4. BF Savings Bank vs . MB, G.R. Nos.

70054 and 68878, Dec 11, 1991, 204 SCRA

767

Doctrine

It is a well-recognized principle that administrative and discretionary functions may not

be interfered with by the courts. In general, courts have no supervising power over the
proceedings and actions of the administrative departments of the government. This is
generally true with respect to acts involving the exercise of judgment or discretion, and
findings of fact. But when there is a grave abuse of discretion which is equivalent to a
capricious and whimsical exercise of judgment or where the power is exercised in an ar-
bitrary or despotic manner, then there is a justification for the courts to set aside the ad-
ministrative determination reached

Facts

This case is a consolidated of each of the 9 cases concerning the legality of the closure
and receivership of petitioner Banco Filipino Savings and Mortgage Bank (Banco Fil -
ipino for brevity) pursuant to the order of respondent Monetary Board.

Six (6) of these cases, namely, G.R. Nos. 68878, 77255-68, 78766, 81303, 81304 and
90473 involve the common issue of whether or not the liquidator appointed by the re-
spondent Central Bank (CB for brevity) has the authority to prosecute as well as to de -
fend suits, and to foreclose mortgages for and in behalf of the bank while the issue on
the validity of the receivership and liquidation of the latter is pending resolution in G.R.
No. 7004. Corollary to this issue is whether the CB can be sued to fulfill financial com-
mitments of a closed bank pursuant to Section 29 of the Central Bank Act. On the other
hand, the other three (3) cases, namely, G.R. Nos. 70054, which is the main case,
78767 and 78894 all seek to annul and set aside M.B. Resolution No. 75 issued by re-
spondents Monetary Board and Central Bank on January 25, 1985.

G.R. No. 70054

Banco Filipino Savings and Mortgage Bank was authorized to operate as such under
M.B. Resolution No. 223 dated February 14, 1963. It commenced operations on July 9,
1964. It has eighty-nine (89) operating branches, forty-six (46) of which are in Manila,
with more than three (3) million depositors.

As of July 31, 1984, the list of stockholders showed the major stockholders to be: Me-
tropolis Development Corporation, Apex Mortgage and Loans Corporation, Filipino Busi-
ness Consultants, Tiu Family Group, LBH Inc. and Anthony Aguirre.
Petitioner Bank had an approved emergency advance of P119.7 million under M.B.
Resolution No. 839 dated June 29, 1984. This was augmented with a P3 billion credit
line under M.B. Resolution No. 934 dated July 27, 1984.

On the same date, respondent Board issued M.B. Resolution No. 955 placing petitioner
bank under conservatorship of Basilio Estanislao. He was later replaced by Gilberto
Teodoro as conservator on August 10, 1984. The latter submitted a report to respon-
dent Board on the conservatorship of petitioner bank, (Teodoro report).

Subsequently, another report was submitted to the Monetary Board by Ramon Tiaoqui ,
Special Assistant to the Governor and Head, SES Department II of the Central Bank, re-
garding the major findings of examination on the financial condition of petitioner BF as
of July 31, 1984. The report, which shall be referred to herein as the Tiaoqui Report
contained the conclusion and recommendation:

 The examination findings, as shown indicate one of insolvency and illiquidity, suf -
ficient justification for forbidding the bank from engaging in banking.

 Foregoing considered, the following are recommended:

The Monetary Board issued the assailed MB Resolution No. 75 which ordered the clo-
sure of BF and which further provides:

 To forbid Banco Filipino Savings and Mortgage Bank and all its branches to do
business in the Philippines;

 To designate Mrs. Carlota P. Valenzuela, Deputy Governor as Receiver who is

directly vested with jurisdiction and authority to immediately take charge of the
bank's assets and liabilities, and as expeditiously as possible collect and gather
all the assets and administer the same for the benefit of its creditors, exercising
all the powers necessary for these purposes including but not limited to, bringing
suits and foreclosing mortgages in the name of the bank;

