National Development Company vs. Philippine Veterans Bank

A presidential decree that extinguishes mortgage liens and other vested property rights of creditors without compensation, treats secured and unsecured creditors alike in violation of equal protection, impairs purely private contracts not affected with public interest, and creates a private corporation by special law is unconstitutional under the due process clause, the equal protection clause, the impairment clause, and the constitutional prohibition on creating private corporations by special law.

Agrix Marketing, Inc. (AGRIX) executed a real estate mortgage dated July 7, 1978, over three parcels of land in Los Baños, Laguna, in favor of Philippine Veterans Bank to secure a loan. AGRIX subsequently went bankrupt. To salvage AGRIX and its affiliated companies, President Marcos issued Presidential Decree No. 1717, which ordered the rehabilitation of the Agrix Group of Companies to be administered mainly by the National Development Company (NDC). The decree established a Claims Committee to process creditor claims and, critically, provided in Section 4(1) that "all mortgages and other liens presently attaching to any of the assets of the dissolved corporations are hereby extinguished." The decree also created New Agrix, Inc., a corporation neither owned nor controlled by the government, to succeed the dissolved AGRIX, with NDC extending a loan of up to ₱10,000,000 and managing the corporation until repayment.

Agrix Marketing, Inc. (AGRIX) executed a real estate mortgage dated July 7, 1978, over three parcels of land situated in Los Baños, Laguna, in favor of private respondent Philippine Veterans Bank to secure a loan credit. During the existence of the mortgage, AGRIX went bankrupt. It was for the expressed purpose of salvaging AGRIX and its affiliated companies that President Marcos issued Presidential Decree No. 1717, ordering the rehabilitation of the Agrix Group of Companies to be administered mainly by the National Development Company (NDC). The decree outlined the procedure for filing claims against the Agrix companies, created a Claims Committee to process these claims, and provided in Section 4(1) that "all mortgages and other liens presently attaching to any of the assets of the dissolved corporations are hereby extinguished."

Pursuant to the decree, the private respondent filed a claim with the AGRIX Claims Committee for the payment of its loan credit. In the meantime, NDC and New Agrix, Inc. — the petitioners — invoking Section 4(1) of the decree, filed a petition with the Regional Trial Court of Calamba, Laguna, for the cancellation of the mortgage lien in favor of the private respondent. For its part, the private respondent took steps to extrajudicially foreclose the mortgage, prompting the petitioners to file a second case with the same court to stop the foreclosure. The two cases were consolidated.

After the submission by the parties of their respective pleadings, the trial court rendered the impugned decision. Judge Francisco Ma. Guerrero annulled not only the challenged provision — Section 4(1) — but the entire Presidential Decree No. 1717 on the grounds that the presidential exercise of legislative power violated the principle of separation of powers, that the law impaired the obligation of contracts, and that the decree violated the equal protection clause. The motion for reconsideration of this decision having been denied, the present petition was filed.

The petition was originally assigned to the Third Division of the Supreme Court but, because of the constitutional questions involved, was transferred to the Court En Banc. On August 30, 1988, the Court granted the petitioners' prayer for a temporary restraining order and instructed the respondents to cease and desist from conducting a public auction sale of the lands in question. After the Solicitor General and the private respondent filed their comments and the petitioners their reply, the Court gave due course to the petition and ordered the parties to file simultaneous memoranda. Upon compliance, the case was deemed submitted.

• Estoppel: Petitioner maintained that the private respondent was estopped from contesting the validity of the decree, citing Mendoza vs. Agrix Marketing, Inc., where the constitutionality of PD 1717 was raised but the petition was dismissed on the ground of estoppel because the petitioners there had already filed their claims with the AGRIX Claims Committee and received shares of stock in settlement. Petitioner stressed that the private respondent likewise invoked the provisions of PD 1717 by filing a claim with the AGRIX Claims Committee, and only attacked the decree's validity when petitioners challenged the foreclosure on the basis of Section 4(1).
• Police Power: Petitioner argued that property rights, like all rights, are subject to regulation under the police power for the promotion of the common welfare, and that this inherent power of the state may be exercised at any time so long as the taking of a property right, even if based on contract, is done with due process of law.

