Anda di halaman 1dari 84

1

1.PRODUCERS BANK OF THE On May 9, 1979, private respondent, Sanchez, Doronilla and a certain
Estrella Dumagpi, Doronilla’s private secretary, met and discussed the
PHILIPPINES VS. CA matter. Thereafter, relying on the assurances and representations of
Sanchez and Doronilla, private respondent issued a check in the
Civil Procedure; Pleadings and Practice; Appeals; Only questions of amount of Two Hundred Thousand Pesos (₱200,000.00) in favor of
law may be raised in a petition for review filed with the Court. —At Sterela. Private respondent instructed his wife, Mrs. Inocencia Vives,
the outset, it must be emphasized that only questions of law may be to accompany Doronilla and Sanchez in opening a savings account in
raised in a petition for review filed with this Court. The Court has the name of Sterela in the Buendia, Makati branch of Producers Bank
repeatedly held that it is not its function to analyze and weigh all over of the Philippines. However, only Sanchez, Mrs. Vives and Dumagpi
again the evidence presented by the parties during trial. The Court’s went to the bank to deposit the check. They had with them an
jurisdiction is in principle limited to reviewing errors of law that authorization letter from Doronilla authorizing Sanchez and her
might have been committed by the Court of Appeals. Moreover, companions, "in coordination with Mr. Rufo Atienza," to open an
factual findings of courts, when adopted and confirmed by the Court account for Sterela Marketing Services in the amount of ₱200,000.00.
of Appeals, are final and conclusive on this Court unless these In opening the account, the authorized signatories were Inocencia
findings are not supported by the evidence on record. Vives and/or Angeles Sanchez. A passbook for Savings Account No.
10-1567 was thereafter issued to Mrs. Vives.4
Civil Law; Contracts; Loan; Distinguished from Commodatum;
Article 1933 of the Civil Code distinguishes between the two kinds of Subsequently, private respondent learned that Sterela was no longer
loans.—By the contract of loan, one of the parties delivers to another, holding office in the address previously given to him. Alarmed, he
either something not consumable so that the latter may use the same and his wife went to the Bank to verify if their money was still intact.
for a certain time and return it, in which case the contract is called a The bank manager referred them to Mr. Rufo Atienza, the assistant
commodatum; or money or other consumable thing, upon the manager, who informed them that part of the money in Savings
condition that the same amount of the same kind and quality shall be Account No. 10-1567 had been withdrawn by Doronilla, and that only
paid, in which case the contract is simply called a loan or mutuum. ₱90,000.00 remained therein. He likewise told them that Mrs. Vives
Commodatum is essentially gratuitous. Simple loan may be gratuitous could not withdraw said remaining amount because it had to answer
or with a stipulation to pay interest. In commodatum, the bailor retains for some postdated checks issued by Doronilla. According to Atienza,
the ownership of the thing loaned, while in simple loan, ownership after Mrs. Vives and Sanchez opened Savings Account No. 10-1567,
passes to the borrower. Doronilla opened Current Account No. 10-0320 for Sterela and
authorized the Bank to debit Savings Account No. 10-1567 for the
amounts necessary to cover overdrawings in Current Account No. 10-
Quasi-Delicts; Employer-Employee Relationship; Solidary Liability;
0320. In opening said current account, Sterela, through Doronilla,
Employers shall be held primarily and solidarily liable for damages
obtained a loan of ₱175,000.00 from the Bank. To cover payment
caused by their employees acting within the scope of their assigned
thereof, Doronilla issued three postdated checks, all of which were
tasks.—Under Article 2180 of the Civil Code, employers shall be held
dishonored. Atienza also said that Doronilla could assign or withdraw
primarily and solidarily liable for damages caused by their employees
the money in Savings Account No. 10-1567 because he was the sole
acting within the scope of their assigned tasks. To hold the employer
proprietor of Sterela.5
liable under this provision, it must be shown that an employer-
employee relationship exists, and that the employee was acting within
the scope of his assigned task when the act complained of was Private respondent tried to get in touch with Doronilla through
committed. Case law in the United States of America has it that a Sanchez. On June 29, 1979, he received a letter from Doronilla,
corporation that entrusts a general duty to its employee is responsible assuring him that his money was intact and would be returned to him.
to the injured party for damages flowing from the employee’s On August 13, 1979, Doronilla issued a postdated check for Two
wrongful act done in the course of his general authority, even though Hundred Twelve Thousand Pesos (₱212,000.00) in favor of private
in doing such act, the employee may have failed in its duty to the respondent. However, upon presentment thereof by private respondent
employer and disobeyed the latter’s instructions. to the drawee bank, the check was dishonored. Doronilla requested
private respondent to present the same check on September 15, 1979
but when the latter presented the check, it was again dishonored.6
This is a petition for review on certiorari of the Decision1 of the
Court of Appeals dated June 25, 1991 in CA-G.R. CV No. 11791 and
of its Resolution2 dated May 5, 1994, denying the motion for Private respondent referred the matter to a lawyer, who made a written
reconsideration of said decision filed by petitioner Producers Bank of demand upon Doronilla for the return of his client’s money. Doronilla
the Philippines. issued another check for ₱212,000.00 in private respondent’s favor
but the check was again dishonored for insufficiency of funds.7
Sometime in 1979, private respondent Franklin Vives was asked by
his neighbor and friend Angeles Sanchez to help her friend and Private respondent instituted an action for recovery of sum of money
townmate, Col. Arturo Doronilla, in incorporating his business, the in the Regional Trial Court (RTC) in Pasig, Metro Manila against
Sterela Marketing and Services ("Sterela" for brevity). Specifically, Doronilla, Sanchez, Dumagpi and petitioner. The case was docketed
Sanchez asked private respondent to deposit in a bank a certain as Civil Case No. 44485. He also filed criminal actions against
amount of money in the bank account of Sterela for purposes of its Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez
incorporation. She assured private respondent that he could withdraw passed away on March 16, 1985 while the case was pending before
his money from said account within a month’s time. Private the trial court. On October 3, 1995, the RTC of Pasig, Branch 157,
respondent asked Sanchez to bring Doronilla to their house so that promulgated its Decision in Civil Case No. 44485, the dispositive
they could discuss Sanchez’s request.3 portion of which reads:
2

IN VIEW OF THE FOREGOING, judgment is hereby rendered Private respondent filed his Comment on September 23, 1994.
sentencing defendants Arturo J. Doronila, Estrella Dumagpi and Petitioner filed its Reply thereto on September 25, 1995. The Court
Producers Bank of the Philippines to pay plaintiff Franklin Vives then required private respondent to submit a rejoinder to the reply.
jointly and severally – However, said rejoinder was filed only on April 21, 1997, due to
petitioner’s delay in furnishing private respondent with copy of the
(a) the amount of ₱200,000.00, representing the money reply12 and several substitutions of counsel on the part of private
deposited, with interest at the legal rate from the filing of the respondent.13 On January 17, 2001, the Court resolved to give due
complaint until the same is fully paid; course to the petition and required the parties to submit their
respective memoranda.14 Petitioner filed its memorandum on April
16, 2001 while private respondent submitted his memorandum on
(b) the sum of ₱50,000.00 for moral damages and a similar
amount for exemplary damages; March 22, 2001.

Petitioner contends that the transaction between private respondent


(c) the amount of ₱40,000.00 for attorney’s fees; and
and Doronilla is a simple loan (mutuum) since all the elements of a
mutuum are present: first, what was delivered by private respondent to
(d) the costs of the suit. Doronilla was money, a consumable thing; and second, the transaction
was onerous as Doronilla was obliged to pay interest, as evidenced by
SO ORDERED.8 the check issued by Doronilla in the amount of ₱212,000.00, or
₱12,000 more than what private respondent deposited in Sterela’s
Petitioner appealed the trial court’s decision to the Court of Appeals. bank account.15 Moreover, the fact that private respondent sued his
In its Decision dated June 25, 1991, the appellate court affirmed in good friend Sanchez for his failure to recover his money from
toto the decision of the RTC.9 It likewise denied with finality Doronilla shows that the transaction was not merely gratuitous but
petitioner’s motion for reconsideration in its Resolution dated May 5, "had a business angle" to it. Hence, petitioner argues that it cannot be
1994.10 held liable for the return of private respondent’s ₱200,000.00 because
it is not privy to the transaction between the latter and Doronilla.16
On June 30, 1994, petitioner filed the present petition, arguing that –
It argues further that petitioner’s Assistant Manager, Mr. Rufo
I. THE HONORABLE COURT OF APPEALS ERRED IN Atienza, could not be faulted for allowing Doronilla to withdraw from
UPHOLDING THAT THE TRANSACTION BETWEEN THE the savings account of Sterela since the latter was the sole proprietor
DEFENDANT DORONILLA AND RESPONDENT VIVES WAS of said company. Petitioner asserts that Doronilla’s May 8, 1979 letter
ONE OF SIMPLE LOAN AND NOT ACCOMMODATION; addressed to the bank, authorizing Mrs. Vives and Sanchez to open a
savings account for Sterela, did not contain any authorization for these
two to withdraw from said account. Hence, the authority to withdraw
II. THE HONORABLE COURT OF APPEALS ERRED IN
therefrom remained exclusively with Doronilla, who was the sole
UPHOLDING THAT PETITIONER’S BANK MANAGER, MR.
proprietor of Sterela, and who alone had legal title to the savings
RUFO ATIENZA, CONNIVED WITH THE OTHER
account.17 Petitioner points out that no evidence other than the
DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should be
testimonies of private respondent and Mrs. Vives was presented
PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE
during trial to prove that private respondent deposited his ₱200,000.00
PETITIONER SHOULD BE HELD LIABLE UNDER THE
in Sterela’s account for purposes of its incorporation.18 Hence,
PRINCIPLE OF NATURAL JUSTICE;
petitioner should not be held liable for allowing Doronilla to withdraw
from Sterela’s savings account.1a\^/phi1.net
III. THE HONORABLE COURT OF APPEALS ERRED IN
ADOPTING THE ENTIRE RECORDS OF THE REGIONAL TRIAL
Petitioner also asserts that the Court of Appeals erred in affirming the
COURT AND AFFIRMING THE JUDGMENT APPEALED FROM,
trial court’s decision since the findings of fact therein were not accord
AS THE FINDINGS OF THE REGIONAL TRIAL COURT WERE
with the evidence presented by petitioner during trial to prove that the
BASED ON A MISAPPREHENSION OF FACTS;
transaction between private respondent and Doronilla was a mutuum,
and that it committed no wrong in allowing Doronilla to withdraw
IV. THE HONORABLE COURT OF APPEALS ERRED IN from Sterela’s savings account.19
DECLARING THAT THE CITED DECISION IN SALUDARES VS.
MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN
Finally, petitioner claims that since there is no wrongful act or
EMPLOYER FOR ACTS COMMITTED BY AN EMPLOYEE IS
omission on its part, it is not liable for the actual damages suffered by
APPLICABLE;
private respondent, and neither may it be held liable for moral and
exemplary damages as well as attorney’s fees.20
V. THE HONORABLE COURT OF APPEALS ERRED IN
UPHOLDING THE DECISION OF THE LOWER COURT THAT
Private respondent, on the other hand, argues that the transaction
HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY
between him and Doronilla is not a mutuum but an accommodation,21
LIABLE WITH THE OTHER DEFENDANTS FOR THE AMOUNT
since he did not actually part with the ownership of his ₱200,000.00
OF P200,000.00 REPRESENTING THE SAVINGS ACCOUNT
and in fact asked his wife to deposit said amount in the account of
DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00 FOR
Sterela so that a certification can be issued to the effect that Sterela
EXEMPLARY DAMAGES, P40,000.00 FOR ATTORNEY’S FEES
had sufficient funds for purposes of its incorporation but at the same
AND THE COSTS OF SUIT.11
time, he retained some degree of control over his money through his
wife who was made a signatory to the savings account and in whose
possession the savings account passbook was given.22
3

He likewise asserts that the trial court did not err in finding that to have the very same goods returned at the end of the period agreed
petitioner, Atienza’s employer, is liable for the return of his money. upon, the loan is a commodatum and not a mutuum.
He insists that Atienza, petitioner’s assistant manager, connived with
Doronilla in defrauding private respondent since it was Atienza who The rule is that the intention of the parties thereto shall be accorded
facilitated the opening of Sterela’s current account three days after primordial consideration in determining the actual character of a
Mrs. Vives and Sanchez opened a savings account with petitioner for contract.27 In case of doubt, the contemporaneous and subsequent
said company, as well as the approval of the authority to debit acts of the parties shall be considered in such determination.28
Sterela’s savings account to cover any overdrawings in its current
account.23
As correctly pointed out by both the Court of Appeals and the trial
court, the evidence shows that private respondent agreed to deposit his
There is no merit in the petition. money in the savings account of Sterela specifically for the purpose of
making it appear "that said firm had sufficient capitalization for
At the outset, it must be emphasized that only questions of law may be incorporation, with the promise that the amount shall be returned
raised in a petition for review filed with this Court. The Court has within thirty (30) days."29 Private respondent merely
repeatedly held that it is not its function to analyze and weigh all over "accommodated" Doronilla by lending his money without
again the evidence presented by the parties during trial.24 The Court’s consideration, as a favor to his good friend Sanchez. It was however
jurisdiction is in principle limited to reviewing errors of law that clear to the parties to the transaction that the money would not be
might have been committed by the Court of Appeals.25 Moreover, removed from Sterela’s savings account and would be returned to
factual findings of courts, when adopted and confirmed by the Court private respondent after thirty (30) days.
of Appeals, are final and conclusive on this Court unless these
findings are not supported by the evidence on record.26 There is no Doronilla’s attempts to return to private respondent the amount of
showing of any misapprehension of facts on the part of the Court of ₱200,000.00 which the latter deposited in Sterela’s account together
Appeals in the case at bar that would require this Court to review and with an additional ₱12,000.00, allegedly representing interest on the
overturn the factual findings of that court, especially since the mutuum, did not convert the transaction from a commodatum into a
conclusions of fact of the Court of Appeals and the trial court are not mutuum because such was not the intent of the parties and because the
only consistent but are also amply supported by the evidence on additional ₱12,000.00 corresponds to the fruits of the lending of the
record. ₱200,000.00. Article 1935 of the Civil Code expressly states that
"[t]he bailee in commodatum acquires the use of the thing loaned but
No error was committed by the Court of Appeals when it ruled that not its fruits." Hence, it was only proper for Doronilla to remit to
the transaction between private respondent and Doronilla was a private respondent the interest accruing to the latter’s money
commodatum and not a mutuum. A circumspect examination of the deposited with petitioner.
records reveals that the transaction between them was a commodatum.
Article 1933 of the Civil Code distinguishes between the two kinds of Neither does the Court agree with petitioner’s contention that it is not
loans in this wise: solidarily liable for the return of private respondent’s money because
it was not privy to the transaction between Doronilla and private
By the contract of loan, one of the parties delivers to another, either respondent. The nature of said transaction, that is, whether it is a
something not consumable so that the latter may use the same for a mutuum or a commodatum, has no bearing on the question of
certain time and return it, in which case the contract is called a petitioner’s liability for the return of private respondent’s money
commodatum; or money or other consumable thing, upon the because the factual circumstances of the case clearly show that
condition that the same amount of the same kind and quality shall be petitioner, through its employee Mr. Atienza, was partly responsible
paid, in which case the contract is simply called a loan or mutuum. for the loss of private respondent’s money and is liable for its
restitution.
Commodatum is essentially gratuitous.
Petitioner’s rules for savings deposits written on the passbook it
Simple loan may be gratuitous or with a stipulation to pay interest. issued Mrs. Vives on behalf of Sterela for Savings Account No. 10-
1567 expressly states that—
In commodatum, the bailor retains the ownership of the thing loaned,
while in simple loan, ownership passes to the borrower. "2. Deposits and withdrawals must be made by the depositor
personally or upon his written authority duly authenticated, and
neither a deposit nor a withdrawal will be permitted except upon the
The foregoing provision seems to imply that if the subject of the
contract is a consumable thing, such as money, the contract would be production of the depositor savings bank book in which will be
a mutuum. However, there are some instances where a commodatum entered by the Bank the amount deposited or withdrawn."30
may have for its object a consumable thing. Article 1936 of the Civil
Code provides: Said rule notwithstanding, Doronilla was permitted by petitioner,
through Atienza, the Assistant Branch Manager for the Buendia
Consumable goods may be the subject of commodatum if the purpose Branch of petitioner, to withdraw therefrom even without presenting
of the contract is not the consumption of the object, as when it is the passbook (which Atienza very well knew was in the possession of
Mrs. Vives), not just once, but several times. Both the Court of
merely for exhibition.
Appeals and the trial court found that Atienza allowed said
withdrawals because he was party to Doronilla’s "scheme" of
Thus, if consumable goods are loaned only for purposes of exhibition, defrauding private respondent:
or when the intention of the parties is to lend consumable goods and
4

X X X But the scheme could not have been executed successfully because the original passbook had been surrendered to the Makati
without the knowledge, help and cooperation of Rufo Atienza, branch in view of a loan accommodation assigning the savings
assistant manager and cashier of the Makati (Buendia) branch of the account (Exh. C). Atienza, who undoubtedly had a hand in the
defendant bank. Indeed, the evidence indicates that Atienza had not execution of this certification, was aware that the contents of the same
only facilitated the commission of the fraud but he likewise helped in are not true. He knew that the passbook was in the hands of Mrs.
devising the means by which it can be done in such manner as to Vives for he was the one who gave it to her. Besides, as assistant
make it appear that the transaction was in accordance with banking manager of the branch and the bank official servicing the savings and
procedure. current accounts in question, he also was aware that the original
passbook was never surrendered. He was also cognizant that Estrella
To begin with, the deposit was made in defendant’s Buendia branch Dumagpi was not among those authorized to withdraw so her
precisely because Atienza was a key officer therein. The records show certification had no effect whatsoever.
that plaintiff had suggested that the ₱200,000.00 be deposited in his
bank, the Manila Banking Corporation, but Doronilla and Dumagpi The circumstance surrounding the opening of the current account also
insisted that it must be in defendant’s branch in Makati for "it will be demonstrate that Atienza’s active participation in the perpetration of
easier for them to get a certification". In fact before he was introduced the fraud and deception that caused the loss. The records indicate that
to plaintiff, Doronilla had already prepared a letter addressed to the this account was opened three days later after the ₱200,000.00 was
Buendia branch manager authorizing Angeles B. Sanchez and deposited. In spite of his disclaimer, the Court believes that Atienza
company to open a savings account for Sterela in the amount of was mindful and posted regarding the opening of the current account
₱200,000.00, as "per coordination with Mr. Rufo Atienza, Assistant considering that Doronilla was all the while in "coordination" with
Manager of the Bank x x x" (Exh. 1). This is a clear manifestation that him. That it was he who facilitated the approval of the authority to
the other defendants had been in consultation with Atienza from the debit the savings account to cover any overdrawings in the current
inception of the scheme. Significantly, there were testimonies and account (Exh. 2) is not hard to comprehend.
admission that Atienza is the brother-in-law of a certain Romeo
Mirasol, a friend and business associate of Doronilla.1awphi1.nét Clearly Atienza had committed wrongful acts that had resulted to the
loss subject of this case. x x x.31
Then there is the matter of the ownership of the fund. Because of the
"coordination" between Doronilla and Atienza, the latter knew before Under Article 2180 of the Civil Code, employers shall be held
hand that the money deposited did not belong to Doronilla nor to primarily and solidarily liable for damages caused by their employees
Sterela. Aside from such foreknowledge, he was explicitly told by acting within the scope of their assigned tasks. To hold the employer
Inocencia Vives that the money belonged to her and her husband and liable under this provision, it must be shown that an employer-
the deposit was merely to accommodate Doronilla. Atienza even employee relationship exists, and that the employee was acting within
declared that the money came from Mrs. Vives. the scope of his assigned task when the act complained of was
committed.32 Case law in the United States of America has it that a
Although the savings account was in the name of Sterela, the bank corporation that entrusts a general duty to its employee is responsible
records disclose that the only ones empowered to withdraw the same to the injured party for damages flowing from the employee’s
were Inocencia Vives and Angeles B. Sanchez. In the signature card wrongful act done in the course of his general authority, even though
pertaining to this account (Exh. J), the authorized signatories were in doing such act, the employee may have failed in its duty to the
Inocencia Vives &/or Angeles B. Sanchez. Atienza stated that it is the employer and disobeyed the latter’s instructions.33
usual banking procedure that withdrawals of savings deposits could
only be made by persons whose authorized signatures are in the There is no dispute that Atienza was an employee of petitioner.
signature cards on file with the bank. He, however, said that this Furthermore, petitioner did not deny that Atienza was acting within
procedure was not followed here because Sterela was owned by the scope of his authority as Assistant Branch Manager when he
Doronilla. He explained that Doronilla had the full authority to assisted Doronilla in withdrawing funds from Sterela’s Savings
withdraw by virtue of such ownership. The Court is not inclined to Account No. 10-1567, in which account private respondent’s money
agree with Atienza. In the first place, he was all the time aware that was deposited, and in transferring the money withdrawn to Sterela’s
the money came from Vives and did not belong to Sterela. He was Current Account with petitioner. Atienza’s acts of helping Doronilla,
also told by Mrs. Vives that they were only accommodating Doronilla a customer of the petitioner, were obviously done in furtherance of
so that a certification can be issued to the effect that Sterela had a petitioner’s interests34 even though in the process, Atienza violated
deposit of so much amount to be sued in the incorporation of the firm. some of petitioner’s rules such as those stipulated in its savings
In the second place, the signature of Doronilla was not authorized in account passbook.35 It was established that the transfer of funds from
so far as that account is concerned inasmuch as he had not signed the Sterela’s savings account to its current account could not have been
signature card provided by the bank whenever a deposit is opened. In accomplished by Doronilla without the invaluable assistance of
the third place, neither Mrs. Vives nor Sanchez had given Doronilla Atienza, and that it was their connivance which was the cause of
the authority to withdraw. private respondent’s loss.

Moreover, the transfer of fund was done without the passbook having The foregoing shows that the Court of Appeals correctly held that
been presented. It is an accepted practice that whenever a withdrawal under Article 2180 of the Civil Code, petitioner is liable for private
is made in a savings deposit, the bank requires the presentation of the respondent’s loss and is solidarily liable with Doronilla and Dumagpi
passbook. In this case, such recognized practice was dispensed with. for the return of the ₱200,000.00 since it is clear that petitioner failed
The transfer from the savings account to the current account was to prove that it exercised due diligence to prevent the unauthorized
without the submission of the passbook which Atienza had given to withdrawals from Sterela’s savings account, and that it was not
Mrs. Vives. Instead, it was made to appear in a certification signed by negligent in the selection and supervision of Atienza. Accordingly, no
Estrella Dumagpi that a duplicate passbook was issued to Sterela error was committed by the appellate court in the award of actual,
5

moral and exemplary damages, attorney’s fees and costs of suit to to him by his employer, as per diems and allowances. Similarly, as
private respondent. stated in the assailed decision of the lower court, “if the amount of the
cash advance he received is less than the amount he spent for actual
WHEREFORE, the petition is hereby DENIED. The assailed travel x x x he has the right to demand reimbursement from his
Decision and Resolution of the Court of Appeals are AFFIRMED.SO employer the amount he spent coming from his personal funds.” In
ORDERED. other words, the money advanced by either party is actually a loan to
the other. Hence, petitioner was under no legal obligation to return the
same cash or money, i.e., the bills or coins, which he received from
2. Yong Chan Kim vs. People the private respondent.

Courts; Due Process; Technicality, when it deserts its proper office, Same; Same; Same; Fiduciary relationship between the complainant
as an aid to justice and becomes its great hindrance and chief and the accused is an essential element of estafa by
enemy, deserves scant consideration from courts.—On 10 August misappropriation or conversion.—The ruling of the trial judge that
1990, we resolved to set aside out resolution dismissing this case and ownership of the cash advanced to the petitioner by private respondent
gave due course to the petition. In the said resolution, we stated: “In was not transferred to the latter is erroneous. Ownership of the money
several cases decided by this Court, it had set aside technicalities in was transferred to the petitioner. x x x Since ownership of the money
the Rules in order to give way to justice and equity. In the present (cash advance) was transferred to petitioner, no fiduciary relationship
case, we note that the petitioner, in filing his Notice of Appeal the was created. Absent this fiduciary relationship between petitioner and
very next day after receiving the decision of the court a quo, lost no private respondent, which is an essential element of the crime of
time in showing his intention to appeal, although the procedure taken estafa by misappropriation or conversion, petitioner could not have
was not correct. The Court can overlook the wrong pleading filed, if committed estafa.
strict compliance with the rules would mean sacrificing justice to
technicality, The imminence of a person being deprived unjustly of This petition seeks the review on certiorari of the following:
his liberty due to procedural lapse of counsel is a strong and
compelling reason to warrant suspension of the Rules. Hence, we shall 1. The decision dated 3 September 1986 of the 15th
consider the petition for review filed in the Court of Appeals as a Municipal Circuit Trial Court (Guimbal-Igbaras-Tigbauan-
Supplement to the Notice of Appeal. As the Court declared in a recent Tubungan) in Guimbal, Iloilo, in Criminal Case No. 628,1
decision, ‘x x x there is nothing sacred about the procedure of and the affirming decision of the Regional Trial Court,
pleadings. This Court may go beyond the pleadings when the interest Branch XXVIII, Iloilo City, in Criminal Case No. 20958,
of justice so warrants. It has the prerogative to suspend its rules for the promulgated on 30 July 1987;2
same purpose. x x x Technicality, when it deserts its proper office as
an aid to justice and becomes its great hindrance and chief enemy,
deserves scant consideration from courts. [Alonzo v. Villamor, et al., 2. The decision of the Court of Appeals, dated 29 April
16 Phil. 315]’ Conscience cannot rest in allowing a man to go straight 1988,3
to jail, closing the door to his every entreaty for a full opportunity to
be heard, even as he has made a prima facie showing of a meritorious dismissing petitioner's appeal/petition for review for having been filed
cause, simply because he had chosen an appeal route, to be sure, out of time, and the resolution, dated 19 August 1988, denying
recognized by law but made inapplicable to his case, under altered petitioner's motion for reconsideration.4
rules of procedure. While the Court of Appeals can not be faulted and,
in fact, it has to be lauded for correctly applying the rules of procedure The antecedent facts are as follows:
in appeals to the Court of Appeals from decisions of the RTC
rendered in the exercise of its appellate jurisdiction, yet, this Court, as Petitioner Yong Chan Kim was employed as a Researcher at the
the ultimate bulwark of human rights and individual liberty, will not Aquaculture Department of the Southeast Asian Fisheries
allow substantial justice to be sacrified at the altar of procedural Development Center (SEAFDEC) with head station at Tigbauan,
rigor.” Province of Iloilo. As Head of the Economics Unit of the Research
Division, he conducted prawn surveys which required him to travel to
Criminal Law; Estafa by Misappropriation or Conversion; Before a various selected provinces in the country where there are potentials
person can be convicted of estafa by misappropriation or for prawn culture.
conversion, it must be proven that he had the obligation to deliver or
return the same money, goods or personal property that he had On 15 June 1982, petitioner was issued Travel Order No. 2222 which
received.—In order that a person can be convicted under the covered his travels to different places in Luzon from 16 June to 21
abovequoted provision, it must be proven that he had the obligation to July 1982, a period of thirty five (35) days. Under this travel order, he
deliver or return the same money, goods or personal property that he received P6,438.00 as cash advance to defray his travel expenses.
had received. Was petitioner under obligation to return the same
money (cash advance) which he had received? We believe not.
Within the same period, petitioner was issued another travel order,
Executive Order No. 10, dated 12 February 1980 provides as follows:
T.O. 2268, requiring him to travel from the Head Station at Tigbauan,
“B. Cash Advance for Travel x x x x x x
Iloilo to Roxas City from 30 June to 4 July 1982, a period of five (5)
x x x “4. All cash advances must be liquidated within 30 days after
days. For this travel order, petitioner received a cash advance of
date of projected return of the person. Otherwise, corresponding
P495.00.
salary deduction shall be made immediately following the expiration
day.” Liquidation simply means the settling of an indebtedness. An
employee, such as herein petitioner, who liquidates a cash advance is On 14 January 1983, petitioner presented both travel orders for
in fact paying back his debt in the form of a loan of money advanced liquidation, submitting Travel Expense Reports to the Accounting
6

