTC), with a Net Present Value of ₱1.287 Billion computed
in the manner outlined in Annex "C" herein attached as an integral part
hereof, that shall be due and owing to PNCC pursuant to the Joint Venture
Agreement between PNCC and First Philippine Infrastructure
Development Corp. dated August 29, 1995 and other related existing
agreements, commencing in 2008. It shall be understood that as a result
of this assignment, PNCC shall charge and withhold the amounts, if any,
pertaining to taxes due on the amounts assigned.
Under the Compromise Agreement, PNCC shall pay Radstock the
reduced amount of ₱6,185,000,000.00 in full settlement of PNCC’s
guarantee of CDCP Mining’s debt allegedly totaling ₱17,040,843,968.00
as of 31 July 2006. To satisfy its reduced obligation, PNCC undertakes to
(1) "assign to a third party assignee to be designated by Radstock all its
rights and interests" to the listed real properties therein; (2) issue to
Radstock or its assignee common shares of the capital stock of PNCC
issued at par value which shall comprise 20% of the outstanding capital
stock of PNCC; and (3) assign to Radstock or its assignee 50% of PNCC’s
6% share, for the next 27 years (2008-2035), in the gross toll revenues of
the Manila North Tollways Corporation.
A. The PNCC Board has no power to compromise
the ₱6.185 billion amount.
Does the PNCC Board have the power to compromise the ₱6.185 billion
"reduced" amount? The answer is in the negative.1avvphi1
The Dissenting Opinion asserts that PNCC has the power, citing Section
36(2) of Presidential Decree No. 1445 (PD 1445), otherwise known as the
Government Auditing Code of the Philippines, enacted in 1978. Section 36
states:
SECTION 36. Power to Compromise Claims. — (1) When the interest of
the government so requires, the Commission may compromise or release
in whole or in part, any claim or settled liability to any government agency
not exceeding ten thousand pesos and with the written approval of the
Prime Minister, it may likewise compromise or release any similar claim or
liability not exceeding one hundred thousand pesos, the application for
relief therefrom shall be submitted, through the Commission and the Prime
Minister, with their recommendations, to the National Assembly.
(2) The respective governing bodies of government-owned or controlled
corporations, and self-governing boards, commissions or agencies of the
government shall have the exclusive power to compromise or release any
similar claim or liability when expressly authorized by their charters and if
in their judgment, the interest of their respective corporations or agencies
so requires. When the charters do not so provide, the power to
compromise shall be exercised by the Commission in accordance with the
preceding paragraph. (Emphasis supplied)
The Dissenting Opinion asserts that since PNCC is incorporated under the
Corporation Code, the PNCC Board has all the powers granted to the
governing boards of corporations incorporated under the Corporation
Code, which includes the power to compromise claims or liabilities.
Section 36 of PD 1445, enacted on 11 June 1978, has been superseded
by a later law -- Section 20(1), Chapter IV, Subtitle B, Title I, Book V of
Executive Order No. 292 or the Administrative Code of 1987, which
provides:
Section 20. Power to Compromise Claims. - (1) When the interest of the
Government so requires, the Commission may compromise or release in
whole or in part, any settled claim or liability to any government agency not
exceeding ten thousand pesos arising out of any matter or case before it
or within its jurisdiction, and with the written approval of the President, it
may likewise compromise or release any similar claim or liability not
exceeding one hundred thousand pesos. In case the claim or liability
exceeds one hundred thousand pesos, the application for relief therefrom
shall be submitted, through the Commission and the President, with their
recommendations, to the Congress[.] x x x (Emphasis supplied)
Under this provision,54 the authority to compromise a settled claim or
liability exceeding ₱100,000.00 involving a government agency, as in this
case where the liability amounts to ₱6.185 billion, is vested not in COA but
exclusively in Congress. Congress alone has the power to compromise
the ₱6.185 billion purported liability of PNCC. Without congressional
approval, the Compromise Agreement between PNCC and Radstock
involving ₱6.185 billion is void for being contrary to Section 20(1), Chapter
IV, Subtitle B, Title I, Book V of the Administrative Code of 1987.
PNCC is a "government agency" because Section 2 on Introductory
Provisions of the Revised Administrative Code of 1987 provides that –
Agency of the Government refers to any of the various units of the
Government, including a department, bureau, office, instrumentality, or
government-owned or controlled corporation, or a local government or a
distinct unit therein. (Boldfacing supplied)
Thus, Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the
Administrative Code of 1987 applies to PNCC, which indisputably is a
government owned or controlled corporation.
In the same vein, the COA’s stamp of approval on the Compromise
Agreement is void for violating Section 20(1), Chapter IV, Subtitle B, Title
I, Book V of the Administrative Code of 1987. Clearly, the Dissenting
Opinion’s reliance on the COA’s finding that the terms and conditions of
the Compromise Agreement are "fair and above board" is patently
erroneous.
Citing Benedicto v. Board of Administrators of Television Stations RPN,
BBC and IBC,55 the Dissenting Opinion views that congressional approval
is not required for the validity of the Compromise Agreement because the
liability of PNCC is not yet "settled."
In Benedicto, the PCGG filed in the Sandiganbayan a civil case to recover
from the defendants (including Roberto S. Benedicto) their ill-gotten wealth
consisting of funds and other properties. The PCGG executed a
compromise agreement with Roberto S. Benedicto ceding to the latter a
substantial part of his ill-gotten assets and the State granting him immunity
from further prosecution. The Court held that prior congressional approval
is not required for the PCGG to enter into a compromise agreement with
persons against whom it has filed actions for recovery of ill-gotten wealth.
In Benedicto, the Court found that the government’s claim against
Benedicto was not yet settled unlike here where the PNCC Board
expressly admitted the liability of PNCC for the Marubeni loans. In
Benedicto, the ownership of the alleged ill-gotten assets was still being
litigated in the Sandiganbayan and no party ever admitted any liability,
unlike here where the PNCC Board had already admitted through a formal
Board Resolution PNCC’s liability for the Marubeni loans. PNCC’s express
admission of liability for the Marubeni loans is essentially the premise of
the execution of the Compromise Agreement. In short, Radstock’s claim
against PNCC is settled by virtue of PNCC’s express admission of liability
for the Marubeni loans. The Compromise Agreement merely reduced this
settled liability from ₱17 billion to ₱6.185 billion.
The provision of the Revised Administrative Code on the power to settle
claims or liabilities was precisely enacted to prevent government agencies
from admitting liabilities against the government, then compromising such
"settled" liabilities. The present case is exactly what the law seeks to
prevent, a compromise agreement on a creditor’s claim settled through
admission by a government agency without the approval of Congress for
amounts exceeding ₱100,000.00. What makes the application of the law
even more necessary is that the PNCC Board’s twin moves are manifestly
and grossly disadvantageous to the Government. First, the PNCC
admitted solidary liability for a staggering ₱10.743 billion private debt
incurred by a private corporation which PNCC does not even control.
Second, the PNCC Board agreed to pay Radstock ₱6.185 billion as a
compromise settlement ahead of all other creditors, including the
Government which is the biggest creditor.
The Dissenting Opinion further argues that since the PNCC is
incorporated under the Corporation Code, it has the power, through its
Board of Directors, to compromise just like any other private corporation
organized under the Corporation Code. Thus, the Dissenting Opinion
states:
Not being a government corporation created by special law, PNCC does
not owe its creation to some charter or special law, but to the Corporation
Code. Its powers are enumerated in the Corporation Code and its articles
of incorporation. As an autonomous entity, it undoubtedly has the power to
compromise, and to enter into a settlement through its Board of
Directors, just like any other private corporation organized under the
Corporation Code. To maintain otherwise is to ignore the character of
PNCC as a corporate entity organized under the Corporation Code, by
which it was vested with a personality and identity distinct and separate
from those of its stockholders or members. (Boldfacing and underlining
supplied)
The Dissenting Opinion is woefully wide off the mark. The PNCC is not
"just like any other private corporation" precisely because it is not a private
corporation but indisputably a government owned corporation. Neither is
PNCC "an autonomous entity" considering that PNCC is under the
Department of Trade and Industry, over which the President exercises
control. To claim that PNCC is an "autonomous entity" is to say that it is a
lost command in the Executive branch, a concept that violates the
President's constitutional power of control over the entire Executive branch
of government.56
The government nominees in the PNCC Board, who practically compose
the entire PNCC Board, are public officers subject to the Anti-Graft and
Corrupt Practices Act, accountable to the Government and the Filipino
people. To hold that a corporation incorporated under the Corporation
Code, despite its being 90.3% owned by the Government, is "an
autonomous entity" that could solely through its Board of Directors
compromise, and transfer ownership of, substantially all its assets to a
private third party without the approval required under the Administrative
Code of 1987,57 is to invite the plunder of all such government owned
corporations.
The Dissenting Opinion’s claim that PNCC is an autonomous entity just
like any other private corporation is inconsistent with its assertion that
Section 36(2) of the Government Auditing Code is the governing law in
determining PNCC's power to compromise. Section 36(2) of the
Government Auditing Code expressly states that it applies to the
governing bodies of "government-owned or controlled corporations."
The phrase "government-owned or controlled corporations" refers to both
those created by special charter as well as those incorporated under the
Corporation Code. Section 2, Article IX-D of the Constitution 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
or 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
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 or the granting institution to submit to such audit
as a condition of subsidy or equity. However, where the internal control
system of the audited agencies is inadequate, the Commission may adopt
such measures, including temporary or special pre-audit, as are necessary
and appropriate to correct the deficiencies. It shall keep the general
accounts of the Government and, for such period as may be provided by
law, preserve the vouchers and other supporting papers pertaining
thereto.
(2) The Commission shall have exclusive authority, subject to the
limitations in this Article, to define the scope of its audit and examination,
establish the techniques and methods required therefor, and promulgate
accounting and auditing rules and regulations, including those for the
prevention and disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures, or uses of government
funds and properties. (Emphasis supplied)
In explaining the extent of the jurisdiction of COA over government owned
or controlled corporations, this Court declared in Feliciano v. Commission
on Audit:58
The COA's audit jurisdiction extends not only to government "agencies or
instrumentalities," but also to "government-owned and controlled
corporations with original charters" as well as "other government-owned or
controlled corporations" without original charters.
xxxx
Petitioner forgets that the constitutional criterion on the exercise of COA's
audit jurisdiction depends on the government's ownership or control of a
corporation. The nature of the corporation, whether it is private, quasi-
public, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over "government-
owned and controlled corporations with original charters," as well as
"government-owned or controlled corporations" without original charters.
GOCCs with original charters are subject to COA pre-audit, while GOCCs
without original charters are subject to COA post-audit. GOCCs without
original charters refer to corporations created under the Corporation Code
but are owned or controlled by the government. The nature or purpose of
the corporation is not material in determining COA's audit jurisdiction.
Neither is the manner of creation of a corporation, whether under a
general or special law.
Clearly, the COA’s audit jurisdiction extends to government owned or
controlled corporations incorporated under the Corporation Code. Thus,
the COA must apply the Government Auditing Code in the audit and
examination of the accounts of such government owned or controlled
corporations even though incorporated under the Corporation Code. This
means that Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the
Administrative Code of 1987 on the power to compromise, which
superseded Section 36 of the Government Auditing Code, applies to the
present case in determining PNCC’s power to compromise. In fact, the
COA has been regularly auditing PNCC on a post-audit basis in
accordance with Section 2, Article IX-D of the Constitution, the
Government Auditing Code, and COA rules and regulations.
B. PNCC’s toll fees are public funds.
PD 1113 granted PNCC a 30-year franchise to construct, operate and
maintain toll facilities in the North and South Luzon Expressways. Section
1 of PD 111359 provides:
Section 1. Any provision of law to the contrary notwithstanding, there is
hereby granted to the Construction and Development Corporation of the
Philippines (CDCP), a corporation duly organized and registered under the
laws of the Philippines, hereinafter called the GRANTEE, for a period of
thirty (30) years from May 1, 1977 the right, privilege and authority to
construct, operate and maintain toll facilities covering the expressways
from Balintawak (Station 9 + 563) to Carmen, Rosales, Pangasinan and
from Nichols, Pasay City (Station 10 + 540) to Lucena, Quezon,
hereinafter referred to collectively as North Luzon Expressway,
respectively.
The franchise herein granted shall include the right to collect toll fees at
such rates as may be fixed and/or authorized by the Toll Regulatory Board
hereinafter referred to as the Board created under Presidential Decree No.
1112 for the use of the expressways above-mentioned. (Emphasis
supplied)
Section 2 of PD 1894,60 which amended PD 1113 to include in PNCC’s
franchise the Metro Manila expressway, also provides:
Section 2. The term of the franchise provided under Presidential Decree
No. 1113 for the North Luzon Expressway and the South Luzon
Expressway which is thirty (30) years from 1 May 1977 shall remain the
same; provided that, the franchise granted for the Metro Manila
Expressway and all extensions linkages, stretches and diversions that
may be constructed after the date of approval of this decree shall likewise
have a term of thirty (30) years commencing from the date of completion
of the project. (Emphasis supplied)
Based on these provisions, the franchise of the PNCC expired on 1 May
2007 or thirty years from 1 May 1977.
PNCC, however, claims that under PD 1894, the North Luzon Expressway
(NLEX) shall have a term of 30 years from the date of its completion in
2005. PNCC argues that the proviso in Section 2 of PD 1894 gave "toll
road projects completed within the franchise period and after the approval
of PD No. 1894 on 12 December 1983 their own thirty-year term
commencing from the date of the completion of the said project,
notwithstanding the expiry of the said franchise."
This contention is untenable.
The proviso in Section 2 of PD 1894 refers to the franchise granted for the
Metro Manila Expressway and all extensions linkages, stretches and
diversions constructed after the approval of PD 1894. It does not pertain to
the NLEX because the term of the NLEX franchise, "which is 30 years
from 1 May 1977, shall remain the same," as expressly provided in the first
sentence of the same Section 2 of PD 1894. To construe that the NLEX
franchise had a new term of 30 years starting from 2005 glaringly conflicts
with the plain, clear and unequivocal language of the first sentence of
Section 2 of PD 1894. That would be clearly absurd.
There is no dispute that Congress did not renew PNCC’s franchise after its
expiry on 1 May 2007. However, PNCC asserts that it "remains a viable
corporate entity even after the expiration of its franchise under Presidential
Decree No. 1113." PNCC points out that the Toll Regulatory Board (TRB)
granted PNCC a "Tollway Operation Certificate" (TOC) which conferred on
PNCC the authority to operate and maintain toll facilities, which includes
the power to collect toll fees. PNCC further posits that the toll fees are
private funds because they represent "the consideration given to tollway
operators in exchange for costs they incurred or will incur in constructing,
operating and maintaining the tollways."
This contention is devoid of merit.
With the expiration of PNCC’s franchise, the assets and facilities of PNCC
were automatically turned over, by operation of law, to the government at
no cost. Sections 2(e) and 9 of PD 1113 and Section 5 of PD 1894
provide:
Section 2 [of PD 1113]. In consideration of this franchise, the GRANTEE
shall:
(e) Turn over the toll facilities and all equipment directly related thereto to Yes, Your Honor.62
the government upon expiration of the franchise period without cost.
xxxx
Section 9 [of PD 1113]. For the purposes of this franchise, the
Government, shall turn over to the GRANTEE (PNCC) not later than April ASSOCIATE JUSTICE CARPIO:
30, 1977 all physical assets and facilities including all equipment and
appurtenances directly related to the operations of the North and South
Toll Expressways: Provided, That, the extensions of such Expressways x x x My question is very simple x x x Is the income from these assets of
shall also be turned over to GRANTEE upon completion of their the national government (interrupted)
construction or of functional sections thereof: Provided, However, That
upon termination of the franchise period, said physical assets and facilities DEAN AGABIN:
including improvements thereon, together with equipment and
appurtenances directly related to their operations, shall be turned over to Yes, Your Honor.63
the Government without any cost or obligation on the part of the latter.
(Emphasis supplied)
xxxx
Section 5 [of PD No. 1894]. In consideration of this franchise, the
GRANTEE shall: ASSOCIATE JUSTICE CARPIO:

(a) Construct, operate and maintain at its own expense the So, it’s the government [that] decides whether it goes to the general fund
Expressways; and or another fund. [W]hat is that other fund? Is there another fund where
revenues of the government go?
(b) Turn over, without cost, the toll facilities and all equipment,
directly related thereto to the Government upon expiration of DEAN AGABIN:
the franchise period. (Emphasis supplied)
It’s the same fund, Your Honor, except that (interrupted)
The TRB does not have the power to give back to PNCC the toll assets
and facilities which were automatically turned over to the Government, by ASSOCIATE JUSTICE CARPIO:
operation of law, upon the expiration of the franchise of the PNCC on 1
May 2007. Whatever power the TRB may have to grant authority to
So it goes to the general fund?
operate a toll facility or to issue a "Tollway Operation Certificate," such
power does not obviously include the authority to transfer back to PNCC
ownership of National Government assets, like the toll assets and DEAN AGABIN:
facilities, which have become National Government property upon the
expiry of PNCC’s franchise. Such act by the TRB would repeal Section 5 Except that it can be categorized as a private fund in a commercial sense,
of PD 1894 which automatically vested in the National Government and it can be categorized as a public fund in a Public Law sense.
ownership of PNCC’s toll assets and facilities upon the expiry of PNCC’s
franchise. The TRB obviously has no power to repeal a law. Further, PD
ASSOCIATE JUSTICE CARPIO:
1113, as amended by PD 1894, granting the franchise to PNCC, is a later
law that must necessarily prevail over PD 1112 creating the TRB. Hence,
the provisions of PD 1113, as amended by PD 1894, are controlling. Okay. So we agree that, okay, it goes to the general fund. I agree with
you, but you are saying it is categorized still as a private funds?
The government’s ownership of PNCC's toll assets and facilities inevitably
results in the government’s ownership of the toll fees and the net income DEAN AGABIN:
derived from these toll assets and facilities. Thus, the toll fees form part of
the National Government’s General Fund, which includes public moneys Yes, Your Honor.
of every sort and other resources pertaining to any agency of the
government.61 Even Radstock’s counsel admits that the toll fees are
public funds, to wit: ASSOCIATE JUSTICE CARPIO:

ASSOCIATE JUSTICE CARPIO: But it’s part of the general fund. Now, if it is part of the general fund, who
has the authority to spend that money?

