Philippine Veterans Bank Employees Union-NUBE vs. Central Bank of the Philippines

A bank created by special law remains subject to the Central Bank's regulatory and liquidation authority, and its stockholders acquire no vested rights under the impairment clause that are immune from the exercise of such authority when the public interest demands preservation of the integrity and stability of the banking system.

The Philippine Veterans Bank was created in 1963 under R.A. No. 3518 to secure the economic future of approximately 510,000 World War II veterans who would be its stockholders. Under Section 3(b) of its charter, 51% of the capital stock was initially subscribed by the Republic of the Philippines on behalf of the veterans, with shares to be turned over to them within five years; the remaining 49% consisted of preferred shares open to subscription by veterans. Section 14 of the charter expressly subjected the Bank to inspection by the Department of Supervision and Examination of the Central Bank. The Bank's affairs were managed by a board of eleven directors, three ex officio and eight elected annually by stockholders under the Corporation Law, and Section 28 of the charter deemed the Act itself the Bank's statutory articles of incorporation, authorizing it to operate as a commercial bank. After years of operation, the Bank fell into severe financial difficulties that ultimately threatened its survival.

On April 10, 1983, the Monetary Board of the Central Bank placed the Philippine Veterans Bank under receivership by virtue of Resolution No. 334, citing the precarious condition of the Bank. A year later, on April 26, 1984, the Philippine Veterans Bank Employees Union-NUBE, together with individual employees, filed a petition before the Supreme Court docketed as G.R. No. 67125, questioning the Bank's retrenchment and reorganization program on the ground of security of tenure and praying that the program be prohibited. The Union also sought a temporary restraining order, which was issued on May 9, 1984. While the case was pending, the Monetary Board, after finding that the Bank had incurred an outstanding liability of ₱540,835,860.79, ordered its liquidation by Resolution No. 612 dated June 7, 1985. The Union opposed this order through a supplemental petition for prohibition with preliminary injunction filed on September 25, 1985. On November 26, 1985, the Veterans Federation of the Philippines entered the proceedings by filing a petition in intervention, echoing the opposition to liquidation and asserting that it was formulating plans for the rehabilitation and eventual expansion of the Bank.

On March 26, 1987, the Supreme Court issued a writ of preliminary injunction enjoining the Central Bank and the PVB Liquidator from liquidating the Bank and from pursuing any act in pursuance of such liquidation, including sales or disposal of properties or disbursing PVB funds, except those incurred in the course of ordinary administration, subject to the prior approval of the liquidation court. On March 18, 1988, Simeon Medalla et al., in their own right and on behalf of the remaining 510,000 World War II veterans or their heirs as defined in R.A. No. 3518, filed an original petition for restitution and for extraordinary and equitable writs, docketed as G.R. No. 82337 and consolidated with G.R. No. 67125. They sought, among other things, a judicial declaration that they were entitled to the ownership, possession, and control of the Bank, and an order restraining the Central Bank from disposing of the Bank's assets except for ordinary administrative expenses and payment of accrued wages and benefits as approved by the liquidator court.

Meanwhile, on June 11, 1987, Judge Abelardo M. Dayrit of the Regional Trial Court of Manila had ordered the payment of employee claims amounting to ₱37,920,310.82. On October 21, 1988, the same court ordered the payment of retirement benefits to two former board members of the Bank, Agustin Marking and Jaime S. Mejia. Upon the representations of the petitioners, the Supreme Court prevented enforcement of this order through a temporary restraining order dated January 12, 1989. On December 15, 1988, the writ of preliminary injunction was amended to exclude from its coverage the sale or disposal by the Central Bank or the Bank Liquidator of the acquired assets of the PVB, in response to petitions filed by several persons seeking to redeem or repurchase properties earlier purchased by the Bank through foreclosure sales. Subsequent ancillary petitions and motions followed, including a petition for immediate payment of back wages filed on August 25, 1989, a motion by the City Government of Davao on May 25, 1990 to lift the injunction with respect to its ₱3,700,000 deposit, and a motion by Dolores V. Molina on June 11, 1990 to withdraw her ₱1,100,000 deposit.

