THE CENTRAL BANK OF THE PHILIPPINES, PETITIONER, VS. HON. JUDGE GAUDENCIO CLORIBEL AND BANCO FILIPINO, SAVINGS AND MORTGAGE BANK, RESPONDENTS.

Central Bank of the Philippines versus Cloribel

The Case

This is a special civil action for certiorari and prohibition brought by the Central Bank of the Philippines against Judge Gaudencio Cloribel of the Court of First Instance of Manila and Banco Filipino, Savings and Mortgage Bank. The Central Bank asks the Supreme Court to annul Judge Cloribel's order of November 23, 1966, which authorized a writ of preliminary injunction restraining the Central Bank and the Monetary Board from enforcing certain circulars and resolutions insofar as they restrict Banco Filipino's payment of monthly interest on savings deposits and advance interest on time deposits. The case matters because it defines the reach of the Monetary Board's power to fix maximum interest rates — whether that power includes the authority to regulate the manner of computing and paying interest — and because it clarifies when notice and hearing are required before administrative rule-making, and when the non-exhaustion of remedies rule yields to recognized exceptions.

Procedural History

Banco Filipino filed a petition for prohibition and preliminary injunction before the Court of First Instance of Manila against the Central Bank and the Monetary Board, seeking to annul Central Bank Circulars Nos. 185 and 222 and Monetary Board Resolutions Nos. 805 and 1566 insofar as they restricted the payment of monthly interest on savings deposits and advance interest on time deposits. Judge Cloribel issued ex parte a restraining order and set the application for preliminary injunction for hearing. After the hearing and the submission of memoranda, Judge Cloribel granted the writ of preliminary injunction in an order dated November 23, 1966. The Central Bank then instituted this original action for certiorari and prohibition before the Supreme Court, alleging grave abuse of discretion amounting to excess of jurisdiction.

Facts

Banco Filipino, a savings and mortgage bank organized under Philippine law, began operations in July 1964. When it opened, savings deposits earned interest at four per cent per annum, compounded quarterly, and its passbooks and rules stated that interest would be computed once every month on the lowest monthly round peso balance and credited to the depositor's account every three months. Within the same year, Banco Filipino changed its policy: it compounded and paid interest on savings deposits on a monthly rather than quarterly basis, and it paid the maximum rates of interest on time deposits in advance.

On December 15, 1964, the Central Bank issued Circular No. 185 pursuant to Monetary Board Resolution No. 1769, regulating interest rates on deposits of all banks except rural banks. On June 14, 1966, Circular No. 222, issued pursuant to Monetary Board Resolution No. 805, modified the earlier circular, providing among others that interest on time deposits shall not be paid in advance but only at maturity or upon withdrawal, and prescribing schedules of maximum rates.

On September 20, 1966, the Monetary Board approved Resolution No. 1566 directing Banco Filipino to comply strictly with Circular No. 222, and this was communicated to the bank in a letter dated September 29, 1966. On October 14, 1966, Banco Filipino filed its petition for prohibition and preliminary injunction before the Court of First Instance of Manila. Judge Cloribel issued a restraining order ex parte, heard the application, and on November 23, 1966 granted the writ of preliminary injunction. The Central Bank then came to the Supreme Court.

Issues

• Whether or not the petition for certiorari and prohibition should be dismissed for failure to exhaust remedies, the Central Bank not having sought reconsideration of the contested order.
• Whether or not the contested circulars and resolutions are null and void for having been issued without previous notice and hearing.
• Whether or not the contested circulars and resolutions impair vested rights.
• Whether or not the authority of the Monetary Board to fix the maximum rates of interest which banks may pay on deposits includes the power to determine and fix the manner in which said interest may be compounded and paid.

Applicable Provisions

Section 109 of Republic Act No. 265, the Central Bank Act, provides:

Sec. 109. Interest rates, commissions and charges. - The Monetary Board may fix the maximum rates of interest which banks may pay on deposits and on any other obligations.

