Municipality of Lucban vs. National Waterworks and Sewerage Authority

The Court held that a municipal waterworks system constructed and maintained by a municipality using its own funds and loans (since liquidated) constitutes patrimonial property, the ownership of which cannot be transferred to a national government agency without payment of just compensation in money; that the transfer of such property under Republic Act No. 1383, which provides only for a book entry credit rather than actual monetary payment, violates the constitutional prohibition against the taking of private property for public use without just compensation; and that such transfer cannot be justified as a valid exercise of police power because police power is limited by the same constitutional prohibition and does not extend to the acquisition of property without compensation.

In 1919, the Municipality of Lucban initiated the construction of a waterworks system pursuant to municipal resolution No. 27, securing loans from the Insular Government and appropriating municipal funds. The system, known as the Apolinario de la Cruz Waterworks System, was completed in 1921 and has since been managed and controlled by the municipality, which regulated fees, appointed personnel, and disposed of operating income. The original loans were fully paid, and subsequent expansions were financed through various legislative appropriations and loans that were also satisfied. Prior to the enactment of Republic Act No. 1383, the municipality had consistently refused to surrender control of the system to any national authority.

• In 1919, the Municipality of Lucban approved Resolution No. 27 providing for the construction of a waterworks system and requested a P25,000.00 loan from the Insular Government.
• On December 29, 1919, the Insular Government advanced P15,000.00 to the municipality, followed by additional allotments of P25,000.00 on August 9, 1920, and P5,000.00 on September 23, 1920.
• On October 21, 1920, the municipal council appropriated P2,000.00 from municipal funds for the construction, bringing the total raised to P47,000.00, of which P46,508.50 had been spent by December 31, 1920.
• The system, named the Apolinario de la Cruz Waterworks System, was completed in 1921 and commenced supplying water to inhabitants; the original loan of P15,000.00 has been fully paid.
• Prior to World War II, the municipality obtained a P10,000.00 loan from the National Market and Waterworks Fund for expansion; this amount was released after liberation and fully paid through partial payments and condonation by the Rehabilitation Finance Corporation.
• The municipality also received P20,000.00 from pork barrel funds, P3,000.00 under Republic Act No. 920, and P12,000.00 under Republic Act No. 1200 for the system.
• On October 18, 1954, the municipality secured a Certificate of Public Convenience from the Public Service Commission to qualify for FAO-PHILCUSA aid, and obtained a loan of P31,601.95 secured by a mortgage of the certificate and equipment; it also received FAO-PHILCUSA aid in the form of pipes, valves, and fittings.
• The municipality has continuously managed and controlled the operation of the system, appointed its personnel, and regulated operating income and expenses through its municipal council.
• Following the enactment of Republic Act No. 1383, the municipal council passed Resolution No. 27 on January 31, 1956, refusing to transfer the system to NAWASA.
• Despite this refusal, former Municipal Treasurer Gregorio V. Isana transferred all assets (book value P46,152.00) and the outstanding loan (P31,601.95) to NAWASA.
• On February 15, 1956, the municipal council passed Resolution No. 35 disapproving the transfer, precipitating the litigation.

• NAWASA maintained that the waterworks system is not municipal patrimonial property but rather public property dedicated to public use, impressed with public interest, and therefore subject to legislative control.
• It argued that the powers exercised by the municipality over the system are purely governmental functions for public services, rendering the property subject to centralization under Republic Act No. 1383 as a valid exercise of the State's police power.
• It contended that even assuming the waterworks is not public property, the State retains authority to legislate over it and may exercise the right of eminent domain to effect its transfer.

• The Municipality of Lucban maintained that its waterworks system constitutes patrimonial property acquired and developed through municipal funds and fully paid loans, placing it beyond the unrestricted authority of the Legislature except through eminent domain with just compensation.
• It argued that Republic Act No. 1383 violates the Constitution because it effects a taking of property without just compensation, providing merely for a book entry credit rather than actual monetary payment.
• It contended that the State's police power cannot be invoked to justify the acquisition of property without compensation, as police power and eminent domain rest on entirely different constitutional considerations.

