Manila Electric Company vs. City of Muntinlupa

A municipal ordinance that is ultra vires and void ab initio for lack of taxing power cannot be validated by a subsequent law converting the municipality into a city; a transitory provision adopting existing ordinances embraces only those that are valid and legally effective at the time of conversion, and an ordinance that is void from the beginning is incapable of being cured.

Muntinlupa enacted its Revenue Code, Municipal Ordinance No. 93-35, effective January 1, 1994. Section 25 imposed a franchise tax on public utilities at the rate of fifty percent (50%) of one percent (1%) of gross annual receipts. At that time, Muntinlupa was a municipality. On March 1, 1995, Republic Act No. 7926 converted the Municipality of Muntinlupa into a highly urbanized city. Its transitory and final provisions, particularly Section 56, adopted all existing municipal ordinances as of the date of the law’s effectivity, continuing their force within the city unless the sangguniang panglungsod enacted an ordinance providing otherwise. Years later, the City Treasurer demanded payment of the franchise tax from Meralco beginning with the years when Muntinlupa was still a municipality, relying on Section 25 of the municipal revenue code and on paragraph 7 of Bureau of Local Government Finance Circular No. 20-98. Meralco challenged the demand, asserting that the municipality had no authority to enact the tax, and the dispute centered on whether the city charter’s adoption clause could validate the previously void impost.

• The Parties: Petitioner Manila Electric Company (Meralco) is a public utility corporation holding a legislative franchise to distribute electricity in the National Capital Region and surrounding areas. Respondent City of Muntinlupa is a local government unit that, prior to March 1, 1995, was a municipality, and thereafter a highly urbanized city by virtue of Republic Act No. 7926. Respondent Nelia A. Barlis was the City Treasurer at the time the franchise tax was assessed against Meralco.
• The Ordinance: On January 1, 1994, Municipal Ordinance No. 93-35, otherwise known as the Revenue Code of the Municipality of Muntinlupa, took effect. Section 25 imposed a franchise tax “on private persons or corporations operating public utilities” at a rate of 50% of 1% of gross annual receipts for the preceding calendar year, based on income realized within the municipality’s territorial jurisdiction. The provision was patterned after Section 137 of the Local Government Code, which grants the power to impose a franchise tax to provinces.
• Cityhood and Transitory Provision: Republic Act No. 7926, the Charter of the City of Muntinlupa, was approved on March 1, 1995, converting the municipality into a highly urbanized city. Section 56 of the law provided that “[a]ll existing municipal ordinances of the Municipality of Muntinlupa as of March 1, 1995, shall continue to take effect within the City of Muntinlupa” unless subsequently modified or repealed by the city’s sangguniang panglungsod.
• Demand and Assessment: On June 28, 1999, City Treasurer Barlis sent a demand letter to Meralco requiring payment of the franchise tax allegedly due for the years 1992 to 1999, and requesting a certified statement of gross sales/receipts for those years. The demand invoked Section 25 of MO 93-35 and paragraph 7 of Bureau of Local Government Finance Circular No. 20-98. Meralco requested deferment, citing a pending motion for reconsideration in Manila Electric Company v. Province of Laguna and its position that the then Municipality of Muntinlupa lacked the power to impose a franchise tax. Further demand letters dated August 21, 2001 and September 27, 2001, sought payment for the years 1994 to 2000. Meralco maintained that, under Sections 134, 137, 142, and 151 of the Local Government Code, the authority to levy a franchise tax resides exclusively with provinces and cities, not municipalities.
• Trial Court’s Findings: The Regional Trial Court found that the municipality had no power to enact Section 25 of MO 93-35, making the ordinance ultra vires and void ab initio. It rejected the city’s reliance on Article 236(b) of the Implementing Rules, holding that administrative regulations cannot expand the statute. It further ruled that the 30-day period to question an ordinance under Section 187 of the Local Government Code is merely permissive, and that Section 56 of the city charter did not cure the ordinance’s fundamental invalidity.

