Friday, February 3, 2012

Doctrine of operative fact explained - G.R. Nos. 177857-58

G.R. Nos. 177857-58

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Petitioners assert that the Sandiganbayan’s refusal to recognize the vested rights purportedly created under the coconut levy laws constitutes taking of private property without due process of law. They reason out that to accord retroactive application to a declaration of unconstitutionality would be unfair inasmuch as such approach would penalize the farmers who merely obeyed then valid laws.

This contention is specious.

In Yap v. Thenamaris Ship’s Management,[170] the Operative Fact Doctrine was discussed in that:

As a general rule, an unconstitutional act is not a law; it confers no rights; it imposes no duties; it affords no protection; it creates no office; it is inoperative as if it has not been passed at all. The general rule is supported by Article 7 of the Civil Code, which provides:

Art. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall not be excused by disuse or custom or practice to the contrary.

The doctrine of operative fact serves as an exception to the aforementioned general rule. In Planters Products, Inc. v. Fertiphil Corporation, we held:

The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity and fair play. It nullifies the effects of an unconstitutional law by recognizing that the existence of a statute prior to a determination of unconstitutionality is an operative fact and may have consequences which cannot always be ignored. The past cannot always be erased by a new judicial declaration.

The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden on those who have relied on the invalid law. Thus, it was applied to a criminal case when a declaration of unconstitutionality would put the accused in double jeopardy or would put in limbo the acts done by a municipality in reliance upon a law creating it.[171]

In that case, this Court further held that the Operative Fact Doctrine will not be applied as an exception when to rule otherwise would be iniquitous and would send a wrong signal that an act may be justified when based on an unconstitutional provision of law.[172]

The Court had the following disquisition on the concept of the Operative Fact Doctrine in the case of Chavez v. National Housing Authority:[173]

The “operative fact” doctrine is embodied in De Agbayani v. Court of Appeals, wherein it is stated that a legislative or executive act, prior to its being declared as unconstitutional by the courts, is valid and must be complied with, thus:

As the new Civil Code puts it: “When the courts declare a law to be inconsistent with the Constitution, the former shall be void and the latter shall govern. Administrative or executive acts, orders and regulations shall be valid only when they are not contrary to the laws of the Constitution.” It is understandable why it should be so, the Constitution being supreme and paramount. Any legislative or executive act contrary to its terms cannot survive.

Such a view has support in logic and possesses the merit of simplicity. It may not however be sufficiently realistic. It does not admit of doubt that prior to the declaration of nullity such challenged legislative or executive act must have been in force and had to be complied with. This is so as until after the judiciary, in an appropriate case, declares its invalidity, it is entitled to obedience and respect. Parties may have acted under it and may have changed their positions. What could be more fitting than that in a subsequent litigation regard be had to what has been done while such legislative or executive act was in operation and presumed to be valid in all respects. It is now accepted as a doctrine that prior to its being nullified, its existence as a fact must be reckoned with. This is merely to reflect awareness that precisely because the judiciary is the governmental organ which has the final say on whether or not a legislative or executive measure is valid, a period of time may have elapsed before it can exercise the power of judicial review that may lead to a declaration of nullity. It would be to deprive the law of its quality of fairness and justice then, if there be no recognition of what had transpired prior to such adjudication.

In the language of an American Supreme Court decision: “The actual existence of a statute, prior to such a determination [of unconstitutionality], is an operative fact and may have consequences which cannot justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of the subsequent ruling as to invalidity may have to be considered in various aspects, with respect to particular relations, individual and corporate, and particular conduct, private and official.” This language has been quoted with approval in a resolution in Araneta v. Hill and the decision in Manila Motor Co., Inc. v. Flores. An even more recent instance is the opinion of Justice Zaldivar speaking for the Court in Fernandez v. Cuerva and Co. (Emphasis supplied.)

The principle was further explicated in the case of Rieta v. People of the Philippines, thus:

In similar situations in the past this Court had taken the pragmatic and realistic course set forth in Chicot County Drainage District vs. Baxter Bank to wit:

The courts below have proceeded on the theory that the Act of Congress, having been found to be unconstitutional, was not a law; that it was inoperative, conferring no rights and imposing no duties, and hence affording no basis for the challenged decree…. It is quite clear, however, that such broad statements as to the effect of a determination of unconstitutionality must be taken with qualifications. The actual existence of a statute, prior to [the determination of its invalidity], is an operative fact and may have consequences which cannot justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of the subsequent ruling as to invalidity may have to be considered in various aspects –with respect to particular conduct, private and official. Questions of rights claimed to have become vested, of status, of prior determinations deemed to have finality and acted upon accordingly, of public policy in the light of the nature both of the statute and of its previous application, demand examination. These questions are among the most difficult of those which have engaged the attention of courts, state and federal, and it is manifest from numerous decisions that an all-inclusive statement of a principle of absolute retroactive invalidity cannot be justified.

