De Guzman vs. COA

A notice of disallowance is not rendered invalid by the absence of a supervising auditor's signature when no supervising auditor has been assigned to the audit team and the audit team leader has been expressly authorized to issue such notices. Local water districts, as GOCCs with special charters, are subject to presidential issuances on austerity measures, and both approving officers who acted with gross negligence and passive recipient employees must return disallowed amounts under the Madera rules on return, absent any applicable exception.

The Baguio Water District (BWD) is a local water district created pursuant to Presidential Decree No. 198, operating as a government-owned and controlled corporation with a special charter. As a GOCC, BWD is attached to the Executive Department and subject to presidential issuances, including Administrative Order No. 103 dated August 31, 2004, issued by President Gloria Macapagal-Arroyo, which directed all government agencies, including GOCCs, to suspend the grant of new or additional benefits to full-time officials and employees, except for Collective Negotiation Agreement Incentives and those expressly provided by presidential issuance. The petitioners are former and current BWD officers and board members who authorized or certified the payment of a centennial bonus, together with the BWD employees who received it.

Under Board Resolution No. 046-2009 dated November 20, 2009, the Baguio Water District authorized the grant of a Centennial Bonus to its officers and employees in an amount equivalent to fifty percent of each employee's salary. The bonus was distributed on the occasion of the 100th anniversary of the City of Baguio, with the total disbursement amounting to P1,233,860.50.

On May 15, 2012, the COA Audit Team, led by Audit Team Leader Antonieta La Madrid, issued Notice of Disallowance No. 12-023-101-(09) disallowing the total amount granted as centennial bonus. The COA Audit Team cited Section 3(b) of Administrative Order No. 103, which suspended the grant of new or additional benefits to full-time officials and employees of government agencies, except for Collective Negotiation Agreement Incentives and those expressly granted by presidential issuances. As a consequence, each recipient was directed to refund the centennial bonus received. The notice of disallowance bore only the signature of the audit team leader, as no supervising auditor had been assigned to the BWD audit team at the time. By Memorandum dated May 9, 2012, the OIC Regional Director of COA-CAR had authorized audit team leaders to issue notices of disallowance without the signature of a supervising auditor.

Petitioners — comprising former General Manager Teresita de Guzman, former Internal Auditor Godiula Guinto, former Administrative Manager Viveca Villafuerte, Senior Accountant Wilhelmina Aquino, current Board of Directors member Renato Rondez, and former Board members Moises Cating, Ramsay Colorado, Gina Romillo-Co, Emmanuel Malicdem, and Maria Rosario Lopez — together with the BWD employees, appealed to the COA-Cordillera Administrative Region. They argued that the notice of disallowance was defective for lacking the supervising auditor's signature, that BWD was not covered by AO 103's austerity measures, and that the bonus was released in good faith. The COA-CAR affirmed the disallowance on May 21, 2015, noting that no supervising auditor was assigned to BWD and that the OIC Regional Director had authorized the audit team leader to issue the notices of disallowance. It further held that as a GOCC, BWD was subject to presidential issuances, and the Board's disregard of AO 103 negated good faith.

On appeal, the COA En Banc rendered Decision No. 2017-475 dated December 28, 2017, affirming the COA-CAR with the modification that passive recipients were not required to refund amounts received in good faith, but the approving, certifying, and authorizing officers remained liable for the total disallowance. Petitioners' Motion for Reconsideration was denied per Resolution dated September 27, 2018. Petitioners then elevated the matter to the Supreme Court via a Petition for Certiorari under Rule 64 of the Rules of Court, arguing that the ND was defective for lacking the supervising auditor's signature, that the BWD Board validly exercised its powers under PD 198 in granting the bonus, and that the bonus was granted in good faith so the officers should not be required to refund. The Office of the Solicitor General countered that the ND was valid despite the lone signature, that BWD as a GOCC was bound by AO 103, and that petitioners were grossly negligent in granting the bonus despite the clear provisions of AO 103.

