Central Bank of the Phils. v. De la Cruz

The actions of the Monetary Board in insolvency proceedings under Section 29 of the Central Bank Act are final and executory and may not be set aside, restrained, or enjoined by the courts except upon convincing proof that the action is plainly arbitrary and made in bad faith; a bank's claim that such resolution is arbitrary and made in bad faith must be asserted as an affirmative defense or counterclaim in the proceedings for assistance in liquidation, or as a separate action only if no petition for assistance in liquidation has yet been instituted.

The Rural Bank of Libmanan (Libmanan Bank) commenced operations in 1965 under Republic Act No. 720 (the Rural Banks' Act), originally owned and managed by the Albas family and later sold to Manuel M. Villar and Alex G. Durante, who began banking operations in January 1979. The Central Bank's Department of Rural Banks and Savings and Loan Associations (DRBSLA) conducted examinations of the bank's books and affairs in 1979. Section 29 of the Central Bank Act (Republic Act No. 265, as amended by Presidential Decree No. 1827) governs proceedings upon insolvency of banks, authorizing the Monetary Board to forbid a bank from doing business, place it under receivership, and order its liquidation, with the Solicitor General filing a petition for assistance in liquidation in the appropriate court.

The Rural Bank of Libmanan commenced operations in 1965 under Republic Act No. 720, the Rural Banks' Act. Originally owned and managed by the Albas family, the bank was later sold to Manuel M. Villar and Alex G. Durante, who began banking operations in January 1979. In 1979, the Central Bank's Department of Rural Banks and Savings and Loan Associations (DRBSLA) conducted examinations of the bank's books and affairs. DRBSLA Director Consolacion V. Odra found serious irregularities in its lending and deposit operations, including false entries and false statements in the bank's records designed to give it an appearance of solidity and soundness it did not possess. As a result of these questionable transactions, the bank became insolvent.

In her memorandum dated May 2, 1980 to the Monetary Board, Director Odra recommended that Libmanan Bank be prohibited from doing business, placed under receivership pursuant to Section 29 of Republic Act No. 265 as amended, and that the DRBSLA Director be designated as receiver. Finding the report to be true, the Monetary Board adopted Resolution No. 929 on May 23, 1980, placing the bank under statutory receivership and designating Director Odra as receiver. The bank was informed of the resolution and advised to submit an acceptable reorganization and rehabilitation program. Director Odra, as receiver, took possession and control of the bank's assets and records. When Libmanan Bank failed to submit the required plan, the Monetary Board issued Resolution No. 1852 on October 3, 1980, ordering its liquidation.

On August 3, 1981, the Solicitor General filed a petition for assistance in liquidation in the then Court of First Instance of Camarines Sur, Branch III, presided over by respondent Judge Rafael De la Cruz. The petition was docketed as SP-111. Libmanan Bank, through its resident-manager and board of directors, opposed the petition. On September 23, 1981, the bank filed a separate complaint for prohibition, mandamus and injunction (Civil Case No. 1309) in the same court, praying that the liquidation proceeding be enjoined and dismissed on the ground that the Central Bank gravely abused its discretion in ordering the liquidation.

The Central Bank sought extensions of time to file a responsive pleading in Civil Case No. 1309. On January 15, 1982, respondent Judge issued an order restraining the CB from closing the rural bank, requiring restoration of management and control to the bank's board of directors, and directing the CB to desist from liquidating its assets. On January 29, 1982, the judge modified this order to require the parties to refrain from disturbing the status quo before the complaint was filed. On February 15, 1982, the CB filed a motion to dismiss Civil Case No. 1309 on the ground that the court had no jurisdiction over a special civil action for prohibition against the Central Bank and that the petition was defective in form for lack of proper verification. The judge denied the motion on March 1, 1982, and gave the CB ten days to file its answer. On March 31, 1982, the judge declared the CB in default, noting that the projected certiorari petition to the Supreme Court did not stop the period to answer. On April 20, 1982, the judge granted the bank's ex parte motion authorizing it to withdraw money from its deposits in other banks. The Central Bank then elevated the matter to the Supreme Court.

