Castañeda, Jr. vs. Commission on Audit

Allowances and benefits granted to government employees without legal basis are properly disallowed, and both the approving and certifying officers who acted with gross negligence and the recipient-payees are liable to refund the disallowed amounts — the former on a solidary basis under the Administrative Code, and the latter under the principle of solutio indebiti regardless of good faith.

The San Rafael Water District (SRWD) is a government-owned and controlled corporation organized under Presidential Decree No. 198, as amended, providing water utility services in San Rafael, Bulacan. Republic Act No. 6758, the Compensation and Position Classification Act of 1989, took effect on July 1, 1989, integrating all allowances into standardized salary rates except for seven enumerated categories and additional compensation being received by incumbents as of that date. The Local Water Utilities Administration (LWUA) exercises supervisory authority over local water districts, including approval of certain compensation grants to their boards of directors. Administrative Order No. 103, issued by the President on August 31, 2004, suspended the grant of new and additional benefits to all GOCC officials and employees as an austerity measure.

The San Rafael Water District (SRWD) is a government-owned and controlled corporation organized under Presidential Decree No. 198, as amended, providing water utility services in San Rafael, Bulacan. Engr. Numeriano M. Castañeda, Jr. served as its General Manager, while Ms. Marivel Suarez held the position of Division Manager C. Together with other SRWD officials and employees, they are the petitioners in this case.

For the period January 1 to December 31, 2011, the SRWD Board of Directors authorized the payment of additional benefits to 22 employees hired after December 31, 1999, in the form of rice allowance, grocery allowance, medical allowance, and year-end financial assistance, totaling PHP 1,727,409.75. Within the same period, SRWD likewise paid year-end financial assistance and cash gift to the members of its Board of Directors in the total amount of PHP 239,000.00. The disbursements were approved by Castañeda, Jr. and certified by Suarez as to correctness, legality, and necessity.

On post-audit, the Audit Team Leader and Supervising Auditor of SRWD issued Audit Observation Memorandum No. 2012-008(11), finding that the payments lacked legal basis. SRWD responded that the questioned allowances and bonuses were paid in good faith, after securing authorization from the LWUA and the DBM. Specifically, SRWD relied on a Letter-Reply dated February 11, 2003, from DBM Regional Director Orlando R. Garcia (the Garcia Letter), which purported to authorize the grant of allowances to SRWD officials and employees hired after December 31, 1999, pursuant to Section 12 of Republic Act No. 6758. For the BOD benefits, SRWD relied on LWUA Board Resolution No. 239 and LWUA Memorandum Circular No. 004.11.

On November 21, 2012, the audit team issued two Notices of Disallowance. ND No. 12-001-101(11) disallowed PHP 857,340.75 in employee allowances and bonuses, naming Castañeda, Jr., Suarez, and the 22 employee-recipients as liable. ND No. 12-002-101(11) disallowed PHP 239,000.00 in BOD benefits, naming Castañeda, Jr., Suarez, and the five BOD members as liable. Petitioners appealed to the COA Regional Office No. III, which denied the appeal on April 30, 2014. They then elevated the matter to the COA Commission Proper, which partially granted the petition on January 29, 2018, affirming the disallowances but absolving the employee-recipients from refunding on the ground of good faith. Upon motion for partial reconsideration by Castañeda, Jr. and Suarez, the COA reversed its earlier absolution of the payees and held all recipients liable to the extent of the amounts they received, while keeping the approving and certifying officers solidarily liable. Petitioners then filed the present Petition for Certiorari before the Supreme Court.

• Validity of DBM Authority: Petitioners maintained that the grant of allowances and benefits to employees hired after December 31, 1999 was authorized by the Garcia Letter dated February 11, 2003, issued by DBM Regional Director Orlando R. Garcia, which expressly authorized the payment of allowances to SRWD officials and employees hired after that date pursuant to Section 12 of Republic Act No. 6758.
• Good Faith of Approving and Certifying Officers: Petitioners contended that they acted in good faith in faithfully and primarily relying on the blanket authority given by the DBM through the Garcia Letter and on SRWD Board resolutions authorizing the release of benefits, and should not be held liable to refund the disallowed amounts, citing Blaquera vs. Alcala.
• Finality of COA's Absolution of Payees: Petitioners argued that the COA's earlier ruling absolving the employee-recipients under ND No. 12-001-101(11) was never the subject of the Motion for Partial Reconsideration and thus obtained finality as of the filing of the instant case.
• Validity of BOD Benefits: Petitioners submitted that the payment of year-end financial assistance and cash gift to the SRWD BOD was made pursuant to LWUA Board Resolution No. 239 and LWUA Memorandum Circular No. 004.11, which authorized the grant and release of such benefits to all incumbent members of water district BODs.
• Retroactive Application of Chozas: Petitioners argued that the COA committed grave abuse of discretion when it retroactively applied the ruling in Chozas vs. Commission on Audit in holding the employee-recipients liable for the refund of the disallowed allowances and benefits.