 To designate Mr. Arnulfo B. Aurellano, Special Assistant to the Governor, and

Mr. Ramon V. Tiaoqui, Special Assistant to the Governor and Head, Supervision
and Examination Sector Department II, as Deputy Receivers who are likewise di-
rectly vested with jurisdiction and authority to do all things necessary or proper to
carry out the functions entrusted to them by the Receiver and otherwise to assist
the Receiver in carrying out the functions vested in the Receiver by law or Mone-
tary Board Resolutions;

petitioner BF filed a complaint with the Regional Trial Court of Makati to set aside the
action of the Monetary Board placing BF under receivership.
Carlota Valenzuela, as Receiver and Arnulfo Aurellano and Ramon Tiaoqui as Deputy
Receivers of Banco Filipino submitted their report on the receivership of BF to the Mon-
etary Board. The report contained the following recommendation:

1. Banco Filipino Savings & Mortgage Bank be liquidated

2. Management be instructed to inform the stockholders of Banco Filipino

Savings & Mortgage Bank of the Monetary Board's decision liquidate the
Bank. (p. 167, Rollo, Vol. I)

petitioner filed a motion before Supreme Court praying that a restraining order or a writ
of preliminary injunction be issued to enjoin respondents from causing the dismantling
of BF signs in its main office and 89 branches.

In the SC resolved direct the respondents Monetary Board and Central Bank hold hear-
ings at which the petitioner should be heard, and terminate such hearings and submit its
resolution within thirty (30) days. This Court further resolved to issue a temporary re-
straining order enjoining the respondents from executing further acts of liquidation of a
bank. Acts such as receiving collectibles and receivables or paying off creditors' claims
and other transactions pertaining to normal operations of a bank were no enjoined. The
Central Bank was also ordered to designate comptroller for the petitioner BF.

Further, the SC submitted a resolution ordering Branch 136 of the Regional Trial Court
of Makati the presided over by Judge Ricardo Francisco to conduct the hearing contem-
plated in the resolution of August 29, 1985 in the most expeditious manner and to sub -
mit its resolution to this Court.

In the Court's resolution the Court stated that the hearing contemplated in the resolution
of August 29, 1985, which is to ascertain whether substantial administrative due
process had been observed by the respondent Monetary Board, may be expedited by
Judge Manuel Cosico who now presides the court vacated by Judge Ricardo Francisco,
who was elevated to the Court of Appeals, there being no legal impediment or justifiable
reason to bar the former from conducting such hearing. Hence, this Court directed
Judge Manuel Cosico to expedite the hearing and submit his report to this Court.

Judge Manuel Cosico submitted his report to this Court with the recommendation that
the resolutions of respondents Monetary Board and Central Bank authorizing the clo-
sure and liquidation of petitioner BP be upheld.

Thus, this petition for certiorari was filed with the petitioner contending that a bank which
has been closed and placed under receivership by the Central Bank under Section 29 of
RA 265 could file suit in court in its name to contest such acts of the Central Bank, with-
out the authorization of the CB-appointed receiver.

ISSUE: whether the CB is correct when it recommended the foreclosure of Banco Fil-
ipino?
HELD: No. The Supreme Court held that the actual closure of Banco Filipino and the
consequent legal effects thereof on its operations, it cannot uphold the legality of its clo-
sure. The SC hold that the closure and receivership of petitioner bank, which was or-
dered by respondent Monetary Board on January 25, 1985, is null and void.

It is a well-recognized principle that administrative and discretionary functions may not

be interfered with by the courts. In general, courts have no supervising power over the
proceedings and actions of the administrative departments of the government. This is
generally true with respect to acts involving the exercise of judgment or discretion, and
findings of fact. But when there is a grave abuse of discretion which is equivalent to a
capricious and whimsical exercise of judgment or where the power is exercised in an ar-
bitrary or despotic manner, then there is a justification for the courts to set aside the ad-
ministrative determination reached

The law applicable in the determination of these issues is Section 29 of Republic Act
No. 265, as amended, also known as the Central Bank Act, which provides:

SEC. 29. Proceedings upon insolvency. — There is no question that under Section 29

of the Central Bank Act, the following are the mandatory requirements to be complied
with before a bank found to be insolvent is ordered closed and forbidden to do business
in the Philippines:

1. Firstly, an examination shall be conducted by the head of the appropriate super -

vising or examining department or his examiners or agents into the condition of
the bank;

2. secondly, it shall be disclosed in the examination that the condition of the bank is
one of insolvency, or that its continuance in business would involve probable loss
to its depositors or creditors;

3. thirdly, the department head concerned shall inform the Monetary Board in writ-
ing, of the facts; and

4. lastly, the Monetary Board shall find the statements of the department head to be
true.

