DBP vs. Commission on Audit

The income of an employees' trust fund established by a government financial institution does not form part of the institution's corporate income where legal title has been transferred to trustees; however, a "Special Loan Program" that allows employees to access and earn from their retirement gratuities before actual retirement constitutes an invalid partial advance of retirement benefits, contrary to the requirement that such benefits accrue only upon severance of employment.

The Development Bank of the Philippines is a government financial institution created under Executive Order No. 81, as amended by Republic Act No. 8523. In 1980, DBP established a Gratuity Plan Fund through Resolution No. 794 and a Trust Indenture to provide retirement benefits to employees under Commonwealth Act No. 186, as amended. The Fund was created as an express trust with DBP as trustor and a Board of Trustees as legal title holders. In 1983, DBP implemented a Special Loan Program (SLP) allowing prospective retirees to "borrow" against their future gratuity benefits for investment in specified instruments, with the earnings distributed as dividends to the employees.

• On February 20, 1980, the DBP Board of Governors adopted Resolution No. 794 creating the DBP Gratuity Plan and authorizing the establishment of a retirement fund to cover benefits due to retiring officials and employees under Commonwealth Act No. 186, as amended, with the Plan made retroactively effective on June 17, 1967.
• On February 26, 1980, DBP entered into a Trust Indenture with the Board of Trustees of the Gratuity Plan Fund, vesting in the latter control and administration of the Fund, and subsequently appointed the DBP Trust Services Department as investment manager.
• In 1983, DBP established a Special Loan Program (SLP) funded by placements from the Gratuity Plan Fund, which was suspended in 1986 but revived in 1991 through Board Resolution No. 066 dated January 5, 1991.
• Under the SLP, prospective retirees could utilize a portion of their "outstanding equity" in the gratuity fund as a loan for investment in specified instruments (time deposits, T-bills, DBP Blue Chip Fund), with the earnings applied to pay interest initially set at 9% per annum, and the excess distributed to the members as dividends.
• The DBP Trust Services Department paid a total of P11,626,414.25 to investor-members representing net earnings for 1991 (P4,568,971.84) and 1992 (P7,057,442.41).
• The implementing rules required that investments be registered in the name of DBP-TSD in trust for the availee-investor, with investments commingled by TSD and Participation Certificates issued to each availee-investor.
• The Auditor disallowed the payments under AOM No. 93-2, finding that the distribution of income to future retirees was irregular and constituted use of public funds for private purposes prohibited under Section 4 of Presidential Decree No. 1445.
• The COA affirmed the disallowance, concluding that the SLP was actually a supplementary retirement benefit in the guise of financial assistance, citing Conte v. Commission on Audit, and that the program deprived the Fund of higher investment earnings.

• DBP possesses the requisite standing to file the petition as the trustor of the Fund and a party to the Trust Agreement, with a material interest in the implementation of the Gratuity Plan and the validity of the SLP approved by its Board of Directors.
• The Trust Agreement created an express trust that transferred legal title over the Fund to the Board of Trustees, giving the Fund a separate legal personality; consequently, the income of the Fund accrues only to the Fund and not to DBP, and should not be recorded in DBP's books.
• The SLP is a normal loan transaction comparable to loans granted by the GSIS, SSS, and DBP Provident Fund, and does not constitute a supplementary retirement plan prohibited under Republic Act No. 4968.
• The DBP Charter (Republic Act No. 8523), as a special and later law, expressly authorizes supplementary retirement plans adopted by and effective in DBP, thereby prevailing over the general prohibition in Republic Act No. 4968.
• Equity and justice demand that the dividends be allowed to stand given the prevailing economic conditions and the purpose of the SLP to protect employees against inflation and the devaluation of their retirement benefits.

