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. . . .

x x x

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.