Okay. Now, when the franchise of PNCC expired on May 7, 2007, under
the terms of the franchise under PD 1896, all the assets, toll way assets, DEAN AGABIN:
equipment, etcetera of PNCC became owned by government at no cost,
correct, under the franchise? Well, the National Government itself.

DEAN AGABIN: ASSOCIATE JUSTICE CARPIO:

Yes, Your Honor. Who in the National Government, the Executive, Judiciary or Legislative?

ASSOCIATE JUSTICE CARPIO: DEAN AGABIN:

Okay. So this is now owned by the national government. [A]ny income Well, the funds are usually appropriated by the Congress.
from these assets of the national government is national government
income, correct? ASSOCIATE JUSTICE CARPIO:

DEAN AGABIN:
x x x you mean to say there are exceptions that money from the general
fund can be spent by the Executive without going t[hrough] Congress, or
xxx is [that] the absolute rule?
DEAN AGABIN:
Well, in so far as the general fund is concerned, that is the absolute rule
set aside by the National Government.
ASSOCIATE JUSTICE CARPIO:
x x x you are saying this is general fund money - the collection from the
assets[?]
DEAN AGABIN:
Yes.64 (Emphasis supplied)
Forming part of the General Fund, the toll fees can only be disposed of in
accordance with the fundamental principles governing financial
transactions and operations of any government agency, to wit: (1) no
money shall be paid out of the Treasury except in pursuance of an
appropriation made by law, as expressly mandated by Section 29(1),
Article VI of the Constitution; and (2) government funds or property shall
be spent or used solely for public purposes, as expressly mandated by
Section 4(2) of PD 1445 or the Government Auditing Code.65
Section 29(1), Article VI of the Constitution provides:
Section 29(1). No money shall be paid out of the Treasury except in
pursuance of an appropriation made by law.
The power to appropriate money from the General Funds of the
Government belongs exclusively to the Legislature. Any act in violation of
this iron-clad rule is unconstitutional.
Reinforcing this Constitutional mandate, Sections 84 and 85 of PD 1445
require that before a government agency can enter into a contract
involving the expenditure of government funds, there must be an
appropriation law for such expenditure, thus:
Section 84. Disbursement of government funds.
1. Revenue funds shall not be paid out of any public treasury or depository
except in pursuance of an appropriation law or other specific statutory
authority.
xxxx
Section 85. Appropriation before entering into contract.
1. No contract involving the expenditure of public funds shall be entered
into unless there is an appropriation therefor, the unexpended balance of
which, free of other obligations, is sufficient to cover the proposed
expenditure.
xxxx
Section 86 of PD 1445, on the other hand, requires that the proper
accounting official must certify that funds have been appropriated for the
purpose.66 Section 87 of PD 1445 provides that any contract entered
into contrary to the requirements of Sections 85 and 86 shall be void,
thus:
Section 87. Void contract and liability of officer. Any contract entered into
contrary to the requirements of the two immediately preceding sections
shall be void, and the officer or officers entering into the contract shall be
liable to the government or other contracting party for any consequent
damage to the same extent as if the transaction had been wholly between
private parties. (Emphasis supplied)
Applying Section 29(1), Article VI of the Constitution, as implanted in
Sections 84 and 85 of the Government Auditing Code, a law must first be
enacted by Congress appropriating ₱6.185 billion as compromise money
before payment to Radstock can be made.67 Otherwise, such payment
violates a prohibitory law and thus void under Article 5 of the Civil Code
which states that "[a]cts executed against the provisions of mandatory
or prohibitory laws shall be void, except when the law itself authorizes
their validity."
Indisputably, without an appropriation law, PNCC cannot lawfully pay
₱6.185 billion to Radstock. Any contract allowing such payment, like the
Compromise Agreement, "shall be void" as provided in Section 87 of the
Government Auditing Code. In Comelec v. Quijano-Padilla,68 this Court
ruled:
Petitioners are justified in refusing to formalize the contract with
PHOTOKINA. Prudence dictated them not to enter into a contract not
backed up by sufficient appropriation and available funds. Definitely, to act
otherwise would be a futile exercise for the contract would inevitably suffer
the vice of nullity. In Osmeña vs. Commission on Audit, this Court held:
The Auditing Code of the Philippines (P.D. 1445) further provides that no
contract involving the expenditure of public funds shall be entered into
unless there is an appropriation therefor and the proper accounting official
of the agency concerned shall have certified to the officer entering into the
obligation that funds have been duly appropriated for the purpose and the
amount necessary to cover the proposed contract for the current fiscal
year is available for expenditure on account thereof. Any contract entered
into contrary to the foregoing requirements shall be VOID.
Clearly then, the contract entered into by the former Mayor Duterte was
void from the very beginning since the agreed cost for the project
(₱,368,920.00) was way beyond the appropriated amount (₱,419,180.00)
as certified by the City Treasurer. Hence, the contract was properly
declared void and unenforceable in COA's 2nd Indorsement, dated
September 4, 1986. The COA declared and we agree, that:
The prohibition contained in Sec. 85 of PD 1445 (Government Auditing
Code) is explicit and mandatory. Fund availability is, as it has always
been, an indispensable prerequisite to the execution of any government
contract involving the expenditure of public funds by all government
agencies at all levels. Such contracts are not to be considered as final or
binding unless such a certification as to funds availability is issued (Letter
of Instruction No. 767, s. 1978). Antecedent of advance appropriation is
thus essential to government liability on contracts (Zobel vs. City of
Manila, 47 Phil. 169). This contract being violative of the legal
requirements aforequoted, the same contravenes Sec. 85 of PD 1445 and
is null and void by virtue of Sec. 87.
Verily, the contract, as expressly declared by law, is inexistent and void ab
initio. This is to say that the proposed contract is without force and effect
from the very beginning or from its incipiency, as if it had never been
entered into, and hence, cannot be validated either by lapse of time or
ratification. (Emphasis supplied)
Significantly, Radstock’s counsel admits that an appropriation law is
needed before PNCC can use toll fees to pay Radstock, thus:
ASSOCIATE JUSTICE CARPIO:
Okay, I agree with you. Now, you are saying that money can be paid out of
the general fund only through an appropriation by Congress, correct?
That’s what you are saying.
DEAN AGABIN:
Yes, Your Honor. DEAN AGABIN:

ASSOCIATE JUSTICE CARPIO: If this is the share that properly belongs to PNCC as a private entity
(interrupted)
I agree with you also. Okay, now, can PNCC xxx use this money to pay
Radstock without Congressional approval? ASSOCIATE JUSTICE CARPIO:

DEAN AGABIN:
Well, I believe that that may not be necessary. Your Honor, because
earlier, the government had already decreed that PNCC should be
properly paid for the reclamation works which it had done. And so
(interrupted)
No, no. I am saying that – You just agreed that all those collections now
will go to the National Government forming part of the general fund. If,
somehow, PNCC is holding this money in the meantime, it holds xxx it in
trust, correct? Because you said, it goes to the general fund, National
Government. So it must be holding this in trust for the National
Government.

ASSOCIATE JUSTICE CARPIO: DEAN AGABIN:

No. I am talking of the funds. Yes, Your Honor.

DEAN AGABIN: ASSOCIATE JUSTICE CARPIO:

And so it is like a foreign obligation. Okay. Can the person holding in trust use it to pay his private debt?

ASSOCIATE JUSTICE CARPIO: DEAN AGABIN:

Counsel, I'm talking of the general funds, collection from the toll fees. No, Your Honor.
Okay. You said, they go to the general fund. You also said, money from
the general fund can be spent only if there is an appropriation law by ASSOCIATE JUSTICE CARPIO:
Congress.
Cannot be.
DEAN AGABIN:
DEAN AGABIN:
Yes, Your Honor.
But I assume that there must be some portion of the collections which
There is no law. properly pertain to PNCC.

DEAN AGABIN: ASSOCIATE JUSTICE CARPIO:

Yes, except that, Your Honor, this fund has not yet gone to the general If there is some portion that xxx may be [for] operating expenses of PNCC.
fund. But that is not

ASSOCIATE JUSTICE CARPIO: DEAN AGABIN:

No. It’s being collected everyday. As of May 7, 2007, national government Even profit, Your Honor.
owned those assets already. All those x x x collections that would have
gone to PNCC are now national government owned. It goes to the general ASSOCIATE JUSTICE CARPIO:
fund. And any body who uses that without appropriation from Congress
commits malversation, I tell you.
Yeah, but that is not the six percent. Out of the six percent, that goes now
to PNCC, that’s entirely national government. But the National
DEAN AGABIN: Government and the PNCC can agree on service fees for collecting, to
pay toll collectors.
That is correct, Your Honor, as long as it has already gone into the general
fund. DEAN AGABIN:

ASSOCIATE JUSTICE CARPIO: Yes, Your Honor.

Oh, you mean to say that it’s still being held now by the agent, PNCC. It ASSOCIATE JUSTICE CARPIO:
has not been remitted to the National Government?
But those are expenses. We are talking of the net income. It goes to the
DEAN AGABIN: general fund. And it’s only Congress that can authorize that expenditure.
Not even the Court of Appeals can give its stamp of approval that it goes
Well, if PNCC (interrupted) to Radstock, correct?

ASSOCIATE JUSTICE CARPIO: DEAN AGABIN:

But if (interrupted) Yes, Your Honor.69 (Emphasis supplied)

Without an appropriation law, the use of the toll fees to pay Radstock
would constitute malversation of public funds. Even counsel for Radstock
expressly admits that the use of the toll fees to pay Radstock constitutes
malversation of public funds, thus:
ASSOCIATE JUSTICE CARPIO:
x x x As of May 7, 2007, [the] national government owned those assets
already. All those x x x collections that would have gone to PNCC are now
national government owned. It goes to the general fund. And any body
who uses that without appropriation from Congress commits malversation,
I tell you.
DEAN AGABIN:
That is correct, Your Honor, as long as it has already gone into the general
fund.
ASSOCIATE JUSTICE CARPIO:
Oh, you mean to say that it’s still being held now by the agent, PNCC. It
has not been remitted to the National Government?
DEAN AGABIN:
Well, if PNCC (interrupted)
ASSOCIATE JUSTICE CARPIO:
But if (interrupted)
DEAN AGABIN:
If this is the share that properly belongs to PNCC as a private entity
(interrupted)
ASSOCIATE JUSTICE CARPIO:
No, no. I am saying that – You just agreed that all those collections now
will go to the National Government forming part of the general fund. If,
somehow, PNCC is holding this money in the meantime, it holds x x x it in
trust, correct? Because you said, it goes to the general fund, National
Government. So it must be holding this in trust for the National
Government.
DEAN AGABIN:
Yes, Your Honor.70 (Emphasis supplied)
Indisputably, funds held in trust by PNCC for the National
Government cannot be used by PNCC to pay a private debt of CDCP
Mining to Radstock, otherwise the PNCC Board will be liable for
malversation of public funds.
In addition, to pay Radstock ₱6.185 billion violates the fundamental public
policy, expressly articulated in Section 4(2) of the Government Auditing
Code,71 that government funds or property shall be spent or used solely
for pubic purposes, thus:
Section 4. Fundamental Principles. x x x (2) Government funds or property
shall be spent or used solely for public purposes. (Emphasis supplied)
There is no question that the subject of the Compromise Agreement is
CDCP Mining’s private debt to Marubeni, which Marubeni subsequently
assigned to Radstock. Counsel for Radstock admits that Radstock holds a
private debt of CDCP Mining, thus:
ASSOCIATE JUSTICE CARPIO:
So your client is holding a private debt of CDCP Mining, correct?
DEAN AGABIN:
Correct, Your Honor.72 (Emphasis supplied)
CDCP Mining obtained the Marubeni loans when CDCP Mining and PNCC
(then CDCP) were still privately owned and managed corporations. The
Government became the majority stockholder of PNCC only because
government financial institutions converted their loans to PNCC into equity
when PNCC failed to pay the loans. However, CDCP Mining have always
remained a majority privately owned corporation with PNCC owning only
13% of its equity as admitted by former PNCC Chairman Arthur N. Aguilar
and PNCC SVP Finance Miriam M. Pasetes during the Senate hearings,
thus:
SEN. OSMEÑA. x x x – I just wanted to know is CDCP Mining a 100
percent subsidiary of PNCC?
MR. AGUILAR. Hindi ho. Ah, no.
SEN. OSMEÑA. If they’re not a 100 percent, why would they sign jointly
and severally? I just want to plug the loopholes.
MR. AGUILAR. I think it was – if I may just speculate. It was just common
ownership at that time.
SEN. OSMEÑA. Al right. Now – Also, the ...
MR. AGUILAR. Ah, 13 percent daw, your Honor.
SEN. OSMEÑA. Huh?
MR. AGUILAR. Thirteen percent ho.
SEN. OSMEÑA. What’s 13 percent?
MR. AGUILAR. We owned ...
MS. PASETES. Thirteen percent of ...
SEN. OSMEÑA. PNCC owned ...
MS. PASETES. (Mike off) CDCP ...
SEN. DRILON. Use the microphone, please.
MS. PASETES. Sorry. Your Honor, the ownership of CDCP of CDCP
Basay Mining ...
SEN. OSMEÑA. No, no, the ownership of CDCP. CDCP Mining, how
many percent of the equity of CDCP Mining was owned by PNCC,
formerly CDCP?
MS. PASETES. Thirteen percent.
SEN. OSMEÑA. Thirteen. And as a 13 percent owner, they agreed to sign
jointly and severally?
MS. PASETES. Yes.
SEN. OSMEÑA. One-three?
So poor PNCC and CDCP got taken to the cleaners here. They sign for a Can a foreigner who xxx cannot own land assign the right of ownership to
100 percent and they only own 13 percent. the land?

x x x x73 (Emphasis supplied) ATTY. AGRA:

PNCC cannot use public funds, like toll fees that indisputably form part of
the General Fund, to pay a private debt of CDCP Mining to Radstock.
Such payment cannot qualify as expenditure for a public purpose. The toll
fees are merely held in trust by PNCC for the National Government, which
is the owner of the toll fees.
Again, Your Honor, at that particular time, it will be PNCC, not through
Radstock, that chain of events should be, there’s a qualified nominee
(interrupted)
ASSOCIATE JUSTICE CARPIO:

Considering that there is no appropriation law passed by Congress for the Yes, xxx you said, Radstock will assign the right of ownership to the
₱6.185 billion compromise amount, the Compromise Agreement is void for qualified assignee[.] So my question is, can a foreigner own the right to
being contrary to law, specifically Section 29(1), Article VI of the ownership of a land when it cannot own the land itself?
Constitution and Section 87 of PD 1445. And since the payment of the
₱6.185 billion pertains to CDCP Mining’s private debt to Radstock, the
Compromise Agreement is also void for being contrary to the fundamental ATTY. AGRA:
public policy that government funds or property shall be spent or used
solely for public purposes, as provided in Section 4(2) of the Government The foreigner cannot own the land, Your Honor.
Auditing Code.
ASSOCIATE JUSTICE CARPIO:
C. Radstock is not qualified to own land in the Philippines.
But you are saying it can own the right of ownership to the land, because
Radstock is a private corporation incorporated in the British Virgin Islands. you are saying, the right of ownership will be assigned by Radstock.
Its office address is at Suite 14021 Duddell Street, Central Hongkong. As
a foreign corporation, with unknown owners whose nationalities are also ATTY. AGRA:
unknown, Radstock is not qualified to own land in the Philippines pursuant
to Section 7, in relation to Section 3, Article XII of the Constitution. These
provisions state: The rights over the properties, Your Honors, if there’s a valid assignment
made to a qualified party, then the assignment will be made.
Section. 3. Lands of the public domain are classified into agricultural,
forest or timber, mineral lands, and national parks. Agricultural lands of the ASSOCIATE JUSTICE CARPIO:
public domain may be further classified by law according to the uses to
which they may be devoted. Alienable lands of the public domain shall be Who makes the assignment?
limited to agricultural lands. Private corporations or associations may not
hold such lands of the public domain except by lease, for a period not ATTY. AGRA:
exceeding twenty-five years, renewable for not more than twenty-five
years, and not to exceed one hundred thousand hectares in area. Citizens
of the Philippines may lease not more than five hundred hectares, or It will be Radstock, Your Honor.
acquire not more than twelve hectares thereof by purchase, homestead, or
grant. ASSOCIATE JUSTICE CARPIO:

Taking into account the requirements of conservation, ecology, and So, if Radstock makes the assignment, it must own its rights, otherwise, it
development, and subject to the requirements of agrarian reform, the cannot assign it, correct?
Congress shall determine, by law, the size of lands of the public domain
which may be acquired, developed, held, or leased and the conditions ATTY. AGRA:
therefor.