Based on the aforequoted provision, the Monetary Board may order the cessation of op-
erations of a bank in the Philippine and place it under receivership upon a finding of in-
solvency or when its continuance in business would involve probable loss its depositors
or creditors. If the Monetary Board shall determine and confirm within sixty (60) days
that the bank is insolvent or can no longer resume business with safety to its depositors,
creditors and the general public, it shall, if public interest will be served, order its liquida-
tion.

Specifically, the basic question to be resolved in G.R. Nos. 70054, 78767 and 78894 is
the documents pertinent to the resolution of these petitions are the Teodoro Report,
Tiaoqui Report, and the Valenzuela, Aurellano and Tiaoqui Report and the supporting
documents made as bases by the supporters of their conclusions contained in their re-
spective reports.

The SC focused on discussion to the Tiaoqui Report and the Valenzuela, Aurellano and
Tiaoqui Report. The former recommended the closure and receivership of petitioner
bank while the latter report made the recommendation to eventually place the petitioner
bank under liquidation.

Anent the first requirement, the Tiaoqui report, submitted revealed that the finding of in -
solvency of petitioner was based on the partial list of exceptions and findings on the reg-
ular examination of the bank conducted by the Supervision and Examination Sector II of
the Central Bank of the Philippines Central Bank. Clearly, Tiaoqui based his report on
an incomplete examination of petitioner bank and outrightly concluded therein that the
latter's financial status was one of insolvency or illiquidity

It is evident from the foregoing circumstances that the examination contemplated in

Sec. 29 of the CB Act as a mandatory requirement was not completely and fully com -
plied with. Despite the existence of the partial list of findings in the examination of the
bank, there were still highly significant items to be weighed and determined such as the
matter of valuation reserves, before these can be considered in the financial condition of
the bank. It would be a drastic move to conclude prematurely that a bank is insolvent if
the basis for such conclusion is lacking and insufficient, especially if doubt exists as to
whether such bases or findings faithfully represent the real financial status of the bank.

The actuation of the Monetary Board in closing petitioner bank on January 25, 1985
barely four days after a conference with the latter on the examiners' partial findings on
its financial position is also violative of what was provided in the CB Manual of Examina-
tion Procedures. Said manual provides that only after the examination is concluded,
should a pre-closing conference led by the examiner-in-charge be held with the
officers/representatives of the institution on the findings/exception, and a copy of the
summary of the findings/violations should be furnished the institution examined so that
corrective action may be taken by them as soon as possible. It is hard to understand
how a period of four days after the conference could be a reasonable opportunity for a
bank to undertake a responsive and corrective action on the partial list of findings of the
examiner-in-charge.

We recognize the fact that it is the responsibility of the Central Bank of the Philippines to
administer the monetary, banking and credit system of the country and that its powers
and functions shall be exercised by the Monetary Board pursuant to Rep. Act No. 265,
known as the Central Bank Act. Consequently, the power and authority of the Monetary
Board to close banks and liquidate them thereafter when public interest so requires is
an exercise of the police power of the state. Police power, however, may not be done
arbitratrily or unreasonably and could be set aside if it is either capricious, discrimina-
tory, whimsical, arbitrary, unjust or is tantamount to a denial of due process and equal
protection clauses of the Constitution
In the instant case, the basic standards of substantial due process were not observed.
Time and again, We have held in several cases, that the procedure of administrative tri-
bunals must satisfy the fundamentals of fair play and that their judgment should express
a well-supported conclusion.

However, as to the requirement of notice and hearing, Sec. 29 of RA 265 does not re-
quire a previous hearing before the Monetary Board implements the closure of a bank,
since its action is subject to judicial scrutiny as provided for under the same law

Notwithstanding the foregoing, administrative due process does not mean that the other
important principles may be dispensed with, namely: the decision of the administrative
body must have something to support itself and the evidence must be substantial. Sub-
stantial evidence is more than a mere scintilla. It means such relevant evidence as a
reasonable mind might accept as adequate to support a conclusion (Ang Tibay vs.
CIR, supra). Hence, where the decision is merely based upon pieces of documentary
evidence that are not sufficiently substantial and probative for the purpose and conclu-
sion they are presented, the standard of fairness mandated in the due process clause is
not met. In the case at bar, the conclusion arrived at by the respondent Board that the
petitioner bank is in an illiquid financial position on January 23, 1985, as to justify its clo-
sure on January 25, 1985 cannot be given weight and finality as the report itself admits
the inadequacy of its basis to support its conclusion.