• Ultra Vires Nature of the Ordinance: Meralco argued that Section 25 of MO 93-35 was void ab initio because it was enacted when Muntinlupa was still a municipality, and under Sections 142, 134, 137, and 151 of the Local Government Code, only provinces and cities possess the power to levy a franchise tax. A municipality may only impose taxes not already levied by provinces, and because Section 137 explicitly vests the franchise tax in provinces, a municipality is precluded from imposing it.
• No Curative Effect of Cityhood: Meralco maintained that the subsequent conversion of Muntinlupa into a city cannot breathe life into an ordinance that was null and void from the beginning. A void ordinance produces no legal effect and cannot be retroactively validated by a transitory provision that merely continues existing valid ordinances.
• Good Faith and Absence of Damages: Meralco contended that it acted in good faith in seeking judicial relief from an illegal assessment, and that the City of Muntinlupa was therefore not entitled to moral damages or attorney’s fees.

• Authority under Implementing Rules: The City of Muntinlupa argued that Section 137 of the Local Government Code, read with Articles 227 and 237 of its Implementing Rules and Regulations, and specifically Article 236(b) thereof, allows municipalities within the Metropolitan Manila Area to levy the same taxes imposable by provinces, including the franchise tax. Thus, MO 93-35 was enacted within the municipality’s delegated authority.
• Curative Effect of RA 7926: The City maintained that Section 56 of its Charter cured any infirmity in Section 25 of MO 93-35 by adopting all existing municipal ordinances upon cityhood, effectively re-enacting the franchise tax as a valid city imposition from March 1, 1995 onward.
• Entitlement to Damages: The City claimed moral damages and attorney’s fees on the ground that Meralco’s suit was baseless and malicious, tarnishing the local government’s reputation and compelling it to engage legal counsel.

• Curative Effect of City Charter: Whether Section 25 of Municipal Ordinance No. 93-35, which was void ab initio because it was enacted by a municipality without power to impose a franchise tax, was cured by Section 56 of Republic Act No. 7926 (the Charter of the City of Muntinlupa), thereby authorizing the City of Muntinlupa to impose and collect a franchise tax under that provision.

• Curative Effect of City Charter: Section 25 of MO 93-35 was held void and incapable of being cured or adopted by Section 56 of the city charter. Applying the Formal and Substantive Tests for ordinance validity as laid down in Ferrer, Jr. v. Bautista and Legaspi v. City of Cebu, the ordinance failed the Formal Test because the then Municipality of Muntinlupa acted beyond its corporate powers: Section 142, in relation to Sections 134, 137, and 151 of the Local Government Code, unambiguously vests the authority to levy a franchise tax only in provinces and cities. Article 236(b) of the Implementing Rules could not expand the statute, as subordinate rules cannot exceed their enabling law. An ordinance that is void ab initio produces no legal effect whatsoever. The transitory provision in Section 56 of RA 7926 adopts only municipal ordinances that were valid and legally existing at the time of conversion; “to continue” presupposes something that already has binding force and effect. Because Section 25 of MO 93-35 was ultra vires from its inception, it was a nullity outside the reach of the transitory saving clause. The rule was squarely applied from City of Pasig v. Manila Electric Company, where an identical municipal franchise tax ordinance was struck down and the Pasig city charter’s parallel transitory provision was held devoid of curative power. Consequently, the City of Muntinlupa could not base any franchise tax liability upon the void ordinance.

• Tests for Validity of an Ordinance — An ordinance must pass both the Formal Test (enacted within the corporate powers of the local government unit and according to prescribed procedure) and the Substantive Test (not contrary to the Constitution or any statute; not unfair, oppressive, partial, or discriminatory; may regulate but not prohibit trade; general and consistent with public policy; and not unreasonable). A failure under either test renders the ordinance invalid. Here, Section 25 of MO 93-35 failed the Formal Test because the municipality lacked the power to enact a franchise tax; it also failed the Substantive Test because it was directly contrary to the express provision of the Local Government Code vesting such power only in provinces and cities.
• Ultra Vires Ordinance is Void Ab Initio — An ordinance enacted beyond the local government unit’s taxing powers is null and void from the beginning. It produces no legal effect, cannot be enforced, and no rights can spring from it. Administrative regulations (such as Article 236(b) of AO 270) cannot confer a power withheld by the statute itself, for “the spring cannot rise above its source.”
• Curative Effect of a Transitory Ordinance-Adoption Clause — A provision in a city charter adopting all existing municipal ordinances carries forward only those ordinances that are valid and legally effective at the time of conversion. A void ordinance cannot be “continued” because it never had legal existence. Conversion from a municipality into a city does not retroactively validate an ultra vires municipal tax ordinance; the void act remains a nullity. The term “continue” implies something already existing with binding force, not something void ab initio.