• Lack of Jurisdiction: Petitioners argued that respondent Judge had no jurisdiction over a special civil action for prohibition, mandamus and injunction against the Central Bank.
• Defective Pleading: Petitioners maintained that the complaint in Civil Case No. 1309 was defective in form because it was not properly verified.
• Grave Abuse of Discretion: Petitioners contended that respondent Judge acted with grave abuse of discretion or without or in excess of jurisdiction in issuing the five questioned orders, particularly by restraining the CB's liquidation without receiving convincing proof that the Monetary Board's action was plainly arbitrary and made in bad faith, as required by Section 29 of the Central Bank Act.
• Improper Preliminary Injunction: Petitioners argued that the preliminary injunction improperly transferred possession and control of the bank to its board of directors, who did not have such possession at the inception of the case.
• Multiplicity of Suits: Petitioners asserted that the bank's separate prohibition action should have been dismissed or consolidated with SP-111, the pending liquidation proceeding, since the law abhors multiplicity of suits.
• Dissipation of Assets: Petitioners argued that authorizing the bank to withdraw funds from its deposits in other banks would result in the further diminution and dissipation of its assets to the prejudice of depositors and creditors.

• Grave Abuse of Discretion by the Central Bank: Respondent Rural Bank of Libmanan argued that the Central Bank gravely abused its discretion in ordering the liquidation of the bank, and prayed that the liquidation proceeding be enjoined and dismissed.

• Finality of Monetary Board Actions: Whether respondent Judge acted with grave abuse of discretion in restraining the Central Bank from closing and liquidating Libmanan Bank without receiving convincing proof that the Monetary Board's action was plainly arbitrary and made in bad faith.
• Proper Venue for Challenging Monetary Board Resolutions: Whether the bank's claim that the Monetary Board's resolution was arbitrary and made in bad faith should have been asserted as a counterclaim in the pending liquidation proceeding (SP-111) rather than as a separate prohibition action.
• Function of Preliminary Injunction: Whether the preliminary injunction issued by respondent Judge improperly transferred possession and control of the bank to its board of directors, contrary to the rule that injunction should only maintain the status quo.
• Conservation of Assets: Whether respondent Judge abused his discretion in authorizing Libmanan Bank to withdraw funds from its deposits in other banks.
• Denial of Motion to Dismiss: Whether respondent Judge erred in denying the Central Bank's motion to dismiss Civil Case No. 1309.
• Declaration of Default: Whether respondent Judge acted with grave abuse of discretion in declaring the Central Bank in default.

• Finality of Monetary Board Actions: Yes. Respondent Judge acted with grave abuse of discretion in restraining the CB's liquidation without receiving convincing proof that the Monetary Board's action was plainly arbitrary and made in bad faith, as mandated by the fourth paragraph of Section 29 of the Central Bank Act.
• Proper Venue for Challenging Monetary Board Resolutions: Yes. The bank's claim should have been asserted as a counterclaim in SP-111, the pending liquidation proceeding, and the separate prohibition action should have been dismissed or consolidated with SP-111; failure to assert the defense in SP-111 constituted a waiver under the Omnibus Motion Rule.
• Function of Preliminary Injunction: Yes. The preliminary injunction improperly transferred possession and control of the bank to its board of directors, who did not have such possession at the inception of the case, contrary to the rule that injunction should only maintain the status quo.
• Conservation of Assets: Yes. Authorizing the insolvent bank to withdraw its deposits in other banks would result in further diminution and dissipation of its assets to the prejudice of depositors and creditors and to the unlawful advantage of the officers who caused the insolvency.
• Denial of Motion to Dismiss: Yes. The motion to dismiss should have been granted because the bank's claim should have been asserted in SP-111, not in a separate action filed after the liquidation petition was already pending.
• Declaration of Default: Yes. The declaration of default was tainted by the same grave abuse of discretion that pervaded the other questioned orders, as the judge improperly proceeded in Civil Case No. 1309 which should have been dismissed.

• Finality of Monetary Board Actions: Section 29 of the Central Bank Act explicitly declares that actions of the Monetary Board in insolvency proceedings are "final and executory" and may not be set aside, restrained, or enjoined by courts except upon "convincing proof that the action is plainly arbitrary and made in bad faith." Respondent Judge issued the restraining order on January 15, 1982 based on his own standards — that he did not receive the CB's formal motions for extension, that he had read the petition, and that there were good reasons shown therein — rather than the statutory standard. By substituting his own criteria for those mandated by Section 29, the judge committed grave abuse of discretion tantamount to excess or lack of jurisdiction. The Court in Rural Bank of Buhi, Inc. vs. Court of Appeals held that the trial court must inquire into the merits of the claim that the Monetary Board's action is plainly arbitrary and made in bad faith, which respondent Judge failed to do.

