FACTS:

The Development Bank of the Philippines (DBP for brevity) Board of Governors adopted Resolution No. 794 creating the DBP Gratuity Plan and authorizing the setting up of a retirement fund to cover the benefits due to DBP retiring officials and employees under Commonwealth Act No. 186, as amended.

A Trust Indenture was entered into by and between the DBP and the Board of Trustees of the Gratuity Plan Fund, vesting in the latter the control and administration of the Fund. The trustee appointed the DBP Trust Services Department (DBP-TSD) as the investment manager, thru an Investment Management Agreement with the end in view of making the income and principal of the Fund sufficient to meet the liabilities of DBP under the Gratuity Plan.

In 1983, the Bank established a Special Loan Program (SLP) availed thru the facilities of the DBP Provident Fund and funded by placements from the Gratuity Plan Fund.

Under the SLP, a prospective retiree is allowed the option to utilize in the form of a loan a portion of his "outstanding equity" in the gratuity fund and to invest it in a profitable investment or undertaking. The earnings of the investment shall then be applied to pay for the interest due on the gratuity loan. The excess or balance of the interest earnings shall then be distributed to the investor-members.

Pursuant to the investment scheme, DBP paid to the investor-members a total of P11,626,414.25 representing the net earnings of the investments for the years 1991 and 1992. The payments were disallowed under AOM No. 93-2 dated March 1, 1993 on the ground that the distribution of income of the Gratuity Plan Fund (GPF) to future retirees of DBP is irregular and constituted the use of public funds for a private purpose which is specifically proscribed under Section 4 of PD No. 1445.

The Auditor, aside from requiring the recipients to refund their dividends, recommended that the DBP record in its books as miscellaneous income the income of the Gratuity Plan Fund, on the ground that the Fund is still owned by the Bank, the Board of Trustees being a mere administrator of the Fund.

Former DBP Chairman Antonio requested COA to reconsider AOM 93-2 arguing that the express trust created for the benefit of qualified DBP employees under the Trust Agreement gave the Fund a separate legal personality as it transferred legal title over the Fund to the Board of Trustees and all earnings of the Fund accrue only to the Fund. Moreover, the income of the fund is not the income of DBP. He also asked COA to lift the disallowance of the P11,626,414.25 distributed as dividends under the SLP on the ground that the latter was simply a normal loan transaction. However, the COA en banc affirmed AOM 93-2 and denied the Motion for Reconsideration.

ISSUES:

1. Whether or not the income of the Fund is income of DBP; and
2. Whether or not the distribution of dividends under the SLP is valid.

RULING:

COA Decision No. 98-403 and COA Resolution No. 2000-212 are affirmed with modification.

The income of the Fund is not the income of the DBP. The DBP Board Resolution No. 794 shows that DBP intended to establish a trust fund to cover the retirement benefits of certain employees under RA 1616. The principal and income of the Fund would be separate and distinct from the funds of DBP, as provided in the salient portions of said Resolution, and must be used to satisfy all of the liabilities to the beneficiary officials and employees under the Gratuity Plan.

COA correctly observed that the right of the employees to claim their gratuities from the Fund is still inchoate. RA 1616 does not allow employees to receive their gratuities until they retire. However, this does not invalidate the trust created by DBP or the concomitant transfer of legal title to the trustees.

The Agreement indisputably transferred legal title over the income and properties of the Fund to the Fund’s trustees. Thus, COA’s directive to record the income of the Fund in DBP’s books of account as the miscellaneous income of DBP constitutes grave abuse of discretion. The income of the Fund does not form part of the revenues or profits of DBP, and DBP may not use such income for its own benefit. As such, it should not be recorded in the books of account of DBP as its income.

The High Court upheld the disallowed dividends distributed under the SLP. As the SLP enabled certain DBP employees to utilize and even earn from their retirement gratuities even before they retired, this constitutes a partial release of their retirement benefits, which is contrary to RA 1616 and the Gratuity Plan.

There was thus no basis for the loans granted to DBP employees under the SLP. The rights of the recipient DBP employees to their retirement gratuities were still inchoate, if not a mere expectancy, when they availed of the SLP. No portion of their retirement benefits could be considered as actually earned or outstanding before retirement.

The Supreme Court also held that since most of the DBP employees were eligible to retire within a few years when they availed of the SLP, the refunds may be deducted from their retirement benefits.