Pursuant to the compromise agreement, once approved, yes, Your

xxxx Honors.

Section 7. Save in cases of hereditary succession, no private lands shall ASSOCIATE JUSTICE CARPIO:
be transferred or conveyed except to individuals, corporations, or
associations qualified to acquire or hold lands of the public domain.
So, you are saying that Radstock can own the rights to ownership of the
land?
The OGCC admits that Radstock cannot own lands in the Philippines.
However, the OGCC claims that Radstock can own the rights to ownership
of lands in the Philippines, thus: ATTY. AGRA:

ASSOCIATE JUSTICE CARPIO: Yes, Your Honors.

Under the law, a foreigner cannot own land, correct? ASSOCIATE JUSTICE CARPIO:

ATTY. AGRA: Yes?

Yes, Your Honor. ATTY. AGRA:

ASSOCIATE JUSTICE CARPIO: The premise, Your Honor, you mentioned a while ago was, if this Court
approves said compromise (interrupted)
ASSOCIATE JUSTICE CARPIO: ATTY. AGRA:

No, no. Whether there is such a compromise agreement - - It’s an Pursuant to the compromise agreement, that will happen.
academic question I am asking you, can a foreigner assign rights to
ownership of a land in the Philippines? ASSOCIATE JUSTICE CARPIO:

ATTY. AGRA: Okay. May I (interrupted)

Under the Compromise Agreement, Your Honors, these rights should be ATTY. AGRA:
respected.
Again, Your Honor, if the compromise agreement ended with a statement
ASSOCIATE JUSTICE CARPIO: that Radstock will be the owner of the property (interrupted)

So, it can? ASSOCIATE JUSTICE CARPIO:

ATTY. AGRA: Yeah. Unfortunately, it says, to a qualified assignee.

It can. Your Honor. But again, this right must, cannot be perfected or ATTY. AGRA:
cannot be, could not take effect.
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
ASSOCIATE JUSTICE CARPIO:
But if it cannot - - It’s not perfected, how can it assign?
And at this point, when it is signed and execut[ed] and approved, PNCC
ATTY. AGRA: has no dominion over that land anymore. Who has dominion over it?

Not directly, Your Honors. Again, there must be a qualified nominee ATTY. AGRA:
assigned by Radstock.
Pending the assignment to a qualified party, Your Honor, PNCC will hold
ASSOCIATE JUSTICE CARPIO: on to the property.

It’s very clear, it’s an indirect way of selling property that is prohibited by
law, is it not?
ATTY. AGRA:
Again, Your Honor, know, believe this is a Compromise Agreement. This
is a dacion en pago.
ASSOCIATE JUSTICE CARPIO:
So, dacion en pago is an exception to the constitutional prohibition.
ATTY. AGRA:
No, Your Honor. PNCC, will still hold on to the property, absent a valid
assignment of properties.
ASSOCIATE JUSTICE CARPIO:
But what rights will PNCC have over that land when it has already signed
the compromise? It is just waiting for instruction xxx from Radstock what to
do with it? So, it’s a trustee of somebody, because it does not, it cannot,
[it] has no dominion over it anymore? It’s just holding it for Radstock. So,
PNCC becomes a dummy, at that point, of Radstock, correct?
ATTY. AGRA:
No, Your Honor, I believe it (interrupted)
ASSOCIATE JUSTICE CARPIO:
Yeah, but it does not own the land, but it still holding the land in favor of
the other party to the Compromise Agreement
ASSOCIATE JUSTICE CARPIO:
Hold on, but who x x x can exercise acts of dominion, to sell it, to lease it?
ATTY. AGRA:
Again, Your Honor, without the valid assignment to a qualified nominee,
the compromise agreement in so far as the transfer of these properties will
not become effective. It is subject to such condition. Your
Honor.74 (Emphasis supplied)
There is no dispute that Radstock is disqualified to own lands in the
Philippines. Consequently, Radstock is also disqualified to own the rights
to ownership of lands in the Philippines. Contrary to the OGCC’s claim,
Radstock cannot own the rights to ownership of any land in the Philippines
because Radstock cannot lawfully own the land itself. Otherwise, there will
be a blatant circumvention of the Constitution, which prohibits a foreign
private corporation from owning land in the Philippines. In addition,
Radstock cannot transfer the rights to ownership of land in the Philippines
if it cannot own the land itself. It is basic that an assignor or seller cannot
assign or sell something he does not own at the time the ownership, or the
rights to the ownership, are to be transferred to the assignee or buyer.75
The third party assignee under the Compromise Agreement who will be
designated by Radstock can only acquire rights duplicating those which its
assignor (Radstock) is entitled by law to exercise.76 Thus, the assignee
can acquire ownership of the land only if its assignor, Radstock, owns the
land. Clearly, the assignment by PNCC of the real properties to a nominee
to be designated by Radstock is a circumvention of the Constitutional
prohibition against a private foreign corporation owning lands in the
Philippines. Such circumvention renders the Compromise Agreement void.
D. Public bidding is required for
the disposal of government properties.
Under Section 79 of the Government Auditing Code,77 the disposition
of government lands to private parties requires public bidding.78 COA
Circular No. 89-926, issued on 27 January 1989, sets forth the guidelines
on the disposal of property and other assets of the government. Part V of
the COA Circular provides:
V. MODE OF DISPOSAL/DIVESTMENT: -
This Commission recognizes the following modes of disposal/divestment
of assets and property of national government agencies, local government
units and government-owned or controlled corporations and their
subsidiaries, aside from other such modes as may be provided for by law.
1. Public Auction
Conformably to existing state policy, the divestment or disposal of
government property as contemplated herein shall be undertaken primarily
thru public auction. Such mode of divestment or disposal shall observe
and adhere to established mechanics and procedures in public bidding,
viz:
a. adequate publicity and notification so as to attract the
greatest number of interested parties; (vide, Sec. 79, P.D.
1445)
b. sufficient time frame between publication and date of
auction;
c. opportunity afforded to interested parties to inspect the
property or assets to be disposed of;
d. confidentiality of sealed proposals;
e. bond and other prequalification requirements to guarantee
performance; and
f. fair evaluation of tenders and proper notification of award.
It is understood that the Government reserves the right to reject any or all
of the tenders. (Emphasis supplied)
Under the Compromise Agreement, PNCC shall dispose of substantial
parcels of land, by way of dacion en pago, in favor of Radstock. Citing Uy
v. Sandiganbayan,79 PNCC argues that a dacion en pago is an exception
to the requirement of a public bidding.
PNCC’s reliance on Uy is misplaced. There is nothing in Uy declaring that
public bidding is dispensed with in a dacion en pago transaction. The
Court explained the transaction in Uy as follows:
We do not see any infirmity in either the MOA or the SSA executed
between PIEDRAS and respondent banks. By virtue of its shareholdings in
OPMC, PIEDRAS was entitled to subscribe to 3,749,906,250 class "A"
and 2,499,937,500 class "B" OPMC shares. Admittedly, it was financially
sound for PIEDRAS to exercise its pre-emptive rights as an existing
shareholder of OPMC lest its proportionate shareholdings be diluted to its
detriment. However, PIEDRAS lacked the necessary funds to pay for the
additional subscription. Thus, it resorted to contract loans from respondent
banks to finance the payment of its additional subscription. The mode of
payment agreed upon by the parties was that the payment would be made
in the form of part of the shares subscribed to by PIEDRAS. The OPMC
shares therefore were agreed upon by the parties to be equivalent
payment for the amount advanced by respondent banks. We see the
wisdom in the conditions of the loan transaction. In order to save
PIEDRAS and/or the government from the trouble of selling the shares in
order to raise funds to pay off the loans, an easier and more direct way
was devised in the form of the dacion en pago agreements.
Moreover, we agree with the Sandiganbayan that neither PIEDRAS nor
the government sustained any loss in these transactions. In fact, after
deducting the shares to be given to respondent banks as payment for the
shares, PIEDRAS stood to gain about 1,540,781,554 class "A" and
710,550,000 class "B" OPMC shares virtually for free. Indeed, the
question that must be asked is whether or not PIEDRAS, in the exercise of
its pre-emptive rights, would have been able to acquire any of these
shares at all if it did not enter into the financing agreements with the
respondent banks.80
Suffice it to state that in Uy, neither PIEDRAS81 nor the government
suffered any loss in the dacion en pagotransactions, unlike here where the
government stands to lose at least ₱6.185 billion worth of assets.
Besides, a dacion en pago is in essence a form of sale, which basically
involves a disposition of a property. In Filinvest Credit Corp. v. Philippine
Acetylene, Co., Inc.,82 the Court defined dacion en pago in this wise:
Dacion en pago, according to Manresa, is the transmission of the
ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of obligation. In dacion en pago, as a
special mode of payment, the debtor offers another thing to the creditor
who accepts it as equivalent of payment of an outstanding debt. The
undertaking really partakes in one sense of the nature of sale, that is, the
creditor is really buying the thing or property of the debtor, payment for
which is to be charged against the debtor's debt.As such, the essential
elements of a contract of sale, namely, consent, object certain, and cause
or consideration must be present. In its modern concept, what actually
takes place in dacion en pago is an objective novation of the obligation
where the thing offered as an accepted equivalent of the performance of
an obligation is considered as the object of the contract of sale, while the
debt is considered as the purchase price. In any case, common consent is
an essential prerequisite, be it sale or innovation to have the effect of
totally extinguishing the debt or obligation.83 (Emphasis supplied)
E. PNCC must follow rules on preference of credit.
Radstock is only one of the creditors of PNCC. Asiavest is PNCC’s
judgment creditor. In its Board Resolution No. BD-092-2000, PNCC
admitted not only its debt to Marubeni but also its debt to the National
Government84 in the amount of ₱36 billion.85 During the Senate hearings,
PNCC admitted that it owed the Government ₱36 billion, thus:
SEN. OSMEÑA. All right. Now, second question is, the management of
PNCC also recognize the obligation to the national government of 36
billion. It is part of the board resolution.
MS. OGAN. Yes, sir, it is part of the October 20 board resolution.
SEN. OSMEÑA. All right. So if you owe the national government 36 billion
and you owe Marubeni 10 billion, you know, I would just declare
bankruptcy and let an orderly disposition of assets be done. What
happened in this case to the claim, the 36 billion claim of the national
government? How was that disposed of by the PNCC? Mas malaki ang
utang ninyo sa national government, 36 billion. Ang gagawin ninyo,
babayaran lahat ang utang ninyo sa Marubeni without any assets left to
satisfy your obligations to the national government. There should have
been, at least, a pari passu payment of all your obligations, 'di ba?
MS. PASETES. Mr. Chairman...
SEN. OSMEÑA. Yes.
MS. PASETES. PNCC still carries in its books an equity account called
equity adjustments arising from transfer of obligations to national
government - - 5.4 billion - - in addition to shares held by government
amounting to 1.2 billion.
SEN. OSMEÑA. What is the 36 billion?
THE CHAIRMAN. Ms. Pasetes...
SEN. OSMEÑA. Wait, wait, wait.
THE CHAIRMAN. Baka ampaw yun eh.
SEN. OSMEÑA. Teka muna. What is the 36 billion that appear in the
resolution of the board in September 2000 (sic)? This is the same
resolution that recognizes, acknowledges and confirms PNCC's
obligations to Marubeni. And subparagraph (a) says "Government of the
Philippines, in the amount of 36,023,784,000 and change. And then (b)
Marubeni Corporation in the amount of 10,743,000,000. So, therefore, in
the same resolution, you acknowledged that had something like P46.7
billion in obligations. Why did PNCC settle the 10 billion and did not
protect the national government's 36 billion? And then, number two, why is
it now in your books, the 36 billion is now down to five? If you use that
ratio, then Marubeni should be down to one.
MS. PASETES. Sir, the amount of 36 billion is principal plus interest and
penalties.
SEN. OSMEÑA. And what about Marubeni? Is that just principal only?
MS. PASETES. Principal and interest.
SEN. OSMEÑA. So, I mean, you know, it's equal treatment. Ten point
seven billion is principal plus penalties plus interest, hindi ba?
MS. PASETES. Yes, sir. Yes, Your Honor.
SEN. OSMEÑA. All right. So now, what you are saying is that you gonna
pay Marubeni 6 billion and change and the national government is only
recognizing 5 billion. I don't think that's protecting the interest of the
national government at all.86
In giving priority and preference to Radstock, the Compromise Agreement
is certainly in fraud of PNCC’s other creditors, including the National
Government, and violates the provisions of the Civil Code on concurrence
and preference of credits.
This Court has held that while the Corporation Code allows the transfer of
all or substantially all of the assets of a corporation, the transfer should not
prejudice the creditors of the assignor corporation.87 Assuming that PNCC
may transfer all or substantially all its assets, to allow PNCC to do so
without the consent of its creditors or without requiring Radstock to
assume PNCC’s debts will defraud the other PNCC creditors88 since the
assignment will place PNCC’s assets beyond the reach of its other
creditors.89 As this Court held in Caltex (Phil.), Inc. v. PNOC Shipping and
Transport Corporation:90
While the Corporation Code allows the transfer of all or substantially all the
properties and assets of a corporation, the transfer should not prejudice
the creditors of the assignor. The only way the transfer can proceed
without prejudice to the creditors is to hold the assignee liable for the
obligations of the assignor. The acquisition by the assignee of all or
substantially all of the assets of the assignor necessarily includes the
assumption of the assignor's liabilities, unless the creditors who did not
consent to the transfer choose to rescind the transfer on the ground of
fraud. To allow an assignor to transfer all its business, properties and
assets without the consent of its creditors and without requiring the
assignee to assume the assignor's obligations will defraud the creditors.
The assignment will place the assignor's assets beyond the reach of its
creditors. (Emphasis supplied)
Also, the law, specifically Article 138791 of the Civil Code, presumes that
there is fraud of creditors when property is alienated by the debtor after
judgment has been rendered against him, thus:
Alienations by onerous title are also presumed fraudulent when made by
persons against whom some judgment has been rendered in any instance
or some writ of attachment has been issued. The decision or attachment
need not refer to the property alienated, and need not have been obtained
by the party seeking rescission. (Emphasis supplied)
As stated earlier, Asiavest is a judgment creditor of PNCC in G.R. No.
110263 and a court has already issued a writ of execution in its favor.
Thus, when PNCC entered into the Compromise Agreement conveying
several prime lots in favor of Radstock, by way of dacion en pago, there is
a legal presumption that such conveyance is fraudulent under Article 1387
of the Civil Code.92 This presumption is strengthened by the fact that the
conveyance has virtually left PNCC’s other creditors, including the biggest
creditor – the National Government - with no other asset to garnish or levy.
Notably, the presumption of fraud or intention to defraud creditors is not
just limited to the two instances set forth in the first and second
paragraphs of Article 1387 of the Civil Code. Under the third paragraph of
the same article, "the design to defraud creditors may be proved in any
other manner recognized by the law of evidence." In Oria v.
Mcmicking,93 this Court considered the following instances as badges of
fraud:
1. The fact that the consideration of the conveyance is fictitious
or is inadequate.
2. A transfer made by a debtor after suit has begun and while it
is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor,
especially when he is insolvent or greatly
embarrassed financially.
6. The fact that the transfer is made between father and son,
when there are present other of the above circumstances.
7. The failure of the vendee to take exclusive possession of all
the property. (Emphasis supplied)
Among the circumstances indicating fraud is a transfer of all or nearly all of
the debtor’s assets, especially when the debtor is greatly embarrassed
financially. Accordingly, neither a declaration of insolvency nor the
institution of insolvency proceedings is a condition sine qua non for a
transfer of all or nearly all of a debtor’s assets to be regarded in fraud of
creditors. It is sufficient that a debtor is greatly embarrassed financially.
In this case, PNCC’s huge negative net worth - at least ₱6 billion as
expressly admitted by PNCC’s counsel during the oral arguments, or ₱14
billion based on the 2006 COA Audit Report - necessarily translates to an
extremely embarrassing financial situation. With its huge negative net
worth arising from unpaid billions of pesos in debt, PNCC cannot claim
that it is financially stable. As a consequence, the Compromise Agreement
stipulating a transfer in favor of Radstock of substantially all of PNCC’s
assets constitutes fraud. To legitimize the Compromise Agreement just
because there is still no judicial declaration of PNCC’s insolvency will work
fraud on PNCC’s other creditors, the biggest creditor of which is the
National Government. To insist that PNCC is very much liquid, given its
admitted huge negative net worth, is nothing but denial of the truth. The
toll fees that PNCC collects belong to the National Government.
Obviously, PNCC cannot claim it is liquid based on its collection of such
toll fees, because PNCC merely holds such toll fees in trust for the
National Government. PNCC does not own the toll fees, and such toll fees
do not form part of PNCC’s assets.
PNCC owes the National Government ₱36 billion, a substantial part of
which constitutes taxes and fees, thus:
SEN. ROXAS. Thank you, Mr. Chairman.
Mr. PNCC Chairman, could you describe for us the composition of your
debt of about five billion – there are in thousands, so this looks like five
and half billion. Current portion of long-term debt, about five billion. What
is this made of?
MS. PASETES. The five billion is composed of what is owed the
Bureau of Treasury and the Toll Regulatory Board for concession
fees that’s almost three billion and another 2.4 billion owed
Philippine National Bank.
SEN. ROXAS. So, how much is the Bureau of Treasury?
MS. PASETES. Three billion.
SEN. ROXAS. Three – Why do you owe the Bureau of Treasury three
billion?
MS. PASETES. That represents the concession fees due Toll Regulatory
Board principal plus interest, Your Honor.
x x x x94 (Emphasis supplied)
In addition, PNCC’s 2006 Audit Report by COA states as follows:
TAX MATTERS
The Company was assessed by the Bureau of Internal Revenue (BIR) of
its deficiencies in various taxes. However, no provision for any liability has
been made yet in the Company’s financial statements.
• 1980 deficiency income tax, deficiency contractor’s tax and deficiency
documentary stamp tax assessments by the BIR totaling ₱212.523 Million.
xxxx
• Deficiency business tax of ₱64 Million due the Belgian Consortium,
PNCC’s partner in its LRT Project.
• 1992 deficiency income tax, deficiency value-added tax and deficiency
expanded withholding tax of ₱1.04 Billion which was reduced to ₱709
Million after the Company’s written protest.
xxxx
• 2002 deficiency internal revenue taxes totaling ₱72.916 Million.
x x x x.95 (Emphasis supplied)
Clearly, PNCC owes the National Government substantial taxes and fees
amounting to billions of pesos.
The ₱36 billion debt to the National Government was acknowledged by
the PNCC Board in the same board resolution that recognized the
Marubeni loans. Since PNCC is clearly insolvent with a huge negative net
worth, the government enjoys preference over Radstock in the satisfaction
of PNCC’s liability arising from taxes and duties, pursuant to the provisions
of the Civil Code on concurrence and preference of credits. Articles
2241,96 224297 and 224398 of the Civil Code expressly mandate that taxes
and fees due the National Government "shall be preferred" and "shall first
be satisfied" over claims like those arising from the Marubeni loans which
"shall enjoy no preference" under Article 2244.99
However, in flagrant violation of the Civil Code, the PNCC Board favored
Radstock over the National Government in the order of credits. This would
strip PNCC of its assets leaving virtually nothing for the National
Government. This action of the PNCC Board is manifestly and grossly
disadvantageous to the National Government and amounts to fraud.
During the Senate hearings, Senator Osmeña pointed out that in the
Board Resolution of 20 October 2000, PNCC acknowledged its obligations
to the National Government amounting to ₱36,023,784,000 and to
Marubeni amounting to ₱10,743,000,000. Yet, Senator Osmeña noted that
in the PNCC books at the time of the hearing, the ₱36 billion obligation to
the National Government was reduced to ₱5 billion. PNCC’s Miriam M.
Pasetes could not properly explain this discrepancy, except by stating that
the ₱36 billion includes the principal plus interest and penalties, thus:
SEN. OSMEÑA. Teka muna. What is the 36 billion that appear in the
resolution of the board in September 2000 (sic)? This is the same
resolution that recognizes, acknowledges and confirms PNCC's
obligations to Marubeni. And subparagraph (a) says "Government of the
Philippines, in the amount of 36,023,784,000 and change. And then (b)
Marubeni Corporation in the amount of 10,743,000,000. So, therefore, in
the same resolution, you acknowledged that had something like P46.7
billion in obligations. Why did PNCC settle the 10 billion and did not
protect the national government's 36 billion? And then, number two, why is
it now in your books, the 36 billion is now down to five? If you use that
ratio, then Marubeni should be down to one.
MS. PASETES. Sir, the amount of 36 billion is principal plus interest and
penalties.
SEN. OSMEÑA. And what about Marubeni? Is that just principal only?
MS. PASETES. Principal and interest.
SEN. OSMEÑA. So, I mean, you know, it's equal treatment. Ten point
seven billion is principal plus penalties plus interest, hindi ba?
MS. PASETES. Yes, sir. Yes, Your Honor.
SEN. OSMEÑA. All right. So now, what you are saying is that you gonna
pay Marubeni 6 billion and change and the national government is only
recognizing 5 billion. I don't think that's protecting the interest of the
national government at all.100
PNCC failed to explain satisfactorily why in its books the obligation to the
National Government was reduced when no payment to the National
Government appeared to have been made. PNCC failed to justify why it
made it appear that the obligation to the National Government was less
than the obligation to Marubeni. It is another obvious ploy to justify the
preferential treatment given to Radstock to the great prejudice of the
National Government.
VI.
Supreme Court is Not Legitimizer of Violations of Laws
During the oral arguments, counsels for Radstock and PNCC admitted
that the Compromise Agreement violates the Constitution and existing
laws. However, they rely on this Court to approve the Compromise
Agreement to shield their clients from possible criminal acts arising from
violation of the Constitution and existing laws. In their view, once this
Court approves the Compromise Agreement, their clients are home free
from prosecution, and can enjoy the ₱6.185 billion loot. The following
exchanges during the oral arguments reveal this view:
ASSOCIATE JUSTICE CARPIO:
If there is no agreement, they better remit all of that to the National
Government. They cannot just hold that. They are holding that [in] trust, as
you said, x x x you agree, for the National Government.
DEAN AGABIN:
Yes, that’s why, they are asking the Honorable Court to approve the
compromise agreement.
ASSOCIATE JUSTICE CARPIO:
We cannot approve that if the power to authorize the expenditure
[belongs] to Congress. How can we usurp x x x the power of
Congress to authorize that expenditure[?] It’s only Congress that can
authorize the expenditure of funds from the general funds.
DEAN AGABIN:
But, Your Honor, if the Honorable Court would approve of this
compromise agreement, I believe that this would be binding on
Congress.
ASSOCIATE JUSTICE CARPIO:
Ignore the Constitutional provision that money shall be paid out of
the National Treasury only pursuant to an appropriation by law. You
want us to ignore that[?]
DEAN AGABIN:
Not really, Your Honor, but I suppose that Congress would have no
choice, because this is a final judgment of the Honorable Court. 101
xxxx
ASSOCIATE JUSTICE CARPIO:
So, if Radstock makes the assignment, it must own its rights, otherwise, it
cannot assign it, correct?
ATTY. AGRA:
Pursuant to the compromise agreement, once approved, yes, Your
Honors.
ASSOCIATE JUSTICE CARPIO:
So, you are saying that Radstock can own the rights to ownership of the
land?
ATTY. AGRA:
Yes, Your Honors.
ASSOCIATE JUSTICE CARPIO:
Yes?
ATTY. AGRA:
The premise, Your Honor, you mentioned a while ago was, if this Court
approves said compromise (interrupted).102(Emphasis supplied)
This Court is not, and should never be, a rubber stamp for litigants
hankering to pocket public funds for their selfish private gain. This Court is
the ultimate guardian of the public interest, the last bulwark against those
who seek to plunder the public coffers. This Court cannot, and must never,
bring itself down to the level of legitimizer of violations of the Constitution,
existing laws or public policy.
Conclusion
In sum, the acts of the PNCC Board in (1) issuing Board Resolution Nos.
BD-092-2000 and BD-099-2000 expressly admitting liability for the
Marubeni loans, and (2) entering into the Compromise Agreement,
constitute evident bad faith and gross inexcusable negligence, amounting
to fraud, in the management of PNCC’s affairs. Being public officers, the
government nominees in the PNCC Board must answer not only to PNCC
and its stockholders, but also to the Filipino people for grossly mishandling
PNCC’s finances.
Under Article 1409 of the Civil Code, the Compromise Agreement is
"inexistent and void from the beginning," and "cannot be ratified," thus:
Art. 1409. The following contracts are inexistent and void from the
beginning:
(1) Those whose cause, object or purpose is contrary to law,
morals, good customs, public order or public policy;
xxx
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. x x x. (Emphasis supplied)
The Compromise Agreement is indisputably contrary to the Constitution,
existing laws and public policy. Under Article 1409, the Compromise
Agreement is expressly declared void and "cannot be ratified." No court,
not even this Court, can ratify or approve the Compromise Agreement.
This Court must perform its duty to defend and uphold the Constitution,
existing laws, and fundamental public policy. This Court must not shirk in
declaring the Compromise Agreement inexistent and void ab initio.
WHEREFORE, we GRANT the petition in G.R. No. 180428. We SET
ASIDE the Decision dated 25 January 2007 and the Resolutions dated 12
June 2007 and 5 November 2007 of the Court of Appeals. We DECLARE
(1) PNCC Board Resolution Nos. BD-092-2000 and BD-099-2000
admitting liability for the Marubeni loans VOID AB INITIO for causing
undue injury to the Government and giving unwarranted benefits to a
private party, constituting a corrupt practice and unlawful act under
Section 3(e) of the Anti-Graft and Corrupt Practices Act, and (2) the
Compromise Agreement between the Philippine National Construction
Corporation and Radstock Securities Limited INEXISTENT AND VOID AB
INITIO for being contrary to Section 29(1), Article VI and Sections 3 and 7,
Article XII of the Constitution; Section 20(1), Chapter IV, Subtitle B, Title I,
Book V of the Administrative Code of 1987; Sections 4(2), 79, 84(1), and
85 of the Government Auditing Code; and Articles 2241, 2242, 2243 and
2244 of the Civil Code.
We GRANT the intervention of Asiavest Merchant Bankers Berhad in G.R.
No. 178158 but DECLARE that Strategic Alliance Development
Corporation has no legal standing to sue.
SO ORDERED.
THE SECRETARY OF THE G.R. No. 167707
DEPARTMENT OF ENVIRONMENT The Antecedents
AND NATURAL RESOURCES, THE
REGIONAL EXECUTIVE Present: G.R. No. 167707
DIRECTOR, DENR-REGION VI,
REGIONAL TECHNICAL PUNO, C.J., Boracay Island in the Municipality of Malay, Aklan, with its
DIRECTOR FOR LANDS, QUISUMBING, powdery white sand beaches and warm crystalline waters, is reputedly a
LANDS MANAGEMENT BUREAU, YNARES-SANTIAGO, premier Philippine tourist destination. The island is also home to 12,003
REGION VI PROVINCIAL CARPIO, inhabitants[4] who live in the bone-shaped islands three barangays.[5]
ENVIRONMENT AND NATURAL AUSTRIA-MARTINEZ,
RESOURCES OFFICER OF KALIBO, CORONA,* On April 14, 1976, the Department of Environment and Natural
AKLAN, REGISTER OF DEEDS, CARPIO MORALES, Resources (DENR) approved the National Reservation Survey of Boracay
DIRECTOR OF LAND AZCUNA, Island,[6] which identified several lots as being occupied or claimed by
REGISTRATION AUTHORITY, TINGA, named persons.[7]
DEPARTMENT OF TOURISM CHICO-NAZARIO,
SECRETARY, DIRECTOR OF VELASCO, JR., On November 10, 1978, then President Ferdinand Marcos
PHILIPPINE TOURISM NACHURA,** issued Proclamation No. 1801[8] declaring Boracay Island, among other
AUTHORITY, REYES, islands, caves and peninsulas in the Philippines, as tourist zones and
Petitioners, LEONARDO-DE CASTRO, and marine reserves under the administration of the Philippine Tourism
BRION, JJ. Authority (PTA). President Marcos later approved the issuance
- versus - of PTA Circular 3-82[9] dated September 3, 1982, to implement
Proclamation No. 1801.