The second requirement provided in Section 29, R.A. 265 before a bank may be closed
is that the examination should disclose that the condition of the bank is one of insol-
vency. In this case, there can be no clearer explanation of the concept of insolvency
than what the law itself states. Sec. 29 of the Central Bank Act provides that insolvency
under the Act, shall be understood to mean that "the realizable assets of a bank or a
non-bank financial intermediary performing quasi-banking functions as determined by
the Central Bank are insufficient to meet its liabilities."

Hence, the contention of the Central Bank that a bank's true financial condition is syn-
onymous with the terms "unimpaired capital and surplus," "combined capital accounts"
and net worth after deducting valuation reserves from the capital, surplus and unre-
tained earnings, citing Sec. 5 of RA 337 is misplaced.

 Firstly, it is clear from the law that a solvent bank is one in which its assets ex -
ceed its liabilities. It is a basic accounting principle that assets are composed of
liabilities and capital. The term "assets" includes capital and surplus" (Exley v.
Harris, 267 p. 970, 973, 126 Kan., 302). On the other hand, the term "capital" in -
cludes common and preferred stock, surplus reserves, surplus and undivided
profits. (Manual of Examination Procedures, Report of Examination on Depart-
ment of Commercial and Savings Banks, p. 3-C). If valuation reserves would be
deducted from these items, the result would merely be the networth or the unim -
paired capital and surplus of the bank applying Sec. 5 of RA 337 but not the total
financial condition of the bank.
Respondents acknowledge that under the said CB manual, CB examiners must recom-
mend valuation reserves, when warranted, to be set up against the corresponding asset
account (p. 8, Objections to Santiago report). Tiaoqui himself, as author of the report
recommending the closure of petitioner bank admits that the valuation reserves should
still be discussed with the petitioner bank in compliance with standard examination pro-
cedure. Hence, for the Monetary Board to unilaterally deduct an uncertain amount as
valuation reserves from the assets of a bank and to conclude therefrom without suffi-
cient basis that the bank is insolvent, would be totally unjust and unfair.

The test of insolvency laid down in Section 29 of the Central Bank Act is mea -
sured by determining whether the realizable assets of a bank are leas than its lia-
bilities. Hence, a bank is solvent if the fair cash value of all its assets, realizable
within a reasonable time by a reasonable prudent person, would equal or exceed
its total liabilities exclusive of stock liability; but if such fair cash value so realiz-
able is not sufficient to pay such liabilities within a reasonable time, the bank is
insolvent. Stated in other words, the insolvency of a bank occurs when the actual cash
market value of its assets is insufficient to pay its liabilities, not considering capital stock
and surplus which are not liabilities for such purpose

In view of the foregoing premises, We believe that the closure of the petitioner bank was
arbitrary and committed with grave abuse of discretion. Granting in gratia argumenti that
the closure was based on justified grounds to protect the public, the fact that petitioner
bank was suffering from serious financial problems should not automatically lead to its
liquidation. Section 29 of the Central Bank provides that a closed bank may be reorga -
nized or otherwise placed in such a condition that it may be permitted to resume busi-
ness with safety to its depositors, creditors and the general public.

2. The petitions in G.R. No. 70054, 78767 and 78894 are GRANTED and the assailed
order of the Central Bank and the Monetary Board dated January 25, 1985 is hereby
ANNULLED AND SET ASIDE. The Central Bank and the Monetary Board are ordered
to reorganize petitioner Banco Filipino Savings and Mortgage Bank and allow the latter
to resume business in the Philippines under the comptrollership of both the Central
Bank and the Monetary Board and under such conditions as may be prescribed by the
latter in connection with its reorganization until such time that petitioner bank can con-
tinue in business with safety to its creditors, depositors and the general public.