VIVAS vs THE MONETARY BOARD

G.R. 191424

Facts:

RBFI is a duly-registered rural banking institution with its principal office located in Cagayan. While the
corporate life of such bank expired on May 31, 2005, petitioner and his principals acquired controlling
interest in RBFI in January 2006. An internal audit found that RBFI performed badly in its operations.
Measures to revitalize the bank were introduced.

On December 2006, BSP issued a Certificate of Authority extending the corporate life of RBFI for another
50 years. It also approved RBFI’s change of name to EuroCredit Community Bank and its increase BOD
members from 5 to 11.

Pursuant to Section 28 of RA 7653, the Integrated Supervision Department II (ISD II) of the BSP
conducted a general examination on the EuroCredit with the cut-off date of December 31, 2007. The
BSP apprised Vivas and the other members of EuroCredit’s BOD of the advance findings.

On April 2008, the examiners from the Department of Loans and Credit of the BSP arrived and cancelled
the rediscounting line of EuroCredit. The Monetary Board placed EuroCredit under Prompt Corrective
Action framework through its Resolution no. 1255 because of the serious findings like the negative
capital of P14.674 Million and the negative capital adequacy ratio of 18.42%; Capital asset management
earnings liquidity composite rating of 2 with a management component rating of 1; and serious
supervisory concerns, particularly on activities deemed unsafe or unsound.

BSP instructed the BOD to infuse fresh capital of P22.643 million; book the amount of P28.563 million
representing unbooked valuation reserves on classified loans and other risks assets on or before
October 31, 2008; and take appropriate action necessary to address the violations/exceptions noted in
the examination.

Vivas moved for a reconsideration of the Resolution no. 1255 on the grounds of non-observance of due
process and arbitrariness.

Then, the BSP directed EuroCredit to explain its other apparent violations.

The March 31, 2009 scheduled general examination of the EuroCredit’s books, records and general
condition with the cut-off date of December 31, 2008 did not push through because it was postponed by
EuroCredit on the ground that there was a pending appeal before the Monetary Board. Vivas believed
that the actions against them was unfair because the letter of authority allegedly contained a clause
pertaining to AMLA and the Bank Secrecy Act.

The Monetary Board posited that EuroCredit unjustly refused to allow the BSP examiners from
examining and inspecting its books and records, in violation of Sections 25 and 34 of RA 7653. BSP
informed the bank that the pendency of its appeal would not prevent the BSP from conducting another
general examination as mandated by Section 28.

In view of EuroCredit’s refusal to comply with such examination, the Monetary Board imposed a
monetary penalty upon EuroCredit. Simultaneously, it referred the matter to the Office of the Special
Investigation for the filing of appropriate action. The BSP sent a letter to the bank ordering the
compliance of its directives.

Still, EuroCredit asked for another deferment due to the pendency of its appeal before the MB and
because Vivas was out of the country but this was denied and ISD II ordered the examination to proceed
as scheduled.

EuroCredit was issued a cease and desist order that enjoined it from pursuing certain acts and
transactions that were considered unsafe or unsound banking practices and from doing such other acts
constituting fraud or might result to its asset dissipation.

The OSI filed a complaint before the DOJ for estafa through falsification of commercial documents
against. Meanwhile, MB issued a resolution denying the bank’s appeal against Resolution no. 1255. The
scheduled general examination commenced. ISD II then warned the bank to submit the financial audit
reports.

EuroCredit filed another motion for reconsideration which was subsequently denied.

By virtue of Resolution no. 276, the Monetary Board placed EuroCredit under receivership in accordance
with the recommendation of the ISD II. Findings showed that the bank was unable to pay its liabilities as
they become due; has insufficient realizable assets; cannot continue in business without involving
probable losses to its depositors and creditors; and has willfully violated the cease and desist order.
PDIC was designated as its receiver.

He contended that the respondent committed grave abuse of discretion when they erroneously applied
Section 30 of New Central Bank Act, instead of Sections 11 and 14 of the Rural Bank Act. Petitioner also
contended that the respondent exhibited manifest arbitrariness and bad faith because of lack of due
process and that the power of the BSP to place rural banks under receiverships is unconstitutional for
invasion of the powers of the Supreme Court.

Issues:

1. Whether or not the Monetary Board committed grave abuse of discretion.

Held:

First of all, Vivas availed of the wrong remedy in assailing the receivership. Section 30 of NCBA provides
that actions taken under this section or under Section 29 shall be final and executory and may not be
restrained nor set aside by the court except on petition for certiorari filed by the stockholders of record
of the bank representing majority.

The petition should be filed before the Court of Appeals because it is already settled that the Monetary
Board is a quasi-judicial agency.

1. No. The Monetary Board committed no grave abuse of discretion.

Vivas argues that the implementation of the resolution was without due process and prior
hearing, invoking Section 11 of the Rural Bank Act which states that the BSP may take over the
management of a rural bank after due hearing.
Based on the records of this case, EuroCredit was given every opportunity to be heard and
improve on its financial standing. There were several meetings between the BSP officials and
examiners and the representatives of the bank to discuss the matters of its findings. The bank
was also reminded and warned that a failure to submit its financial report would result to a
penalty. More importantly, EuroCredit was heard on its motion for reconsideration. The bank
cannot claim that it was deprived of its right under the Rural Bank Act.

Taking a look into Section 30 of the NCBA, the Monetary Board may forbid a bank from doing
business and place it under receivership without prior notice and hearing.

Section 30 of RA 7653 – “Whenever, upon report of the head of the supervising and
examining department, the Monetary board finds that a bank or quasi-bank:
a. is unable to pay its liabilities as they become due in the ordinary course of business:
provided that this shall not include inability to pay caused by extraordinary demands
induced by financial panic in the banking community;
b. has insufficient realizable assets, as determined by the Bangko Sentral, to meet its
liabilities; or
c. cannot continue in business without involving probable losses to its depositors or
creditors; or
d. has willfully violated a cease and desist order under Section 37 that has become
final, involving acts or transactions which amount to fraud or a dissipation of assets
of the institution; in which cases, the Monetary Board may summarily and without
need of a prior hearing forbid the institution from doing business in the Philippines
and designate the PDIC as receiver of the banking institution.

The Court has upheld in several cases, the power of the Monetary Board to take over banks
without need of prior hearing. The court reiterated the doctrine of “close now, hear later”.

In BSP-MB vs Antonio-Valenzuela,

The “close now, hear later” doctrine has already been justified as a measure for the
protection of the public interest. Swift action is called for on the part of the BSP when it
finds that a bank is in dire straits. Unless adequate and determined efforts are taken by
the government against distressed and mismanaged banks, public faith in the banking
system is certain to deteriorate to the prejudice of the national economy itself, not to
mention the losses suffered by the bank depositors, creditors, and stockholders, who all
deserve the protection of the government.

The doctrine is founded on practical and legal considerations to obviate unwarranted dissipation
of the bank’s assets and as a valid exercise of police power to protect the depositors, creditors,
stockholders, and the general public.

In this case, based on the recommendation of the ISD II, it found EuroCredit’s inability to pay its
liabilities as they become due in the ordinary course of its business, its assets being less than its
liabilities, and that if EuroCredit continues in its operations, it would most probably result in the
incurrence of losses to the prejudice of its depositors and creditors. The bank also violated the
cease and desist order that was issued against them. Furthermore, it was established that
Monetary Board has given the bank enough time to restore and improve its financial health.

Therefore, all circumstances considered in light of Section 30, the placement of the bank under
receivership was properly applied.