Land Bank of the Philippines vs. Eduardo M. Cacayuran

A municipal loan is void as an ultra vires act in the primary sense when it is contracted pursuant to mere resolutions rather than a law or ordinance and its purpose is to commercialize a public plaza, which is property of public dominion outside the commerce of man; a resident-taxpayer has standing to challenge such a loan when public funds are involved or the act affects a public property.

The case arose from the Municipality of Agoo’s multi-phased Redevelopment Plan for the Agoo Public Plaza, a historical and public park containing the Imelda Garden and Jose Rizal Monument. To finance the plan, the Municipality obtained two loans from Land Bank, using a portion of the plaza as collateral and assigning part of its IRA as security. Residents led by Cacayuran opposed the conversion of the plaza into a commercial center, leading to a taxpayer suit that eventually reached the SC.

• Original Filing: RTC of Agoo, La Union, Branch 31; complaint filed by Cacayuran against the Implicated Officers and Land Bank (case number not stated in the decision).
• Lower Court Decision: April 10, 2007, RTC ruled in favor of Cacayuran, declaring the Subject Loans null and void.
• Appeal: Land Bank filed its Notice of Appeal on April 23, 2007; the Implicated Officers’ appeal was deemed abandoned and dismissed for failure to file an appellants’ brief; only Land Bank’s appeal was given due course by the CA.
• CA Decision: March 26, 2010, CA in CA-G.R. CV No. 89732 affirmed with modification, excluding Vice Mayor Eslao from personal liability.
• SC Action: Land Bank filed a Petition for Review on Certiorari; the SC Second Division denied the petition and affirmed the CA.

The Municipality of Agoo, La Union, through its Sangguniang Bayan, adopted a multi-phased Redevelopment Plan from 2005 to 2006 to redevelop the Agoo Public Plaza, where the Imelda Garden and Jose Rizal Monument were situated. To finance phase 1, the SB passed Resolution No. 68-2005 on April 19, 2005, authorizing then Mayor Eufranio Eriguel to obtain a loan from Land Bank of the Philippines and, as collateral, to mortgage a 2,323.75-square-meter lot at the southeastern portion of the Agoo Plaza (Plaza Lot). The resolution also authorized the assignment of a portion of the Municipality’s internal revenue allotment (IRA) and the monthly income from the proposed project in favor of Land Bank. The terms were confirmed, approved, and ratified on October 4, 2005 through Resolution No. 139-2005.

On November 21, 2005, Land Bank extended a P4,000,000.00 loan to the Municipality (First Loan). The proceeds were used to construct ten kiosks at the northern and southern portions of the Imelda Garden, which were later rented out. On March 7, 2006, the SB passed Resolution No. 58-2006 approving the construction of a commercial center on the Plaza Lot as phase II of the Redevelopment Plan. Mayor Eriguel was again authorized to obtain a loan from Land Bank, posting the same securities as those for the First Loan. The prior representations and warranties related to the negotiation and obtention of the new loan were ratified on September 5, 2006 through Resolution No. 128-2006. Consequently, on October 20, 2006, Land Bank granted a second loan to the Municipality in the principal amount of P28,000,000.00 (Second Loan).

Unlike phase 1, the construction of the commercial center drew strong opposition from some residents of the Municipality. Led by respondent Eduardo Cacayuran, these residents claimed that converting the Agoo Plaza into a commercial center, funded by the proceeds of the First and Second Loans (Subject Loans), was highly irregular, violative of law, detrimental to public interests, and would result in the wanton desecration of the historical and public park. Their position was embodied in a Manifesto launched through a signature campaign. Cacayuran also wrote a letter dated December 8, 2006 to Mayor Eriguel, Vice Mayor Antonio Eslao, and the members of the SB—Violeta Laroya-Balbin, Jaime Boado, Jr., Rogelio De Vera, James Dy, Crisogono Colubong, Ricardo Fronda, Josephus Komiya, Erwina Eriguel, Felizardo Villanueva, and Gerard Mamuyac (Implicated Officers)—expressing the growing public clamor against the conversion and requesting certified copies of documents related to it, including the resolutions approving the Redevelopment Plan and the loan agreements, for public information and transparency.

