Cagayan de Oro City Water District vs. COA

Recipients of COA-disallowed allowances and benefits are generally liable to refund under the principle of solutio indebiti, but may be excused from returning amounts received more than three (3) years before the notice of disallowance on equity and social justice grounds, unless they actively participated in fraudulent transactions; approving/certifying officers found to have acted in bad faith, malice, or gross negligence are solidarily liable only for the net disallowed amount, which excludes amounts excused from return by payees.

The Cagayan de Oro City Water District (COWD) is a local water district governed by Presidential Decree No. 198, as amended, which prescribes the compensation framework for members of its Board of Directors (BOD). As a government-owned and controlled corporation, COWD's personnel are subject to the Salary Standardization Law (R.A. No. 6758), which established July 1, 1989 as the cut-off date for non-integrated benefits. The Commission on Audit (COA) conducted post-audits of COWD's expenditures for multiple calendar years, resulting in Notices of Disallowance for various allowances and benefits granted to COWD BOD members, officers, and organic personnel. The obligation to refund disallowed amounts had been governed by an evolving line of jurisprudence culminating in the Madera vs. COA rules, which the Court adopted to harmonize conflicting rulings on the civil liability of payees and approving officers.

The Cagayan de Oro City Water District (COWD) is a local water district whose Board of Directors (BOD) and personnel were the subjects of post-audit examinations conducted by the Commission on Audit (COA) across multiple calendar years. The COA's post-audit of COWD for calendar years 1994–1996 resulted in the issuance of Certificate of Settlement and Balances (CSB) No. 98-001-001(96), indicating disallowances aggregating P8,524,660.87. A special audit for calendar year 1997 produced CSB No. 99-001-101(97), indicating similar disallowances amounting to P2,236,099.30. COWD appealed these CSBs through the COA's internal appellate hierarchy — from the Regional Cluster Director (RCD-RLOA) to the COA Legal and Adjudication Office-Corporate (LAO-C), and finally to the COA Proper. The COA Proper, in Decision No. 2012-019 dated February 17, 2012, denied COWD's appeal, affirming the disallowance of various allowances and benefits granted to BOD members and personnel while lifting certain disallowances for personnel who were incumbents as of July 1, 1989.

In 2002, the COA conducted a separate post-audit of COWD covering the period January 1, 1998 to May 31, 1999, resulting in CSB No. 2002-001 (98 & 99) issued on January 31, 2002. This CSB indicated audit disallowances in the aggregate amount of P37,363,278.47, itemized across twenty-five expenditure categories including honorarium and representation allowance, miscellaneous expense, mid-year incentive pay, service incentive pay, year-end incentive pay, hazard pay, uniform allowance, amelioration allowance, staple food allowance, cash gift, per diems, car plan and its incidental expenses, cellular phone expenses, rice allowance, extraordinary and miscellaneous expenses, health care insurance, and donations. The disallowed items were granted to both members of the COWD BOD and managerial and other personnel. COWD sought reversal of CSB 2002-001 but was denied by the RCD-RLOA in its 11th and 2nd Indorsements dated August 27, 2003 and January 23, 2004, respectively.

COWD appealed to the COA LAO-C, raising seven grounds: that BOD allowances were legal under COWD Board Resolution No. 007, S.-95 pursuant to the rule-making power of administrative agencies; that the parties acted in good faith and need not refund benefits received under LWUA Board Resolution No. 313; that the General Manager was not covered by E.O. 248's limited travel allowance; that cellular phone expenses were job-related; that COWD was not subsidized by the national or local government and thus not covered by the annual budget law; that the DBM had affirmed certain allowances as part of compensation under the non-diminution principle; and that donations to religious and civic organizations served COWD's public purpose. The COA LAO-C, in Decision No. 2008-043 dated July 29, 2008, denied the appeal and affirmed CSB 2002-001 with modifications, lifting disallowances for incumbent personnel as of July 1, 1989 but affirming disallowances for those hired after that date. The COA LAO-C relied on Baybay Water District vs. COA for the proposition that BOD members of water districts cannot receive allowances beyond per diems under P.D. No. 198, and on Molen Jr. vs. COA for the rule that the good faith excuse to refund applied only to allowances specifically enumerated in LWUA Resolution No. 313, series of 1995.