MAYOR JOSE S. YAP, LIBERTAD Claiming that Proclamation No. 1801 and PTA Circular No 3-82
TALAPIAN, MILA Y. SUMNDAD, and precluded them from filing an application for judicial confirmation of
ANICETO YAP, in their behalf and Promulgated: imperfect title or survey of land for titling purposes, respondents-claimants
in behalf of all those similarly situated, Mayor Jose S. Yap, Jr., Libertad Talapian, Mila Y. Sumndad, and Aniceto
Respondents. October 8, 2008 Yap filed a petition for declaratory relief with the RTC in Kalibo, Aklan.

x--------------------------------------------------x In their petition, respondents-claimants alleged that

Proclamation No. 1801 and PTA Circular No. 3-82 raised doubts on their
DR. ORLANDO SACAY and G.R. No. 173775 right to secure titles over their occupied lands. They declared that they
WILFREDO GELITO, joined by themselves, or through their predecessors-in-interest, had been in open,
THE LANDOWNERS OF continuous, exclusive, and notorious possession and occupation in Boracay
BORACAY SIMILARLY since June 12, 1945, or earlier since time immemorial. They declared their
SITUATED NAMED IN A LIST, lands for tax purposes and paid realty taxes on them.[10]
ANNEX A OF THIS PETITION,
Petitioners, Respondents-claimants posited that Proclamation No. 1801 and
its implementing Circular did not place Boracay beyond the commerce of
man. Since the Islandwas classified as a tourist zone, it was susceptible of
- versus - private ownership. Under Section 48(b) of Commonwealth Act (CA) No.
141, otherwise known as the Public Land Act, they had the right to have the
THE SECRETARY OF THE lots registered in their names through judicial confirmation of imperfect titles.
DEPARTMENT OF ENVIRONMENT
AND NATURAL RESOURCES, THE The Republic, through the Office of the Solicitor General (OSG),
REGIONAL TECHNICAL opposed the petition for declaratory relief. The OSG countered
DIRECTOR FOR LANDS, LANDS that Boracay Island was an unclassified land of the public domain. It
MANAGEMENT BUREAU, formed part of the mass of lands classified as public forest, which was not
REGION VI, PROVINCIAL available for disposition pursuant to Section 3(a) of Presidential Decree
ENVIRONMENT AND NATURAL (PD) No. 705 or the Revised Forestry Code,[11] as amended.
RESOURCES OFFICER, KALIBO,
AKLAN, The OSG maintained that respondents-claimants reliance on
Respondents. PD No. 1801 and PTA Circular No. 3-82 was misplaced. Their right to
judicial confirmation of title was governed by CA No. 141 and PD No.
x--------------------------------------------------x 705. Since Boracay Island had not been classified as alienable and
disposable, whatever possession they had cannot ripen into ownership.
DECISION
During pre-trial, respondents-claimants and the OSG stipulated
on the following facts: (1) respondents-claimants were presently in
REYES, R.T., J.: possession of parcels of land in Boracay Island; (2) these parcels of land
were planted with coconut trees and other natural growing trees; (3) the
coconut trees had heights of more or less twenty (20) meters and were
AT stake in these consolidated cases is the right of the present planted more or less fifty (50) years ago; and (4) respondents-claimants
occupants of Boracay Island to secure titles over their occupied lands. declared the land they were occupying for tax purposes.[12]

There are two consolidated petitions. The first is G.R. No.
167707, a petition for review on certiorari of the Decision[1] of the Court of
Appeals (CA) affirming that[2] of the Regional Trial Court (RTC) in Kalibo,
Aklan, which granted the petition for declaratory relief filed by respondents-
claimants Mayor Jose Yap, et al. and ordered the survey of Boracay for
titling purposes. The second is G.R. No. 173775, a petition for prohibition,
mandamus, and nullification of Proclamation No. 1064[3]issued by President
Gloria Macapagal-Arroyo classifying Boracay into reserved forest and
agricultural land.
The parties also agreed that the principal issue for resolution was
purely legal: whether Proclamation No. 1801 posed any legal hindrance or
impediment to the titling of the lands in Boracay. They decided to forego
with the trial and to submit the case for resolution upon submission of their
respective memoranda.[13]
The RTC took judicial notice[14] that certain parcels of land
in Boracay Island, more particularly Lots 1 and 30, Plan PSU-5344, were
covered by Original Certificate of Title No. 19502 (RO 2222) in the name of
the Heirs of Ciriaco S. Tirol. These lots were involved in Civil Case Nos. Petitioners-claimants contended that there is no need for a
5222 and 5262 filed before proclamation reclassifying Boracay into agricultural land. Being classified as
the RTC of Kalibo, Aklan.[15] The titles were issued on neither mineral nor timber land, the island is deemed agricultural pursuant
August 7, 1933.[16] to the Philippine Bill of 1902 and Act No. 926, known as the first Public Land
Act.[32] Thus, their possession in the concept of owner for the required
RTC and CA Dispositions period entitled them to judicial confirmation of imperfect title.

