RUTTER vs.

ESTEBAN
G.R. No. L-3708; May 18, 1953; 93 Phil. 68
Ponente: Bautista Angelo

Doctrine: Inherent powers of the State; Police Power; The national economy

FACTS:
In August 20, 1941, Rutter sold to Esteban 2 parcels of land in Manila. Esteban paid
3/4ths of the purchase price and they constituted a mortgage over one of the
parcels to secure the payment of the balance.

However, the war broke out and somehow, Esteban was not able to pay the balance
of the purchase price on the due date and so, on August 2, 1949, Rutter instituted
an action to recover the balance with the CFI.

Esteban admitted the averments of the complaint but as a defense, he claimed that
his obligation was a pre-war obligation covered by the moratorium embodied in R.A.
No. 342.

Section 2 of Republic Act No. 342 provides that all debts and other monetary
obligations contracted before December 8, 1941, any provision in the contract
creating the same or any subsequent aggreement affecting such obligation to the
contrary notwithstanding, shall not due and demandable for a period of eight (8)
years from and after settlement of the war damage claim of the debtor by the
Philippine War Damage Commission.

The CFI ruled in favor of the debtor Esteban. This brings us to the sole issue raised
by petitioner on appeal

ISSUE:
Whether or not R.A. No. 342, which declared a moratorium on certain pre-war
obligations, is unconstitutional for violation of the Constitutional provision
prohibiting the impairment of the obligation of contracts.

HELD:
Yes. R.A. No. 342 is unconstitutional.

Statutes declaring a moratorium on obligations are generally constitutional

Statutes declaring a moratorium on obligations are not new: For some 1,400 years
western civilization has made use of extraordinary devices for saving the credit
structure, devices generally known as moratoria. The moratorium is postponement
of fulfillment of obligations decreed by the state through the medium of the courts
or the legislature. Its essence is the application of the sovereign power.

Such laws were often passed during or after times of financial distress such as wars
and disasters. Similar laws were passed in some US states after the civil war and
they have been declared constitutional. Some laws however, were declared
unconstitutional where the period of moratorium prescribed is indefinite or
unreasonable.
The argument that moratorium laws impair the obligation of contracts does not hold
water. It is justified as a valid exercise of the state of it's police power.

In the US case, Home Building and Loan Association vs. Blaisdell, it was held that:

The economic interests of the State may justify the exercise of its continuing and
dominant protective power notwithstanding interference with contracts. . . .

xxx

Similarly, where the protective power of the State is exercised in a manner

otherwise appropriate in the regulation of a business it is no objection that the
performance of existing contracts may be frustrated by the prohibition of injurious
practices. . . .

. . . . The question is not whether the legislative action affects contracts incidentally,
or directly or indirectly, but whether the legislation is addressed to a legitimate end
and the measures taken are reasonable and appropriate to that end.

Thus the true test of constitutionality of a moratorium statute lies in the

determination of the period of a suspension of the remedy. It is required that such
suspension be definite and reasonable, otherwise it would be violative of the
constitution.

R.A. No. 342 is unconstitutional for being unreasonable

The moratorium law, enacted in 1948, came on the heels of executive orders
likewise declaring moratoriums. With its 8 year moratorium period, it is clearly
unreasonable for creditors who have to observe a vigil of 12 years to collect on
debts which have become demandable as early as 1941. And the injustice is more
patent when, under the law, the debtor is not even required to pay interest during
the operation of the relief.

The court also noted that the reconstruction is paying off and that the Philippines is
headed to better times. Hence the Supreme Court declared R.A. No. 342
unreasonable and oppressive and hence, null and void and without effect.

Disposition:
Esteban was ordered to pay the balance with interest at the rate of 7% per annum
with 12% attorneys fees.

