RURAL BANK OF LUCENA, INC. vs. HON.

FRANCISCO ARCA, as Judge of the Court

of First Instance of Manila, Branch 1, and CENTRAL BANK OF THE PHILIPPINES
(September 20, 1965)

The Monetary Board shall determine if the rural bank affected, is insolvent, or that its
continuance in business would involve probable loss to its depositors or creditors, or if it can
resume business with safety to its creditors.

FACTS:
Rural Bank of Lucena, Inc.(Lucena bank) instituted in the CFI of Manila an action to
collect damages and to enjoin the Central Bank from enforcing Resolution No. 928 of its Monetary
Board, finding that the Lucena bank had committed acts substantially prejudicial to the
Government, depositors, and creditors, and directing Lucena to reorganize its board of directors
and that its management would be taken over if the it should fail to comply with the resolution.

While the litigation was still undecided, the Monetary Board, adopted its Resolution No.
122: "To request the Solicitor General, pursuant to section 29 of Republic Act No. 265, to file a
petition in the proper courts for the liquidation of the affairs of the Rural Bank of Lucena, Inc.”

Two days later, the Lucena bank filed suit in the CFI of Quezon to annul Resolution No.122
and to enjoin its enforcement. The court issued ex parte a writ of preliminary injunction to such
effect, but subsequently dissolved said preliminary injunction. Aside from a denied MR, Lucena
bank took no other steps to prosecute the case it had filed

CFI of Manila, as per Judge Magno Gatmaitan of Branch XIV, enjoined the enforcement
of Resolution No. 928 of the Monetary Board, for having been issued without the prior hearing
prescribed by section 10 of the Rural Bank Act, and ordering the Central Bank to pay P5,000.00
damages and costs. The Central Bank appealed.

Central Bank petitioned the CFI of Manila for assistance in the liquidation of the Lucena
bank. Judge Arca issued an interlocutory order for Lucena bank to turn over to the Central Bank
the physical possession of all assets, properties and papers and if Lucena bank fails to comply, the
Central Bank is authorized to take actual and physical possession of all of said assets, properties
and papers.

Rural Bank of Lucena petitioned, claiming that Judge Arca gravely abused his discretion
in issuing the order. The court issued a temporary restraining order until April 25, 1963, but the
same was not renewed when it expired.

ISSUE:
1) Whether or not there is a conflict between section 10 of Republic Act No. 720 and section 29
of Republic Act No. 265 (NO)
2) Whether or not Judge Arca gravely abused his discretion in issuing the interlocutory order (NO)

RULING:
1) NO. The court sees no irreconcilable conflict between section 10 of Republic Act No. 720 (Rural
Banks Act) and section 29 of Republic Act No. 265 (Central Bank Act). The former authorizes the
take over of the management by the Central Bank, until the governing body of the offending Rural
Bank is recognized with a view to assuring compliance by it with the laws and regulations. While
the latter provides for the liquidation of a rural bank by taking over its assets and converting them
into money to pay off its creditors. It is applicable in cases such as the one in hand, when the
Monetary Board should find that the rural bank affected, is insolvent, or that its continuance in
business would involve probable loss to its depositors or creditors, and that it can not resume
business with safety.
On the assumption that under section 10 of the Rural Banks Act the Monetary Board may
not take over the management of a rural bank without giving the latter a hearing, such a previous
hearing is nowhere required by section 29 of the Central Bank law. The statute has provided for a
subsequent judicial review of the Monetary Board, in lieu of a previous hearing.

2) NO. In the order of Judge Arca and Judge Gatmaitan's decision, the issues involved are different
in each case. One involved a take over of management under section 10 of the Rural Banks Act,
and the other a seizure of assets and liquidation under section 29 of the Central Bank law.
Judge Arca had no reason to inquire into the merits of the case before issuing the disputed
order requiring the surrender of the assets and papers of the Lucena bank, because: (1) neither the
statute (sec. 29, R. A. 265) nor the constitutional requirement of due process demand that the
correctness of the Monetary Board's resolution to stop operations and proceed to the liquidation of
the Lucena Bank should first be adjudged before making the resolution effective, it being enough
that a subsequent judicial review be provided; (2) the period for asking such Judicial review had
elapsed with excess between the adoption of the Monetary Board Resolution No. 122 (February 2,
1962) and the filing of the case by the Central Bank in the Court of First Instance of Manila (March
31,1962); (3) the correctness of said resolution had already been put in issue before the CFI of
Quezon; (4) the latter court had refused to stop implementation of the Resolution of the Monetary
Board when it dissolved its own preliminary injunction; and (5) because the Lucena Bank had
apparently acquiesced in the action taken by the CFI of Quezon Province, since the Rural Bank
had not sought that the action of the Quezon court be set aside by a higher court.

Whether or not the Central Bank acted with arbitrariness or bad faith in decreeing that
circumstances called for the liquidation of the Lucena Rural Bank should be determined, not by
Judge Arca but in CFI of Quezon Province, which appears to be still pending.