On July 14, 1999, the RTC rendered a decision in favor of
respondents-claimants, with a fallo reading:
WHEREFORE, in view of the foregoing,
the Court declares that Proclamation No. 1801
and PTA Circular No. 3-82 pose no legal obstacle to
the petitioners and those similarly situated to acquire
title to their lands in Boracay, in accordance with the
applicable laws and in the manner prescribed therein;
and to have their lands surveyed and approved by
respondent Regional Technical Director of Lands as
the approved survey does not in itself constitute a title
to the land.
Opposing the petition, the OSG argued that petitioners-
claimants do not have a vested right over their occupied portions in the
island. Boracay is an unclassified public forest land pursuant to Section 3(a)
of PD No. 705. Being public forest, the claimed portions of the island are
inalienable and cannot be the subject of judicial confirmation of imperfect
title. It is only the executive department, not the courts, which has authority
to reclassify lands of the public domain into alienable and disposable
lands. There is a need for a positive government act in order to release the
lots for disposition.
On November 21, 2006, this Court ordered the consolidation of
the two petitions as they principally involve the same issues on the land
classification of BoracayIsland.[33]

SO ORDERED.[17] Issues

The RTC upheld respondents-claimants right to have their
occupied lands titled in their name. It ruled that neither Proclamation No.
1801 nor PTA Circular No. 3-82 mentioned that lands in Boracay were
inalienable or could not be the subject of disposition.[18] The Circular itself
recognized private ownership of lands.[19] The trial court cited Sections
87[20] and 53[21] of the Public Land Act as basis for acknowledging private
ownership of lands in Boracay and that only those forested areas in public
lands were declared as part of the forest reserve.[22]
G.R. No. 167707
The OSG raises the lone issue of whether Proclamation No.
1801 and PTA Circular No. 3-82 pose any legal obstacle for respondents,
and all those similarly situated, to acquire title to their occupied lands
in Boracay Island.[34]

