Republic of the Philippines was declared first by executive order and then by legislation.

The
SUPREME COURT Supreme Court was right therefore in rejecting the contention that on
Manila its face, the Moratorium Law was unconstitutional, amounting as it did
to the impairment of the obligation of contracts. Time passed however,
and conditions did change.
EN BANC
Same; Time to consider in applying the rational basis test to
  moratorium legislation.—When the legislation was before this Court in
1953, the question before it was its satisfying the rational basis test,
G.R. No. L-23127 April 29, 1971 not as of the time of its enactment, but as of such date. Clearly, if then
it were found unreasonable, the right to non-impairment of contractual
obligations must prevail over the assertion of community power to
FRANCISCO SERRANO DE AGBAYANI, plaintiff-appellee, remedy an existing evil. The Supreme Court was convinced that such
vs. indeed was the case. As of the time of adjudication, it was apparent
PHILIPPINE NATIONAL BANK and THE PROVINCIAL SHERIFF that Republic Act No. 342 could not survive the test of validity.
OF PANGASINAN, defendants, PHILIPPINE NATIONAL Executive Order No. 32 should likewise be nullified. That before the
BANK, defendant-appellant. decision they were not constitutionally infirm was admitted expressly.
There is all the more reason then to yield assent to the now prevailing
Dionisio E. Moya for plaintiff-appellee. principle that the existence of a statute or executive order prior to its
being adjudged void is an operative fact to which legal consequences
are attached.
Ramon B. de los Reyes for defendant-appellant.
Same; Prescription tolled during period of moratorium.—Precisely
Constitutional law; Orthodox view on an unconstitutional act.—The though because of the judicial recognition that moratorium was a valid
orthodox view is that an unconstitutional act, for that matter an governmental response to the plight of the debtors who were war
executive order or a municipal ordinance likewise suffering from that sufferers, this Court has made clear its view in a series of cases
infirmity, cannot be the source of any legal rights or duties. Nor can it impressive in their number and unanimity that during the eight-year
justify any official act taken under it. Its repugnancy to the period that Executive Order No. 32 and Republic Act No. 342 were in
fundamental law once judicially declared results in its being to all force, prescription did not run. So it has been held from Day v. Court
intents and purposes a mere scrap of paper. of First Instance, 94 Phil. 816, decided in 1954, to Republic v. Hernaez,
L-24137, Jan. 30, 1970. Hence, the error of the lower court in
Same; Same; Orthodox view, not realistic.—The orthodox view has sustaining plaintiff’s suit is manifest. The prescriptive period was tolled,
support in logic and possesses the merit of simplicity. It may not from March 10, 1945, the effectivity of Executive Order No. 32, to May
however be sufficiently realistic. It does not admit of doubt, that prior 18, 1953, when the decision of Rutter v. Esteban was promulgated,
to the declaration of nullity such challenged legislative or executive act covering eight years, two montns and eight days.
must have been in force and had to be complied with. This is so as
until after the judiciary, man appropriate case, declares its invalidity, it APPEAL from a decision of the Court of First Instance of Pangasinan.
is entitled to obedience and respect. Parties may have acted under it Bello, J.
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 FERNANDO, J.:
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 A correct appreciation of the controlling doctrine as to the effect, if
governmental organ which has the final say on whether or not a any, to be attached to a statute subsequently adjudged invalid, is
legislative or executive measure is valid, a period of time may have decisive of this appeal from a lower court decision. Plaintiff Francisco
elapsed before it can exercise the power of judicial review that may Serrano de Agbayani, now appellee, was able to obtain a favorable
lead to a declaration of nullity. It would be to deprive the law of its judgment in her suit against defendant, now appellant Philippine
quality of fairness and justice then, if there be no recognition of what National Bank, permanently enjoining the other defendant, the
had transpired prior to such adjudication. Provincial Sheriff of Pangasinan, from proceeding with an extra-judicial
foreclosure sale of land belonging to plaintiff mortgaged to appellant
Same; Unconstitutional statutes; Effect of.—The actual existence of a Bank to secure a loan declared no longer enforceable, the prescriptive
statute, prior to such a determination (of unconstitutionality), is an period having lapsed. There was thus a failure to sustain the defense
operative fact and may have consequences which cannot justly be raised by appellant that if the moratorium under an Executive Order
ignored. The past cannot always be erased by a new judicial and later an Act subsequently found unconstitutional were to be
declaration. The effect of the subsequent ruling as to invalidity may counted in the computation, then the right to foreclose the mortgage
have to be considered in various aspects,—with respect to particular was still subsisting. In arriving at such a conclusion, the lower court
relations, individual and corporate, and particular conduct, private and manifested a tenacious adherence to the inflexible view that an
official. unconstitutional act is not a law, creating no rights and imposing no
duties, and thus as inoperative as if it had never been. It was oblivious
Same; Same; Unconstitutionality of act, still to be shown.—Such an to the force of the principle adopted by this Court that while a statute's
approach all the more commends itself whenever police power repugnancy to the fundamental law deprives it of its character as a
legislation intended to promote public welfare but adversely affecting juridical norm, its having been operative prior to its being nullified is a
