Mirasol vs. Court of Appeals

In any action involving the validity of a statute, presidential decree, or regulation, mandatory notice to the Solicitor General is required under Rule 64, Section 3 of the Rules of Court, and the failure to give such notice deprives the lower court of authority to pass upon the constitutional question; furthermore, courts will not reach constitutional issues where the controversy can be settled on other grounds such as the law on agency and legal compensation.

During the martial law regime, President Ferdinand Marcos issued P.D. No. 579, rationalizing sugar exports by authorizing the Philippine Exchange Co., Inc. (PHILEX) to purchase export sugar and directing that profits from such sales be remitted to a special fund of the National Government. The decree authorized PNB to finance PHILEX's purchases. Sugar planters, including the Mirasols, were required to sell their export sugar to the government through this scheme at prices fixed by government agencies (P180.00 per picul for crop years 1973-1974 and 1974-1975), significantly below world market prices.

• Filed in RTC: Civil Case No. 14725, RTC Bacolod City, Branch 42 (August 9, 1979) for accounting, specific performance, and damages; amended June 16, 1987 to implead PHILEX.
• RTC Decision: Declared P.D. No. 579 unconstitutional; ordered PNB and PHILEX to pay the unliquidated cost price differential of export sugar; awarded moral damages and attorney's fees; modified by Resolution dated May 14, 1992 to include reservation of rights under R.A. No. 7202.
• Appealed to CA: Docketed as CA-G.R. CV No. 38607.
• CA Decision: Reversed RTC; declared dacion en pago and foreclosure valid; ordered PNB to render accounting and recompute indebtedness pursuant to R.A. No. 7202.
• SC: Petition for review on certiorari denied; CA decision affirmed.

• Petitioners Spouses Mirasol are sugarland owners and planters who obtained crop loans from PNB for crop years 1973-1974 and 1974-1975, secured by chattel mortgages on standing crops and real estate mortgages.
• Under the chattel mortgage contracts, PNB acted as attorney-in-fact for petitioners to negotiate and sell their sugar.
• Pursuant to P.D. No. 579, PHILEX purchased the Mirasols' export sugar (25,662.36 piculs for 1973-1974; 23,696.40 piculs for 1974-1975) at the government-fixed price of P180.00 per picul.
• Petitioners believed the actual export prices were higher (P300.00 and P214.14 per picul, respectively) and that the proceeds, if properly accounted for, could offset their obligations to PNB.
• PNB refused to render an accounting, claiming that under P.D. No. 579 all earnings from export sales pertained to the National Government.
• Petitioners continued availing loans from PNB for subsequent crop years (1975-1977) and made unfunded withdrawals, resulting in an overdrawn account.
• On August 4, 1977, petitioners executed a dacion en pago conveying real properties valued at P1,410,466.00 to PNB, leaving an unpaid balance of P1,513,347.78.
• On August 10, 1982, petitioners' outstanding loans stood at P15,964,252.93.
• PNB extrajudicially foreclosed the mortgaged properties and, as highest bidder, acquired them for P3,413,000.00, leaving a deficiency claim of P12,551,252.93.

• The RTC had jurisdiction to declare P.D. No. 579 unconstitutional despite lack of notice to the Solicitor General because the parties agreed to submit the issue, and Rule 64, Section 3 applies only to actions for declaratory relief, not ordinary actions for accounting.
• P.D. No. 579 is unconstitutional for violating due process and the prohibition against taking private property without just compensation; R.A. No. 7202 (Sugar Restitution Law) effectively affirmed this unconstitutionality by providing for restitution of losses.
• The CA erred in refusing to pierce the corporate veil between PNB and PHILEX, alleging PHILEX was a wholly-owned subsidiary of PNB prior to privatization.
• The dacion en pago and foreclosure were void for want of consideration because the loans had been fully paid by legal compensation; the dacion was executed under duress (martial law ASSO).
• The CA erred in deleting awards for moral damages and attorney's fees despite finding PNB breached its duty to render an accounting.

• Notice to the Solicitor General is mandatory in any action assailing the validity of a statute under Rule 64, Section 3 and P.D. No. 478; the RTC's failure to notify rendered its declaration of unconstitutionality improper.
• The constitutional issue is not the lis mota of the case; the dispute can be resolved under the law on agency and legal compensation without reaching the constitutionality of P.D. No. 579.
• PNB and PHILEX are separate juridical entities with distinct operations and purposes; there is no basis to pierce the corporate veil.
• Legal compensation is impossible because under P.D. No. 579, the sugar profits belonged to the National Government, not PNB or PHILEX, and the claim for sugar proceeds was unliquidated and still in litigation.
• The dacion en pago and foreclosure were valid; petitioners admitted their indebtedness and failed to prove duress or bad faith.

• Procedural Issues:
  • Whether the RTC had authority to declare P.D. No. 579 unconstitutional without notice to the Solicitor General where the parties agreed to submit the issue.
• Substantive Issues:
  • Whether P.D. No. 579 is unconstitutional for violating due process and the taking clause.
  • Whether the CA committed manifest error in refusing to pierce the corporate veil between PNB and PHILEX.
  • Whether the dacion en pago and foreclosure of mortgaged properties were valid.
  • Whether petitioners are entitled to moral damages and attorney's fees.

