Reyna vs. Commission on Audit

A COA disallowance of an advance payment to a supplier stands, and the responsible Land Bank officers are personally liable, where the release violated the bank’s Manual on Lending Operations and no document in the record authorized prepayment; a subsequent write-off of the loan is not a condonation, compromise, or novation and does not extinguish the debt. An Ombudsman dismissal for lack of sufficient evidence does not bar the COA’s administrative disallowance.

Land Bank of the Philippines operated a cattle-financing program under which loans were granted to cooperatives, with a Credit Facility Proposal and a Memorandum of Agreement between the cooperative and cattle supplier REMAD as part of the loan process. Petitioners Ruben Reyna and Lloyd Soria were Land Bank Ipil Branch employees, serving as Senior Field Operations Specialist and Loans and Credit Analyst II, respectively. The COA exercises audit jurisdiction over government funds and properties under Presidential Decree No. 1445, including disallowances of irregular expenditures.

In December 1993, the Land Bank Ipil Branch approved six loans for four cooperatives under its cattle-financing program: two for R.T. Lim Rubber Marketing Cooperative and Buluan Agrarian Reform Beneficiaries MPC each, and one each for Tungawan Paglaum Multi-Purpose Cooperative and Siay Farmers’ Multi-Purpose Cooperative. The releases totaled ₱3,375,775, with ₱264,775 for livestock insurance and ₱3,115,000 paid to REMAD. R.T. Lim RMC received ₱795,305 and ₱187,705; BARBEMCO received ₱482,825 and ₱448,105; Tungawan PFMPC received ₱482,825; and SIFAMCO received ₱983,010. Pursuant to the CFP, the cooperatives individually entered into a contract with REMAD denominated as a “Cattle-Breeding and Buy-Back Marketing Agreement.”

Petitioners alleged that the CFP terms allowed prepayment or advancement of payments before delivery, and that the contracts allegedly contained a stipulation that the release of the loan be made sixty days prior to delivery. The SC noted, however, that copies of the CFPs were not attached to the record, and the Cattle-Breeding and Buy-Back Marketing Agreement did not contain a provision authorizing prepayment. Three checks were issued by the Ipil Branch to REMAD as advanced payment for the cattle, but REMAD failed to supply the cattle on the dates agreed upon.

In post audit, the Land Bank Auditor disallowed ₱3,115,000 under CSB No. 95-005 dated December 27, 1996 and Notices of Disallowance Nos. 96-014 to 96-019 because of the non-delivery and because the advance payment violated bank policies and COA rules. The auditor noted that No. 1 of the loan terms and conditions allowed prepayments without taking into consideration the interest of the bank; that nowhere in the documents reviewed was a prepayment scheme with REMAD disclosed; that there was no justification for the prepayment; that it deviated from existing asset-financing procedures under which the bank first issues a letter guarantee and pays only upon delivery, inspection, and acceptance; and that it violated Section 88 of PD 1445 and the Manual on FOG Lending Operations, which requires payment to the dealer after presentation of reimbursement documents acknowledged by the authorized LBP representative that the goods were delivered.

The auditor held Emmanuel B. Bartocillo, George G. Hebrona, Ruben A. Reyna, Lloyd V. Soria, Mary Jane T. Cunting, and Leona O. Cabanatan liable for the disallowed amount. The same employees, including petitioners, were also made respondents in a complaint filed by COA Regional Office No. IX before the Office of the Ombudsman for gross negligence, violation of reasonable office rules and regulations, conduct prejudicial to the interest of the bank, and giving unwarranted benefits to persons, causing undue injury in violation of Section 3(e) of Republic Act No. 3019.

On January 28, 1997, petitioners filed a Joint Motion for Reconsideration claiming that the Notice of Disallowance was premature because of the pending case in the Office of the Ombudsman; the Auditor denied the motion. Petitioners appealed to the COA Regional Office, which affirmed the auditor on August 29, 1997 in Decision No. 97-001. Their February 4, 1998 motion for reconsideration was denied in Decision No. 98-005 dated February 18, 1998. Petitioners did not file a petition for review or notice of appeal under Section 3, Rule VI of the 1997 Revised COA Rules, so the Regional Office decision became final under Section 51 of PD 1445. On April 12, 1999, the Director of COA Regional Office No. IX directed the Auditor to require the Ipil Branch accountant to record the disallowance; on July 12, 1999, the Auditor wrote the Branch Manager to record it.