The OSG moved for reconsideration but its motion was G.R. No. 173775
denied.[23] The Republic then appealed to the CA.
Petitioners-claimants hoist five (5) issues, namely:
On December 9, 2004, the appellate court affirmed in
toto the RTC decision, disposing as follows: I.
AT THE TIME OF THE ESTABLISHED
WHEREFORE, in view of the foregoing POSSESSION OF PETITIONERS IN CONCEPT OF
premises, judgment is hereby rendered by us OWNER OVER THEIR RESPECTIVE AREAS IN
DENYING the appeal filed in this case and BORACAY, SINCE TIME IMMEMORIAL OR AT THE
AFFIRMING the decision of the lower court.[24] LATEST SINCE 30 YRS. PRIOR TO THE FILING OF
THE PETITION FOR DECLARATORY RELIEF
ON NOV. 19, 1997, WERE THE AREAS OCCUPIED
The CA held that respondents-claimants could not be prejudiced BY THEM PUBLIC AGRICULTURAL LANDS AS
by a declaration that the lands they occupied since time immemorial were DEFINED BY LAWS THEN ON JUDICIAL
part of a forest reserve. CONFIRMATION OF IMPERFECT TITLES OR
PUBLIC FOREST AS DEFINED BY SEC. 3a, PD
Again, the OSG sought reconsideration but it was similarly 705?
denied.[25] Hence, the present petition under Rule 45.
II.
G.R. No. 173775 HAVE PETITIONERS OCCUPANTS ACQUIRED
PRIOR VESTED RIGHT OF PRIVATE
On May 22, 2006, during the pendency of G.R. No. 167707, President OWNERSHIP OVER THEIR OCCUPIED
Gloria Macapagal-Arroyo issued Proclamation No. 1064[26] classifying PORTIONS OF BORACAY LAND, DESPITE
Boracay Island into four hundred (400) hectares of reserved forest land THE FACT THAT THEY HAVE NOT APPLIED YET
(protection purposes) and six hundred twenty-eight and 96/100 (628.96) FOR JUDICIAL CONFIRMATION OF IMPERFECT
hectares of agricultural land (alienable and disposable). The Proclamation TITLE?
likewise provided for a fifteen-meter buffer zone on each side of the
centerline of roads and trails, reserved for right-of-way and which shall form III.
part of the area reserved for forest land protection purposes. IS THE EXECUTIVE DECLARATION OF THEIR
AREAS AS
On August 10, 2006, petitioners-claimants Dr. Orlando ALIENABLE AND DISPOSABLE UNDER SEC 6,
Sacay,[27] Wilfredo Gelito,[28] and other landowners[29] in Boracay filed with CA 141 [AN] INDISPENSABLE PRE-REQUISITE
this Court an original petition for prohibition, mandamus, and nullification of FOR PETITIONERS TO OBTAIN TITLE UNDER
Proclamation No. 1064.[30] They allege that the Proclamation infringed on THE TORRENS SYSTEM?
their prior vested rights over portions of Boracay. They have been in
continued possession of their respective lots in Boracay since time IV.
immemorial. They have also invested billions of pesos in developing their IS THE ISSUANCE OF PROCLAMATION 1064
lands and building internationally renowned first class resorts on their ON MAY 22, 2006, VIOLATIVE OF THE PRIOR
lots.[31] VESTED RIGHTS TO PRIVATE OWNERSHIP OF
PETITIONERS OVER THEIR LANDS IN BORACAY,
PROTECTED BY THE DUE PROCESS CLAUSE OF
THE CONSTITUTION OR IS PROCLAMATION 1064
 CONTRARY TO SEC. 8, CA 141, OR SEC. 4(a) OF
RA 6657.
V.
CAN RESPONDENTS BE COMPELLED BY
MANDAMUS TO ALLOW THE SURVEY AND TO
APPROVE THE SURVEY PLANS FOR PURPOSES
OF THE APPLICATION FOR TITLING OF THE
LANDS OF PETITIONERS IN
BORACAY?[35] (Underscoring supplied)
In capsule, the main issue is whether private claimants
(respondents-claimants in G.R. No. 167707 and petitioners-claimants
in G.R. No. 173775) have a right to secure titles over their occupied portions
in Boracay. The twin petitions pertain to their right, if any, to judicial
confirmation of imperfect title under CA No. 141, as amended. They do not
involve their right to secure title under other pertinent laws.
Our Ruling
Regalian Doctrine and power of the executive
to reclassify lands of the public domain
Private claimants rely on three (3) laws and executive acts in
their bid for judicial confirmation of imperfect title, namely: (a) Philippine Bill
of 1902[36] in relation to Act No. 926, later amended and/or superseded by
Act No. 2874 and CA No. 141;[37] (b) Proclamation No. 1801[38] issued by
then President Marcos; and (c) Proclamation No. 1064[39] issued by
President Gloria Macapagal-Arroyo. We shall proceed to determine their
rights to apply for judicial confirmation of imperfect title under these laws
and executive acts.
But first, a peek at the Regalian principle and the power of the
executive to reclassify lands of the public domain.
The 1935 Constitution classified lands of the public domain into
agricultural, forest or timber.[40] Meanwhile, the 1973 Constitution provided
the following divisions: agricultural, industrial or commercial, residential,
resettlement, mineral, timber or forest and grazing lands, and such other
classes as may be provided by law,[41] giving the government great leeway
for classification.[42] Then the 1987 Constitution reverted to the 1935
Constitution classification with one addition: national parks.[43] Of
these, only agricultural lands may be alienated.[44] Prior to Proclamation
No. 1064 of May 22, 2006, Boracay Island had never been expressly and
administratively classified under any of these grand divisions. Boracay was
an unclassified land of the public domain.
The Regalian Doctrine dictates that all lands of the public domain
belong to the State, that the State is the source of any asserted right to
ownership of land and charged with the conservation of such
patrimony.[45] The doctrine has been consistently adopted under the 1935,
1973, and 1987 Constitutions.[46]
All lands not otherwise appearing to be clearly within private
ownership are presumed to belong to the State.[47] Thus, all lands that have
not been acquired from the government, either by purchase or by grant,
belong to the State as part of the inalienable public domain.[48] Necessarily,
it is up to the State to determine if lands of the public domain will be
disposed of for private ownership. The government, as the agent of the
state, is possessed of the plenary power as the persona in law to determine
who shall be the favored recipients of public lands, as well as under what
terms they may be granted such privilege, not excluding the placing of
obstacles in the way of their exercise of what otherwise would be ordinary
acts of ownership.[49]
Our present land law traces its roots to the Regalian
Doctrine. Upon the Spanish conquest of the Philippines, ownership of all
lands, territories and possessions in the Philippines passed to the Spanish
Crown.[50] The Regalian doctrine was first introduced in
the Philippines through the Laws of the Indies and the Royal Cedulas,
which laid the foundation that all lands that were not acquired from the
Government, either by purchase or by grant, belong to the public domain.[51]
The Laws of the Indies was followed by the Ley Hipotecaria or
the Mortgage Law of 1893. The Spanish Mortgage Law provided for the
systematic registration of titles and deeds as well as possessory claims.[52]
The Royal Decree of 1894 or the Maura Law[53] partly amended
the Spanish Mortgage Law and the Laws of the Indies. It established
possessory information as the method of legalizing possession of vacant
Crown land, under certain conditions which were set forth in said
decree.[54] Under Section 393 of the Maura Law, an informacion
posesoria or possessory information title,[55] when duly inscribed in the
Registry of Property, is converted into a title of ownership only after the
lapse of twenty (20) years of uninterrupted possession which must be
actual, public, and adverse,[56] from the date of its inscription.[57] However,
possessory information title had to be perfected one year after the
promulgation of the Maura Law, or until April 17, 1895. Otherwise, the lands
would revert to the State.[58]
In sum, private ownership of land under the Spanish regime
could only be founded on royal concessions which took various forms,
namely: (1) titulo real or royal grant; (2) concesion especial or special
grant; (3) composicion con el estado or adjustment title; (4) titulo de
compra or title by purchase; and (5) informacion posesoria or possessory
information title.[59]
The first law governing the disposition of public lands in
the Philippines under American rule was embodied in the Philippine Bill
of 1902.[60] By this law, lands of the public domain in the Philippine Islands
were classified into three (3) grand divisions, to wit: agricultural, mineral,
and timber or forest lands.[61] The act provided for, among others, the
disposal of mineral lands by means of absolute grant (freehold system) and
by lease (leasehold system).[62] It also provided the definition by exclusion
of agricultural public lands.[63] Interpreting the meaning of agricultural lands
under the Philippine Bill of 1902, the Court declared in Mapa v. Insular
Government:[64]
x x x In other words, that the
phrase agricultural land as used in Act No. 926
means those public lands acquired
from Spain which are not timber or mineral
lands. x x x[65] (Emphasis Ours)
On February 1, 1903, the Philippine Legislature passed Act
No. 496, otherwise known as the Land Registration Act. The act established
a system of registration by which recorded title becomes absolute,
indefeasible, and imprescriptible. This is known as the Torrens system.[66]
Concurrently, on October 7, 1903, the Philippine Commission
passed Act No. 926, which was the first Public Land Act. The Act introduced
the homestead system and made provisions for judicial and administrative
confirmation of imperfect titles and for the sale or lease of public lands. It
permitted corporations regardless of the nationality of persons owning the
controlling stock to lease or purchase lands of the public domain.[67] Under
the Act, open, continuous, exclusive, and notorious possession and
occupation of agricultural lands for the next ten (10) years preceding July
26, 1904 was sufficient for judicial confirmation of imperfect title.[68]
On November 29, 1919, Act No. 926 was superseded by Act
No. 2874, otherwise known as the second Public Land Act. This new, more
comprehensive law limited the exploitation of agricultural lands to Filipinos
and Americans and citizens of other countries which gave Filipinos the
same privileges. For judicial confirmation of title, possession and
occupation en concepto dueo since time immemorial, or since July 26,
1894, was required.[69]
After the passage of the 1935 Constitution, CA No.
141 amended Act No. 2874 on December 1, 1936. To this day, CA No. 141,
as amended, remains as the existing general law governing the
classification and disposition of lands of the public domain other than timber
and mineral lands,[70] and privately owned lands which reverted to the
State.[71]
Section 48(b) of CA No. 141 retained the requirement under Act
No. 2874 of possession and occupation of lands of the public domain since
time immemorial or since July 26, 1894. However, this provision was
superseded by Republic Act (RA) No. 1942,[72] which provided for a simple
thirty-year prescriptive period for judicial confirmation of imperfect title. The
provision was last amended by PD No. 1073,[73] which now provides for
possession and occupation of the land applied for since June 12, 1945, or
earlier.[74]
The issuance of PD No. 892[75] on February 16,
1976 discontinued the use of Spanish titles as evidence in land registration
proceedings.[76] Under the decree, all holders of Spanish titles or grants
should apply for registration of their lands under Act No. 496 within six (6)
months from the effectivity of the decree on February 16, 1976. Thereafter,
the recording of all unregistered lands[77] shall be governed by Section 194
of the Revised Administrative Code, as amended by Act No. 3344.
On June 11, 1978, Act No. 496 was amended and updated
by PD No. 1529, known as the Property Registration Decree. It was enacted
to codify the various laws relative to registration of property.[78] It governs
registration of lands under the Torrens system as well as unregistered
lands, including chattel mortgages.[79]
A positive act declaring land as alienable and disposable is
required. In keeping with the presumption of State ownership, the Court
has time and again emphasized that there must be a positive act of the
government, such as an official proclamation,[80] declassifying inalienable
public land into disposable land for agricultural or other purposes.[81] In fact,
Section 8 of CA No. 141 limits alienable or disposable lands only to those
lands which have been officially delimited and classified.[82]
The burden of proof in overcoming the presumption of State
ownership of the lands of the public domain is on the person applying for
registration (or claiming ownership), who must prove that the land subject
of the application is alienable or disposable.[83] To overcome this
presumption, incontrovertible evidence must be established that the land
subject of the application (or claim) is alienable or disposable.[84] There must
still be a positive act declaring land of the public domain as alienable and
disposable. To prove that the land subject of an application for registration
is alienable, the applicant must establish the existence of a positive act of
the government such as a presidential proclamation or an executive order;
an administrative action; investigation reports of Bureau of Lands
investigators; and a legislative act or a statute.[85] The applicant may also
secure a certification from the government that the land claimed to have
been possessed for the required number of years is alienable and
disposable.[86]
In the case at bar, no such proclamation, executive order,
administrative action, report, statute, or certification was presented to the
Court. The records are bereft of evidence showing that, prior to 2006, the
portions of Boracay occupied by private claimants were subject of a
government proclamation that the land is alienable and disposable. Absent
such well-nigh incontrovertible evidence, the Court cannot accept the
submission that lands occupied by private claimants were already open to
disposition before 2006. Matters of land classification or reclassification
cannot be assumed. They call for proof.[87]
Ankron and De Aldecoa did not make the whole of Boracay
Island, or portions of it, agricultural lands. Private claimants posit that
Boracay was already an agricultural land pursuant to the old cases Ankron
v. Government of the Philippine Islands (1919)[88] and De Aldecoa v. The
Insular Government (1909).[89] These cases were decided under the
provisions of the Philippine Bill of 1902 and Act No. 926. There is a
statement in these old cases that in the absence of evidence to the contrary,
that in each case the lands are agricultural lands until the contrary is
shown.[90]
Private claimants reliance on Ankron and De Aldecoa is
misplaced. These cases did not have the effect of converting the whole
of Boracay Island or portions of it into agricultural lands. It should be
stressed that the Philippine Bill of 1902 and Act No. 926 merely provided
the manner through which land registration courts would classify lands of
the public domain. Whether the land would be classified as timber, mineral,
or agricultural depended on proof presented in each case.
Ankron and De Aldecoa were decided at a time when the
President of the Philippines had no power to classify lands of the public
domain into mineral, timber, and agricultural. At that time, the courts were
free to make corresponding classifications in justiciable cases, or were
vested with implicit power to do so, depending upon the preponderance of
the evidence.[91] This was the Courts ruling in Heirs of the Late Spouses
Pedro S. Palanca and Soterranea Rafols Vda. De Palanca v. Republic,[92] in
which it stated, through Justice Adolfo Azcuna, viz.:
x x x Petitioners furthermore insist that a
particular land need not be formally released by an
act of the Executive before it can be deemed open to
private ownership, citing the cases of Ramos v.
Director of Lands and Ankron v. Government of the
Philippine Islands.
xxxx
Petitioners reliance upon Ramos v.
Director of Lands and Ankron v. Government is
misplaced. These cases were decided under the
Philippine Bill of 1902 and the first Public Land Act
No. 926 enacted by the Philippine Commission
on October 7, 1926, under which there was no legal
provision vesting in the Chief Executive or President
of the Philippines the power to classify lands of the
public domain into mineral, timber and agricultural so
that the courts then were free to make corresponding
classifications in justiciable cases, or were vested
with implicit power to do so, depending upon the
preponderance of the evidence.[93]
To aid the courts in resolving land registration cases under Act
No. 926, it was then necessary to devise a presumption on land
classification. Thus evolved the dictum in Ankron that the courts have a
right to presume, in the absence of evidence to the contrary, that in each
case the lands are agricultural lands until the contrary is shown.[94]
But We cannot unduly expand the presumption
in Ankron and De Aldecoa to an argument that all lands of the public
domain had been automatically reclassified as disposable and alienable
agricultural lands. By no stretch of imagination did the presumption convert
all lands of the public domain into agricultural lands.
If We accept the position of private claimants, the Philippine Bill
of 1902 and Act No. 926 would have automatically made all lands in
the Philippines, except those already classified as timber or mineral land,
alienable and disposable lands. That would take these lands out of State
ownership and worse, would be utterly inconsistent with and totally
repugnant to the long-entrenched Regalian doctrine.
The presumption in Ankron and De Aldecoa attaches only to
land registration cases brought under the provisions of Act No. 926, or more
specifically those cases dealing with judicial and administrative confirmation
of imperfect titles. The presumption applies to an applicant for judicial or
administrative conformation of imperfect title under Act No. 926. It certainly
cannot apply to landowners, such as private claimants or their
predecessors-in-interest, who failed to avail themselves of the benefits of
Act No. 926. As to them, their land remained unclassified and, by virtue of
the Regalian doctrine, continued to be owned by the State.
In any case, the assumption in Ankron and De Aldecoa was not
absolute. Land classification was, in the end, dependent on proof. If there
was proof that the land was better suited for non-agricultural uses, the
courts could adjudge it as a mineral or timber land despite the
presumption. In Ankron, this Court stated:
In the case of Jocson vs. Director of
Forestry (supra), the Attorney-General admitted in
effect that whether the particular land in question
belongs to one class or another is a question of
fact. The mere fact that a tract of land has trees upon
 it or has mineral within it is not of itself sufficient to We note that the RTC decision[99] in G.R. No. 167707
declare that one is forestry land and the other, mentioned Krivenko v. Register of Deeds of Manila,[100] which was decided
mineral land. There must be some proof of the extent in 1947 when CA No. 141, vesting the Executive with the sole power to
and present or future value of the forestry and of the classify lands of the public domain was already in effect. Krivenko cited the
minerals. While, as we have just said, many old cases Mapa v. Insular Government,[101] De Aldecoa v. The Insular
definitions have been given for agriculture, forestry, Government,[102] and Ankron v. Government of the Philippine Islands.[103]
and mineral lands, and that in each case it is a
question of fact, we think it is safe to say that in order Krivenko, however, is not controlling here because it involved a
to be forestry or mineral land the proof must show that totally different issue. The pertinent issue in Krivenko was whether
it is more valuable for the forestry or the mineral residential lots were included in the general classification of agricultural
which it contains than it is for agricultural purposes. lands; and if so, whether an alien could acquire a residential lot. This Court
(Sec. 7, Act No. 1148.) It is not sufficient to show that ruled that as an alien, Krivenko was prohibited by the 1935
there exists some trees upon the land or that it bears Constitution[104] from acquiring agricultural land, which included residential
some mineral. Land may be classified as forestry or lots. Here, the issue is whether unclassified lands of the public domain are
mineral today, and, by reason of the exhaustion of the automatically deemed agricultural.
timber or mineral, be classified as agricultural land
tomorrow. And vice-versa, by reason of the rapid
growth of timber or the discovery of valuable Notably, the definition of agricultural public lands mentioned
minerals, lands classified as agricultural today may in Krivenko relied on the old cases decided prior to the enactment of Act No.
be differently classified tomorrow. Each case must 2874, including Ankron and De Aldecoa.[105] As We have already stated,
be decided upon the proof in that particular those cases cannot apply here, since they were decided when the Executive
case, having regard for its present or future value did not have the authority to classify lands as agricultural, timber, or mineral.
for one or the other purposes. We believe,
however, considering the fact that it is a matter of Private claimants continued possession under Act No. 926
public knowledge that a majority of the lands in the does not create a presumption that the land is alienable. Private
Philippine Islands are agricultural lands that the claimants also contend that their continued possession of portions
courts have a right to presume, in the absence of of Boracay Island for the requisite period of ten (10) years under Act No.
evidence to the contrary, that in each case the lands 926[106] ipso facto converted the island into private ownership. Hence, they
are agricultural lands until the contrary is may apply for a title in their name.
shown. Whatever the land involved in a particular
land registration case is forestry or mineral land A similar argument was squarely rejected by the Court in Collado
must, therefore, be a matter of proof. Its superior v. Court of Appeals.[107] Collado, citing the separate opinion of now Chief
value for one purpose or the other is a question Justice Reynato S. Puno in Cruz v. Secretary of Environment and Natural
of fact to be settled by the proof in each particular Resources,107-a ruled:
case. The fact that the land is a manglar [mangrove
swamp] is not sufficient for the courts to decide Act No. 926, the
whether it is agricultural, forestry, or mineral land. It first Public Land Act, was
may perchance belong to one or the other of said passed in pursuance of the
classes of land. The Government, in the first provisions of the Philippine Bill
instance, under the provisions of Act No. 1148, may, of 1902. The law governed the
by reservation, decide for itself what portions of public disposition of lands of the
land shall be considered forestry land, unless private public domain. It prescribed
interests have intervened before such reservation is rules and regulations for the
made. In the latter case, whether the land is homesteading, selling and
agricultural, forestry, or mineral, is a question of leasing of portions of the public
proof. Until private interests have intervened, the domain of the Philippine
Government, by virtue of the terms of said Act (No. Islands, and prescribed the
1148), may decide for itself what portions of the public terms and conditions to enable
domain shall be set aside and reserved as forestry or persons to perfect their titles to
mineral land. (Ramos vs. Director of Lands, 39 Phil. public lands in the Islands. It
175; Jocson vs. Director of also provided for the issuance
Forestry, supra)[95] (Emphasis ours) of patents to certain native
settlers upon public lands, for
Since 1919, courts were no longer free to determine the the establishment of town sites
classification of lands from the facts of each case, except those that have and sale of lots therein, for the
already became private lands.[96]Act No. 2874, promulgated in 1919 and completion of imperfect titles,
reproduced in Section 6 of CA No. 141, gave the Executive Department, and for the cancellation or
through the President, the exclusive prerogative to classify or reclassify confirmation of Spanish
public lands into alienable or disposable, mineral or forest.96-a Since then, concessions and grants in
courts no longer had the authority, whether express or implied, to determine the Islands. In short, the Public
the classification of lands of the public domain.[97] Land Act operated on the
assumption that title to public
Here, private claimants, unlike the Heirs of Ciriaco Tirol who lands in the Philippine Islands
were issued their title in 1933,[98] did not present a justiciable case for remained in the government;
determination by the land registration court of the propertys land and that the governments title
classification. Simply put, there was no opportunity for the courts then to to public land sprung from the
resolve if the land the Boracay occupants are now claiming were agricultural Treaty of Paris and other
lands. When Act No. 926 was supplanted by Act No. 2874 in 1919, without subsequent treaties between
an application for judicial confirmation having been filed by private claimants Spain and the United States.
or their predecessors-in-interest, the courts were no longer authorized to The term public land referred
determine the propertys land classification. Hence, private claimants to all lands of the public
cannot bank on Act No. 926. domain whose title still
remained in the government
and are thrown open to private
 appropriation and settlement,
and excluded the patrimonial
property of the government
and the friar lands.
Thus, it is plain error for petitioners to argue that
under the Philippine Bill of 1902
and Public Land Act No. 926, mere possession by
private individuals of lands creates the legal
presumption that the lands are alienable and
disposable.[108] (Emphasis Ours)
Except for lands already covered by existing titles, Boracay
was an unclassified land of the public domain prior to Proclamation
No. 1064. Such unclassified lands are considered public forest under
PD No. 705. The DENR[109] and the National Mapping and Resource
Information Authority[110] certify that Boracay Islandis an unclassified land of
the public domain.
PD No. 705 issued by President Marcos categorized all
unclassified lands of the public domain as public forest. Section 3(a) of PD
No. 705 defines a public forest as a mass of lands of the public domain
which has not been the subject of the present system of classification for
the determination of which lands are needed for forest purpose and which
are not. Applying PD No. 705, all unclassified lands, including those
in Boracay Island, are ipso facto considered public forests. PD No. 705,
however, respects titles already existing prior to its effectivity.
The Court notes that the classification of Boracay as a forest land
under PD No. 705 may seem to be out of touch with the present realities in
the island. Boracay, no doubt, has been partly stripped of its forest cover to
pave the way for commercial developments. As a premier tourist destination
for local and foreign tourists, Boracay appears more of a commercial island
resort, rather than a forest land.
Nevertheless, that the occupants of Boracay have built multi-
million peso beach resorts on the island;[111] that the island has already been
stripped of its forest cover; or that the implementation of Proclamation No.
1064 will destroy the islands tourism industry, do not negate its character
as public forest.
Forests, in the context of both the Public Land Act and the
Constitution[112] classifying lands of the public domain into agricultural,
forest or timber, mineral lands, and national parks, do not necessarily refer
to large tracts of wooded land or expanses covered by dense growths of
trees and underbrushes.[113] The discussion in Heirs of Amunategui v.
Director of Forestry[114] is particularly instructive:
A forested area classified as forest land of
the public domain does not lose such classification
simply because loggers or settlers may have stripped
it of its forest cover. Parcels of land classified as
forest land may actually be covered with grass or
planted to crops by kaingin cultivators or other
farmers. Forest lands do not have to be on mountains
or in out of the way places. Swampy areas covered
by mangrove trees, nipa palms, and other trees
growing in brackish or sea water may also be
classified as forest land. The classification is
descriptive of its legal nature or status and does
not have to be descriptive of what the land
actually looks like. Unless and until the land
classified as forest is released in an official
proclamation to that effect so that it may form part of
the disposable agricultural lands of the public
domain, the rules on confirmation of imperfect title do
not apply.[115](Emphasis supplied)
There is a big difference between forest as defined in a dictionary and forest
or timber land as a classification of lands of the public domain as appearing
in our statutes. One is descriptive of what appears on the land while the
other is a legal status, a classification for legal purposes.[116] At any rate, the
Court is tasked to determine the legal status of Boracay Island, and not
look into its physical layout. Hence, even if its forest cover has been
replaced by beach resorts, restaurants and other commercial
establishments, it has not been automatically converted from public forest
to alienable agricultural land.
Private claimants cannot rely on Proclamation No. 1801 as
basis for judicial confirmation of imperfect title. The proclamation did
not convert Boracay into an agricultural land. However, private
claimants argue that Proclamation No. 1801 issued by then President
Marcos in 1978 entitles them to judicial confirmation of imperfect title. The
Proclamation classified Boracay, among other islands, as a tourist
zone. Private claimants assert that, as a tourist spot, the island is
susceptible of private ownership.
Proclamation No. 1801 or PTA Circular No. 3-82 did not convert
the whole of Boracay into an agricultural land. There is nothing in the law or
the Circular which made Boracay Island an agricultural land. The reference
in Circular No. 3-82 to private lands[117] and areas declared as alienable and
disposable[118] does not by itself classify the entire island as
agricultural. Notably, Circular No. 3-82 makes reference not only to private
lands and areas but also to public forested lands. Rule VIII, Section 3
provides:
No trees in forested private lands may be
cut without prior authority from the PTA. All forested
areas in public lands are declared forest
reserves. (Emphasis supplied)
Clearly, the reference in the Circular to both private and public
lands merely recognizes that the island can be classified by the Executive
department pursuant to its powers under CA No. 141. In fact, Section 5 of
the Circular recognizes the then Bureau of Forest Developments authority
to declare areas in the island as alienable and disposable when it provides:
Subsistence farming, in areas declared as
alienable and disposable by the Bureau of Forest
Development.
Therefore, Proclamation No. 1801 cannot be deemed the
positive act needed to classify Boracay Island as alienable and disposable
land. If President Marcos intended to classify the island as alienable and
disposable or forest, or both, he would have identified the specific limits of
each, as President Arroyo did in Proclamation No. 1064. This was not done
in Proclamation No. 1801.
The Whereas clauses of Proclamation No. 1801 also explain the
rationale behind the declaration of Boracay Island, together with other
islands, caves and peninsulas in the Philippines, as a tourist zone and
marine reserve to be administered by the PTA to ensure the concentrated
efforts of the public and private sectors in the development of the areas
tourism potential with due regard for ecological balance in the marine
environment. Simply put, the proclamation is aimed at administering the
islands for tourism and ecological purposes. It does not address the
areas alienability.[119]
More importantly, Proclamation No. 1801 covers not only
Boracay Island, but sixty-four (64) other islands, coves, and peninsulas in
the Philippines, such as Fortune and Verde Islands in Batangas, Port Galera
in Oriental Mindoro, Panglao and Balicasag Islands in Bohol, Coron Island,
Puerto Princesa and surrounding areas in Palawan, Camiguin Island in
Cagayan de Oro, and Misamis Oriental, to name a few. If the designation
of Boracay Island as tourist zone makes it alienable and disposable by
virtue of Proclamation No. 1801, all the other areas mentioned would
likewise be declared wide open for private disposition. That could not have
been, and is clearly beyond, the intent of the proclamation.
It was Proclamation No. 1064 of 2006 which positively
declared part of Boracay as alienable and opened the same to private
ownership. Sections 6 and 7 of CA No. 141[120] provide that it is only the
President, upon the recommendation of the proper department head, who
has the authority to classify the lands of the public domain into alienable or
disposable, timber and mineral lands.[121]
In issuing Proclamation No. 1064, President Gloria Macapagal-
Arroyo merely exercised the authority granted to her to classify lands of the
public domain, presumably subject to existing vested rights. Classification
of public lands is the exclusive prerogative of the Executive Department,
through the Office of the President. Courts have no authority to do
so.[122] Absent such classification, the land remains unclassified until
released and rendered open to disposition.[123]
Proclamation No. 1064 classifies Boracay into 400 hectares of
reserved forest land and 628.96 hectares of agricultural land. The
Proclamation likewise provides for a 15-meter buffer zone on each side of
the center line of roads and trails, which are reserved for right of way and
which shall form part of the area reserved for forest land protection
purposes.
Contrary to private claimants argument, there was nothing
invalid or irregular, much less unconstitutional, about the classification
of Boracay Island made by the President through Proclamation No. 1064. It
was within her authority to make such classification, subject to existing
vested rights.
Proclamation No. 1064 does not violate the Comprehensive
Agrarian Reform Law. Private claimants further assert that Proclamation
No. 1064 violates the provision of the Comprehensive Agrarian Reform Law
(CARL) or RA No. 6657 barring conversion of public forests into agricultural
lands. They claim that since Boracay is a public forest under PD No. 705,
President Arroyo can no longer convert it into an agricultural land without
running afoul of Section 4(a) of RA No. 6657, thus:
SEC. 4. Scope. The Comprehensive
Agrarian Reform Law of 1988 shall cover, regardless
of tenurial arrangement and commodity produced, all
public and private agricultural lands as provided in
Proclamation No. 131 and Executive Order No. 229,
including other lands of the public domain suitable for
agriculture.
More specifically, the following lands are
covered by the Comprehensive Agrarian Reform
Program:
(a) All alienable and
disposable lands of the
public domain devoted
to or suitable for
agriculture. No reclassi
fication of forest or
mineral lands to
agricultural lands shall
be undertaken after the
approval of this Act until
Congress, taking into
account ecological,
developmental and
equity considerations,
shall have determined
by law, the specific
limits of the public
domain.
That Boracay Island was classified as a public forest under PD
No. 705 did not bar the Executive from later converting it into agricultural
land. Boracay Island still remained an unclassified land of the public domain
despite PD No. 705.
In Heirs of the Late Spouses Pedro S. Palanca and Soterranea
Rafols v. Republic,[124] the Court stated that unclassified lands are public
forests.
While it is true that the land
classification map does not categorically state
that the islands are public forests, the fact that
they were unclassified lands leads to the same
result. In the absence of the classification as mineral
or timber land, the land remains unclassified land
until released and rendered open to
disposition.[125] (Emphasis supplied)
Moreover, the prohibition under the CARL applies only to a
reclassification of land. If the land had never been previously classified, as
in the case of Boracay, there can be no prohibited reclassification under the
agrarian law. We agree with the opinion of the Department of Justice[126] on
this point:
Indeed, the key word to the correct
application of the prohibition in Section 4(a) is the
word reclassification. Where there has been no
previous classification of public forest [referring, we
repeat, to the mass of the public domain which has
not been the subject of the present system of
classification for purposes of determining which are
needed for forest purposes and which are not] into
permanent forest or forest reserves or some other
forest uses under the Revised Forestry Code, there
can be no reclassification of forest lands to speak of
within the meaning of Section 4(a).
Thus, obviously, the prohibition in Section
4(a) of the CARL against the reclassification of forest
lands to agricultural lands without a prior law
delimiting the limits of the public domain, does not,
and cannot, apply to those lands of the public domain,
denominated as public forest under the Revised
Forestry Code, which have not been previously
determined, or classified, as needed for forest
purposes in accordance with the provisions of the
Revised Forestry Code.[127]
Private claimants are not entitled to apply for judicial
confirmation of imperfect title under CA No. 141. Neither do they have
vested rights over the occupied lands under the said law. There are two
requisites for judicial confirmation of imperfect or incomplete title under CA
No. 141, namely: (1) open, continuous, exclusive, and notorious possession
and occupation of the subject land by himself or through his predecessors-
in-interest under a bona fide claim of ownership since time immemorial or
from June 12, 1945; and (2) the classification of the land as alienable and
disposable land of the public domain.[128]
As discussed, the Philippine Bill of 1902, Act No. 926, and
Proclamation No. 1801 did not convert portions of Boracay Island into an
agricultural land. The island remained an unclassified land of the public
domain and, applying the Regalian doctrine, is considered State property.
Private claimants bid for judicial confirmation of imperfect title,
relying on the Philippine Bill of 1902, Act No. 926, and Proclamation No.
1801, must fail because of the absence of the second element of alienable
and disposable land. Their entitlement to a government grant under our
present Public Land Act presupposes that the land possessed and applied
for is already alienable and disposable. This is clear from the wording of the
law itself.[129] Where the land is not alienable and disposable, possession of
the land, no matter how long, cannot confer ownership or possessory
rights.[130]
Neither may private claimants apply for judicial confirmation of
imperfect title under Proclamation No. 1064, with respect to those lands
which were classified as agricultural lands. Private claimants failed to prove
the first element of open, continuous, exclusive, and notorious possession
of their lands in Boracay since June 12, 1945.
We cannot sustain the CA and RTC conclusion in the petition for
declaratory relief that private claimants complied with the requisite period of
possession.
The tax declarations in the name of private claimants are
insufficient to prove the first element of possession. We note that the earliest
of the tax declarations in the name of private claimants were issued in
1993. Being of recent dates, the tax declarations are not sufficient to
convince this Court that the period of possession and occupation
commenced on June 12, 1945.

