In a significant ruling, the Supreme Court of the Philippines affirmed the nullity of loan agreements that sought to convert a public plaza into a commercial center. This decision underscores the principle that properties of public dominion, such as plazas, are intended for public use and cannot be appropriated for private commercial purposes. This ruling protects public spaces, ensuring they remain accessible and free from commercial exploitation, thereby upholding the community’s right to enjoy these areas.

Can Public Plazas Be Collateralized? A Case of Municipal Overreach

The case of Land Bank of the Philippines vs. Eduardo M. Cacayuran revolves around the Municipality of Agoo, La Union, which sought to redevelop the Agoo Public Plaza. To finance this project, the municipality, led by then Mayor Eufranio Eriguel, obtained loans from Land Bank, using a portion of the plaza as collateral. Resident Eduardo Cacayuran challenged the validity of these loans, arguing that the plaza, being property of public dominion, could not be used as collateral or converted into a commercial center. This sparked a legal battle that reached the Supreme Court, raising crucial questions about the limits of municipal authority and the protection of public spaces.

The central issue was whether the loan agreements, secured by a mortgage on the Agoo Plaza, were valid. Land Bank argued that the resolutions passed by the Sangguniang Bayan (SB) provided sufficient authorization for the mayor to contract the loans. They also contended that Cacayuran lacked standing to sue since he was not a party to the loan agreements. The Supreme Court disagreed, asserting that Cacayuran, as a taxpayer and resident, had the right to question the legality of the loans, especially since public funds, derived from the municipality’s Internal Revenue Allotment (IRA), were involved. The Court emphasized the importance of protecting public spaces from unlawful appropriation.

Building on this principle, the Court examined the validity of the resolutions authorizing the loans. Section 444(b)(1)(vi) of the Local Government Code (LGC) stipulates that while the mayor’s authorization need not be in the form of an ordinance, the underlying obligation must be made pursuant to a law or ordinance. In this case, the loans and the Redevelopment Plan were approved through resolutions, not ordinances. The Supreme Court highlighted the distinction between ordinances, which are laws of general and permanent character, and resolutions, which are merely declarations of sentiment or opinion. Because the loans were not authorized by an ordinance, the Court found the SB’s actions to be in violation of the LGC.

Sec. 444. The Chief Executive: Powers, Duties, Functions and Compensation. –

x x x x

(b) For efficient, effective and economical governance the purpose of which is the general welfare of the municipality and its inhabitants pursuant to Section 16 of this Code, the municipal mayor shall:

x x x x

(vi) Upon authorization by the sangguniang bayan, represent the municipality in all its business transactions and sign on its behalf all bonds, contracts, and obligations, and such other documents made pursuant to law or ordinance

Adding to the irregularities, the Court noted that the resolutions were not submitted to the Sangguniang Panlalawigan for review, as required by Section 56 of the LGC, and lacked proper publication and posting, contravening Section 59 of the LGC. These procedural lapses further undermined the validity of the resolutions and, consequently, the loans obtained by the municipality.

The Supreme Court also addressed the nature of the Agoo Plaza as property of public dominion. Article 420 of the Civil Code defines properties of public dominion as those intended for public use, such as roads, canals, rivers, and public plazas. These properties are outside the commerce of man and cannot be disposed of or leased to private parties.

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by the State, banks, shores, roadsteads, and others of similar character; x x x x

The Court emphasized that the conversion of the Agoo Plaza into a commercial center was beyond the municipality’s jurisdiction, as it involved appropriating property dedicated to public use. The municipality’s attempt to declare the plaza as patrimonial property through Municipal Ordinance No. 02-2007 was deemed invalid without an express grant from the national government. The ruling reinforced the principle that local government units cannot unilaterally convert public land into patrimonial property for commercial purposes.

The Supreme Court categorized the loans as ultra vires acts, meaning they were beyond the powers conferred upon the municipality. The Court distinguished between two types of ultra vires acts:

There is a distinction between an act utterly beyond the jurisdiction of a municipal corporation and the irregular exercise of a basic power under the legislative grant in matters not in themselves jurisdictional. The former are ultra vires in the primary sense and void; the latter, ultra vires only in a secondary sense which does not preclude ratification or the application of the doctrine of estoppel in the interest of equity and essential justice.

The loans in question fell into the first category, being acts outside the municipality’s jurisdiction. Since the purpose of the loans was to fund the commercialization of a public plaza, the Court deemed them void from the beginning. As a result, the municipality was not bound by the loan agreements, although the officers who authorized the resolutions could be held personally liable for their actions.

FAQs

What was the key issue in this case?	The key issue was whether the Municipality of Agoo could validly mortgage a public plaza to secure loans for commercial development.
Why did the Supreme Court invalidate the loan agreements?	The Court invalidated the loans because the plaza was property of public dominion, not subject to commercial appropriation, and the loan authorization lacked proper legal basis.
What is property of public dominion?	Property of public dominion includes assets intended for public use, like roads, rivers, and plazas, which cannot be privately owned or commercially exploited.
What does ultra vires mean in this context?	Ultra vires refers to actions taken by a corporation or municipality that exceed its legal powers or jurisdiction, rendering such actions void.
Can a municipality convert public land into patrimonial property?	No, a municipality cannot unilaterally convert public land into patrimonial property without an express grant from the national government.
Who can challenge the validity of government contracts?	Taxpayers and residents have standing to challenge government contracts if public funds are involved or if the contract violates public interest.
What is the role of resolutions versus ordinances?	Ordinances are laws of general and permanent nature, while resolutions are declarations of sentiment or opinion, lacking the force of law.
Are public officials personally liable for ultra vires acts?	Yes, public officials can be held personally liable for acts performed ultra vires, especially if such acts result in unlawful disbursement of public funds.

This case serves as a crucial reminder to local government units about the importance of adhering to legal requirements when entering into loan agreements and managing public properties. It underscores the principle that public spaces must be protected and preserved for the benefit of the community. The decision reinforces the need for transparency and accountability in local governance, ensuring that public resources are used in accordance with the law and in the best interests of the public.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: LAND BANK OF THE PHILIPPINES, VS. EDUARDO M. CACAYURAN, G.R. No. 191667, April 17, 2013