• Validity of the Notice of Disallowance: Petitioners argued that ND No. 12-023-101-(09) was defective because it did not bear the supervising auditor's signature, in violation of Section 10.2, Chapter III of the COA Rules and Regulations on Settlement of Accounts, which provides that a notice of disallowance shall be signed by both the Audit Team Leader and the Supervising Auditor.
• Authority to Grant Bonus: Petitioners maintained that under Presidential Decree No. 198, water districts were granted the power to conduct their business and affairs through their respective boards of directors, and that the BWD Board validly exercised its power when it granted the centennial bonus.
• Good Faith: Petitioners argued that the centennial bonus was granted in good faith, and therefore the officers who authorized its release should not be required to refund the disallowed amounts.

• Validity of the Notice of Disallowance: Respondent countered that ND No. 12-023-101-(09) was valid despite bearing only the audit team leader's signature, because at the time of its issuance, there was no supervising auditor assigned to the BWD audit team, and the OIC Regional Director had authorized the audit team leader to issue notices of disallowance.
• Coverage of AO 103: Respondent argued that since water districts are GOCCs, they are under the control of the Office of the President, and AO 103 is therefore binding on the BWD.
• Gross Negligence: Respondent maintained that petitioners could not invoke good faith because they were grossly negligent in granting the centennial bonus despite the clear provisions of AO 103.

• Validity of the Notice of Disallowance: Whether ND No. 12-023-101-(09) is defective for not bearing the signature of a supervising auditor.
• Presidential Power of Control: Whether the BWD is subject to the power of control of the Office of the President.
• Liability to Refund: Whether petitioners are liable to refund the full disallowed amount.

• Validity of the Notice of Disallowance: No. The ND is not deemed defective or without force and effect simply because it did not bear the signature of a supervising auditor, since no supervising auditor was assigned to the BWD audit team and the OIC Regional Director expressly authorized the audit team leader to issue notices of disallowance without an SA's signature.
• Presidential Power of Control: Yes. Local water districts are GOCCs with special charters created pursuant to PD 198, and as such are part of the Executive Department and subject to the President's power of control, including AO 103's suspension of new or additional benefits.
• Liability to Refund: Yes. Both the certifying and approving officers and the recipient employees are liable to return the disallowed amounts — the officers jointly and severally for gross negligence under Section 43 of the Administrative Code, and the employees individually on the principle of solutio indebiti, no applicable exception being present.

• Validity of the Notice of Disallowance: The requirement under Section 10.2, Chapter III of the COA-RRSA that an ND be signed by both the Audit Team Leader and the Supervising Auditor is not a fatal defect when non-compliance results from the non-assignment of an SA by the COA Central Office. The Court quoted the COA En Banc's finding that the ATL could not be faulted for issuing the ND without the SA's signature under the circumstances. The OIC Regional Director of COA-CAR had, by Memorandum dated May 9, 2012, expressly authorized Audit Team Leader Antonieta La Madrid to issue notices of disallowance without an SA's signature. The Court emphasized that COA's post-audit functions do not depend on the availability of a supervising auditor and are not halted simply because an officer has resigned or has not been appointed in the meantime.

• Presidential Power of Control: Local water districts are not private corporations but GOCCs, specifically GOCCs with special charters created pursuant to PD 198. Under the Revised Administrative Code, GOCCs are part of the Executive Department, attached to the appropriate department with which they have allied functions. As a GOCC, BWD is subject to the President's power of control. The Court cited ZCWD vs. COA, which held that the President, exercising power of control over the executive department including attached agencies, may limit the authority of the Local Water Utilities Administration over the amounts of per diem it may allow. AO 103 expressly directed all GOCCs to suspend the grant of new or additional benefits except CNA Incentives and those expressly provided by presidential issuance. The centennial bonus granted on the occasion of Baguio City's 100th anniversary was neither a CNA incentive nor authorized by a presidential issuance, rendering its grant devoid of legal basis.