• Invalidity of Garcia Letter: The COA, through the Office of the Solicitor General, contended that petitioners cannot validly rely on the Garcia Letter, given that the only exemptions from the general rule on integration of allowances under Section 12 of Republic Act No. 6758 are those expressly excluded by law or by a DBM issuance like DBM CCC No. 10-99.
• Gross Negligence Negates Good Faith: Citing Ancheta vs. Commission on Audit, the COA argued that the presumption of good faith and regularity of performance of official duty is negated by the gross negligence of the approving and certifying officers in the performance of their duties.
• Liability of Recipient-Payees: The COA pointed out that the Court, in several cases, has upheld the liability of recipient-payees to return the amounts they received even prior to the promulgation of Chozas vs. Commission on Audit.

• Propriety of Disallowance — Employee Allowances: Whether the COA gravely abused its discretion in upholding ND No. 12-001-101(11) disallowing the payment of additional allowances and bonuses to SRWD employees hired after December 31, 1999.
• Propriety of Disallowance — BOD Benefits: Whether the COA gravely abused its discretion in upholding ND No. 12-002-101(11) disallowing the payment of year-end financial assistance and cash gift to the SRWD Board of Directors.
• Liability of Approving and Certifying Officers: Whether Castañeda, Jr. and Suarez, as approving and certifying officers, may be excused from solidary liability on the ground of good faith.
• Liability of Recipient-Payees: Whether the COA gravely abused its discretion in holding the employee-recipients and BOD members liable to refund the disallowed amounts, including by retroactively applying the ruling in Chozas vs. Commission on Audit.

• Propriety of Disallowance — Employee Allowances: No. The disallowance was proper because the employee-recipients were not incumbents as of July 1, 1989, the reckoning date fixed by Section 12 of Republic Act No. 6758, and the Garcia Letter authorizing the grant to post-1999 hires was erroneous and cannot override the statute.
• Propriety of Disallowance — BOD Benefits: No. The disallowance was proper because LWUA MC No. 004.11 referred to CY 2010 benefits, not 2011, and LWUA Resolution No. 239 was issued in violation of Administrative Order No. 103, which suspended the grant of new and additional benefits to GOCC officials.
• Liability of Approving and Certifying Officers: No. Castañeda, Jr. and Suarez were correctly held solidarily liable, their claim of good faith negated by gross negligence in disregarding established jurisprudence and applicable rules existing at the time of disbursement.
• Liability of Recipient-Payees: No. The COA did not gravely abuse its discretion in holding all payees liable to refund, as the obligation to return is based on solutio indebiti and unjust enrichment under Article 22 of the Civil Code, under which good faith is inconsequential for passive recipients.

• Propriety of Disallowance — Employee Allowances: Section 12 of Republic Act No. 6758 integrates all allowances into standardized salary rates, except for seven enumerated categories and additional compensation being received by incumbents as of July 1, 1989. DBM CCC No. 10-99, issued pursuant to this authority, allows the continuation of certain benefits — including rice subsidy and medical benefits — only to incumbents authorized and actually receiving them as of June 30, 1989. The employee-recipients were hired after December 31, 1999, and thus were not incumbents as of the statutory reckoning date. The Garcia Letter, which prescribed December 31, 1999 as the reckoning date, was erroneous because a DBM regional director cannot by interpretation change the meaning and intent of the law; implementing rules cannot extend or expand a statute's coverage, as the power to amend or repeal a statute is vested in the legislature. In Torcuator vs. Commission on Audit, the Court ruled that July 1, 1989 is the reckoning point under Republic Act No. 6758. In Agra vs. Commission on Audit, it was held that if a benefit was not yet existing when the law took effect on July 1, 1989, there is nothing to continue and no basis for applying the policy of non-diminution of pay. Grocery allowance and year-end financial assistance, not being among the enumerated exclusions or listed in any DBM issuance, were unauthorized regardless of incumbency. The Garcia Letter was a mere advisory opinion without the force and effect of a valid rule or law.