• DBP lacks standing to file the certiorari petition because government instrumentalities must accept COA rulings with finality; the proper parties to question the disallowance should be the trustees of the Fund or the DBP employees themselves who received the dividends.
• The Gratuity Plan Fund is owned by DBP, the trustees are mere administrators, and the employees possess only an inchoate interest; therefore, the Fund's income is properly considered income of DBP.
• The adoption of the SLP effectively eliminated the separate personality of the Fund by entangling its resources in a program that was grossly disadvantageous to the government, depriving the Fund of higher investment earnings.
• The SLP constitutes a supplementary retirement or pension benefit disguised as financial assistance, violating Section 28(b) of Commonwealth Act No. 186 as amended by Republic Act No. 4968, which prohibits the creation of any insurance or retirement plan other than the GSIS for government employees.
• Retirement benefits may only be availed of upon actual retirement; the SLP permitted partial payment and enjoyment of benefits before retirement, which is prohibited by Philippine retirement laws and the Gratuity Plan itself.

• Procedural:
  • Whether the Development Bank of the Philippines has the requisite standing to file the instant petition for certiorari to question the decisions of the Commission on Audit.
• Substantive Issues:
  • Whether the income of the Gratuity Plan Fund constitutes income of DBP subject to recording in its books of account.
  • Whether the distribution of dividends under the Special Loan Program is valid and legally permissible.

• Procedural:
  • DBP has the requisite standing to file the petition for certiorari. Section 7 of Article IX of the Constitution and Section 50 of Presidential Decree No. 1445 expressly allow an aggrieved government agency to bring decisions of the COA to the Supreme Court on certiorari. As the sole party in the proceedings before the COA, the trustor of the Fund, and the entity with a material interest in the implementation of the Gratuity Plan and the SLP, DBP is the real party in interest entitled to avail of the remedy.
• Substantive:
  • The income of the Gratuity Plan Fund is not income of DBP. Resolution No. 794 and the Trust Agreement created an express employees' trust, vesting legal title over the Fund in the Board of Trustees. The Fund is a separate taxable entity established for the exclusive benefit of employees, with the principal and income constituting the res of the trust that cannot revert to DBP. The COA's directive to record the Fund's income as DBP miscellaneous income constitutes grave abuse of discretion.
  • The distribution of dividends under the SLP is invalid and properly disallowed. The SLP is not a true loan transaction (mutuum) because the borrowed amounts were never released to the employees' control but remained in the Fund's custody, commingled with existing investments. The program allowed employees to utilize and earn from their retirement gratuities before actual retirement, constituting a prohibited partial advance of benefits. Retirement benefits accrue only upon fulfillment of statutory conditions and actual severance of employment; prior to retirement, employees have only an inchoate or expectant right. The SLP circumvents Republic Act No. 1616 and the Gratuity Plan rules, which require that benefits be released only upon retirement. While the DBP Charter authorizes supplementary retirement plans, this does not validate a scheme that permits pre-retirement access to benefits.

• Express Trust — A fiduciary relationship with respect to property involving equitable duties imposed upon the holder of legal title to deal with it for the benefit of another, created by direct and positive acts of the parties through writing or words evincing intent; an employees' trust is a separate taxable entity established for the exclusive benefit of employees.
• Real Party in Interest — The party who stands to be benefited or injured by the judgment in the suit, possessing a material interest in the issue that the decision will affect, as distinguished from mere incidental interest.
• Accrual of Retirement Benefits — Retirement benefits are in the nature of a reward granted by the State to a government employee who has given the best years of his life to the service of his country; such benefits accrue only upon fulfillment of statutory prerequisites and actual retirement involving severance of employment, and may not be partially advanced or enjoyed prior to retirement.
• Special Law Prevailing Over General Law — A special law enacted later in time prevails over a general law on the same subject, provided the special law is not repugnant to the Constitution.

• "A trust is a 'fiduciary relationship with respect to property which involves the existence of equitable duties imposed upon the holder of the title to the property to deal with it for the benefit of another.'"
• "Retirement benefits are not meant to recompense employees who are still in the employ of the government. That is the function of salaries and other emoluments."
• "Retirement benefits are in the nature of a reward granted by the State to a government employee who has given the best years of his life to the service of his country."
• "Equity cannot supplant or contravene the law."
• "The 'person aggrieved' under Section 1 of Rule 65 who can avail of the special civil action of certiorari pertains only to one who was a party in the proceedings before the court a quo."