• Procedural: The RTC lacked authority to declare P.D. No. 579 unconstitutional. Rule 64, Section 3 of the Rules of Court mandates notice to the Solicitor General in "any action" involving the validity of a statute, not merely declaratory relief actions. The word "shall" imposes a mandatory duty; failure to notify deprived the Solicitor General of his day in court and rendered the RTC's constitutional ruling improper.
• Substantive:
  • The SC declined to rule on the constitutionality of P.D. No. 579. The requisites for judicial review include that the constitutional question must be the very lis mota of the case. Here, the case was primarily for accounting and specific performance, resolvable under the law on agency (PNB's duty to render an account as attorney-in-fact) and legal compensation without passing on the decree's validity. R.A. No. 7202 did not repeal P.D. No. 579 (repeals by implication are not favored), nor could a legislative repeal constitute a judicial declaration of unconstitutionality.
  • The CA correctly refused to pierce the corporate veil. Findings of fact by the CA are conclusive on the SC in Rule 45 petitions unless unsupported by evidence; the CA found PNB and PHILEX were separate juridical persons with distinct operations.
  • The dacion en pago and foreclosure were valid. Legal compensation under Articles 1278 and 1279 of the Civil Code requires, inter alia, that parties be mutual creditors and debtors and that debts be liquidated and demandable. Here, no mutual debt existed because under P.D. No. 579, sugar profits went to the National Government, not PNB/PHILEX; furthermore, the sugar proceeds claim was unliquidated and still contested. No evidence supported the claim of duress.
  • Moral damages and attorney's fees were properly deleted. Under Articles 2220 and 2208(5) of the Civil Code, such damages require proof of fraud or bad faith; good faith is presumed, and petitioners failed to discharge the burden of proving malice or ill motive on PNB's part.

• Mandatory Notice to Solicitor General — Rule 64, Section 3 requires notice in "any action" (not just declaratory relief) assailing the validity of a statute, treaty, or regulation. The purpose is to enable the Solicitor General to determine if intervention is necessary. The SC applied this to invalidate the RTC's constitutional ruling for lack of notice.
• Requisites for Judicial Review — (1) Actual case or controversy; (2) Ripeness; (3) Standing; (4) Question raised at the earliest opportunity; (5) Lis mota. The SC emphasized that the constitutional issue must be the very lis mota; if the case can be resolved on other grounds, courts will avoid constitutional rulings.
• Presumption of Constitutionality — "To doubt is to sustain." Courts presume acts of political departments are valid absent clear showing to the contrary, based on separation of powers.
• Legal Compensation (Set-off) — Under Articles 1278-1279 of the Civil Code, compensation requires: (a) mutual creditor-debtor relationship; (b) debts consist of money or consumables of same kind/quality; (c) both debts are due; (d) both are liquidated and demandable; (e) no retention or controversy by third parties. The SC held compensation impossible here because the government, not PNB, was the debtor for sugar profits, and the claim was unliquidated.
• Moral Damages in Contractual Breach — Awardable only if the defendant acted fraudulently or in bad faith (Article 2220, Civil Code). Good faith is presumed; the burden to prove bad faith rests on the claimant.
• Attorney's Fees — Recoverable under Article 2208(5) only when the defendant acted in gross and evident bad faith in refusing a plainly valid claim.

• "It is basic legal construction that where words of command such as 'shall,' 'must,' or 'ought' are employed, they are generally and ordinarily regarded as mandatory."
• "The purpose of the mandatory notice in Rule 64, Section 3 is to enable the Solicitor General to decide whether or not his intervention in the action assailing the validity of a law or treaty is necessary. To deny the Solicitor General such notice would be tantamount to depriving him of his day in court."
• "As a rule, the courts will not resolve the constitutionality of a law, if the controversy can be settled on other grounds."
• "To doubt is to sustain."
• "Good faith, however, is always presumed and any person who seeks to be awarded damages due to the acts of another has the burden of proving that the latter acted in bad faith, with malice, or with ill motive."

• J.M. Tuason and Co. v. Court of Appeals — Cited for the proposition that inferior courts have jurisdiction over constitutional questions subject to appellate review.
• Board of Optometry v. Colet — Enumerated the requisites for the exercise of judicial review.
• Ty v. Trampe — Applied the principle that courts avoid ruling on constitutional questions if the controversy can be settled on other grounds.
• Angara v. Electoral Commission — Held that the power to declare a law unconstitutional lies with the courts, not the legislature.
• Silahis Marketing Corp. v. Intermediate Appellate Court — Cited for the rule that compensation cannot take place where one claim is unliquidated and still the subject of litigation.

• Rule 64, Section 3, Rules of Court — Mandates notice to the Solicitor General in actions involving the validity of statutes.
• P.D. No. 478, Section 1(c) — Grants the Solicitor General the power to appear in actions involving the validity of laws when intervention is necessary.
• B.P. Blg. 129, Section 19 — Grants RTCs jurisdiction over civil actions where the subject is incapable of pecuniary estimation (basis for constitutional jurisdiction).
• Constitution, Article VIII, Section 5(2) — Vests judicial power in the SC and lower courts.
• P.D. No. 579 — Authorized PHILEX to purchase export sugar and remit profits to the National Government (assailed as unconstitutional).
• R.A. No. 7202 — Sugar Restitution Law; held not to repeal P.D. No. 579 by implication.
• Civil Code, Articles 1170, 1278, 1279, 1891, 2208(5), 2217, 2220 — Provisions on damages, legal compensation, agency duties, and moral damages.