G.R. No. 217342 - Makil vs. Commission on Audit

The petitioners, composed of Noel F. Manankil, Liberato P. Laus, Gloria C. Magtoto, Evangeline G. Tejada, Alizaido F. Paras, and Philip Jose B. Panlilio, contested actions taken by the Commission on Audit (COA) regarding the disallowance of a disbursement.
Clark Development Corporation (CDC) is a subsidiary of the Bases Conversion and Development Authority (BCDA) and was established under Executive Order No. 80 in 1993 to manage the Clark Special Economic Zone (CSEZ).
CDC holds the statutory authority to manage, lease, and otherwise administer government properties in the zone.

On December 14, 1995, CDC entered into a 25‑year Lease Agreement with Amari Duty Free, Inc. (later renamed Grand Duty Free Plaza, Inc.) for a 1.70‑hectare parcel along Dyess Highway, Pampanga.
The lease rent was to be computed by either minimum guaranteed lease payments or as a percentage of gross revenues over varying periods.
Amari Duty Free was obliged to improve the leased property, with any improvements automatically transferring to CDC after the lease term.
An original two‑story building was constructed on the leased property, completed on November 13, 1996, with an estimated cost of P36,000,000.00.
In accordance with the lease terms, the lessee insured the structure under a policy that mandated the designation of CDC as the beneficiary and included comprehensive provisions covering reconstruction in the event of loss or damage.

A fire on December 29, 2005, razed the original structure, resulting in the cessation of Grand Duty Free’s business operations at the site.
Grand Duty Free requested a waiver of rental payments starting January 2006; CDC’s Executive Committee then approved a moratorium until December 31, 2007.
Later, Grand Duty Free proposed to engage in new business ventures, such as manufacturing branded cigarettes for export, and enquired about tax and regulatory issues from CDC.
CDC required Grand Duty Free to submit business and construction proposals detailing plans for a new structure, as well as documents evidencing its readiness to recommence operations, before considering an extension of the moratorium.

With the parties reaching an impasse regarding reconstruction and ongoing operations, Grand Duty Free suggested preterminating the Lease Agreement.
Following negotiations, CDC agreed to a pretermination effective December 31, 2007, as evidenced by Board Resolution No. SM‑03‑03, Series of 2008.
The parties agreed to a 50‑50 sharing scheme of the insurance proceeds (amounting to P39,246,781.37), whereby each party would receive P19,623,390.68, after adjusting for security deposits and unpaid dues.
CDC’s net proceeds, after accounting for the security deposit and deduction of unpaid rentals, amounted to P20,503,541.10.
On April 1, 2008, CDC issued a check to Grand Duty Free reflecting its 50% share.

On October 17, 2008, the COA issued Notice of Disallowance (ND) Nos. 2008-10-03 against the check disbursed to Grand Duty Free, citing a violation of Article VIII, Sections 2 and 3 of the Lease Agreement and, by implication, provisions of the Insurance Code.
Specific persons—including Grand Duty Free’s President and various CDC officials—were implicated for their roles in the disbursement.
The COA Regional Director, in Decision No. 2011‑09 (April 13, 2011), upheld the ND, asserting that CDC was entitled to 100% of the insurance proceeds as the sole beneficiary.
The COA Commission Proper, in Decision No. 2014‑421 (December 18, 2014), affirmed the Regional Director’s decision and reasoned that the 50‑50 sharing scheme was unsupported by law and was inconsistent with the terms of the Lease Agreement.

The petitioners filed a petition for certiorari challenging the ND and COA’s findings.
Although their petition for certiorari and the initial motion for reconsideration were dismissed, the petitioners later filed a Second Motion for Reconsideration insisting that the pretermination agreement—which included the 50‑50 sharing arrangement—was a valid exercise of CDC’s management discretion and reflected sound business judgment.
The Office of the Solicitor General (OSG), representing the COA, argued against any further motion for reconsideration on procedural grounds.

Did the COA clearly identify and articulate the jurisdictional grounds under which it disallowed the 50% release as provided in the ND?
Was the failure to expressly state one of the specific grounds (illegal, irregular, excessive, or unconscionable expenditure) a violation of due process?

Does the pretermination of the Lease Agreement invalidate the original obligations regarding the reconstruction of the original structure?
Is the 50‑50 sharing arrangement between CDC and Grand Duty Free valid and enforceable in light of the contractual provisions, despite the insurance contract’s prescribed beneficiary designation?

To what extent does the Insurance Code, specifically Sections 18 and 53, govern the use or distribution of the insurance proceeds after they have been released to CDC?
Should the use of these proceeds, following a valid pretermination agreement, remain subject to the limitations imposed by the Insurance Code?

Was CDC’s decision to preterminate the Lease Agreement and approve the 50‑50 sharing scheme a legitimate exercise of its statutory and corporate powers?
Does the evidence support that the CDC Board acted within its authority and with sound business judgment regarding the disposition of the insurance proceeds?