• Constitutional Invalidity of PD 1717: Respondent attacked the validity of Section 4(1) of the decree when petitioners invoked it to challenge the foreclosure, asserting that the provision extinguishing mortgage liens was unconstitutional.
• Validity of the Mortgage Claim: Respondent's claim before the AGRIX Claims Committee was kept pending for more than seven years for alleged lack of supporting papers, and the validity of that claim was never questioned by the petitioners when they sought to restrain the extrajudicial foreclosure.

• Estoppel: Whether the private respondent is estopped from questioning the constitutionality of Presidential Decree No. 1717 after having filed a claim with the AGRIX Claims Committee created by the decree.
• Validity of Police Power Exercise: Whether Presidential Decree No. 1717 constitutes a valid exercise of police power.
• Due Process: Whether the extinguishment of mortgage liens and other property rights under Section 4(1) of the decree constitutes a deprivation of property without due process of law.
• Equal Protection: Whether the decree violates the equal protection clause by treating secured and unsecured creditors alike.
• Impairment of Obligation of Contracts: Whether the decree impairs the obligation of contracts between AGRIX and the private respondent.
• Creation of Private Corporation by Special Law: Whether the creation of New Agrix, Inc. by special decree violates the constitutional provision that private corporations shall be created only by general law.

• Estoppel: No. The principle of estoppel does not apply because the private respondent filed its claim in 1980, during the Marcos regime, when any judicial challenge to presidential decrees would have been futile. The case was distinguished from Mendoza, where the petitioners there had received shares of stock without protest, whereas the private respondent had not been paid a single centavo on its claim.
• Validity of Police Power Exercise: No. The decree is an invalid exercise of police power, failing the requirements of a lawful subject and a lawful method. The public interest was not sufficiently identified, and the means employed were unduly oppressive, arbitrarily destroying property rights without compensation.
• Due Process: No. The extinguishment of mortgage liens, accrued interests, penalties, and charges constitutes a taking of vested property rights without due process of law, as no consideration was paid and no public purpose was demonstrated.
• Equal Protection: No. The decree violated the equal protection clause by lumping secured creditors with unsecured creditors and placing them on the same level, treating persons differently situated as though they were alike.
• Impairment of Obligation of Contracts: Yes, the decree impaired the obligation of contracts. The contracts of loan and mortgage between AGRIX and the private respondent were purely private transactions not affected with public interest, and there was no warrant to amend their provisions and deprive the private respondent of its vested property rights.
• Creation of Private Corporation by Special Law: Yes, the creation was unconstitutional. New Agrix, Inc. was neither owned nor controlled by the government and should have been organized under the Corporation Law by general law, not by special decree, pursuant to Article XIV, Section 4 of the 1973 Constitution.

• Estoppel: The Court declined to apply estoppel against the private respondent. The claim was filed in 1980, when President Marcos was the absolute ruler and his decrees were the absolute law; any judicial challenge would have been futile and foolhardy. Not a single act or issuance of President Marcos was ever declared unconstitutional while he was in power. The case was distinguished from Mendoza vs. Agrix Marketing, Inc., where the petitioners had received shares of stock valued at ₱40,000 in settlement of their claims without protest or reservation. In the present case, the private respondent had not been paid a single centavo, its claim having been kept pending for more than seven years. Furthermore, the validity of the claim was never questioned by the petitioners when they sought to restrain the foreclosure. Independently, the Court noted that an affront to the Constitution cannot be allowed to continue simply because of procedural inhibitions that exalt form over substance.

• Validity of Police Power Exercise: A legislative act based on police power requires the concurrence of a lawful subject and a lawful method: (a) the interests of the public generally, as distinguished from those of a particular class, should justify the interference of the state; and (b) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals. The decree spoke vaguely of "the public, particularly the small investors," but the record did not state how many such investors there were, who they were, or why they were being preferred to the private respondent and other creditors with vested property rights. The public interest was not identified or explained, and it appeared the decree was issued only to favor a special group of investors preferred over legitimate creditors. Even assuming a valid public interest, the means were unduly oppressive: the right to property in all mortgages, liens, interests, penalties, and charges was arbitrarily destroyed without consideration, and property was taken from one person and given to another without compensation or known public purpose.