Section. When the Travel Expense Reports were audited, it was On 30 October 1987, petitioner filed with the appellate court a petition
discovered that there was an overlap of four (4) days (30 June to 3 for review. As earlier stated, on 29 April 1988, the Court of Appeals
July 1982) in the two (2) travel orders for which petitioner collected dismissed the petition for having been filed out of time. Petitioner's
per diems twice. In sum, the total amount in the form of per diems and motion for reconsideration was denied for lack of merit.
allowances charged and collected by petitioner under Travel Order
No. 2222, when he did not actually and physically travel as Hence, the present recourse.
represented by his liquidation papers, was P1,230.00.
On 19 October 1988, the Court resolved to require the respondents to
Petitioner was required to comment on the internal auditor's report comment on the petition for review. The Solicitor General filed his
regarding the alleged anomalous claim for per diems. In his reply, Comment on 20 January 1989, after several grants of extensions of
petitioner denied the alleged anomaly, claiming that he made make-up time to file the same.
trips to compensate for the trips he failed to undertake under T.O.
2222 because he was recalled to the head office and given another
In his Comment, the Solicitor General prayed for the dismissal of the
assignment.
instant petition on the ground that, as provided for under Section 22,
Batas Pambansa 129, Section 22 of the Interim Rules and Guidelines,
In September 1983, two (2) complaints for Estafa were filed against and Section 3, Rule 123 of the 1985 Rules of Criminal Procedure, the
the petitioner before the Municipal Circuit Trial Court at Guimbal, petitioner should have filed a petition for review with the then
Iloilo, docketed as Criminal Case Nos. 628 and 631. Intermediate Appellate Court instead of a notice of appeal with the
Regional Trial Court, in perfecting his appeal from the RTC to the
After trial in Criminal Case No. 628, the Municipal Circuit Trial Intermediate Appellate Court, since the RTC judge was rendered in
Court rendered a decision, the dispositive part of which reads as the exercise of its appellate jurisdiction over municipal trial courts.
follows: The failure of petitioner to file the proper petition rendered the
decision of the Regional Trial Court final and executory, according to
IN VIEW OF THE FOREGOING CONSIDERATIONS, the the Solicitor General.
court finds the accused, Yong Chan Kim, guilty beyond
reasonable doubt for the crime of Estafa penalized under Petitioner's counsel submitted a Reply (erroneously termed
paragraph l(b) of Article 315, Revised Penal Code. Records Comment)7 wherein she contended that the peculiar circumstances of
disclose there is no aggravating circumstance proven by the a case, such as this, should be considered in order that the principle
prosecution. Neither there is any mitigating circumstance barring a petitioner's right of review can be made flexible in the
proven by the accused. Considering the amount subject of the interest of justice and equity.
present complaint, the imposable penalty should be in the
medium period of arresto mayor in its maximum period to In our Resolution of 29 May 1989, we resolved to deny the petition
prision correccional in its minimum period in accordance for failure of petitioner to sufficiently show that the Court of Appeals
with Article 315, No. 3, Revised Penal Code. Consonantly, had committed any reversible error in its questioned judgment which
the Court hereby sentences the accused to suffer an had dismissed petitioner's petition for review for having been filed out
imprisonment ranging from four (4) months as the minimum of time.8
to one (1) year and six (6) months as the maximum in
accordance with the Indeterminate Sentence Law and to
Petitioner filed a motion for reconsideration maintaining that his
reimburse the amount of P1,230.00 to SEAFDEC.
petition for review did not limit itself to the issue upon which the
appellate court's decision of 29 April 1988 was based, but rather it
The surety bond of the accused shall remain valid until final delved into the substance and merits of the case.9
judgment in accordance herewith.
On 10 August 1990, we resolved to set aside our resolution dismissing
Costs against the accused.5 this case and gave due course to the petition. In the said resolution, we
stated:
Criminal Case No. 631 was subsequently dismissed for failure to
prosecute. In several cases decided by this Court, it had set aside
technicalities in the Rules in order to give way to justice and
Petitioner appealed from the decision of the Municipal Circuit Trial equity. In the present case, we note that the petitioner, in
Court in Criminal Case No. 628. On 30 July 1987, the Regional Trial filing his Notice of Appeal the very next day after receiving
Court in Iloilo City in Criminal Case No. 20958 affirmed in toto the the decision of the court a quo lost no time in showing his
trial court's decision.6 intention to appeal, although the procedure taken was not
correct. The Court can overlook the wrong pleading filed, if
The decision of the Regional Trial Court was received by petitioner strict compliance with the rules would mean sacrificing
on 10 August 1987. On 11 August 1987, petitioner, thru counsel, filed justice to technicality. The imminence of a person being
a notice of appeal with the Regional Trial Court which ordered the deprived unjustly of his liberty due to procedural lapse of
elevation of the records of the case to the then Intermediate Appellate counsel is a strong and compelling reason to warrant
Court on the following day, 12 August 1987. The records of the case suspension of the Rules. Hence, we shall consider the
were received by the Intermediate Appellate Court on 8 October 1987, petition for review filed in the Court of Appeals as a
and the appeal was docketed as CA-G.R. No. 05035. Supplement to the Notice of Appeal. As the Court declared
in a recent decision, '. . . there is nothing sacred about the
procedure of pleadings. This Court may go beyond the
7

pleadings when the interest of justice so warrants. It has the Art. 315. Swindling (Estafa). Any person who shall defraud
prerogative to suspend its rules for the same purpose. . . . another by any of the means mentioned herein below shall be
Technicality, when it deserts its proper office as an aid to punished by:
justice and becomes its great hindrance and chief enemy,
deserves scant consideration from courts. [Alonzo v. xxx xxx xxx
Villamor, et al., 16 Phil. 315]
1. With unfaithfulness or abuse of confidence, namely:
Conscience cannot rest in allowing a man to go straight to
jail, closing the door to his every entreaty for a full
(a) x x x xxx xxx
opportunity to be heard, even as he has made a prima facie
showing of a meritorious cause, simply because he had
chosen an appeal route, to be sure, recognized by law but (b) By misappropriating or converting, to the
made inapplicable to his case, under altered rules of prejudice of another, money, goods, or any other
procedure. While the Court of Appeals can not be faulted personal property received by the offender in trust
and, in fact, it has to be lauded for correctly applying the or on commission, or for administration, or under
rules of procedure in appeals to the Court of Appeals from any other obligation involving the duty to make
decisions of the RTC rendered in the exercise of its appellate delivery of; or to return, the same, even though such
jurisdiction, yet, this Court, as the ultimate bulwark of human obligation be fatally or partially guaranteed by a
rights and individual liberty, will not allow substantial justice bond; or by denying having received such money,
to be sacrified at the altar of procedural rigor.10 goods, or other property.

In the same resolution, the parties were required to file their respective In order that a person can be convicted under the abovequoted
memoranda, and in compliance with said resolution, petitioner filed provision, it must be proven that he had the obligation to deliver or
his memorandum on 25 October 1989, while private respondent return the same money, good or personal property that he had
SEAFDEC filed its required memorandum on 10 April 1990. On the received.11
other hand, the Solicitor General filed on 13 March 1990 a
Recommendation for Acquittal in lieu of the required memorandum. Was petitioner under obligation to return the same money (cash
advance) which he had received? We belive not. Executive Order No.
Two (2) issues are raised by petitioner to wit: 10, dated 12 February 1980 provides as follows:

I. WHETHER OR NOT THE DECISION (sic) OF THE B. Cash Advance for Travel
MUNICIPAL CIRCUIT TRIAL COURT (GUIMBAL,
ILOILO) AND THE REGIONAL TRIAL COURT, xxx xxx xxx
BRANCH 28 (ILOILO CITY) ARE SUPPORTED BY THE
FACTS AND EVIDENCE OR CONTRARY TO LAW 4. All cash advances must be liquidated within 30 days after
AND THAT THE TWO COURTS A QUO HAVE ACTED date of projected return of the person. Otherwise,
WITH GRAVE ABUSE OF DISCRETION AMOUNTING corresponding salary deduction shall be made immediately
TO LACK OF JURISDICTION OR HAVE ACTED following the expiration day.
WITHOUT OR IN EXCESS OF JURISDICTION.
Liquidation simply means the settling of an indebtedness. An
II. WHETHER OR NOT THE DECISION OF THE employee, such as herein petitioner, who liquidates a cash advance is
HONORABLE COURT OF APPEALS IS CONTRARY TO in fact paying back his debt in the form of a loan of money advanced
LAW, ESTABLISHED JURISPRUDENCE, EQUITY AND to him by his employer, as per diems and allowances. Similarly, as
DUE PROCESS. stated in the assailed decision of the lower court, "if the amount of the
cash advance he received is less than the amount he spent for actual
The second issue has been resolved in our Resolution dated 10 August travel . . . he has the right to demand reimbursement from his
1990, when we granted petitioner's second motion for reconsideration. employer the amount he spent coming from his personal funds.12 In
We shall now proceed to the first issue. other words, the money advanced by either party is actually a loan to
the other. Hence, petitioner was under no legal obligation to return the
We find merit in the petition. same cash or money, i.e., the bills or coins, which he received from
the private respondent.13
It is undisputed that petitioner received a cash advance from private
respondent SEAFDEC to defray his travel expenses under T.O. 2222. Article 1933 and Article 1953 of the Civil Code define the nature of a
It is likewise admitted that within the period covered by T.O. 2222, simple loan.
petitioner was recalled to the head station in Iloilo and given another
assignment which was covered by T.O. 2268. The dispute arose when Art. 1933. By the contract of loan, one of the parties delivers
petitioner allegedly failed to return P1,230.00 out of the cash advance to another, either something not consumable so that the latter
which he received under T.O. 2222. For the alleged failure of may use the same for a certain time and return it, in which
petitioner to return the amount of P1,230.00, he was charged with the case the contract is called a commodatum; or money or other
crime of Estafa under Article 315, par. 1(b) of the Revised Penal consumable thing, upon the condition that the same amount
Code, which reads as follows: of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
8

Commodatum is essentially gratuitous. WHEREFORE, the decision dated 3 September 1986 of the 15th
Municipal Circuit Trial Court in Guimbal, Iloilo in Criminal Case No.
Simple loan may be gratuitous or with a stipulation to pay 628, finding petitioner guilty of estafa under Article 315, par. 1 (b) of
interest. the Revised Penal Code and the affirming decision of the Regional
Trial Court, Branch XXVIII, Iloilo City, in Criminal Case No. 20958,
In commodatum the bailor retains the ownership of the thing promulgated on 30 July 1987 are both hereby SET ASIDE. Petitioner
is ACQUITTED of criminal charge filed against him.
loaned, while in simple loan, ownership passes to the
borrower.
SO ORDERED.
Art. 1953.— A person who receives a loan of money or any
other fungible thing acquires the ownership thereof, and is 3.NAGUIAT VS. COURT OF APPEALS
bound to pay to the creditor an equal amount of the same
kind and quality.
Remedial Law; Appeals; Under Rule 45 which governs appeal by
certiorari, only questions of law may be raised as the Supreme Court
The ruling of the trial judge that ownership of the cash advanced to is not a trier of facts.—The resolution of the issues presented before
the petitioner by private respondent was not transferred to the latter is this Court by Naguiat involves the determination of facts, a function
erroneous. Ownership of the money was transferred to the petitioner. which this Court does not exercise in an appeal by certiorari. Under
Even the prosecution witness, Virgilio Hierro, testified thus: Rule 45 which governs appeal by certiorari, only questions of law
may be raised as the Supreme Court is not a trier of facts. The
Q When you gave cash advance to the accused in this Travel resolution of factual issues is the function of lower courts, whose
Order No. 2222 subject to liquidation, who owns the funds, findings on these matters are received with respect and are in fact
accused or SEAFDEC? How do you consider the funds in the generally binding on the Supreme Court. A question of law which the
possession of the accused at the time when there is an actual Court may pass upon must not involve an examination of the
transfer of cash? . . . probative value of the evidence presented by the litigants. There is a
question of law in a given case when the doubt or difference arises as
A The one drawing cash advance already owns the money to what the law is on a certain state of facts; there is a question of fact
but subject to liquidation. If he will not liquidate, be is when the doubt or difference arises as to the truth or the falsehood of
obliged to return the amount. alleged facts.

Qxxx xxx xxx Evidence; Documents; The presumption of truthfulness engendered by


notarized documents is rebuttable, yielding as it does to clear and
So why do you treat the itinerary of travel temporary when in convincing evidence to the contrary.—Against the common finding of
fact as of that time the accused owned already the cash the courts below, Naguiat vigorously insists that Queaño received the
advance. You said the cash advance given to the accused is loan proceeds.
his own money. In other words, at the time you departed with
the money it belongs already to the accused? Capitalizing on the status of the mortgage deed as a public document,
she cites the rule that a public document enjoys the presumption of
A Yes, but subject for liquidation. He will be only entitled validity and truthfulness of its contents. The Court of Appeals,
for that credence if he liquidates. however, is correct in ruling that the presumption of truthfulness of
the recitals in a public document was defeated by the clear and
convincing evidence in this case that pointed to the absence of
Q If other words, it is a transfer of ownership subject to a
consideration. This Court has held that the presumption of truthfulness
suspensive condition that he liquidates the amount of cash
engendered by notarized documents is rebuttable, yielding as it does
advance upon return to station and completion of the travel?
to clear and convincing evidence to the contrary, as in this case.
A Yes, sir.
Civil Law; Estoppel; Court of Appeals is correct in invoking the said
rule on agency by estoppel.—The Court of Appeals recognized the
(pp. 26-28, tsn, May 8, 1985).14 existence of an “agency by estoppel” citing Article 1873 of the Civil
Code. Apparently, it considered that at the very least, as a
Since ownership of the money (cash advance) was transferred to consequence of the interaction between Naguiat and Ruebenfeldt,
petitioner, no fiduciary relationship was created. Absent this fiduciary Queaño got the impression that Ruebenfeldt was the agent of Naguiat,
relationship between petitioner and private respondent, which is an but Naguiat did nothing to correct Queaño’s impression. In that
essential element of the crime of estafa by misappropriation or situation, the rule is clear. One who clothes another with apparent
conversion, petitioner could not have committed estafa.15 authority as his agent, and holds him out to the public as such, cannot
be permitted to deny the authority of such person to act as his agent,
Additionally, it has been the policy of private respondent that all cash to the prejudice of innocent third parties dealing with such person in
advances not liquidated are to be deducted correspondingly from the good faith, and in the honest belief that he is what he appears to be.
salary of the employee concerned. The evidence shows that the The Court of Appeals is correct in invoking the said rule on agency by
corresponding salary deduction was made in the case of petitioner vis- estoppel.
a-vis the cash advance in question.
9

Same; Mortgages; A mortgage contract being a mere accessory Queaño told Naguiat that she did not receive the proceeds of the loan,
contract, its validity would depend on the validity of the loan secured adding that the checks were retained by Ruebenfeldt, who purportedly
by it.—All told, we find no compelling reason to disturb the finding of was Naguiat’s agent.7
the courts a quo that the lender did not remit and the borrower did not
receive the proceeds of the loan. That being the case, it follows that Naguiat applied for the extrajudicial foreclosure of the mortgage with
the mortgage which is supposed to secure the loan is null and void. the Sheriff of Rizal Province, who then scheduled the foreclosure sale
The consideration of the mortgage contract is the same as that of the on 14 August 1981. Three days before the scheduled sale, Queaño
principal contract from which it receives life, and without which it filed the case before the Pasay City RTC,8 seeking the annulment of
cannot exist as an independent contract. A mortgage contract being a the mortgage deed. The trial court eventually stopped the auction
mere accessory contract, its validity would depend on the validity of sale.9
the loan secured by it.
On 8 March 1991, the RTC rendered judgment, declaring the Deed of
Real Estate Mortgage null and void, and ordering Naguiat to return to
Queaño the owner’s duplicates of her titles to the mortgaged lots.10
Before us is a Petition for Review on Certiorari under Rule 45, Naguiat appealed the decision before the Court of Appeals, making no
assailing the decision of the Sixteenth Division of the respondent less than eleven assignments of error. The Court of Appeals
Court of Appeals promulgated on 21 December 19941 , which promulgated the decision now assailed before us that affirmed in toto
affirmed in toto the decision handed down by the Regional Trial Court the RTC decision. Hence, the present petition.
(RTC) of Pasay City.2
Naguiat questions the findings of facts made by the Court of Appeals,
The case arose when on 11 August 1981, private respondent Aurora especially on the issue of whether Queaño had actually received the
Queaño (Queaño) filed a complaint before the Pasay City RTC for loan proceeds which were supposed to be covered by the two checks
cancellation of a Real Estate Mortgage she had entered into with Naguiat had issued or indorsed. Naguiat claims that being a notarial
petitioner Celestina Naguiat (Naguiat). The RTC rendered a decision, instrument or public document, the mortgage deed enjoys the
declaring the questioned Real Estate Mortgage void, which Naguiat presumption that the recitals therein are true. Naguiat also questions
appealed to the Court of Appeals. After the Court of Appeals upheld the admissibility of various representations and pronouncements of
the RTC decision, Naguiat instituted the present petition.1ªvvphi1.nét Ruebenfeldt, invoking the rule on the non-binding effect of the
admissions of third persons.11
The operative facts follow:
The resolution of the issues presented before this Court by Naguiat
Queaño applied with Naguiat for a loan in the amount of Two involves the determination of facts, a function which this Court does
Hundred Thousand Pesos (₱200,000.00), which Naguiat granted. On not exercise in an appeal by certiorari. Under Rule 45 which governs
11 August 1980, Naguiat indorsed to Queaño Associated Bank Check appeal by certiorari, only questions of law may be raised12 as the
No. 090990 (dated 11 August 1980) for the amount of Ninety Five Supreme Court is not a trier of facts.13 The resolution of factual
Thousand Pesos (₱95,000.00), which was earlier issued to Naguiat by issues is the function of lower courts, whose findings on these matters
the Corporate Resources Financing Corporation. She also issued her are received with respect and are in fact generally binding on the
own Filmanbank Check No. 065314, to the order of Queaño, also Supreme Court.14 A question of law which the Court may pass upon
dated 11 August 1980 and for the amount of Ninety Five Thousand must not involve an examination of the probative value of the
Pesos (₱95,000.00). The proceeds of these checks were to constitute evidence presented by the litigants.15 There is a question of law in a
the loan granted by Naguiat to Queaño.3 given case when the doubt or difference arises as to what the law is on
a certain state of facts; there is a question of fact when the doubt or
To secure the loan, Queaño executed a Deed of Real Estate Mortgage difference arises as to the truth or the falsehood of alleged facts.16
dated 11 August 1980 in favor of Naguiat, and surrendered to the
latter the owner’s duplicates of the titles covering the mortgaged Surely, there are established exceptions to the rule on the
properties.4 On the same day, the mortgage deed was notarized, and conclusiveness of the findings of facts of the lower courts.17 But
Queaño issued to Naguiat a promissory note for the amount of TWO Naguiat’s case does not fall under any of the exceptions. In any event,
HUNDRED THOUSAND PESOS (₱200,000.00), with interest at both the decisions of the appellate and trial courts are supported by the
12% per annum, payable on 11 September 1980.5 Queaño also issued evidence on record and the applicable laws.
a Security Bank and Trust Company check, postdated 11 September
1980, for the amount of TWO HUNDRED THOUSAND PESOS Against the common finding of the courts below, Naguiat vigorously
(₱200,000.00) and payable to the order of Naguiat. insists that Queaño received the loan proceeds. Capitalizing on the
status of the mortgage deed as a public document, she cites the rule
Upon presentment on its maturity date, the Security Bank check was that a public document enjoys the presumption of validity and
dishonored for insufficiency of funds. On the following day, 12 truthfulness of its contents. The Court of Appeals, however, is correct
September 1980, Queaño requested Security Bank to stop payment of in ruling that the presumption of truthfulness of the recitals in a public
her postdated check, but the bank rejected the request pursuant to its document was defeated by the clear and convincing evidence in this
policy not to honor such requests if the check is drawn against case that pointed to the absence of consideration.18 This Court has
insufficient funds.6 held that the presumption of truthfulness engendered by notarized
documents is rebuttable, yielding as it does to clear and convincing
evidence to the contrary, as in this case.19
On 16 October 1980, Queaño received a letter from Naguiat’s lawyer,
demanding settlement of the loan. Shortly thereafter, Queaño and one
Ruby Ruebenfeldt (Ruebenfeldt) met with Naguiat. At the meeting,
10

On the other hand, absolutely no evidence was submitted by Naguiat More fundamentally, whatever was the true relationship between
that the checks she issued or endorsed were actually encashed or Naguiat and Ruebenfeldt is irrelevant in the face of the fact that the
deposited. The mere issuance of the checks did not result in the checks issued or indorsed to Queaño were never encashed or
perfection of the contract of loan. For the Civil Code provides that the deposited to her account of Naguiat.
delivery of bills of exchange and mercantile documents such as
checks shall produce the effect of payment only when they have been All told, we find no compelling reason to disturb the finding of the
cashed.20 It is only after the checks have produced the effect of courts a quo that the lender did not remit and the borrower did not
payment that the contract of loan may be deemed perfected. Art. 1934 receive the proceeds of the loan. That being the case, it follows that
of the Civil Code provides: the mortgage which is supposed to secure the loan is null and void.
The consideration of the mortgage contract is the same as that of the
"An accepted promise to deliver something by way of commodatum principal contract from which it receives life, and without which it
or simple loan is binding upon the parties, but the commodatum or cannot exist as an independent contract.28 A mortgage contract being
simple loan itself shall not be perfected until the delivery of the object a mere accessory contract, its validity would depend on the validity of
of the contract." the loan secured by it.29

A loan contract is a real contract, not consensual, and, as such, is WHEREFORE, the petition is denied and the assailed decision is
perfected only upon the delivery of the object of the contract.21 In affirmed. Costs against petitioner.
this case, the objects of the contract are the loan proceeds which
Queaño would enjoy only upon the encashment of the checks signed SO ORDERED.
or indorsed by Naguiat. If indeed the checks were encashed or
deposited, Naguiat would have certainly presented the corresponding
documentary evidence, such as the returned checks and the pertinent 4.BPI INVESTMENT CORPORATION
bank records. Since Naguiat presented no such proof, it follows that
the checks were not encashed or credited to Queaño’s
VS. CA
account.1awphi1.nét
Obligations and Contracts; Loans; A loan contract is not a
Naguiat questions the admissibility of the various written consensual contract but a real contract, perfected only upon the
representations made by Ruebenfeldt on the ground that they could delivery of the object of the contract.—We agree with private
not bind her following the res inter alia acta alteri nocere non debet respondents. A loan contract is not a consensual contract but a real
rule. The Court of Appeals rejected the argument, holding that since contract. It is perfected only upon the delivery of the object of the
Ruebenfeldt was an authorized representative or agent of Naguiat the contract. Petitioner misapplied Bonnevie. The contract in Bonnevie
situation falls under a recognized exception to the rule.22 Still, declared by this Court as a perfected consensual contract falls under
Naguiat insists that Ruebenfeldt was not her agent. the first clause of Article 1934, Civil Code. It is an accepted promise
to deliver something by way of simple loan.
Suffice to say, however, the existence of an agency relationship
between Naguiat and Ruebenfeldt is supported by ample evidence. As Same; Same; While a perfected loan contract can give rise to an
correctly pointed out by the Court of Appeals, Ruebenfeldt was not a action for damages, said contract does not constitute the real contract
stranger or an unauthorized person. Naguiat instructed Ruebenfeldt to of loan which requires the delivery of the object of the contract for its
withhold from Queaño the checks she issued or indorsed to Queaño, perfection and which gives rise to obligations only on the part of the
pending delivery by the latter of additional collateral. Ruebenfeldt borrower.—In Saura Import and Export Co. Inc. vs. Development
served as agent of Naguiat on the loan application of Queaño’s friend, Bank of the Philippines, 44 SCRA 445, petitioner applied for a loan of
Marilou Farralese, and it was in connection with that transaction that P500,000 with respondent bank. The latter approved the application
Queaño came to know Naguiat.23 It was also Ruebenfeldt who through a board resolution. Thereafter, the corresponding mortgage
accompanied Queaño in her meeting with Naguiat and on that was executed and registered. However, because of acts attributable to
occasion, on her own and without Queaño asking for it, Reubenfeldt petitioner, the loan was not released. Later, petitioner instituted an
actually drew a check for the sum of ₱220,000.00 payable to Naguiat, action for damages. We recognized in this case, a perfected
to cover for Queaño’s alleged liability to Naguiat under the loan consensual contract which under normal circumstances could have
agreement.24 made the bank liable for not releasing the loan. However, since the
fault was attributable to petitioner therein, the court did not award it
damages. A perfected consensual contract, as shown above, can give
The Court of Appeals recognized the existence of an "agency by rise to an action for damages. However, said contract does not
estoppel25 citing Article 1873 of the Civil Code.26 Apparently, it constitute the real contract of loan which requires the delivery of the
considered that at the very least, as a consequence of the interaction object of the contract for its perfection and which gives rise to
between Naguiat and Ruebenfeldt, Queaño got the impression that obligations only on the part of the borrower.
Ruebenfeldt was the agent of Naguiat, but Naguiat did nothing to
correct Queaño’s impression. In that situation, the rule is clear. One
who clothes another with apparent authority as his agent, and holds Same; Same; A contract of loan involves a reciprocal obligation,
him out to the public as such, cannot be permitted to deny the wherein the obligation or promise of each party is the consideration
authority of such person to act as his agent, to the prejudice of for that of the other; It is a basic principle in reciprocal obligations
innocent third parties dealing with such person in good faith, and in that neither party incurs in delay, if the other does not comply or is
the honest belief that he is what he appears to be.27 The Court of not ready to comply in a proper manner with what is incumbent upon
Appeals is correct in invoking the said rule on agency by him.—We also agree with private respondents that a contract of loan
estoppel.1awphi1.nét involves a reciprocal
11

obligation, wherein the obligation or promise of each party is the Case No. 11831, for foreclosure of mortgage by petitioner BPI
consideration for that of the other. As averred by private respondents, Investment Corporation (BPIIC for brevity) against private
the promise of BPIIC to extend and deliver the loan is upon the respondents ALS Management and Development Corporation and
consideration that ALS and Litonjua shall pay the monthly Antonio K. Litonjua,1 consolidated with (b) Civil Case No. 52093, for
amortization commencing on May 1, 1981, one month after the damages with prayer for the issuance of a writ of preliminary
supposed release of the loan. It is a basic principle in reciprocal injunction by the private respondents against said petitioner.
obligations that neither party incurs in delay, if the other does not
comply or is not ready to comply in a proper manner with what is The trial court had held that private respondents were not in default in
incumbent upon him. Only when a party has performed his part of the the payment of their monthly amortization, hence, the extrajudicial
contract can he demand that the other party also fulfills his own foreclosure conducted by BPIIC was premature and made in bad faith.
obligation and if the latter fails, default sets in. Consequently, It awarded private respondents the amount of ₱300,000 for moral
petitioner could only demand for the payment of the monthly damages, ₱50,000 for exemplary damages, and ₱50,000 for attorney’s
amortization after September 13, 1982 for it was only then when it fees and expenses for litigation. It likewise dismissed the foreclosure
complied with its obligation under the loan contract. Therefore, in suit for being premature.
computing the amount due as of the date when BPIIC extrajudicially
caused the foreclosure of the mortgage, the starting date is October
The facts are as follows:
13, 1982 and not May 1, 1981.
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum
Same; Same; Foreclosure of Mortgage; Damages; Where the
from Ayala Investment and Development Corporation (AIDC), the
borrower was irregular in the payment of its monthly amortization, it
predecessor of petitioner BPIIC, for the construction of a house on his
may not claim moral and exemplary damages due to the erroneous lot in New Alabang Village, Muntinlupa. Said house and lot were
foreclosure proceedings initiated by the creditor-mortgagor.—Private mortgaged to AIDC to secure the loan. Sometime in 1980, Roa sold
respondents counter that BPIIC was guilty of bad faith and should be
the house and lot to private respondents ALS and Antonio Litonjua
liable for said damages because it insisted on the payment of
for ₱850,000. They paid ₱350,000 in cash and assumed the ₱500,000
amortization on the loan even before it was released. Further, it did
balance of Roa’s indebtedness with AIDC. The latter, however, was
not make the corresponding deduction in the monthly amortization to
not willing to extend the old interest rate to private respondents and
conform to the actual amount of loan released, and it immediately proposed to grant them a new loan of ₱500,000 to be applied to Roa’s
initiated foreclosure proceedings when private respondents failed to debt and secured by the same property, at an interest rate of 20% per
make timely payment. But as admitted by private respondents
annum and service fee of 1% per annum on the outstanding principal
themselves, they were irregular in their payment of monthly
balance payable within ten years in equal monthly amortization of
amortization. Conformably with our ruling in SSS, we can not
₱9,996.58 and penalty interest at the rate of 21% per annum per day
properly declare BPIIC in bad faith. Consequently, we should rule out
from the date the amortization became due and payable.
the award of moral and exemplary damages.
Consequently, in March 1981, private respondents executed a
Same; Same; Same; Same; The negligence of the creditor-mortgagor
mortgage deed containing the above stipulations with the provision
in relying merely on the entries found in the deed of mortgage,
that payment of the monthly amortization shall commence on May 1,
without checking and correspondingly adjusting its records on the
1981.
amount actually released to the borrower and the date when it was
released, which negligence resulted in damages to the latter, entitles
the borrower to an award of nominal damages in recognition of its On August 13, 1982, ALS and Litonjua updated Roa’s arrearages by
rights which were violated.—In our view, BPIIC was negligent in paying BPIIC the sum of ₱190,601.35. This reduced Roa’s principal
relying merely on the entries found in the deed of mortgage, without balance to ₱457,204.90 which, in turn, was liquidated when BPIIC
checking and correspondingly adjusting its records on the amount applied thereto the proceeds of private respondents’ loan of ₱500,000.
actually released to private respondents and the date when it was
released. Such negligence resulted in damage to private respondents, On September 13, 1982, BPIIC released to private respondents
for which an award of nominal damages should be given in ₱7,146.87, purporting to be what was left of their loan after full
payment of Roa’s loan.
recognition of their rights which were violated by BPIIC. For this
purpose, the amount of P25,000 is sufficient. In June 1984, BPIIC instituted foreclosure proceedings against private
respondents on the ground that they failed to pay the mortgage
Same; Same; Same; Same; Attorney’s Fees; An award of attorney’s indebtedness which from May 1, 1981 to June 30, 1984, amounted to
fees is warranted where a party was compelled to litigate.—As in SSS Four Hundred Seventy Five Thousand Five Hundred Eighty Five and
where we awarded attorney’s fees because private respondents were 31/100 Pesos (₱475,585.31). A notice of sheriff’s sale was published
compelled to litigate, we sustain the award of P50,000 in favor of on August 13, 1984.
private respondents as attorney’s fees.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093
QUISUMBING, J.: against BPIIC. They alleged, among others, that they were not in
arrears in their payment, but in fact made an overpayment as of June
30, 1984. They maintained that they should not be made to pay
This petition for certiorari assails the decision dated February 28,
amortization before the actual release of the ₱500,000 loan in August
1997, of the Court of Appeals and its resolution dated April 21, 1998,
and September 1982. Further, out of the ₱500,000 loan, only the total
in CA-G.R. CV No. 38887. The appellate court affirmed the judgment
amount of ₱464,351.77 was released to private respondents. Hence,
of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil
12

applying the effects of legal compensation, the balance of ₱35,648.23 The motion for reconsideration filed by petitioner BPIIC was likewise
should be applied to the initial monthly amortization for the loan. denied, hence this petition, where BPIIC submits for resolution the
following issues:
On August 31, 1988, the trial court rendered its judgment in Civil
Case Nos. 11831 and 52093, thus: I. WHETHER OR NOT A CONTRACT OF LOAN IS A
CONSENSUAL CONTRACT IN THE LIGHT OF THE
WHEREFORE, judgment is hereby rendered in favor of ALS RULE LAID DOWN IN BONNEVIE VS. COURT OF
Management and Development Corporation and Antonio K. Litonjua APPEALS, 125 SCRA 122.
and against BPI Investment Corporation, holding that the amount of
loan granted by BPI to ALS and Litonjua was only in the principal II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE
sum of P464,351.77, with interest at 20% plus service charge of 1% FOR MORAL AND EXEMPLARY DAMAGES AND
per annum, payable on equal monthly and successive amortizations at ATTORNEY’S FEES IN THE FACE OF IRREGULAR
P9,283.83 for ten (10) years or one hundred twenty (120) months. The PAYMENTS MADE BY ALS AND OPPOSED TO THE
amortization schedule attached as Annex "A" to the "Deed of RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS.
Mortgage" is correspondingly reformed as aforestated. COURT OF APPEALS, 120 SCRA 707.