On August 10, 1999, petitioners wrote the COA Regional Office to set aside the booking, citing the Ombudsman’s February 23, 1999 Resolution dismissing the complaint for lack of sufficient evidence and the Bangko Sentral ng Pilipinas’ approval of the write-off. The Ombudsman Resolution was approved by Margarito P. Gervacio, Jr., Deputy Ombudsman for Mindanao. The Regional Office endorsed the matter to the COA Commission Proper in its February 28, 2000 letter, maintaining that the appeal period had lapsed and that the disallowance was irregular and disadvantageous despite the Ombudsman Resolution. The COA requested a reply on June 29, 2000; petitioners filed a Compliance/Reply on August 10, 2000, arguing that the Ombudsman Resolution was a supervening event exempting them from the appeal requirement and that the Regional Director had waived finality by invoking the Commission Proper’s jurisdiction.

The COA Commission Proper, on July 17, 2003, Decision No. 2003-107, affirmed the disallowance and the order to record it, without prejudice to the right to run after REMAD. Petitioners’ August 22, 2003 motion for reconsideration was denied in Resolution No. 2004-046 dated December 7, 2004. Land Bank Vice-President Conrado B. Roxas had earlier advised the Ipil Branch in an August 5, 1998 Memorandum that the BSP, in a July 20, 1998 letter, approved the write-off of the Agrarian Reform Loan Accounts and Commercial Loan Accounts covered by LBP Board Resolution Nos. 98-291 and 98-292 dated June 18, 1998; the attached schedule covered two BARBEMCO loans, two RTLim RMC loans, and one Tungawan PFMPC loan totaling ₱2,209,000, while the SIFAMCO loan was covered by a separate write-off advice to the Buug Branch for ₱906,000.

• Prepayment Stipulation: Petitioners argued that the COA gravely abused its discretion in declaring the prepayment stipulation in the Land Bank-REMAD contract proscribed by Section 103 of PD 1445; they maintained that the COA was estopped because the contract was a standard bank form used in 22 Land Bank branches and they did not draft it, that the prepayment clause was valid, and that public works contracts with mobilization funds show prepayment is not unusual.
• Manual Compliance: Petitioners argued that they processed the cooperatives’ loan applications in accordance with their job descriptions and the Bank’s Manual on Field Office Guidelines on Lending Operations, so they should not be administratively liable.
• Good Faith and Write-Off: Petitioners argued that they acted in evident good faith, that the collectibles had been effectively written off with BSP approval, and that the COA’s order requiring them to refund the disallowed amount was functus officio.
• Ombudsman Resolution and Finality: Petitioners argued that the Ombudsman Resolution absolving them was a supervening event and a sufficient ground to exempt them from filing a petition for review or notice of appeal, and that the Regional Director waived the finality of the Regional Office decision by invoking the jurisdiction of the COA Commission Proper.

• Finality and Validity of Disallowance: Respondent countered that the disallowance had become final and executory because petitioners failed to appeal, and that the Ombudsman’s dismissal did not affect its validity and propriety.
• Violation of Audit Rules: Respondent maintained that the advance payment violated Section 88 of PD 1445 and Land Bank rules and regulations, and that the disallowance was proper.
• Write-Off Requires COA Approval: Respondent argued that the alleged write-off was of no moment because Section 66 of PD 1445 granted the COA the right to compromise monetary liabilities of the government, and without its approval the write-off was ineffectual.

• Prepayment and Disallowance: Whether the COA committed grave abuse of discretion in disallowing the ₱3,115,000 advance payment to REMAD as a violation of Section 88 of PD 1445 and the Manual on Lending Operations.
• Administrative Liability: Whether the COA committed grave abuse of discretion in holding petitioners administratively liable for processing the loans.
• Write-Off and Refund: Whether the COA committed grave abuse of discretion in requiring petitioners to refund the disallowed amount despite the BSP-approved write-off and their claim of good faith.
• Ombudsman Dismissal: Whether the Ombudsman’s dismissal of the criminal complaint for lack of sufficient evidence barred the COA disallowance or established petitioners’ good faith.
• Finality and Due Process: Whether the COA committed grave abuse of discretion in resolving the case despite petitioners’ failure to appeal from the COA Regional Office decision.

• Prepayment and Disallowance: No. The COA did not gravely abuse its discretion; the record did not show an authorized prepayment, and the release violated the Manual’s payment-after-delivery rule.
• Administrative Liability: No. Petitioners cannot invoke the Manual because they violated its explicit payment-after-delivery procedure; the presumption of regularity fails.
• Write-Off and Refund: No. A write-off is an accounting measure, not condonation, compromise, or novation; the debt remains and petitioners are liable, without prejudice to running after REMAD.
• Ombudsman Dismissal: No. The dismissal was for lack of sufficient evidence, not a finding of good faith; it does not bar the administrative disallowance.
• Finality and Due Process: No. Although the Regional Office decision became final for failure to appeal, the COA Commission Proper still resolved petitioners’ letter and gave them opportunity; no grave abuse.