COWD's motion for reconsideration was treated as an appeal to the COA Proper, which issued Decision No. 2012-036 dated March 22, 2012, denying the appeal and affirming the LAO-C decision. The COA Proper additionally noted that private health insurance procured by COWD was an additional benefit proscribed under Section 12 of R.A. No. 6758 (Salary Standardization Law), since PhilHealth already provided government health insurance under R.A. No. 7875. COWD's motion for reconsideration of Decision No. 2012-036 was denied by the COA Proper in its Letter dated April 4, 2014, prompting COWD to file the instant Petition for Certiorari before the Supreme Court.

• Good Faith of BOD Members: Petitioner maintained that the disallowed allowances and benefits granted to members of the COWD BOD were approved and received in good faith, citing Bases Conversion and Development Authority vs. COA, Philippine Ports Authority vs. COA, Barbo vs. COA, Abanilla vs. COA, and Lumayna vs. COA, arguing that the Court had declared in those cases that concerned officers and employees need not refund benefits received before the Baybay Water District ruling, whether or not included in LWUA Resolution No. 313.
• Presumption of Regularity: Petitioner argued that there was no proof of bad faith on the part of the BOD members, and that official acts enjoy the presumption of regularity, with bad faith never presumed and the burden of proof on the party alleging it.
• Good Faith of Personnel: Petitioner argued, based on Agra vs. COA, that there should have been no order to refund allowances and benefits received by COWD officers and organic personnel, as they were recipients in good faith.
• Cellular Phone Expenses Not Excessive: Petitioner claimed that the disallowed cellular phone expenses were not shown to be "excessive expenditures," contending that exceeding the rates set by COWD's own board resolutions did not ipso facto render them excessive, and that the COA must have a reasonable and justifiable comparison before declaring them as such.
• Hazard Pay Justified: Petitioner attempted to justify the grant of hazard pay by claiming that Northern Mindanao was greatly affected by the El Niño/La Niña phenomenon at the time hazard pay was given, and that no refund should have been required based on Philippine Ports Authority vs. COA and Kapisanan ng mga Manggagawa sa GSIS vs. COA.
• Donations Made in Good Faith: Petitioner did not question the legality of the disallowance of donations to religious and civic organizations but claimed there should be no order to refund as these were made in good faith.

• Grave Abuse of Discretion — BOD Allowances: Whether the COA committed grave abuse of discretion in affirming the disallowance and ordering the refund of Mid-Year Incentive Pay, Service Incentive Pay, Year-End Incentive Pay, Amelioration Allowance, Staple Food Incentive, Per Diems (Cash Advance for Travel), Car Plan, Car Plan Incidental Expenses, and Miscellaneous Expenses granted to members of the COWD BOD.
• Grave Abuse of Discretion — Personnel Allowances: Whether the COA committed grave abuse of discretion in affirming the disallowance and ordering the refund of Mid-Year Incentive Pay, Service Incentive Pay, Year-End Incentive Pay, Staple Food Incentive, Car Plan, Car Plan Incidental Expenses, Per Diems (cash advance for travel), Rice Allowance, Healthcare Insurance, and Extraordinary Miscellaneous Expenses granted to COWD officers and organic personnel, including those hired after July 1, 1989.
• Grave Abuse of Discretion — Excessive Cellular Phone Expenses: Whether the COA committed grave abuse of discretion in disallowing and ordering the refund of excessive cellular phone expenses granted to COWD personnel.
• Grave Abuse of Discretion — Hazard Pay: Whether the COA committed grave abuse of discretion in disallowing and ordering the refund of Hazard Pay granted to COWD BOD and personnel.
• Grave Abuse of Discretion — Donations: Whether the COA committed grave abuse of discretion in disallowing and ordering the refund of Donations to Religious and Civic Organizations.