The Court further finds that ALS and Litonjua suffered compensable On the first issue, petitioner contends that the Court of Appeals erred
damages when BPI caused their publication in a newspaper of general in ruling that because a simple loan is perfected upon the delivery of
circulation as defaulting debtors, and therefore orders BPI to pay ALS the object of the contract, the loan contract in this case was perfected
and Litonjua the following sums: only on September 13, 1982. Petitioner claims that a contract of loan
a) P300,000.00 for and as moral damages; is a consensual contract, and a loan contract is perfected at the time
the contract of mortgage is executed conformably with our ruling in
b) P50,000.00 as and for exemplary damages; Bonnevie v. Court of Appeals, 125 SCRA 122. In the present case, the
loan contract was perfected on March 31, 1981, the date when the
mortgage deed was executed, hence, the amortization and interests on
c) P50,000.00 as and for attorney’s fees and expenses of
litigation. the loan should be computed from said date.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED
for being premature. Petitioner also argues that while the documents showed that the loan
was released only on August 1982, the loan was actually released on
March 31, 1981, when BPIIC issued a cancellation of mortgage of
Costs against BPI.
Frank Roa’s loan. This finds support in the registration on March 31,
1981 of the Deed of Absolute Sale executed by Roa in favor of ALS,
SO ORDERED.2 transferring the title of the property to ALS, and ALS executing the
Mortgage Deed in favor of BPIIC. Moreover, petitioner claims, the
Both parties appealed to the Court of Appeals. However, private delay in the release of the loan should be attributed to private
respondents’ appeal was dismissed for non-payment of docket fees. respondents. As BPIIC only agreed to extend a ₱500,000 loan, private
respondents were required to reduce Frank Roa’s loan below said
On February 28, 1997, the Court of Appeals promulgated its decision, amount. According to petitioner, private respondents were only able
the dispositive portion reads: to do so in August 1982.

WHEREFORE, finding no error in the appealed decision the same is In their comment, private respondents assert that based on Article
hereby AFFIRMED in toto. 1934 of the Civil Code,4 a simple loan is perfected upon the delivery
of the object of the contract, hence a real contract. In this case, even
SO ORDERED.3 though the loan contract was signed on March 31, 1981, it was
perfected only on September 13, 1982, when the full loan was
released to private respondents. They submit that petitioner misread
In its decision, the Court of Appeals reasoned that a simple loan is
Bonnevie. To give meaning to Article 1934, according to private
perfected only upon the delivery of the object of the contract. The
respondents, Bonnevie must be construed to mean that the contract to
contract of loan between BPIIC and ALS & Litonjua was perfected
extend the loan was perfected on March 31, 1981 but the contract of
only on September 13, 1982, the date when BPIIC released the
loan itself was only perfected upon the delivery of the full loan to
purported balance of the ₱500,000 loan after deducting therefrom the
private respondents on September 13, 1982.
value of Roa’s indebtedness. Thus, payment of the monthly
amortization should commence only a month after the said date, as
can be inferred from the stipulations in the contract. This, despite the Private respondents further maintain that even granting, arguendo,
express agreement of the parties that payment shall commence on that the loan contract was perfected on March 31, 1981, and their
May 1, 1981. From October 1982 to June 1984, the total amortization payment did not start a month thereafter, still no default took place.
due was only ₱194,960.43. Evidence showed that private respondents According to private respondents, a perfected loan agreement imposes
had an overpayment, because as of June 1984, they already paid a reciprocal obligations, where the obligation or promise of each party
total amount of ₱201,791.96. Therefore, there was no basis for BPIIC is the consideration of the other party. In this case, the consideration
to extrajudicially foreclose the mortgage and cause the publication in for BPIIC in entering into the loan contract is the promise of private
newspapers concerning private respondents’ delinquency in the respondents to pay the monthly amortization. For the latter, it is the
payment of their loan. This fact constituted sufficient ground for promise of BPIIC to deliver the money. In reciprocal obligations,
moral damages in favor of private respondents. neither party incurs in delay if the other does not comply or is not
13

ready to comply in a proper manner with what is incumbent upon him. factual. Since petitioner has not shown that the instant case is one of
Therefore, private respondents conclude, they did not incur in delay the exceptions to the basic rule that only questions of law can be
when they did not commence paying the monthly amortization on raised in a petition for review under Rule 45 of the Rules of Court,10
May 1, 1981, as it was only on September 13, 1982 when petitioner factual matters need not tarry us now. On these points we are bound
fully complied with its obligation under the loan contract. by the findings of the appellate and trial courts.

We agree with private respondents. A loan contract is not a On the second issue, petitioner claims that it should not be held liable
consensual contract but a real contract. It is perfected only upon the for moral and exemplary damages for it did not act maliciously when
delivery of the object of the contract.5 Petitioner misapplied it initiated the foreclosure proceedings. It merely exercised its right
Bonnevie. The contract in Bonnevie declared by this Court as a under the mortgage contract because private respondents were
perfected consensual contract falls under the first clause of Article irregular in their monthly amortization.1âwphi1 It invoked our ruling
1934, Civil Code. It is an accepted promise to deliver something by in Social Security System vs. Court of Appeals, 120 SCRA 707, where
way of simple loan. we said:

In Saura Import and Export Co. Inc. vs. Development Bank of the Nor can the SSS be held liable for moral and temperate damages. As
Philippines, 44 SCRA 445, petitioner applied for a loan of ₱500,000 concluded by the Court of Appeals "the negligence of the appellant is
with respondent bank. The latter approved the application through a not so gross as to warrant moral and temperate damages," except that,
board resolution. Thereafter, the corresponding mortgage was said Court reduced those damages by only P5,000.00 instead of
executed and registered. However, because of acts attributable to eliminating them. Neither can we agree with the findings of both the
petitioner, the loan was not released. Later, petitioner instituted an Trial Court and respondent Court that the SSS had acted maliciously
action for damages. We recognized in this case, a perfected or in bad faith. The SSS was of the belief that it was acting in the
consensual contract which under normal circumstances could have legitimate exercise of its right under the mortgage contract in the face
made the bank liable for not releasing the loan. However, since the of irregular payments made by private respondents and placed
fault was attributable to petitioner therein, the court did not award it reliance on the automatic acceleration clause in the contract. The
damages. filing alone of the foreclosure application should not be a ground for
an award of moral damages in the same way that a clearly unfounded
A perfected consensual contract, as shown above, can give rise to an civil action is not among the grounds for moral damages.
action for damages. However, said contract does not constitute the
real contract of loan which requires the delivery of the object of the Private respondents counter that BPIIC was guilty of bad faith and
contract for its perfection and which gives rise to obligations only on should be liable for said damages because it insisted on the payment
the part of the borrower.6 of amortization on the loan even before it was released. Further, it did
not make the corresponding deduction in the monthly amortization to
In the present case, the loan contract between BPI, on the one hand, conform to the actual amount of loan released, and it immediately
and ALS and Litonjua, on the other, was perfected only on September initiated foreclosure proceedings when private respondents failed to
13, 1982, the date of the second release of the loan. Following the make timely payment.
intentions of the parties on the commencement of the monthly
amortization, as found by the Court of Appeals, private respondents’ But as admitted by private respondents themselves, they were
obligation to pay commenced only on October 13, 1982, a month after irregular in their payment of monthly amortization. Conformably with
the perfection of the contract.7 our ruling in SSS, we can not properly declare BPIIC in bad faith.
Consequently, we should rule out the award of moral and exemplary
We also agree with private respondents that a contract of loan damages.11
involves a reciprocal obligation, wherein the obligation or promise of
each party is the consideration for that of the other.8 As averred by However, in our view, BPIIC was negligent in relying merely on the
private respondents, the promise of BPIIC to extend and deliver the entries found in the deed of mortgage, without checking and
loan is upon the consideration that ALS and Litonjua shall pay the correspondingly adjusting its records on the amount actually released
monthly amortization commencing on May 1, 1981, one month after to private respondents and the date when it was released. Such
the supposed release of the loan. It is a basic principle in reciprocal negligence resulted in damage to private respondents, for which an
obligations that neither party incurs in delay, if the other does not award of nominal damages should be given in recognition of their
comply or is not ready to comply in a proper manner with what is rights which were violated by BPIIC.12 For this purpose, the amount
incumbent upon him.9 Only when a party has performed his part of of ₱25,000 is sufficient.
the contract can he demand that the other party also fulfills his own
obligation and if the latter fails, default sets in. Consequently, Lastly, as in SSS where we awarded attorney’s fees because private
petitioner could only demand for the payment of the monthly respondents were compelled to litigate, we sustain the award of
amortization after September 13, 1982 for it was only then when it ₱50,000 in favor of private respondents as attorney’s fees.
complied with its obligation under the loan contract. Therefore, in
computing the amount due as of the date when BPIIC extrajudicially
WHEREFORE, the decision dated February 28, 1997, of the Court
caused the foreclosure of the mortgage, the starting date is October
of Appeals and its resolution dated April 21, 1998, are AFFIRMED
13, 1982 and not May 1, 1981. WITH MODIFICATION as to the award of damages. The award of
moral and exemplary damages in favor of private respondents is
Other points raised by petitioner in connection with the first issue, DELETED, but the award to them of attorney’s fees in the amount of
such as the date of actual release of the loan and whether private ₱50,000 is UPHELD. Additionally, petitioner is ORDERED to pay
respondents were the cause of the delay in the release of the loan, are
14

private respondents ₱25,000 as nominal damages. Costs against the Court of Appeals granted the 30-day extension to Guevarra. The
petitioner.SO ORDERED. Court of Appeals did not commit grave abuse of discretion when it
approved Guevarra’s motion for extension. The Court of Appeals
gave due course to the motion for extension because it complied with
5.Pajuyo vs. Court of Appeals the condition set by the appellate court in its resolution dated 28
January 1997. The resolution stated that the Court of Appeals would
Actions; Appeals; Pleadings and Practice; Decisions of regional trial only give due course to the motion for extension if filed on time. The
courts in the exercise of their appellate jurisdiction are appealable to motion for extension met this condition. The material dates to
the Court of Appeals by petition for review in cases involving consider in determining the timeliness of the filing of the motion for
questions of fact or mixed questions of fact and law while their extension are (1) the date of receipt of the judgment or final order or
decisions involving pure questions of law are appealable directly to resolution subject of the petition, and (2) the date of filing of the
the Supreme Court.—Decisions of the regional trial courts in the motion for extension. It is the date of the filing of the motion or
exercise of their appellate jurisdiction are appealable to the Court of pleading, and not the date of execution, that determines the timeliness
Appeals by petition for review in cases involving questions of fact or of the filing of that motion or pleading. Thus, even if the motion for
mixed questions of fact and law. Decisions of the regional trial courts extension bears no date, the date of filing stamped on it is the
involving pure questions of law are appealable directly to this Court reckoning point for determining the timeliness of its filing.
by petition for review. These modes of appeal are now embodied in
Section 2, Rule 41 of the 1997 Rules of Civil Procedure. Same; Same; Same; Same; Estoppel; Estoppel sets in not because the
judgment of the court is a valid and conclusive adjudication but
Same; Same; Questions of Law and Questions of Fact; Words and because the practice of attacking the court’s jurisdiction after
Phrases; There is a question of law when the doubt or difference is on voluntarily submitting to it is against public policy.—Assuming that
what the law is on a certain state of facts and there is a question of the Court of Appeals should have dismissed Guevarra’s appeal on
fact when the doubt or difference is on the truth or falsity of the facts technical grounds, Pajuyo did not ask the appellate court to deny the
alleged.—Guevarra believed that his appeal of the RTC decision motion for extension and dismiss the petition for review at the earliest
involved only questions of law. Guevarra thus filed his motion for opportunity. Instead, Pajuyo vigorously discussed the merits of the
extension to file petition for review before this Court on 14 December case. It was only when the Court of Appeals ruled in Guevarra’s favor
1996. On 3 January 1997, Guevarra then filed his petition for review that Pajuyo raised the procedural issues against Guevarra’s petition
with this Court. A perusal of Guevarra’s petition for review gives the for review. A party, who, after voluntarily submitting a dispute for
impression that the issues he raised were resolution, receives an adverse decision on the merits, is estopped
from attacking the jurisdiction of the court. Estoppel sets in not
because the judgment of the court is a valid and conclusive
pure questions of law. There is a question of law when the doubt or
adjudication, but because the practice of attacking the court’s
difference is on what the law is on a certain state of facts. There is a
jurisdiction after voluntarily submitting to it is against public policy.
question of fact when the doubt or difference is on the truth or falsity
of the facts alleged.
Same; Certification of Non-Forum Shopping; Verification; Pleadings
and Practice; A party’s failure to sign the certification against forum
Same; Same; The Court of Appeals has the power to grant an
shopping is different from the party’s failure to sign personally the
extension of time to file a petition for review—the prohibition against
verification; A party’s representative, lawyer or any person who
granting an extension of time applies only in a case where ordinary
personally knows the truth of the facts alleged in the pleading may
appeal is perfected by a mere notice of appeal.—The Court of
sign the verification.—A party’s failure to sign the certification
Appeals has the power to grant an extension of time to file a petition
against forum shopping is different from the party’s failure to sign
for review. In Lacsamana v. Second Special Cases Division of the
personally the verification. The certificate of non-forum shopping
Intermediate Appellate Court, we declared that the Court of Appeals
must be signed by the party, and not by counsel. The certification of
could grant extension of time in appeals by petition for review. In
counsel renders the petition defective. On the other hand, the
Liboro v. Court of Appeals, we clarified that the prohibition against
requirement on verification of a pleading is a formal and not a
granting an extension of time applies only in a case where ordinary
jurisdictional requisite. It is intended simply to secure an assurance
appeal is perfected by a mere notice of appeal. The prohibition does
that what are alleged in the pleading are true and correct and not the
not apply in a petition for review where the pleading needs
product of the imagination or a matter of speculation, and that the
verification. A petition for review, unlike an ordinary appeal, requires
pleading is filed in good faith. The party need not sign the
preparation and research to present a persuasive position. The drafting
verification. A party’s representative, lawyer or any person who
of the petition for review entails more time and effort than filing a
personally knows the truth of the facts alleged in the pleading may
notice of appeal. Hence, the Court of Appeals may allow an extension
sign the verification.
of time to file a petition for review.

Same; Ejectment; Ownership; The defendant’s claim of ownership of


Same; Same; Judgments; Pleadings and Practice; A judgment
the disputed property does not divest the inferior court of its
becomes “final and executory” by operation of law; The material
jurisdiction over an ejectment case.—Settled is the rule that the
dates to consider in determining the timeliness of the filing of the
defendant’s claim of ownership of the disputed property will not
motion for extension are (1) the date of receipt of the judgment or
divest the inferior court of its jurisdiction over the ejectment case.
final order or resolution subject of the petition, and (2) the date of
Even if the pleadings raise the issue of ownership, the court may pass
filing of the motion for extension.—A judgment becomes “final and
on such issue to determine only the question of possession, especially
executory” by operation of law. Finality of judgment becomes a fact
if the ownership is inseparably linked with the possession. The
on the lapse of the reglementary period to appeal if no appeal is
adjudication on the issue of ownership is only provisional and will not
perfected. The RTC decision could not have gained finality because
bar an action between the same parties involving title to the land. This
15

doctrine is a necessary consequence of the nature of the two summary possession of the lot that the latter had illegally occupied, emboldened
actions of ejectment, forcible entry and unlawful detainer, where the by the knowledge that the courts would leave them where they are.
only issue for adjudication is the physical or material possession over Nothing would then stand in the way of the ousted squatter from re-
the real property. claiming his prior possession at all cost. Petty warfare over possession
of properties is precisely what ejectment cases or actions for recovery
Same; Same; Same; The absence of title over a contested lot is not a of possession seek to prevent. Even the owner who has title over the
ground for the courts to withhold relief from the parties in an disputed property cannot take the law into his own hands to regain
ejectment case.—Ownership or the right to possess arising from possession of his property. The owner must go to court. Courts must
ownership is not at issue in an action for recovery of possession. The resolve the issue of possession even if the parties to the ejectment suit
parties cannot present evidence to prove ownership or right to legal are squatters. The determination of priority and superiority of
possession except to prove the nature of the possession when possession is a serious and urgent matter that cannot be left to the
necessary to resolve the issue of physical possession. The same is true squatters to decide. To do so would make squatters receive better
when the defendant asserts the absence of title over the property. The treatment under the law. The law restrains property owners from
absence of title over the contested lot is not a ground for the courts to taking the law into their own hands. However, the principle of pari
withhold relief from the parties in an ejectment case. The only delicto as applied by the Court of Appeals would give squatters free
question that the courts must resolve in ejectment proceedings is— rein to dispossess fellow squatters or violently retake possession of
who is entitled to the physical possession of the premises, that is, to properties usurped from them. Courts should not leave squatters to
the possession de facto and not to the possession de jure. It does not their own devices in cases involving recovery of possession.
even matter if a party’s title to the property is questionable, or when
both parties intruded into public land and their applications to own the Same; Same; Administrative Law; Public Lands; The determination of
land have yet to be approved by the proper government agency. the respective rights of rival claimants to public land is distinct from
Regardless of the actual condition of the title to the property, the party the determination of who has the actual physical possession or who
in peaceable quiet possession shall not be thrown out by a strong has a better right of physical possession; Courts should not preempt
hand, violence or terror. Neither is the unlawful withholding of the decision of the administrative agency mandated by law to
property allowed. Courts will always uphold respect for prior determine the qualifications of applicants for the acquisition of public
possession. lands.—In Pitargue, we ruled that courts have jurisdiction over
possessory actions involving public land to determine the issue of
Same; Same; The underlying philosophy behind ejectment suits is to physical possession. The determination of the respective rights of rival
prevent breach of the peace and criminal disorder and to compel the claimants to public land is, however, distinct from the determination
party out of possession to respect and resort to the law alone to obtain of who has the actual physical possession or who has a better right of
what he claims is his.—Courts must not abdicate their jurisdiction to physical possession. The administrative disposition and alienation of
resolve the issue of physical possession because of the public need to public lands should be threshed out in the proper government agency.
preserve the basic policy behind the summary actions of forcible entry The Court of Appeals’ determination of Pajuyo and Guevarra’s rights
and unlawful detainer. The underlying philosophy behind ejectment under Proclamation No. 137 was premature. Pajuyo and Guevarra
suits is to prevent breach of the peace and criminal disorder and to were at most merely potential beneficiaries of the law. Courts should
compel the party out of possession to respect and resort to the law not preempt the decision of the administrative agency mandated by
alone to obtain what he claims is his. The party deprived of possession law to determine the qualifications of applicants for the acquisition of
must not take the law into his own hands. Ejectment proceedings are public lands. Instead, courts should expeditiously resolve the issue of
summary in nature so the authorities can settle speedily actions to physical possession in ejectment cases to prevent disorder and
recover possession because of the overriding need to quell social breaches of peace.
disturbances.
Same; Same; Unlawful Detainer; Unlawful detainer involves the
Same; Same; Pari Delicto; One of the exceptions to the application of withholding by a person from another of the possession of real
the pari delicto principle is where its application would violate well- property to which the latter is entitled after the expiration or
established public policy.—Articles 1411 and 1412 of the Civil Code termination of the former’s right to hold possession under a contract,
embody the principle of pari delicto. We explained the principle of express or implied.—Based on the Kasunduan, Pajuyo permitted
pari delicto in these words: The rule of pari delicto is expressed in the Guevarra to reside in the house and lot free of rent, but Guevarra was
maxims ‘ex dolo malo non eritur actio’ and ‘in pari delicto potior est under obligation to maintain the premises in good condition. Guevarra
conditio defedentis.’ The law will not aid either party to an illegal promised to vacate the premises on Pajuyo’s demand but Guevarra
agreement. It leaves the parties where it finds them. The application of broke his promise and refused to heed Pajuyo’s demand to vacate.
the pari delicto principle is not absolute, as there are exceptions to its These facts make out a case for unlawful detainer. Unlawful detainer
application. One of these exceptions is where the application of the involves the withholding by a person from another of the possession
pari delicto rule would violate well-established public policy. of real property to which the latter is entitled after the expiration or
termination of the former’s right to hold possession under a contract,
Same; Same; Same; Squatting; The application of the principle of pari express or implied. Where the plaintiff allows the defendant to use his
delicto to a case of ejectment between squatters is fraught with property by tolerance without any contract, the defendant is
necessarily bound by an implied promise that he will vacate on
danger; Courts must resolve the issue of possession even if the parties
demand, failing which, an action for unlawful detainer will lie. The
to the ejectment suit are squatters—courts should not leave squatters
defendant’s refusal to comply with the demand makes his continued
to their own devices in cases involving recovery of possession.—
possession of the property unlawful. The status of the defendant in
Clearly, the application of the principle of pari delicto to a case of
ejectment between squatters is fraught with danger. To shut out relief such a case is similar to that of a lessee or tenant whose term of lease
has expired but whose occupancy continues by tolerance of the owner.
to squatters on the ground of pari delicto would openly invite
mayhem and lawlessness. A squatter would oust another squatter from
16

Same; Same; Contracts; Commodatum; Precarium; Words and intruders who clandestinely enter into titled government property
Phrases; An essential feature of commodatum is that it is gratuitous, cannot, by such act, acquire any legal right to said property.” We
while another feature is that the use of the thing belonging to another made this declaration because the person who had title or who had the
is for a certain period; If the use of the thing is merely tolerated by the right to legal possession over the disputed property was a party in the
bailor, he can demand the return of the thing at will, in which case the ejectment suit and that party instituted the case against squatters or
contractual relation is called a precarium; Precarium is a kind of usurpers. In this case, the owner of the land, which is the government,
commodatum.—In a contract of commodatum, one of the parties is not a party to the ejectment case. This case is between squatters.
delivers to another something not consumable so that the latter may Had the government participated in this case, the courts could have
use the same for a certain time and return it. An essential feature of evicted the contending squatters, Pajuyo and Guevarra. Since the
commodatum is that it is gratuitous. Another feature of commodatum party that has title or a better right over the property is not impleaded
is that the use of the thing belonging to another is for a certain period. in this case, we cannot evict on our own the parties. Such a ruling
Thus, the bailor cannot demand the return of the thing loaned until would discourage squatters from seeking the aid of the courts in
after expiration of the period stipulated, or after accomplishment of settling the issue of physical possession. Stripping both the
the use for which the commodatum is constituted. If the bailor should
have urgent need of the thing, he may demand its return for temporary plaintiff and the defendant of possession just because they are
use. If the use of the thing is merely tolerated by the bailor, he can squatters would have the same dangerous implications as the
demand the return of the thing at will, in which case the contractual application of the principle of pari delicto. Squatters would then
relation is called a precarium. Under the Civil Code, precarium is a rather settle the issue of physical possession among themselves than
kind of commodatum. seek relief from the courts if the plaintiff and defendant in the
ejectment case would both stand to lose possession of the disputed
Contracts; Human Relations; Squatting; There must be honor even property. This would subvert the policy underlying actions for
between squatters.—Guevarra turned his back on the Kasunduan on recovery of possession.
the sole ground that like him, Pajuyo is also a squatter. Squatters,
Guevarra pointed out, cannot enter into a contract involving the land Attorney’s Fees; Attorney’s fees are not awarded every time a party
they illegally occupy. Guevarra insists that the contract is void. prevails in a suit because of the policy that no premium should be
Guevarra should know that there must be honor even between placed on the right to litigate.—The MTC and RTC failed to justify
squatters. Guevarra freely entered the award of P3,000 attorney’s fees to Pajuyo. Attorney’s fees as part
of damages are awarded only in the instances enumerated in Article
into the Kasunduan. Guevarra cannot now impugn the Kasunduan 2208 of the Civil Code. Thus, the award of attorney’s fees is the
after he had benefited from it. The Kasunduan binds Guevarra. exception rather than the rule. Attorney’s fees are not awarded every
time a party prevails in a suit because of the policy that no premium
Same; Ejectment; Possession; Prior possession is not always a should be placed on the rigaht to litigate. We therefore delete the
condition sine qua non in ejectment.—Prior possession is not always a attorney’s fees awarded to Pajuyo.
condition sine qua non in ejectment. This is one of the distinctions
between forcible entry and unlawful detainer. In forcible entry, the Before us is a petition for review1 of the 21 June 2000 Decision2 and
plaintiff is deprived of physical possession of his land or building by 14 December 2000 Resolution of the Court of Appeals in CA-G.R. SP
means of force, intimidation, threat, strategy or stealth. Thus, he must No. 43129. The Court of Appeals set aside the 11 November 1996
allege and prove prior possession. But in unlawful detainer, the decision3 of the Regional Trial Court of Quezon City, Branch 81, 4
defendant unlawfully withholds possession after the expiration or affirming the 15 December 1995 decision5 of the Metropolitan Trial
termination of his right to possess under any contract, express or Court of Quezon City, Branch 31.6
implied. In such a case, prior physical possession is not required.
The Antecedents
Same; Same; Same; Possession in the eyes of the law does not mean
that a man has to have his feet on every square meter of the ground In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid ₱400 to a
before he is deemed in possession.—Pajuyo’s withdrawal of his certain Pedro Perez for the rights over a 250-square meter lot in Barrio
permission to Guevarra terminated the Kasunduan. Guevarra’s Payatas, Quezon City. Pajuyo then constructed a house made of light
transient right to possess the property ended as well. Moreover, it was materials on the lot. Pajuyo and his family lived in the house from
Pajuyo who was in actual possession of the property because 1979 to 7 December 1985.
Guevarra had to seek Pajuyo’s permission to temporarily hold the
property and Guevarra had to follow the conditions set by Pajuyo in
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra
the Kasunduan. Control over the property still rested with Pajuyo and
("Guevarra") executed a Kasunduan or agreement. Pajuyo, as owner
this is evidence of actual possession. Pajuyo’s absence did not affect
of the house, allowed Guevarra to live in the house for free provided
his actual possession of the disputed property. Possession in the eyes Guevarra would maintain the cleanliness and orderliness of the house.
of the law does not mean that a man has to have his feet on every Guevarra promised that he would voluntarily vacate the premises on
square meter of the ground before he is deemed in possession. One
Pajuyo’s demand.
may acquire possession not only by physical occupation, but also by
the fact that a thing is subject to the action of one’s will. Actual or
physical occupation is not always necessary. In September 1994, Pajuyo informed Guevarra of his need of the
house and demanded that Guevarra vacate the house. Guevarra
refused.
Same; Same; Squatting; Where the party that has title or a better right
over the property is not impleaded in the case, the Court cannot evict
on its own the contending parties who are squatters.—We are aware Pajuyo filed an ejectment case against Guevarra with the Metropolitan
of our pronouncement in cases where we declared that “squatters and Trial Court of Quezon City, Branch 31 ("MTC").
17

