Case Summary (G.R. No. L-46158)
Petitioner
Central Bank of the Philippines, challenging the injunction against and recovery of penalty interest.
Respondent
Tayug Rural Bank, Inc., seeking reimbursement of penalties imposed and injunctive relief.
Key Dates
• December 28, 1962–July 30, 1963: Thirteen rediscounted loans obtained by the rural bank.
• December 23, 1964: Issuance of Memorandum Circular No. DLC-8 imposing a 10% per annum penalty on past due loans, effective July 4, 1965.
• June 27, 1969: Complaint filed by Tayug Rural Bank; counterclaim by CBP.
• January 6, 1971: Trial court renders judgment in favor of the rural bank.
• April 13, 1977: Court of Appeals certifies legal issue to the Supreme Court.
• November 28, 1986: Decision by the Supreme Court.
Applicable Law
• 1973 Philippine Constitution (impairment of contracts; due process)
• Republic Act No. 720, as amended:
– Sec. 3 (Monetary Board rule-making authority)
– Sec. 10 (Monetary Board supervisory powers)
– Sec. 13 (Rediscounting and lending authority)
• Rules and Regulations Governing Rural Banks (Monetary Board Resolution, Sept. 5, 1958):
– Sec. 147–148 (duty to remit payments; penalty for default)
Facts
Tayug Rural Bank rediscounted thirteen promissory notes with CBP between 1962 and 1963. None of these notes contained a penal-interest clause. In December 1964, CBP issued Memorandum Circular No. DLC-8—pursuant to Sections 147 and 148 of the Rural Bank Regulations—imposing a 10% per annum penalty on all past due rediscounted loans effective July 4, 1965. The rural bank refused to remit these penalties, sued for recovery of amounts already collected and sought to enjoin further impositions. CBP counterclaimed for outstanding balances plus interest and penalty. The trial court held the penalty circular retroactive, impairing contractual obligations without due process. The Court of Appeals, finding only a pure question of law, certified the issue to the Supreme Court.
Issue
Can the Monetary Board validly authorize CBP to impose a 10% per annum penalty on past due rediscounted loans of rural banks in the absence of a penal clause in the promissory notes?
Ruling
No. The Supreme Court affirmed the trial court’s judgment, holding that the Monetary Board and CBP exceeded their authority by retroactively imposing a 10% penalty without contractual or statutory basis. Modification: the rural bank must pay 10% of the unpaid balance (but not less than ₱500) as attorney’s fees and costs, as stipulated in the promissory notes.
Rationale
Enabling Statute and Regulations
• R.A. 720 authorizes the Monetary Board to supervise rural banks, prescribe interest rates and terms of rediscounting, and impose “reasonable penalties,” but does not expressly authorize a fixed 10% administrative penalty.
• Sections 147–148 of the Rural Bank Regulations refer generally to “additional reasonable penalties,” without specifying rate or retroactive application.Limits on Administrative Rule-Making
• Administrative rules must conform strictly to statutory grants of power. A regulation that conflicts with or extends beyond its enabling act is ultra vires.
• Retroactive imposition of penalties impairs vested contractual rights and violates due process principles under the 1973 Constitution.Absence of Contractual Basis
• The promissory notes executed by Tayug Rural Bank contained no penal-interest claus
Case Syllabus (G.R. No. L-46158)
Facts of the Case
- Plaintiff-Appellee Tayug Rural Bank, Inc., a rural banking corporation in Tayug, Pangasinan, obtained thirteen (13) rediscounted loans from Defendant-Appellant Central Bank of the Philippines between December 28, 1962 and July 30, 1963.
- The loans, originally amounting to ₱813,000.00 as of July 30, 1963, bore interest at ½% per annum until March 28, 1963, thereafter at 2½% per annum, and were evidenced by promissory notes prescribing their terms.
- By July 15, 1969, the outstanding balance on these loans was ₱444,809.45.
- On December 23, 1964, through Memorandum Circular No. DLC-8, the Central Bank (via its Director of the Department of Loans and Credit) announced a 10% per annum penalty on all past-due rural bank rediscounted loans, effective retroactively to January 4, 1965 and enforced from July 4, 1965.
- On June 27, 1969, Tayug Rural Bank filed suit in the Court of First Instance of Manila for recovery of the 10% penalty already collected (₱16,874.97 as of September 27, 1968) and for an injunction against further imposition of the penalty.
- The Central Bank counterclaimed for the unpaid principal (₱444,809.45) plus accrued interest and 10% per annum penalty on the past-due balance.
- Appellant justified the penalty under Sections 147 and 148 of the Rules and Regulations Governing Rural Banks (promulgated September 5, 1958 by the Monetary Board, pursuant to Section 3 of Republic Act No. 720, as amended).
- Appellee denied any contractual basis for the penalty, asserting that the promissory notes contained no penal clause and that the charge was arbitrary and illegal.
Procedural History
- The Court of First Instance, Branch III, Manila (Civil Case No. 76920), rendered judgment on January 6, 1971:
• In favor of Tayug Rural Bank, ordering credit for penalties collected (₱19,335.88) and enjoining further 10% charges.
• On the Central Bank’s counterclaim, ordering Tayug Rural Bank to pay ₱444,809.45 plus prescribed interest, less the sum of ₱19,335.88. - Central Bank appealed to the Court of Appeals, which, by decision promulgated April 13, 1977, found only a legal issue—whether the Monetary Board had authority to impose the 10% penalty—and certified the case to the Supreme Court.
- The Supreme Court docketed and subm