property rights is involved. While subject to be assailed on due fact that is not devoid of legal consequences. As will hereafter be
process, equal protection and non-impairment grounds, all that is explained, such a failing of the lower court resulted in an erroneous
required to avoid the corrosion of invalidity is that the rational basis or decision. We find for appellant Philippine National Bank, and we
reasonableness test is satisfied. The legislature on the whole is not reverse.
likely to allow an enactment suffering, to paraphrase Cardozo, from
the infirmity of outrunning the bounds of reason and resulting in sheer There is no dispute as to the facts. Plaintiff obtained the loan in the
oppression. It may be of course that if challenged, an adverse amount of P450.00 from defendant Bank dated July 19, 1939,
judgment could be the result, as its running counter to the Constitution maturing on July 19, 1944, secured by real estate mortgage duly
could still be shown. In the meanwhile though, in the normal course of registered covering property described in T.C.T. No. 11275 of the
things, it has been acted upon by the public and accepted as valid. To province of Pangasinan. As of November 27, 1959, the balance due on
ignore such a fact would indeed be the fruitful parent of injustice. said loan was in the amount of P1,294.00. As early as July 13 of the
Moreover, as its constitutionality is conditioned on its being fair or same year, defendant instituted extra-judicial foreclosure proceedings
reasonable, which in turn is dependent on the actual situation, never in the office of defendant Provincial Sheriff of Pangasinan for the
static but subject to change, a measure valid when enacted may recovery of the balance of the loan remaining unpaid. Plaintiff
subsequently, due to altered circumstances, be stricken down. countered with his suit against both defendants on August 10, 1959,
her main allegation being that the mortgage sought to be foreclosed
Same; Moratorium legislation and question of constitutionality.—At the had long prescribed, fifteen years having elapsed from the date of
time of the issuance of Executive Order No. 32 in 1945 and of the maturity, July 19, 1944. She sought and was able to obtain a writ of
passage of R.A. 342 in 1948, there was a factual justification for the preliminary injunction against defendant Provincial Sheriff, which was
moratorium. The Philippines was confronted with an emergency of made permanent in the decision now on appeal. Defendant Bank in its
impressive magnitude at the time of her liberation from the Japanese answer prayed for the dismissal of the suit as even on plaintiff's own
military forces in 1945. Business was at a standstill. Her economy lay theory the defense of prescription would not be available if the period
prostrate. Measures, radical measures, were then devised to tide her from March 10, 1945, when Executive Order No. 321 was issued, to
over until some semblance of normalcy could be restored and an July 26, 1948, when the subsequent legislative act2 extending the
improvement in her economy noted. No wonder then that the period of moratorium was declared invalid, were to be deducted from
suspension of enforcement of payment of the obligations then existing the computation of the time during which the bank took no legal steps
for the recovery of the loan. As noted, the lower court did not find improvement in her economy noted. No wonder then that the
such contention persuasive and decided the suit in favor of plaintiff. suspension of enforcement of payment of the obligations then existing
was declared first by executive order and then by legislation. The
Supreme Court was right therefore in rejecting the contention that on
Hence this appeal, which, as made clear at the outset, possesses
its face, the Moratorium Law was unconstitutional, amounting as it did
merit, there being a failure on the part of the lower court to adhere to
to the impairment of the obligation of contracts. Considering the
the applicable constitutional doctrine as to the effect to be given to a
circumstances confronting the legitimate government upon its return
statute subsequently declared invalid.
to the Philippines, some such remedial device was needed and badly
so. An unyielding insistence then on the rights to property on the part
1. The decision now on appeal reflects the orthodox view that an of the creditors was not likely to meet with judicial sympathy. Time
unconstitutional act, for that matter an executive order or a municipal passed however, and conditions did change.
ordinance likewise suffering from that infirmity, cannot be the source
of any legal rights or duties. Nor can it justify any official act taken
When the legislation was before this Court in 1953, the question
under it. Its repugnancy to the fundamental law once judicially
before it was its satisfying the rational basis test, not as of the time of
declared results in its being to all intents and purposes a mere scrap of
its enactment but as of such date. Clearly, if then it were found
paper. As the new Civil Code puts it: "When the courts declare a law to
unreasonable, the right to non-impairment of contractual obligations
be inconsistent with the Constitution, the former shall be void and the
must prevail over the assertion of community power to remedy an
latter shall govern. Administrative or executive acts, orders and
existing evil. The Supreme Court was convinced that such indeed was
regulations shall be valid only when they are not contrary to the laws
the case. As stated in the opinion of Justice Bautista Angelo: "But we
of the Constitution.3 It is understandable why it should be so, the
should not lose sight of the fact that these obligations had been
Constitution being supreme and paramount. Any legislative or
pending since 1945 as a result of the issuance of Executive Orders
executive act contrary to its terms cannot survive.
Nos. 25 and 32 and at present their enforcement is still inhibited
because of the enactment of Republic Act No. 342 and would continue
Such a view has support in logic and possesses the merit of simplicity. to be unenforceable during the eight-year period granted to prewar