This is the source of the power whose scope the Court is asked to define.

Section 109 further provides:

In order to avoid possible evasion of maximum interest rates set by the Monetary Board, the Board may also fix the maximum rates that banks may pay to or collect from their customers in the form of commissions, discounts, charges, fees or payments of any sort.

This clause supplies the textual basis for the Court's conclusion that the power extends to the manner of computing and paying interest.

Section 14 of the same law provides:

Sec. 14. Exercise of authority. - In order to exercise the authority granted to it under this Act. the Monetary Board shall: (a) Prepare and issue such rules and regulations as it considers necessary for the effective discharge of the responsibilities and exercise of the powers assigned to the Monetary Board and to the Central Bank under this Act;

This supports the implied grant of all powers necessary to carry out those expressly conferred.

Section 109 also provides:

Any modifications in the maximum interest rates permitted for the borrowing or lending operations of the banks shall apply only to future operations and not to those made prior to the date on which the modification becomes effective.

This defeats the argument that the circulars impair vested rights, since they operate prospectively.

Ruling

On the first issue, the Court held that while a motion for reconsideration is generally required before certiorari may be entertained, the rule admits exceptions: where the issue raised is purely one of law, where public interest is involved, and in case of urgency. All three circumstances were present. Moreover, the Central Bank had already raised the same questions in its answer and rejoinder below, so a motion for reconsideration would have served no practical purpose. The rule requiring exhaustion of remedies does not call for an exercise in futility.

On the second issue, the Court held that previous notice and hearing are not required before the Monetary Board fixes maximum rates of interest. Due process requires notice and hearing for the protection of life or vested property rights in judicial or quasi-judicial proceedings, but not for general rules or regulations promulgated to govern the future conduct of a class of persons or enterprises, unless the law provides otherwise. The fixing of maximum rates is legislative in character, and no statutory requirement of notice and hearing exists.

On the third issue, the Court held that the contested circulars and resolutions do not impair vested rights because they operate prospectively and affect only deposits made and interest accruing after their promulgation. All contracts are subject to the police power of the State, which is deemed incorporated into the laws of the land and forms part of all contracts.

On the fourth issue, the Court held that the Monetary Board's authority to fix maximum rates of interest necessarily includes the power to determine the manner of computing and paying interest. The law does not merely authorize the Board to fix maximum rates; it also empowers the Board, in order to avoid possible evasion of maximum rates, to fix the maximum rates that banks may pay in the form of payments of any sort. The authority to establish maximum rates carries with it the power to determine the maximum rates payable for given periods of time, and consequently the prerogative to regulate the manner of computing said rates and the manner or time of payment of interest, insofar as these affect the amount of interest to be paid.

Doctrine

The power of the Monetary Board to fix the maximum rates of interest which banks may pay on deposits and on any other obligations includes the power to determine the manner in which said interest may be compounded and paid. This follows from the express authority to avoid evasion of maximum rates by regulating payments of any sort, and from the implied grant of all powers necessary to carry out those expressly conferred. Notice and hearing are not required in the formulation and issuance of general rules and regulations, as distinguished from adjudicatory determinations; procedural due process applies only where there is interference with life, liberty, or a vested property right. Contracts are subject to the police power of the State, and laws in force at the time of contracting are deemed incorporated into the contract, so that regulations operating prospectively do not impair vested rights. The rule on exhaustion of remedies admits exceptions, including purely legal questions, public interest, and urgency, and does not require an exercise in futility.

Disposition

The Supreme Court granted the petition, annulled the order of Judge Cloribel dated November 23, 1966, and upheld the authority of the Monetary Board to regulate the manner of computing and paying interest on bank deposits.

Remember This

The single line worth memorizing: the power to fix maximum interest rates carries with it the power to regulate the manner of computing and paying them, and no notice and hearing is required for such general rule-making. Examiners use this case to test the scope of the Monetary Board's regulatory power, the rule-making versus adjudication distinction in due process, and the exceptions to the exhaustion of remedies rule.