• “A void ordinance, or provision thereof, is what it is – a nullity that produces no legal effect. It cannot be enforced; and no right could spring forth from it. The cityhood of Pasig notwithstanding, it has no right to collect franchise tax under the assailed ordinance.” (quoting City of Pasig v. Manila Electric Company) — This passage directly states the principle that a void ordinance cannot be resurrected by cityhood, which the Court applied to Muntinlupa.
• “The spring cannot rise above its source.” — Used to reinforce that implementing rules and regulations cannot grant a power that the statute itself denies.
• “To ‘continue’ means (1) to be steadfast or constant in a course or activity; (2) to keep going: maintain a course, direction, or progress; or (3) to remain in a place or condition. It presupposes something already existing. A void ordinance cannot legally exist, it cannot have binding force and effect.” (again from City of Pasig) — Articulates why Section 56 of the Muntinlupa charter could not adopt the void franchise tax provision.

• City of Pasig v. Manila Electric Company, G.R. No. 181710, March 7, 2018 — Directly controlling precedent. The Court struck down a substantially identical municipal franchise tax ordinance enacted by Pasig when it was a municipality, holding that the city charter’s transitory provision did not cure its invalidity. The same reasoning was adopted here.
• Ferrer, Jr. v. Bautista, 762 Phil. 233 (2015) and Legaspi v. City of Cebu, 723 Phil. 90 (2013) — These cases defined the Formal and Substantive Tests for the validity of ordinances, which the Court used as the analytical framework for assessing MO 93-35.
• City of Manila v. Cosmos Bottling Corporation, G.R. No. 196681, June 27, 2018 — Cited for the principle that a local government cannot impose a tax based on void ordinances that have no legal existence.
• City of Batangas v. Philippine Shell Petroleum Corporation, 810 Phil. 566 (2017) — Reinforced the rule that a void ordinance cannot be a source of tax liability.

• Sections 134, 137, 142, and 151, Republic Act No. 7160 (Local Government Code of 1991) — These provisions delimit the scope of taxing powers of provinces, municipalities, and cities, with Section 134 authorizing provinces to levy taxes listed in the article, Section 137 specifically granting provinces the franchise tax, Section 142 restricting municipalities to taxes not otherwise levied by provinces, and Section 151 allowing cities to levy the taxes that either a province or a municipality may impose. Because Section 137 vests the franchise tax in provinces, a municipality is constitutionally and statutorily barred from imposing it under Section 142.
• Section 56, Republic Act No. 7926 (Charter of the City of Muntinlupa) — The transitory provision adopting all municipal ordinances existing as of the effectivity of the charter. Interpreted to refer only to ordinances that are valid and legally existing, not to those that are void ab initio.
• Article 236(b), Administrative Order No. 270 (IRR of the Local Government Code) — Purported to allow municipalities within the Metropolitan Manila Area to levy taxes imposable by provinces, including the franchise tax. The Court held that this provision cannot prevail over the clear limitation in Section 142 of the Code itself.

Chief Justice Peralta, Justices Perlas-Bernabe, Leonen, Caguioa, Gesmundo, Carandang, Inting, Zalameda, Lopez (presumably Associate Justice Mario V. Lopez), Delos Santos, Gaerlan, Rosario, and Lopez (Associate Justice Jhosep Y. Lopez) all concurred. Associate Justice Lazaro-Javier took no part due to prior participation in the proceedings in the Court of Appeals.