Rural Bank of Makati, Inc. vs. Municipality of Makati

A local government unit may not order the closure of a business establishment for non-payment of local taxes without observing due process, the civil remedies available under the Local Tax Code being limited to distraint of personal property and legal action.

In August 1990, the municipal attorney of Makati, Atty. Victor A.L. Valero, inquired into the Rural Bank of Makati's unpaid taxes and fees. Bank corporate secretary Magdalena V. Landicho claimed the bank was exempt from payment under Republic Act No. 720. Criminal complaints were subsequently filed against the bank's officers for violating the Metropolitan Tax Code and municipal ordinances. Pending the criminal cases, the municipality ordered the bank's closure, prompting the bank to pay the assessed amount of ₱82,408.66 under protest.

• Tax Exemption Claim: In August 1990, upon request of the municipal treasurer, Atty. Valero inquired about the bank's unpaid taxes and fees. Petitioner Magdalena V. Landicho, corporate secretary, asserted that the bank was exempt from paying such taxes under Republic Act No. 720, as amended.
• Criminal Charges: On November 19, 1990, the municipality filed a complaint with the Prosecutor's Office against petitioners Esteban S. Silva (president and general manager) and Landicho for violating the Metropolitan Tax Code. On April 5, 1991, two Informations were filed with the MeTC of Makati for non-payment of the mayor's permit fee and annual business tax.
• Closure and Protest Payment: While the criminal cases were pending, the respondent municipality ordered the closure of the bank. Constrained by the closure order, petitioners paid under protest the mayor's permit fee and annual fixed tax totaling ₱82,408.66.
• Civil Action for Refund: On October 18, 1991, petitioners filed a complaint for sum of money and damages with the RTC. They alleged the collection was oppressive, arbitrary, and illegal because it was effected despite the pendency of the criminal cases and without prior notice or assessment. They also challenged the validity of the municipal ordinances for lack of publication and asserted that Atty. Valero acted ultra vires. Petitioners claimed unrealized earnings of ₱19,778.

• Validity of Closure: Petitioners maintained that the closure was an improper exercise of police power, arguing that a municipal corporation possesses only delegated police power, which must be exercised by the municipal council through ordinances, not by the mayor through executive action.
• Applicable Law: Petitioners contended that the Court of Appeals erred in invoking the Local Government Code of 1991, which took effect in 1992, when the closure occurred on July 31, 1991.
• Validity of Ordinances: Petitioners argued that MMC Ordinance No. 82-03 and Municipal Ordinance No. 122 were void for lack of publication as required by Tañada v. Tuvera, and that no tax assessment was ever presented to the bank.
• Refund and Damages: Petitioners claimed a refund of ₱57,854.00 representing overpaid taxes prior to the withdrawal of their exemption, unrealized profits, moral damages, exemplary damages, and attorney's fees.

• Legal Obligation and Police Power: Respondent municipality countered that the payment of ₱82,408.66 was a legal obligation, as the mayor's permit fee and business license are required of all business concerns in furtherance of the municipality's police power.
• No Coercion and Ultra Vires: Atty. Valero asserted that no coercion was committed, that the payment was a legal obligation, and that the bank's claim of exemption lacked legal basis. He argued he was merely performing his official duties and filed a counterclaim for moral damages, alleging the suit was intended to harass and humiliate him.

• Tax Liability: Whether petitioner bank is liable to pay the business taxes and mayor’s permit fees imposed by respondent.
• Validity of Closure: Whether the closure of petitioner bank is valid.
• Petitioners' Damages: Whether petitioners are entitled to an award of unrealized profit and damages.
• Valero's Damages: Whether respondent Atty. Victor Valero is entitled to damages.

• Tax Liability: Liability for the business taxes and permit fees was affirmed. Republic Act No. 720 previously exempted rural banks with net assets not exceeding one million pesos from all taxes, charges, and fees; however, this exemption was effectively withdrawn by Executive Order No. 93, issued on December 17, 1986, which withdrew all tax and duty incentives except those expressly excluded. Rural banks were not among the exceptions. The claim for a partial refund of ₱57,854.00 was denied for lack of substantiation, the factual findings of the Court of Appeals on the computation being binding and conclusive.
• Validity of Closure: The closure was declared invalid. Although the general welfare clause under the old Local Government Code (B.P. Blg. 337), which was in effect at the time of the closure, authorized the municipal council to enact ordinances and the municipal mayor to enforce them, closure is not a recognized remedy for the collection of delinquent taxes. Section 62 of the Local Tax Code limits civil remedies to distraint of personal property and legal action. Because the bank was not engaged in illegal or immoral activities and had acted in good faith in relying on its claimed exemption, the extrajudicial closure violated the bank's right to due process.
• Petitioners' Damages: The award of damages and unrealized profits to petitioners was denied. A corporation cannot be granted moral damages, being an artificial person incapable of experiencing physical suffering and mental anguish. Exemplary damages are likewise unavilable absent an award of moral damages. Attorney's fees were denied for lack of adequate support and proof.
• Valero's Damages: The award of moral damages and attorney's fees to Atty. Valero was deleted. No illegal motive or malice could be ascribed to the bank for impleading him, as he was the official charged with implementing the municipal ordinances and was rightly impleaded as a necessary party in the suit against the municipality.

