G.R. No. L-50031-32 - Central Bank of the Philippines vs. Court of Appeals

Case Summary (G.R. No. L-50031-32)

Factual Background

The disputed institution, hereinafter PROVIDENT, was incorporated after the Central Bank approved its establishment under Monetary Board Resolution No. 572 dated May 3, 1963, and registered with the Securities and Exchange Commission on October 31, 1963. PROVIDENT began operations in December 1963 and within four years opened six extension offices in greater Manila. Its authorized capital was P10 million divided into 100,000 shares of common stock at P100 par per share. By the end of 1967 paid-up capital had reached P6.7 million. Respondents Isidro E. Fernandez and Jesus R. Jayme were majority stockholders, holding 41% and 22% respectively.

Loan Concentration and Early Supervision

From its inception a major portion of PROVIDENT’s loanable funds went to directors, officers, stockholders, and related interests. The Central Bank cautioned PROVIDENT against concentration of credits and urged loan diversification. Despite the cautions, these insider and related-party loans persisted and were known to the Central Bank.

September 1968 Bank Run and Emergency Assistance

In September 1968 a bank run affected several savings banks, including PROVIDENT, driven by adverse publicity regarding congressional investigations. PROVIDENT suffered unusually heavy withdrawals and initially requested emergency loans from Central Bank of the Philippines, which the Monetary Board denied. PROVIDENT borrowed from other banks, notably Banco Filipino, which advanced up to P8 million secured by real estate and a pledge of P4.074 million in shares owned by Fernandez and Jayme. Those advances did not suffice and PROVIDENT temporarily closed on September 12, 1968. The Central Bank later extended emergency loans that permitted PROVIDENT to reopen on September 16, 1968, and high Central Bank officials publicly assured the bank’s solvency.

Pressure to Relinquish Control and the Memorandum Agreement

Following reopening, withdrawals continued and Fernandez and Jayme sought further assistance. The Central Bank introduced them to representatives of the Iglesia Ni Kristo (INK), which held a sizable P5.5 million deposit. Deputy Governor Amado Brinas communicated that the Central Bank would not continue support unless management was turned over to the INK group. Faced with that ultimatum and to protect their investment, Fernandez and Jayme executed a Memorandum Agreement on December 6, 1968, with the Eagle Broadcasting Corporation, an entity identified with INK. The Memorandum provided among other commitments that INK would convert its time deposit into voting preferred shares, that the Articles of Incorporation would be amended to create voting preferred shares at P70 par, that INK would purchase 53,000 common shares within six months, that a voting trust agreement in favor of INK would be executed, and that INK would defer foreclosure of certain mortgages for four years provided certain payment schedules were met.

Transfer of Management and Subsequent Conduct

Following shareholder action and a Voting Trust Agreement, Fernandez and Jayme withdrew from management effective December 1, 1968, and management passed to the INK/Eagle group. Thereafter the Central Bank granted additional loans to PROVIDENT at a reduced interest rate of 10% and allowed the bank to resume lending. The net worth of PROVIDENT at the time of transfer was P7.2 million. The INK/Eagle group, however, did not convert its deposits as promised; instead it caused conversion of deposits into "bills payable" earning 12% which were subsequently withdrawn. The new management restored 12% interest on outstanding loans, failed to comply with Monetary Board rehabilitation directives, and committed various irregularities to the detriment of PROVIDENT despite the presence of resident Central Bank examiners. INK/Eagle also facilitated assignments and mortgages of PROVIDENT assets in favor of Eagle Broadcasting Corporation.

Attempts at Rehabilitation and Monetary Board Action

In September 1971 the Central Bank requested concrete rehabilitation proposals. INK’s chairman Rogelio W. Manalo submitted a letter dated October 15, 1971 proposing conversion of INK’s bills payable into equity, staggered payment of deposits, and prepayment of majority stockholder borrowings, but the Monetary Board rejected these proposals on January 7, 1972 (Res. No. 6). Manalo resigned on August 22, 1972, triggering further large withdrawals. Provident sought external assistance to avert another run, but its financial condition continued to decline. On September 15, 1972 the Monetary Board adopted Resolution No. 1766 forbidding PROVIDENT from doing business in the Philippines, instructed the Superintendent of Banks to take charge of its assets, and directed appropriate steps pursuant to Section 29 of Republic Act No. 265. The Central Bank’s Legal Counsel was instructed to request the Solicitor General to file a petition in the Court of First Instance for assistance and supervision in liquidation.

Commencement of Judicial Proceedings

On September 28, 1972, Fernandez and Jayme filed a petition for certiorari, prohibition and mandamus and/or specific performance, with preliminary injunction, in the Court of First Instance of Manila (Sp. Proc. No. 88415), seeking annulment of Monetary Board Resolution No. 1766 and restraint on liquidation, and praying instead for Central Bank performance of its alleged commitments to reorganize and rehabilitate PROVIDENT as it had in prior cases. The Central Bank answered that PROVIDENT was insolvent and that closure under Section 29, R.A. No. 265, was warranted. On December 11, 1972 the Central Bank filed its own petition for assistance and supervision in liquidation of PROVIDENT in the Court of First Instance (Sp. Proc. No. 89219). The two cases were consolidated for hearing.