• Prepayment and Disallowance: The SC held that the validity of the prepayment scheme is a question of fact, and a Rule 64 petition cannot correct simple errors of judgment absent grave abuse. Even if factual review were allowed, petitioners failed to prove authorization: Annex I, the Cattle-Breeding and Buy-Back Marketing Agreement, did not contain the alleged stipulation 6.1; no CFP or loan contract was attached; the Auditor found that no reviewed document disclosed a prepayment scheme with REMAD. The CFP is only a facility proposal, not the loan contract, and any prepayment term should appear in the loan contract. Petitioners also violated the Manual on Lending Operations, which requires payment to the dealer after presentation of reimbursement documents acknowledged by the authorized LBP representative that the goods were delivered. The alleged August 22, 1996 Land Bank Memorandum opining that Section 88 of PD 1445 did not apply was not offered in evidence, and even if correct, it would not cure the Manual violation. COA findings of fact are respected if supported by substantial evidence.
• Administrative Liability: The SC held that petitioners cannot rely on the Manual because the same Manual requires payment after delivery and reimbursement documents; they did not dispute the COA finding that they violated it. The presumption that public officials regularly perform their duties fails when an explicit rule was violated. The COA did not gravely abuse its discretion in holding petitioners administratively liable.
• Write-Off and Refund: The SC held that Land Bank has the power to write off loans under its charter, the General Banking Act, and BSP circulars, and the BSP approved the write-offs. But a write-off is a financial accounting concept that removes uncollectible accounts from the books; it is not a legal ground for extinguishing an obligation under the Civil Code, not a compromise, not a condonation (which requires gratuity and acceptance), and not a novation. The debtor remains liable. The COA’s reliance on Section 66 of PD 1445 was baseless; Section 36 uses “may” and gives governing bodies of government-owned or controlled corporations exclusive power to compromise when authorized by charter, so the COA does not have the exclusive prerogative. Thus the write-off did not release petitioners; Land Bank must record the disallowance and petitioners and four co-employees are personally liable, without prejudice to running after REMAD.
• Ombudsman Dismissal: The SC held that the Ombudsman dismissed the complaint for lack of sufficient evidence, not because it found good faith. Criminal and administrative proceedings are distinct; an absolution from a criminal charge is not a bar to administrative prosecution or vice versa. The administrative disallowance requires only substantial evidence. The memoranda mentioned in the Ombudsman Resolution were not attached, and the April 6, 1992 Memorandum was not raised before the COA; petitioners’ failure to present it was due to their own negligence in letting the appeal period lapse.
• Finality and Due Process: The SC noted that petitioners failed to file a petition for review or notice of appeal under Section 3, Rule VI of the 1997 Revised COA Rules, so the Regional Office decision became final under Section 51 of PD 1445. But the COA Commission Proper still resolved their August 10, 1999 letter and requested a reply; petitioners submitted their Compliance/Reply. They were given opportunity to argue and present evidence. The SC found no capricious or whimsical exercise of judgment amounting to grave abuse.

• Write-off is not condonation, compromise, or novation — A write-off is an accounting device that removes an uncollectible account from the creditor’s books; it does not extinguish the debtor’s legal obligation, does not amount to a compromise, condonation, or novation, and leaves the creditor free to collect if the debtor later becomes solvent. The SC applied this to hold that the BSP-approved write-off of the Land Bank loans did not release petitioners from personal liability for the disallowed advance payment.
• COA findings of fact and substantial evidence — Findings of fact of quasi-judicial agencies like the COA are generally accorded respect and even finality if supported by substantial evidence, in recognition of their expertise. The SC applied this to uphold the COA’s finding that no document authorized the prepayment and that petitioners violated the Manual on Lending Operations.
• Presumption of regularity yields to proof of violated rule — Public officials are presumed to have regularly performed their duties, but the presumption fails when an explicit rule was violated. The SC applied this to reject petitioners’ reliance on the Manual because the same Manual required payment only after delivery and reimbursement documents.
• Ombudsman dismissal does not bar administrative disallowance — An absolution from a criminal charge is not a bar to an administrative prosecution or vice versa; the criminal case requires proof beyond reasonable doubt while the administrative case requires only substantial evidence. The SC applied this to hold that the Ombudsman’s dismissal for lack of sufficient evidence did not invalidate the COA disallowance.
• Grave abuse of discretion — Grave abuse of discretion means capricious and whimsical exercise of judgment equivalent to lack of jurisdiction, or exercise of power in an arbitrary manner by reason of passion, prejudice, or personal hostility, so patent or gross as to amount to evasion of duty or refusal to act. The SC found no such abuse by the COA.
• Land Bank’s power to write off loans — Land Bank, as a specialized banking institution under the General Banking Act and BSP supervision, has the implied power to write off loans in accordance with BSP circulars; write-offs of ₱100,000 or more require Monetary Board approval. The SC applied this to hold the write-off valid but ineffective to release petitioners.
• COA does not have exclusive power to compromise liabilities — Under Section 36 of PD 1445, the COA’s power to compromise is permissive (“may”), and governing bodies of government-owned or controlled corporations have exclusive power to compromise or release claims when authorized by their charters. The SC applied this to reject the COA’s argument that its approval was required for the write-off.