• Grave Abuse of Discretion — BOD Allowances: No. The disallowance and order to refund were affirmed, the disallowed allowances and benefits having no legal basis under Section 13 of P.D. No. 198, which prohibits directors of water districts from receiving compensation other than per diems. The BOD members did not qualify for the good faith exception under Molen because the disallowed items were not among those enumerated in LWUA Resolution No. 313.
• Grave Abuse of Discretion — Personnel Allowances: Partly yes. The disallowance was affirmed, but the refund was excused for amounts granted and received more than three years before the notice of disallowance (January 1, 1998 to January 31, 1999), pursuant to Rule 2d of Madera on social justice and equity considerations. Amounts received from February 1, 1999 to May 31, 1999 remained subject to refund.
• Grave Abuse of Discretion — Excessive Cellular Phone Expenses: No. The disallowance was affirmed, the expenses being excessive by P132,712.51 compared to the rates prescribed by COWD's own Board Resolutions No. 069, series of 1995, and No. 037, series of 1998. The same three-year period rule was applied to determine refundability.
• Grave Abuse of Discretion — Hazard Pay: No. The disallowance was affirmed, COWD having failed to prove that its personnel were assigned to work areas enumerated under DBM-National Compensation Circular No. 76 that would qualify them for hazard pay. The BOD members were held solidarily liable for the hazard pay they personally received, having acted in bad faith or gross negligence.
• Grave Abuse of Discretion — Donations: No. The disallowance was affirmed, the donations lacking public purpose and being illegal under Section 29(2), Article VI of the Constitution. The approving/certifying officers and BOD members were held solidarily liable, having acted in bad faith or gross negligence. The donee organizations could not be held liable in this case as they were not impleaded as parties.

• Grave Abuse of Discretion — BOD Allowances: The Court applied the doctrine established in Baybay Water District vs. COA and Magno vs. COA that Section 13 of P.D. No. 198, as amended, governs the compensation of BOD members of water districts, authorizing them to receive only per diems and no other compensation or allowance in whatever form. The prohibition is plain and clear, precluding any reasonable textual interpretation that could serve as a badge of good faith under the Madera framework. Under Molen, the good faith excuse to refund applies only to allowances and benefits specifically enumerated in LWUA Resolution No. 313, series of 1995, which have colorable legality and validity. The disallowed items granted to COWD BOD members — Mid-Year Incentive Pay, Service Incentive Pay, Year-End Incentive Pay, Amelioration Allowance, Staple Food Incentive, Per Diems (cash advance for travel), Car Plan, Car Plan Incidental Expenses, and Miscellaneous Expenses — were not among those enumerated in the Resolution, and no evidence was adduced to justify them as falling under it or having the same nature and purposes. A blanket claim of good faith is insufficient to excuse the refund. The BOD members and approving/certifying officers were therefore held solidarily liable to refund these disallowed amounts.

• Grave Abuse of Discretion — Personnel Allowances: The Court affirmed the COA Proper's application of the Ambros vs. COA doctrine that additional allowances and benefits are allowed in audit only for incumbent personnel already receiving them as of July 1, 1989, and are disallowed for personnel hired after that date. On the obligation to refund, the Court applied Rule 2d of Madera, which allows the Court to excuse the return of recipients based on undue prejudice, social justice considerations, and other bona fide exceptions on a case-to-case basis. The Court adopted two guiding principles: first, the nature and purpose of the disallowed allowances and benefits, requiring recipients to prove with substantial evidence the nature and purpose of the benefits and the existence and truthfulness of compelling or exigent circumstances; second, the lapse of three (3) years between receipt of the benefits and the issuance of the notice of disallowance, recognizing that after such a period without notice of illegality, recipients would have already spent the amounts in good faith. The disallowed allowances were granted during January 1, 1998 to May 31, 1999, and CSB No. 2002-001 was issued on January 31, 2002. Thus, amounts granted and received from January 1, 1998 to January 31, 1999 — more than three years before the notice — were excused from refund. Amounts from February 1, 1999 to May 31, 1999 remained subject to refund. The approving/certifying officers and BOD members were deemed to have acted in bad faith, applying MIAA vs. COA, because they were duty-bound to know the law and could not claim good faith in failing to understand R.A. No. 6758 and its implementing issuances.