It may not however be sufficiently realistic. It does not admit of doubt debtors to afford them an opportunity to rehabilitate themselves,
that prior to the declaration of nullity such challenged legislative or which in plain language means that the creditors would have to
executive act must have been in force and had to be complied with. observe a vigil of at least twelve (12) years before they could affect a
This is so as until after the judiciary, in an appropriate case, declares liquidation of their investment dating as far back as 1941. This period
its invalidity, it is entitled to obedience and respect. Parties may have seems to us unreasonable, if not oppressive. While the purpose of
acted under it and may have changed their positions. What could be Congress is plausible, and should be commended, the relief accorded
more fitting than that in a subsequent litigation regard be had to what works injustice to creditors who are practically left at the mercy of the
has been done while such legislative or executive act was in operation debtors. Their hope to effect collection becomes extremely remote,
and presumed to be valid in all respects. It is now accepted as a more so if the credits are unsecured. And the injustice is more patent
doctrine that prior to its being nullified, its existence as a fact must be when, under the law the debtor is not even required to pay interest
reckoned with. This is merely to reflect awareness that precisely during the operation of the relief, unlike similar statutes in the United
because the judiciary is the governmental organ which has the final States. 10 The conclusion to which the foregoing considerations
say on whether or not a legislative or executive measure is valid, a inevitably led was that as of the time of adjudication, it was apparent
period of time may have elapsed before it can exercise the power of that Republic Act No. 342 could not survive the test of validity.
judicial review that may lead to a declaration of nullity. It would be to Executive Order No. 32 should likewise be nullified. That before the
deprive the law of its quality of fairness and justice then, if there be no decision they were not constitutionally infirm was admitted expressly.
recognition of what had transpired prior to such adjudication. There is all the more reason then to yield assent to the now prevailing
principle that the existence of a statute or executive order prior to its
In the language of an American Supreme Court decision: "The actual being adjudged void is an operative fact to which legal consequences
existence of a statute, prior to such a determination [of are attached.
unconstitutionality], is an operative fact and may have consequences
which cannot justly be ignored. The past cannot always be erased by a 3. Precisely though because of the judicial recognition that moratorium
new judicial declaration. The effect of the subsequent ruling as to was a valid governmental response to the plight of the debtors who
invalidity may have to be considered in various aspects, with respect to were war sufferers, this Court has made clear its view in a series of
particular relations, individual and corporate, and particular conduct, cases impressive in their number and unanimity that during the eight-
private and official." 4 This language has been quoted with approval in year period that Executive Order No. 32 and Republic Act No. 342
a resolution in Araneta v. Hill5 and the decision in Manila Motor Co., were in force, prescription did not run. So it has been held from Day v.
Inc. v. Flores.6 An even more recent instance is the opinion of Justice Court of First
Zaldivar speaking for the Court in Fernandez v. Cuerva and Co.7 Instance, 11 decided in 1954, to Republic v. Hernaez, 12 handed down
only last year. What is deplorable is that as of the time of the lower
2. Such an approach all the more commends itself whenever police court decision on January 27, 1960, at least eight decisions had left no
power legislation intended to promote public welfare but adversely doubt as to the prescriptive period being tolled in the meanwhile prior
affecting property rights is involved. While subject to be assailed on to such adjudication of invalidity. 13 Speaking of the opposite view
due process, equal protection and non-impairment grounds, all that is entertained by the lower court, the present Chief Justice, in Liboro v.
required to avoid the corrosion of invalidity is that the rational basis or Finance and Mining Investments Corp. 14 has categorized it as having
reasonableness test is satisfied. The legislature on the whole is not been "explicitly and consistently rejected by this Court." 15
likely to allow an enactment suffering, to paraphrase Cardozo, from
the infirmity of out running the bounds of reason and resulting in sheer The error of the lower court in sustaining plaintiff's suit is thus
oppression. It may be of course that if challenged, an adverse manifest. From July 19, 1944, when her loan matured, to July 13,
judgment could be the result, as its running counter to the Constitution 1959, when extra-judicial foreclosure proceedings were started by
could still be shown. In the meanwhile though, in the normal course of appellant Bank, the time consumed is six days short of fifteen years.
things, it has been acted upon by the public and accepted as valid. To The prescriptive period was tolled however, from March 10, 1945, the
ignore such a fact would indeed be the fruitful parent of injustice. effectivity of Executive Order No. 32, to May 18, 1953, when the
Moreover, as its constitutionality is conditioned on its being fair or decision of Rutter v. Esteban  was promulgated, covering eight years,
reasonable, which in turn is dependent on the actual situation, never two months and eight days. Obviously then, when resort was had
static but subject to change, a measure valid when enacted may extra-judicially to the foreclosure of the mortgage obligation, there was
subsequently, due to altered circumstances, be stricken down. time to spare before prescription could be availed of as a defense.