When no response came, Cacayuran, invoking his right as a taxpayer, filed a Complaint against the Implicated Officers and Land Bank. He assailed the validity of the Subject Loans on the ground that the Plaza Lot used as collateral was property of public dominion and therefore beyond the commerce of man. Land Bank moved to dismiss, but the motion was denied on December 27, 2006. The Implicated Officers and Land Bank filed their respective Answers. Land Bank claimed that it was not privy to the Implicated Officers’ acts of destroying the Agoo Plaza and that Cacayuran had no cause of action against it because he was not privy to any of the Subject Loans.

During the pendency of the proceedings, the construction of the commercial center was completed, and the structure became known as the Agoo’s People Center (APC). On May 8, 2007, the SB passed Municipal Ordinance No. 02-2007, declaring the area where the APC stood as patrimonial property of the Municipality. The RTC found that the resolutions approving the Subject Loans were passed in a highly irregular manner and that the Plaza Lot was proscribed from collateralization because it was property for public use. The CA found that Cacayuran was born, raised, and a bona fide resident of the Municipality, and that the issue involved public interest of transcendental importance; it affirmed the RTC with modification by excluding Vice Mayor Eslao from personal liability.

• Land Bank argued that Cacayuran lacked standing to sue because he was not privy to the Subject Loans and the construction was funded by loan proceeds, not public funds.
• It contended that the Subject Resolutions validly authorized Mayor Eriguel, and that Section 444(b)(1)(vi) of the Local Government Code of 1991 (LGC) merely requires authorization by the Sangguniang Bayan, not an ordinance.
• It asserted that the Subject Loans were not ultra vires because they were within the Municipality’s power and were properly authorized.
• It also claimed that it was not privy to the Implicated Officers’ acts of destroying the Agoo Plaza and that Cacayuran had no cause of action against it.

• Cacayuran argued that he had standing as a resident-taxpayer because the issue involved public interest and public funds were involved through the IRA assignment and the loan proceeds.
• He contended that the Subject Resolutions were invalid because they were not ordinances and did not comply with the LGC’s review, publication, and posting requirements.
• He maintained that the Plaza Lot is property of public dominion and cannot be collateralized or used for commercial purposes.
• He asserted that the Subject Loans are ultra vires and void because they were transacted without proper authority and their purpose was contrary to law, public policy, and public order.

• Procedural Issues: Whether Cacayuran has standing to sue.
• Substantive Issues:
  • Whether the Subject Resolutions were validly passed.
  • Whether the Subject Loans are ultra vires.
  • Whether the Plaza Lot, being public dominion, could be collateralized or converted into patrimonial property.

• Procedural: The SC held that Cacayuran has standing to sue. It applied the requisites of a taxpayer’s suit: (1) public funds derived from taxation are disbursed by a political subdivision or instrumentality and, in doing so, a law is violated or some irregularity is committed; and (2) the petitioner is directly affected by the alleged act. The first requisite was met because the Municipality assigned a portion of its IRA, which is its share in national internal revenue taxes and thus public funds, as security; also, the loan proceeds became public funds upon receipt and official custody. The second requisite was met because Cacayuran, as a resident-taxpayer, was directly affected by the conversion of the Agoo Plaza, a public plaza and property of public dominion. He need not be privy to the Subject Loans; under Mamba vs. Lara, a taxpayer may challenge a contract’s validity as long as taxes are involved.
• Substantive: The SC held that the Subject Resolutions were invalidly passed. Section 444(b)(1)(vi) of the LGC requires that the mayor’s authorization be pursuant to a law or ordinance, even if not in ordinance form. The loans and the Redevelopment Plan were approved only through resolutions, which are mere declarations of sentiment or opinion and are temporary in nature; no rights can be conferred by or inferred from a resolution. The SB also failed to submit the resolutions to the Sangguniang Panlalawigan for review under Section 56 of the LGC and failed to publish and post them under Section 59.
• Substantive: The SC held that the Subject Loans are ultra vires in the primary sense and void. Ultra vires acts are of two types: primary, which are utterly beyond the jurisdiction of a municipal corporation and void; and secondary, which are an irregular exercise of a basic power under the legislative grant and are subject to ratification or estoppel. The Subject Loans fall under primary ultra vires because they were entered into beyond the Municipality’s express, implied, or inherent powers and did not comply with substantive requirements of law. Their purpose was to commercialize the Agoo Plaza, a public plaza and property of public dominion outside the commerce of man; it cannot be appropriated, leased, or made the object of contractual undertakings. Under Article 1409(1) of the Civil Code, contracts with a purpose contrary to law, morals, good customs, public order, or public policy are void. The land cannot be converted into patrimonial property absent express grant by the national government. The officers who authorized the resolutions are personally liable for ultra vires acts.