In his Answer, Guevarra claimed that Pajuyo had no valid title or right On 28 January 1997, the Thirteenth Division of the Court of Appeals
of possession over the lot where the house stands because the lot is issued a Resolution10 granting the motion for extension conditioned
within the 150 hectares set aside by Proclamation No. 137 for on the timeliness of the filing of the motion.
socialized housing. Guevarra pointed out that from December 1985 to
September 1994, Pajuyo did not show up or communicate with him. On 27 February 1997, the Court of Appeals ordered Pajuyo to
Guevarra insisted that neither he nor Pajuyo has valid title to the lot. comment on Guevara’s petition for review. On 11 April 1997, Pajuyo
filed his Comment.
On 15 December 1995, the MTC rendered its decision in favor of
Pajuyo. The dispositive portion of the MTC decision reads: On 21 June 2000, the Court of Appeals issued its decision reversing
the RTC decision. The dispositive portion of the decision reads:
WHEREFORE, premises considered, judgment is hereby
rendered for the plaintiff and against defendant, ordering the WHEREFORE, premises considered, the assailed Decision
latter to: of the court a quo in Civil Case No. Q-96-26943 is
REVERSED and SET ASIDE; and it is hereby declared that
A) vacate the house and lot occupied by the the ejectment case filed against defendant-appellant is
defendant or any other person or persons claiming without factual and legal basis.
any right under him;
SO ORDERED.11
B) pay unto plaintiff the sum of THREE
HUNDRED PESOS (₱300.00) monthly as Pajuyo filed a motion for reconsideration of the decision. Pajuyo
reasonable compensation for the use of the premises pointed out that the Court of Appeals should have dismissed outright
starting from the last demand; Guevarra’s petition for review because it was filed out of time.
Moreover, it was Guevarra’s counsel and not Guevarra who signed
C) pay plaintiff the sum of ₱3,000.00 as and by way the certification against forum-shopping.
of attorney’s fees; and
On 14 December 2000, the Court of Appeals issued a resolution
D) pay the cost of suit. denying Pajuyo’s motion for reconsideration. The dispositive portion
of the resolution reads:
SO ORDERED.7
WHEREFORE, for lack of merit, the motion for
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon reconsideration is hereby DENIED. No costs.
City, Branch 81 ("RTC").
SO ORDERED.12
On 11 November 1996, the RTC affirmed the MTC decision. The
dispositive portion of the RTC decision reads: The Ruling of the MTC

WHEREFORE, premises considered, the Court finds no The MTC ruled that the subject of the agreement between Pajuyo and
reversible error in the decision appealed from, being in Guevarra is the house and not the lot. Pajuyo is the owner of the
accord with the law and evidence presented, and the same is house, and he allowed Guevarra to use the house only by tolerance.
hereby affirmed en toto. Thus, Guevarra’s refusal to vacate the house on Pajuyo’s demand
made Guevarra’s continued possession of the house illegal.
SO ORDERED.8
The Ruling of the RTC
Guevarra received the RTC decision on 29 November 1996. Guevarra
had only until 14 December 1996 to file his appeal with the Court of The RTC upheld the Kasunduan, which established the landlord and
Appeals. Instead of filing his appeal with the Court of Appeals, tenant relationship between Pajuyo and Guevarra. The terms of the
Guevarra filed with the Supreme Court a "Motion for Extension of Kasunduan bound Guevarra to return possession of the house on
Time to File Appeal by Certiorari Based on Rule 42" ("motion for demand.
extension"). Guevarra theorized that his appeal raised pure questions
of law. The Receiving Clerk of the Supreme Court received the The RTC rejected Guevarra’s claim of a better right under
motion for extension on 13 December 1996 or one day before the Proclamation No. 137, the Revised National Government Center
right to appeal expired. Housing Project Code of Policies and other pertinent laws. In an
ejectment suit, the RTC has no power to decide Guevarra’s rights
On 3 January 1997, Guevarra filed his petition for review with the under these laws. The RTC declared that in an ejectment case, the
Supreme Court. only issue for resolution is material or physical possession, not
ownership.
On 8 January 1997, the First Division of the Supreme Court issued a
Resolution9 referring the motion for extension to the Court of Appeals The Ruling of the Court of Appeals
which has concurrent jurisdiction over the case. The case presented no
special and important matter for the Supreme Court to take
cognizance of at the first instance.
18

The Court of Appeals declared that Pajuyo and Guevarra are 1) in GRANTING, instead of denying, Private
squatters. Pajuyo and Guevarra illegally occupied the contested lot Respondent’s Motion for an Extension of thirty
which the government owned. days to file petition for review at the time when
there was no more period to extend as the decision
Perez, the person from whom Pajuyo acquired his rights, was also a of the Regional Trial Court had already become
squatter. Perez had no right or title over the lot because it is public final and executory.
land. The assignment of rights between Perez and Pajuyo, and the
Kasunduan between Pajuyo and Guevarra, did not have any legal 2) in giving due course, instead of dismissing,
effect. Pajuyo and Guevarra are in pari delicto or in equal fault. The private respondent’s Petition for Review even
court will leave them where they are. though the certification against forum-shopping was
signed only by counsel instead of by petitioner
The Court of Appeals reversed the MTC and RTC rulings, which held himself.
that the Kasunduan between Pajuyo and Guevarra created a legal tie
akin to that of a landlord and tenant relationship. The Court of 3) in ruling that the Kasunduan voluntarily entered
Appeals ruled that the Kasunduan is not a lease contract but a into by the parties was in fact a commodatum,
commodatum because the agreement is not for a price certain. instead of a Contract of Lease as found by the
Metropolitan Trial Court and in holding that "the
Since Pajuyo admitted that he resurfaced only in 1994 to claim the ejectment case filed against defendant-appellant is
property, the appellate court held that Guevarra has a better right over without legal and factual basis".
the property under Proclamation No. 137. President Corazon C.
Aquino ("President Aquino") issued Proclamation No. 137 on 7 4) in reversing and setting aside the Decision of the
September 1987. At that time, Guevarra was in physical possession of Regional Trial Court in Civil Case No. Q-96-26943
the property. Under Article VI of the Code of Policies Beneficiary and in holding that the parties are in pari delicto
Selection and Disposition of Homelots and Structures in the National being both squatters, therefore, illegal occupants of
Housing Project ("the Code"), the actual occupant or caretaker of the the contested parcel of land.
lot shall have first priority as beneficiary of the project. The Court of
Appeals concluded that Guevarra is first in the hierarchy of priority. 5) in deciding the unlawful detainer case based on
the so-called Code of Policies of the National
In denying Pajuyo’s motion for reconsideration, the appellate court Government Center Housing Project instead of
debunked Pajuyo’s claim that Guevarra filed his motion for extension deciding the same under the Kasunduan voluntarily
beyond the period to appeal. executed by the parties, the terms and conditions of
which are the laws between themselves.13
The Court of Appeals pointed out that Guevarra’s motion for
extension filed before the Supreme Court was stamped "13 December The Ruling of the Court
1996 at 4:09 PM" by the Supreme Court’s Receiving Clerk. The Court
of Appeals concluded that the motion for extension bore a date, The procedural issues Pajuyo is raising are baseless. However, we
contrary to Pajuyo’s claim that the motion for extension was undated. find merit in the substantive issues Pajuyo is submitting for resolution.
Guevarra filed the motion for extension on time on 13 December 1996
since he filed the motion one day before the expiration of the
Procedural Issues
reglementary period on 14 December 1996. Thus, the motion for
extension properly complied with the condition imposed by the Court
of Appeals in its 28 January 1997 Resolution. The Court of Appeals Pajuyo insists that the Court of Appeals should have dismissed
explained that the thirty-day extension to file the petition for review outright Guevarra’s petition for review because the RTC decision had
was deemed granted because of such compliance. already become final and executory when the appellate court acted on
Guevarra’s motion for extension to file the petition. Pajuyo points out
that Guevarra had only one day before the expiry of his period to
The Court of Appeals rejected Pajuyo’s argument that the appellate appeal the RTC decision. Instead of filing the petition for review with
court should have dismissed the petition for review because it was
the Court of Appeals, Guevarra filed with this Court an undated
Guevarra’s counsel and not Guevarra who signed the certification
motion for extension of 30 days to file a petition for review. This
against forum-shopping. The Court of Appeals pointed out that Pajuyo
Court merely referred the motion to the Court of Appeals. Pajuyo
did not raise this issue in his Comment. The Court of Appeals held
believes that the filing of the motion for extension with this Court did
that Pajuyo could not now seek the dismissal of the case after he had not toll the running of the period to perfect the appeal. Hence, when
extensively argued on the merits of the case. This technicality, the the Court of Appeals received the motion, the period to appeal had
appellate court opined, was clearly an afterthought.
already expired.

The Issues
We are not persuaded.

Pajuyo raises the following issues for resolution:


Decisions of the regional trial courts in the exercise of their appellate
jurisdiction are appealable to the Court of Appeals by petition for
WHETHER THE COURT OF APPEALS ERRED OR review in cases involving questions of fact or mixed questions of fact
ABUSED ITS AUTHORITY AND DISCRETION and law.14 Decisions of the regional trial courts involving pure
TANTAMOUNT TO LACK OF JURISDICTION: questions of law are appealable directly to this Court by petition for
19

review.15 These modes of appeal are now embodied in Section 2, Rule gave due course to the motion for extension because it complied with
41 of the 1997 Rules of Civil Procedure. the condition set by the appellate court in its resolution dated 28
January 1997. The resolution stated that the Court of Appeals would
Guevarra believed that his appeal of the RTC decision involved only only give due course to the motion for extension if filed on time. The
questions of law. Guevarra thus filed his motion for extension to file motion for extension met this condition.
petition for review before this Court on 14 December 1996. On 3
January 1997, Guevarra then filed his petition for review with this The material dates to consider in determining the timeliness of the
Court. A perusal of Guevarra’s petition for review gives the filing of the motion for extension are (1) the date of receipt of the
impression that the issues he raised were pure questions of law. There judgment or final order or resolution subject of the petition, and (2)
is a question of law when the doubt or difference is on what the law is the date of filing of the motion for extension. 24 It is the date of the
on a certain state of facts.16 There is a question of fact when the doubt filing of the motion or pleading, and not the date of execution, that
or difference is on the truth or falsity of the facts alleged. 17 determines the timeliness of the filing of that motion or pleading.
Thus, even if the motion for extension bears no date, the date of filing
In his petition for review before this Court, Guevarra no longer stamped on it is the reckoning point for determining the timeliness of
disputed the facts. Guevarra’s petition for review raised these its filing.
questions: (1) Do ejectment cases pertain only to possession of a
structure, and not the lot on which the structure stands? (2) Does a suit Guevarra had until 14 December 1996 to file an appeal from the RTC
by a squatter against a fellow squatter constitute a valid case for decision. Guevarra filed his motion for extension before this Court on
ejectment? (3) Should a Presidential Proclamation governing the lot 13 December 1996, the date stamped by this Court’s Receiving Clerk
on which a squatter’s structure stands be considered in an ejectment on the motion for extension. Clearly, Guevarra filed the motion for
suit filed by the owner of the structure? extension exactly one day before the lapse of the reglementary period
to appeal.
These questions call for the evaluation of the rights of the parties
under the law on ejectment and the Presidential Proclamation. At first Assuming that the Court of Appeals should have dismissed
glance, the questions Guevarra raised appeared purely legal. However, Guevarra’s appeal on technical grounds, Pajuyo did not ask the
some factual questions still have to be resolved because they have a appellate court to deny the motion for extension and dismiss the
bearing on the legal questions raised in the petition for review. These petition for review at the earliest opportunity. Instead, Pajuyo
factual matters refer to the metes and bounds of the disputed property vigorously discussed the merits of the case. It was only when the
and the application of Guevarra as beneficiary of Proclamation No. Court of Appeals ruled in Guevarra’s favor that Pajuyo raised the
137. procedural issues against Guevarra’s petition for review.

The Court of Appeals has the power to grant an extension of time to A party who, after voluntarily submitting a dispute for resolution,
file a petition for review. In Lacsamana v. Second Special Cases receives an adverse decision on the merits, is estopped from attacking
Division of the Intermediate Appellate Court,18 we declared that the the jurisdiction of the court.25 Estoppel sets in not because the
Court of Appeals could grant extension of time in appeals by petition judgment of the court is a valid and conclusive adjudication, but
for review. In Liboro v. Court of Appeals,19 we clarified that the because the practice of attacking the court’s jurisdiction after
prohibition against granting an extension of time applies only in a voluntarily submitting to it is against public policy.26
case where ordinary appeal is perfected by a mere notice of appeal.
The prohibition does not apply in a petition for review where the In his Comment before the Court of Appeals, Pajuyo also failed to
pleading needs verification. A petition for review, unlike an ordinary discuss Guevarra’s failure to sign the certification against forum
appeal, requires preparation and research to present a persuasive shopping. Instead, Pajuyo harped on Guevarra’s counsel signing the
position.20 The drafting of the petition for review entails more time verification, claiming that the counsel’s verification is insufficient
and effort than filing a notice of appeal.21 Hence, the Court of Appeals since it is based only on "mere information."
may allow an extension of time to file a petition for review.
A party’s failure to sign the certification against forum shopping is
In the more recent case of Commissioner of Internal Revenue v. different from the party’s failure to sign personally the verification.
Court of Appeals,22 we held that Liboro’s clarification of Lacsamana The certificate of non-forum shopping must be signed by the party,
is consistent with the Revised Internal Rules of the Court of Appeals and not by counsel.27 The certification of counsel renders the petition
and Supreme Court Circular No. 1-91. They all allow an extension of defective.28
time for filing petitions for review with the Court of Appeals. The
extension, however, should be limited to only fifteen days save in
On the other hand, the requirement on verification of a pleading is a
exceptionally meritorious cases where the Court of Appeals may grant formal and not a jurisdictional requisite.29 It is intended simply to
a longer period. secure an assurance that what are alleged in the pleading are true and
correct and not the product of the imagination or a matter of
A judgment becomes "final and executory" by operation of law. speculation, and that the pleading is filed in good faith.30 The party
Finality of judgment becomes a fact on the lapse of the reglementary need not sign the verification. A party’s representative, lawyer or any
period to appeal if no appeal is perfected.23 The RTC decision could person who personally knows the truth of the facts alleged in the
not have gained finality because the Court of Appeals granted the 30- pleading may sign the verification.31
day extension to Guevarra.
We agree with the Court of Appeals that the issue on the certificate
The Court of Appeals did not commit grave abuse of discretion when against forum shopping was merely an afterthought. Pajuyo did not
it approved Guevarra’s motion for extension. The Court of Appeals call the Court of Appeals’ attention to this defect at the early stage of
20

the proceedings. Pajuyo raised this procedural issue too late in the public land. The plaintiff had a pending application for the land with
proceedings. the Bureau of Lands when the defendant ousted him from possession.
The plaintiff filed the action of forcible entry against the defendant.
Absence of Title over the Disputed Property will not Divest the The government was not a party in the case of forcible entry.
Courts of Jurisdiction to Resolve the Issue of Possession
The defendant questioned the jurisdiction of the courts to settle the
Settled is the rule that the defendant’s claim of ownership of the issue of possession because while the application of the plaintiff was
disputed property will not divest the inferior court of its jurisdiction still pending, title remained with the government, and the Bureau of
over the ejectment case.32 Even if the pleadings raise the issue of Public Lands had jurisdiction over the case. We disagreed with the
ownership, the court may pass on such issue to determine only the defendant. We ruled that courts have jurisdiction to entertain
question of possession, especially if the ownership is inseparably ejectment suits even before the resolution of the application. The
linked with the possession.33 The adjudication on the issue of plaintiff, by priority of his application and of his entry, acquired prior
ownership is only provisional and will not bar an action between the physical possession over the public land applied for as against other
same parties involving title to the land.34 This doctrine is a necessary private claimants. That prior physical possession enjoys legal
consequence of the nature of the two summary actions of ejectment, protection against other private claimants because only a court can
forcible entry and unlawful detainer, where the only issue for take away such physical possession in an ejectment case.
adjudication is the physical or material possession over the real
property.35 While the Court did not brand the plaintiff and the defendant in
Pitargue44 as squatters, strictly speaking, their entry into the disputed
In this case, what Guevarra raised before the courts was that he and land was illegal. Both the plaintiff and defendant entered the public
Pajuyo are not the owners of the contested property and that they are land without the owner’s permission. Title to the land remained with
mere squatters. Will the defense that the parties to the ejectment case the government because it had not awarded to anyone ownership of
are not the owners of the disputed lot allow the courts to renounce the contested public land. Both the plaintiff and the defendant were in
their jurisdiction over the case? The Court of Appeals believed so and effect squatting on government property. Yet, we upheld the courts’
held that it would just leave the parties where they are since they are jurisdiction to resolve the issue of possession even if the plaintiff and
in pari delicto. the defendant in the ejectment case did not have any title over the
contested land.
We do not agree with the Court of Appeals.
Courts must not abdicate their jurisdiction to resolve the issue of
physical possession because of the public need to preserve the basic
Ownership or the right to possess arising from ownership is not at
issue in an action for recovery of possession. The parties cannot policy behind the summary actions of forcible entry and unlawful
present evidence to prove ownership or right to legal possession detainer. The underlying philosophy behind ejectment suits is to
prevent breach of the peace and criminal disorder and to compel the
except to prove the nature of the possession when necessary to resolve
party out of possession to respect and resort to the law alone to obtain
the issue of physical possession.36 The same is true when the
what he claims is his.45 The party deprived of possession must not
defendant asserts the absence of title over the property. The absence
take the law into his own hands.46 Ejectment proceedings are
of title over the contested lot is not a ground for the courts to withhold
relief from the parties in an ejectment case. summary in nature so the authorities can settle speedily actions to
recover possession because of the overriding need to quell social
disturbances.47
The only question that the courts must resolve in ejectment
proceedings is - who is entitled to the physical possession of the
We further explained in Pitargue the greater interest that is at stake in
premises, that is, to the possession de facto and not to the possession
de jure.37 It does not even matter if a party’s title to the property is actions for recovery of possession. We made the following
pronouncements in Pitargue:
questionable,38 or when both parties intruded into public land and
their applications to own the land have yet to be approved by the
proper government agency.39 Regardless of the actual condition of the The question that is before this Court is: Are courts without
title to the property, the party in peaceable quiet possession shall not jurisdiction to take cognizance of possessory actions
be thrown out by a strong hand, violence or terror. 40 Neither is the involving these public lands before final award is made by
unlawful withholding of property allowed. Courts will always uphold the Lands Department, and before title is given any of the
respect for prior possession. conflicting claimants? It is one of utmost importance, as
there are public lands everywhere and there are thousands of
settlers, especially in newly opened regions. It also involves
Thus, a party who can prove prior possession can recover such
possession even against the owner himself.41 Whatever may be the a matter of policy, as it requires the determination of the
character of his possession, if he has in his favor prior possession in respective authorities and functions of two coordinate
branches of the Government in connection with public land
time, he has the security that entitles him to remain on the property
conflicts.
until a person with a better right lawfully ejects him. 42 To repeat, the
only issue that the court has to settle in an ejectment suit is the right to
physical possession. Our problem is made simple by the fact that under the Civil
Code, either in the old, which was in force in this country
before the American occupation, or in the new, we have a
In Pitargue v. Sorilla,43 the government owned the land in dispute.
possessory action, the aim and purpose of which is the
The government did not authorize either the plaintiff or the defendant
recovery of the physical possession of real property,
in the case of forcible entry case to occupy the land. The plaintiff had
irrespective of the question as to who has the title thereto.
prior possession and had already introduced improvements on the
21

Under the Spanish Civil Code we had the accion interdictal, the administration of matters concerning the same. (50 C. J.
a summary proceeding which could be brought within one 1093-1094.) We have no quarrel with this principle. The
year from dispossession (Roman Catholic Bishop of Cebu vs. determination of the respective rights of rival claimants to
Mangaron, 6 Phil. 286, 291); and as early as October 1, 1901, public lands is different from the determination of who has
upon the enactment of the Code of Civil Procedure (Act No. the actual physical possession or occupation with a view to
190 of the Philippine Commission) we implanted the protecting the same and preventing disorder and breaches of
common law action of forcible entry (section 80 of Act No. the peace. A judgment of the court ordering restitution of the
190), the object of which has been stated by this Court to be possession of a parcel of land to the actual occupant, who has
"to prevent breaches of the peace and criminal disorder been deprived thereof by another through the use of force or
which would ensue from the withdrawal of the remedy, and in any other illegal manner, can never be "prejudicial
the reasonable hope such withdrawal would create that interference" with the disposition or alienation of public
some advantage must accrue to those persons who, lands. On the other hand, if courts were deprived of
believing themselves entitled to the possession of property, jurisdiction of cases involving conflicts of possession, that
resort to force to gain possession rather than to some threat of judicial action against breaches of the peace
appropriate action in the court to assert their claims." committed on public lands would be eliminated, and a state
(Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, of lawlessness would probably be produced between
314.) So before the enactment of the first Public Land Act applicants, occupants or squatters, where force or might,
(Act No. 926) the action of forcible entry was already not right or justice, would rule.
available in the courts of the country. So the question to be
resolved is, Did the Legislature intend, when it vested the It must be borne in mind that the action that would be used to
power and authority to alienate and dispose of the public solve conflicts of possession between rivals or conflicting
lands in the Lands Department, to exclude the courts from applicants or claimants would be no other than that of
entertaining the possessory action of forcible entry between forcible entry. This action, both in England and the United
rival claimants or occupants of any land before award thereof States and in our jurisdiction, is a summary and expeditious
to any of the parties? Did Congress intend that the lands remedy whereby one in peaceful and quiet possession may
applied for, or all public lands for that matter, be removed recover the possession of which he has been deprived by a
from the jurisdiction of the judicial Branch of the stronger hand, by violence or terror; its ultimate object being
Government, so that any troubles arising therefrom, or any to prevent breach of the peace and criminal disorder. (Supia
breaches of the peace or disorders caused by rival claimants, and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The
could be inquired into only by the Lands Department to the basis of the remedy is mere possession as a fact, of physical
exclusion of the courts? The answer to this question seems to possession, not a legal possession. (Mediran vs. Villanueva,
us evident. The Lands Department does not have the means 37 Phil. 752.) The title or right to possession is never in issue
to police public lands; neither does it have the means to in an action of forcible entry; as a matter of fact, evidence
prevent disorders arising therefrom, or contain breaches of thereof is expressly banned, except to prove the nature of the
the peace among settlers; or to pass promptly upon conflicts possession. (Second 4, Rule 72, Rules of Court.) With this
of possession. Then its power is clearly limited to nature of the action in mind, by no stretch of the imagination
disposition and alienation, and while it may decide conflicts can conclusion be arrived at that the use of the remedy in the
of possession in order to make proper award, the settlement courts of justice would constitute an interference with the
of conflicts of possession which is recognized in the court alienation, disposition, and control of public lands. To limit
herein has another ultimate purpose, i.e., the protection of ourselves to the case at bar can it be pretended at all that its
actual possessors and occupants with a view to the result would in any way interfere with the manner of the
prevention of breaches of the peace. The power to dispose alienation or disposition of the land contested? On the
and alienate could not have been intended to include the contrary, it would facilitate adjudication, for the question of
power to prevent or settle disorders or breaches of the peace priority of possession having been decided in a final manner
among rival settlers or claimants prior to the final award. by the courts, said question need no longer waste the time of
As to this, therefore, the corresponding branches of the the land officers making the adjudication or award.
Government must continue to exercise power and (Emphasis ours)
jurisdiction within the limits of their respective functions.
The vesting of the Lands Department with authority to The Principle of Pari Delicto is not Applicable to Ejectment Cases
administer, dispose, and alienate public lands, therefore,
must not be understood as depriving the other branches of
the Government of the exercise of the respective functions The Court of Appeals erroneously applied the principle of pari delicto
or powers thereon, such as the authority to stop disorders to this case.
and quell breaches of the peace by the police, the authority
on the part of the courts to take jurisdiction over possessory Articles 1411 and 1412 of the Civil Code48 embody the principle of
actions arising therefrom not involving, directly or pari delicto. We explained the principle of pari delicto in these words:
indirectly, alienation and disposition.
The rule of pari delicto is expressed in the maxims ‘ex dolo
Our attention has been called to a principle enunciated in malo non eritur actio’ and ‘in pari delicto potior est conditio
American courts to the effect that courts have no jurisdiction defedentis.’ The law will not aid either party to an illegal
to determine the rights of claimants to public lands, and that agreement. It leaves the parties where it finds them.49
until the disposition of the land has passed from the control
of the Federal Government, the courts will not interfere with
22

The application of the pari delicto principle is not absolute, as there the Code declares that the actual occupant or caretaker is the one
are exceptions to its application. One of these exceptions is where the qualified to apply for socialized housing.
application of the pari delicto rule would violate well-established
public policy.50 The ruling of the Court of Appeals has no factual and legal basis.