• Due Process: A mortgage lien is a property right derived from contract and comes under the protection of the Bill of Rights. Interests on loans, as well as penalties and charges, are also vested rights once they accrue. The decree extinguished these rights by legislative fiat without regard to the private interest violated and in favor of another private interest. Such plain arbitrariness is not permitted under the Constitution, which provides in Section 1 of the Bill of Rights that "no person shall be deprived of life, liberty or property without due course of law."

• Equal Protection: The decree lumped secured creditors with unsecured creditors and placed them on the same level, treating all as unsecured creditors. The only concession to secured creditors was that their loans could earn interest from the date of the decree, but accrued interests before that date were extinguished for all creditors regardless of security. Under the equal protection clause, all persons or things similarly situated must be treated alike, and persons differently situated should be treated differently. Here, persons differently situated were similarly treated, in disregard of the principle that there should be equality only among equals. The decree operated, in the words of Yick Wo vs. Hopkins, "with an evil eye and an uneven hand."

• Impairment of Obligation of Contracts: While police power is superior to the impairment clause, the principle applies only where the contract is so related to public welfare that it is susceptible to change by the legislature in the interest of the greater number. The contracts of loan and mortgage between AGRIX and the private respondent were purely private transactions and had not been shown to be affected with public interest. There was no warrant to amend their provisions and deprive the private respondent of its vested property rights. The Court reaffirmed Development Bank of the Philippines vs. NLRC, where it sustained the preference in payment of a mortgage creditor as a property right protected by the due process and contract clauses.

• Creation of Private Corporation by Special Law: Article XIV, Section 4 of the 1973 Constitution provided that the Batasang Pambansa shall not, except by general law, provide for the formation, organization, or regulation of private corporations, unless such corporations are owned or controlled by the Government or any subdivision or instrumentality thereof. New Agrix, Inc. was neither owned nor controlled by the government: NDC was merely required to extend a loan, and the stocks were to be issued to the old investors and stockholders of AGRIX, who would then own the new corporation. Being entirely private, New Agrix, Inc. should have been organized under the Corporation Law by general law, not by special decree.

• Requirements of a Valid Police Power Exercise — A legislative act based on police power requires the concurrence of a lawful subject and a lawful method: (a) the interests of the public generally, as distinguished from those of a particular class, should justify the interference of the state; and (b) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals. The Court applied these criteria and found both wanting: the public interest was not sufficiently demonstrated, and the means were unduly oppressive, destroying property rights without compensation.

• Estoppel in Constitutional Challenges During Authoritarian Rule — A party who complied with a presidential decree during the Marcos regime, when judicial challenge to such decrees would have been futile, is not estopped from later questioning the decree's constitutionality. The Court distinguished compliance under coercive political conditions from voluntary acceptance of benefits, the latter being the basis for estoppel in Mendoza vs. Agrix Marketing, Inc.

• Vested Property Rights in Mortgage Liens — A mortgage lien is a property right derived from contract and is protected by the due process and contract clauses of the Bill of Rights. Interests on loans, penalties, and charges are likewise vested rights once they accrue. Private property cannot be taken by law from one person and given to another without compensation and any known public purpose.

• Equal Protection Among Equals — All persons or things similarly situated must be treated alike, both in privileges conferred and obligations imposed; conversely, persons differently situated should be treated differently. Treating secured and unsecured creditors alike violates equal protection because there should be equality only among equals.

• Police Power vs. Impairment Clause — While police power is superior to the impairment clause, the principle applies only where the contract is so related to public welfare that it is considered susceptible to change by the legislature in the interest of the greater number. Purely private contracts not affected with public interest may not be impaired under the guise of police power.

• Creation of Private Corporations by General Law — Private corporations not owned or controlled by the government must be created by general law, not by special law or decree, pursuant to Article XIV, Section 4 of the 1973 Constitution (reenacted in Article XII, Section 16 of the 1987 Constitution).

• "The police power is not a panacea for all constitutional maladies. Neither does its mere invocation conjure an instant and automatic justification for every act of the government depriving a person of his life, liberty or property." — This passage articulates the Court's rejection of the petitioners' overbroad reliance on police power, establishing that invocation alone does not justify deprivation of property rights.

• "Private property cannot simply be taken by law from one person and given to another without compensation and any known public purpose. This is plain arbitrariness and is not permitted under the Constitution." — This statement defines the core due process violation: the decree's extinguishment of mortgage rights without compensation and without demonstrated public purpose constituted arbitrary taking.