Trial Court Judgment

On February 20, 1974 the Court of First Instance rendered judgment granting the writs sought in the amended petition except mandamus, annulled Resolution No. 1766 and ordered the Central Bank to desist from liquidating PROVIDENT. The trial court ordered the Central Bank to specifically perform its obligation to reorganize and rehabilitate PROVIDENT within two years, following precedents set in the rehabilitation of the Republic Bank and the Overseas Bank of Manila and the Supreme Court’s decision in Ramos vs. Central Bank, 41 SCRA 565. The trial court also awarded Fernandez and Jayme, jointly and severally against Central Bank and Eagle Broadcasting Corporation, P600,000 actual damages, P50,000 moral damages, P25,000 exemplary damages, and P50,000 attorney’s fees plus costs.

Court of Appeals Disposition

Eagle Broadcasting Corporation and Central Bank of the Philippines appealed. The Court of Appeals, in a decision dated January 22, 1979, affirmed the trial court’s judgment but modified it by excluding the award of damages and attorney’s fees. The appellate court ordered costs de officio.

Issues on Appeal to the Supreme Court

The Central Bank raised three principal contentions before the Supreme Court. First, the Central Bank argued that the Court of Appeals erred in not applying Presidential Decree No. 1007, which amended Section 29 of R.A. No. 265 during appeal pendency, and which made the Monetary Board’s determination final and executory and subject to judicial disturbance only upon convincing proof of arbitrariness and bad faith. Second, the Central Bank contended that estoppel could not be invoked against it because its closure of the bank constituted a valid exercise of police power. Third, the Central Bank asserted that PROVIDENT’s anomalous insider loans had caused its insolvency, thereby justifying liquidation rather than rehabilitation.

Supreme Court’s Ruling on Applicable Law and Bad Faith

The Supreme Court held that the appellate court should apply the law prevailing at the time of disposition and therefore that Section 29 of Republic Act No. 265, as amended by Presidential Decree No. 1007, was applicable. The Court nevertheless affirmed the Court of Appeals’ conclusion that the Monetary Board’s action in forbidding PROVIDENT from doing business and ordering its liquidation was arbitrary and made in bad faith. The Court found that although there might not be clear proof of gross and evident bad faith sufficient to uphold damages against the Central Bank and Eagle Broadcasting Corporation, the acts of the Monetary Board showed arbitrariness and bad faith insofar as the Central Bank had pressured Fernandez and Jayme to cede management to the INK/Eagle group and had thereafter failed to ensure compliance with the Memorandum Agreement, failed to supervise and control INK/Eagle’s management, and failed to enforce rehabilitation measures and support necessary to restore PROVIDENT.

Promissory Estoppel and Police Power

The Supreme Court rejected the Central Bank’s contention that estoppel could not bind the bank when exercising police power. The Court explained that while closure and liquidation of a bank may constitute an exercise of police power, such an exercise remained subject

Case Syllabus (G.R. No. L-50031-32)

Parties and Procedural Posture

Central Bank of the Philippines was the petitioner in the present certiorari review seeking relief from the decision of the respondent Court of Appeals.
Isidro E. Fernandez and Jesus R. Jayme were the private respondents and majority stockholders of Provident Savings Bank who instituted Sp. Proc. No. 88415 in the Court of First Instance of Manila.
The Central Bank filed Sp. Proc. No. 89219 titled "In re: Liquidation of the Provident Savings Bank" seeking court assistance and supervision in liquidation.
The Court of First Instance rendered judgment on February 20, 1974 annulling Monetary Board Resolution No. 1766 dated September 15, 1972 and ordering the Central Bank to rehabilitate Provident and to pay damages.
The Court of Appeals affirmed the CFI decision but modified it by excluding the award of damages and attorneys' fees on January 22, 1979.
The present petition sought review by certiorari of the Court of Appeals' judgment and the Supreme Court affirmed the appellate court's decision.

Key Factual Allegations

Provident Savings Bank was incorporated following Monetary Board Resolution No. 572 dated May 3, 1963, commenced operations on December 9, 1963, and had authorized capital of P10 million.
Isidro E. Fernandez and Jesus R. Jayme held forty-one percent and twenty-two percent respectively of Provident's subscribed capital and formed the controlling stockholder group.
A bank run in September 1968 forced Provident to seek emergency loans and initially the Monetary Board denied emergency assistance, prompting Provident to borrow from other banks.
Under Central Bank pressure and the threat of discontinued support, Fernandez and Jayme executed a Memorandum Agreement dated December 6, 1968 with the Eagle Broadcasting Corporation identified with the Iglesia Ni Kristo, which provided, among other things, conversion of deposits into voting preferred shares, an increase in capital, purchase of 53,000 shares, and a voting trust arrangement.
Management control of Provident was transferred to the Iglesia Ni Kristo/Eagle group effective December 1, 1968, after which the Central Bank extended loans at reduced interest and Provident resumed lending.
The Iglesia Ni Kristo/Eagle group failed to convert deposits to equity, converted deposits into "bills payable" which were withdrawn, engaged in mismanagement and asset assignments, and failed to comply with Monetary Board rehabilitation directives.
Repeated deterioration in Provident's condition and the failure of parties to submit acceptable rehabilitation proposals culminated in the Monetary Board's issuance of Resolution No. 1766 on September 15, 1972 forbidding Provident from doing business and instructing the Superintendent of Banks to take charge pursuant to Section 29 of Republic Act No. 265.
Fernandez and Jayme filed a petition for certiorari, prohibition and mandamus on September 28, 1972, and the Central Bank filed its petition for assistance and supervision in liquidation on December 11, 1972; the two cases were heard jointly.

Statutory Framework

Section 29 of Republic Act No. 265 provided the statutory basis for the Monetary Board's authority to forbid a bank from doing business and to instruct the Superintendent of Banks to take charge.
Presidential Decree No. 1