The Court had purposely delayed resolution of the cases in the hope that rehabilitation efforts by the Executive Department, through the Special Presidential Committee on the Philippine Veterans Bank created by Administrative Order No. 29 dated July 10, 1987, would render judicial action unnecessary. Despite optimistic statements that the Bank would reopen soon, that prospect did not appear imminent, and the Court resolved to decide the cases.

• Impairment Clause and Vested Rights: Petitioners in G.R. No. 67125 argued that because the Bank was created by a special law, a contractual relationship existed between the Government and the stockholders that could not be disturbed without violating the impairment clause. The acceptance of the benefits of R.A. No. 3518 conferred vested rights that could not be withdrawn without their consent, as this would constitute deprivation of property without due process of law.
• Exclusive Legislative Prerogative: Petitioners contended that even if the benefits could be revoked, this could not be done by the Central Bank alone but only by the legislature itself, which conferred the franchise on the Bank in the first place.
• Government Bank Status: Petitioners maintained that the Central Bank could not exercise authority over the Bank because the latter was itself a government bank with the same status as the Development Bank of the Philippines, the Land Bank of the Philippines, and the Philippine National Bank, over which the Central Bank had no control.
• Veterans' Ownership Claim: Petitioners in G.R. No. 82337 argued that the deficit incurred by the Bank when liquidation was ordered was not imputable to them and that they could rehabilitate the Bank given proper government support. They asked the Court to order the Central Bank to grant necessary loans and facilities, the Secretary of Budget to certify as appropriated the amount needed to fully pay all common and preferred shares, and the National Treasurer to release such amounts to the Bank.

• Central Bank Regulatory Authority: Respondents countered that the Bank, as a lending institution, was part of the banking system and therefore covered by the regulatory power of the Central Bank, as expressly provided in the Central Bank Act and in Section 14 of R.A. No. 3518 itself, which subjected the Bank to inspection by the Department of Supervision and Examination.
• Procedural Defect in G.R. No. 82337: The Solicitor General argued that the petition in G.R. No. 82337 did not fall under any of the Supreme Court's jurisdictional categories — it was not an appeal, nor a petition for certiorari, prohibition, or mandamus — and that even if construed as mandamus, the facts did not present a case where the named officials were legally mandated to perform the acts sought.
• Retirement Benefits of Marking and Mejia: Respondents maintained that payment of retirement benefits to the two former board members was in order, as they were covered by the Retirement Plan of the Bank.

• Central Bank Liquidation Power: Whether the Central Bank has the power to liquidate the Philippine Veterans Bank.
• Back Wages: Whether the Bank employees are entitled to back wages as a result of the liquidation.
• Retirement Benefits: Whether former board members Marking and Mejia are entitled to retirement benefits and what priority their claims enjoy.
• Veterans' Ownership Claim: Whether the petitioners in G.R. No. 82337 are entitled to a declaration of ownership and management of the Bank and to the ancillary reliefs sought.

• Central Bank Liquidation Power: Yes. The Central Bank has statutory authority to order the liquidation of the Philippine Veterans Bank, the Bank being a banking institution expressly subject to Central Bank supervision under both the Central Bank Act and its own charter.
• Back Wages: No. The employees' claim for back wages was rejected because their separation resulted from lawful liquidation ordered by higher authority, not from illegal dismissal by the employer.
• Retirement Benefits: Yes, but subordinated. Marking and Mejia are entitled to retirement benefits under the Bank's Retirement Plan, but as managerial employees their claims are subordinate to the preference granted to rank-and-file workers under Article 110 of the Labor Code.
• Veterans' Ownership Claim: No. The petition in G.R. No. 82337 was dismissed for lack of jurisdiction and failure to establish a cause of action for mandamus, the Court holding that the affairs of the Bank were best entrusted to the liquidator court.