That is precisely what happened in connection with Republic Act No. WHEREFORE, the decision of January 27, 1960 is reversed and the suit
342, the moratorium legislation, which continued Executive Order No. of plaintiff filed August 10, 1959 dismissed. No costs.
32, issued by the then President Osmeña, suspending the enforcement
of payment of all debts and other monetary obligations payable by war
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro,
sufferers. So it was explicitly held in Rutter v. Esteban8 where such
Teehankee, Barredo, Villamor, and Makasiar, JJ., concur.
enactment was considered in 1953 "unreasonable and oppressive, and
should not be prolonged a minute longer, and, therefore, the same
should be declared null and void and without effect." 9 At the time of  Decision reversed.
the issuance of the above Executive Order in 1945 and of the passage
of such Act in 1948, there was a factual justification for the Footnotes
moratorium. The Philippines was confronted with an emergency of
impressive magnitude at the time of her liberation from the Japanese
1 Under Executive Order No. 32 providing for a debt moratorium, it
military forces in 1945. Business was at a standstill. Her economy lay was specifically stated: "Enforcement of payment of all debts and
prostrate. Measures, radical measures, were then devised to tide her other monetary obligations payable within the Philippines, except
over until some semblance of normalcy could be restored and an debts and other monetary obligations entered into in any area after
declaration by Presidential Proclamation that such area has been
freed from enemy occupation and control, is temporarily suspended
pending action by the Commonwealth Government." Executive
Order No. 32 was issued on March 10, 1945. Executive Order No.
32 amended Executive Order No. 25 (1944).

