Agbayani vs. Philippine National Bank

A statute or executive order, though subsequently declared unconstitutional, is an operative fact prior to its nullification, and its existence during that period tolls the running of prescription. The legal consequences of its operation cannot be ignored merely because it is later stricken down.

Plaintiff Francisco Serrano de Agbayani borrowed P450.00 from defendant Philippine National Bank on July 19, 1939, maturing July 19, 1944, secured by a real estate mortgage over property registered under T.C.T. No. 11275 of Pangasinan. In the aftermath of the Japanese occupation, the Commonwealth government issued Executive Order No. 32 on March 10, 1945, suspending enforcement of payment of all debts and monetary obligations of war sufferers; this moratorium was later extended by Republic Act No. 342 enacted in 1948. Republic Act No. 342 was subsequently declared unconstitutional in Rutter vs. Esteban in 1953 for being unreasonable and oppressive as applied to then-existing conditions, though its validity at the time of enactment was acknowledged.

On July 19, 1939, Francisco Serrano de Agbayani obtained a loan of P450.00 from the Philippine National Bank, maturing on July 19, 1944, secured by a real estate mortgage duly registered over property described in T.C.T. No. 11275 of the province of Pangasinan. As of November 27, 1959, the balance due on the loan stood at P1,294.00.

On July 13, 1959, PNB instituted extrajudicial foreclosure proceedings in the office of the Provincial Sheriff of Pangasinan to recover the unpaid balance. Plaintiff responded on August 10, 1959 by filing suit against both defendants, alleging that the mortgage sought to be foreclosed had long prescribed, fifteen years having elapsed from the date of maturity on July 19, 1944. She obtained a writ of preliminary injunction against the Provincial Sheriff, which the lower court later made permanent in its decision of January 27, 1960.

PNB, in its answer, prayed for dismissal of the suit, contending that even on plaintiff's own theory, prescription would not be available if the period from March 10, 1945 — when Executive Order No. 32 was issued — to July 26, 1948 — when the subsequent legislative act extending the moratorium was declared invalid — were deducted from the computation of the time during which the bank took no legal steps to recover the loan. The lower court rejected this contention, adhering to the orthodox view that an unconstitutional act is not a law, creates no rights, and imposes no duties, and thus treated the moratorium period as though it had never existed. That decision is the subject of the present appeal.

• Prescription: Defendant-appellant PNB argued that the prescriptive period for foreclosure had not lapsed because the moratorium period under Executive Order No. 32 (effective March 10, 1945) and Republic Act No. 342 (enacted 1948), which suspended enforcement of debt payments, must be excluded from the computation of time during which the bank took no legal steps to recover the loan.
• Operative Fact Doctrine: PNB maintained that even though the moratorium legislation was subsequently declared unconstitutional in Rutter vs. Esteban, its existence as an operative fact prior to nullification could not be disregarded, and the period during which it was in force tolled prescription.

• Orthodox View of Unconstitutionality: Plaintiff-appellee contended that the mortgage obligation had prescribed, fifteen years having elapsed from the maturity date of July 19, 1944, and that the moratorium period under Executive Order No. 32 and Republic Act No. 342 could not be counted in the computation because those measures were subsequently declared unconstitutional and therefore were inoperative as if they had never existed.

• Effect of Subsequently Invalidated Statute: Whether the period during which a moratorium law, subsequently declared unconstitutional, was in force should be counted as tolling the prescriptive period for foreclosure of a mortgage obligation.
• Operative Fact Doctrine: Whether a statute or executive order, prior to its being adjudged void, is an operative fact to which legal consequences attach, notwithstanding its subsequent nullification.

• Effect of Subsequently Invalidated Statute: Yes. The moratorium period from March 10, 1945 to May 18, 1953 — eight years, two months, and eight days — tolled the running of prescription, leaving sufficient time for foreclosure when PNB acted on July 13, 1959.
• Operative Fact Doctrine: Yes. The existence of a statute or executive order prior to its being adjudged void is an operative fact to which legal consequences are attached; the past cannot always be erased by a new judicial declaration.

• Effect of Subsequently Invalidated Statute: The orthodox view that an unconstitutional act is not a law and creates no rights or duties, while logically sound and simple, is insufficiently realistic. Prior to a declaration of nullity, a challenged legislative or executive act must have been in force and had to be complied with; parties may have acted under it and changed their positions. The Court adopted the principle that the existence of a statute or executive order prior to its being adjudged void is an operative fact to which legal consequences attach. This reflects the reality that, because the judiciary is the governmental organ with final authority on validity, a period of time may elapse before it exercises judicial review leading to nullification. Applying this principle, the moratorium period from March 10, 1945 (effectivity of Executive Order No. 32) to May 18, 1953 (promulgation of Rutter vs. Esteban) — totaling eight years, two months, and eight days — tolled prescription. From July 19, 1944 (maturity) to July 13, 1959 (foreclosure), only fourteen years and six days elapsed, six days short of fifteen years. Subtracting the eight-plus years of moratorium, there was ample time remaining before prescription could be invoked as a defense.