• Proper Venue for Challenging Monetary Board Resolutions: In Rural Bank of Buhi, Inc. vs. Court of Appeals and Salud vs. Central Bank of the Philippines, the Court ruled that a bank's claim that a Monetary Board resolution under Section 29 is plainly arbitrary and made in bad faith should be asserted as an affirmative defense or counterclaim in the proceedings for assistance in liquidation, or as a separate action only if no petition for assistance in liquidation has yet been instituted. Since the CB's petition for assistance in liquidation (SP-111) was filed on August 3, 1981, and the bank's separate prohibition complaint (Civil Case No. 1309) was filed only on September 23, 1981, the claim should have been asserted as a counterclaim in SP-111. The separate action should have been dismissed or consolidated with SP-111 because the law abhors multiplicity of suits. The bank's failure to assert the defense in SP-111 constituted a waiver under the Omnibus Motion Rule, which provides that defenses and objections not pleaded either in a motion to dismiss or in the answer are generally deemed waived.

• Function of Preliminary Injunction: A preliminary injunction should never be used to transfer possession or control of a thing to a party who did not have such possession or control at the inception of the case, as held in Lasala vs. Fernandez and Emilia vs. Bado. Its proper function is simply to maintain the status quo at the commencement of the action. The status quo at the time Civil Case No. 1309 was filed was that Libmanan Bank was under the control of the DRBSLA Director, with Consolacion V. Odra as liquidator appointed by the Central Bank. By ordering restoration of management and control to the bank's board of directors, respondent Judge improperly used the injunction to transfer possession to a party that did not have it.

• Conservation of Assets: The bank had become insolvent as a result of mismanagement, frauds, irregularities, and violations of banking laws, rules, and regulations by its officers. Its remaining assets should be conserved to pay its creditors. Allowing the bank to withdraw its deposits in other banks would result in the further diminution and dissipation of its assets, to the prejudice of depositors and creditors, and to the unlawful advantage of the very officers who brought about the insolvency. The judge's authorization of the withdrawal was therefore an abuse of discretion.

• Denial of Motion to Dismiss: The motion to dismiss should have been granted because the bank's separate prohibition action was improper. The claim that the Monetary Board's resolution was arbitrary and made in bad faith should have been raised in SP-111, the already pending liquidation proceeding. The judge's denial of the motion to dismiss compounded his jurisdictional error.

• Declaration of Default: The declaration of default on March 31, 1982 flowed from the same jurisdictional infirmity. The judge noted that the projected certiorari petition to the Supreme Court did not stop the period to answer, but the entire proceeding in Civil Case No. 1309 was itself improper and should have been dismissed. The default declaration was thus part of the pattern of grave abuse of discretion.

• Finality of Monetary Board Actions in Insolvency Proceedings — Under the fourth paragraph of Section 29 of the Central Bank Act, the actions of the Monetary Board in proceedings on insolvency are final and executory and may not be set aside, restrained, or enjoined by the courts, except upon convincing proof that the action is plainly arbitrary and made in bad faith. No restraining order or injunction shall be issued enjoining the Central Bank from implementing its actions under Section 29 unless there is such convincing proof and the petitioner files a bond in favor of the Central Bank. The Court applied this doctrine to nullify respondent Judge's orders because he restrained the CB without receiving any convincing proof of arbitrariness or bad faith, using his own standards instead of the statutory standard.

• Proper Remedy for Challenging Monetary Board Resolutions — A banking institution's claim that a Monetary Board resolution under Section 29 should be set aside as plainly arbitrary and made in bad faith may be asserted as an affirmative defense or counterclaim in the proceedings for assistance in liquidation, or as a cause of action in a separate and distinct action only if the latter was filed ahead of the petition for assistance in liquidation. The Court applied this doctrine by holding that since SP-111 was filed before Civil Case No. 1309, the bank's claim should have been raised as a counterclaim in SP-111, and the separate action was improper.