2 According to the declaration of policy in Republic Act No. 342

(1948), Executive Order No. 32 remains in full force and effect for
the war sufferers as for them the emergency created by the last
war was still existent. Then came this specific provision: "All debts
and other monetary obligations payable by private parties within
the Philippines originally incurred or contracted before December 8,
1941, and still remaining unpaid, any provision or provisions in the
contract creating the same or in any subsequent agreement
affecting such obligation to the contrary notwithstanding, shall not
be due and demandable for a period of eight (8) years from and
after settlement of the war damage claim of the debtor by the
United States Philippine War Damage Commission, without
prejudice, however, to any voluntary agreement which the
interested parties may enter into after the approval of this Act for
the settlement of said obligations."
Sec. 2.

3 ART. 7. In the classic language of Justice Field: "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 in legal
contemplation as inoperative as though it had never been." Norton
v. Shelly County, 118 US 425 (1886).

4 Chicot County Drainage Dist. v. Baxter States Bank 308 US 371,

374 (1940).

5 93 Phil. 1002 (1953).

6 99 Phil. 738 (1956).

7 L-21114, Nov. 28, 1967, 21 SCRA 1095.

8 93 Phil. 68 (1953). Rutter v. Esteban was subsequently cited in

the following cases: Araneta v. Hill, 93 Phil. 1002 (1953); Londres
v. National Life Insurance Co., 94 Phil. 627 (1954); Dizon v.
Ocampo, 94 Phil. 803 (1954); De Leon v. Ibañez, 95 Phil. 119
(1954); Picornell and Co. v. Cordovan 95 Phil. 632 (1954); Berg v.
Teus, 96 Phil. 102 (1954); Herrera v. Arellano, 97 Phil. 776 (1955);
Chua Lamko v. Dioso, 97 Phil. 821 (1955); Rio y Cia v. Sandoval,
100 Phil. 407 (1956); Gonzaga v. Rehabilitation Finance Corp., 100
Phil. 892 (1957); Pacific Commercial Co. v. Aquino, 100 Phil. 961
(1957); Bachrach motor Co., Inc. v. Chua Tua Hian, 101 Phil. 194
(1957); Liboro v. Finance and Mining Investment Corp., 102 Phil.
489 1957); Rio y Compania v. Jolkipli 105 Phil. 447 (1959); People
v. Jolliffe 105 Phil. 677 (1959); Uy Hoo and Co., Inc. v. Tan, 105
Phil. 717 (1959); Compania Maritima v. Court of Appeals and Libby,
McNeill and Libby (Phil.), Inc., 108 Phil. 469 (1960).

9 Ibid., p. 82. The same conclusion obtains in the opinion of the

Court as regards Executive Order No. 32.

10 Ibid., p. 77.

11 94 Phil. 816.

12 L-24137, January 30, 1970, 31 SCRA 219, citing Republic v.

Grijaldo, L-20240, December 31, 1965, 15 SCRA 681; Republic v.
Rodriguez, L-18967, January 31, 1966, 16 SCRA 53; Nielson and
Co., Inc. v. Lepanto Consolidated Mining Co., L-21601, December
28, 1968, 26 SCRA 540.

13 Day v. Court of First Instance of Tarlac, 94 Phil. 816 (1954);

Montilla v. Pacific Commercial Company, 98 Phil. 133 (1955);
Pacific Commercial Co. v. Aquino, 100 Phil. 961 (1957); Bachrach
Motor Co., Inc. v. Chua Tua Tian 101 Phil. 184 (1957); Liboro v.
Finance and Mining Investment Corp., 102 Phil. 489 (1957); Rio y
Compania v. Jolkipli, 105 Phil. 447 (1959); People v. Jollifee, 105
Phil. 677 (1959) ; Uy Hoo & Co., Inc. v. Tan, 105 Phil. 716 (1959).

14 102 Phil. 489 (1957).

15 Ibid., p. 493.