• General Welfare Clause — The general welfare clause comprises two branches: (1) the general legislative power, which authorizes the municipal council to enact ordinances necessary to carry into effect the powers and duties conferred by law; and (2) the police power proper, which authorizes the municipality to enact ordinances necessary for the health, safety, prosperity, morals, peace, good order, comfort, and convenience of the municipality and its inhabitants, and for the protection of their property. In this case, the ordinances imposing licenses and permits fell under the first branch, while the imposition of annual business tax was an exercise of the power of taxation.
• Moral Damages for Corporations — A corporation, as an artificial person existing only in legal contemplation, cannot experience physical suffering and mental anguish and is therefore ineligible to recover moral damages.
• Remedies for Delinquent Local Taxes — The civil remedies available to enforce payment of delinquent local taxes under the Local Tax Code are limited to distraint of personal property and legal action. Outright closure of a business establishment is not among the authorized remedies and constitutes a violation of due process when effected extrajudicially.

• "The general welfare clause has two branches. The first, known as the general legislative power, authorizes the municipal council to enact ordinances and make regulations not repugnant to law, as may be necessary to carry into effect and discharge the powers and duties conferred upon the municipal council by law. The second, known as the police power proper, authorizes the municipality to enact ordinances as may be necessary and proper for the health and safety, prosperity, morals, peace, good order, comfort, and convenience of the municipality and its inhabitants, and for the protection of their property."
• "The appropriate remedies to enforce payment of delinquent taxes or fees are provided for in Section 62 of the Local Tax Code... Said Section 62 did not provide for closure. Moreover, the order of closure violated petitioner’s right to due process, considering that the records show that the bank exercised good faith and presented what it thought was a valid and legal justification for not paying the required taxes and fees."
• "The award of moral damages cannot be granted to a corporation, it being an artificial person that exists only in legal contemplation and cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by one having a nervous system."

• Tatel v. Municipality of Virac, G.R. No. 40243 — Followed. Cited for the proposition that municipal corporations are agencies of the State endowed with police powers under the general welfare clause to effectively accomplish the objects of their creation.
• Estate of Gregoria Francisco v. Court of Appeals, G.R. No. 95279 — Followed. Cited to support the ruling that the violation of a municipal ordinance does not empower a municipal mayor to avail of extrajudicial remedies.
• ABS-CBN Broadcasting Corporation v. Court of Appeals, G.R. No. 128690 — Followed. Cited as authority for the doctrine that a corporation cannot recover moral damages because it is an artificial person incapable of experiencing physical suffering and mental anguish.
• Austria v. Court of Appeals, G.R. No. 133323 — Followed. Cited for the rule that factual findings of the Court of Appeals which are supported by the record are binding and conclusive upon the Supreme Court.

• Section 14, Republic Act No. 720 (as amended by R.A. No. 4106) — Exempted rural banks with net assets not exceeding one million pesos from the payment of all taxes, charges, and fees. Applied to show that petitioner bank was initially exempt, as its net assets as of December 29, 1986, were only ₱745,432.29.
• Section 1, Executive Order No. 93 — Withdrew all tax and duty incentives granted to government and private entities, subject to certain exceptions. Applied to withdraw the tax exemption previously enjoyed by rural banks under R.A. No. 720, as rural banks were not among the exceptions.
• Section 7, Batas Pambansa Blg. 337 (Old Local Government Code) — The general welfare clause in effect at the time of the closure. Applied to uphold the municipality's authority to enact ordinances for the general welfare, notwithstanding the non-applicability of the 1991 Local Government Code.
• Section 141, Batas Pambansa Blg. 337 — Enumerated the powers and duties of the municipal mayor, including the granting of licenses and permits and the enforcement of laws and ordinances. Applied to show that the mayor possessed the authority to enforce municipal ordinances and that Atty. Valero, as the mayor's agent, acted within his mandate.
• Section 62, Presidential Decree No. 231 (Local Tax Code) — Provided that civil remedies for enforcing payment of delinquent taxes shall be by distraint of personal property and by legal action. Applied to demonstrate that closure was not an authorized remedy for the collection of delinquent local taxes.
• Article 2233, Civil Code of the Philippines — Provides that exemplary damages cannot be awarded if moral damages are not awarded. Applied to deny the bank's claim for exemplary damages.

Puno, C.J. (Chairman), Callejo, Sr., and Tinga, JJ., concurred.