• Omnibus Motion Rule / Waiver of Defense — Defenses and objections not pleaded either in a motion to dismiss or in the answer are generally deemed waived; a motion attacking a pleading or proceeding shall include all objections then available, and all objections not so included shall be deemed waived. The Court applied this rule to hold that the bank's failure to assert in SP-111 the defense that the Monetary Board's resolution was arbitrary and made in bad faith constituted a waiver of that defense.

• Function of Preliminary Injunction — A preliminary injunction should never be used to transfer possession or control of a thing to a party who did not have such possession or control at the inception of the case; its proper function is simply to maintain the status quo at the commencement of the action. The Court applied this doctrine to hold that the injunction improperly transferred control of the bank from the CB-appointed liquidator back to the bank's board of directors.

• "It is noteworthy that the actions of the Monetary Board in proceedings on insolvency are explicitly declared by law to be 'final and executory.' They may not be set aside, or restrained, or enjoined by the courts, except upon 'convincing proof that the action is plainly arbitrary and made in bad faith.'" — This passage articulates the controlling standard for judicial review of Monetary Board insolvency resolutions under Section 29 of the Central Bank Act, the central ratio decidendi of the case.

• "It is a basic procedural postulate that a preliminary injunction should never be used to transfer the possession or control of a thing to a party who did not have such possession or control at the inception of the case. Its proper function is simply to maintain the status quo at the commencement of the action." — This passage states the canonical formulation of the function of preliminary injunction as applied to the banking context, explaining why the judge's order restoring management to the bank's board was improper.

• "Allowing the Rural Bank to withdraw its deposits in other banks would result in the further diminution and dissipation of its assets to the prejudice of its depositors and creditors, and to the unlawful advantage of the very officers who brought about the bank's insolvency." — This passage explains the rationale for conserving the remaining assets of an insolvent bank and the prejudice caused by the judge's authorization of fund withdrawals.

• Salud vs. Central Bank of the Philippines, 143 SCRA 590 — Controlling precedent followed. Established that Monetary Board actions in insolvency proceedings are final and executory and may be enjoined only upon convincing proof of arbitrariness and bad faith, and that the Omnibus Motion Rule applies to defenses not asserted in the liquidation proceeding.
• Rural Bank of Buhi, Inc. vs. Court of Appeals, 162 SCRA 288 — Controlling precedent followed. Held that a bank's claim that a Monetary Board resolution is arbitrary and made in bad faith should be asserted as an affirmative defense or counterclaim in the liquidation proceeding, or as a separate action only if filed ahead of the petition for assistance in liquidation.
• Central Bank vs. Court of Appeals, 106 SCRA 143 — Cited as supporting authority for the rule that a bank's challenge to a Monetary Board resolution may be filed as a separate action only where the separate action was filed ahead of the petition for assistance in liquidation.
• Lasala vs. Fernandez, 5 SCRA 79 — Cited for the doctrine that a preliminary injunction should never transfer possession or control to a party who did not have it at the inception of the case.
• Emilia vs. Bado, 28 SCRA 183 — Cited for the same doctrine on the proper function of preliminary injunction as maintaining the status quo.

• Section 29, Republic Act No. 265 (Central Bank Act), as amended by Presidential Decree No. 1827 — Governs proceedings upon insolvency of banks. Authorizes the Monetary Board to forbid a bank from doing business, designate a receiver, determine whether reorganization is possible, and order liquidation if the bank is insolvent. Its fourth paragraph declares Monetary Board actions final and executory, subject to judicial review only upon convincing proof of arbitrariness and bad faith. The Court applied this provision to hold that respondent Judge's restraining orders were issued in plain disregard of the statutory standard.
• Republic Act No. 720 (Rural Banks' Act) — The law under which the Rural Bank of Libmanan commenced operations in 1965, providing the statutory framework for rural banking.
• Sections 1 and 4(b), Rule 6, Rules of Court — Cited for the rule that a bank's challenge to a Monetary Board resolution may be asserted as an affirmative defense in the liquidation proceeding.
• Section 6, Rule 6; Section 2, Rule 72, Rules of Court — Cited for the rule that such challenge may be asserted as a counterclaim in the liquidation proceeding.

Narvasa, Cruz, Gancayco, and Medialdea, JJ., concurred.