Facts: On August 20,1941 Rutter sold to Esteban two parcels of land situated in the
Manila for P9,600 of which P4,800 were paid outright, and the balance was made
payable as follows: P2,400 on or before August 7, 1942, and P2,400 on or before
August 27, 1943, with interest at the rate of 7 percent per annum. To secure the
payment of said balance of P4,800, a first mortgage has been constituted in favor of
the plaintiff. Esteban failed to pay the two installments as agreed upon, as well as
the interest that had accrued and so Rutter instituted an action to recover the
balance due, the interest due and the attorney's fees. The complaint also contains a
prayer for sale of the properties mortgaged in accordance with law. Esteban claims
that this is a prewar obligation contracted and that he is a war sufferer, having filed
his claim with the Philippine War Damage Commission for the losses he had suffered
as a consequence of the last war; and that under section 2 of RA 342(moratorium
law), payment of his obligation cannot be enforced until after the lapse of eight
years. The complaint was dismissed. A motion for recon was made which assails the
constitutionality of RA 342.

Issue: Whether or Not RA 342 unconstitutional on non-impairment clause grounds.

Held: Yes. The moratorium is postponement of fulfillment of obligations decreed by

the state through the medium of the courts or the legislature. Its essence is the
application of police power. The economic interests of the State may justify the
exercise of its continuing and dominant protective power notwithstanding
interference with contracts. The question is not whether the legislative action
affects contracts incidentally, or directly or indirectly, but whether the legislation is
addressed to a legitimate end and the measures taken are reasonable and
appropriate to that end.

However based on the Presidents general SONA and consistent with what the Court
believes to be as the only course dictated by justice, fairness and righteousness,
declared that the continued operation and enforcement of RA 342 at the present
time is unreasonable and oppressive, and should not be prolonged should be
declared null and void and without effect. This holds true as regards Executive
Orders Nos. 25 and 32, with greater force and reason considering that said Orders
contain no limitation whatsoever in point of time as regards the suspension of the
enforcement and effectivity of monetary obligations.

Case Digest: Ortigas & Co. vs Feati Bank & Trust Co.
Facts:

On March 4, 1952, Ortigas sold Lot 5 and 6, Block 31 of the Highway Hills
Subdivision at Mandaluyong to Augusto Padilla y Angeles and Natividad Angeles.
The latter transferred their rights in favour of Emma Chavez, upon completion of
payment a deed was executed with stipulations, one of which is that the use of the
lots are to be exclusive for residential purposes only. This was annotated in the
Transfer Certificate of Titles No. 101509 and 101511. Feati then acquired Lot 5
directly from Emma Chavez and Lot 6 from Republic Flour Mills. On May 5, 1963,
Feati started construction of a building on both lots to be devoted for banking
purposes but could also be for residential use. Ortigas sent a written demand to
stop construction but Feati continued contending that the building was being
constructed according to the zoning regulations as stated in Municipal Resolution 27
declaring the area along the West part of EDSA to be a commercial and industrial
zone. Civil case No. 7706 was made and decided in favour of Feati.

Issue:

Whether or not Resolution number 27 declaring Lot 5 and 6 to be part of an

industrial and commercial zone is valid considering the contract stipulation in the
Transfer Certificate of Titles.

Held:

Resolution No. 27 prevails over the contract stipulations. Section 3 of RA 2264 of the
Local Autonomy Act empowers a Municipal Council to adopt zoning and subdivision
ordinances or regulations for the Municipality. Section 12 or RA 2264 states that
implied power of the municipality should be liberally construed in its favour, to
give more power to the local government in promoting economic conditions, social
welfare, and material progress in the community. This is found in the General
Welfare Clause of the said act. Although non-impairment of contracts is
constitutionally guaranteed, it is not absolute since it has to be reconciled with the
legitimate exercise of police power, e.g. the power to promote health, morals,
peace, education, good order or safety and general welfare of the people.
Resolution No. 27 was obviously passed in exercise of police power to safeguard
health, safety, peace and order and the general welfare of the people in the locality
as it would not be a conducive residential area considering the amount of traffic,
pollution, and noise which results in the surrounding industrial and commercial
establishments.

Decision dismissing the complaint of Ortigas is AFFIRMED.

[Digest] Ortigas vs. FEATI (1979)

ORTIGAS & CO., LIMITED PARTENRSHIP V. FEATI BANK AND TRUST CO. (1979)
Santos, J.