• Propriety of Disallowance — BOD Benefits: In Baybay Water District vs. Commission on Audit, the Court ruled that Republic Act No. 6758 does not apply to directors of local water districts; their additional compensation is governed by Presidential Decree No. 198, as amended by Republic Act No. 9286, Section 13 of which allows allowances and benefits as the Board may prescribe subject to LWUA approval. However, LWUA MC No. 004.11 specifically involved the release of 2010 year-end financial assistance and cash gift, not 2011, so there was no valid LWUA approval for the 2011 benefits. LWUA Board Resolution No. 239, issued on December 20, 2006, was approved in violation of Administrative Order No. 103, issued by the President on August 31, 2004, which suspended the grant of new and additional benefits to all GOCC officials and employees. In Paguio vs. Commission on Audit, the Court held that LWUA Resolution No. 239 cannot be considered a legitimate approval because AO No. 103 was already in effect more than a year before its issuance, and the LWUA Board of Trustees and water district BODs cannot ignore the Chief Executive's clear directive without undermining the President's constitutionally vested power of control and supervision over executive departments, bureaus, offices, and GOCCs.

• Liability of Approving and Certifying Officers: Under the Madera vs. Commission on Audit guidelines, approving and certifying officers who acted in good faith, in regular performance of official functions, and with diligence of a good father of a family are not civilly liable; those shown to have acted in bad faith, malice, or gross negligence are solidarily liable to return the net disallowed amount. The presumption of good faith is negated not only by evident bad faith but also by gross negligence. In Abrigo vs. Commission on Audit, the Court held that approving and certifying officers are expected to know relevant rules and regulations, prevailing jurisprudence, and applicable directives, and palpable disregard thereof amounts to gross negligence betraying the presumption of good faith. Here, Castañeda, Jr. and Suarez disregarded multiple established circumstances: the Garcia Letter was issued in 2003, eight years before the disbursements; the 2005 ruling in De Jesus vs. Commission on Audit had already settled that Section 12 of Republic Act No. 6758 applies to LWDs and that additional allowances may be continuously given only to incumbents as of July 1, 1989; LWUA-MC No. 004.11 referred to CY 2010, not 2011; and the ruling in Paguio, issued in 2002, had already denied the legitimacy of LWUA Resolution No. 239 as having been issued in violation of AO No. 103. Their reliance fell short of the standards of good faith and diligence required of public officers.

• Liability of Recipient-Payees: In Chozas vs. Commission on Audit, the Court held that the natural consequence of a finding that allowances and benefits were illegally disbursed is the obligation of all recipients to restore the amounts to the government, based on unjust enrichment under Article 22 of the Civil Code. In Abellanosa vs. Commission on Audit, the Court stressed that when a payee-recipient's liability is viewed through the lens of solutio indebiti rather than the public accountability framework of the Administrative Code, good faith is inconsequential; the general rule is that recipients, notwithstanding good faith, are civilly liable to return the disallowed amounts they individually received. The exceptions are: (1) where the questioned benefits were genuinely given in consideration of services rendered, or (2) where excused by the Court on grounds of undue prejudice, social justice considerations, or other bona fide exceptions. Here, no evidence showed the allowances were given in consideration of actual services rendered or work accomplished. The COA's reversal of its earlier absolution of payees was proper because a motion for reconsideration grants the COA an opportunity to re-examine the legal and factual circumstances without qualification as to whether the error was raised in the motion. The retroactive application of Chozas was not abusive because the Court had upheld recipient-payee liability even in cases decided prior to Chozas.

• Integration of Allowances under Republic Act No. 6758 — All allowances are deemed included in the standardized salary rates prescribed under Republic Act No. 6758, except for seven enumerated categories (representation and transportation allowances; clothing and laundry allowances; subsistence allowances of marine officers and crew on board government vessels; subsistence allowances of hospital personnel; hazard pay; allowances of foreign service personnel stationed abroad; and such other additional compensation as may be determined by the DBM) and additional compensation being received by incumbents as of July 1, 1989. The reckoning date for determining incumbency is July 1, 1989, the effectivity date of the law. Allowances not integrated may continue to be authorized only for those who were incumbents and actually receiving them as of that date. The Court applied this by holding that employees hired after December 31, 1999 were not incumbents as of July 1, 1989, and thus not entitled to the non-integrated allowances.