• Operative Fact Doctrine: The approach is especially compelling where police power legislation intended to promote public welfare but adversely affecting property rights is involved. The moratorium legislation was a valid governmental response to the post-war emergency at the time of its enactment; the Philippines was confronted with an economy in prostration upon liberation from Japanese forces. The Supreme Court had rightly rejected the contention that the Moratorium Law was unconstitutional on its face, recognizing that some such remedial device was needed. It was only by 1953, when conditions had changed, that the Court found the continued moratorium unreasonable and oppressive as applied to then-existing circumstances. The fact that the legislation was valid when enacted but invalid when adjudicated underscores why the operative fact doctrine must apply: to ignore what transpired while the law was in force would be the fruitful parent of injustice. The Court had consistently held, from Day vs. Court of First Instance (1954) to Republic vs. Hernaez (1970), that during the period the moratorium was in force, prescription did not run — a view the lower court explicitly and consistently rejected, in error.

• Operative Fact Doctrine — A statute or executive order, though subsequently declared unconstitutional, is an operative fact prior to its nullification; its existence during the period it was in force and presumed valid is not devoid of legal consequences. Parties may have acted under it and changed their positions, and regard must be had to what was done while such measure was in operation. The past cannot always be erased by a new judicial declaration. In this case, the doctrine was applied to hold that the moratorium period under Executive Order No. 32 and Republic Act No. 342 tolled the running of prescription for mortgage foreclosure, even though both measures were later declared unconstitutional in Rutter vs. Esteban.

• Rational Basis Test as Time-Dependent — A police power measure valid when enacted may subsequently, due to altered circumstances, be stricken down. The constitutionality of such legislation is conditioned on its being fair or reasonable, which in turn depends on the actual situation — never static but subject to change. The moratorium legislation was valid at the time of enactment in 1945 and 1948 given the post-war emergency, but unreasonable and oppressive by 1953 when conditions had improved, leading to its nullification in Rutter vs. Esteban.

• "The actual existence of a statute, prior to such a determination [of unconstitutionality], 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 the 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." — This passage, quoted from the U.S. Supreme Court decision in Chicot County Drainage Dist. vs. Baxter States Bank, articulates the canonical formulation of the operative fact doctrine as adopted by the Philippine Supreme Court.

• "It is now accepted as a doctrine that prior to its being nullified, its existence as a fact must be reckoned with. This is merely to reflect awareness that precisely because the judiciary is the governmental organ which has the final say on whether or not a legislative or executive measure is valid, a period of time may have elapsed before it can exercise the power of judicial review that may lead to a declaration of nullity." — This passage explains the doctrinal basis for recognizing the legal consequences of a statute's operation prior to nullification, grounded in the institutional reality of judicial review.

• "To ignore such a fact would indeed be the fruitful parent of injustice." — A concise statement of the equity rationale underlying the operative fact doctrine, emphasizing that disregarding actions taken under a law presumed valid would produce injustice.

• Rutter vs. Esteban, 93 Phil. 68 (1953) — Controlling precedent declaring Republic Act No. 342 and Executive Order No. 32 unconstitutional as unreasonable and oppressive as of 1953, while acknowledging their validity at the time of enactment. The Court relied on this case to establish the period during which the moratorium was in force and to delimit the operative fact period.
• Day vs. Court of First Instance of Tarlac, 94 Phil. 816 (1954) — Followed precedent holding that during the moratorium period, prescription did not run. Cited as the earliest in a consistent line of cases establishing that the prescriptive period was tolled while the moratorium was in force.
• Republic vs. Hernaez, L-24137, January 30, 1970, 31 SCRA 219 — Followed precedent, the most recent at the time, reaffirming that prescription was tolled during the moratorium period. Cited to demonstrate the consistency and unanimity of the Court's position.
• Liboro vs. Finance and Mining Investments Corp., 102 Phil. 489 (1957) — Followed precedent in which the Chief Justice categorized the opposite view — that prescription was not tolled during the moratorium — as having been "explicitly and consistently rejected by this Court."
• Fernandez vs. Cuerva and Co., L-21114, Nov. 28, 1967, 21 SCRA 1095 — Cited as an even more recent instance of the Court's adoption of the operative fact doctrine, through the opinion of Justice Zaldivar.
• Araneta vs. Hill, 93 Phil. 1002 (1953) — Cited as a resolution in which the operative fact doctrine language from Chicot County was quoted with approval.
• Manila Motor Co., Inc. vs. Flores, 99 Phil. 738 (1956) — Cited as a decision in which the operative fact doctrine language was quoted with approval.

• Article 7, Civil Code of the Philippines — Provides that when courts declare a law inconsistent with the Constitution, the former shall be void and the latter shall govern; administrative or executive acts, orders, and regulations shall be valid only when not contrary to the laws or the Constitution. The Court acknowledged this codal provision as reflecting the orthodox view but held it insufficient to negate the operative fact doctrine.
• Executive Order No. 32 (March 10, 1945) — Suspended enforcement of payment of all debts and monetary obligations payable within the Philippines, except those contracted in areas already freed from enemy occupation. The Court held that the period of its operation tolled prescription.
• Republic Act No. 342 (1948) — Extended the moratorium for eight years from settlement of war damage claims, continuing Executive Order No. 32 in full force and effect for war sufferers. Declared unconstitutional in Rutter vs. Esteban but its period of operation was held to toll prescription under the operative fact doctrine.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Teehankee, Barredo, Villamor, and Makasiar, JJ., concurred.