• Liability to Refund: The Court applied the framework established in Madera vs. COA, which set out the rules on return for disallowed amounts. For approving and certifying officers, civil liability under Sections 38 and 39 of the Administrative Code arises only upon a showing of bad faith, malice, or gross negligence; where these are present, liability is solidary under Section 43. The Court found no malice or bad faith but held the certifying and approving officers guilty of gross negligence, as AO 103 clearly suspended the grant of new or additional benefits, and the centennial bonus did not fall within any exception. The officers' disregard of the clear provisions of AO 103 constituted a flagrant breach of duty. For recipient employees, the general rule under Madera is that they must return disallowed payments on the ground of solutio indebiti or unjust enrichment as a result of mistake in payment. Restitution may be excused where the amounts received were genuinely given in consideration of services rendered (e.g., performance incentives, productivity pay, or merit increases), or on grounds of undue prejudice, social justice, or humanitarian considerations. None of these exceptions applied: the centennial bonus was not given in consideration of services rendered, and a monetary grant contravening the unambiguous letter of the law could not be excused on social justice grounds. Accordingly, both the officers (jointly and severally) and the employees (individually) were held liable to return the disallowed amounts.

• Madera Rules on Return — The framework established in Madera vs. COA (G.R. No. 244128, September 15, 2020) governs the liability of parties for disallowed amounts: (1) If the ND is set aside, no return is required from any person. (2) If the ND is 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; (b) approving and certifying officers who acted in bad faith, malice, or gross negligence are solidarily liable to return only the net disallowed amount, excluding amounts excused from return by payees; (c) recipients — whether approving/certifying officers or mere passive recipients — are liable to return the amounts respectively received, unless they show the amounts were genuinely given in consideration of services rendered; (d) the Court may excuse return based on undue prejudice, social justice considerations, or other bona fide exceptions on a case-to-case basis. The Court applied these rules to hold BWD's approving officers solidarily liable for gross negligence and the recipient employees individually liable under solutio indebiti, no exception applying.

• Badges of Good Faith and Diligence for Authorizing Officers — As proposed by Justice Leonen and adopted 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 DOJ legal opinion; (3) absence of precedent allowing a similar case in jurisprudence; (4) traditional practice within the agency with no prior disallowance; or (5) reasonable textual interpretation of legality on questions of law. The presence of any of these factors may uphold the presumption of good faith. In this case, none of these badges were present, as AO 103 clearly suspended the grant of new benefits and the centennial bonus fell under no exception.

• GOCCs Subject to Presidential Power of Control — Local water districts are GOCCs with special charters created pursuant to PD 198, and as such are part of the Executive Department and subject to the President's power of control. Presidential issuances on austerity measures, such as AO 103, are binding on water districts and limit their authority to grant benefits to officers and employees.

• Solutio Indebiti and Unjust Enrichment in Disallowance Cases — If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. This principle applies to passive recipient employees regardless of good faith, unless an exception is established — such as the amounts having been genuinely given in consideration of services rendered, or where undue prejudice, social justice, or humanitarian considerations warrant excusing the return.

• "Although the requirement that an ND should be signed by both the ATL and the SA as provided under Section 10.2, Chapter III of the RRSA, its non-compliance is not a fatal defect that could render the ND invalid and without effect." — The Court adopted this COA En Banc reasoning to hold that the absence of a supervising auditor's signature does not invalidate a notice of disallowance when no supervising auditor was assigned.

• "Here, the commemorative or centennial bonus granted to the BWD officers and employees on the occasion of the agency's 100th anniversary of Baguio City is neither a CNA incentive nor authorized by a presidential issuance. Its grant, therefore, was devoid of any legal basis." — This passage states the ratio decidendi on the second issue, establishing that the centennial bonus fell outside the exceptions to AO 103's suspension of new benefits.

• "In the ultimate analysis, the Court, through these new precedents, has returned to the basic premise that 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." — Quoted from Madera, this passage articulates the doctrinal foundation for requiring passive recipients to return disallowed amounts irrespective of good faith, marking a departure from earlier jurisprudence that excused payees based solely on good faith.

• "A monetary grant that contravenes the unambiguous letter of the law cannot be forgone on social justice considerations. Liability arises and should be enforced when there is disregard for the basic principle of statutory construction that when the law was clear, there should be no room for interpretation but only application." — This passage explains why the social justice exception to the return requirement was inapplicable, reinforcing that statutory clarity precludes equitable excusal.