Private claimants insist that they have a vested right in Boracay,
having been in possession of the island for a long time. They have invested
millions of pesos in developing the island into a tourist spot. They say their
continued possession and investments give them a vested right which
cannot be unilaterally rescinded by Proclamation No. 1064.
The continued possession and considerable investment of
private claimants do not automatically give them a vested right in
Boracay. Nor do these give them a right to apply for a title to the land they
are presently occupying. This Court is constitutionally bound to decide
cases based on the evidence presented and the laws applicable. As the law
and jurisprudence stand, private claimants are ineligible to apply for a
judicial confirmation of title over their occupied portions in Boracay even
with their continued possession and considerable investment in the island.
One Last Note
The Court is aware that millions of pesos have been invested for
the development of Boracay Island, making it a by-word in the local and
international tourism industry. The Court also notes that for a number of
years, thousands of people have called the island their home. While the
Court commiserates with private claimants plight, We are bound to apply
the law strictly and judiciously. This is the law and it should prevail. Ito ang
batas at ito ang dapat umiral.
emptied of their contents. The fish disappear.
Denuded areas become dust bowls. As waterfalls
cease to function, so will hydroelectric plants. With
the rains, the fertile topsoil is washed away;
geological erosion results. With erosion come the
dreaded floods that wreak havoc and destruction to
property crops, livestock, houses, and highways not
to mention precious human lives. Indeed, the
foregoing observations should be written down in a
lumbermans decalogue.[135]
WHEREFORE, judgment is rendered as follows:
1. The petition for certiorari in G.R. No. 167707
is GRANTED and the Court of Appeals Decision in CA-G.R. CV No.
71118 REVERSED AND SET ASIDE.
2. The petition for certiorari in G.R. No. 173775
is DISMISSED for lack of merit.
SO ORDERED.

All is not lost, however, for private claimants. While they may not
be eligible to apply for judicial confirmation of imperfect title under Section
48(b) of CA No. 141, as amended, this does not denote their automatic
ouster from the residential, commercial, and other areas they possess now
classified as agricultural. Neither will this mean the loss of their substantial
investments on their occupied alienable lands. Lack of title does not
necessarily mean lack of right to possess.

For one thing, those with lawful possession may claim good faith
as builders of improvements. They can take steps to preserve or protect
their possession. For another, they may look into other modes of applying
for original registration of title, such as by homestead[131] or sales
patent,[132] subject to the conditions imposed by law.

More realistically, Congress may enact a law to entitle private

claimants to acquire title to their occupied lots or to exempt them from
certain requirements under the present land laws. There is one such
bill[133] now pending in the House of Representatives. Whether that bill or a
similar bill will become a law is for Congress to decide.

In issuing Proclamation No. 1064, the government has taken the

step necessary to open up the island to private ownership. This gesture may
not be sufficient to appease some sectors which view the classification of
the island partially into a forest reserve as absurd. That the island is no
longer overrun by trees, however, does not becloud the vision to protect its
remaining forest cover and to strike a healthy balance between progress
and ecology. Ecological conservation is as important as economic progress.

To be sure, forest lands are fundamental to our nations

survival. Their promotion and protection are not just fancy rhetoric for
politicians and activists. These are needs that become more urgent as
destruction of our environment gets prevalent and difficult to control. As
aptly observed by Justice Conrado Sanchez in 1968 in Director of Forestry
v. Munoz:[134]

The view this Court takes of the cases at

bar is but in adherence to public policy that should be
followed with respect to forest lands. Many have
written much, and many more have spoken, and quite
often, about the pressing need for forest
preservation, conservation, protection, development
and reforestation. Not without justification. For,
forests constitute a vital segment of any country's
natural resources. It is of common knowledge by now
that absence of the necessary green cover on our
lands produces a number of adverse or ill effects of
serious proportions. Without the trees, watersheds
dry up; rivers and lakes which they supply are
GREGORIA MARTINEZ, Petitioner, - versus - HON. COURT OF
APPEALS, HEIRS OF MELANIO MEDINA, SR., MELANIO MEDINA, JR.,
NORBERTO MEDINA, ERMITANO MEDINA, ALBERTO MEDINA,
SENEN MEDINA, ANTONIO MEDINA, MANOLO MEDINA, and ARTURO
MEDINA, Respondents.
DECISION
TINGA, J.: The present petition originally stemmed from a
Complaint[2] filed by private respondents against petitioner,[3] seeking the
cancellation of titles over the parcels of land involved.[4] Subject of the
complaint are three (3) parcels of land with areas of approximately 10,064;
48,000; and 5,784 sq m, all situated in Bangkal, Carmona, Cavite and
covered respectively by Original Certificates of Title (OCT Nos.) No. P-
5518, No. P-5519, and No. P-5482.[5]
Respondents are the heirs of the late Melanio Medina, Sr. who
during his lifetime inherited the properties from his mother, Rosa Martinez
Emitao, who in turn inherited them from her own mother, Celedonia
Martinez (Celedonia). The complaint alleged that sometime in 1992,
petitioner, whose real name as appearing in her birth certificate is Gregoria
Merquines, represented herself as Gregoria Martinez and as thus one of the
descendants of Celedonia, and under that name applied for free patents
over the properties with the Community Environmental and Natural
Resources Office of Bacoor, Cavite. Unbeknownst to private respondents,
the corresponding OCTs were thus issued in the name of Gregoria
Martinez. When private respondents later filed an application for land
registration over the same properties, petitioner opposed the same. This
impelled private respondents to file the instant complaint.[6]
The complaint was heard by the Regional Trial Court (RTC) of
Imus, Cavite, Branch 20.[7] The only issue raised at the trial was whether
the free patents and land titles should be annulled due to fraud and
misrepresentation in their procurement.[8]
After weighing the evidence of both sides, the trial court rendered
a Decision[9] ordering the cancellation of petitioners titles. It found that the
true surname of petitioner Gregoria is Merquines and not Martinez, a
surname which petitioner used for the first time when she applied for the
free patents. The RTC observed that no other document was presented to
show that petitioner used the surname Martinez in any of her previous
transactions; that the surname indicated in her birth certificate is Merquines;
that she was born on 17 November 1924 to spouses Pablo Merquines and
Bartola Cardona; and that the records of marriage of the Local Civil
Registrar of Carmona, Cavite recorded the marriage of Gregoria Merquines,
daughter of Pablo Merquines and Bartola Cardona, to Jose Restrivera on
13 July 1941.
The trial court further endeavored to trace the lineage of
petitioner. The baptismal certificate of her father, Pablo Merquines, showed
that he was born on 26 June 1897 to the spouses Faustino Merquines and
Juana Sarmiento, while the baptismal certificate of her mother, Bartola
Cardona, showed that she was born on 28 August 1898 to spouses Gaspar
Cardona and Antonia Realon. Even the birth certificates of petitioners
siblings, Crispina, born on 20 January 1920 and Dominador, born on 4
October 1931, showed that they bore the surname Merquines. Moreover,
the birth certificates of the children of petitioner and her husband Jose
Restrivera namely, Norberto and Jaime Restrivera, showed that the
surname of their mother is Merquines and not Martinez.[10]
The trial court observed that notwithstanding the
misrepresentations of petitioner in her free patent applications, private
respondents were not necessarily entitled to the automatic reconveyance of
the subject lots.[11] It simply disposed of the case in this wise:
WHEREFORE, premises considered,
judgment is hereby rendered ordering the
cancellation of OCT Nos. P-5518, P-5519 and P-
5482 issued in the name of defendant.
SO ORDERED.[12]
Only petitioner interposed an appeal from the trial courts
decision to the Court of Appeals.
Before the Court of Appeals, petitioner challenged the findings
of fact of the trial court concerning the fraud and misrepresentations which
she committed. The appellate court made short shrift of the challenge as
follows:[13]
From the evidence extant on record, it is
at once apparent that appellant committed fraud and
misrepresentation in her application for free patent
which later became the basis for the issuance of the
certificates of title in her name. More than the issue
of the use of the surname Martinez, her fraudulent act
consists essentially in misrepresenting before the
Community Environment and Natural Resources
Office of Bacoor, Cavite that she is the heir of
Celedonia Martinez whom she admitted in her
Answer as the original absolute owner of the subject
parcels of land. She testified in open court that
Celedonia Martinez is her grandmother, being the
mother of her father Pablo Merquines.
The documentary evidence adduced by
appellles, however, particularly her fathers baptismal
certificate plainly shows that he is the son of spouses
Faustino Merquines and Juana Sarmiento. Her
mother Bartola Cadona was also shown in her
baptismal certificate to be the child of spouses
Gaspar Cardona and Antonia Realon. These
documents indubitably show that neither of
appellants parents is the child of Celodonia Martinez
and she is not in [anyway] related by blood to the
latter. Thus, not only was her application for patents
tainted with fraud, she also committed perjury in this
case when she lied bold-faced about her lineage
which was disproved by the documentary evidence
relative to her ancestors.[14]
Petitioner also assigned two other errors which, however, were
neither raised in her answer as defenses nor otherwise litigated during the
trial. She argued in the main that the trial court erred in adjudicating the case
although an indispensable party in the person of the State through the
director of lands was not impleaded,[15] and that the titles secured were
already indefeasible in view of the lapse of one year from the issuance of
the titles.[16]
Sustaining the jurisdiction of the lower court, the Court of Appeals remarked
that the jurisdiction of the court is determined by the allegations in the
complaint. In their complaint, private respondents asserted private
ownership over the subject lands as they had been in possession of and
had been cultivating the same for more than 60 years.[17]
The appellate court also noted that the issues were not raised in
the petitioners answer and in the subsequent proceedings.[18]
Concerning the alleged indefeasibility of the titles issued to
petitioner, the Court of Appeals ruled that the argument is untenable since
petitioner employed fraud in the proceedings which led to the issuance of
the free patents and the titles.[19]
Before this Court, petitioner reiterates the same two issues
previously raised for the first time before the appellate court.
We sustain the Court of Appeals.
It is a well-settled principle that points of law, theories, issues
and arguments not adequately brought to the attention of the trial court need
not be, and ordinarily will not be, considered by a reviewing court as they
cannot be raised for the first time on appeal[20] because this would be
offensive to the basic rules of fair play, justice and due process.[21] On this
point alone, the petition could be denied outright. Nonetheless, like the
Court of Appeals, we deign to decide the case on the merits.
 Public lands suitable for agricultural purposes can be disposed
of only by homestead patent, sale, lease, judicial confirmation of imperfect
or incomplete titles, and administrative legalization or free patent.[22] One
claiming private rights as basis of ownership must prove compliance with
the Public Land Act which prescribes the substantive as well as the
procedural requirements for acquisition of public lands.[23] Each mode of
disposition is appropriately covered by a separate chapter of the Public
Land Act. There are specific requirements and application procedures for
every mode.[24]
The confirmation of imperfect or incomplete titles to alienable
and disposable agricultural land of the public domain may be done in two
ways: judicial legalization or judicial confirmation of imperfect or incomplete
titles under Chapter VIII, and administrative legalization or free patent under
Chapter VII of the Public Land Act.
Any citizen of the Philippines, occupying lands of the public
domain or claiming to own any such lands or an interest therein, but whose
titles have not been perfected or completed, may apply with the RTC of the
province where the land is located for confirmation of his/her claim and the
issuance of a certificate of title therefor under the Property Registration
Decree.[25] Such applicants must by themselves or through their
predecessors in interest have been in open, continuous, exclusive, and
notorious possession and occupation
of alienable and disposable agricultural lands of the public domain,[26]
under a bona fide claim of acquisition or ownership, since 12 June
1945,[27] except when prevented by war or force majeure, shall be
conclusively presumed to have performed all the conditions essential to a
Government grant.[28] At present, such applications for judicial confirmation
of imperfect or incomplete titles must be filed prior to 31 December 2020;
and must cover an area of up to 12 hectares only.[29]
When the conditions specified in Section 48(b)[30] of the Public
Land Act are complied with, the possessor is deemed to have acquired, by
operation of law, a right to a grant, without the necessity of a certificate of
title being issued. The land, therefore, ceased to be
of the public domain, and beyond the authority of the director of lands to
dispose of. The application for confirmation is a mere formality, the lack of
which does not affect the legal sufficiency of the title as would be evidenced
by the patent and the Torrens title to be issued upon the strength of said
patent.[31] For all legal intents and purposes, the land is segregated from the
public domain, because the beneficiary is
conclusively presumed to have performed all the conditions essential to a
Government grant and shall be entitled to a certificate of title under the
provisions of this chapter.
Section 44, Chapter VII of the Public Land Act provides that the
applicant for administrative confirmation of imperfect title must be a natural
born citizen of the Philippines who is not the owner of more than 12 hectares
and who, for at least 30 years prior to the effectivity of Republic Act No.
6940 amending the Public Land Act,[32] has continuously occupied and
cultivated, either by himself or through his predecessor-in-interest, a tract or
tracts of agricultural public land subject to disposition, who shall have paid
the real estate tax thereon while the same has not been occupied by any
person shall be entitled to a free patent over such land/s not to exceed 12
hectares.
Turning again to the first issue raised by petitioner, it is apparent
that her insistence that the State through the director of
lands is an indispensable party flows from her failure to recognize that
private respondents action is one for declaration of nullity of title which is
different from an action for reversion of title to the State. In the latter case
the director of lands needs to be impleaded, unlike in the first. Thus, we
reiterated in Evangelista v. Santiago:[33]
An ordinary civil action for declaration of
nullity of free patents and certificates of title is not the
same as an action for reversion. The difference
between them lies in the allegations as to the
character of ownership of the realty whose title is
sought to be
nullified. In an action for reversion, the pertinent alle
gations
in the complaint would admit Stateownership of the
disputed
land. Hence, in Gabila v. Barriga [41 SCRA 131],
where the plaintiff in his complaint admits that he has
no right to demand the cancellation or amendment of
the defendants title because even if the title were
canceled or amended the ownership of the land
embraced therein or of the portion affected by the
amendment would revert to the public domain, we
ruled that the action was for reversion and that the
only person or entity entitled to relief would be the
Director of Lands.
On the other hand, a cause of action for
declaration of nullity of free patent and certificate of
title would require allegations of the plaintiffs
ownership of the contested lot prior to the issuance of
such free patent and certificate of title as well as the
defendants fraud or mistake, as the case may be, in
successfully obtaining these documents of title over
the parcel of land claimed by plaintiff. In such a case,
the nullity arises strictly not from the fraud or deceit
but from the fact that the land is beyond the
jurisdiction of the Bureau of Lands to bestow and
whatever patent or certificate of title obtained
therefore is consequently void ab initio. The real
party-in-interest is not the State but the plaintiff who
alleges a pre-existing right of ownership over the
parcel of land in question even before the grant of title
to the defendant.[34]
In an earlier case,[35] in reversing the dismissal of the complaint
by the trial court, this Court stressed that the allegations of the complaint
present an action for nullification of free patent and title, not an action for
reversion of title which has to be instituted by the Solicitor General.
It is true that the trial court opined that the next step following the
cancellation of petitioners titles is an action for the reversion of
the disputed lands back to the public domain.[36] Said observation, found in
the body only and not in the dispositive portion of the decision, does not
detract from, but in fact even bolsters, the real nature of the complaint as an
action for nullification of title.
Now, the second issue. Petitioner claims that her titles are
already indefeasible and incontrovertible following the lapse of one year
following their issuance.
In Apuyan v. Haldeman,[37] also cited by petitioner, it was held that a
certificate of title issued on the basis of a free patent procured through fraud
or in violation of the law may be cancelled, as such title is not cloaked with
indefeasibility.
It was likewise held in Meneses v. Court of Appeals[38] that the principle of
indefeasibility of title is unavailing where fraud attended the issuance of the
free patents and titles.
WHEREFORE, the petition is DENIED. The decision of the Court
of Appeals in CA-G.R. CV. No. 70458 is AFFIRMED. Costs against
petitioner.
SO ORDERED.
G.R. No. 179987 September 3, 2013 HEIRS OF MARIO MALABANAN,
(Represented by Sally A. Malabanan), Petitioners,
vs.
REPUBLIC OF THE PHILIPPINES, Respondent.
RESOLUTION
BERSAMIN, J.:
For our consideration and resolution are the motions for reconsideration of the
parties who both assail the decision promulgated on April 29, 2009, whereby
we upheld the ruling of the Court of Appeals (CA) denying the application of
the petitioners for the registration of a parcel of land situated in Barangay Tibig,
Silang, Cavite on the ground that they had not established by sufficient
evidence their right to the registration in accordance with either Section 14(1)
or Section 14(2) of Presidential Decree No. 1529 (Property Registration
Decree).
Antecedents
The property subject of the application for registration is a parcel of land
situated in Barangay Tibig, Silang Cavite, more particularly identified as Lot
9864-A, Cad-452-D, with an area of 71,324-square meters. On February 20,
1998, applicant Mario Malabanan, who had purchased the property from
Eduardo Velazco, filed an application for land registration covering the property
in the Regional Trial Court (RTC) in Tagaytay City, Cavite, claiming that the
property formed part of the alienable and disposable land of the public domain,
and that he and his predecessors-in-interest had been in open, continuous,
uninterrupted, public and adverse possession and occupation of the land for
more than 30 years, thereby entitling him to the judicial confirmation of his
title.1
To prove that the property was an alienable and disposable land of the public
domain, Malabanan presented during trial a certification dated June 11, 2001
issued by the Community Environment and Natural Resources Office
(CENRO) of the Department of Environment and Natural Resources (DENR),
which reads:
This is to certify that the parcel of land designated as Lot No. 9864 Cad 452-D,
Silang Cadastre as surveyed for Mr. Virgilio Velasco located at Barangay Tibig,
Silang, Cavite containing an area of 249,734 sq. meters as shown and
described on the Plan Ap-04-00952 is verified to be within the Alienable or
Disposable land per Land Classification Map No. 3013 established under
Project No. 20-A and approved as such under FAO 4-1656 on March 15,
1982.2
After trial, on December 3, 2002, the RTC rendered judgment granting
Malabanan’s application for land registration, disposing thusly:
WHEREFORE, this Court hereby approves this application for registration and
thus places under the operation of Act 141, Act 496 and/or P.D. 1529,
otherwise known as Property Registration Law, the lands described in Plan
Csd-04-0173123-D, Lot 9864-A and containing an area of Seventy One
Thousand Three Hundred Twenty Four (71,324) Square Meters, as supported
by its technical description now forming part of the record of this case, in
addition to other proofs adduced in the name of MARIO MALABANAN, who is
of legal age, Filipino, widower, and with residence at Munting Ilog, Silang,
Cavite.
Once this Decision becomes final and executory, the corresponding decree of
registration shall forthwith issue.
SO ORDERED.3
The Office of the Solicitor General (OSG) appealed the judgment to the CA,
arguing that Malabanan had failed to prove that the property belonged to the
alienable and disposable land of the public domain, and that the RTC erred in
finding that he had been in possession of the property in the manner and for
the length of time required by law for confirmation of imperfect title.
On February 23, 2007, the CA promulgated its decision reversing the RTC and
dismissing the application for registration of Malabanan. Citing the ruling in
Republic v. Herbieto (Herbieto),4 the CA declared that under Section 14(1) of
the Property Registration Decree, any period of possession prior to the
classification of the land as alienable and disposable was inconsequential and
should be excluded from the computation of the period of possession. Noting
that the CENRO-DENR certification stated that the property had been declared
alienable and disposable only on March 15, 1982, Velazco’s possession prior
to March 15, 1982 could not be tacked for purposes of computing Malabanan’s
period of possession.
Due to Malabanan’s intervening demise during the appeal in the CA, his heirs
elevated the CA’s decision of February 23, 2007 to this Court through a
petition for review on certiorari.
The petitioners assert that the ruling in Republic v. Court of Appeals and
Corazon Naguit5 (Naguit) remains the controlling doctrine especially if the
property involved is agricultural land. In this regard, Naguit ruled that any
possession of agricultural land prior to its declaration as alienable and
disposable could be counted in the reckoning of the period of possession to
perfect title under the Public Land Act (Commonwealth Act No. 141) and the
Property Registration Decree. They point out that the ruling in Herbieto, to the
effect that the declaration of the land subject of the application for registration
as alienable and disposable should also date back to June 12, 1945 or earlier,
was a mere obiter dictum considering that the land registration proceedings
therein were in fact found and declared void ab initio for lack of publication of
the notice of initial hearing.
The petitioners also rely on the ruling in Republic v. T.A.N. Properties, Inc.6 to
support their argument that the property had been ipso jure converted into
private property by reason of the open, continuous, exclusive and notorious
possession by their predecessors-in-interest of an alienable land of the public
domain for more than 30 years. According to them, what was essential was
that the property had been "converted" into private property through
prescription at the time of the application without regard to whether the
property sought to be registered was previously classified as agricultural land
of the public domain.
As earlier stated, we denied the petition for review on certiorari because
Malabanan failed to establish by sufficient evidence possession and
occupation of the property on his part and on the part of his predecessors-in
interest since June 12, 1945, or earlier.
Petitioners’ Motion for Reconsideration
In their motion for reconsideration, the petitioners submit that the mere
classification of the land as alienable or disposable should be deemed
sufficient to convert it into patrimonial property of the State. Relying on the
rulings in Spouses De Ocampo v. Arlos,7 Menguito v. Republic8 and Republic
v. T.A.N. Properties, Inc.,9 they argue that the reclassification of the land as
alienable or disposable opened it to acquisitive prescription under the Civil
Code; that Malabanan had purchased the property from Eduardo Velazco
believing in good faith that Velazco and his predecessors-in-interest had been
the real owners of the land with the right to validly transmit title and ownership
thereof; that consequently, the ten-year period prescribed by Article 1134 of
the Civil Code, in relation to Section 14(2) of the Property Registration Decree,
applied in their favor; and that when Malabanan filed the application for
registration on February 20, 1998, he had already been in possession of the
land for almost 16 years reckoned from 1982, the time when the land was
declared alienable and disposable by the State.
The Republic’s Motion for Partial Reconsideration
The Republic seeks the partial reconsideration in order to obtain a clarification
with reference to the application of the rulings in Naguit and Herbieto.
Chiefly citing the dissents, the Republic contends that the decision has
enlarged, by implication, the interpretation of Section 14(1) of the Property
Registration Decree through judicial legislation. It reiterates its view that an
applicant is entitled to registration only when the land subject of the application
had been declared alienable and disposable since June 12, 1945 or earlier.
Ruling
We deny the motions for reconsideration.
In reviewing the assailed decision, we consider to be imperative to discuss the
different classifications of land in relation to the existing applicable land
registration laws of the Philippines.
Classifications of land according to ownership
Land, which is an immovable property,10 may be classified as either of public
dominion or of private ownership.11Land is considered of public dominion if it
either: (a) is intended for public use; or (b) belongs to the State, without being
for public use, and is intended for some public service or for the development
of the national wealth.12 Land belonging to the State that is not of such
character, or although of such character but no longer intended for public use
or for public service forms part of the patrimonial property of the State.13 Land
that is other than part of the patrimonial property of the State, provinces, cities
and municipalities is of private ownership if it belongs to a private individual.
Pursuant to the Regalian Doctrine (Jura Regalia), a legal concept first
introduced into the country from the West by Spain through the Laws of the
Indies and the Royal Cedulas,14 all lands of the public domain belong to the
State.15This means that the State is the source of any asserted right to
ownership of land, and is charged with the conservation of such patrimony.16
All lands not appearing to be clearly under private ownership are presumed to
belong to the State. Also, public lands remain part of the inalienable land of the
public domain unless the State is shown to have reclassified or alienated them
to private persons.17
Classifications of public lands
according to alienability
Whether or not land of the public domain is alienable and disposable primarily
rests on the classification of public lands made under the Constitution. Under
the 1935 Constitution,18 lands of the public domain were classified into three,
namely, agricultural, timber and mineral.19 Section 10, Article XIV of the 1973
Constitution classified lands of the public domain into seven, specifically,
agricultural, industrial or commercial, residential, resettlement, mineral, timber
or forest, and grazing land, with the reservation that the law might provide
other classifications. The 1987 Constitution adopted the classification under
the 1935 Constitution into agricultural, forest or timber, and mineral, but added
national parks.20 Agricultural lands may be further classified by law according
to the uses to which they may be devoted.21 The identification of lands
according to their legal classification is done exclusively by and through a
positive act of the Executive Department.22
Based on the foregoing, the Constitution places a limit on the type of public
land that may be alienated. Under Section 2, Article XII of the 1987
Constitution, only agricultural lands of the public domain may be alienated; all
other natural resources may not be.
Alienable and disposable lands of the State fall into two categories, to wit: (a)
patrimonial lands of the State, or those classified as lands of private ownership
under Article 425 of the Civil Code,23 without limitation; and (b) lands of the
public domain, or the public lands as provided by the Constitution, but with the
limitation that the lands must only be agricultural. Consequently, lands
classified as forest or timber, mineral, or national parks are not susceptible of
alienation or disposition unless they are reclassified as agricultural.24 A positive
act of the Government is necessary to enable such reclassification,25 and the
exclusive prerogative to classify public lands under existing laws is vested in
the Executive Department, not in the courts.26 If, however, public land will be
classified as neither agricultural, forest or timber, mineral or national park, or
when public land is no longer intended for public service or for the
development of the national wealth, thereby effectively removing the land from
the ambit of public dominion, a declaration of such conversion must be made
in the form of a law duly enacted by Congress or by a Presidential
proclamation in cases where the President is duly authorized by law to that
effect.27 Thus, until the Executive Department exercises its prerogative to
classify or reclassify lands, or until Congress or the President declares that the
State no longer intends the land to be used for public service or for the
development of national wealth, the Regalian Doctrine is applicable.
Disposition of alienable public lands
Section 11 of the Public Land Act (CA No. 141) provides the manner by which
alienable and disposable lands of the public domain, i.e., agricultural lands,
can be disposed of, to wit:
Section 11. Public lands suitable for agricultural purposes can be disposed of
only as follows, and not otherwise:
(1) For homestead settlement;
(2) By sale;
(3) By lease; and
(4) By confirmation of imperfect or incomplete titles;
(a) By judicial legalization; or
(b) By administrative legalization (free patent).
The core of the controversy herein lies in the proper interpretation of Section
11(4), in relation to Section 48(b) of the Public Land Act, which expressly
requires possession by a Filipino citizen of the land since June 12, 1945, or
earlier, viz:
Section 48. The following-described citizens of the Philippines, occupying
lands of the public domain or claiming to own any such lands or an interest
therein, but whose titles have not been perfected or completed, may apply to
the Court of First Instance of the province where the land is located for
confirmation of their claims and the issuance of a certificate of title thereafter,
under the Land Registration Act, to wit:
xxxx
(b) Those who by themselves or through their predecessors-in-interest have
been in open, continuous, exclusive, and notorious possession and occupation
of alienable and disposable lands of the public domain, under a bona fide claim
of acquisition of ownership, since June 12, 1945, or earlier, immediately
preceding the filing of the applications for confirmation of title, except when
prevented by war or force majeure. These shall be conclusively presumed to
have performed all the conditions essential to a Government grant and shall be
entitled to a certificate of title under the provisions of this chapter. (Bold
emphasis supplied)
Note that Section 48(b) of the Public Land Act used the words "lands of the
public domain" or "alienable and disposable lands of the public domain" to
clearly signify that lands otherwise classified, i.e., mineral, forest or timber, or
national parks, and lands of patrimonial or private ownership, are outside the
coverage of the Public Land Act. What the law does not include, it excludes.
The use of the descriptive phrase "alienable and disposable" further limits the
coverage of Section 48(b) to only the agricultural lands of the public domain as
set forth in Article XII, Section 2 of the 1987 Constitution. Bearing in mind such
limitations under the Public Land Act, the applicant must satisfy the following
requirements in order for his application to come under Section 14(1) of the
Property Registration Decree,28 to wit:
1. The applicant, by himself or through his predecessor-in-interest,
has been in possession and occupation of the property subject of
the application;
2. The possession and occupation must be open, continuous,
exclusive, and notorious;
3. The possession and occupation must be under a bona fide claim
of acquisition of ownership;
4. The possession and occupation must have taken place since
June 12, 1945, or earlier; and
5. The property subject of the application must be an agricultural
land of the public domain.
Taking into consideration that the Executive Department is vested with the
authority to classify lands of the public domain, Section 48(b) of the Public
Land Act, in relation to Section 14(1) of the Property Registration Decree,
presupposes that the land subject of the application for registration must have
been already classified as agricultural land of the public domain in order for the
provision to apply. Thus, absent proof that the land is already classified as
agricultural land of the public domain, the Regalian Doctrine applies, and
overcomes the presumption that the land is alienable and disposable as laid
down in Section 48(b) of the Public Land Act. However, emphasis is placed on
the requirement that the classification required by Section 48(b) of the Public
Land Act is classification or reclassification of a public land as agricultural.
The dissent stresses that the classification or reclassification of the land as
alienable and disposable agricultural land should likewise have been made on
June 12, 1945 or earlier, because any possession of the land prior to such
classification or reclassification produced no legal effects. It observes that the
fixed date of June 12, 1945 could not be minimized or glossed over by mere
judicial interpretation or by judicial social policy concerns, and insisted that the
full legislative intent be respected.
We find, however, that the choice of June 12, 1945 as the reckoning point of (a) Agricultural lands of the public domain are rendered
the requisite possession and occupation was the sole prerogative of Congress, alienable and disposable through any of the exclusive
the determination of which should best be left to the wisdom of the lawmakers. modes enumerated under Section 11 of the Public
Except that said date qualified the period of possession and occupation, no Land Act. If the mode is judicial confirmation of
other legislative intent appears to be associated with the fixing of the date of imperfect title under Section 48(b) of the Public Land
June 12, 1945. Accordingly, the Court should interpret only the plain and literal Act, the agricultural land subject of the application
meaning of the law as written by the legislators. needs only to be classified as alienable and disposable
as of the time of the application, provided the
applicant’s possession and occupation of the land
Moreover, an examination of Section 48(b) of the Public Land Act indicates
that Congress prescribed no requirement that the land subject of the dated back to June 12, 1945, or earlier. Thereby, a
registration should have been classified as agricultural since June 12, 1945, or conclusive presumption that the applicant has
earlier. As such, the applicant’s imperfect or incomplete title is derived only performed all the conditions essential to a government
grant arises,36 and the applicant becomes the owner of
from possession and occupation since June 12, 1945, or earlier. This means
that the character of the property subject of the application as alienable and the land by virtue of an imperfect or incomplete title. By
disposable agricultural land of the public domain determines its eligibility for legal fiction, the land has already ceased to be part of
the public domain and has become private property.37
land registration, not the ownership or title over it.