In Drilon v. Gaurana,51 we reiterated the basic policy behind the First. Guevarra did not present evidence to show that the contested lot
summary actions of forcible entry and unlawful detainer. We held is part of a relocation site under Proclamation No. 137. Proclamation
that: No. 137 laid down the metes and bounds of the land that it declared
open for disposition to bona fide residents.
It must be stated that the purpose of an action of forcible
entry and detainer is that, regardless of the actual condition The records do not show that the contested lot is within the land
of the title to the property, the party in peaceable quiet specified by Proclamation No. 137. Guevarra had the burden to prove
possession shall not be turned out by strong hand, violence or that the disputed lot is within the coverage of Proclamation No. 137.
terror. In affording this remedy of restitution the object of the He failed to do so.
statute is to prevent breaches of the peace and criminal
disorder which would ensue from the withdrawal of the Second. The Court of Appeals should not have given credence to
remedy, and the reasonable hope such withdrawal would
Guevarra’s unsubstantiated claim that he is the beneficiary of
create that some advantage must accrue to those persons
Proclamation No. 137. Guevarra merely alleged that in the survey the
who, believing themselves entitled to the possession of
project administrator conducted, he and not Pajuyo appeared as the
property, resort to force to gain possession rather than to
actual occupant of the lot.
some appropriate action in the courts to assert their claims.
This is the philosophy at the foundation of all these actions
of forcible entry and detainer which are designed to compel There is no proof that Guevarra actually availed of the benefits of
the party out of possession to respect and resort to the law Proclamation No. 137. Pajuyo allowed Guevarra to occupy the
alone to obtain what he claims is his.52 disputed property in 1985. President Aquino signed Proclamation No.
137 into law on 11 March 1986. Pajuyo made his earliest demand for
Guevarra to vacate the property in September 1994.
Clearly, the application of the principle of pari delicto to a case of
ejectment between squatters is fraught with danger. To shut out relief
to squatters on the ground of pari delicto would openly invite During the time that Guevarra temporarily held the property up to the
mayhem and lawlessness. A squatter would oust another squatter from time that Proclamation No. 137 allegedly segregated the disputed lot,
possession of the lot that the latter had illegally occupied, emboldened Guevarra never applied as beneficiary of Proclamation No. 137. Even
by the knowledge that the courts would leave them where they are. when Guevarra already knew that Pajuyo was reclaiming possession
Nothing would then stand in the way of the ousted squatter from re- of the property, Guevarra did not take any step to comply with the
claiming his prior possession at all cost. requirements of Proclamation No. 137.

Petty warfare over possession of properties is precisely what Third. Even assuming that the disputed lot is within the coverage of
ejectment cases or actions for recovery of possession seek to Proclamation No. 137 and Guevarra has a pending application over
prevent.53 Even the owner who has title over the disputed property the lot, courts should still assume jurisdiction and resolve the issue of
cannot take the law into his own hands to regain possession of his possession. However, the jurisdiction of the courts would be limited to
property. The owner must go to court. the issue of physical possession only.

Courts must resolve the issue of possession even if the parties to the In Pitargue,55 we ruled that courts have jurisdiction over possessory
ejectment suit are squatters. The determination of priority and actions involving public land to determine the issue of physical
superiority of possession is a serious and urgent matter that cannot be possession. The determination of the respective rights of rival
left to the squatters to decide. To do so would make squatters receive claimants to public land is, however, distinct from the determination
better treatment under the law. The law restrains property owners of who has the actual physical possession or who has a better right of
from taking the law into their own hands. However, the principle of physical possession.56 The administrative disposition and alienation of
pari delicto as applied by the Court of Appeals would give squatters public lands should be threshed out in the proper government
free rein to dispossess fellow squatters or violently retake possession agency.57
of properties usurped from them. Courts should not leave squatters to
their own devices in cases involving recovery of possession. The Court of Appeals’ determination of Pajuyo and Guevarra’s rights
under Proclamation No. 137 was premature. Pajuyo and Guevarra
Possession is the only Issue for Resolution in an Ejectment Case were at most merely potential beneficiaries of the law. Courts should
not preempt the decision of the administrative agency mandated by
law to determine the qualifications of applicants for the acquisition of
The case for review before the Court of Appeals was a simple case of
public lands. Instead, courts should expeditiously resolve the issue of
ejectment. The Court of Appeals refused to rule on the issue of physical possession in ejectment cases to prevent disorder and
physical possession. Nevertheless, the appellate court held that the breaches of peace.58
pivotal issue in this case is who between Pajuyo and Guevarra has the
"priority right as beneficiary of the contested land under Proclamation
No. 137."54 According to the Court of Appeals, Guevarra enjoys Pajuyo is Entitled to Physical Possession of the Disputed Property
preferential right under Proclamation No. 137 because Article VI of
23

Guevarra does not dispute Pajuyo’s prior possession of the lot and not require Guevarra to pay rent, it obligated him to maintain the
ownership of the house built on it. Guevarra expressly admitted the property in good condition. The imposition of this obligation makes
existence and due execution of the Kasunduan. The Kasunduan reads: the Kasunduan a contract different from a commodatum. The effects
of the Kasunduan are also different from that of a commodatum. Case
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, law on ejectment has treated relationship based on tolerance as one
Quezon City, ay nagbibigay pahintulot kay G. Eddie Guevarra, na that is akin to a landlord-tenant relationship where the withdrawal of
pansamantalang manirahan sa nasabing bahay at lote ng "walang permission would result in the termination of the lease. 69 The tenant’s
bayad." Kaugnay nito, kailangang panatilihin nila ang kalinisan at withholding of the property would then be unlawful. This is settled
kaayusan ng bahay at lote. jurisprudence.

Sa sandaling kailangan na namin ang bahay at lote, sila’y kusang aalis Even assuming that the relationship between Pajuyo and Guevarra is
ng walang reklamo. one of commodatum, Guevarra as bailee would still have the duty to
turn over possession of the property to Pajuyo, the bailor. The
obligation to deliver or to return the thing received attaches to
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the
contracts for safekeeping, or contracts of commission, administration
house and lot free of rent, but Guevarra was under obligation to
maintain the premises in good condition. Guevarra promised to vacate and commodatum.70 These contracts certainly involve the obligation
the premises on Pajuyo’s demand but Guevarra broke his promise and to deliver or return the thing received.71
refused to heed Pajuyo’s demand to vacate.
Guevarra turned his back on the Kasunduan on the sole ground that
like him, Pajuyo is also a squatter. Squatters, Guevarra pointed out,
These facts make out a case for unlawful detainer. Unlawful detainer
involves the withholding by a person from another of the possession cannot enter into a contract involving the land they illegally occupy.
Guevarra insists that the contract is void.
of real property to which the latter is entitled after the expiration or
termination of the former’s right to hold possession under a contract,
express or implied.59 Guevarra should know that there must be honor even between
squatters. Guevarra freely entered into the Kasunduan. Guevarra
Where the plaintiff allows the defendant to use his property by cannot now impugn the Kasunduan after he had benefited from it. The
Kasunduan binds Guevarra.
tolerance without any contract, the defendant is necessarily bound by
an implied promise that he will vacate on demand, failing which, an
action for unlawful detainer will lie.60 The defendant’s refusal to The Kasunduan is not void for purposes of determining who between
comply with the demand makes his continued possession of the Pajuyo and Guevarra has a right to physical possession of the
property unlawful.61 The status of the defendant in such a case is contested property. The Kasunduan is the undeniable evidence of
similar to that of a lessee or tenant whose term of lease has expired Guevarra’s recognition of Pajuyo’s better right of physical possession.
but whose occupancy continues by tolerance of the owner. 62 Guevarra is clearly a possessor in bad faith. The absence of a contract
would not yield a different result, as there would still be an implied
promise to vacate.
This principle should apply with greater force in cases where a
contract embodies the permission or tolerance to use the property. The
Kasunduan expressly articulated Pajuyo’s forbearance. Pajuyo did not Guevarra contends that there is "a pernicious evil that is sought to be
require Guevarra to pay any rent but only to maintain the house and avoided, and that is allowing an absentee squatter who (sic) makes
lot in good condition. Guevarra expressly vowed in the Kasunduan (sic) a profit out of his illegal act."72 Guevarra bases his argument on
that he would vacate the property on demand. Guevarra’s refusal to the preferential right given to the actual occupant or caretaker under
comply with Pajuyo’s demand to vacate made Guevarra’s continued Proclamation No. 137 on socialized housing.
possession of the property unlawful.
We are not convinced.
We do not subscribe to the Court of Appeals’ theory that the
Kasunduan is one of commodatum. Pajuyo did not profit from his arrangement with Guevarra because
Guevarra stayed in the property without paying any rent. There is also
In a contract of commodatum, one of the parties delivers to another no proof that Pajuyo is a professional squatter who rents out usurped
something not consumable so that the latter may use the same for a properties to other squatters. Moreover, it is for the proper
certain time and return it.63 An essential feature of commodatum is government agency to decide who between Pajuyo and Guevarra
that it is gratuitous. Another feature of commodatum is that the use of qualifies for socialized housing. The only issue that we are addressing
the thing belonging to another is for a certain period. 64 Thus, the is physical possession.
bailor cannot demand the return of the thing loaned until after
expiration of the period stipulated, or after accomplishment of the use Prior possession is not always a condition sine qua non in ejectment.73
for which the commodatum is constituted.65 If the bailor should have This is one of the distinctions between forcible entry and unlawful
urgent need of the thing, he may demand its return for temporary detainer.74 In forcible entry, the plaintiff is deprived of physical
use.66 If the use of the thing is merely tolerated by the bailor, he can possession of his land or building by means of force, intimidation,
demand the return of the thing at will, in which case the contractual threat, strategy or stealth. Thus, he must allege and prove prior
relation is called a precarium.67 Under the Civil Code, precarium is a possession.75 But in unlawful detainer, the defendant unlawfully
kind of commodatum.68 withholds possession after the expiration or termination of his right to
possess under any contract, express or implied. In such a case, prior
The Kasunduan reveals that the accommodation accorded by Pajuyo physical possession is not required.76
to Guevarra was not essentially gratuitous. While the Kasunduan did
24

Pajuyo’s withdrawal of his permission to Guevarra terminated the The MTC and RTC failed to justify the award of ₱3,000 attorney’s
Kasunduan. Guevarra’s transient right to possess the property ended fees to Pajuyo. Attorney’s fees as part of damages are awarded only in
as well. Moreover, it was Pajuyo who was in actual possession of the the instances enumerated in Article 2208 of the Civil Code.83 Thus,
property because Guevarra had to seek Pajuyo’s permission to the award of attorney’s fees is the exception rather than the rule. 84
temporarily hold the property and Guevarra had to follow the Attorney’s fees are not awarded every time a party prevails in a suit
conditions set by Pajuyo in the Kasunduan. Control over the property because of the policy that no premium should be placed on the right to
still rested with Pajuyo and this is evidence of actual possession. litigate.85 We therefore delete the attorney’s fees awarded to Pajuyo.

Pajuyo’s absence did not affect his actual possession of the disputed We sustain the ₱300 monthly rentals the MTC and RTC assessed
property. Possession in the eyes of the law does not mean that a man against Guevarra. Guevarra did not dispute this factual finding of the
has to have his feet on every square meter of the ground before he is two courts. We find the amount reasonable compensation to Pajuyo.
deemed in possession.77 One may acquire possession not only by The ₱300 monthly rental is counted from the last demand to vacate,
physical occupation, but also by the fact that a thing is subject to the which was on 16 February 1995.
action of one’s will.78 Actual or physical occupation is not always
necessary.79 WHEREFORE, we GRANT the petition. The Decision dated 21
June 2000 and Resolution dated 14 December 2000 of the Court of
Ruling on Possession Does not Bind Title to the Land in Dispute Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The Decision
dated 11 November 1996 of the Regional Trial Court of Quezon City,
We are aware of our pronouncement in cases where we declared that Branch 81 in Civil Case No. Q-96-26943, affirming the Decision
"squatters and intruders who clandestinely enter into titled dated 15 December 1995 of the Metropolitan Trial Court of Quezon
government property cannot, by such act, acquire any legal right to City, Branch 31 in Civil Case No. 12432, is REINSTATED with
said property."80 We made this declaration because the person who MODIFICATION. The award of attorney’s fees is deleted. No costs.
had title or who had the right to legal possession over the disputed
property was a party in the ejectment suit and that party instituted the
case against squatters or usurpers.
6.Asean Pacific Planners vs. City of
Urdaneta
In this case, the owner of the land, which is the government, is not a
party to the ejectment case. This case is between squatters. Had the Actions; Pleadings and Practice; Certification of Non-Forum
government participated in this case, the courts could have evicted the Shopping; Verification; Corporation Law; Only individuals vested
contending squatters, Pajuyo and Guevarra. with authority by a valid board resolution may sign the certificate of
non-forum shopping in behalf of a corporation; The submission in the
Since the party that has title or a better right over the property is not motion for reconsideration of the authority to sign the verification and
impleaded in this case, we cannot evict on our own the parties. Such a certification constitutes substantial compliance with the procedural
ruling would discourage squatters from seeking the aid of the courts in requirements.—Cesar Goco had no proof of his authority to sign the
settling the issue of physical possession. Stripping both the plaintiff verification and certification of non-forum shopping of the petition for
and the defendant of possession just because they are squatters would certiorari filed with the Court of Appeals. Thus, the Court of Appeals
have the same dangerous implications as the application of the is allowed by the rules the discretion to dismiss the petition since only
principle of pari delicto. Squatters would then rather settle the issue of individuals vested with authority by a valid board resolution may sign
physical possession among themselves than seek relief from the courts the certificate of non-forum shopping in behalf of a corporation. Proof
if the plaintiff and defendant in the ejectment case would both stand to of said authority must be attached; otherwise,
lose possession of the disputed property. This would subvert the
policy underlying actions for recovery of possession. the petition is subject to dismissal. However, it must be pointed out
that in several cases, this Court had considered as substantial
Since Pajuyo has in his favor priority in time in holding the property, compliance with the procedural requirements the submission in the
he is entitled to remain on the property until a person who has title or motion for reconsideration of the authority to sign the verification and
a better right lawfully ejects him. Guevarra is certainly not that certification, as in this case. The Court notes that the attachments in
person. The ruling in this case, however, does not preclude Pajuyo and the motion for reconsideration show that on March 5, 2003, the Board
Guevarra from introducing evidence and presenting arguments before of Directors of APPCDC authorized Cesar Goco to institute the
the proper administrative agency to establish any right to which they petition before the Court of Appeals. On March 22, 2003, Ronilo
may be entitled under the law.81 Goco doing business under the name APP, also appointed his father,
Cesar Goco, as his attorney-in-fact to file the petition. When the
In no way should our ruling in this case be interpreted to condone petition was filed on March 26, 2003 before the Court of Appeals,
squatting. The ruling on the issue of physical possession does not Cesar Goco was duly authorized to sign the verification and
affect title to the property nor constitute a binding and conclusive certification except that the proof of his authority was not submitted
adjudication on the merits on the issue of ownership. 82 The owner can together with the petition.
still go to court to recover lawfully the property from the person who
holds the property without legal title. Our ruling here does not Same; Parties; Taxpayers’ Suits; Locus Standi; In taxpayers’ suits,
diminish the power of government agencies, including local the party suing as a taxpayer must prove that he has sufficient interest
governments, to condemn, abate, remove or demolish illegal or in preventing the illegal expenditure of money raised by taxation—
unauthorized structures in accordance with existing laws. taxpayers have been allowed to sue where there is a claim that public
funds are illegally disbursed or that public money is being deflected to
Attorney’s Fees and Rentals any improper purpose, or that public funds are wasted through the
25

enforcement of an invalid or unconstitutional law; A city acquires party adverse to the provincial government. But this case is not
ownership of the money loaned to it, making the money public fund.— between Urdaneta City and the Province of Pangasinan. And we have
Petitioners’ contentions lack merit. The RTC properly allowed the consistently held that a local government unit cannot be represented
taxpayers’ suits. In Public Interest Center, Inc. v. Roxas, 513 SCRA by private counsel as only public officers may act for and in behalf of
457 (2007), we held: In the case of taxpayers’ suits, the party suing as public entities and public funds should not be spent to hire private
a taxpayer must prove that he has sufficient interest in preventing the lawyers. Pro bono representation in collaboration with the municipal
illegal expenditure of money raised by taxation. Thus, taxpayers have attorney and prosecutor has not even been allowed.
been allowed to sue where there is a claim that public funds are
illegally disbursed or that public money is being deflected to any Same; Evidence; Amendment of Pleadings; Section 5, Rule 10 of the
improper purpose, or that public funds are wasted through the Rules of Court pertinently provides that if evidence is objected to at
enforcement of an invalid or unconstitutional law. x x x x Petitioners’ the trial on the ground that it is not within the issues raised by the
allegations in their Amended Complaint that the loan contracts pleadings, the court may allow the pleadings to be amended and shall
entered into by the Republic and NPC are serviced or paid through a do so with liberality if the presentation of the merits of the action and
disbursement of public funds are not disputed by respondents, hence, the ends of substantial justice will be subserved thereby.—Section 5,
they are invested with personality to institute the same. Here, the Rule 10 of the Rules of Court pertinently provides that if evidence is
allegation of taxpayers Del Castillo, Del Prado, Ordono and Maguisa objected to at the trial on the ground that it is not within the issues
that P95 million of the P250 million PNB loan had already been paid raised by the pleadings, the court may allow the pleadings to be
for minimal work is sufficient allegation of overpayment, of illegal amended and shall do so with liberality if the presentation of the
disbursement, that invests them with personality to sue. Petitioners do merits of the action and the ends of substantial justice will be
not dispute the allegation as they subserved thereby. Objections need not even arise in this case since
the Pre-trial Order dated April 1, 2002 already defined as an issue
merely insist, albeit erroneously, that public funds are not involved. whether the contracts are valid. Thus, what is needed is presentation
Under Article 1953 of the Civil Code, the city acquired ownership of of the parties’ evidence on the issue. Any evidence of the city for or
the money loaned from PNB, making the money public fund. The city against the validity of the contracts will be relevant and admissible.
will have to pay the loan by revenues raised from local taxation or by Note also that under Section 5, Rule 10, necessary amendments to
its internal revenue allotment. pleadings may be made to cause them to conform to the evidence.

Same; Local Government Units; Attorneys; The city legal officer is Same; Same; A party’s testimony in open court may override
supposed to represent the city in all civil actions and special admissions in the Answer.—Despite Urdaneta City’s judicial
proceedings wherein the city or any of its officials is a party, but admissions, the trial court is still given leeway to consider other
where the position is as yet vacant, the City Prosecutor remains the evidence to be presented for said admissions may not necessarily
city’s legal adviser and officer for civil cases.—Section 481(a) of the prevail over documentary evidence, e.g., the contracts assailed. A
Local Government Code (LGC) of 1991 mandates the appointment of party’s testimony in open court may also override admissions in the
a city legal officer. Under Section 481(b)(3)(i) of the LGC, the city Answer.
legal officer is supposed to represent the city in all civil actions, as in
this case, and special proceedings wherein the city or any of its Same; Attorneys; Legal Ethics; Notice is taken of the offensive
officials is a party. In Ramos v. Court of Appeals, 269 SCRA 34 language used by Attys. Oscar C. Sahagun and Antonio B. Escalante
(1997), we cited that under Section 19 of Republic Act No. 5185, city in their pleadings before the Supreme Court and the Court of
governments may already create the position of city legal officer to Appeals.—Notice is taken of the offensive language used by Attys.
whom the function of the city fiscal (now prosecutor) as legal adviser Oscar C. Sahagun and Antonio B. Escalante in their pleadings before
and officer for civil cases of the city shall be transferred. In the case of us and the Court of Appeals. They unfairly called the Court of
Urdaneta City, however, the position of city legal officer is still Appeals a “court of technicalities” for validly dismissing their
vacant, although its charter was enacted way back in 1998. Because of defectively prepared petition. They also accused the Court of Appeals
such vacancy, the City Prosecutor’s appearance as counsel of of
Urdaneta City is proper. The City Prosecutor remains as the city’s
legal adviser and officer for civil cases, a function that could not yet
protecting, in their view, “an incompetent judge.” In explaining the
be transferred to the city legal officer. Under the circumstances, the
“concededly strong language,” Atty. Sahagun further indicted himself.
RTC should not have allowed the entry of appearance of the Lazaro
He said that the Court of Appeals’ dismissal of the case shows its
Law Firm vice the City Prosecutor. Notably, the city’s Answer was “impatience and readiness to punish petitioners for a perceived slight
sworn to before the City Prosecutor by Mayor Perez. The City on its dignity” and such dismissal “smacks of retaliation and does not
Prosecutor prepared the city’s pre-trial brief and represented the city
augur for the cold neutrality and impartiality demanded of the
in the pre-trial conference. No question was raised against the City
appellate court.” Accordingly, we impose upon Attys. Oscar C.
Prosecutor’s actions until the Lazaro Law Firm entered its appearance
Sahagun and Antonio B. Escalante a fine of P2,000 each payable to
and claimed that the city lacked adequate legal representation.
this Court within ten days from notice and we remind them that they
should observe and maintain the respect due to the Court of Appeals
Same; Same; Same; A local government unit cannot be represented by and judicial officers; abstain from offensive language before the
private counsel as only public officers may act for and in behalf of courts; and not attribute to a Judge motives not supported by the
public entities and public funds should not be spent to hire private record. Similar acts in the future will be dealt with more severely.
lawyers.—The appearance of the Lazaro Law Firm as counsel for
Urdaneta City is against the law. Section 481(b)(3)(i) of the LGC
QUISUMBING, J.:
provides when a special legal officer may be employed, that is, in
actions or proceedings where a component city or municipality is a
26

The instant petition seeks to set aside the Resolutions1 dated April 15, was dropped as defendant, and his complaint filed by Atty. Jorito C.
2003 and February 4, 2004 of the Court of Appeals in CA-G.R. SP Peralta was admitted and consolidated with the complaints of Del
No. 76170. Castillo and Urdaneta City. The RTC also directed APP and APPCDC
to answer Capalad's complaint.
This case stemmed from a Complaint2 for annulment of contracts with
prayer for preliminary prohibitory injunction and temporary Aggrieved, APP and APPCDC filed a petition for certiorari before the
restraining order filed by respondent Waldo C. Del Castillo, in his Court of Appeals. In its April 15, 2003 Resolution, the Court of
capacity as taxpayer, against respondents City of Urdaneta and Appeals dismissed the petition on the following grounds: (1) defective
Ceferino J. Capalad doing business under the name JJEFWA Builders, verification and certification of non-forum shopping, (2) failure of the
and petitioners Asean Pacific Planners (APP) represented by Ronilo petitioners to submit certified true copies of the RTC's assailed orders
G. Goco and Asean Pacific Planners Construction and Development as mere photocopies were submitted, and (3) lack of written
Corporation (APPCDC) represented by Cesar D. Goco. explanation why service of the petition to adverse parties was not
personal.10 The Court of Appeals also denied APP and APPCDC's
Del Castillo alleged that then Urdaneta City Mayor Rodolfo E. motion for reconsideration in its February 4, 2004 Resolution. 11
Parayno entered into five contracts for the preliminary design,
construction and management of a four-storey twin cinema Hence, this petition, which we treat as one for review on certiorari
commercial center and hotel involving a massive expenditure of under Rule 45, the proper remedy to assail the resolutions of the Court
public funds amounting to P250 million, funded by a loan from the of Appeals.12
Philippine National Bank (PNB). For minimal work, the contractor
was allegedly paid P95 million. Del Castillo also claimed that all the Petitioners argue that:
contracts are void because the object is outside the commerce of men.
The object is a piece of land belonging to the public domain and
I.
which remains devoted to a public purpose as a public elementary
school. Additionally, he claimed that the contracts, from the feasibility
study to management and lease of the future building, are also void THE APPELLATE COURT PALPABLY ERRED AND GRAVELY
because they were all awarded solely to the Goco family. ABUSED ITS JUDICIAL PREROGATIVES BY SUMMARILY
DISMISSING THE PETITION ON THE BASIS OF PROCEDURAL
TECHNICALITIES DESPITE SUBSTANTIAL COMPLIANCE
In their Answer,3 APP and APPCDC claimed that the contracts are
[THEREWITH]…
valid. Urdaneta City Mayor Amadeo R. Perez, Jr., who filed the city's
Answer,4 joined in the defense and asserted that the contracts were
properly executed by then Mayor Parayno with prior authority from II.
the Sangguniang Panlungsod. Mayor Perez also stated that Del
Castillo has no legal capacity to sue and that the complaint states no THE TRIAL COURT PALPABLY ERRED AND GRAVELY
cause of action. For respondent Ceferino J. Capalad, Atty. Oscar C. ABUSED ITS JUDICIAL PREROGATIVES BY CAPRICIOUSLY
Sahagun filed an Answer5 with compulsory counterclaim and motion
to dismiss on the ground that Del Castillo has no legal standing to sue. (a.) Entertaining the taxpayers' suits of private respondents del
Castillo, del Prado, Ordono and Maguisa despite their clear lack of
Respondents Norberto M. Del Prado, Jesus A. Ordono and Aquilino legal standing to file the same.
Maguisa became parties to the case when they jointly filed, also in
their capacity as taxpayers, a Complaint-in-Intervention6 adopting the (b.) Allowing the entry of appearance of a private law firm to
allegations of Del Castillo. represent the City of Urdaneta despite the clear statutory and
jurisprudential prohibitions thereto.
After pre-trial, the Lazaro Law Firm entered its appearance as counsel
for Urdaneta City and filed an Omnibus Motion7 with prayer to (1) (c.) Allowing Ceferino J. Capalad and the City of Urdaneta to switch
withdraw Urdaneta City's Answer; (2) drop Urdaneta City as sides, by permitting the withdrawal of their respective answers and
defendant and be joined as plaintiff; (3) admit Urdaneta City's admitting their complaints as well as allowing the appearance of Atty.
complaint; and (4) conduct a new pre-trial. Urdaneta City allegedly Jorito C. Peralta to represent Capalad although Atty. Oscar C.
wanted to rectify its position and claimed that inadequate legal Sahagun, his counsel of record, had not withdrawn from the case, in
representation caused its inability to file the necessary pleadings in gross violation of well settled rules and case law on the matter. 13
representation of its interests.
We first resolve whether the Court of Appeals erred in denying
In its Order8 dated September 11, 2002, the Regional Trial Court reconsideration of its April 15, 2003 Resolution despite APP and
(RTC) of Urdaneta City, Pangasinan, Branch 45, admitted the entry of APPCDC's subsequent compliance.
appearance of the Lazaro Law Firm and granted the withdrawal of
appearance of the City Prosecutor. It also granted the prayer to drop Petitioners argue that the Court of Appeals should not have dismissed
the city as defendant and admitted its complaint for consolidation with the petition on mere technicalities since they have attached the proper
Del Castillo's complaint, and directed the defendants to answer the documents in their motion for reconsideration and substantially
city's complaint. complied with the rules.