Moreover, the Court ruled in Chavez that:

Furthermore, when petitioner filed the instant case against respondents on August 5, 2004, the JVAs were already terminated by virtue of the MOA between the NHA and RBI. The respondents had no reason to think that their agreements were unconstitutional or even questionable, as in fact, the concurrent acts of the executive department lent validity to the implementation of the Project. The SMDRP agreements have produced vested rights in favor of the slum dwellers, the buyers of reclaimed land who were issued titles over said land, and the agencies and investors who made investments in the project or who bought SMPPCs. These properties and rights cannot be disturbed or questioned after the passage of around ten (10) years from the start of the SMDRP implementation. Evidently, the “operative fact” principle has set in. The titles to the lands in the hands of the buyers can no longer be invalidated.[174]

In the case at bar, the Court rules that the dictates of justice, fairness and equity do not support the claim of the alleged farmer-owners that their ownership of the UCPB shares should be respected. Our reasons:

1. Said farmers or alleged claimants do not have any legal right to own the UCPB shares distributed to them. It was not successfully refuted that said claimants were issued receipts under R.A. 6260 for the payment of the levy that went into the Coconut Investment Fund (CIF) upon which shares in the “Coconut Investment Company” will be issued. The Court upholds the finding of the Sandiganbayan that said investment company is a different corporate entity from the United Coconut Planters Bank. This was in fact admitted by petitioners during the April 17, 2001 oral arguments in G.R. Nos. 147062-64.[175]

The payments under R.A. 6260 cannot be equated with the payments under P.D. No. 276, the first having been made as contributions to the Coconut Investment Fund while the payments under P.D. No. 276 constituted the Coconut Consumers Stabilization Fund (“CCSF”). R.A. 6260 reads:

Section 2. Declaration of Policy. It is hereby declared to be the national policy to accelerate the development of the coconut industry through the provision of adequate medium and long-term financing for capital investment in the industry, by instituting a Coconut Investment fund capitalized and administered by coconut farmers through a Coconut Investment Company.[176]

P.D. No. 276 provides:

1. In addition to its powers granted under Presidential Decree No. 232, the Philippine Coconut Authority is hereby authorized to formulate andimmediately implement a stabilization scheme for coconut-based consumer goods, along the following general guidelines:

(a) ….

The proceeds from the levy shall be deposited with the Philippine National Bank or any other government bank to the account of the Coconut Consumers Stabilization Fund, as a separate trust fund which shall not form part of the general fund of the government.

(b) The Fund shall be utilized to subsidize the sale of coconut-based products at prices set by the Price Control Council, under rules and regulations to be promulgated by the Philippine Consumers Stabilization Committee….[177]

The PCA, via Resolution No. 045-75 dated May 21, 1975, clarified the distinction between the CIF levy payments under R.A. 6260 and the CCSF levy paid pursuant to P.D. 276, thusly:

It must be remembered that the receipts issued under R.A. No. 6260 were to be registered in exchange for shares of stock in the Coconut Investment Company (CIC), which obviously is a different corporate entity from UCPB. This fact was admitted by petitioners during the April 17, 2001 oral arguments in G.R. Nos. 147062-64.

In fact, while the CIF levy payments claimed to have been paid by petitioners were meant for the CIC, the distribution of UCPB stock certificates to the coconut farmers, if at all, were meant for the payors of the CCSF in proportion to the coconut farmer’s CCSF contributions pursuant to PCA Resolution No. 045-75 dated May 21, 1975:

RESOLVED, FURTHER, That the amount of ONE HUNDRED FIFTY MILLION (P150,000,000.00) PESOS be appropriated and set aside from available funds of the PCA to be utilized in payment for the shares of stock of such existing commercial bank and that the Treasurer be instructed to disburse the said amount accordingly.

… … …

RESOLVED, FINALLY, That … be directed to organize a team which shall prepare a list of coconut farmers who have paid the levy and contributed to the [CCSF] and to prepare a stock distribution plan to the end that the aforesaid coconut farmers shall receive certificates of stock of such commercial bank in proportion to their contributions to the Fund.

Unfortunately, the said resolution was never complied with in the distribution of the so-called “farmers” UCPB shares.