• Grave Abuse of Discretion — Excessive Cellular Phone Expenses: The Court affirmed the disallowance, finding the cellular phone expenses excessive by P132,712.51 compared to the allowable rates prescribed by COWD's own Board Resolution No. 069, series of 1995, and Board Resolution No. 037, series of 1998. Under COA Circular No. 85-55-A, "excessive expenditures" include expenses which exceed what is usual or proper and those in excess of reasonable limits. The COWD Board Resolutions themselves prescribed what was usual or proper, and the COA correctly relied on them as the standard of comparison. COWD bore the burden of justifying the excess over its own rates. The same three-year period rule was applied: expenses granted and received from January 1, 1998 to January 31, 1999 were excused from refund, while those from February 1, 1999 to May 31, 1999 were subject to refund, with approving/certifying officers solidarily liable and recipient personnel individually liable to the extent of amounts received.

• Grave Abuse of Discretion — Hazard Pay: The Court affirmed the disallowance, holding that hazard pay by its nature is intended for a limited group of government employees with peculiar working conditions. Item No. 3 of DBM-National Compensation Circular No. 76 enumerated qualifying work areas such as embattled or strife-torn areas, sites of armed encounters, difficult or distressed work areas, and areas affected by volcanic activity. COWD's workplace did not fall within these categories, and the unsubstantiated claim of El Niño/La Niña effects could not justify the grant. On refund liability, the three-year period rule was applied for COWD personnel. For BOD members and approving/certifying officers, the Court held they acted in bad faith or gross negligence, as they could not deny knowledge of the law and executive issuances governing hazard pay and failed to present any proof justifying its approval. They were held solidarily liable to refund the total amount of hazard pay personally received by them.

• Grave Abuse of Discretion — Donations: The Court affirmed the disallowance, holding that the donations to religious and civic organizations were not for a public purpose or connected with the discharge of COWD's corporate functions, making them illegal under Section 29(2), Article VI of the Constitution, which limits the appropriation of public money and property. COA Circular No. 2012-003 further classified donations and contributions to civic organizations as examples of irregular expenditures. The approving/certifying officers and BOD members acted in bad faith or gross negligence, having knowledge of the constitutional prohibition, and were held solidarily liable under Section 52, Book V, Title I, Chapter 9 of the Administrative Code. Regarding the donee organizations, the Court recognized that under the principle of solutio indebiti, they should ideally be held liable to refund, but declined to rule on their liability because they were not impleaded as parties. Citing National Housing Authority vs. Evangelista and the constitutional guarantee of due process, the Court held that any decision against the donee organizations would be null and void insofar as it affected their rights, as strangers to a case are not bound by judgments rendered by the court.

• Madera Rules on Return — The Supreme Court in Madera vs. COA established comprehensive rules governing the obligation to refund amounts disallowed by the COA: (1) If a Notice of Disallowance is set aside, no return is required; (2) If upheld: (a) approving and certifying officers who acted in good faith, in regular performance of official functions, and with the diligence of a good father of a family are not civilly liable to return, consistent with Section 38 of the Administrative Code of 1987; (b) approving and certifying officers who acted in bad faith, malice, or gross negligence are solidarily liable to return only the "net disallowed amount" (total disallowed amount minus amounts excused from return by payees), pursuant to Section 43 of the Administrative Code; (c) recipients — whether approving/certifying officers or mere passive recipients — are liable to return the disallowed amounts respectively received, unless they show the amounts were genuinely given in consideration of services rendered; (d) the Court may excuse the return of recipients based on undue prejudice, social justice considerations, and other bona fide exceptions on a case-to-case basis. In this case, the Court applied Rule 2d to excuse rank-and-file recipients from refunding amounts received more than three years before the notice of disallowance.

• Three-Year Period Rule — First established in this decision, the Court recognized three (3) years as a reasonable period for recipients to be notified of any illegality or irregularity in allowances or benefits. The lapse of this period without any notice of disallowance or similar notice is sufficient to excuse recipients from refunding amounts received, on grounds of equity and fairness. This rule does not apply in favor of persons found to have actively participated in fraudulent transactions, such as those found culpable in Special Audits or Fraud Audits conducted by the COA.