In its February 14, 2003 Order,9 the RTC denied reconsideration of Respondent Urdaneta City maintains that the Court of Appeals
the September 11, 2002 Order. It also granted Capalad's motion to correctly dismissed the petition because Cesar Goco had no proof he
expunge all pleadings filed by Atty. Sahagun in his behalf. Capalad
27

was authorized to sign the certification of non-forum shopping in In the case of taxpayers' suits, the party suing as a taxpayer must
behalf of APPCDC. prove that he has sufficient interest in preventing the illegal
expenditure of money raised by taxation. Thus, taxpayers have been
Indeed, Cesar Goco had no proof of his authority to sign the allowed to sue where there is a claim that public funds are illegally
verification and certification of non-forum shopping of the petition for disbursed or that public money is being deflected to any improper
certiorari filed with the Court of Appeals.14 Thus, the Court of purpose, or that public funds are wasted through the enforcement of
Appeals is allowed by the rules the discretion to dismiss the petition an invalid or unconstitutional law.
since only individuals vested with authority by a valid board
resolution may sign the certificate of non-forum shopping in behalf of xxxx
a corporation. Proof of said authority must be attached; otherwise, the
petition is subject to dismissal.15 Petitioners' allegations in their Amended Complaint that the loan
contracts entered into by the Republic and NPC are serviced or paid
However, it must be pointed out that in several cases,16 this Court had through a disbursement of public funds are not disputed by
considered as substantial compliance with the procedural respondents, hence, they are invested with personality to institute the
requirements the submission in the motion for reconsideration of the same.24
authority to sign the verification and certification, as in this case. The
Court notes that the attachments in the motion for reconsideration Here, the allegation of taxpayers Del Castillo, Del Prado, Ordono and
show that on March 5, 2003, the Board of Directors of APPCDC Maguisa that P95 million of the P250 million PNB loan had already
authorized Cesar Goco to institute the petition before the Court of been paid for minimal work is sufficient allegation of overpayment, of
Appeals.17 On March 22, 2003, Ronilo Goco doing business under the illegal disbursement, that invests them with personality to sue.
name APP, also appointed his father, Cesar Goco, as his attorney-in- Petitioners do not dispute the allegation as they merely insist, albeit
fact to file the petition.18 When the petition was filed on March 26, erroneously, that public funds are not involved. Under Article 1953 25
200319 before the Court of Appeals, Cesar Goco was duly authorized of the Civil Code, the city acquired ownership of the money loaned
to sign the verification and certification except that the proof of his from PNB, making the money public fund. The city will have to pay
authority was not submitted together with the petition. the loan by revenues raised from local taxation or by its internal
revenue allotment.
Similarly, petitioners submitted in the motion for reconsideration
certified true copies of the assailed RTC orders and we may also In addition, APP and APPCDC's lack of objection in their Answer on
consider the same as substantial compliance.20 Petitioners also the personality to sue of the four complainants constitutes waiver to
included in the motion for reconsideration their explanation21 that raise the objection under Section 1, Rule 9 of the Rules of Court. 26
copies of the petition were personally served on the Lazaro Law Firm
and mailed to the RTC and Atty. Peralta because of distance. The On the second point, petitioners contend that only the City Prosecutor
affidavit of service22 supported the explanation. Considering the
can represent Urdaneta City and that law and jurisprudence prohibit
substantial issues involved, it was thus error for the appellate court to
the appearance of the Lazaro Law Firm as the city's counsel.
deny reinstatement of the petition.
The Lazaro Law Firm, as the city's counsel, counters that the city was
Having discussed the procedural issues, we shall now proceed to inutile defending its cause before the RTC for lack of needed legal
address the substantive issues raised by petitioners, rather than remand
advice. The city has no legal officer and both City Prosecutor and
this case to the Court of Appeals. In our view, the issue, simply put,
Provincial Legal Officer are busy. Practical considerations also dictate
is: Did the RTC err and commit grave abuse of discretion in (a)
that the city and Mayor Perez must have the same counsel since he
entertaining the taxpayers' suits; (b) allowing a private law firm to
faces related criminal cases. Citing Mancenido v. Court of Appeals, 27
represent Urdaneta City; (c) allowing respondents Capalad and the law firm states that hiring private counsel is proper where rigid
Urdaneta City to switch from being defendants to becoming
adherence to the law on representation would deprive a party of his
complainants; and (d) allowing Capalad's change of attorneys?
right to redress a valid grievance.28

On the first point at issue, petitioners argue that a taxpayer may only We cannot agree with the Lazaro Law Firm. Its appearance as
sue where the act complained of directly involves illegal disbursement Urdaneta City's counsel is against the law as it provides expressly who
of public funds derived from taxation. The allegation of respondents
should represent it. The City Prosecutor should continue to represent
Del Castillo, Del Prado, Ordono and Maguisa that the construction of
the city.
the project is funded by the PNB loan contradicts the claim regarding
illegal disbursement since the funds are not directly derived from
taxation. Section 481(a)29 of the Local Government Code (LGC) of 1991 30
mandates the appointment of a city legal officer. Under Section
481(b)(3)(i)31 of the LGC, the city legal officer is supposed to
Respondents Del Castillo, Del Prado, Ordono and Maguisa counter
represent the city in all civil actions, as in this case, and special
that their personality to sue was not raised by petitioners APP and
proceedings wherein the city or any of its officials is a party. In
APPCDC in their Answer and that this issue was not even discussed
Ramos v. Court of Appeals,32 we cited that under Section 1933 of
in the RTC's assailed orders. Republic Act No. 5185,34 city governments may already create the
position of city legal officer to whom the function of the city fiscal
Petitioners' contentions lack merit. The RTC properly allowed the (now prosecutor) as legal adviser and officer for civil cases of the city
taxpayers' suits. In Public Interest Center, Inc. v. Roxas, 23 we held: shall be transferred.35 In the case of Urdaneta City, however, the
position of city legal officer is still vacant, although its charter 36 was
enacted way back in 1998.
28

Because of such vacancy, the City Prosecutor's appearance as counsel Capalad filed a complaint for annulment of the contracts. Certainly,
of Urdaneta City is proper. The City Prosecutor remains as the city's Atty. Sahagun cannot represent totally conflicting interests. Thus, we
legal adviser and officer for civil cases, a function that could not yet should expunge all pleadings filed by Atty. Sahagun in behalf of
be transferred to the city legal officer. Under the circumstances, the Capalad.
RTC should not have allowed the entry of appearance of the Lazaro
Law Firm vice the City Prosecutor. Notably, the city's Answer was Relatedly, we affirm the order of the RTC in allowing Capalad's
sworn to before the City Prosecutor by Mayor Perez. The City change of attorneys, if we can properly call it as such, considering
Prosecutor prepared the city's pre-trial brief and represented the city in Capalad's claim that Atty. Sahagun was never his attorney.
the pre-trial conference. No question was raised against the City
Prosecutor's actions until the Lazaro Law Firm entered its appearance
Before we close, notice is taken of the offensive language used by
and claimed that the city lacked adequate legal representation. Attys. Oscar C. Sahagun and Antonio B. Escalante in their pleadings
before us and the Court of Appeals. They unfairly called the Court of
Moreover, the appearance of the Lazaro Law Firm as counsel for Appeals a "court of technicalities"45 for validly dismissing their
Urdaneta City is against the law. Section 481(b)(3)(i) of the LGC defectively prepared petition. They also accused the Court of Appeals
provides when a special legal officer may be employed, that is, in of protecting, in their view, "an incompetent judge." 46 In explaining
actions or proceedings where a component city or municipality is a the "concededly strong language," Atty. Sahagun further indicted
party adverse to the provincial government. But this case is not himself. He said that the Court of Appeals' dismissal of the case
between Urdaneta City and the Province of Pangasinan. And we have shows its "impatience and readiness to punish petitioners for a
consistently held that a local government unit cannot be represented perceived slight on its dignity" and such dismissal "smacks of
by private counsel37 as only public officers may act for and in behalf retaliation and does not augur for the cold neutrality and impartiality
of public entities and public funds should not be spent to hire private demanded of the appellate court." 47
lawyers.38 Pro bono representation in collaboration with the municipal
attorney and prosecutor has not even been allowed. 39
Accordingly, we impose upon Attys. Oscar C. Sahagun and Antonio
B. Escalante a fine of P2,00048 each payable to this Court within ten
Neither is the law firm's appearance justified under the instances listed days from notice and we remind them that they should observe and
in Mancenido when local government officials can be represented by maintain the respect due to the Court of Appeals and judicial
private counsel, such as when a claim for damages could result in officers;49 abstain from offensive language before the courts;50 and not
personal liability. No such claim against said officials was made in attribute to a Judge motives not supported by the record. 51 Similar acts
this case. Note that before it joined the complainants, the city was the in the future will be dealt with more severely.
one sued, not its officials. That the firm represents Mayor Perez in
criminal cases, suits in his personal capacity,40 is of no moment.
WHEREFORE, we (1) GRANT the petition; (2) SET ASIDE the
Resolutions dated April 15, 2003 and February 4, 2004 of the Court of
On the third point, petitioners claim that Urdaneta City is estopped to Appeals in CA-G.R. SP No. 76170; (3) DENY the entry of
reverse admissions in its Answer that the contracts are valid and, in its appearance of the Lazaro Law Firm in Civil Case No. U-7388 and
pre-trial brief, that the execution of the contracts was in good faith. EXPUNGE all pleadings it filed as counsel of Urdaneta City; (4)
ORDER the City Prosecutor to represent Urdaneta City in Civil Case
We disagree. The court may allow amendment of pleadings. No. U-7388; (5) AFFIRM the RTC in admitting the complaint of
Capalad; and (6) PROHIBIT Atty. Oscar C. Sahagun from
Section 5,41 Rule 10 of the Rules of Court pertinently provides that if representing Capalad and EXPUNGE all pleadings that he filed in
evidence is objected to at the trial on the ground that it is not within behalf of Capalad.
the issues raised by the pleadings, the court may allow the pleadings
to be amended and shall do so with liberality if the presentation of the Let the records of Civil Case No. U-7388 be remanded to the trial
merits of the action and the ends of substantial justice will be court for further proceedings.
subserved thereby. Objections need not even arise in this case since
the Pre-trial Order42 dated April 1, 2002 already defined as an issue Finally, we IMPOSE a fine of P2,000 each on Attys. Oscar C.
whether the contracts are valid. Thus, what is needed is presentation Sahagun and Antonio B. Escalante for their use of offensive language,
of the parties' evidence on the issue. Any evidence of the city for or payable to this Court within ten (10) days from receipt of this
against the validity of the contracts will be relevant and admissible. Decision.
Note also that under Section 5, Rule 10, necessary amendments to
pleadings may be made to cause them to conform to the evidence.
SO ORDERED.

In addition, despite Urdaneta City's judicial admissions, the trial court


is still given leeway to consider other evidence to be presented for 7. People vs. Puig
said admissions may not necessarily prevail over documentary
evidence,43 e.g., the contracts assailed. A party's testimony in open
Criminal Law; Theft; Elements of theft under Article 308 of the
court may also override admissions in the Answer. 44
Revised Penal Code.—Theft, as defined in Article 308 of the Revised
Penal Code, requires the physical taking of another’s property without
As regards the RTC's order admitting Capalad's complaint and violence or intimidation against persons or force upon things. The
dropping him as defendant, we find the same in order. Capalad insists elements of the crime under this Article are: 1. Intent to gain; 2.
that Atty. Sahagun has no authority to represent him. Atty. Sahagun Unlawful taking; 3. Personal property belonging to another; 4.
claims otherwise. We note, however, that Atty. Sahagun represents Absence of violence or intimidation against persons or force upon
petitioners who claim that the contracts are valid. On the other hand, things.
29

Same; Same; Qualified Theft; Elements of qualified theft.—To fall Office of the Solicitor General, praying for the reversal of the Orders
under the crime of Qualified Theft, the following elements must dated 30 January 2006 and 9 June 2006 of the Regional Trial Court
concur: 1. Taking of personal property; 2. That the said property (RTC) of the 6th Judicial Region, Branch 68, Dumangas, Iloilo,
belongs to another; 3. That the said taking be done with intent to gain; dismissing the 112 cases of Qualified Theft filed against respondents
4. That it be done without the owner’s consent; 5. That it be Teresita Puig and Romeo Porras, and denying petitioner’s Motion for
accomplished without the use of violence or intimidation against Reconsideration, in Criminal Cases No. 05-3054 to 05-3165.
persons, nor of force upon things; 6. That it be done with grave abuse
of confidence. The following are the factual antecedents:

Same; Same; Same; Banks, where monies are deposited, are On 7 November 2005, the Iloilo Provincial Prosecutor’s Office filed
considered the owners thereof; The relationship between banks and before Branch 68 of the RTC in Dumangas, Iloilo, 112 cases of
depositors has been held to be that of creditor and debtor.—It is Qualified Theft against respondents Teresita Puig (Puig) and Romeo
beyond doubt that tellers, Cashiers, Bookkeepers and other employees Porras (Porras) who were the Cashier and Bookkeeper, respectively,
of a Bank who come into possession of the monies deposited therein of private complainant Rural Bank of Pototan, Inc. The cases were
enjoy the confidence reposed in them by their employer. Banks, on docketed as Criminal Cases No. 05-3054 to 05-3165.
the other hand, where monies are deposited, are considered the owners
thereof. This is very clear not only from the express provisions of the The allegations in the Informations1 filed before the RTC were
law, but from established jurisprudence. The relationship between
uniform and pro-forma, except for the amounts, date and time of
banks and depositors has been held to be that of creditor and debtor.
commission, to wit:

Criminal Procedure; Actions; Court has consistently considered the


INFORMATION
allegations in the Information that such employees acted with grave
abuse of confidence, to the damage and prejudice of the Bank, without
particularly referring to it as owner of the money deposits, as That on or about the 1st day of August, 2002, in the
Municipality of Pototan, Province of Iloilo, Philippines, and
within the jurisdiction of this Honorable Court, above-named
sufficient to make out a case of Qualified Theft.—In a long line of [respondents], conspiring, confederating, and helping one
cases involving Qualified Theft, this Court has firmly established the
another, with grave abuse of confidence, being the Cashier
nature of possession by the Bank of the money deposits therein, and
and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan,
the duties being performed by its employees who have custody of the
Iloilo, without the knowledge and/or consent of the
money or have come into possession of it. The Court has consistently
management of the Bank and with intent of gain, did then
considered the allegations in the Information that such employees and there willfully, unlawfully and feloniously take, steal and
acted with grave abuse of confidence, to the damage and prejudice of carry away the sum of FIFTEEN THOUSAND PESOS
the Bank, without particularly referring to it as owner of the money
(P15,000.00), Philippine Currency, to the damage and
deposits, as sufficient to make out a case of Qualified Theft.
prejudice of the said bank in the aforesaid amount.

Same; Same; When the defendant, with grave abuse of confidence, After perusing the Informations in these cases, the trial court did not
removed the money and appropriated it to his own use without the find the existence of probable cause that would have necessitated the
consent of the Bank, there was taking as contemplated in the crime of
issuance of a warrant of arrest based on the following grounds:
Qualified Theft.—People v. Locson, 57 Phil. 325 (1932), in addition
to People v. Sison, described the nature of possession by the Bank.
The money in this case was in the possession of the defendant as (1) the element of ‘taking without the consent of the
receiving teller of the bank, and the possession of the defendant was owners’ was missing on the ground that it is the depositors-
the possession of the Bank. The Court held therein that when the clients, and not the Bank, which filed the complaint in these
defendant, with grave abuse of confidence, removed the money and cases, who are the owners of the money allegedly taken by
appropriated it to his own use without the consent of the Bank, there respondents and hence, are the real parties-in-interest; and
was taking as contemplated in the crime of Qualified Theft.
(2) the Informations are bereft of the phrase alleging
Banks and Banking; Criminal Law; Qualified Theft; The Bank "dependence, guardianship or vigilance between the
acquires ownership of the money deposited by its clients; and the respondents and the offended party that would have
employees of the Bank, who are entrusted with the possession of created a high degree of confidence between them which
money of the Bank due to the confidence reposed in them, occupy the respondents could have abused."
positions of confidence.—In summary, the Bank acquires ownership
of the money deposited by its clients; and the employees of the Bank, It added that allowing the 112 cases for Qualified Theft filed against
who are entrusted with the possession of money of the Bank due to the respondents to push through would be violative of the right of the
the confidence reposed in them, occupy positions of confidence. The respondents under Section 14(2), Article III of the 1987 Constitution
Informations, therefore, sufficiently allege all the essential elements which states that in all criminal prosecutions, the accused shall enjoy
constituting the crime of Qualified Theft. the right to be informed of the nature and cause of the accusation
against him. Following Section 6, Rule 112 of the Revised Rules of
CHICO-NAZARIO, J.: Criminal Procedure, the RTC dismissed the cases on 30 January 2006
and refused to issue a warrant of arrest against Puig and Porras.
This is a Petition for Review under Rule 45 of the Revised Rules of
Court with petitioner People of the Philippines, represented by the
30

A Motion for Reconsideration2 was filed on 17 April 2006, by the justify the issuance of the warrant of arrest. Petitioner assails the
petitioner. dismissal contending that the Informations for Qualified Theft
sufficiently state facts which constitute (a) the qualifying
On 9 June 2006, an Order3 denying petitioner’s Motion for circumstance of grave abuse of confidence; and (b) the element of
Reconsideration was issued by the RTC, finding as follows: taking, with intent to gain and without the consent of the owner, which
is the Bank.
Accordingly, the prosecution’s Motion for Reconsideration
should be, as it hereby, DENIED. The Order dated January In determining the existence of probable cause to issue a warrant of
30, 2006 STANDS in all respects. arrest, the RTC judge found the allegations in the Information
inadequate. He ruled that the Information failed to state facts
Petitioner went directly to this Court via Petition for Review on constituting the qualifying circumstance of grave abuse of confidence
and the element of taking without the consent of the owner, since the
Certiorari under Rule 45, raising the sole legal issue of:
owner of the money is not the Bank, but the depositors therein. He
also cites People v. Koc Song,4 in which this Court held:
WHETHER OR NOT THE 112 INFORMATIONS FOR
QUALIFIED THEFT SUFFICIENTLY ALLEGE THE
ELEMENT OF TAKING WITHOUT THE CONSENT OF There must be allegation in the information and proof of a
relation, by reason of dependence, guardianship or vigilance,
THE OWNER, AND THE QUALIFYING
between the respondents and the offended party that has
CIRCUMSTANCE OF GRAVE ABUSE OF
created a high degree of confidence between them, which the
CONFIDENCE.
respondents abused.
Petitioner prays that judgment be rendered annulling and setting aside
At this point, it needs stressing that the RTC Judge based his
the Orders dated 30 January 2006 and 9 June 2006 issued by the trial
conclusion that there was no probable cause simply on the
court, and that it be directed to proceed with Criminal Cases No. 05-
insufficiency of the allegations in the Informations concerning the
3054 to 05-3165.
facts constitutive of the elements of the offense charged. This,
therefore, makes the issue of sufficiency of the allegations in the
Petitioner explains that under Article 1980 of the New Civil Code, Informations the focal point of discussion.
"fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple
Qualified Theft, as defined and punished under Article 310 of the
loans." Corollary thereto, Article 1953 of the same Code provides that
"a person who receives a loan of money or any other fungible thing Revised Penal Code, is committed as follows, viz:
acquires the ownership thereof, and is bound to pay to the creditor an
equal amount of the same kind and quality." Thus, it posits that the ART. 310. Qualified Theft. – The crime of theft shall be
depositors who place their money with the bank are considered punished by the penalties next higher by two degrees than
creditors of the bank. The bank acquires ownership of the money those respectively specified in the next preceding article, if
deposited by its clients, making the money taken by respondents as committed by a domestic servant, or with grave abuse of
belonging to the bank. confidence, or if the property stolen is motor vehicle, mail
matter or large cattle or consists of coconuts taken from the
premises of a plantation, fish taken from a fishpond or
Petitioner also insists that the Informations sufficiently allege all the
fishery or if property is taken on the occasion of fire,
elements of the crime of qualified theft, citing that a perusal of the
earthquake, typhoon, volcanic eruption, or any other
Informations will show that they specifically allege that the
respondents were the Cashier and Bookkeeper of the Rural Bank of calamity, vehicular accident or civil disturbance. (Emphasis
Pototan, Inc., respectively, and that they took various amounts of supplied.)
money with grave abuse of confidence, and without the knowledge
and consent of the bank, to the damage and prejudice of the bank. Theft, as defined in Article 308 of the Revised Penal Code, requires
the physical taking of another’s property without violence or
Parenthetically, respondents raise procedural issues. They challenge intimidation against persons or force upon things. The elements of the
crime under this Article are:
the petition on the ground that a Petition for Review on Certiorari via
Rule 45 is the wrong mode of appeal because a finding of probable
cause for the issuance of a warrant of arrest presupposes evaluation of 1. Intent to gain;
facts and circumstances, which is not proper under said Rule.
2. Unlawful taking;
Respondents further claim that the Department of Justice (DOJ),
through the Secretary of Justice, is the principal party to file a Petition 3. Personal property belonging to another;
for Review on Certiorari, considering that the incident was indorsed
by the DOJ. 4. Absence of violence or intimidation against persons or
force upon things.
We find merit in the petition.
To fall under the crime of Qualified Theft, the following elements
The dismissal by the RTC of the criminal cases was allegedly due to must concur:
insufficiency of the Informations and, therefore, because of this
defect, there is no basis for the existence of probable cause which will 1. Taking of personal property;
31

2. That the said property belongs to another; have custody of the money or have come into possession of it. The
Court has consistently considered the allegations in the Information
3. That the said taking be done with intent to gain; that such employees acted with grave abuse of confidence, to the
damage and prejudice of the Bank, without particularly referring to it
4. That it be done without the owner’s consent; as owner of the money deposits, as sufficient to make out a case of
Qualified Theft. For a graphic illustration, we cite Roque v. People,6
where the accused teller was convicted for Qualified Theft based on
5. That it be accomplished without the use of violence or this Information:
intimidation against persons, nor of force upon things;
That on or about the 16th day of November, 1989, in the
6. That it be done with grave abuse of confidence. municipality of Floridablanca, province of Pampanga,
Philippines and within the jurisdiction of his Honorable
On the sufficiency of the Information, Section 6, Rule 110 of the Court, the above-named accused ASUNCION GALANG
Rules of Court requires, inter alia, that the information must state the ROQUE, being then employed as teller of the Basa Air Base
acts or omissions complained of as constitutive of the offense. Savings and Loan Association Inc. (BABSLA) with office
address at Basa Air Base, Floridablanca, Pampanga, and as
On the manner of how the Information should be worded, Section 9, such was authorized and reposed with the responsibility to
Rule 110 of the Rules of Court, is enlightening: receive and collect capital contributions from its
member/contributors of said corporation, and having
Section 9. Cause of the accusation. The acts or omissions collected and received in her capacity as teller of the
complained of as constituting the offense and the qualifying BABSLA the sum of TEN THOUSAND PESOS
and aggravating circumstances must be stated in ordinary and (P10,000.00), said accused, with intent of gain, with grave
concise language and not necessarily in the language used in abuse of confidence and without the knowledge and
the statute but in terms sufficient to enable a person of consent of said corporation, did then and there willfully,
common understanding to know what offense is being unlawfully and feloniously take, steal and carry away the
charged as well as its qualifying and aggravating amount of P10,000.00, Philippine currency, by making it
circumstances and for the court to pronounce judgment. appear that a certain depositor by the name of Antonio
Salazar withdrew from his Savings Account No. 1359, when
in truth and in fact said Antonio Salazar did not withdr[a]w
It is evident that the Information need not use the exact language of
the said amount of P10,000.00 to the damage and prejudice
the statute in alleging the acts or omissions complained of as
of BABSLA in the total amount of P10,000.00, Philippine
constituting the offense. The test is whether it enables a person of
currency.
common understanding to know the charge against him, and the court
to render judgment properly.5
In convicting the therein appellant, the Court held that:
The portion of the Information relevant to this discussion reads:
[S]ince the teller occupies a position of confidence, and the
A]bove-named [respondents], conspiring, confederating, and helping one another, with grave bank places money in the teller’s possession due to the
abuse of confidence, being the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., confidence reposed on the teller, the felony of qualified theft
Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank x x x. would be committed.7

Also in People v. Sison,8 the Branch Operations Officer was


It is beyond doubt that tellers, Cashiers, Bookkeepers and other
convicted of the crime of Qualified Theft based on the Information as
employees of a Bank who come into possession of the monies
herein cited:
deposited therein enjoy the confidence reposed in them by their
employer. Banks, on the other hand, where monies are deposited, are
considered the owners thereof. This is very clear not only from the That in or about and during the period compressed between
express provisions of the law, but from established jurisprudence. The January 24, 1992 and February 13, 1992, both dates
relationship between banks and depositors has been held to be that of inclusive, in the City of Manila, Philippines, the said accused
creditor and debtor. Articles 1953 and 1980 of the New Civil Code, as did then and there wilfully, unlawfully and feloniously, with
appropriately pointed out by petitioner, provide as follows: intent of gain and without the knowledge and consent of the
owner thereof, take, steal and carry away the following, to
wit:
Article 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 Cash money amounting to P6,000,000.00 in different
kind and quality. denominations belonging to the PHILIPPINE
COMMERCIAL INTERNATIONAL BANK (PCIBank for
brevity), Luneta Branch, Manila represented by its Branch
Article 1980. Fixed, savings, and current deposits of money
Manager, HELEN U. FARGAS, to the damage and prejudice
in banks and similar institutions shall be governed by the
of the said owner in the aforesaid amount of P6,000,000.00,
provisions concerning loan.
Philippine Currency.

In a long line of cases involving Qualified Theft, this Court has firmly
That in the commission of the said offense, herein accused
established the nature of possession by the Bank of the money
acted with grave abuse of confidence and unfaithfulness, he
deposits therein, and the duties being performed by its employees who
32

being the Branch Operation Officer of the said complainant acquittal may be undertaken, whenever legally feasible,
and as such he had free access to the place where the said insofar as the criminal aspect thereof is concerned and may
amount of money was kept. be made only by the public prosecutor; or in the case of an
appeal, by the State only, through the OSG. x x x.
The judgment of conviction elaborated thus:
On the alleged wrong mode of appeal by petitioner, suffice it to state
The crime perpetuated by appellant against his employer, the that the rule is well-settled that in appeals by certiorari under Rule 45
Philippine Commercial and Industrial Bank (PCIB), is of the Rules of Court, only errors of law may be raised, 14 and herein
Qualified Theft. Appellant could not have committed the petitioner certainly raised a question of law.
crime had he not been holding the position of Luneta Branch
Operation Officer which gave him not only sole access to the As an aside, even if we go beyond the allegations of the Informations
bank vault xxx. The management of the PCIB reposed its in these cases, a closer look at the records of the preliminary
trust and confidence in the appellant as its Luneta Branch investigation conducted will show that, indeed, probable cause exists
Operation Officer, and it was this trust and confidence which for the indictment of herein respondents. Pursuant to Section 6, Rule
he exploited to enrich himself to the damage and prejudice of 112 of the Rules of Court, the judge shall issue a warrant of arrest
PCIB x x x.9 only upon a finding of probable cause after personally evaluating the
resolution of the prosecutor and its supporting evidence. Soliven v.
From another end, People v. Locson,10 in addition to People v. Sison, Makasiar,15 as reiterated in Allado v. Driokno,16 explained that
described the nature of possession by the Bank. The money in this probable cause for the issuance of a warrant of arrest is the existence
case was in the possession of the defendant as receiving teller of the of such facts and circumstances that would lead a reasonably discreet
bank, and the possession of the defendant was the possession of the and prudent person to believe that an offense has been committed by
Bank. The Court held therein that when the defendant, with grave the person sought to be arrested.17 The records reasonably indicate
abuse of confidence, removed the money and appropriated it to his that the respondents may have, indeed, committed the offense
own use without the consent of the Bank, there was taking as charged.
contemplated in the crime of Qualified Theft.11
Before closing, let it be stated that while it is truly imperative upon the
Conspicuously, in all of the foregoing cases, where the Informations fiscal or the judge, as the case may be, to relieve the respondents from
merely alleged the positions of the respondents; that the crime was the pain of going through a trial once it is ascertained that no probable
committed with grave abuse of confidence, with intent to gain and cause exists to form a sufficient belief as to the guilt of the
without the knowledge and consent of the Bank, without necessarily respondents, conversely, it is also equally imperative upon the judge
stating the phrase being assiduously insisted upon by respondents, "of to proceed with the case upon a showing that there is a prima facie
a relation by reason of dependence, guardianship or vigilance, case against the respondents.
between the respondents and the offended party that has created a
high degree of confidence between them, which respondents WHEREFORE, premises considered, the Petition for Review on
abused,"12 and without employing the word "owner" in lieu of the Certiorari is hereby GRANTED. The Orders dated 30 January 2006
"Bank" were considered to have satisfied the test of sufficiency of and 9 June 2006 of the RTC dismissing Criminal Cases No. 05-3054
allegations. to 05-3165 are REVERSED and SET ASIDE. Let the corresponding
Warrants of Arrest issue against herein respondents TERESITA PUIG
As regards the respondents who were employed as Cashier and and ROMEO PORRAS. The RTC Judge of Branch 68, in Dumangas,
Bookkeeper of the Bank in this case, there is even no reason to Iloilo, is directed to proceed with the trial of Criminal Cases No. 05-
quibble on the allegation in the Informations that they acted with 3054 to 05-3165, inclusive, with reasonable dispatch. No
grave abuse of confidence. In fact, the Information which alleged pronouncement as to costs.
grave abuse of confidence by accused herein is even more precise, as
this is exactly the requirement of the law in qualifying the crime of SO ORDERED.
Theft.