The payments therefore under R.A. 6260 are not the same as those under P.D. No. 276. The amounts of CIF contributions under R.A. 6260 which were collected starting 1971 are undeniably different from the CCSF levy under P.D. No. 276, which were collected starting 1973. The two (2) groups of claimants differ not only in identity but also in the levy paid, the amount of produce and the time the government started the collection.

Thus, petitioners and the alleged farmers claiming them pursuant to R.A. 6260 do not have any legal basis to own the UCPB shares distributed to them, assuming for a moment the legal feasibility of transferring these shares paid from the R.A. 6260 levy to private individuals.

2. To grant all the UCPB shares to petitioners and its alleged members would be iniquitous and prejudicial to the remaining 4.6 million farmers who have not received any UCPB shares when in fact they also made payments to either the CIF or the CCSF but did not receive any receipt or who was not able to register their receipts or misplaced them.

Section 1 of P.D. No. 755 which was declared unconstitutional cannot be considered to be the legal basis for the transfer of the supposed private ownership of the UCPB shares to petitioners who allegedly paid the same under R.A. 6260. The Solicitor General is correct in concluding that such unauthorized grant to petitioners constitutes illegal deprivation of property without due process of law. Due process of law would mean that the distribution of the UCPB shares should be made only to farmers who have paid the contribution to the CCSF pursuant to P.D. No. 276, and not to those who paid pursuant to R.A. 6260. What would have been the appropriate distribution scheme was violated by Section 1 of P.D. No. 755 when it required that the UCPB shares should be distributed to coconut farmers without distinction – in fact, giving the PCA limitless power and free hand, to determine who these farmers are, or would be.

We cannot sanction the award of the UCPB shares to petitioners who appear to represent only 1.4 million members without any legal basis to the extreme prejudice of the other 4.6 million coconut farmers (Executive Order No. 747 fixed the number of coconut farmers at 6 million in 1981). Indeed, petitioners constitute only a small percentage of the coconut farmers in thePhilippines. Thus, the Sandiganbayan correctly declared that the UCPB shares are government assets in trust for the coconut farmers, which would be more beneficial to all the coconut farmers instead of a very few dubious claimants;

3. The Sandiganbayan made the finding that due to enormous operational problems and administrative complications, the intended beneficiaries of the UCPB shares were not able to receive the shares due to them. To reiterate what the anti-graft court said:

The actual distribution of the bank shares was admittedly an enormous operational problem which resulted in the failure of the intended beneficiaries to receive their shares of stocks in the bank, as shown by the rules and regulations, issued by the PCA, without adequate guidelines being provided to it by P.D. No. 755. PCA Administrative Order No. 1, Series of 1975 (August 20, 1975), “Rules and Regulations Governing the Distribution of Shares of Stock of the Bank Authorized to be Acquired Pursuant to PCA Board Resolution No. 246-75”, quoted hereunder discloses how the undistributed shares of stocks due to anonymous coconut farmers or payors of the coconut levy fees were authorized to be distributed to existing shareholders of the Bank:

“Section 9. Fractional and Undistributed Shares – Fractional shares and shares which remain undistributed as a consequence of the failure of the coconut farmers to register their COCOFUND receipts or the destruction of the COCOFUND receipts or the registration of the COCOFUND receipts in the name of an unqualified individual, after the final distribution is made on the basis of the consolidated IBM registration Report as of March 31, 1976 shall be distributed to all the coconut farmers who have qualified and received equity in the Bank and shall be apportioned among them, as far as practicable, in proportion to their equity in relation to the number of undistributed equity and such further rules and regulations as may hereafter be promulgated.’

The foregoing PCA issuance was further amended by Resolution No. 074-78, still citing the same problem of distribution of the bank shares. This latter Resolution is quoted as follows:





WHEREAS, pursuant to PCA Board Resolution No. 246-75, the total par value of the shares of stock of the Bank purchased by the PCA for the benefit of the coconut farmers is P85,773,600.00 with a par value of P1.00 per share or equivalent to 85,773.600 shares;

WHEREAS, out of the 85,773,600 shares, a total of 34,572,794 shares have already been distributed in accordance with Administrative Order No. 1, Series of 1975, to wit:

First Distribution - 12,573,059

Second Distribution - 10,841,409

Third Distribution - 11,158,326


“WHEREAS, there is, therefore, a total of 51,200,806 shares still available for distribution among the coconut farmers;

WHEREAS, it was determined by the PCA Board, in consonance with the policy of the state on the integration of the coconut industry, that the Bank shares must be widely distributed as possible among the coconut farmers, for which purpose a national census of coconut farmers was made through the Philippine Coconut Producers Federation (COCOFED);