• “The foregoing pronouncements notwithstanding, this Court rules that writing-off a loan does not equate to a condonation or release of a debt by the creditor.” — The SC used this to reject the argument that the BSP-approved write-off extinguished petitioners’ liability.
• “Write-off is not one of the legal grounds for extinguishing an obligation under the Civil Code. It is not a compromise of liability. Neither is it a condonation, since in condonation gratuity on the part of the obligee and acceptance by the obligor are required.” — This defines the legal effect of a write-off and supports the ruling that the debt remained despite the accounting entry.
• “An absolution from a criminal charge is not a bar to an administrative prosecution or vice versa.” — The SC used this to hold that the Ombudsman’s dismissal did not bar the COA disallowance.
• “It is well settled that findings of fact of quasi-judicial agencies, such as the COA, are generally accorded respect and even finality by this Court, if supported by substantial evidence, in recognition of their expertise on the specific matters under their jurisdiction.” — This supported deference to the COA’s finding that no document authorized the prepayment.

• Land Bank of the Philippines vs. Commission on Audit — Controlling precedent; the SC relied on it to hold that Land Bank has the power to write off loans under its charter and BSP circulars, but that such write-off does not condone the debt.

• Section 88, Presidential Decree No. 1445 (State Audit Code) — Prohibits advance payment for services not yet rendered or supplies not yet delivered except with prior approval of the President. The auditor invoked it; the SC upheld the disallowance even assuming petitioners’ argument that a Land Bank memorandum said it did not apply, because they violated the Manual on Lending Operations.
• Section 51, Presidential Decree No. 1445 — Provides that a decision of the COA or any auditor within its jurisdiction, if not appealed as provided, is final and executory. The SC noted that the COA Regional Office decision became final after petitioners failed to appeal.
• Section 3, Rule VI, 1997 Revised Rules of Procedure of the COA — Sets the period for appeal from the Director to the COA Commission Proper. Petitioners did not file the required petition for review or notice of appeal.
• Section 66, Presidential Decree No. 1445 — The COA invoked it as granting power to compromise monetary liabilities; the SC held the reliance baseless because Section 66 does not pertain to the COA’s power to compromise claims.
• Section 36, Presidential Decree No. 1445 — Governs the COA’s power to compromise claims; the use of “may” makes it permissive, and governing bodies of government-owned or controlled corporations have exclusive power to compromise or release claims when authorized by their charters. The SC used this to reject the COA’s claim that its approval was required for the write-off.
• Section 84, General Banking Act (Republic Act No. 337, as amended) — Requires prior approval of the Monetary Board for writing off loans and advances with an outstanding amount of ₱100,000 or more. The SC, through the Land Bank precedent, relied on this in discussing Land Bank’s power to write off.
• Section 75, Republic Act No. 3844 (Land Bank Charter) — Vests Land Bank with specific banking powers and authority to exercise general powers under the Corporation Law and General Banking Act. The SC relied on this in the Land Bank precedent to support the write-off power.
• Central Bank Circular No. 958, Series of 1983 — Leaves the frequency of writing off loans to the bank’s Board of Directors, subject to a ceiling; the SC relied on it in the Land Bank precedent to uphold Land Bank’s write-off power.
• Civil Code (provisions on extinguishment, condonation, and novation) — The SC referred to the Civil Code in holding that a write-off is not a legal ground for extinguishing an obligation, not a compromise, and not a condonation or novation. No specific article is cited in the text.

• Justice Roberto A. Abad (Dissenting) — Voted to grant the petition. He disagreed with personal liability, saying the COA should be bound by the Ombudsman’s dismissal, which found no bad faith or malicious intent; REMAD failed due foot-and-mouth disease; the prepayment was part of the CFP and approved by Land Bank management; Section 88 did not apply because Land Bank was lending money, not buying cattle; the BSP-approved write-off showed the loan was not an unauthorized expenditure; absent bad faith, malice, or gross negligence, the presumption of regularity should stand; the employees should not pay for a debt they did not contract, and Land Bank could still sue the proper parties. He also said the other employees should receive the same relief.
• Justice Conchita Carpio Morales (Dissenting) — Joined Justice Abad’s dissent.
• Justice Teresita J. Leonardo-De Castro (Dissenting) — Joined Justice Abad’s dissent.
• Justice Mariano C. Del Castillo (Dissenting) — Joined Justice Abad’s dissent.