Facts:
Ortigas & Co., Limited Partnership engaged in real estate business
developing and selling lots to the public particularly Highway Hills subdivision along
EDSA
March 4, 1952 Augusto Padilla y Angeles and Natividad Angeles entered into
separate agreements of sale on installments over Lots 5 and 6 Block 31, Highway
Hills
July 19, 1962 Augusto and Natividad transferred their rights and interests in
favor of Emma Chavez
o Transfer contained the following restrictions and stipulations:
For residential purposes only
 All buildings and improvements (except fences) should use strong building
material, have modern sanitary installations connected to the public sewer or own
septic tank and shall not be more than 2 meters from the boundary lines
Resolution 27 Feb 4, 1960 reclassified the western part of EDSA (Shaw
boulevard to Pasig River) as a commercial and industrial zone
Such restrictions were annotated on the TCTs
July 23, 1962 - Feati bank bought Lot 5 from Emma Chavez while lot 6 was
purchased by Republic Flour Mills

May 5, 1963 Feati Bank began laying foundation and construction of a

building for banking purposes on lots 5 and 6
Ortigas & Co. Demanded that they comply with the annotated restrictions
Feati Bank refused arguing that it was following the zoning regulations
Ortigas & Co. filed a case in the lower courts which held that Resolution No.
27 was a valid exercise of police power of the municipality hence the zoning is
binding and takes precedence over the annotations in the TCTs because private
interest should bow down to general interest and welfare.
March 2, 1965 motion for reconsideration by Ortigas & Co. which was
denied on March 26, 1965
April 2, 1965 Ortigas filed notice of appeal which was given due course on
April 14, 1965 hence this case.

Issues:
WON Resolution No. 27 is a valid exercise of police power
WON Resolution No. 27 can nullify or supersede contractual obligations by Feati
Bank and Trust Co.

Held:
YES it is a valid exercise police power.
YES it can nullify contractual obligations by Feati with Ortigas & Co.

Ratio:
The validity of the resolution was never assailed in the lower courts and can
therefore not be raised for the first time on appeal
o The rule against flip flopping issues and arguments prevents deception in courts
o Ortigas & Co. also did not dispute the factual findings of the lower court on the
validity of the resolution
Assuming arguendo it was properly raised the resolution is still valid
o RA 2264 (Local Autonomy Act) Sec 3 empowers municipalities to adopt zoning
and subdivision ordinances or regulations for the municipality
o The resolution is regulatory measure!
o RA 2264 Sec 12 any fair and reasonable doubt as to the existence of the
power should be interpreted in favor of the local government and it shall be
presumed to exist this gives more power to LGUs to promote general welfare,
economic conditions, social welfare and material progress in their locality
The non-impairment clause of contracts is not absolute since it must be
reconciled with the legitimate exercise of police power
o when general welfare and private property rights clash, the former must prevail
through police powers of the state
 Lots 5 and 6 front EDSA and has become surrounded by industrial and
commercial complexes
o Development in the area has resulted in extreme noise and air pollution that is
not conducive to health, safety and welfare of the would-be residents justifies the
usage by Feati Bank of the land for more reasonable purposes

Decision: Affirmed

Dissenting: Abad Santos, J.

Resolution 27 is valid because it has not yet been struck down but it is not a
legitimate exercise of police power because its means (zoning) do not fit with its
purpose of general welfare
Zoning the area as industrial and commercial will contribute to chaos, frenzy,
pollution, noise which suffocate and cause the deterioration of the ecology Lowers
quality of life for residents in Metro Manila

Lozano vs Martinez Digest

Facts:

Petitioners were charged with violation of Batas Pambansa Bilang 22 (Bouncing

Check Law). They moved seasonably to quash the informations on the ground that
the acts charged did not constitute an offense, the statute being unconstitutional.
The motions were denied by the respondent trial courts, except in one case,
wherein the trial court declared the law unconstitutional and dismissed the case.
The parties adversely affected thus appealed.