• Madera vs. COA, G.R. No. 244128, September 15, 2020 — Controlling precedent. The Court applied the Madera rules on return for disallowed amounts, which distinguish the liability of approving/certifying officers (solidary if acting with bad faith, malice, or gross negligence) from that of recipient employees (liable under solutio indebiti unless an exception applies). The Madera framework was the analytical backbone for the Court's ruling on the third issue.
• ZCWD vs. COA, 779 Phil. 225 (2016) — Followed. The Court relied on this case for the proposition that local water districts are GOCCs subject to the President's power of control, and that presidential issuances such as AO 103 limit the authority of the LWUA and local water districts to grant benefits.
• Engr. Borja vs. People, 576 Phil. 245 (2008) — Cited for the proposition that local water districts are not private corporations but GOCCs.
• Engr. Feliciano vs. Hon. Gison, 643 Phil. 328 (2010) — Cited for the proposition that a water district is a GOCC with a special charter created pursuant to PD 198.
• MWSS vs. COA, 821 Phil. 117 (2017) — Cited in support of the principle that when the law is clear, there should be no room for interpretation but only application, precluding social justice considerations from excusing return of amounts granted in violation of unambiguous law.

• Section 3(b), Administrative Order No. 103 (August 31, 2004) — Directed all GOCCs to suspend the grant of new or additional benefits to full-time officials and employees, except CNA Incentives and those expressly provided by presidential issuance. The Court held that the centennial bonus fell under neither exception, rendering its grant devoid of legal basis.
• Section 10.2, Chapter III, COA Rules and Regulations on Settlement of Accounts — Provides that a notice of disallowance shall be signed by both the Audit Team Leader and the Supervising Auditor. The Court held that non-compliance with this requirement is not a fatal defect when no supervising auditor has been assigned.
• Section 38, Chapter 9, Book I, 1987 Administrative Code — Provides that a public officer is not civilly liable for acts done in the performance of official duties absent bad faith, malice, or gross negligence. The Court applied this provision in determining the liability of BWD's approving and certifying officers.
• Section 39, Chapter 9, Book I, 1987 Administrative Code — Provides that a subordinate officer or employee is not civilly liable for acts done in good faith in the performance of duties, but is liable for willful or negligent acts contrary to law.
• Section 43, Chapter V, Book VI, 1987 Administrative Code — Provides that every payment made in violation of law is illegal, and every official authorizing or making such payment and every person receiving such payment shall be jointly and severally liable to the Government for the full amount. The Court applied this provision to hold the approving officers solidarily liable.
• Section 52, Chapter 9, Title I-B, Book V, 1987 Administrative Code — Provides that expenditures of government funds in violation of law shall be a personal liability of the official or employee found directly responsible.
• Sections 102 and 103, Government Auditing Code of the Philippines — Section 102 establishes the primary and secondary responsibility of agency heads and persons entrusted with custody of government funds; Section 103 provides that unlawful expenditures are a personal liability of the official or employee directly responsible.
• Section 49, Presidential Decree No. 1177 (Budget Reform Decree of 1977) — Provides that expenditures in violation of law are void and that officials authorizing or making such payment and persons receiving such payment are jointly and severally liable to the Government.
• Section 42, Revised Administrative Code — Provides that GOCCs are attached to the appropriate department with which they have allied functions, placing them within the Executive Department and subject to presidential power of control.
• Presidential Decree No. 198 — Declared a national policy favoring local operation and control of water systems, authorizing the formation of local water districts. The Court noted that water districts created under PD 198 are GOCCs with special charters.
• Section 19, Manual of Certificate of Settlement and Balances — Provides that liability for audit disallowances is determined based on the nature of the disallowance, the duties and responsibilities of the officers, the extent of participation, and the amount of losses to the government.

Peralta, C.J., Perlas-Bernabe, Leonen*, Caquioa, Gesmundo, Hernando, Carandang, Inting, Zalameda, Lopez, and Delos Santos, JJ., concurred. (Justice Leonen was on official leave, as indicated by the asterisk in the decision's signature line, but is listed among the concurring justices.)