WHEREAS, to implement such determination of the PCA Board, there is a need to accordingly amend Administrative Order No. 1, Series of 1975;

NOW, THEREFORE, BE IT RESOLVED, AS IT IS HEREBY RESOLVED, that the remaining 51,200,806 shares of stock of the Bank authorized to be acquired pursuant to the PCA Board Resolution No. 246-75 dated July 25, 1975 be distributed as follows:

(1) All the coconut farmers who have received their shares in the equity of the Bank on the basis of Section 8 of Administrative Order No. 1, Series of 1975, shall receive additional share for each share presently owned by them;

(2) Fractional shares shall be completed into full shares, and such full shares shall be distributed among the coconut farmers who qualified for the corresponding fractional shares;

(3) The balance of the shares, after deducting those to be distributed in accordance with (1) and (2) above, shall be transferred to COCOFED for distribution, immediately after completion of the national census of coconut farmers prescribed under Resolution No. 033-78 of the PCA Board, to all those who are determined by the PCA Board to be bona fide coconut farmers and have not received shares of stock of the Bank. The shares shall be equally determined among them on the basis of per capita.

RESOLVED, FURTHER, That the rules and regulations under Administrative Order No. 1, Series of 1975, which are inconsistent with this Administrative Order be, as they are hereby, repealed and/or amended accordingly.”

Thus, when 51,200,806 shares in the bank remained undistributed, the PCA deemed it proper to give a “bonanza” to coconut farmers who already got their bank shares, by giving them an additional share for each share owned by them and by converting their fractional shares into full shares. The rest of the shares were then transferred to a private organization, the COCOFED, for distribution to those determined to be “bona fide coconut farmers” who had “not received shares of stock of the Bank.” The distribution to the latter was made on the basis of “per capita”, meaning without regard to the COCOFUND receipts. The PCA considered itself free to disregard the said receipts in the distribution of the shares although they were considered by the May 25, 1975 Agreement between the PCA and defendant Cojuangco (par. [8] of said Agreement) and by Sections 1, 3, 4, 6 and 9, PCA Administrative Order No. 1, Series of 1975 as the basis for the distribution of shares.

The PCA thus assumed, due to lack of adequate guidelines set by P.D. No. 755, that it had complete authority to define who are the coconut farmers and to decide as to who among the coconut farmers shall be given the gift of bank shares; how many shares shall be given to them, and what basis it shall use to determine the amount of shares to be distributed for free to the coconut farmers. In other words, P.D. No. 755 fails the completeness test which renders it constitutionally infirm.

Due to numerous flaws in the distribution of the UCPB shares by PCA, it would be best for the interest of all coconut farmers to revert the ownership of the UCBP shares to the government for the entire coconut industry, which includes the farmers;

4. The Court also takes judicial cognizance of the fact that a number, if not all, of the coconut farmers who sold copra did not get the receipts for the payment of the coconut levy for the reason that the copra they produced were bought by traders or middlemen who in turn sold the same to the coconut mills. The reality on the ground is that it was these traders who got the receipts and the corresponding UCPB shares. In addition, some uninformed coconut farmers who actually got the COCOFUND receipts, not appreciating the importance and value of said receipts, have already sold said receipts to non-coconut farmers, thereby depriving them of the benefits under the coconut levy laws. Ergo, the coconut farmers are the ones who will not be benefited by the distribution of the UCPB shares contrary to the policy behind the coconut levy laws. The nullification of the distribution of the UCPB shares and their transfer to the government for the coconut industry will, therefore, ensure that the benefits to be deprived from the UCPB shares will actually accrue to the intended beneficiaries – the genuine coconut farmers.

From the foregoing, it is highly inappropriate to apply the operative fact doctrine to the UCPB shares. Public funds, which were supposedly given utmost safeguard, were haphazardly distributed to private individuals based on statutory provisions that are found to be constitutionally infirm on not only one but on a variety of grounds. Worse still, the recipients of the UCPB shares may not actually be the intended beneficiaries of said benefit. Clearly, applying the Operative Fact Doctrine would not only be iniquitous but would also serve injustice to the Government, to the coconut industry, and to the people, who, whether willingly or unwillingly, contributed to the public funds, and therefore expect that their Government would take utmost care of them and that they would be used no less, than for public purpose.

We clarify that PSJ-A is subject of another petition for review interposed by Eduardo Cojuangco, Jr., in G.R. No. 180705 entitled, Eduardo M. Cojuangco, Jr. v. Republic of the Philippines, which shall be decided separately by this Court. Said petition should accordingly not be affected by this Decision save for determinatively legal issues directly addressed herein.

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