In summary, the Bank acquires ownership of the money deposited by 8. Ocampo III vs People.
its clients; and the employees of the Bank, who are entrusted with the
possession of money of the Bank due to the confidence reposed in Civil Law; Loans; The relationship between the Province of Tarlac
them, occupy positions of confidence. The Informations, therefore, and the Lingkod Tarlac Foundation, Inc. (LTFI) is that of a creditor
sufficiently allege all the essential elements constituting the crime of and debtor; Failure to pay the indebtedness would give rise to a
Qualified Theft. collection suit.—Art. 1953 of the Civil Code provides that “[a] person
who receives a loan of money or any other fungible thing acquires the
On the theory of the defense that the DOJ is the principal party who ownership thereof, and is bound to pay to the creditor an equal
may file the instant petition, the ruling in Mobilia Products, Inc. v. amount of the same kind and quality.” Hence, petitioner Ocampo
Hajime Umezawa13 is instructive. The Court thus enunciated: correctly argued that the NALGU funds shed their public character
when they were lent to LTFI as it acquired ownership of the funds
In a criminal case in which the offended party is the State, with an obligation to repay the Province of Tarlac the amount
the interest of the private complainant or the offended party borrowed. The relationship between the Province of Tarlac and the
is limited to the civil liability arising therefrom. Hence, if a LTFI is that of a creditor and debtor. Failure to pay the indebtedness
criminal case is dismissed by the trial court or if there is an would give rise to a collection suit.
acquittal, a reconsideration of the order of dismissal or
33

Criminal Law; Malversation; Ways by which malversation may be the Sandiganbayan dismissed one case4 on demurrer to evidence. In
committed; Essential elements common to all acts of malversation its Decision promulgated on March 8, 2002, the Fifth Division of the
under Art. 217 of the Revised Penal Code.—Malversation may be Sandiganbayan dismissed two 5 of five criminal cases for malversation
committed by appropriating public funds or property; by taking or of public funds against petitioners. On motion for reconsideration, the
misappropriating the same; by consenting, or through abandonment or Sandiganbayan dismissed one6 more case in a Resolution promulgated
negligence, by permitting any other person to take such public funds on January 6, 2003. The two remaining cases are the subject matters
or property; or by being otherwise guilty of the misappropriation or in the instant consolidated petitions.
malversation of such funds or property. The essential elements
common to all acts of malversation under Art. 217 of the Revised The Informations of the remaining two cases filed on May 28, 1991
Penal Code are: (a) That the offender be a public officer; (b) That he state:
had the custody or control of funds or property by reason of the duties
of his office; (c) That those funds or property were public funds or Crim. Case No. 16794
property for which he was accountable; (d) That he appro-
That on or about the periods between November 2, 1988 to
priated, took, misappropriated or consented or, through abandonment
February 27, 1989, or sometime subsequent thereto, in the
or negligence, permitted another person to take them. Province of Tarlac, Philippines and within the jurisdiction of
this Honorable Court, accused Mariano Un Ocampo III, then
AZCUNA, J.: the Governor of the province of Tarlac and at the same time
President-Chairman of the Board of Trustees of the Lingkod
These are consolidated petitions for review on certiorari1 of the Tarlac Foundation, Inc. (LTFI), a private entity, having
Sandiganbayan’s Decision promulgated on March 8, 2002 and its received by reason of his position, public funds amounting to
Resolution promulgated on January 6, 2003. more than Fifty Two Million Pesos (P52,000,000) x x x from
the National Aid for Local Government Unit (NALGU)
The Decision and Resolution of the Sandiganbayan held petitioners funds, which he is accountable by reason of his official
Mariano Un Ocampo III and Andres S. Flores guilty of malversation duties, did then and there with intent to defraud the
of public funds in Crim. Case Nos. 16794 and 16795. government aforethought release out of the aforesaid funds
thru the said LTFI, the amount of EIGHT MILLION EIGHT
HUNDRED SIXTY THOUSAND PESOS (P8,860,000) x x
The facts are as follows:
x for the payment of the importation of Juki Embroidery
Machines which actually cost SEVEN MILLION SIX
During the incumbency of President Corazon C. Aquino, Tarlac HUNDRED SEVENTY NINE THOUSAND FIVE
Province was chosen as one of the four provinces that would serve as HUNDRED THIRTY PESOS AND FIFTY TWO
a test case on decentralization of local government administration. CENTAVOS (P7,679,530.52) x x x thereby leaving a
balance of P1,180,463.48 which ought to have been returned,
For this purpose, the Department of Budget and Management (DBM) but far from returning the said amount, accused Mariano Un
released National Aid for Local Government Units (NALGU) funds in Ocampo III, in connivance with his co-accused, Andres S.
the total amount of P100 million to the Province of Tarlac. The Flores and William Uy wilfully, unlawfully and feloniously
NALGU is a fund set aside in the General Appropriations Act to assist misapply, misappropriate and convert for their own personal
local governments in their various projects and services. The use and benefit the said amount resulting to the damage and
distribution of this fund is entirely vested with the Secretary of the prejudice of the government in the aforesaid sum of One
DBM. Million One Hundred Eighty Thousand Four Hundred Sixty
Three Pesos and Forty Eight Centavos (P1,180,463.48).
Petitioner Ocampo, provincial governor of Tarlac from February 22,
1988 up to June 30, 1992, loaned out P56.6 million of the P100 CONTRARY TO LAW.
million to the Lingkod Tarlac Foundation, Inc. (LTFI) for the
implementation of various livelihood projects. The loan was made Crim. Case No. 16795
pursuant to a Memorandum of Agreement (MOA) entered into by the
Province of Tarlac, represented by petitioner Ocampo, and LTFI,
That on or about the periods between November 2, 1988 to
represented by petitioner Flores, on August 8, 1988.
February 27, 1989, or sometime subsequent thereto, in the
Province of Tarlac, Philippines and within the jurisdiction of
LTFI is a private non-stock corporation with petitioner Ocampo as its this Honorable Court, accused Mariano Un Ocampo III, then
first chairperson and petitioner Andres S. Flores as its executive the Governor of the province of Tarlac, and at the same time
director. The Sandiganbayan, in its Resolution dated January 6, 2000, President-Chairman of the Board of Trustees of the Lingkod
admitted the annexes2 submitted by petitioner Ocampo, which Tarlac Foundation, Inc. (LTFI), a private entity, having
annexes proved that petitioner Ocampo resigned as chairperson and received by reason of his position, public funds amounting to
trustee of the LTFI prior to August 8, 1988, the date when petitioner more than Fifty Two Million Pesos (P52,000,000.00) x x x
Ocampo and LTFI entered into the MOA. from the National Aid for Local Government Unit (NALGU)
Funds, which he is accountable by reason of his official
How the P56.6 million released to LTFI was utilized became the duties, caused the withdrawal by co-accused Andres S.
subject matter of 25 criminal cases. In a Resolution in G.R. Nos. Flores on April 28, 1989, then Executive Officer, LTFI, from
103754-78 dated October 22, 1992,3 this Court quashed 19 of the 25 the PHILIPPINE NATIONAL BANK LTFI account the sum
Informations filed against petitioner Ocampo. The Fifth Division of of FIFTY EIGHT THOUSAND PESOS (P58,000.00),
34

portion of the said NALGU funds deposited by LTFI under (11) Between the amount listed in the books of the
Account No. 490-555744, both accused conniving and corporation (P8,860,000) and the amount of the LC
confederating with one another, with intent to gain and to (P7,679,530), a discrepancy of P1,180,496.48 existed.
defraud the government, did then and there, wilfully,
unlawfully and feloniously misappropriate, misapply and (12) Between the total amount deposited in PNB S/A No.
convert the same to their own personal use and benefit to the 490-555744-6 (P7,727,261.00) and the total amount
damage and prejudice of the government in the aforesaid withdrawn from the account for the payment of the machines
amount of P58,000.00, Philippine Currency. (P7,679,530.52), a balance of P47,730.48 remained. This
balance (plus interest), in the amount of P58,000.00, was
CONTRARY TO LAW.7 later withdrawn upon authorization of accused Flores.8

The Prosecution relied mainly on an audit conducted by the Petitioner Ocampo did not testify regarding the subject cases on the
Commission on Audit on LTFI from February 12, 1990 up to April 2, ground that he was not competent to testify on the disbursements
1990. The audit covered the period from July 1, 1988 to December 31, made by LTFI but only as to the receipt of the NALGU funds from
1989 and was confined to the examination of the loans granted by the the government.
Provincial Government of Tarlac for the implementation of its Rural
Industrialization Can Happen Program. The result of the audit was The Sandiganbayan declared that petitioner Ocampo as governor of
embodied in Special Audit Report No. 90-91, offered as Exhibit "B" Tarlac, who personally received the NALGU funds from the DBM
by the prosecution. and thereafter released some of them to the LTFI, was duty bound to
put up regular and effective measures for the monitoring of the
According to the Sandiganbayan, the money trail with respect to the projects approved by him.
two cases, as proven by the prosecution, is as follows:
According to the Sandiganbayan, Sec. 203(t) of the Local
(1) Accused Ocampo released P11.5 Million to LTFI, Government Code obligated provincial governors to "adopt measures
P7,023,836.00 of which was intended for the purchase of 400 to safeguard all the lands, buildings, records, monies, credits and other
embroidery machines; property rights of the province." However, petitioner Ocampo, as
governor of Tarlac, neglected to set up safeguards for the proper
(2) The total amount released was deposited by LTFI to the handling of the NALGU funds in the hands of LTFI which resulted in
Rural Bank of Tarlac, Inc.; the disappearance of P1,132,739 and P58,000 of the said funds. The
Sandiganbayan held:
(3) Within two (2) months from the deposit, a total of
P5,465,000.00 was withdrawn and given to William Uy For such gross and inexcusable negligence, accused is liable
(LTFI’s broker for the importation of the machines); for malversation. In so ruling, we are guided by the oft-
repeated principle that malversation may be committed
(4) This amount (P5,465,000) was thereafter deposited to the through a positive act of misappropriation of public funds or
personal account of "Willam Uy and/or Andres Flores" under passively though negligence by allowing another to commit
such misappropriation (Cabello vs. Sandiganbayan, 197
S/A No. 26127;
SCRA 94 [1991]). Although accused was charged with
willful malversation, he can validly be convicted of
(5) Another account (PNB S/A No. 490-555744-6) was malversation through negligence where the evidence sustains
opened by "LTFI by Andres Flores," this time with PNB, the latter mode of committing the offense (Cabello, supra).9
intended solely for the purchase of the machines;
Further, the Sandiganbayan stated that under Sec. 203(f) of the Local
(6) A check in the amount of P3,395,000.00 dated February Government Code of 1983,10 the provincial governor, as chief
27, 1989, was remitted for the payment of the machines; executive of the provincial government, has the power to "represent
the province in all its business transactions and sign on its behalf all
(7) This amount, together with the P5,465,000.00 placed on bonds, contracts and obligations and other official documents made in
the personal account of William Uy and/or Andres Flores, accordance with law or ordinance."
made up the cost of he machines or a total of P8,860,000.00
as recorded in the books of LTFI; Sec. 2 (c) of Rule XI11 of the Rules and Regulations Implementing the
Local Government Code of 1983 provides that the local chief
(8) To the PNB account was added a total of P4,332,261.00 executive of a local government unit shall "[r]epresent the respective
deposited on different dates from March 6 to April 17, 1989 local units in all their business transactions and sign on its behalf all
which funds came from S/A No. 26127; bonds, contracts and obligations and other official documents made in
accordance with law or ordinance." Sec. 2 of Rule VI 12 states that
(9) Thus, the total amount on deposit with PNB was "[t]he power to sue, to acquire and convey real or personal property,
P7,727,261.00 plus interest; and to enter into contracts shall be exercised by the local chief
executive upon authority of the Sanggunian concerned." Thus, the
(10) Of this amount, P7,679,530.52 was used for the opening Sandiganbayan declared that since the required authority from the
of the LC (for the payment of the machines) leaving a Sangguniang Panlalawigan was not shown to have been obtained by
balance of P47,730,48.00 plus interest; petitioner Ocampo, the MOA is ineffective as far as the Province of
Tarlac is concerned.
35

Petitioner Flores, as executive director of LTFI, was charged with The Sandiganbayan declared that the documents showing the
malversation of public funds in connivance with a public officer. extinguishment of LTFI’s obligations to the Province of Tarlace do
However, the Sandiganbayan found that there was no conspiracy not mitigate the liability of petitioners since the crime is consummated
between the petitioners, and held petitioner Flores guilty of as of asportation, akin to the taking of another’s property in theft. It
malversation through his independent acts under Art. 222 of the held that the return of the amount malversed is neither an exempting
Revised Penal Code,13 since the purpose of Art. 222 is to extend the circumstance nor a ground for extinguishing the criminal liability of
provisions of the Penal Code on malversation to private individuals. petitioners.
According to the Sandiganbayan, petitioner Flores bound himself, as a
signatory of the MOA representing LTFI, to receive NALGU funds On March 8, 2002, the Fifth Division of the Sandiganbayan rendered
from the province of Tarlac. In such capacity, he had charge of these a Decision acquitting petitioners of the crime of malversation of
funds. public funds in Crim. Case Nos. 16796 and 16802, but finding them
guilty of the crime in Crim. Case Nos. 16787, 16794 and 16795. The
In Crim. Case No. 16794, petitioner Flores was found to have charge dispositive portion of the Decision reads:
of missing NALGU funds deposited in his personal account in the
amount of P1,132,739, which formed part of the discrepancy of the WHEREFORE, premises considered, accused Mariano Un
actual cost of the embroidery machines and the NALGU funds Ocampo III and Andres S. Flores are hereby found GUILTY
released for payment of the said machines. beyond reasonable doubt of the crime of malversation of
Public Funds under Crim. Case No. 16787 and are sentenced
In defense, petitioner Flores claimed that the broker for the to suffer the indeterminate penalty of (10) years, and one (1)
importation of the machines made an initial payment to the supplier of day of prision mayor, as minimum, to eighteen (18) years,
the machines, which initial payment would explain the discrepancy eight (8) months and one (1) day of reclusion temporal as
between the reported cost as stated in the books of the corporation and maximum and to pay a fine of sixty-six thousand nine
the letter of credit. However, the Sandiganbayan stated that the hundred thirty-two pesos and seventy centavos (P66,932.70).
explanation was hearsay as the broker was not presented in court, and They shall also suffer the penalty of perpetual special
there was no proof of the initial payment. disqualification. Costs against the accused.

In Crim. Case No. 16795, the Sandiganbayan held that petitioner For Crim. Case No. 16794, accused Mariano Un Ocampo III
Flores’ failure to explain the purpose of the withdrawal on April 28, and Andres S. Flores are hereby found GUILTY beyond
1989 of P58,000 upon his authorization, considering that he was in reasonable doubt of the crime of Malversation of Public
charge of the PNB savings account, made him liable for malversation Funds and are sentenced to suffer the indeterminate penalty
of public funds. of (10) years, and one (1) day of prision mayor, as minimum,
to eighteen (18) years, eight (8) months and one (1) day of
Petitioners presented five documents to show that LTFI’s obligations reclusion temporal as maximum and to pay a fine of one
to the Province of Tarlac, in the amount of P56.6 million, have been million one hundred thirty-two thousand seven hundred
extinguished. The documents are as follows: thirty-nine pesos (P1,132,739.00). They shall also suffer the
penalty of perpetual special disqualification. Costs against
1) The Tripartite Memorandum of Agreement (TMOA) dated the accused.
May 23, 1990 executed by the Province of Tarlac, LTFI and
the Barangay Unity for Industrial and Leadership For Crim. Case No. 16795, accused Mariano Un Ocampo III
Development (BUILD) Foundation whereby the liability of and Andres S. Flores are hereby found GUILTY beyond
LTFI in favor of the Province of Tarlac was transferred and reasonable doubt of the crime of Malversation of Public
assumed by BUILD in the total amount of P40 million. Funds and are sentenced to suffer the indeterminate penalty
of (10) years, and one (1) day of prision mayor, as minimum,
to eighteen (18) years, eight (8) months and one (1) day of
2) Resolution No. 76 of the Sangguniang Panlalawigan of
reclusion temporal as maximum and to pay a fine of fifty-
Tarlac dated April 5, 1990 showing that the authority of
eight thousand pesos (P58,000.00). They shall also suffer the
petitioner Ocampo in entering into the TMOA was with prior
approval of the Sangguniang Panlalawigan. penalty of perpetual special disqualification. Costs against
the accused.
3) A Deed of Assignment between Tarlac and LTFI whereby
For Crim. Case No. 16796, on ground that the crime was not
the latter assigned its loan portfolios (including interests and
committed by the accused, accused Mariano Un Ocampo III
certificates of time deposit), the Juki embroidery machines
and other assignable documents to the Province of Tarlac in and Andres S. Flores are hereby ACQUITTED of the crime
the total amount of P16,618,403. charged. The surety bonds posted by them for their
provisional liberty are cancelled.
4) Resolution No. 199 of the Sangguniang Panlalawigan of
For Crim. Case No. 16802, on ground of reasonable doubt,
Tarlac dated October 18, 1990 authorizing petitioner
Ocampo to enter into the Deed of Assignment with LTFI. accused Mariano Un Ocampo III and Andres S. Flores are
hereby ACQUITTED of the crime charged. The surety bonds
posted by them for their provisional liberty are cancelled.
5) A certified photocopy of a document dated June 16, 1992
issued by the OIC provincial treasurer of Tarlac whereby the
SO ORDERED.14
treasurer affirmed the existence of the above documents.
36

Petitioners separately filed a motion for reconsideration of the WHEREAS, the First Party [the Provincial Government of
Decision. Tarlac], in order to vigorously pursue its livelihood program
for rural development, has identified the need to establish a
In a Resolution promulgated on January 6, 2003, the Sandiganbayan RICH (Rural Industrialization Can Happen) Program;
reconsidered its Decision in Crim. Case No. 16787, and acquitted
petitioners of the crime charged. In that case, the prosecution alleged WHEREAS, the First Party now realizes the effectivity and
that P5 million of the NALGU funds loaned to LTFI were placed in efficiency of designating a professional private non-profit
time deposits with the Rural Bank of Tarlac and earned a total interest organization to implement the various livelihood projects
of P116,932.77, of which amount only P50,000.00 was recorded in under the RICH Program;
the books of LTFI. The unrecorded interest of P66,932.77 was said to
have been withdrawn from December 27, 1988 to February 2, 1989 WHEREAS, the Second Party [Lingkod Tarlac Foundation],
and allegedly malversed by petitioners. The Sandiganbayan held that has represented that it has the technical expertise required by
as this Court has already labeled the subject agreement as one of loan, the First Party in the implementation of the various
the said "interest are private funds, hence, not the proper subject for livelihood projects under the RICH Program;
malversation of public funds." Thus, petitioners were acquitted in
Crim. Case No. 16787. WHEREAS, the First Party desires to engage the Second
Party and the latter agrees as the implementing arm of the
Petitioners thereafter filed their respective petitions, which were Provincial Government for its livelihood projects;
consolidated by the Court in a Resolution dated February 20, 2006.
NOW, THEREFORE, in consideration of the mutual
The pertinent issues raised by petitioners may be summarized as covenants herein contained, the Parties hereby agree as
follows: follows:

1) Whether or not petitioners Ocampo and Flores are guilty ARTICLE I


of the crime of malversation of public funds under Art. 217
and Art. 220 respectively of the Revised Penal Code;
UNDERTAKINGS OF THE FIRST PARTY

2) Whether or not the Sandiganbayan erred in holding that


1. The First Party shall provide all the data and information
the MOA is void and did not bind the Province of Tarlac on as may be required by [the] Second Party in the
the ground that the MOA was entered into by petitioner implementation of the RICH Program;
Ocampo without authority from the Sangguniang
Panlalawigan in violation of the Local Government Code of
1983. ARTICLE III

First Issue: Whether or not petitioners Ocampo and Flores are guilty DESCRIPTION OF THE PRIORITY PROJECTS
of the crime of malversation of public funds under Art. 217 and Art.
220 respectively of the Revised Penal Code? A. Program For Lease Purchase Agreements on equipment,
machineries, buildings and structures:
Crucial to the resolution of the first issue is the nature of the
transaction entered into by the Province of Tarlac and LTFI. xxx

Petitioners claim that in the instant cases, the public funds alleged to B. Direct Lending Pogram:
have been malversed were loaned by the Province of Tarlac to LTFI
per the MOA; hence, LTFI acquired ownership of the funds which Under this scheme, the Lingkod Tarlac Foundation
thus shed their public character and became private funds. shall engage in direct lending operations to
proponents of livelihood activities under the Rural
Petitioner Ocampo also asserts that the Sandiganbayan impliedly ruled Industrialization Can Happen (RICH PROGRAM)
that the funds were private in character and owned by LTFI when it at variable interest rates and loan conditions
ruled in Crim. Case No. 16787 that since this Court has already depending on the viability and nature of the
labeled the subject agreement as one of loan, the interests from the livelihood projects availing of the loan.
loan are private funds; hence, not the proper subject for malversation
of public funds. Having declared the interests earned by the funds C. Direct Borrowing by Lingkod Tarlac Foundation:
loaned to LTFI as private funds, the Sandiganbayan should have also
declared the funds loaned as private. The Lingkod Tarlac Foundation shall be allowed
to borrow funds directly from the Provincial
Petitioners’ arguments are meritorious. government to fund Lingkod Tarlac Foundation
projects provided the projects are livelihood
The MOA states: projects under the Rural Industrialization Can
Happen (RICH Program).
xxx
37

D. Other project financing schemes that may be developed CONCURRED IN BY:


for the RICH Program.
(Signed)
ARTICLE IV GUILLERMO N. CARAGUE
Secretary of Budget & Management
CONDITIONS FOR RELEASE OF FUNDS
The MOA shows that LTFI is "allowed to borrow funds directly from
The First Party shall release in lump sum the appropriate
the Provincial Government to fund Lingkod Tarlac Foundation
funds for the approved projects covered by individual loan
projects provided the projects are livelihood projects under the Rural
documents upon signing of [the] respective loan agreement
Industrialization Can Happen Program." Moreover, the agreement
and approval of the Commission on Audit.
stipulates under the "Conditions for Release of Funds" that the
Province of Tarlac "shall release in lump sum the appropriate funds
ARTICLE V for the approved projects covered by individual loan documents
upon signing of the respective loan agreement...."15
TERMS OF REPAYMENT
In Crim. Case No. 16794, the fund alleged to have been malversed in
1. The Second Party shall repay the First Party only the total the amount of P1,180,496.48 represents the discrepancy of the cost of
amount of capital without interest in consideration of the the Juki embroidery machines as listed in the books of LTFI and the
following: amount actually paid to open the letter of credit for the payment of the
machines. In the books of LTFI, the cost of the Juki embroidery
a) The Second Party shall shoulder all its operating machines was listed as P8,860,000, while the amount paid to open the
expenses. letter of credit for the payment of the machines was P7,679,530.52.
Petitioner Flores was held liable only up to the amount of P1,132,739.
b) The Second Party shall not charge the Province
any management fees or whatever fees. In Crim. Case No. 16795, the fund alleged to have been malversed in
the amount of P58,000 is the money left (P47,730) in PNB S/A No.
c) The Second Party shall, whenever necessary, 490-555744-6 after the withdrawal of the purchase price of the Juki
assure the beneficiaries of the project interests and embroidery machines, plus interest. The amount of P58,000 was
management fees at rates lower than the commercial withdrawn upon the authorization of petitioner Flores. The withdrawal
financial rates. was neither reflected as deposit in the bank accounts of LTFI nor
spent by it.
2. The terms of repayment shall be based on the projects’
ability to pay without sacrificing on the projects viability. In both cases, the money trail proven by the prosecution shows that
the subject funds or the money used for the purchase of the Juki
embroidery machines came from the release of the Province of Tarlac
ARTICLE VI through petitioner Ocampo of NALGU funds in the amount of P11.5
million to LTFI on October 24, 1988. The release of the funds was
SUCCESSORS AND ASSIGNEES covered by a loan document in accordance with the MOA which
states that the Province of Tarlac "shall release in lump sum the
Except as may be mutually agreed in writing, neither party appropriate funds for the approved projects covered by individual
can assign, sublet, or transfer its interest or duties under this loan documents upon signing of the respective loan agreement...."
Agreement.
The Report on the Special Audit of LTFI16 stated:
ARTICLE VII
. . . For the period July 1988 to December 1989, LTFI
TERMS OF THE AGREEMENT received a total of P56.6 million which consisted of six
releases and covered by individual loan agreements, as
This Agreement shall exist for as long as the Program exists follows:
or any extension thereof.
Date Amount
IN WITNESS WHEREOF, the Parties have hereunto set 08 30 88 P7, 000, 000
their hands on this 8th day of August, 1988 in Tarlac, Tarlac.
10 24 88 11,500, 000
12 08 88 1,500, 000
LINGKOD TARLAC PROVINCE OF TARLAC
FOUNDATION First Party 02 22 89 4,000, 000
Second Party 04 12 89 18,000, 000
(Signed) 06 14 89 12,718, 403
(Signed) MARIANO UN OCAMPO III Total P56,618, 403
ANDRES S, FLORES Governor
Executive Director
38

xxx The essential elements common to all acts of malversation under Art.
217 of the Revised Penal Code20 are:
On October 24, 1988, the Provincial Government of Tarlac
approved and released an amount of P11,500,000 to Lingkod (a) That the offender be a public officer;
Tarlac Foundation, Inc. (LTFI) for the Rural Industrialization
Can Happen (RICH) Program. Of the amount released, (b) That he had the custody or control of funds or property by
P7,023,836 was intended for the purchase of 400 sets reason of the duties of his office;
embroidery machines for the Embroidery Skills Training
Project.17
(c) That those funds or property were public funds or
property for which he was accountable;
Based on the foregoing, it is clear that the funds released by the
Province of Tarlac, including the money allegedly malversed by
(d) That he appropriated, took, misappropriated or consented
petitioners in Crim. Case Nos. 16794 and 16795, were in the nature of
or, through abandonment or negligence, permitted another
a loan to LTFI.
person to take them.21

Art. 1953 of the Civil Code provides that "[a] person who receives a
There can be no malversation of public funds by petitioner Ocampo in
loan of money or any other fungible thing acquires the ownership
the instant cases since the loan of P11.5 million transferred ownership
thereof, and is bound to pay to the creditor an equal amount of the
and custody of the funds, which included the sum of money allegedly
same kind and quality."
malversed, to LTFI for which Ocampo could no longer be held
accountable. Thus, contrary to the allegation of the Office of the
Hence, petitioner Ocampo correctly argued that the NALGU funds Special Prosecutor, petitioner Ocampo cannot be held culpable for
shed their public character when they were lent to LTFI as it acquired malversation committed through negligence in adopting measures to
ownership of the funds with an obligation to repay the Province of safeguard the money of the Province of Tarlac, since the same were
Tarlac the amount borrowed. The relationship between the Province neither in his custody nor was he accountable therefor after the loan to
of Tarlac and the LTFI is that of a creditor and debtor. Failure to pay LTFI.
the indebtedness would give rise to a collection suit.
Thus, petitioner Flores, as the executive director of LTFI, cannot also
The Sandiganbayan convicted petitioner Ocampo of malversation of be held liable for malversation of public funds in a contract of loan
public funds under Art. 217 of the Revised Penal Code for his "gross which transferred ownership of the funds to LTFI making them
and inexcusable negligence" in not setting up safeguards in private in character. Liwanag v. Court of Appeals22 held:
accordance with Sec. 203(t) of the Local Government Code 18 for the
proper handling of the NALGU funds in the hands of LTFI which
. . . in a contract of loan once the money is received by the
resulted in the disappearance of P1,132,739 allegedly malversed in
debtor, ownership over the same is transferred. Being the
Crim. Case No. 16794 and the disappearance of P58,000 in Crim.
owner, the borrower can dispose of it for whatever purpose
Case No. 16795. he may deem proper.