• Conte v. Commission on Audit (264 SCRA 19) — Cited by COA for the proposition that financial assistance granted to retiring employees constitutes supplementary retirement benefits; distinguished by the Court because the DBP Charter (a special law) authorizes supplementary retirement plans, unlike the situation in Conte.
• Government v. Abadilla (46 Phil. 642) — Applied for the principle that it is not always necessary that the cestui que trust should be named or be in esse at the time the trust is created; it is sufficient that beneficiaries are sufficiently certain or identifiable.
• Philippine International Trading Corporation v. Commission on Audit (368 Phil. 478) — Cited as precedent establishing that government agencies and government-owned and controlled corporations may resort to petitions for certiorari to question rulings of the COA.
• Tala Realty Services Corporation v. Banco Filipino Savings and Mortgage Bank (G.R. No. 137533) — Cited for the definition of a trust as a fiduciary relationship with respect to property.
• Heirs of Yap v. Court of Appeals (371 Phil. 523) — Cited regarding express trusts being created by direct and positive acts of parties through writing or deed.
• Commissioner of Internal Revenue v. Court of Appeals (207 SCRA 487) — Cited for the principle that an employees' trust is a separate taxable entity maintained by an employer to provide retirement benefits.
• Pantranco North Express, Inc. v. NLRC (259 SCRA 161) — Cited for the definition of retirement as a bilateral act involving a voluntary agreement whereby the employee, after reaching a certain age, consents to sever his employment.
• Santos v. Court of Appeals (345 SCRA 553) — Cited for the distinction that retirement benefits do not constitute compensation, as a retired person may receive both retirement annuity and salary for a new appointment without constituting double compensation.

• 1987 Constitution, Article IX, Section 7 — Provides that any decision, order, or ruling of the COA may be brought to the Supreme Court on certiorari by the aggrieved party within thirty days from receipt.
• 1987 Constitution, Article IX-D, Section 2 — Grants the COA exclusive authority to define the scope of its audit and examination and to promulgate auditing rules and regulations.
• Presidential Decree No. 1445 (Government Auditing Code), Section 50 — Allows the party aggrieved by any COA decision to appeal on certiorari to the Supreme Court, and permits the proper head of a government agency to appeal when the decision adversely affects the agency's interest.
• Rules of Court, Rule 64, Section 2 — Embodies the procedure for bringing judgments or final orders of the COA to the Supreme Court on certiorari under Rule 65.
• Commonwealth Act No. 186, Section 28(b) as amended by Republic Act No. 4968 — Prohibits the creation of any insurance or retirement plan for government officers or employees other than the GSIS.
• Republic Act No. 1616 — Prescribes modes of retirement for government employees and requires the employer to pay the gratuity benefit.
• Republic Act No. 8291 (GSIS Act of 1997), Section 49(b) — Provides that agencies shall process and pay the gratuities of their employees under RA 1616.
• Executive Order No. 81 as amended by Republic Act No. 8523 (DBP Charter), Section 34 — Authorizes supplementary retirement plans adopted by and effective in DBP, subject to approval of the Minister of Finance for plans adopted after the Charter's effectivity.
• Civil Code, Article 1440 — Defines a trust as a fiduciary relationship with respect to property, identifying the trustor, trustee, and beneficiary.
• Civil Code, Article 1953 — Provides that a person who receives a loan of money acquires ownership thereof, distinguishing a true loan from the SLP arrangement.
• National Internal Revenue Code, Section 60(B) — Exempts from tax employees' trusts forming part of a pension plan where contributions are made for the purpose of distributing earnings and principal to employees, provided the corpus or income cannot be diverted to other purposes prior to satisfaction of all liabilities.