• Taxpayer’s suit — Requisites: (1) public funds derived from taxation are disbursed by a political subdivision or instrumentality and, in doing so, a law is violated or some irregularity is committed; and (2) the petitioner is directly affected by the alleged act. Applied: Cacayuran had standing because the IRA is public funds and he was a resident-taxpayer affected by the public plaza’s commercialization.
• Ordinance vs. resolution — Ordinances are laws with a general and permanent character; resolutions are mere declarations of the sentiment or opinion of a lawmaking body on a specific matter and are temporary. No rights can be conferred by or inferred from a resolution. Applied: the Subject Resolutions could not authorize the loans because the LGC requires the obligation to be pursuant to a law or ordinance.
• Ultra vires acts (primary vs. secondary) — Primary ultra vires: an act utterly beyond the jurisdiction of a municipal corporation; void. Secondary ultra vires: an irregular exercise of a basic power under the legislative grant in matters not jurisdictional; subject to ratification or estoppel. Applied: the Subject Loans were primary ultra vires because they funded the commercialization of public dominion property, beyond the Municipality’s jurisdiction.
• Public dominion / public plaza — Public plazas are properties for public use and belong to the public dominion; they are outside the commerce of man and cannot be disposed of or leased to private parties. Applied: the Agoo Plaza could not be collateralized or converted into a commercial center.
• Void contracts under Article 1409(1) — Contracts whose cause, object, or purpose is contrary to law, morals, good customs, public order, or public policy are inexistent and void from the beginning; they cannot be ratified. Applied: the Subject Loans were void because their purpose was unlawful.
• Personal liability of public officials for ultra vires acts — Public officials may be held personally accountable for acts performed in connection with official duties when they acted ultra vires. Applied: the officers who authorized the Subject Resolutions are personally liable, although the Municipality is not bound.
• Loan proceeds as public funds — Funds from private sources become impressed with the characteristics of public funds when under official custody. Applied: the loan proceeds became public funds upon receipt by the Municipality.
• IRA as public funds — The IRA is the local government unit’s just share in national taxes and is in the nature of public funds derived from taxation. Applied: its assignment as security brought the case within taxpayer standing.
• No conversion of public dominion to patrimonial property without express national government grant — Public land used for public use belongs to the Republic and cannot be converted into patrimonial property absent express grant. Applied: Municipal Ordinance No. 02-2007 could not convert the Agoo Plaza area into patrimonial property.

• Section 444(b)(1)(vi), Local Government Code of 1991 — The municipal mayor may represent the municipality in business transactions upon authorization by the Sangguniang Bayan, but the obligation must be made pursuant to a law or ordinance. Applied: the Subject Loans were approved only through resolutions, not a law or ordinance, so the authorization was insufficient.
• Section 56, Local Government Code of 1991 — Requires submission of approved ordinances and resolutions approving local development plans and public investment programs to the Sangguniang Panlalawigan for review. Applied: the SB failed to submit the Subject Resolutions for review.
• Section 59, Local Government Code of 1991 — Governs effectivity of ordinances or resolutions through posting and publication. Applied: the Subject Resolutions lacked publication and posting.
• Section 284, Local Government Code of 1991 — Provides for the local government unit’s share in national internal revenue taxes, known as the IRA. Applied: the IRA is public funds derived from taxation, and its assignment as security brought the case within taxpayer standing.
• Article 420, Civil Code — Defines property of public dominion as those intended for public use, such as roads, canals, rivers, ports, bridges, and others of similar character. Applied: the Agoo Plaza is property of public dominion.
• Article 1409(1), Civil Code — Contracts whose cause, object, or purpose is contrary to law, morals, good customs, public order, or public policy are inexistent and void from the beginning. Applied: the Subject Loans were void because their purpose was to commercialize a public plaza.

None.