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The dubious legacy of the Legacy Group

(Article published in the Mar 4, 2009 issue of Manila Standard Today)

It was the banking industry’s good fortune that the Supreme Court in a very timely manner restrained on 24 November 2008, until its further orders, the Court of Appeals from implementing and enforcing the latter’s decision dated 30 September 2008 which affirmed the TRO issued by the Regional Trial Court, Branch 28, of Manila against the Bangko Sentral ng Pilipinas.

 The Supreme Court thereby restored the rational order of things and permitted the events to take their natural course. Accordingly, the Legacy rural banks have since closed or have been closed for business; the Philippine Deposit Insurance Corporation has gone about doing its unpleasant job of cleaning up the mess, sorting out the genuine assets and liabilities from the fictitious ones; depositors, like the rest of the creditors of the banks,  have continued to be inconvenienced by their inability to recover their investments on due dates; criminal cases have started to be filed with the Department of Justice against persons who appeared to be liable for a variety of crimes; and hearings have been initiated by Congress in aid of whatever and/or whoever it was the Congressmen wanted the hearings to be in aid of.

 With SNAFU (“situation normal all f**cked up”) now in place, it is time to give credit where credit is due.  I submit that the man behind the Legacy banks ought to be credited (or more accurately discredited) with the legacy of having been able to foist upon the judiciary, at least up to now only up to the level the Court of Appeals, a new paradigm in administrative law.


Whereas the traditional wisdom was that the process of bank examination was a necessary tool by which the regulator made sure that the players in the banking system were performing their duties to the constituencies properly, the new paradigm passed off by the Legacy rural banks was that the examination process was, instead, an adversarial proceeding wherein the examining department of the BSP ought to treat the examined bank like a person being made to answer an accusation in a criminal case.

 In line with that theory, the Report of Examination (“RoE”), according to Celso De los Angeles’ Legacy rural banks, is in the nature of an indictment of the bank examined; it must therefore be shown to the examining bank by the examining department before the Monetary Board can be asked act on it, in the same way that the defense is, before trial, entitled under the law to be informed of the nature and cause of the accusation to be proven by the prosecution; thus, the submitting personnel of BSP are considered to take the role of prosecutor, the bank examined assumes the personality of the defense, and the Monetary Board sits as judge-in-waiting.

 How Celso de los Angeles’ theory was able to get the nod of Judge Nina G. Antonio Valenzuela of the Manila RTC and of Justice Apolinario D. Bruselas, Jr., ponente, and Justices Bienvenido L. Reyes and Mariflor P.Punzalan Castillo, of the Court of Appeals, thereby winning for his rural banks 18 more months of doing their thing, is a study in pleading and practice.

 It is Banking 101 that no court is permitted to enjoin the examination of a bank.  Thus, the last paragraph of Section 25 of the New Central Bank Act (R.A. No. 7653) states that “no restraining order shall be issued by the court enjoining the Bangko Sentral from examining any institution subject to supervision or examination by the Bangko Sentral…”

 To go around this statutory prohibition on the judiciary, what Celso de los Angeles did was, not to ask the courts to stop the examination of his rural banks, but rather to stop the submission of the reports by the examiners to the Monetary Board after the examinations have been conducted. Despite the difference in objects, the results of stopping an examination and preventing the submission of the RoE are the same:  the Monetary Board would have nothing to act on; hence, the banks could go on with business-as-usual.

 Thus, the Legacy rural banks went to court to ask that Chuchi Fonacier, the officer-in-charge of the Supervision and Examination Department IV (now known as the Integrated Supervision Department II), be stopped from submitting to the Monetary Board the results of the simultaneous examination her unit conducted of the Legacy rural banks that ended on 30 April 2005. In the event the RoE had already been submitted, the Legal rural banks prayed that the Monetary Board be stopped from acting on the basis of that report. 

 The device used by De los Angeles to gain the sympathy of the courts, is exemplified in Par. 7 of the complaint in the case of Rural Bank of Parañaque against Fonacier et al., Civil Case No. 08119243 heard before the Regional Trial Court of Manila, Br. 28:

 “7…there are two phases to the examination process. Prior to the submission of the report of examination, the bank is granted the opportunity to be heard.  The bank is given a copy of the report of examination and an opportunity to study and comment on the report.  This is so the report of examination will present an accurate and faithful picture of the true financial condition of the bank and provide a reliable roadmap to addressing any points of concern.  After the submission of the report of examination, the fate of the bank is totally in the hands of the Monetary Board.  Based on standing practice, the Monetary Board acts behind closed doors, and it does not consider anything other than the report of examination.  For this reason, and because the Monetary Board can act summarily and without hearing, the bank’s first, last and only opportunity to present its case occurs only before the report of examination reaches the Monetary Board.”

 Beginning Paragraph 7 with the statement that “prior to the submission of the report of examination, the bank is granted the opportunity to be heard” was ingenious.  The statement appears to be harmless since no one would quarrel with affording anybody the opportunity to be heard.  But actually, it was disingenuous and was more than a mere statement of principle.  The invocation of the right to be heard in the context of a bank examination subliminally asserted, falsely, that the bank examination was a proceeding where the bank was being called to task and therefore had to be heard before being sanctioned.  The truth is, a bank examination is a supervisor’s process of ensuring that everything goes on smoothly.

 Then Paragraph 7 proceeds with another subliminal assertion, namely, that it is in the implementation of the sacred right to be heard (in the already wrongly suggested adversarial context) that “the bank is given a copy of the report of examination and an opportunity to study and comment on the report.”  That subconscious assertion, not only is a reiteration of an erroneous premise, it is simply false.

 In the first place, the examined bank is not given a copy of the report of examination before being submitted to the Monetary Board. What it is given is a document called a List of Findings/Exceptions.  Secondly, the purpose of providing that document to the examined bank for its comment and reaction is not for the bank to launch its defense since no battle is being fought. Instead, it is for the examined bank to be aware of what the regulator has seen as deficiencies in its operations and for the examined bank to take immediate corrective action even before the final assessment of the bank’s condition is formally handed down by the regulatory authority. 

 After having made his dubious assertions subliminally, Celso de los Angeles ends his argument in Paragraph 7 with melodrama.  He hammed it up and, capitalizing on the necessary confidentiality that must attend Monetary Board deliberations, concluded by saying that “the bank’s first, last and only opportunity to present its case occurs only before the report of examination reaches the Monetary Board.”  There is nothing like an ending flourish to make the audience forget flaws in one’s performance.

 When the Supreme Court finally gets around to deciding BSP et al v Rural Bank of Parañaque, et al., G.R. No. 184778, we shall find out soon enough whether the De los Angeles new paradigm of bank examination as being a contest between regulator and regulated will become part of the law of the land or whether the traditional role of the regulator as keeper of the gates against the onslaught of frauds will remain to the rule.