• Limits on Implementing Rules and Regulations — Implementing rules and regulations cannot extend, expand, or change the meaning of the law they implement. The power to amend or repeal a statute is vested in the legislature. A DBM regional director cannot, by his own interpretation, change the meaning and intent of the law. The Court applied this by ruling that the Garcia Letter, which prescribed December 31, 1999 as the reckoning date instead of July 1, 1989, went beyond the scope of statutory authority and was a mere advisory opinion without the force and effect of a valid rule or law.

• Madera Rules on Return of Disallowed Amounts — When a notice of disallowance is upheld: (a) approving and certifying officers who acted in good faith, in regular performance of official functions, and with 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 are clearly shown to have acted in bad faith, malice, or gross negligence are solidarily liable to return only the net disallowed amount, pursuant to Section 43 of the Administrative Code. Recognized badges of good faith and diligence include: (1) certificates of availability of funds pursuant to Section 40 of the Administrative Code; (2) in-house or DOJ legal opinion; (3) absence of precedent disallowing a similar case in jurisprudence; (4) traditional practice within the agency with no prior disallowance; or (5) reasonable textual interpretation on legality of a question of law. The Court applied this by finding Castañeda, Jr. and Suarez grossly negligent for disregarding established jurisprudence and applicable rules at the time of disbursement.

• Solutio Indebiti and Unjust Enrichment for Recipient-Payees — The general rule is that recipients of disallowed amounts, notwithstanding good faith, are civilly liable to return what they received based on solutio indebiti and unjust enrichment under Article 22 of the Civil Code. When the civil obligation is sourced from solutio indebiti, good faith is inconsequential. Previous rulings absolving passive recipients solely and automatically based on good faith have been abandoned. Exceptions exist where: (1) the questioned benefits were genuinely given in consideration of services rendered; or (2) the Court excuses return on the basis of undue prejudice, social justice considerations, and other bona fide exceptions depending on the purpose, nature, and amount of the disallowed benefit relative to the attending circumstances. The Court applied this by holding all payees liable to refund, absent evidence that the benefits were given for services rendered.

• "Director Garcia cannot, by his own interpretation, change the meaning and intent of the law." — This passage articulates the principle that implementing rules and subordinate issuances cannot override or expand statutory provisions, forming the basis for invalidating the Garcia Letter as a legal authority for the disallowed grants.

• "the general rule is that recipients, notwithstanding their good faith, are civilly liable to return the disallowed amounts they had individually received on the basis of solutio indebiti." — This is the canonical formulation from Abellanosa vs. Commission on Audit as quoted in the decision, establishing that good faith does not excuse passive recipients from refunding disallowed amounts — a rule frequently cited in subsequent COA disallowance jurisprudence.

• "We have consistently held that palpable disregard of laws, prevailing jurisprudence, and other applicable directives amounts to gross negligence, which betrays the presumption of good faith and regularity in the performance of official functions enjoyed by public officers." — This passage, quoting Abrigo vs. Commission on Audit, defines the standard for negating the presumption of good faith as applied to approving and certifying officers in disallowed transactions.

• Torcuator vs. Commission on Audit, 849 Phil. 101 (2019) — Controlling precedent holding that July 1, 1989 is the reckoning date under Republic Act No. 6758 for determining entitlement to non-integrated allowances, and that the DBM is constrained to abide by this statutory date. Followed to invalidate the Garcia Letter's use of December 31, 1999.

• Baybay Water District vs. Commission on Audit, 425 Phil. 326 (2002) — Controlling precedent establishing that Republic Act No. 6758 does not apply to directors of local water districts; their additional compensation is governed by Presidential Decree No. 198, as amended by Republic Act No. 9286. Followed to determine the legal framework for BOD benefits.

• Paguio vs. Commission on Audit, G.R. No. 223547, April 27, 2021 — Followed. Held that LWUA Resolution No. 239 cannot be considered a legitimate approval of LWDs' grant of year-end financial assistance and cash gift because it was issued in violation of Administrative Order No. 103.