• Good Faith Exception under Molen — Under Molen Jr. vs. COA, the good faith doctrine as an excuse to refund applies only to disallowed allowances and benefits specifically enumerated in LWUA Resolution No. 313, series of 1995, which have colorable legality and validity. To establish good faith, it must be alleged and proved that the disallowed allowances and benefits fall under those provided in the Resolution. Disallowed items not enumerated in the Resolution cannot be excused on the ground of good faith.

• Badges of Good Faith for Approving/Certifying Officers — Adopted from Justice Leonen's concurring opinion in Madera, the following circumstances may be considered in determining whether an authorizing officer exercised the diligence of a good father of a family: (1) certificates of availability of funds pursuant to Section 40 of the Administrative Code; (2) in-house or Department of Justice legal opinion; (3) absence of any precedent disallowing a similar case in jurisprudence; (4) traditional practice within the agency with no prior disallowance; (5) with regard to questions of law, a reasonable textual interpretation of legality. The presence of any of these factors may uphold the presumption of good faith.

• Solutio Indebiti in COA Disallowances — Recipients of disallowed benefits, regardless of good or bad faith, are generally obliged to refund to the government on the grounds of unjust enrichment and solutio indebiti. This equitable principle prevents undue fiscal leakage that may occur if the government is unable to recover from passive recipients amounts corresponding to a properly disallowed transaction. Bona fide exceptions may be recognized where amounts were genuinely given in consideration of services rendered, or where undue prejudice, social justice, or humanitarian considerations are attendant.

• "the responsibility to return is a civil obligation to which fundamental civil law principles, such as unjust enrichment and solutio indebiti apply regardless of the good faith of passive recipients." — This passage from Madera, quoted and applied in this decision, articulates the foundational principle that the obligation to refund disallowed amounts is a civil obligation grounded in civil law, not dependent on the recipient's state of mind.

• "the net disallowed amount shall be solidarily shared by the approving/authorizing officers who were clearly shown to have acted in bad faith, with malice, or were grossly negligent." — This formulation from Madera, adopted in this decision, defines the scope of solidary liability for errant officers, limiting their exposure to the net disallowed amount after excluding amounts excused from return by payees, thereby correcting the prior inequitable practice of holding officers liable for the entire disallowed amount.

• "Absent any circumstances the Court may deem sufficient, the lapse of three (3) years without any such notice shall be sufficient to excuse recipients from making a refund." — This passage establishes the three-year period rule, a new doctrinal contribution from this decision, providing a concrete temporal benchmark for excusing recipients from refund obligations on equity grounds.

• "no party shall be affected by any proceeding to which he/she is a stranger, and strangers to a case are not bound by a judgment rendered by the court." — This passage, applied to the donee religious and civic organizations not impleaded as parties, reinforces the due process guarantee that prevents the Court from adjudicating the liability of absent parties.

• Madera vs. COA, G.R. No. 244128, September 8, 2020 — Controlling precedent. The Court applied the Madera Rules on Return to determine the refund liabilities of payees and approving/certifying officers in COA disallowance cases. The rules on return, including the net disallowed amount concept and the recognition of social justice exceptions, were the primary framework for the Court's analysis.

• Baybay Water District vs. COA, 425 Phil. 326 (2002) — Controlling precedent on BOD compensation. Established that P.D. No. 198 governs the compensation of BOD members of water districts, who are authorized to receive only per diems and not other compensation or allowances. Applied to affirm the disallowance of additional allowances and benefits granted to COWD BOD members.

• Molen Jr. vs. COA, 493 Phil. 874 (2005) — Followed. Established that the good faith doctrine as an excuse to refund applies only to allowances and benefits specifically enumerated in LWUA Resolution No. 313, series of 1995. Applied to deny the good faith excuse for disallowed items not included in the Resolution.

• Magno vs. COA, 558 Phil. 76 (2007) — Followed. Recognized that good faith is justified under an honest belief of validity under LWUA Resolution No. 313, but only for allowances and benefits enumerated therein. Applied to hold that COWD BOD members could not claim good faith for disallowed items not falling under the Resolution.

• Ambros vs. COA, 501 Phil. 255 (2005) — Followed. Established that additional allowances and benefits are allowed in audit only for incumbent personnel already receiving them as of July 1, 1989, and disallowed for personnel hired after that date. Applied to affirm the disallowance of benefits granted to COWD personnel hired after July 1, 1989.