• Procedural:
  • N/A
• Substantive Issues:
  • Whether the municipal waterworks system constitutes patrimonial property or public property subject to unrestricted legislative control.
  • Whether the transfer of ownership to NAWASA under Republic Act No. 1383 constitutes a valid exercise of police power.
  • Whether the transfer constitutes a valid exercise of the power of eminent domain.
  • Whether Sections 1, 8, and 9 of Republic Act No. 1383 are constitutional insofar as they vest ownership of municipal waterworks in NAWASA without just compensation.

• Procedural:
  • N/A
• Substantive:
  • The Court ruled that the waterworks system is patrimonial property, not mere public property, because it was established with municipal funds and serves the public only upon payment of required charges, making it proprietary in character.
  • The Court held that the transfer of ownership to NAWASA is not a valid exercise of police power because police power is limited by the constitutional prohibition against taking private property without just compensation, and the power does not extend to acquisition without compensation.
  • The Court ruled that the transfer is not a valid exercise of eminent domain because Republic Act No. 1383 fails to provide for the payment of just compensation in money, offering only a book entry credit, which does not satisfy the constitutional requirement that just compensation be ascertained and paid according to law.
  • The Court declared Sections 1, 8, and 9 of Republic Act No. 1383 unconstitutional insofar as they vest ownership of municipal waterworks systems in NAWASA without just compensation, and affirmed the decision of the lower court declaring the Municipality of Lucban the owner of its waterworks system and ordering NAWASA to render an accounting of revenues received.

• Patrimonial Property of Municipal Corporations: Property acquired and maintained by a municipality using its own funds, even if serving a public utility function, constitutes patrimonial property when access is conditioned upon payment of fees; such property is distinct from public property dedicated to governmental functions and is protected against taking without just compensation.
• Limits of Police Power: The inherent police power of the State, while broad, is subject to constitutional limitations, specifically the prohibition against the taking of private property for public use without just compensation; it cannot be used as a substitute for eminent domain to acquire property without payment.
• Requisites of Eminent Domain: The lawful exercise of the power of eminent domain requires the payment of just compensation to the owner in money, not merely by book entry or credit, and such compensation must be ascertained according to law.

• "It overlooks the fact that only those of the general public who pay the required rental or charge authorized and collected by the System, do make use of the water. In other words, the System serves all who pay the charges. It is open to the public (in this sense, it is public service), but upon the payment of only of a certain rental (which makes it proprietary)."
• "Similarly, we cannot uphold appellant's theory that the transfer of ownership of the (Osmeña) waterworks system to another government agency is a valid exercise of the police power of the State because while the power to enact laws intended to promote public order, safety, health, morals and general welfare of society is inherent in every sovereign state, such power is not without limitations, notable among which is the constitutional prohibition against the taking of private property for public use without just compensation."
• "This we find to be equally untenable, for one of the essential requisites to the lawful exercise of this right is the payment to the owner of the condemned property of just compensation to be ascertained according to law."

• City of Baguio v. National Waterworks and Sewerage Authority, G.R. No. L-12032, August 31, 1959: Controlling precedent establishing that municipal waterworks are patrimonial property and that Republic Act No. 1383 is unconstitutional for lack of just compensation provision; the Court adopted the same ruling based on similar factual situations.
• City of Cebu v. National Waterworks and Sewerage Authority, G.R. No. L-12892, April 30, 1960: Controlling precedent reaffirming the unconstitutionality of RA 1383 and the proprietary nature of municipal waterworks.
• Western Union Tel. Co. v. Louisville, etc. RCO, 270 Ill. 388: Cited for the principle that just compensation must be paid to the owner of condemned property as an essential requisite of eminent domain.

• Republic Act No. 1383, Sections 1, 8, and 9: The statutory provisions challenged as unconstitutional for providing the transfer of municipal waterworks to NAWASA without actual monetary compensation (Section 8 providing for payment by book entry).
• Article III, Section 1 of the 1935 Constitution: The constitutional provision prohibiting the taking of private property for public use without just compensation, which limits both police power and eminent domain.
• Section 2317 of the Revised Administrative Code: The statutory basis authorizing the municipality to construct the waterworks system and secure loans from the Insular Government.