• De Jesus vs. Commission on Audit, 497 Phil. 675 (2005) — Followed. Settled that Section 12 of Republic Act No. 6758 applies to LWDs, and additional allowances may be continuously given only to incumbents as of July 1, 1989, consistent with the policy of non-diminution of benefits.

• Madera vs. Commission on Audit, 882 Phil. 744 (2020) — Controlling precedent providing the guidelines on the rules of return for disallowed amounts, distinguishing the liability of approving and certifying officers from that of recipient-payees. Applied to determine the solidary liability of Castañeda, Jr. and Suarez.

• Chozas vs. Commission on Audit, 864 Phil. 733 (2019) — Followed. Held that the natural consequence of illegally disbursed allowances is the obligation of all recipients to restore the amounts to the government based on unjust enrichment under Article 22 of the Civil Code.

• Abellanosa vs. Commission on Audit, 890 Phil. 413 (2020) — Followed. Established that good faith is inconsequential for passive recipients whose liability is based on solutio indebiti under a civil law framework, and that previous rulings automatically absolving payees based on good faith have been abandoned.

• Abrigo vs. Commission on Audit-Commission Proper, G.R. No. 253117, March 29, 2022 — Followed. Held that approving and certifying officers are expected to know relevant rules and jurisprudence, and palpable disregard thereof amounts to gross negligence betraying the presumption of good faith.

• Agra vs. Commission on Audit, 677 Phil. 608 (2011) — Followed. Held that if a benefit was not yet existing when Republic Act No. 6758 took effect on July 1, 1989, there is nothing to continue and no basis for applying the policy of non-diminution of pay.

• Blaquera vs. Alcala, 356 Phil. 678 (1998) — Cited by petitioners but effectively distinguished and overridden by subsequent jurisprudence (Madera, Abellanosa) holding that good faith no longer automatically exempts payees from refund liability under solutio indebiti.

• Section 12, Republic Act No. 6758 — Provides that all allowances are deemed included in standardized salary rates except for seven enumerated categories and additional compensation received by incumbents as of July 1, 1989. Applied to hold that employee-recipients hired after December 31, 1999 were not entitled to non-integrated allowances.

• Sub-paragraphs 5.4 and 5.5, DBM Corporate Compensation Circular No. 10-99 — Lists allowances and fringe benefits not integrated into basic salary and allowed to be continued only for incumbents as of June 30, 1989 who were authorized and actually receiving such benefits, including rice subsidy and medical/dental/optical allowances. Applied to determine that the employee-recipients did not meet the incumbency requirement.

• Section 13, Presidential Decree No. 198, as amended by Republic Act No. 9286 — Governs compensation of local water district directors, allowing allowances and benefits as the Board may prescribe subject to the approval of the LWUA. Applied to determine the legal framework for BOD benefits, while noting the absence of valid LWUA approval for the 2011 grants.

• Section 8(d), Executive Order No. 24 — Provides that salaries, allowances, benefits, and other bonuses for GOCC board members shall not be allowed unless specifically authorized by law or charter and approved by the President. Applied to note the absence of presidential approval for the BOD benefits.

• Administrative Order No. 103 — Directs all GOCCs to suspend the grant of new or additional benefits to non-full-time officials and employees, including members of governing boards, and to reduce combined per diems, honoraria, and benefits exceeding PHP 20,000.00 per month. Applied to invalidate LWUA Resolution No. 239 as having been issued in violation of this directive.

• Article 22, Civil Code — Provides that every person who through an act or performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground shall return the same. Applied as the basis for the obligation of recipient-payees to refund disallowed amounts under the principle of unjust enrichment and solutio indebiti.

• Sections 38, 39, and 43, Administrative Code of 1987 — Section 38 exempts superior officers from civil liability for acts done in performance of official duties absent bad faith, malice, or gross negligence; Section 39 provides liability of subordinate officers for willful or negligent acts contrary to law; Section 43 imposes joint and several liability on officials authorizing or making illegal payments and on persons receiving such payments. Applied to determine the solidary liability of the approving and certifying officers.

Gesmundo, C.J., Caguioa, Lazaro-Javier, Zalameda, M. Lopez, Gaerlan, Rosario, J. Lopez, Dimaampao, Marquez, and Kho, Jr., JJ., concurred. Leonon, SAJ., was on official business. Hernando, J., and Singh, J., were on leave.