• Manila International Airport Authority vs. COA, 681 Phil. 644 (2012) — Followed. Held that the exercise of power by the BOD must always be subject to existing laws, rules, and regulations which they are mandated to know, and that officers cannot claim good faith when they fail to understand the law they are tasked to implement. Applied to hold COWD BOD members and approving/certifying officers liable in bad faith.

• Abellanosa vs. COA, G.R. No. 185806, November 17, 2020 — Followed. Elucidated the application of Rule 2d of Madera, providing that the exception to solutio indebiti must constitute a bona fide instance which strongly impels the court to prevent a clear inequity arising from a directive to return. Applied to justify the excusal of refund for amounts received beyond the three-year period.

• Uy vs. COA (2000) — Cited for the proposition that social justice considerations may be utilized in assessing whether there may be an exception to the rule on solutio indebiti so that the return may be excused altogether. Applied as jurisprudential basis for the social justice exception under Rule 2d of Madera.

• Section 13, Presidential Decree No. 198, as amended by P.D. No. 768 — Governs the compensation of members of the BOD of water districts, providing that each director shall receive a per diem for each meeting actually attended, not exceeding the equivalent of four meetings per month, and that "[n]o director shall receive other compensation for services to the district." Applied to disallow all additional allowances and benefits granted to COWD BOD members beyond per diems.

• Section 12, Republic Act No. 6758 (Salary Standardization Law) — Proscribes additional benefits not authorized by the DBM. Applied to disallow the private health insurance procured by COWD for its employees, as PhilHealth already provided government health insurance under R.A. No. 7875, making the private insurance an unauthorized additional benefit.

• Section 29(2), Article VI, 1987 Constitution — Prohibits the appropriation of public money or property for purposes other than public purpose. Applied to disallow donations to religious and civic organizations, which were not for a public purpose or connected with the discharge of COWD's corporate functions.

• Section 38, Administrative Code of 1987 (E.O. No. 292) — Provides that a public officer is not liable for acts done in good faith in the regular performance of official duties. Applied to exempt approving/certifying officers who acted in good faith from civil liability to return disallowed amounts.

• Section 43, Administrative Code of 1987 — Governs the liability of officers who acted in bad faith, malice, or gross negligence. Applied to hold approving/certifying officers solidarily liable for the net disallowed amount.

• Section 52, Book V, Title I, Chapter 9, Administrative Code of 1987 — Establishes the general rule that expenditures of government funds or uses of government property in violation of law or regulations shall be a personal liability of the official or employee found to be directly responsible. Applied to hold COWD BOD members and approving/certifying officers solidarily liable for the disallowed donations.

• Section 40, Administrative Code of 1987 — Pertains to certificates of availability of funds. Cited as one of the badges of good faith for determining whether authorizing officers exercised the diligence of a good father of a family.

• Article III, Section 1, 1987 Constitution — Constitutional guarantee of due process of law. Applied to hold that the Court could not rule on the liability of donee religious and civic organizations not impleaded as parties, as any decision against them would violate due process.

• COA Circular No. 85-55-A (1985) — Defines "excessive expenditures" as unreasonable expenses incurred at an immoderate quantity and exorbitant price, including expenses which exceed what is usual or proper and those in excess of reasonable limits. Applied to disallow the excessive cellular phone expenses of COWD personnel.

• COA Circular No. 2012-003 — Includes donations and contributions to civic organizations as examples of irregular expenditures. Applied to classify COWD's donations to religious and civic organizations as irregular expenses.

• DBM-National Compensation Circular No. 76, dated March 31, 1995 — Enumerates the work areas qualifying for hazard pay, including embattled or strife-torn areas, sites of armed encounters, difficult or distressed work areas, and areas affected by volcanic activity. Applied to disallow hazard pay granted to COWD personnel, whose workplace did not fall within the enumerated categories.

Gesmundo, C.J., Leonen, Caguioa, Hernando, Carandang, Lazaro-Javier, Inting, Zalameda, M. Lopez, Delos Santos, Rosario, and J. Lopez, JJ., concurred. Perlas-Bernabe, J., filed a concurring opinion.