• Central Bank Liquidation Power: The mere fact that the Bank was created by special law did not confer upon it extraordinary privileges beyond those granted to similar charters. As a lending institution, it was part of the banking system and covered by the Central Bank's regulatory power. Section 25 of the Central Bank Act charged the Department of Supervision and Examination with supervision and periodic examination of all banking institutions, including all government credit institutions. Section 29 authorized the Monetary Board, upon finding a bank insolvent or unable to resume business safely, to order its liquidation. More directly, Section 14 of R.A. No. 3518 expressly subjected the Bank to inspection by the Department of Supervision and Examination of the Central Bank. The purpose of these provisions was to enable the Central Bank, as the entity responsible for maintaining the stability of the banking and monetary systems, to take necessary steps against any banking institution whose continued operation may prejudice depositors, creditors, and the general public. Even if the charter constituted a contract between the Government and the stockholders, it would not follow that the relationship could not be altered without violating the impairment clause. Citing Norman vs. Baltimore, the Court stressed that contracts involving public interest have a congenital infirmity — their susceptibility to change whenever required by the public interest. The police power can be validly asserted to make that change. The preservation of the integrity and stability of the banking system constituted a compelling public need justifying regulatory intervention. The stockholdings did not enjoy special immunity; like shares in any corporation, they were subject to the vicissitudes of business. The charter itself provided that the Bank would automatically become functus officio after fifty years and could be subject to quo warranto proceedings, demonstrating that revocation was not exclusively a legislative function. The Bank was also not a government bank: under Section 3(b) of its charter, the Government's initial subscription was to be turned over to the veterans, and the board was managed partly by elected directors, making it an ordinary commercial corporation rather than a government-owned or controlled corporation under Article IX-B, Section 2(1) of the Constitution.

• Back Wages: Under the Labor Code, back wages are awarded for work that could have been performed by the employee except that he was prevented from doing so because of his illegal dismissal by the employer. The employees in this case were not illegally dismissed but lawfully separated as a result of the liquidation of the Bank on orders of the Monetary Board. The closure was not the decision of the Bank but was forced upon it by resolution of the Central Bank. Back wages were therefore not due.

• Retirement Benefits: The Retirement Plan of the Bank defined "employee" to include members of the Board of Directors and other hired workers who, because of extended service, would qualify under the retirement categories. Article III, Section 1 of the Plan automatically enrolled all employees as defined. Marking and Mejia were therefore covered. However, for purposes of Article 110 of the Labor Code, as amended by R.A. No. 6715, the directors must be considered managerial employees or officers, and thus not entitled to the preference of claims granted to rank-and-file workers. The claims of rank-and-file workers must be accorded priority over all other claims, including those of the directors and even of the Government itself.

• Veterans' Ownership Claim: The petition in G.R. No. 82337 was procedurally flawed. It was not an appeal from any lower court or quasi-judicial body, nor was it a proper petition for certiorari, prohibition, or mandamus, as there was no tribunal, board, or officer that had acted without or in excess of jurisdiction or with grave abuse of discretion. Although the petition partook of the nature of mandamus in seeking to direct specific officials to perform certain acts, the facts did not present a case where those officials were legally mandated to do the acts sought. Moreover, given the Central Bank's established expertise in bank regulation and the liquidator court's familiarity with the problem, the affairs of the Bank were best entrusted to the liquidator court rather than managed directly by the petitioners. The Court noted that rehabilitation could still be ordered by the President without violation of the decision.

• Central Bank Regulatory Power Over Banking Institutions — All banking institutions operating in the Philippines, including government credit institutions, are subject to the supervision, examination, and regulatory authority of the Central Bank. A bank created by special law does not acquire immunity from this authority by virtue of its charter; the charter itself may expressly subject the bank to Central Bank supervision. The Central Bank may appoint a conservator (Section 28-A), a receiver, or a liquidator (Section 29) when a bank is insolvent or its continuance in business would involve probable loss to depositors and creditors. Actions of the Monetary Board under these provisions are final and executory and can be set aside only upon convincing proof that the action is plainly arbitrary and made in bad faith.

• Impairment Clause vs. Police Power — Contracts involving public interest suffer a congenital infirmity: their susceptibility to change whenever required by the public interest. The impairment clause yields to the inherent powers of the State, particularly police power, when public interest demands their exercise. The modern understanding is that a contract is protected by the guaranty only if it does not affect public interest, but practically every contract now affects public interest and is susceptible to valid alteration. In this case, the preservation of banking system integrity constituted a compelling public need justifying regulatory intervention over the Bank's charter.

• Back Wages Require Illegal Dismissal — Back wages are awarded only for work that an employee could have performed but was prevented from doing because of illegal dismissal by the employer. Employees lawfully separated as a result of liquidation ordered by higher authority are not entitled to back wages, as the closure was not the employer's decision but was forced upon it by the Monetary Board.