(b) Lands of the public domain subsequently classified

Alienable public land held by a possessor, either personally or through his
predecessors-in-interest, openly, continuously and exclusively during the
prescribed statutory period is converted to private property by the mere lapse
or completion of the period.29 In fact, by virtue of this doctrine, corporations
may now acquire lands of the public domain for as long as the lands were
already converted to private ownership, by operation of law, as a result of
satisfying the requisite period of possession prescribed by the Public Land
Act.30 It is for this reason that the property subject of the application of
Malabanan need not be classified as alienable and disposable agricultural land
of the public domain for the entire duration of the requisite period of
possession.
To be clear, then, the requirement that the land should have been classified as
alienable and disposable agricultural land at the time of the application for
registration is necessary only to dispute the presumption that the land is
inalienable.
The declaration that land is alienable and disposable also serves to determine
the point at which prescription may run against the State. The imperfect or
incomplete title being confirmed under Section 48(b) of the Public Land Act is
title that is acquired by reason of the applicant’s possession and occupation of
the alienable and disposable agricultural land of the public domain. Where all
the necessary requirements for a grant by the Government are complied with
through actual physical, open, continuous, exclusive and public possession of
an alienable and disposable land of the public domain, the possessor is
deemed to have acquired by operation of law not only a right to a grant, but a
grant by the Government, because it is not necessary that a certificate of title
be issued in order that such a grant be sanctioned by the courts.31
If one follows the dissent, the clear objective of the Public Land Act to
adjudicate and quiet titles to unregistered lands in favor of qualified Filipino
citizens by reason of their occupation and cultivation thereof for the number of
years prescribed by law32 will be defeated. Indeed, we should always bear in
mind that such objective still prevails, as a fairly recent legislative development
bears out, when Congress enacted legislation (Republic Act No. 10023)33in
order to liberalize stringent requirements and procedures in the adjudication of
alienable public land to qualified applicants, particularly residential lands,
subject to area limitations.34
or declared as no longer intended for public use or for
the development of national wealth are removed from
the sphere of public dominion and are considered
converted into patrimonial lands or lands of private
ownership that may be alienated or disposed through
any of the modes of acquiring ownership under the Civil
Code. If the mode of acquisition is prescription, whether
ordinary or extraordinary, proof that the land has been
already converted to private ownership prior to the
requisite acquisitive prescriptive period is a condition
sine qua non in observance of the law (Article 1113,
Civil Code) that property of the State not patrimonial in
character shall not be the object of prescription.
To reiterate, then, the petitioners failed to present sufficient evidence to
establish that they and their predecessors-in-interest had been in possession
of the land since June 12, 1945. Without satisfying the requisite character and
period of possession - possession and occupation that is open, continuous,
exclusive, and notorious since June 12, 1945, or earlier - the land cannot be
considered ipso jure converted to private property even upon the subsequent
declaration of it as alienable and disposable. Prescription never began to run
against the State, such that the land has remained ineligible for registration
under Section 14(1) of the Property Registration Decree. Likewise, the land
continues to be ineligible for land registration under Section 14(2) of the
Property Registration Decree unless Congress enacts a law or the President
issues a proclamation declaring the land as no longer intended for public
service or for the development of the national wealth.1âwphi1
WHEREFORE, the Court DENIES the petitioners' Motion for Reconsideration
and the respondent's Partial Motion for Reconsideration for their lack of merit.
SO ORDERED.

On the other hand, if a public land is classified as no longer intended for public
use or for the development of national wealth by declaration of Congress or the
President, thereby converting such land into patrimonial or private land of the
State, the applicable provision concerning disposition and registration is no
longer Section 48(b) of the Public Land Act but the Civil Code, in conjunction
with Section 14(2) of the Property Registration Decree.35 As such, prescription
can now run against the State.

To sum up, we now observe the following rules relative to the disposition of
public land or lands of the public domain, namely:

(1) As a general rule and pursuant to the Regalian Doctrine, all

lands of the public domain belong to the State and are inalienable.
Lands that are not clearly under private ownership are also
presumed to belong to the State and, therefore, may not be
alienated or disposed;

(2) The following are excepted from the general rule, to wit: