G.R. No.

80294-95

September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner, vs. COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents. Valdez, Ereso, Polido & Associates for petitioner. Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner. Jaime G. de Leon for the Heirs of Egmidio Octaviano. Cotabato Law Office for the Heirs of Juan Valdez. GANCAYCO, J.: The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long time ago can properly be considered res judicata by respondent Court of Appeals in the present two cases between petitioner and two private respondents. Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth Division of Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for Recovery of Possession, which affirmed the Decision of the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio and Benguet in Civil Case No. 3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as follows: WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar Apostolic of the Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs. Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set of plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et al.). For lack or insufficiency of evidence, the plaintiffs' claim or damages is hereby denied. Said defendant is ordered to pay costs. (p. 36, Rollo) Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's conclusions that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in question; that the two lots were possessed by the predecessors-in-interest of private respondents under claim of ownership in good faith from 1906 to 1951; that petitioner had been in possession of the same lots as bailee in commodatum up to 1951, when petitioner repudiated the trust and when it applied for registration in 1962; that petitioner had just been in possession as owner for eleven years, hence there is no possibility of acquisitive prescription which requires 10 years possession with just title and 30 years of possession without; that the principle of res judicata on these findings by the Court of Appeals will bar a reopening of these questions of facts; and that those facts may no longer be altered.

Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied. The facts and background of these cases as narrated by the trail court are as follows ... The documents and records presented reveal that the whole controversy started when the defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed with the Court of First Instance of Baguio Benguet on September 5, 1962 an application for registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of the Catholic Church building, convents, high school building, school gymnasium, school dormitories, social hall, stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto. After trial on the merits, the land registration court promulgated its Decision, dated November 17, 1965, confirming the registrable title of VICAR to Lots 1, 2, 3, and 4. The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607) appealed the decision of the land registration court to the then Court of Appeals, docketed as CA-G.R. No. 38830-R. The Court of Appeals rendered its decision, dated May 9, 1977, reversing the decision of the land registration court and dismissing the VICAR's application as to Lots 2 and 3, the lots claimed by the two sets of oppositors in the land registration case (and two sets of plaintiffs in the two cases now at bar), the first lot being presently occupied by the convent and the second by the women's dormitory and the sister's convent. On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court of Appeals to order the registration of Lot 3 in the names of the Heirs of Egmidio Octaviano, and on May 17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed their motion for reconsideration praying that both Lots 2 and 3 be ordered registered in the names of the Heirs of Juan Valdez and Pacita Valdez. On August 12,1977, the Court of Appeals denied the motion for reconsideration filed by the Heirs of Juan Valdez on the ground that there was "no sufficient merit to justify reconsideration one way or the other ...," and likewise denied that of the Heirs of Egmidio Octaviano. Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the decision of the Court of Appeals dismissing his (its) application for registration of Lots 2 and 3, docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic of the Mountain Province vs. Court of Appeals and Heirs of Egmidio Octaviano.' From the denial by the Court of Appeals of their motion for reconsideration the Heirs of Juan Valdez and Pacita Valdez, on September 8, 1977, filed with the Supreme Court a petition for review, docketed as G.R. No. L-46872, entitled, Heirs of Juan Valdez and Pacita Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio Octaviano and Annable O. Valdez. On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of VICAR on the one hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for lack of merit. Upon the finality of both Supreme Court resolutions in G.R. No. L-46832 and G.R. No. L- 46872, the Heirs of Octaviano 2

filed with the then Court of First Instance of Baguio, Branch II, a Motion For Execution of Judgment praying that the Heirs of Octaviano be placed in possession of Lot 3. The Court, presided over by Hon. Salvador J. Valdez, on December 7, 1978, denied the motion on the ground that the Court of Appeals decision in CA-G.R. No. 38870 did not grant the Heirs of Octaviano any affirmative relief. On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petitioner for certiorari and mandamus, docketed as CA-G.R. No. 08890-R, entitled Heirs of Egmidio Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its decision dated May 16, 1979, the Court of Appeals dismissed the petition. It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed Civil Case No. 3607 (419) on July 24, 1979, for recovery of possession of Lot 3; and the Heirs of Juan Valdez filed Civil Case No. 3655 (429) on September 24, 1979, likewise for recovery of possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.). In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano presented one (1) witness, Fructuoso Valdez, who testified on the alleged ownership of the land in question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano (Exh. C ); his written demand (Exh. BB-4 ) to defendant Vicar for the return of the land to them; and the reasonable rentals for the use of the land at P10,000.00 per month. On the other hand, defendant Vicar presented the Register of Deeds for the Province of Benguet, Atty. Nicanor Sison, who testified that the land in question is not covered by any title in the name of Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed with the testimony of Mons.William Brasseur when the plaintiffs admitted that the witness if called to the witness stand, would testify that defendant Vicar has been in possession of Lot 3, for seventy-five (75) years continuously and peacefully and has constructed permanent structures thereon. In Civil Case No. 3655, the parties admitting that the material facts are not in dispute, submitted the case on the sole issue of whether or not the decisions of the Court of Appeals and the Supreme Court touching on the ownership of Lot 2, which in effect declared the plaintiffs the owners of the land constitute res judicata. In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up the defense of ownership and/or long and continuous possession of the two lots in question since this is barred by prior judgment of the Court of Appeals in CA-G.R. No. 038830-R under the principle of res judicata. Plaintiffs contend that the question of possession and ownership have already been determined by the Court of Appeals (Exh. C, Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme Court (Exh. 1, Minute Resolution of the Supreme Court). On his part, defendant Vicar maintains that the principle of res judicata would not prevent them from litigating the issues of long possession and ownership because the dispositive portion of the prior judgment in CA-G.R. No. 038830-R merely dismissed their application for registration and titling of lots 2 and 3. Defendant Vicar contends that only the dispositive portion of the decision, and not its body, is the controlling pronouncement of the Court of Appeals. 2 The alleged errors committed by respondent Court of Appeals according to petitioner are as follows: 1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA; 3

2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED; 3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND OCTAVIANO; 4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER; 5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND THE PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906; 6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE IS A PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS; 7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830 WAS AFFIRMED BY THE SUPREME COURT; 8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951; 9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE; 10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3 The petition is bereft of merit. Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149, when it clearly held that it was in agreement with the findings of the trial court that the Decision of the Court of Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership of Lots 2 and 3, declared that the said Court of Appeals Decision CA-G.R. No. 38830-R) did not positively declare private respondents as owners of the land, neither was it declared that they were not owners of the land, but it held that the predecessors of private respondents were possessors of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower in commodatum up to 1951, when it repudiated the trust by declaring the properties in its name for taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept of owner only for eleven years. Ordinary acquisitive prescription requires possession for ten years, but always with just title. Extraordinary acquisitive prescription requires 30 years. 4

On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We see no error in respondent appellate court's ruling that said findings are res judicata between the parties. They can no longer be altered by presentation of evidence because those issues were resolved with finality a long time ago. To ignore the principle of res judicata would be to open the door to endless litigations by continuous determination of issues without end. An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R. No. 38830-R, shows that it reversed the trial court's Decision 6 finding petitioner to be entitled to register the lands in question under its ownership, on its evaluation of evidence and conclusion of facts. The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for ordinary acquisitive prescription because of the absence of just title. The appellate court did not believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no documentary evidence to support the same and the alleged purchases were never mentioned in the application for registration. By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both Valdez and Octaviano had Free Patent Application for those lots since 1906. The predecessors of private respondents, not petitioner Vicar, were in possession of the questioned lots since 1906. There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not Lots 2 and 3, because the buildings standing thereon were only constructed after liberation in 1945. Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in 1951. The improvements oil Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was appointed only in 1947, the church was constructed only in 1951 and the new convent only 2 years before the trial in 1963. When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only in 1962. Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title. The Court of Appeals found that the predecessors-in-interest and private respondents were possessors under claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee in commodatum; and that the adverse claim and repudiation of trust came only in 1951.

We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-R. Its findings of fact have become incontestible. This Court declined to review said decision, thereby in effect, affirming it. It has become final and executory a long time ago. Respondent appellate court did not commit any reversible error, much less grave abuse of discretion, when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is governing, under the principle of res judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CA-G.R. No. 05149. The facts as supported by evidence established in that decision may no longer be altered. WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals is AFFIRMED, with costs against petitioner. SO ORDERED. CATHOLIC VICAR APOSTOLIC V CA 165 SCRA 515 (1988) The whole controversy started when Catholic Vicar of the Mountain Province (Vicar for brevity)filed with the CFI of Baguio, Benguet an application for registration of title for Lots 1,2,3 and 4of Psu-194357 situated at Poblacion Central, La Trinidad, Benguet. Said lots being the sites of the Catholic Church building, convents, school, etc., Upon learning of the application, the Heirs of Juan Valdez and the Heirs of Emigdio Octaviano filed an Answer/Opposition thereto on Lots 2 and3,respectively, asserting ownership and title thereto. The land registration court promulgated its decision confirming the registrable title to Vicar. Both heirs of Valdez and Octaviano appealed to the Court of Appeals. The CA modified the decision of the land registration court and found that Lots 2 and 3 were possessed by the predecessors-in-interest of private respondents under claim of ownership in good faith from 1906 to 1951; that Vicar has been in possession of the same lots as bailee in commodatum up to 1951, when Vicar repudiated the trust and when it applied for registration in1962; that Vicar had just been in possession as owner for 11years,hence there is no possibility of acquisitive prescription which requires 10 years possession with just title and 30 years possession without. ISSUE: WON the failure of Vicar to return the subject property to private respondents wouldconstitute an adverse possession that would entitle Vicar to have a just title in order for ordinaryacquisitive prescription to set in. RULING: Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title.

The Court of Appeals found that the predecessors-in-interest and private respondents were possessors under claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee in commodatum; and that the adverse claim and repudiation of trust came only in 1951. Catholic Vicar Apostolic of the Mountain Province vs. Court of Appeals, Heirs of Egmidio Octaviano and Juan Valdez Facts: The whole controversy started when the herein petitioner filed an application for registration of lands 1, 2, 3 and 4 in La Trinidad, Benguet on September 5, 1962. The heirs of Juan Valdez and the heirs of Egmidio Octaviano filed an opposition on lots 2 and 3, respectively. On November 17, 1965, the land registration court confirmed the registrable title of the petitioner. On May 9, 1977, the Court of Appeals reversed the decision and dismissed the Vicars application. The heirs filed a motion for reconsideration, praying that the lots be ordered registered under their names. The Court of Appeals denied the motion for lack of sufficient merit. Both parties then came before the Supreme Court. The Supreme Court, in a minute resolution, denied both petitions. The heirs filed the instant cases for the recovery and possession of the lots. Respondents argue that the petitioner is barred from setting up the defense of ownership or long and continuous possession by the prior judgment of the Court of Appeals under the principle of res judicata. Petitioner contends that the principle is not applicable because the dispositive portion of the judgment merely dismissed the application for registration. Issues: (1) Whether the decision of the Court of Appeals constitute res judicata and therefore bars the petitioner from alleging ownership over the lots (2) Whether the petitioner has acquired the lots through acquisitive prescription Held: (1) The Court of Appeals did not positively declare private respondents as owners of the land, neither was it declared that they were not owners of the land, but it held that the predecessors of private respondents were possessors of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower in commodatum up to 1951, when it repudiated the trust by declaring the properties in its name for taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept of owner only for eleven years. Ordinary acquisitive prescription requires possession for ten years, but always with just title. Extraordinary acquisitive prescription requires 30 years. On the above findings of facts supported by evidence and evaluated by the Court of Appeals, affirmed by this Court, We see no error in respondent appellate court's ruling that said findings are res judicata between the parties. They can no longer be altered by presentation of evidence because those issues were resolved with finality a long time ago. To ignore the

principle of res judicata would be to open the door to endless litigations by continuous determination of issues without end. (2) Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title. Motion for Reconsideration Issue: Who is entitled to the possession and ownership of the land? Held: Pursuant to the said decision in CA-G.R. No. 38830-R, the two lots in question remained part of the public lands. This is the only logical conclusion when the appellate court found that neither the petitioner nor private respondents are entitled to confirmation of imperfect title over said lots. Hence, the Court finds the contention of petitioner to be well taken in that the trial court and the appellate court have no lawful basis in ordering petitioner to return and surrender possession of said lots to private respondents. Said property being a public land its disposition is subject to the provision of the Public Land Act, as amended. Article 555 of the Civil Code provides as follows: Art. 555. A possessor may lose his possession: (4) By the possession of another, subject to the provisions of Article 537, if the new possession has lasted longer than one year. But the real right of possession is not lost till after the lapse of ten years. It is clear that the real right of possession of private respondents over the property was lost or no longer exists after the lapse of 10 years that petitioner had been in adverse possession thereof. Thus, the action for recover of possession of said property filed by private respondents against petitioner must fail. The Court, therefore, finds that the trial court and the Court of Appeals erred in declaring the private respondents to be entitled to the possession thereof. Much less can they pretend to be owners thereof. Said lots are part of the public domain. Republic of the Philippines vs. Jose Bagtas, Felicidad Bagtas, administratrix of the intestate estate left by Jose Bagtas Facts: 8

On May 8, 1948, Jose Bagtas borrowed from the Bureau of Animal Industry 3 bulls for 1 year for breeding purposes, subject to breeding fee for 10% of the book value of the bulls. Upon the expiration of the contract, Bagtas asked for a renewal for another year. The renewal granted was only for 1 bull. Bagtas offered to buy the bulls at book value less depreciation, but the Bureau told him that he should either return the bulls or pay for their book value. Bagtas failed to pay the book value, and so the Republic commenced an action with the CFI Manila to order the return of the bulls of the payment of book value. Felicidad Bagtas, the surviving spouse and administratrix of the decedents estate, stated that the 2 bulls have already been returned in 1952, and that the remaining one died of gunshot during a Huk raid. As regards the two bulls, is was proven that they were returned and thus, there is no more obligation on the part of the appellant. As to the bull not returned, Felicidad contends that the obligation is extinguished since the contract is that of a commodatum and that the loss through fortuitous event should be borne by the owner. Issue: Whether, depending on the nature of the contract, the respondent is liable for the death of the bull Held: A contract of commodatum is essentially gratuitous. If the breeding fee be considered a compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides that a bailee in a contract of commodatum. . . is liable for loss of the things, even if it should be through a fortuitous event: (2) If he keeps it longer than the period stipulated . . . (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event; The loan of one bull was renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had each an appraised book value. It was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability. Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the probate court for payment by the appellant, the administratrix appointed by the court. Republic of the Philippines SUPREME COURT 9

Manila SECOND DIVISION G.R. No. L-60033 April 4, 1984

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS, petitioners, vs. THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA and CLEMENT DAVID, respondents. MAKASIAR, Actg. C.J.:+.wph!1 This is a petition for prohibition and injunction with a prayer for the immediate issuance of restraining order and/or writ of preliminary injunction filed by petitioners on March 26, 1982. On March 31, 1982, by virtue of a court resolution issued by this Court on the same date, a temporary restraining order was duly issued ordering the respondents, their officers, agents, representatives and/or person or persons acting upon their (respondents') orders or in their place or stead to refrain from proceeding with the preliminary investigation in Case No. 8131938 of the Office of the City Fiscal of Manila (pp. 47-48, rec.). On January 24, 1983, private respondent Clement David filed a motion to lift restraining order which was denied in the resolution of this Court dated May 18, 1983. As can be gleaned from the above, the instant petition seeks to prohibit public respondents from proceeding with the preliminary investigation of I.S. No. 81-31938, in which petitioners were charged by private respondent Clement David, with estafa and violation of Central Bank Circular No. 364 and related regulations regarding foreign exchange transactions principally, on the ground of lack of jurisdiction in that the allegations of the charged, as well as the testimony of private respondent's principal witness and the evidence through said witness, showed that petitioners' obligation is civil in nature. For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor General in its Comment dated June 28,1982, as follows:t.hqw On December 23,1981, private respondent David filed I.S. No. 81-31938 in the Office of the City Fiscal of Manila, which case was assigned to respondent Lota for preliminary investigation (Petition, p. 8). In I.S. No. 81-31938, David charged petitioners (together with one Robert Marshall and the following directors of the Nation Savings and Loan Association, Inc., namely Homero Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto Manalac, Jaime V. Paz, Paulino B. Dionisio, and one John Doe) with estafa and violation of Central Bank Circular No. 364 and related Central Bank regulations on foreign exchange transactions, allegedly committed as follows (Petition, Annex "A"):t.hqw

10

"From March 20, 1979 to March, 1981, David invested with the Nation Savings and Loan Association, (hereinafter called NSLA) the sum of P1,145,546.20 on nine deposits, P13,531.94 on savings account deposits (jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit, US$15,000.00 under a receipt and guarantee of payment and US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise Kuhne), that David was induced into making the aforestated investments by Robert Marshall an Australian national who was allegedly a close associate of petitioner Guingona Jr., then NSLA President, petitioner Martin, then NSLA Executive Vice-President of NSLA and petitioner Santos, then NSLA General Manager; that on March 21, 1981 N LA was placed under receivership by the Central Bank, so that David filed claims therewith for his investments and those of his sister; that on July 22, 1981 David received a report from the Central Bank that only P305,821.92 of those investments were entered in the records of NSLA; that, therefore, the respondents in I.S. No. 81-31938 misappropriated the balance of the investments, at the same time violating Central Bank Circular No. 364 and related Central Bank regulations on foreign exchange transactions; that after demands, petitioner Guingona Jr. paid only P200,000.00, thereby reducing the amounts misappropriated to P959,078.14 and US$75,000.00." Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in which they stated the following.t.hqw "That Martin became President of NSLA in March 1978 (after the resignation of Guingona, Jr.) and served as such until October 30, 1980, while Santos was General Manager up to November 1980; that because NSLA was urgently in need of funds and at David's insistence, his investments were treated as special- accounts with interest above the legal rate, an recorded in separate confidential documents only a portion of which were to be reported because he did not want the Australian government to tax his total earnings (nor) to know his total investments; that all transactions with David were recorded except the sum of US$15,000.00 which was a personal loan of Santos; that David's check for US$50,000.00 was cleared through Guingona, Jr.'s dollar account because NSLA did not have one, that a draft of US$30,000.00 was placed in the name of one Paz Roces because of a pending transaction with her; that the Philippine Deposit Insurance Corporation had already reimbursed David within the legal limits; that majority of the stockholders of NSLA had filed Special Proceedings No. 82-1695 in the Court of First Instance to contest its (NSLA's) closure; that after NSLA was placed under receivership, Martin executed a promissory note in David's favor and caused the transfer to him of a nine and on behalf (9 1/2) carat diamond ring with a net value of P510,000.00; and, that the liabilities of NSLA to David were civil in nature." Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the following:t.hqw "That he had no hand whatsoever in the transactions between David and NSLA since he (Guingona Jr.) had resigned as NSLA president in March 1978, or prior to those transactions; that he assumed a portion o; the liabilities of NSLA to David because of the latter's insistence that he placed his investments with NSLA because of his faith in Guingona, Jr.; that in a Promissory Note dated June 17, 1981 (Petition, Annex "D") he (Guingona, Jr.) bound himself to pay David the sums of P668.307.01 and US$37,500.00 in stated installments; that he (Guingona, Jr.) secured payment of those amounts with second mortgages over two (2) parcels of land under a deed of Second Real Estate Mortgage (Petition, Annex "E") in which 11

it was provided that the mortgage over one (1) parcel shall be cancelled upon payment of one-half of the obligation to David; that he (Guingona, Jr.) paid P200,000.00 and tendered another P300,000.00 which David refused to accept, hence, he (Guingona, Jr.) filed Civil Case No. Q-33865 in the Court of First Instance of Rizal at Quezon City, to effect the release of the mortgage over one (1) of the two parcels of land conveyed to David under second mortgages." At the inception of the preliminary investigation before respondent Lota, petitioners moved to dismiss the charges against them for lack of jurisdiction because David's claims allegedly comprised a purely civil obligation which was itself novated. Fiscal Lota denied the motion to dismiss (Petition, p. 8). But, after the presentation of David's principal witness, petitioners filed the instant petition because: (a) the production of the Promisory Notes, Banker's Acceptance, Certificates of Time Deposits and Savings Account allegedly showed that the transactions between David and NSLA were simple loans, i.e., civil obligations on the part of NSLA which were novated when Guingona, Jr. and Martin assumed them; and (b) David's principal witness allegedly testified that the duplicate originals of the aforesaid instruments of indebtedness were all on file with NSLA, contrary to David's claim that some of his investments were not record (Petition, pp. 8-9). Petitioners alleged that they did not exhaust available administrative remedies because to do so would be futile (Petition, p. 9) [pp. 153-157, rec.]. As correctly pointed out by the Solicitor General, the sole issue for resolution is whether public respondents acted without jurisdiction when they investigated the charges (estafa and violation of CB Circular No. 364 and related regulations regarding foreign exchange transactions) subject matter of I.S. No. 81-31938. There is merit in the contention of the petitioners that their liability is civil in nature and therefore, public respondents have no jurisdiction over the charge of estafa. A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the City Fiscal of Manila by private respondent David against petitioners Teopisto Guingona, Jr., Antonio I. Martin and Teresita G. Santos, together with one Robert Marshall and the other directors of the Nation Savings and Loan Association, will show that from March 20, 1979 to March, 1981, private respondent David, together with his sister, Denise Kuhne, invested with the Nation Savings and Loan Association the sum of P1,145,546.20 on time deposits covered by Bankers Acceptances and Certificates of Time Deposits and the sum of P13,531.94 on savings account deposits covered by passbook nos. 6-632 and 29-742, or a total of P1,159,078.14 (pp. 15-16, roc.). It appears further that private respondent David, together with his sister, made investments in the aforesaid bank in the amount of US$75,000.00 (p. 17, rec.). Moreover, the records reveal that when the aforesaid bank was placed under receivership on March 21, 1981, petitioners Guingona and Martin, upon the request of private respondent David, assumed the obligation of the bank to private respondent David by executing on June 17, 1981 a joint promissory note in favor of private respondent acknowledging an indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This promissory note was based on the statement of account as of June 30, 1981 prepared 12

by the private respondent (p. 81, rec.). The amount of indebtedness assumed appears to be bigger than the original claim because of the added interest and the inclusion of other deposits of private respondent's sister in the amount of P116,613.20. Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said indebtedness, and petitioner Guingona executed another promissory note antedated to June 17, 1981 whereby he personally acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25, rec.). The aforesaid promissory notes were executed as a result of deposits made by Clement David and Denise Kuhne with the Nation Savings and Loan Association. Furthermore, the various pleadings and documents filed by private respondent David, before this Court indisputably show that he has indeed invested his money on time and savings deposits with the Nation Savings and Loan Association. It must be pointed out that when private respondent David invested his money on nine. and savings deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides that:t.hqw Article 1980. Fixed, savings, and current deposits of-money in banks and similar institutions shall be governed by the provisions concerning simple loan. In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We said:t.hqw It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are hat true deposits. are considered simple loans and, as such, are not preferred credits (Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association 65 Phil. 375; Fletcher American National Bank vs. Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)." This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA 102 [1980]) that:t.hqw Bank deposits are in the nature of irregular deposits. They are really 'loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans (Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits, are loans to a bank because it can use the same. The petitioner here in making time deposits that earn interests will respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay its obligation as a debtor and not a breach of trust arising from a depositary's failure to return the subject matter of the deposit (Emphasis supplied). 13

Hence, the relationship between the private respondent and the Nation Savings and Loan Association is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute estafa through misappropriation punishable under Article 315, par. l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the public respondents have no- jurisdiction. WE have already laid down the rule that:t.hqw In order that a person can be convicted under the above-quoted provision, it must be proven that he has the obligation to deliver or return the some money, goods or personal property that he received Petitioners had no such obligation to return the same money, i.e., the bills or coins, which they received from private respondents. This is so because as clearly as stated in criminal complaints, the related civil complaints and the supporting sworn statements, the sums of money that petitioners received were loans. The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.t.hqw "Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time- and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall he paid in which case the contract is simply called a loan or mutuum. "Commodatum is essentially gratuitous. "Simple loan may be gratuitous or with a stipulation to pay interest. "In commodatum the bailor retains the ownership of the thing loaned while in simple loan, ownership passes to the borrower. "Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality." It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted to commodatum the borrower acquires ownership of the money, goods or personal property borrowed Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and his act will not be considered misappropriation thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979]; Emphasis supplied). But even granting that the failure of the bank to pay the time and savings deposits of private respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any incipient criminal liability was deemed avoided, because when the aforesaid bank was 14

placed under receivership by the Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to private respondent David, thereby resulting in the novation of the original contractual obligation arising from deposit into a contract of loan and converting the original trust relation between the bank and private respondent David into an ordinary debtor-creditor relation between the petitioners and private respondent. Consequently, the failure of the bank or petitioners Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust but would merely be a failure to pay the obligation as a debtor. Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent the rise of criminal liability as long as it occurs prior to the filing of the criminal information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held that:t.hqw As pointed out in People vs. Nery, novation prior to the filing of the criminal information as in the case at bar may convert the relation between the parties into an ordinary creditor-debtor relation, and place the complainant in estoppel to insist on the original transaction or "cast doubt on the true nature" thereof. Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581 [1983] ), this Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring that:t.hqw The novation theory may perhaps apply prior to the filling of the criminal information in court by the state prosecutors because up to that time the original trust relation may be converted by the parties into an ordinary creditor-debtor situation, thereby placing the complainant in estoppel to insist on the original trust. But after the justice authorities have taken cognizance of the crime and instituted action in court, the offended party may no longer divest the prosecution of its power to exact the criminal liability, as distinguished from the civil. The crime being an offense against the state, only the latter can renounce it (People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8 Phil. 620). It may be observed in this regard that novation is not one of the means recognized by the Penal Code whereby criminal liability can be extinguished; hence, the role of novation may only be to either prevent the rise of criminal habihty or to cast doubt on the true nature of the original basic transaction, whether or not it was such that its breach would not give rise to penal responsibility, as when money loaned is made to appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581; U.S. vs. Villareal, 27 Phil. 481). In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory note on June 17, 1981 assuming the obligation of the bank to private respondent David; while the criminal complaint for estafa was filed on December 23, 1981 with the Office of the City Fiscal. Hence, it is clear that novation occurred long before the filing of the criminal complaint with the Office of the City Fiscal. Consequently, as aforestated, any incipient criminal liability would be avoided but there will still be a civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation.

15

Petitioners herein were likewise charged with violation of Section 3 of Central Bank Circular No. 364 and other related regulations regarding foreign exchange transactions by accepting foreign currency deposit in the amount of US$75,000.00 without authority from the Central Bank. They contend however, that the US dollars intended by respondent David for deposit were all converted into Philippine currency before acceptance and deposit into Nation Savings and Loan Association. Petitioners' contention is worthy of behelf for the following reasons: 1. It appears from the records that when respondent David was about to make a deposit of bank draft issued in his name in the amount of US$50,000.00 with the Nation Savings and Loan Association, the same had to be cleared first and converted into Philippine currency. Accordingly, the bank draft was endorsed by respondent David to petitioner Guingona, who in turn deposited it to his dollar account with the Security Bank and Trust Company. Petitioner Guingona merely accommodated the request of the Nation Savings and loan Association in order to clear the bank draft through his dollar account because the bank did not have a dollar account. Immediately after the bank draft was cleared, petitioner Guingona authorized Nation Savings and Loan Association to withdraw the same in order to be utilized by the bank for its operations. 2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they were accepted and deposited in Nation Savings and Loan Association, because the bank is presumed to have followed the ordinary course of the business which is to accept deposits in Philippine currency only, and that the transaction was regular and fair, in the absence of a clear and convincing evidence to the contrary (see paragraphs p and q, Sec. 5, Rule 131, Rules of Court). 3. Respondent David has not denied the aforesaid contention of herein petitioners despite the fact that it was raised. in petitioners' reply filed on May 7, 1982 to private respondent's comment and in the July 27, 1982 reply to public respondents' comment and reiterated in petitioners' memorandum filed on October 30, 1982, thereby adding more support to the conclusion that the US$75,000.00 were really converted into Philippine currency before they were accepted and deposited into Nation Savings and Loan Association. Considering that this might adversely affect his case, respondent David should have promptly denied petitioners' allegation. In conclusion, considering that the liability of the petitioners is purely civil in nature and that there is no clear showing that they engaged in foreign exchange transactions, We hold that the public respondents acted without jurisdiction when they investigated the charges against the petitioners. Consequently, public respondents should be restrained from further proceeding with the criminal case for to allow the case to continue, even if the petitioners could have appealed to the Ministry of Justice, would work great injustice to petitioners and would render meaningless the proper administration of justice. While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition and injunction, this court has recognized the resort to the extraordinary writs of prohibition and injunction in extreme cases, thus:t.hqw

16

On the issue of whether a writ of injunction can restrain the proceedings in Criminal Case No. 3140, the general rule is that "ordinarily, criminal prosecution may not be blocked by court prohibition or injunction." Exceptions, however, are allowed in the following instances:t.hqw "1. "2. "3. "4. for the orderly administration of justice; to prevent the use of the strong arm of the law in an oppressive and vindictive manner; to avoid multiplicity of actions; to afford adequate protection to constitutional rights;

"5. in proper cases, because the statute relied upon is unconstitutional or was held invalid" ( Primicias vs. Municipality of Urdaneta, Pangasinan, 93 SCRA 462, 469-470 [1979]; citing Ramos vs. Torres, 25 SCRA 557 [1968]; and Hernandez vs. Albano, 19 SCRA 95, 96 [1967]). Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We held that:t.hqw The writs of certiorari and prohibition, as extraordinary legal remedies, are in the ultimate analysis, intended to annul void proceedings; to prevent the unlawful and oppressive exercise of legal authority and to provide for a fair and orderly administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took cognizance of a petition for certiorari and prohibition although the accused in the case could have appealed in due time from the order complained of, our action in the premises being based on the public welfare policy the advancement of public policy. In Dimayuga vs. Fajardo, 43 Phil. 304, We also admitted a petition to restrain the prosecution of certain chiropractors although, if convicted, they could have appealed. We gave due course to their petition for the orderly administration of justice and to avoid possible oppression by the strong arm of the law. And in Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the trial court's action admitting an amended information was sustained despite the availability of appeal at the proper time. WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY RESTRAINING ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS AGAINST THE PRIVATE RESPONDENT. SO ORDERED.1wph1.t Teofisto Guingona, Jr., Antonio Martin, and Teresita Santos vs. The City Fiscal of Manila, Hon. Jose Flaminiano, Asst. City Fiscal Felizardo Lota and Facts: From March 1979 to March 1981, Clement David made several investments with the National Savings and Loan Association. On March 21, 1981, the bank was placed under receivership by the Bangko Sentral. Upon Davids request, petitioners Guingona and Martin issued a joint promissory note, absorbing the obligations of the bank. On July 17, 1981, they divided the indebtedness. David filed a complaint for estafa and violation of Central Bank Circular No. 364 and related regulations regarding foreign exchange transactions before the Office of the City Fiscal of Manila. Petitioners filed the herein 17

petition for prohibition and injunction with a prayer for immediate issuance of restraining order and/or writ of preliminary injunction to enjoin the public respondents to proceed with the preliminary investigation on the ground that the petitioners obligation is civil in nature. Issue: (1) Whether the contract between NSLA and David is a contract of depositor a contract of loan, which answer determines whether the City Fiscal has the jurisdiction to file a case for estafa (2) Whether there was a violation of Central Bank Circular No. 364 Held: (1) When private respondent David invested his money on nine. and savings deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. Hence, the relationship between the private respondent and the Nation Savings and Loan Association is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute estafa through misappropriation punishable under Article 315, par. l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the public respondents have no jurisdiction. But even granting that the failure of the bank to pay the time and savings deposits of private respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any incipient criminal liability was deemed avoided, because when the aforesaid bank was placed under receivership by the Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to private respondent David, thereby resulting in the novation of the original contractual obligation arising from deposit into a contract of loan and converting the original trust relation between the bank and private respondent David into an ordinary debtor-creditor relation between the petitioners and private respondent. Consequently, the failure of the bank or petitioners Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust but would merely be a failure to pay the obligation as a debtor. Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent the rise of criminal liability as long as it occurs prior to the filing of the criminal information in court. In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory note on June 17, 1981 assuming the obligation of the bank to private respondent David; while the criminal complaint for estafa was filed on December 23, 1981 with the Office of the City Fiscal. Hence, it is clear that novation occurred long before the filing of the criminal complaint with the Office of the City Fiscal. Consequently, as aforestated, any incipient criminal liability would be avoided but there will still be a civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation.

18

(2) Petitioner Guingona merely accommodated the request of the Nation Savings and loan Association in order to clear the bank draft through his dollar account because the bank did not have a dollar account. Immediately after the bank draft was cleared, petitioner Guingona authorized Nation Savings and Loan Association to withdraw the same in order to be utilized by the bank for its operations. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they were accepted and deposited in Nation Savings and Loan Association, because the bank is presumed to have followed the ordinary course of the business which is to accept deposits in Philippine currency only, and that the transaction was regular and fair, in the absence of a clear and convincing evidence to the contrary. In conclusion, considering that the liability of the petitioners is purely civil in nature and that there is no clear showing that they engaged in foreign exchange transactions, We hold that the public respondents acted without jurisdiction when they investigated the charges against the petitioners. Consequently, public respondents should be restrained from further proceeding with the criminal case for to allow the case to continue, even if the petitioners could have appealed to the Ministry of Justice, would work great injustice to petitioners and would render meaningless the proper administration of justice. G.R. No. L-17474 October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. JOSE V. BAGTAS, defendant, FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V. Bagtas, petitionerappellant. D. T. Reyes, Liaison and Associates for petitioner-appellant. Office of the Solicitor General for plaintiff-appellee.

PADILLA, J.:

The Court of Appeals certified this case to this Court because only questions of law are raised.

On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a government charge of breeding fee of 10% of the book value of the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another period of one year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof of only 19

one bull for another year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction of yearly depreciation to be approved by the Auditor General. On 19 October 1950 the Director of Animal Industry advised him that the book value of the three bulls could not be reduced and that they either be returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to return them. So, on 20 December 1950 in the Court of First Instance of Manila the Republic of the Philippines commenced an action against him praying that he be ordered to return the three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of P199.62, both with interests, and costs; and that other just and equitable relief be granted in (civil No. 12818). On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the pending appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of the Philippines from the refusal by the Director of Animal Industry to deduct from the book value of the bulls corresponding yearly depreciation of 8% from the date of acquisition, to which depreciation the Auditor General did not object, he could not return the animals nor pay their value and prayed for the dismissal of the complaint. After hearing, on 30 July 1956 the trial court render judgment . . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus the breeding fees in the amount of P626.17 with interest on both sums of (at) the legal rate from the filing of this complaint and costs. On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18 October and issued on 11 November 1958. On 2 December 1958 granted an ex-parte motion filed by the plaintiff on November 1958 for the appointment of a special sheriff to serve the writ outside Manila. Of this order appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas, the surviving spouse of the defendant Jose Bagtas who died on 23 October 1951 and as administratrix of his estate, was notified. On 7 January 1959 she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were returned to the Bureau Animal of Industry and that sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda Felicidad Intal, and praying that the writ of execution be quashed and that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied her motion. Hence, this appeal certified by the Court of Appeals to this Court as stated at the beginning of this opinion. It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter (Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's motion to quash the writ of 20

execution the appellee prays "that another writ of execution in the sum of P859.53 be issued against the estate of defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which already had been returned to and received by the appellee. The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and that as such death was due to force majeure she is relieved from the duty of returning the bull or paying its value to the appellee. The contention is without merit. The loan by the appellee to the late defendant Jose V. Bagtas of the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls. The appellant contends that the contract was commodatum and that, for that reason, as the appellee retained ownership or title to the bull it should suffer its loss due to force majeure. A contract of commodatum is essentially gratuitous.1 If the breeding fee be considered a compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides that a bailee in a contract of commodatum . . . is liable for loss of the things, even if it should be through a fortuitous event: (2) If he keeps it longer than the period stipulated . . .

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event; The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had each an appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability. The appellant's contention that the demand or prayer by the appellee for the return of the bull or the payment of its value being a money claim should be presented or filed in the intestate proceedings of the defendant who died on 23 October 1951, is not altogether without merit. However, the claim that his civil personality having ceased to exist the trial court lost jurisdiction over the case against him, is untenable, because section 17 of Rule 3 of the Rules of Court provides that After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal representative of the deceased to appear and to be substituted for the deceased, within a period of thirty (30) days, or within such time as may be granted. . . .and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule 3 which provides that 21

Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court promptly of such death . . . and to give the name and residence of the executory administrator, guardian, or other legal representative of the deceased . . . . The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had been issue letters of administration of the estate of the late Jose Bagtas and that "all persons having claims for monopoly against the deceased Jose V. Bagtas, arising from contract express or implied, whether the same be due, not due, or contingent, for funeral expenses and expenses of the last sickness of the said decedent, and judgment for monopoly against him, to file said claims with the Clerk of this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the date of the first publication of this order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the said deceased," is not a notice to the court and the appellee who were to be notified of the defendant's death in accordance with the above-quoted rule, and there was no reason for such failure to notify, because the attorney who appeared for the defendant was the same who represented the administratrix in the special proceedings instituted for the administration and settlement of his estate. The appellee or its attorney or representative could not be expected to know of the death of the defendant or of the administration proceedings of his estate instituted in another court that if the attorney for the deceased defendant did not notify the plaintiff or its attorney of such death as required by the rule. As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is only liable for the sum of P859.63, the value of the bull which has not been returned to the appellee, because it was killed while in the custody of the administratrix of his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959 to the motion filed on 7 January 1959 by the appellant for the quashing of the writ of execution. Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the probate court for payment by the appellant, the administratrix appointed by the court. ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs. Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and Makalintal, JJ., concur. Barrera, J., concurs in the result. Insurance Case Digest: Palileo v. Cosio (1955) Labels: 1955, G.R. No. L-7667, insurance, insurance case digest, Juris Doctor, mortgagor, November 28 G.R. No. L-7667 Lessons Applicable: Mortgagor (Insurance) 22 November 28, 1955

Laws Applicable: FACTS: Cherie Palileo (debtor-mortgagor) filed a complaint against Beatriz Cosio (creditor-mortgagee) praying that their transaction be one of a loan with an equitable mortgage to secure the payment of the loan. The original counsel of Cosio Atty. Guerrero being appointed Undersecretary of Foreign Affairs so she forgot the date of the trial and she was substituted. it is a loan of P12,000 secured by a "Conditional Sale of Residential Building" with right to repurchase. After the execution of the contract, Cosio insured in her name the building with Associated Insurance & Surety Co. against fire. The building was partly destroyed by fire so she claimed an indemnity of P13,107 Palileo demanded that the amount of insurance proceeds be credited to her loan RTC: it is a loan with equitable mortgage so the insurance proceeds should be credited to the loan and refund the overpayment. ISSUE: W/N Cosio as mortgagee is entitled to the insurance proceeds for her own benefit HELD: YES. Modify. collection of insurance proceeds shall not be deemed to have compensated the obligation of the Palileo to Cosio, but bars the Cosio from claiming its payment from the Palileo; and Cosio shall pay to Palileo P810 representing the overpayment made by Palileo by way of interest on the loan. When the the mortgagee may insure his interest in the property independently of the mortgagor , upon the destruction of the property the insurance money paid to the mortgagee will not inure to the benefit of the mortgagor, and the amount due under the mortgage debt remains unchanged. The mortgagee, however, is not allowed to retain his claim against the mortgagor, but it passes by subrogation to the insurer, to the extent of the insurance money paid It is true that there are authorities which hold that "If a mortgagee procures insurance on his separate interest at his own expense and for his own benefit, without any agreement with the mortgagor with respect thereto, the mortgagor has no interest in the policy, and is not entitled to have the insurance proceeds applied in reduction of the mortgage debt" But these authorities merely represent the minority view Palileo v. Cosio November 28, 1955 G.R. No. L-7667 CHERIE PALILEO, plaintiff-appellee, vs. BEATRIZ COSIO, defendant-appellant.

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Claro M. Recto for appellant. Bengson, Villegas, Jr. and Villar for appellee., J.: Plaintiff filed a complaint against defendant in the Court of First Instance of Manila praying that (1) the transaction entered into between them on December 18, 1951 be declared as one of loan, and the document executed covering the transaction as one of equitable mortgage to secure the payment of said loan; (2) the defendant be ordered to credit to the plaintiff with the necessary amount from the sum received by the defendant from the Associated Insurance & Surety Co., Inc. and to apply the same to the payment of plaintiffs obligation thus considering it as fully paid; and (3) the defendant be ordered to pay to plaintiff the difference between the alleged indebtedness of plaintiff and the sum received by defendant from the aforementioned insurance company, plus the sum allegedly paid to defendant as interest on the alleged indebtedness. On December 19, 1952, defendant filed her answer setting up as special defense that the transaction entered into between the plaintiff and defendant is one of sale with option to repurchase but that the period for repurchase had expired without plaintiff having returned the price agreed upon as a result of which the ownership of the property had become consolidated in the defendant. Defendant also set up certain counterclaims which involve a total amount of P4,900. On April 7, 1953, the case was set for trial on the merits, but because of several postponements asked by the parties, the same has to be set anew for trial on January 12, 1954. On this date, neither the defendant nor her counsel appeared, even if the latter had been notified of the postponement almost a month earlier, and so the court received the evidence of the plaintiff. On January 18, 1954, the court, having in view the evidence presented, rendered judgment granting the relief prayed for in the complaint. On February 2, 1954, the original counsel for the defendant was substituted and the new counsel immediately moved that the judgment be set aside on the ground that, due to mistake or excusable negligence, defendant was unable to present her evidence and the decision was contrary to law, and this motion having been denied, defendant took the present appeal. The important issue to be determined in this appeal is whether the lower court committed a grave abuse of discretion in not reopening the case to give defendant an opportunity to present her evidence considering that the failure of her original counsel to appear was due to mistake or execusable negligence which ordinary prudence could not have guarded against. The original counsel of defendant was Atty. Leon Ma. Guerrero. As early as February 11, 1953, said counsel showed interest in the early disposal of this case by moving the court to have it set for trial. The first date set was April 7, 1953, but no hearing was had on that date because plaintiff had moved to postpone it. The case was next set for hearing on April 28, 1953, but on motion again of plaintiff, the hearing was transferred to November 6, 1953. Then, upon petition of defendant, the trial had to be moved to December 15, 1953, and because Atty. Guerrero could not appear on said date because of a case he had in Cebu City, the hearing was postponed to January 18, 1954. 24

And on January 4, 1954, or nineteen days after receiving the notice of hearing, Atty. Guerrero was appointed Undersecretary of Foreign Affairs. It is now contended that the appointment was so sudden and unexpected that Atty. Guerrero, after taking his oath, was unable to wind up his private cases or make any preparation at all. It is averred that The days that followed his appointment were very busy days for defendants former counsel. There was an immediate need for clearing the backlog of official business, including the reorganization of the Department of Foreign Affairs and our Foreign Service, and more importantly, he had to assist the Secretary of Foreign Affairs in negotiations of national importance like the Japanese reparations, and the revision of the trade agreement with the United States, that, Atty. Guerrero had to work as much as fourteen hours daily . . . Because of all these unavoidable confusion that followed in the wake of Atty. Guerreros sudden and unexpected appointment, the trial of this case scheduled for January 18, 1954 escaped his memory, and consequently, Atty. Guerrero and the defendant were unable to appear when the case was called for trial. These reasons, it is intimated, constitute excusable negligence which ordinary prudence could not have guarded against and should have been considered by the trial court as sufficient justification to grant the petition of defendant for a rehearing. It is a well-settled rule that the granting of a motion to set aside a judgment or order on the ground of mistake or excusable negligence is addressed to the sound discretion of the court (see Coombs vs. Santos, 24 Phil. 446; Daipan vs. Sigabu, 25, Phil. 184). And an order issued in the exercise of such discretion is ordinarily not to be disturbed unless it is shown that the court has gravely abused such discretion. (See Tell vs. Tell, 48 Phil. 70; Macke vs. Camps, 5 Phil. 185; Calvo vs. De Gutierrez, 4 Phil. 203; Manzanares vs. Moreta, 38 Phil. 821; Salva vs. Palacio and Leuterio, 90 Phil. 731.) In denying the motion for reopening the trial court said: After going over the same arguments, this Court is of the opinion, and so holds that the decision of this Court of January 18, 1954 should not be disturbed. Considering the stature, ability and experience of counsel Leon Ma. Guerrero, and the fact that he was given almost one month notice before the date set for trial, we are persuaded to conclude that the trial court did not abuse its discretion in refusing to reconsider its decision. Coming now to the merits of the case, we note that the lower court made the following findings: On December 18, 1951, plaintiff obtained from defendant a loan in the sum of P12,000 subject to the following conditions: (a) that plaintiff shall pay to defendant an interest in the amount of P250 a month; (b) that defendant shall deduct from the loan certain obligations of plaintiff to third persons amounting to P4,550, plus the sum of P250 as interest for the first month; and (c) that after making the above deductions, defendant shall deliver to plaintiff only the balance of the loan of P12,000. Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total of P2,250.00 corresponding to nine months from December 18, 1951, on the basis of P250.00 a month, which is more than the maximum interest authorized by law. To secure the payment of the aforesaid loan, defendant required plaintiff to sign a document known as Conditional Sale of Residential Building, purporting to convey to defendant, with right to repurchase, a two-story building of strong materials belonging to plaintiff. This document did not express the true intention of the parties which was merely to place said property as security for the payment of the loan.

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After the execution of the aforesaid document, defendant insured the building against fire with the Associated Insurance & Surety Co., Inc. for the sum of P15,000, the insurance policy having been issued in the name of defendant. The building was partly destroyed by fire and, after proper demand, defendant collected from the insurance company an indemnity of P13,107.00. Plaintiff demanded from defendant that she be credited with the necessary amount to pay her obligation out of the insurance proceeds but defendant refused to do so. And on the strength of these facts, the court rendered decision the dispositive part of which reads as follows: Wherefore, judgment is hereby rendered declaring the transaction had between plaintiff and defendant, as shown in Exhibit A, an equitable mortgage to secure the payment of the sum of P12,000 loaned by the defendant to plaintiff; ordering the defendant to credit the sum of P13,107 received by the defendant from the Associated Insurance & surety Co., Inc. to the payment of plaintiffs obligation in the sum of P12,000.00 as stated in the complaint, thus considering the agreement of December 18, 1951 between the herein plaintiff and defendant completely paid and leaving still a balance in the sum of P1,107 from the insurance collected by defendant; that as plaintiff had paid to the defendant the sum of P2,250.00 for nine months as interest on the sum of P12,000 loaned to plaintiff and the legal interest allowed by law in this transaction does not exceed 12 per cent per annum, or the sum of P1,440 for one year, so the herein plaintiff and overpaid the sum of P810 to the defendant, which this Court hereby likewise orders the said defendant to refund to herein plaintiff, plus the balance of P1,107 representing the difference of the sum loan of P12,000 and the collected insurance of P13,107 from the insurance company abovementioned to which the herein plaintiff is entitled to receive, and to pay the costs. The question that now arises is: Is the trial court justified in considering the obligation of plaintiff fully compensated by the insurance amount and in ordering defendant to refund to plaintiff the sum of P1,107 representing the difference of the loan of P12,000 and the sum of P13,107 collected by said defendant from the insurance company notwithstanding the fact that it was not proven that the insurance was taken for the benefit of the mortgagor? Is is our opinion that on this score the court is in error for its ruling runs counter to the rule governing an insurance taken by a mortgagee independently of the mortgagor. The rule is that where a mortgagee, independently of the mortgagor, insures the mortgaged property in his own name and for his own interest, he is entitled to the insurance proceeds in case of loss, but in such case, he is not allowed to retain his claim against the mortgagor, but is passed by subrogation to the insurer to the extent of the money paid. (Vance on Insurance, 2d ed., p. 654)Or, stated in another way, the mortgagee may insure his interest in the property independently of the mortgagor. In that event, upon the destruction of the property the insurance money paid to the mortgagee will not inure to the benefit of the mortgagor, and the amount due under the mortgage debt remains unchanged. The mortgagee, however, is not allowed to retain his claim against the mortgagor, but it passes by subrogation to the insurer, to the extent of the insurance money paid. (Vance on Insurance, 3rd ed., pp. 772-773) This is the same rule upheld by this Court in a case that arose in this jurisdiction. In the case mentioned, an insurance contract was taken out by the mortgagee upon his own interest, it being stipulated that the proceeds would be paid to him only and when the case came up for decision, this Court held that the mortgagee, in case of loss, may only recover upon the policy to the extent of his credit at the time of the loss. It was declared that 26

the mortgaged had no right of action against the mortgagee on the policy. (San Miguel Brewery vs. Law Union, 40 Phil. 674.) It is true that there are authorities which hold that If a mortgagee procures insurance on his separate interest at his own expense and for his own benefit, without any agreement with the mortgagor with respect thereto, the mortgagor has no interest in the policy, and is not entitled to have the insurance proceeds applied in reduction of the mortgage debt (19 R.C.L., p. 405), and that, furthermore, the mortgagee has still a right to recover his whole debt of the mortgagor. (King vs. State Mut. F. Ins. Co., 7 Cush. 1; Suffolk F. Ins. Co. vs. Boyden 9 Allen, 123; See also Loomis vs. Eagle Life & Health Ins. Co., 6 Gray, 396; Washington Mills Emery Mfg. Co. vs. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506; Foster vs. Equitable Mut. F. Ins. Co., 2 Gray 216.) But these authorities merely represent the minority view (See case note, 3 Lawyers Report Annotated, new series, p. 79). The general rule and the weight of authority is, that the insurer is thereupon subrogated to the rights of the mortgagee under the mortgage. This is put upon the analogy of the situation of the insurer to that of a surety. (Jones on Mortgages, Vol. I, pp. 671-672.) Considering the foregoing rules, it would appear that the lower court erred in declaring that the proceeds of the insurance taken out by the defendant on the property mortgaged inured to the benefit of the plaintiff and in ordering said defendant to deliver to the plaintiff the difference between her indebtedness and the amount of insurance received by the defendant, for, in the light of the majority rule we have above enunciated, the correct solution should be that the proceeds of the insurance should be delivered to the defendant but that her claim against the plaintiff should be considered assigned to the insurance company who is deemed subrogated to the rights of the defendant to the extent of the money paid as indemnity. Consistent with the foregoing pronouncement, we therefore modify the judgment of the lower court as follows:(1) the transaction had between the plaintiff and defendant as shown in Exhibit A is merely an equitable mortgage intended to secure the payment of the loan of P12,000;(2) that the proceeds of the insurance amounting to P13,107.00 was properly collected by defendant who is not required to account for it to the plaintiff; (3) that the collection of said insurance proceeds shall not be deemed to have compensated the obligation of the plaintiff to the defendant, but bars the latter from claiming its payment from the former; and (4) defendant shall pay to the plaintiff the sum of P810.00 representing the overpayment made by plaintiff by way of interest on the loan. No pronouncement as to costs. Bengzon, Montemayor, Reyes, A., Jugo, Labrador , Concepcion, and Reyes, J.B.L., JJ., concur.

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