Issue:

1. Whether or not BP 22 is violative of the constitutional provision on non-

imprisonment due to debt
2. Whether it impairs freedom of contract
3. Whether it contravenes the equal protection clause

Held:

1. The enactment of BP 22 is a valid exercise of the police power and is not

repugnant to the constitutional inhibition against imprisonment for debt. The
gravamen of the offense punished by BP 22 is the act of making and issuing a
worthless check or a check that is dishonored upon its presentation for payment. It
is not the non-payment of an obligation which the law punishes. The law is not
intended or designed to coerce a debtor to pay his debt. The thrust of the law is to
prohibit, under pain of penal sanctions, the making of worthless checks and putting
them in circulation. Because of its deleterious effects on the public interest, the
practice is proscribed by the law. The law punishes the act not as an offense against
property, but an offense against public order.
Unlike a promissory note, a check is not a mere undertaking to pay an amount of
money. It is an order addressed to a bank and partakes of a representation that the
drawer has funds on deposit against which the check is drawn, sufficient to ensure
payment upon its presentation to the bank. There is therefore an element of
certainty or assurance that the instrument will be paid upon presentation. For this
reason, checks have become widely accepted as a medium of payment in trade and
commerce. Although not legal tender, checks have come to be perceived as
convenient substitutes for currency in commercial and financial transactions. The
basis or foundation of such perception is confidence. If such confidence is shaken,
the usefulness of checks as currency substitutes would be greatly diminished or
may become nil. Any practice therefore tending to destroy that confidence should
be deterred for the proliferation of worthless checks can only create havoc in trade
circles and the banking community.

The effects of the issuance of a worthless check transcends the private interests of
the parties directly involved in the transaction and touches the interests of the
community at large. The mischief it creates is not only a wrong to the payee or
holder, but also an injury to the public. The harmful practice of putting valueless
commercial papers in circulation, multiplied a thousand fold, can very wen pollute
the channels of trade and commerce, injure the banking system and eventually hurt
the welfare of society and the public interest.

2. The freedom of contract which is constitutionally protected is freedom to enter

into lawful contracts. Contracts which contravene public policy are not lawful.
Besides, we must bear in mind that checks can not be categorized as mere
contracts. It is a commercial instrument which, in this modem day and age, has
become a convenient substitute for money; it forms part of the banking system and
therefore not entirely free from the regulatory power of the state.

3. There is no substance in the claim that the statute in question denies equal
protection of the laws or is discriminatory, since it penalizes the drawer of the
check, but not the payee. It is contended that the payee is just as responsible for
the crime as the drawer of the check, since without the indispensable participation
of the payee by his acceptance of the check there would be no crime. This
argument is tantamount to saying that, to give equal protection, the law should
punish both the swindler and the swindled. The petitioners posture ignores the
well-accepted meaning of the clause equal protection of the laws. The clause does
not preclude classification of individuals, who may be accorded different treatment
under the law as long as the classification is not unreasonable or arbitrary. (Lozano
vs Martinez, G.R. No. L-63419, December 18, 1986)

FACTS:

This is a consolidated case, the petition arose from cases involving prosecution of
offenses under the BP 22 also known as Bouncing Check Law. The defendant in
these case moved seasonably to quash the information on the ground that the acts
charged did not constitute an offense, the statute being unconstitutional. The
motions were denied by the respondent trial court, except in one case, which is the
subject of G.R No. 75789, wherein the trial court declared the law unconstitutional
and dismissed the case. The parties adversely affected have come to the court for
remedy. Those who question the constitutionality of the said statute insist the
following ground:

1) It offends the constitutional provision forbidding imprisonment for debt;

2) it impairs freedom of contract;
3) it contravenes the equal protection clause;
4) it unduly delegates legislative and executive powers; and
5) its enactment is flawed in the sense that during its passage the interim Batasan
violated the constitutional provision prohibiting to a bill on Third Reading.

ISSUE:

Whether or not BP 22 or the Bouncing Check Law is unconstitutional.

RULING:

No, the enactment of the assailed statute is a valid exercise of Police power and is
not repugnant to the constitutional inhibition against imprisonment for debt. It may
be constitutionally impermissible for the legislature to penalize a person for non-
payment of debt ex contractu, but certainly it is within the prerogative of the
lawmaking body to prescribe certain acts deemed pernicious and inimical to public
welfare. Acts mala in se are not only acts which the law can punish. An act may not
be considered by society as inherently wrong, hence, not malum in se, but because
of the harm that it inflicts on the community, it can be outlawed and criminally
punished as malum prohibitum. The state can do this in the exercise of its police
power.

The enactment of the said statute is a declaration by the legislature that, as a

matter of public policy, the making and issuance of a worthless check is deemed a
public nuisance to be abated by the imposition of penal sanctions.