• "To rule now that the private respondent is estopped for having abided with the decree instead of boldly assailing it is to close our eyes to a cynical fact of life during that repressive time." — This passage explains why estoppel cannot bar constitutional challenges to decrees complied with under the Marcos regime, acknowledging the political reality that made judicial resistance futile.

• "An affront to the Constitution cannot be allowed to continue existing simply because of procedural inhibitions that exalt form over substance." — This statement establishes the principle that substantive constitutional violations cannot be perpetuated on procedural grounds such as estoppel.

• Mendoza vs. Agrix Marketing, Inc., G.R. No. 62259, April 19, 1989 — Distinguished. In Mendoza, the petitioners who had filed claims with the AGRIX Claims Committee and received shares of stock without protest were held estopped from questioning the decree. The present case was distinguished because the private respondent had not been paid and had not voluntarily accepted benefits under the decree.

• U.S. vs. Toribio, 15 Phil. 85 — Cited as authority for the two-tiered test of a valid police power exercise (lawful subject and lawful method), along with Fabie vs. City of Manila, 21 Phil. 486; Case vs. Board of Health, 24 Phil. 256; Bautista vs. Juinio, 127 SCRA 329; and Ynot vs. IAC, 148 SCRA 659.

• Yick Wo vs. Hopkins, 118 U.S. 356 — Cited for the proposition that a law may be invalid where it operates "with an evil eye and an uneven hand," illustrating the equal protection violation in the decree's disparate treatment of creditors.

• Stone vs. Mississippi, 101 U.S. 814 — Cited for the principle that police power is superior to the impairment clause only where the contract is so related to public welfare as to be susceptible to legislative change in the interest of the greater number.

• Development Bank of the Philippines vs. NLRC, G.R. Nos. 82763-64, March 19, 1990 — Followed and reaffirmed. The Court there sustained the preference in payment of a mortgage creditor as a property right protected by the due process and contract clauses, notwithstanding the argument that labor claims should take precedence.

• Dumlao vs. COMELEC, 95 SCRA 392 (1980) — Cited in the concurring opinion of Justice Melencio-Herrera, where a portion of a statute was declared null and void for being unconstitutional, supporting her concurrence "in the result."

• Section 4(1), Presidential Decree No. 1717 — Provided that "all mortgages and other liens presently attaching to any of the assets of the dissolved corporations are hereby extinguished." The Court declared this provision unconstitutional as an arbitrary taking of vested property rights without compensation or public purpose.

• Section 4(ii) and (iii), Presidential Decree No. 1717 — Subsection (ii) provided that "unsecured obligations shall not bear interest" and subsection (iii) provided that "all accrued interests, penalties or charges as of date hereof pertaining to the obligations, whether secured or unsecured, shall not be recognized." The Court found these provisions unconstitutional for extinguishing vested rights to accrued interest, penalties, and charges.

• Section 1, Bill of Rights (1973 Constitution) — Provided that "no person shall be deprived of life, liberty or property without due course of law nor shall any person be denied the equal protection of the law." Applied to invalidate the decree's extinguishment of property rights without due process and its discriminatory treatment of creditors.

• Section 10, Bill of Rights (1973 Constitution) — Provided that "no law impairing the obligation of contracts shall be passed." Applied to invalidate the decree's interference with the purely private loan and mortgage contracts between AGRIX and the private respondent.

• Article XIV, Section 4, 1973 Constitution — Provided that "the Batasang Pambansa shall not, except by general law, provide for the formation, organization, or regulation of private corporations, unless such corporations are owned or controlled by the Government or any subdivision or instrumentality thereof." Applied to invalidate the creation of New Agrix, Inc. by special decree, as the corporation was neither owned nor controlled by the government. This provision was reworded in Article XII, Section 16 of the 1987 Constitution.

Fernan (C.J.), Narvasa, Gutierrez, Jr., Paras, Gancayco, Padilla, Bidin, Sarmiento, Griño-Aquino, Medialdea, and Regalado, JJ., concurred. Melencio-Herrera, J., concurred "In the result," citing Dumlao vs. COMELEC, 95 SCRA 392 (1980), where a portion of a statute was declared null and void for being unconstitutional. Feliciano, J., was on leave.