• Worker Preference in Bankruptcy (Article 110, Labor Code, as amended by R.A. No. 6715) — In the event of bankruptcy or liquidation of an employer's business, workers shall enjoy first preference as regards their unpaid wages and other monetary claims, which shall be paid in full before the claims of the Government and other creditors. Managerial employees or officers, including board members covered by a retirement plan, are not entitled to this preference; rank-and-file worker claims are accorded priority over all other claims.

• "Contracts, however express, cannot fetter the constitutional authority of the Congress. Contracts may create rights of property, but when contracts deal with a subject matter which lies within the control of the Congress, they have a congenital infirmity. Parties cannot remove their transactions from the reach of dominant constitutional power by making contracts about them." — This passage, quoted from Norman vs. Baltimore, articulates the doctrine that contracts involving public interest are susceptible to valid alteration under police power, forming the constitutional basis for upholding the Central Bank's liquidation authority against the impairment clause challenge.

• "The government cannot simply cross its arms while the assets of a bank are being depleted through mismanagement or irregularities. It is the duty of the Central Bank in such an event to step in and salvage the remaining resources of the bank so that they may not continue to be dissipated or plundered by those entrusted with their management." — This passage states the ratio decidendi for the Central Bank's regulatory and liquidation power, grounding it in the public interest of preserving banking system integrity.

• "Back pay is awarded for work that could have been performed by the employee except that he was prevented from doing so because of his illegal dismissal by the employer. It is clearly not due in the case at bar to the employees whose services were terminated as a result of the forcible closure of the Bank." — This passage defines the controlling rule on back wages and distinguishes lawful liquidation-induced separation from illegal dismissal.

• Norman vs. Baltimore, 294 U.S. 240 — Cited as a landmark U.S. Supreme Court decision establishing that contracts involving public interest have a congenital infirmity rendering them susceptible to change whenever required by the public interest. The Court applied this principle to uphold the Central Bank's regulatory action against the impairment clause challenge, drawing an analogy between regulation of the value of money and preservation of banking system stability.

• Section 25, Republic Act No. 265 (Central Bank Act) — Creates the supervising and examining departments of the Central Bank charged with supervision and periodic or special examination of all banking institutions operating in the Philippines, including all government credit institutions. Applied to establish that the Philippine Veterans Bank, as a banking institution, fell within Central Bank supervisory jurisdiction.
• Section 28-A, Republic Act No. 265 — Authorizes the Monetary Board to appoint a conservator when a bank is in a state of continuing inability or unwillingness to maintain adequate liquidity. Cited as part of the statutory framework for Central Bank regulatory intervention.
• Section 29, Republic Act No. 265 — Governs proceedings upon insolvency, authorizing the Monetary Board to forbid an insolvent institution from doing business, appoint a receiver, and order liquidation if public interest requires. Applied as the direct statutory basis for the Central Bank's liquidation of the Philippine Veterans Bank.
• Section 14, Republic Act No. 3518 (Philippine Veterans Bank Charter) — Expressly subjects the Bank to inspection by the Department of Supervision and Examination of the Central Bank in accordance with R.A. No. 265 and R.A. No. 337. Applied to refute the argument that the Bank's special charter exempted it from Central Bank authority.
• Section 3(b), Republic Act No. 3518 — Provides that 51% of the Bank's capital stock was initially subscribed by the Republic on behalf of the veterans, with shares to be turned over to them within five years. Applied to determine that the Bank was not a government-owned or controlled corporation but an ordinary commercial corporation.
• Article 110, Labor Code (as amended by Republic Act No. 6715) — Grants workers first preference in bankruptcy or liquidation for unpaid wages and other monetary claims, payable in full before claims of the Government and other creditors. Applied to subordinate the retirement benefit claims of board members (managerial employees) to the claims of rank-and-file workers.
• Article IX-B, Section 2(1), 1987 Constitution — Provides that the Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the Government, including government-owned or controlled corporations with original charters. Applied to determine that the Bank, not being owned or controlled by the Government, did not fall under the Civil Service.

Fernan (C.J.), Narvasa, Melencio-Herrera, Gancayco, Pacalla, Bidin, Cortes, Griño-Aquino, Medialdea, and Regalado concurred. Gutierrez, Jr., J., concurred in the results.