In his petition, petitioner Ocampo states that he made sure that proper
The Sandiganbayan erred when it stated that the intention of the
safeguards were in place within LTFI to ensure the proper handling of
parties was for the funds to remain public, citing the MOA which
NALGU funds by LTFI. On August 5, 1988, before the Province of
allegedly provided, thus:
Tarlac and LTFI entered into the MOA, LTFI’s Articles of
Incorporation were amended to add the following:
The Province shall have the right to have access to all
resources and records of either LTF[I] or BUILD and may
TENTH: That no part of the net income of the Foundation
conduct COA examination or audit on any or all matter
shall inure to the benefit of any member of the Foundation
affecting the loans or assets covered by this agreement and
and that at least seventy percent (70%) of the funds shall be funds from the Province of Tarlac.
used for the projects and not more than thirty percent (30%)
of said funds shall be used for administrative purposes.
A review of the MOA did not show the presence of such provision.
But the cited provision is contained in the TMOA, which was later
Petitioner Ocampo argues that since he had resigned from LTFI both entered into by the Province of Tarlac, LTFI and BUILD, whereby
as chairperson and as trustee on June 22, 1988, he ceased to become LTFI transferred part of its obligation to BUILD.
accountable for the handling of the NALGU funds after the same were
loaned to LTFI pursuant to the MOA dated August 8, 1988.
Consequently, he may not be held criminally liable for disbursements What is controlling in the instant cases is that the parties entered
made by LTFI since he had nothing to do with its operations after his into a contract of loan for each release of NALGU funds. The
resignation. second release on October 24, 1988 included the subject funds in
controversy. By virtue of the contract of loan, ownership of the
subject funds was transferred to LTFI making them private in
Malversation may be committed by appropriating public funds or
character, and therefore not subject of the instant cases of
property; by taking or misappropriating the same; by consenting, or
malversation of public funds.
through abandonment or negligence, by permitting any other person to
take such public funds or property; or by being otherwise guilty of the
misappropriation or malversation of such funds or property. 19
39

The Court notes that the obligation of LTFI to repay the NALGU Further, petitioner Ocampo states that in any case, the lack of
Funds of P56,618,403 obtained by it from the Province of Tarlac authority of one who enters into a contract in the name of another
pursuant to the MOA was extinguished as follows: does not render the contract void under Art. 1409 of the Civil Code, 28
as ruled by the Sandiganbayan, but only unenforceable under Art.
(1) BUILD assumed LTFI’s principal loan of P40 million; 1403(1) of the Civil Code. He points out that unenforceable contracts
are susceptible of ratification, and in this case, the Provincial Board of
Tarlac can be deemed to have ratified the MOA when it passed the
(2) LTFI ceded, transferred and assigned to the Province of
following resolutions:
Tarlac all the rights and interests of LTFI in certain loans
including interests, certificate of time deposit and certain
Juki embroidery machines in the total amount of (1) Resolution No. 76, which confirmed and ratified the
P16,618,403. TMOA among the Province of Tarlac, LTFI and the BUILD,
whereby the liability of LTFI in favor of the Province of
Tarlac in the total amount of P40 million was transferred to
Second Issue: Whether or not the Sandiganbayan erred in holding
and assumed by BUILD;29 and
that the MOA is void and did not bind the Province of Tarlac on the
ground that the MOA was entered into by petitioner Ocampo without
authority from the Sangguniang Panlalawigan in violation of the (2) Resolution No. 199, which authorized petitioner Ocampo
Local Government Code of 1983? to sign the Deed of Assignment between the Province of
Tarlac and LTFI, whereby LTFI assigned loans, sewing
machines and other assignable documents in favor of the
In its Resolution dated January 6, 2003, the Sandiganbayan concedes
Province of Tarlac to settle the balance of its obligation in
that the transaction between the Province of Tarlac through petitioner
Ocampo and the LTFI was one of loan. However, it stated that since the amount of P16,618,403.00. 30
Ocampo was not authorized by the Sangguniang Panlalawigan to
enter into the MOA as required by the Local Government Code of The Court holds that since petitioner Ocampo was not duly authorized
1983, the MOA did not bind the province nor did it give any benefits by the Sangguniang Panlalawigan to enter into the MOA, the
to the LTFI because a void contract has no effect whatsoever. agreement is an unenforceable contract under Sec. 1403 of the Civil
Code:
Petitioner Ocampo alleges that he had ample authority to enter into
the MOA for the following reasons: Art. 403. The following contracts are unenforceable, unless
they are ratified:
1) NALGU funds received by the Province of Tarlac came
straight from the national government and were intended for (1) Those entered into in the name of another person by one
a specific purpose, that is, the implementation of various who has been given no authority or legal representation, or
livelihood projects in the Province of Tarlac, as evidenced by who has acted beyond his powers; x x x.
the exchange of correspondence between him (petitioner
Ocampo) and DBM Secretary Guillermo N. Carague.23 Unenforceable contracts are governed by the following provisions of
the Civil Code:
2) On July 15, 1988, the DBM released a revolving fund for
the implementation of various livelihood projects in the Art. 1404. Unauthorized contracts are governed by article
Province of Tarlac under Advice Allotment No. BCS-0183- 1317 and the principles of agency in Title X of this Book.
88-301.24 In August 1988, he (petitioner Ocampo) informed
the DBM that the Province of Tarlac had designated LTFI as Art. 1317. No one may contract in the name of another
the implementing arm for its livelihood projects, and without being authorized by the latter, or unless he has by
requested authority to extend loans to LTFI, which request law or right to represent him.
was approved by the DBM Secretary.25
A contract entered into in the name of another by one who
3) The DBM’s approval of petitioner Ocampo’s request has no authority or legal representation, or who has acted
constituted the authority of petitioner Ocampo to enter into beyond his powers, shall be unenforceable, unless it is
the MOA with LTFI. ratified, expressly or impliedly, by the person on whose
behalf it has been executed, before it is revoked by the other
4) DBM also approved and concurred with the terms of the contracting party.31
MOA as evidenced by the DBM Secretary’s signature on the
MOA. The Court finds that the MOA has been impliedly ratified by the
Sangguniang Panlalawigan as it has not directly impugned the
Petitioner Ocampo also asserts that Sec. 203(f) of the Local validity of the MOA despite knowledge of this controversy. Implied
Government Code of 1983,26 which authorized the provincial ratification is also shown by the following acts:
governor to enter into business transactions on behalf of the province,
did not expressly require the concurrence of the provincial board 1) The Sangguniang Panlalawigan subsequently recognized
unlike its counterpart provision in the Local Government Code of the transfer of liabilities of LTFI in favor of the Province of
1991.27 Tarlac to BUILD in the amount of P40 million contained in a
TMOA.32
40

2) It authorized petitioner Ocampo to sign in behalf of the court, agency or a person is doing, threatening, or is attempting to do,
Province of Tarlac the Deed of Assignment entered into by or is procuring or suffering to be done, some act or acts probably in
the Province of Tarlac and LTFI33 which extinguished the violation of the rights of the applicant respecting the subject of the
remaining loan obligations of LTFI obtained under the action or proceeding, and tendering to render the judgment
MOA. ineffectual.

WHEREFORE, the consolidated petitions are GRANTED. The Same; The grant of a preliminary injunction in a case rests on the
Decision of the Sandiganbayan promulgated on March 8, 2002 and its sound discretion of the court with the caveat that it should be made
Resolution promulgated on January 6, 2003 are SET ASIDE. with great caution; A petition for a writ of preliminary injunction
Petitioner Mariano Un Ocampo III and petitioner Andres S. Flores are rests upon an alleged existence of an emergency or of a special
hereby ACQUITTED of the crime of malversation of public funds in reason for such a writ before the case can be regularly tried.—The
Crim. Case Nos. 16794 and 16795. grant of a preliminary injunction in a case rests on the sound
discretion of the court with the caveat that it should be made with
No costs. great caution. The exercise of sound judicial discretion by the lower
court should not be interfered with except in cases of manifest abuse.
Injunction is a preservative remedy for the protection of the parties’
SO ORDERED.
substantive rights and interests. The sole aim of a preliminary
injunction is to preserve the status quo within the last actual status that
9 Nisce vs. Equitable PCI Bank, Inc. preceded the pending controversy until the merits of the case can be
heard fully. Moreover, a petition for a preliminary injunction
Certiorari; The general rule is that before filing a petition for
is an equitable remedy, and one who comes to claim for equity must
certiorari under Rule 65 of the Rules of Court, the petitioner is
do so with clean hands. It is to be resorted to by a litigant to prevent or
mandated to comply with a condition precedent: the filing of a motion
preserve a right or interest where there is a pressing necessity to avoid
for reconsideration of the assailed order, and the subsequent denial of
injurious consequences which cannot be remedied under any standard
the court a quo; Exceptions.—The general rule is that before filing a
of compensation. A petition for a writ of preliminary injunction rests
petition for certiorari under Rule 65 of the Rules of Court, the
upon an alleged existence of an emergency or of a special reason for
petitioner is mandated to comply with a condition precedent: the filing
such a writ before the case can be regularly tried. By issuing a writ of
of a motion for reconsideration of the assailed order, and the
preliminary injunction, the court can thereby prevent a threatened or
subsequent denial of the court a quo. It must be stressed that a petition
continued irreparable injury to the plaintiff before a judgment can be
for certiorari is an extraordinary remedy and should be filed only as a
rendered on the claim.
last resort. The filing of a motion for reconsideration is intended to
afford the public respondent an opportunity to correct any actual error
attributed to it by way of re-examination of the legal and factual Same; In the absence of proof of a legal right and the injury sustained
issues. However, the rule is subject to the following recognized by the plaintiff, an order for the issuance of a writ of preliminary
exceptions: (a) where the order is a patent nullity, as where the court a injunction will be nullified.—The plaintiff praying for a writ of
quo has no jurisdiction; (b) where the questions raised in the preliminary injunction must further establish that he or she has a
certiorari proceeding have been duly raised and passed upon by the present and unmistakable right to be protected; that the facts against
lower court, or are the same as those raised and passed upon in the which injunction is directed violate such right; and there is a special
lower court; (c) where there is an urgent necessity for the resolution and paramount necessity for the writ to prevent serious damages. In
the absence of proof of a legal right and the injury sustained by the
plaintiff, an order for the issuance of a writ of preliminary injunction
of the question and any further delay would prejudice the interests of
will be nullified. Thus, where the plaintiff’s right is doubtful or
the Government or of the petitioner or the subject matter of the action
disputed, a preliminary injunction is not proper. The possibility of
is perishable; (d) where, under the circumstances, a motion for
irreparable damage without proof of an actual existing right is not a
reconsideration would be useless; (e) where petitioner was deprived of
ground for a preliminary injunction.
due process and there is extreme urgency for relief; (f) where, in a
criminal case, relief from an order of arrest is urgent and the granting
of such relief by the trial court is improbable; (g) where the Same; To establish the essential requisites for a preliminary
proceedings in the lower court are a nullity for lack of due process; (h) injunction, the evidence to be submitted by the plaintiff need not be
where the proceedings was ex parte or in which the petitioner had no conclusive and complete.—To establish the essential requisites for a
opportunity to object; and (i) where the issue raised is one purely of preliminary injunction, the evidence to be submitted by the plaintiff
law or public interest is involved. need not be conclusive and complete. The plaintiffs are only required
to show that they have an ostensible right to the final relief prayed for
in their complaint. A writ of preliminary injunction is generally based
Injunctions; Requisites before a preliminary injunction may be
solely on initial or incomplete evidence. Such evidence need only be a
granted.—Section 3, Rule 58 of the Rules of Court provides that a
sampling intended merely to give the court an evidence of justification
preliminary injunction may be granted when the following have been
for a preliminary injunction pending the decision on the merits of the
established: (a) That the applicant is entitled to the relief demanded,
case, and is not conclusive of the principal action which has yet to be
and the whole or part of such relief consists in restraining the
decided.
commission or continuance of the act or acts complained of, or in
requiring the performance of an act or acts, either for a limited period
or perpetually; (b) That the commission, continuance or Compensation; Obligations and Contracts; Compensation takes place
nonperformance of the act or acts complained of during the litigation when two persons, in their own right, are creditors and debtors of
would probably work injustice to the applicant; or (c) That a party, each other; Requisites in order that compensation may be proper.—
41

Under Article 1278 of the New Civil Code, compensation shall take majority or complete stock control, but complete dominion, not only
place when two persons, in their own right, are creditors and debtors of finances but of policy and business practice in respect to the
of each other. In order that compensation may be proper, petitioners transaction attacked so that the corporate entity as to this transaction
were burdened to establish the following: (1) That each one of the had at the time no separate mind, will or existence of its own; 2. Such
obligors be bound principally, and that he be at the same time a control must have been used by the defendant to commit fraud or
principal creditor of the other; (2) That both debts consist in a sum of wrong, to perpetuate the violation of a statutory or other positive legal
money, or if the things due are consumable, they be of the same kind, duty, or dishonest and unjust act in contravention of plaintiff’s legal
and also of the same quality if the latter has been stated; (3) That the rights; and 3. The aforesaid control and breach of duty must
two debts be due; (4) That they be liquidated and demandable; (5) proximately cause the injury or unjust loss complaint of.
That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the Same; Same; Absence of any one of these elements prevents “piercing
debtor. the corporate veil.”—The Court emphasized that the absence of any
one of these elements prevents “piercing the corporate veil.” In
Same; Same; Same; Legal compensation operates even against the applying the “instrumentality” or “alter ego” doctrine, the courts are
will of the interested parties and even without their consent.— concerned with reality and not form, with how the corporation
Compensation takes effect by operation of law when all the requisites operated and the individual defendant’s relationship to that operation.
mentioned in Article 1279 of the New Civil Code are present and
extinguishes both debts to the concurrent amount even though the CALLEJO, SR., J.:
creditors and debtors are not aware of the compensation. Legal
compensation operates even against the will of the interested parties
On November 26, 2002, Equitable PCI Bank1 (Bank) as creditor-
and even without their consent. Such compensation takes place ipso mortgagee filed a petition for extrajudicial foreclosure before the
jure; its effects arise on the very day on which all requisites concur. Office of the Clerk of Court as Ex-Officio Sheriff of the Regional
Trial Court (RTC) of Makati City. It sought to foreclose the following
Same; Same; Same; Compensation, be it legal or conventional, real estate mortgage contracts executed by the spouses Ramon and
requires confluence in the parties of the characters of mutual debtors Natividad Nisce over two parcels of land covered by Transfer
and creditors although their rights as such creditors or their Certificate of Title (TCT) Nos. S-83466 and S-83467 of the Registry
obligations as such debtors need not spring from one and the same of Deeds of Rizal: one dated February 26, 1974; two (2) sets of
contract or transaction.—As its minimum, compensation presupposes "Additional Real Estate Mortgage" dated September 27, 1978 and
two persons who, in their own right and as principals, are mutually June 3, 1996; and an "Amendment to Real Estate Mortgage" dated
indebted to each other respecting equally demandable and liquidated February 28, 2000. The mortgage contracts were executed by the
obligations over any of which no retention or controversy commenced spouses Nisce to secure their obligation under Promissory Note Nos.
and communicated in due time to the debtor exists. Compensation, be 1042793 and BD-150369, including a Suretyship Agreement executed
it legal or conventional, requires confluence in the parties of the by Natividad. The obligation of the Nisce spouses totaled
characters of mutual debtors and creditors, although their rights as P34,087,725.76 broken down as follows:
such creditors or their obligations as such debtors need not spring
from one and the same contract or transaction.
Spouses Ramon & Natividad Nisce - - - - - P17,422,285.99

Corporation Law; Piercing the Corporate Veil; The fact that a Natividad P. Nisce (surety) - - - - - - - - - - US$57,306.59
corporation owns all of the stocks of another corporation, taken
alone, is not sufficient to justify their being treated as one entity.—
Admittedly, PCI Capital is a subsidiary of respondent Bank. Even and - - - - - - - - - - - - P16,665,439.772
then,
On December 2, 2002, the Ex-Officio Sheriff set the sale at public
PCI Capital [PCI Express Padala (HK) Ltd.] has an independent and auction at 10:00 a.m. on January 14, 2003, 3 or on January 30, 2003 in
separate juridical personality from that of the respondent Bank, its the event the public auction would not take place on the earlier
parent company; hence, any claim against the subsidiary is not a claim setting.
against the parent company and vice versa. The evidence on record
shows that PCIB, which had been merged with Equitable Bank, owns On January 28, 2003, the Nisce spouses filed before the RTC of
almost all of the stocks of PCI Capital. However, the fact that a Makati City a complaint for "nullity of the Suretyship Agreement,
corporation owns all of the stocks of another corporation, taken alone, damages and legal compensation" with prayer for injunctive relief
is not sufficient to justify their being treated as one entity. If used to against the Bank and the Ex-Officio Sheriff. They alleged the
perform legitimate functions, a subsidiary’s separate existence shall following: in a letter4 dated December 7, 2000 they had requested the
be respected, and the liability of the parent corporation, as well as the bank (through their lawyer-son Atty. Rosanno P. Nisce) to setoff the
subsidiary shall be confined to those arising in their respective peso equivalent of their obligation against their US dollar account
business. A corporation has a separate personality distinct from its with PCI Capital Asia Limited (Hong Kong), a subsidiary of the
stockholders and from other corporations to which it may be Bank, under Certificate Deposit No. 01612 5 and Account No. 090-
conducted. This separate and distinct personality of a corporation is a 0104 (Passbook No. 83-3041);6 the Bank accepted their offer and
fiction created by law for convenience and to prevent injustice. requested for an estimate of the balance of their account; they
complied with the Bank's request and in a letter dated February 11,
Same; Same; Test in determining the application of the 2002, informed it that the estimated balance of their account as of
instrumentality or alter ego doctrine.—The Court likewise declared in December 1991 (including the 11.875% per annum interest) was
the same case that the test in determining the application of the US$51,000.42,7 and that as of December 2002, Natividad's US dollar
instrumentality or alter ego doctrine is as follows: 1. Control, not mere deposit with it amounted to at least P9,000,000.00; they were
42

surprised when they received a letter from the Bank demanding defendant Bank to exclude the amounts covered by said suretyship
payment of their loan account, and later a petition for extrajudicial contract from plaintiffs' obligations with defendant Bank;
foreclosure.
(d) ordering defendant Bank to pay plaintiffs the following sums:
The spouses Nisce also pointed out that the petition for foreclosure
filed by the Bank included the alleged obligation of Natividad as (i) at least P3,000,000.00 as moral damages;
surety for the loan of Vista Norte Trading Corporation, a company
owned and managed by their son Dino Giovanni P. Nisce
(ii) at least P1,500,000.00 as exemplary damages; andcralawlibrary
(P16,665,439.77 and US$57,306.59). They insisted, however, that the
suretyship agreement was null and void for the following reasons:
(iii) at least P500,000.00 as attorney's fees and for other expenses of
litigation.
(a) x x x [I]t was executed without the knowledge and consent of
plaintiff Ramon M. Nisce, who is by law the administrator of the
conjugal partnership; Plaintiffs further pray for costs of suit and such other reliefs as may be
deemed just and equitable.9
(b) The suretyship agreement did not redound to the benefit of the
conjugal partnership and therefore did not bind the same; On same day, the Bank filed an "Amended Petition" with the Office
of the Executive Judge for extrajudicial foreclosure of the Real Estate
Mortgage to satisfy the spouses' loan account of P30,533,552.24,
(c) Assuming, arguendo, that the suretyship contract was valid and exclusive of interests, penalties and other charges; and the amounts of
binding, any obligation arising therefrom is not covered by plaintiffs' P16,665,439.77 and US$57,306.59 covered by the suretyship
real estate mortgages which were constituted to secure the payment of
agreement executed by Natividad Nisce.10
certain specific obligations only.8
In the meantime, the parties agreed to have the sale at public auction
The spouses Nisce likewise alleged that since they and the Bank were reset to January 30, 2003.
creditors and debtors with respect to each other, their obligations
should have been offset by legal compensation to the extent of their
account with the Bank. In its Answer to the complaint, the Bank alleged that the spouses had
no cause of action for legal compensation since PCI Capital was a
different corporation with a separate and distinct personality; if at all,
To support their plea for a writ of preliminary and prohibitory offsetting may occur only with respect to the spouses' US$500.00
injunction, the spouses Nisce alleged that the amount for which their
deposit account in its Paseo de Roxas branch.
property was being sold at public auction (P34,087,725.76) was
grossly excessive; the US dollar deposit of Natividad with PCI Capital
Asia Ltd. (Hong Kong), and the obligation covered by the suretyship In the meantime, the Ex-Officio Sheriff set the sale at public auction
agreement had not been deducted. They insisted that their property at 10:00 a.m. on March 5 and 27, 2003.11 The spouses Nisce then filed
rights would be violated if the sale at public auction would push a Supplemental Complaint with plea for a temporary restraining order
through. Thus, the spouses Nisce prayed that they be granted the to enjoin the sale at public auction.12 Thereafter, the RTC conducted
following reliefs: hearings on the plaintiffs' plea for a temporary restraining order, and
the parties adduced testimonial and documentary evidence on their
respective arguments.
(1) that upon the filing of this Complaint and/or after due notice and
summary hearing, the Honorable Court immediately issue a temporary
restraining order (TRO) restraining defendants, their representatives The Case for the Spouses Nisce
and/or deputies, and other persons acting for and on their behalf from
proceeding with the extrajudicial foreclosure sale of plaintiffs' Natividad frequently traveled abroad and needed a facility with easy
mortgaged properties on 30 January 2003 or on any other dates access to foreign exchange. She inquired from E.P. Nery, the Bank
subsequent thereto; Manager for PCI Bank Paseo de Roxas Branch, about opening an
account. He assured her that she would be able to access it from
(2) that after due notice and hearing and posting of the appropriate anywhere in the world. She and Nery also agreed that any balance of
bond, the Honorable Court convert the TRO to a writ of preliminary account remaining at maturity date would be rolled over until further
prohibitory injunction; instructions, or until she terminated the facility.13 Convinced,
Natividad deposited US$20,500.00 on July 19, 1984, and was issued
Passbook No. 83-3041.14 Upon her request, the bank transferred the
(3) that after trial on the merits, the Honorable Court render judgment
US$20,000.00 to PCI Capital Asia Ltd. in Hong Kong via cable
'
order.15

(a) making the preliminary injunction final and permanent; On July 11, 1996, the spouses Nisce secured a P20,000,000.00 loan
from the Bank under Promissory Note No. BD-150369.16 The
(b) ordering defendant Bank to set off the present peso value of Mrs. maturity date of the loan was July 11, 2001, payable in monthly
Nisce's US dollar time deposit, inclusive of stipulated interest, against installments at 16.731% interest per annum. To secure the payment of
plaintiffs' loan obligations with defendant Bank; the loan account, they executed an Amendment to the Real Estate
Mortgage over the properties17 located in Makati City covered by
(c) declaring the Deed of Suretyship dated 25 May 1998 null and valid TCT Nos. S-83466 and S-83467.18 They later secured another loan of
and without any binding effect as to plaintiff spouses, and ordering P13,089,936.90 on March 1, 2000 (to mature on March 1, 2005)
43

payable quarterly at 13.9869% interest per annum; this loan According to the Bank, Natividad's US$20,000.00 deposit with the
agreement is evidenced by Promissory Note (PN) No. 1042793 19 and PCIB Paseo de Roxas branch was transferred to PCI Capital via cable
covered by a Real Estate Mortgage20 executed on February 28, 2000. order,40 and that it later issued Certificate of Deposit No. 01612 (Non-
They made a partial payment of P13,866,666.50 on the principal of transferrable).41 In a letter dated May 9, 2001, it informed Natividad
their loan account covered by PN No. BD-150369, and P5,348,239.82 that it had acted merely as a conduit in facilitating the transfer of the
on the interests.21 These payments are evidenced by receipts and funds, and that her deposit was made with PCI Capital and not with
checks.22 However, there were payments totaling P4,600,000.00 PCIB. PCI Capital had a separate and distinct personality from the
received by the Bank but were not covered by checks or receipts. 23 As PCIB, and a claim against the former cannot be made against the
of September 2000, the balance of their loan account under PN No. latter. It was later advised that PCI Capital had already ceased
BD-150369 was only P4,333,333.46.24 They also made partial operations.42
payment on their loan account under PN No. 1042793 which, as of
May 30, 2001, amounted to P2,218,793.61.25 The spouses Nisce presented rebuttal documentary evidence to show
that PCI Capital was registered in Hong Kong as a corporation under
On July 20, 1984, PCI Capital issued Certificate of Deposit No. CD- Registration No. 84555 on February 27, 1989 43 with an authorized
01612;26 proof of receipt of the US$20,000.00 transferred to it by PCI capital stock of 50,000,000 (with par value of HKD1.00); the PCIB
Bank Paseo de Roxas Branch as requested by Natividad. The deposit subscribed to 29,039,993 issued shares at the par value of HKD1.00
account was to earn interest at the rate of 11.875% per annum, and per share;44 on October 25, 2004, the corporate name of PCI Capital
would mature on October 22, 1984, thereafter to be payable at the was changed to PCI Express Padala (HK) Ltd.;45 and the
office of the depositary in Hong Kong upon presentation of the stockholdings of PCIB remained at 29,039,999 shares.46
Certificate of Deposit.
On March 24, 2003, the RTC issued an Order 47 granting the spouses
In June 1991, two sons of the Nisce spouses were stranded in Hong Nisce's plea for a writ of preliminary injunction on a bond of
Kong. Natividad called the Bank and requested for a partial release of P10,000,000.00. The dispositive portion of the Order reads:
her dollar deposit to her sons. However, she was informed that
according to its computer records, no such dollar account existed. WHEREFORE, in order not to render the judgment ineffectual, upon
Sometime in November 1991, she submitted her US dollar passbook filing by the plaintiffs and the approval thereof by the court of a bond
with a xerox copy of the Certificate of Deposit for the PCIB to in the amount of Php10,000,000.00, which shall answer for any
determine the whereabouts of the account.27 She reiterated her request damage should the court finally decide that plaintiffs are not entitled
to the Bank on January 27, 199228 and September 11, 2000.29 thereto, let a writ of preliminary injunction issue enjoining defendants
Equitable-PCI Bank, Atty. Engracio M. Escasinas, Jr., and any person
In the meantime, in 1994, the Equitable Banking Corporation and the or entity acting for and in their behalf from proceeding with the
PCIB were merged under the corporate name Equitable PCI Bank. extrajudicial foreclosure sale of TCT Nos. 437678 and 437679
registered in the names of the plaintiffs.48
In a letter dated December 7, 2000, Natividad confirmed to the Bank,
through Ms. Shellane R. Casaysayan, her offer to settle their loan After weighing the parties' arguments along with their documentary
account by offsetting the peso equivalent of her dollar account with evidence, the RTC declared that justice would be best served if a writ
PCI Capital under Account No. 090-0104.30 Their son, Atty. Rosanno of preliminary injunction would be issued to preserve the status quo. It
Nisce, later wrote the Bank, declaring that the estimated balance of had yet to resolve the issue of setoff since only Natividad dealt with
the US dollar account with PCI Capital as of December 1991 was the Bank regarding her dollar account. It also had to resolve the issue
US$51,000.42.31 Atty. Nisce corroborated this in his testimony, and of whether the Bank had failed to credit the amount of P4,600,000.00
stated that Ms. Casaysayan had declared that she would refer the to the spouses Nisce's account under PN No. BD-150369, and their
matter to her superiors.32 A certain Rene Esteven also told him that claim that the Bank had effectively accelerated the respective maturity
another offer to setoff his parents' account had been accepted, and he dates of their loan.49 The spouses Nisce posted the requisite bond
was assured that its implementation was being processed.33 On cross which was approved by the RTC.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
examination, Atty. Nisce declared that there was no response to his
request for setoff,34 and that Esteven assured him that the Bank would The Bank opted not to file a motion for reconsideration of the order,
look for the records of his mother's US dollar savings deposit. 35 He and instead assailed the trial court's order before the CA via petition
was later told that the Bank had accepted the offer to setoff the for certiorari under Rule 65 of the Rules of Court. The Bank alleged
account.36 that the RTC had acted without or in excess of its jurisdiction, or with
grave abuse of its discretion amounting to lack or excess of
The Case for the Bank jurisdiction when it issued the assailed order;50 the spouses Nisce had
failed to prove the requisites for the issuance of a writ of preliminary
The Bank adduced evidence that, as of January 31, 2003, the balance injunction; respondents' claim that their account with petitioner had
of the spouses' account under the two promissory notes, including been extinguished by legal compensation has no factual and legal
interest and penalties, was P30,533,552.24.37 It had agreed to basis. It further asserted that according to the evidence, Natividad
restructure their loans on March 31, 1998, but they nevertheless failed made the US$20,000.00 deposit with PCI Capital before it merged
to pay despite repeated demands.38 The spouses had also been with Equitable Bank - hence, the Bank was not the debtor of
furnished with a statement of their account as of June 2001. Thus, Natividad relative to the dollar account. The Bank cited the ruling of
under the terms of the Real Estate Mortgage and Promissory Notes, it this Court in Escaño v. Heirs of Escaño and Navarro 51 to support its
had the right to the remedy of foreclosure. It insisted that there is no arguments. It insisted that the spouses Nisce had failed to establish
showing in its records that the spouses had delivered checks "irreparable injury" in case of denial of their plea for injunctive relief.
amounting to P4,600,000.00.39
44

The spouses, for their part, pointed out that the Bank failed to file a The spouses Nisce moved to have the decision reconsidered, but the
motion for reconsideration of the trial court's order, a condition sine appellate court denied the motion. They thus filed the instant Petition
qua non to the filing of a petition for certiorari under Rule 65 of the for Review on the following grounds:
Rules of Court. Moreover, the error committed by the trial court is a
mere error of judgment not correctible by certiorari; hence, the 5.1. THE HONORABLE COURT OF APPEALS ERRED IN
petition should have been dismissed outright by the CA. They TAKING COGNIZANCE OF THE PETITION FOR CERTIORARI
reiterated their claim that they had made a partial payment of DESPITE THE BANK'S FAILURE TO FILE A MOTION FOR
P4,600,000.00 on their loan account which petitioner failed to credit RECONSIDERATION WITH THE TRIAL COURT.
in their favor. The Bank had agreed to debit their US dollar savings
deposit in the PCI Capital as payment of their loan account. They
5.2. THE HONORABLE COURT OF APPEALS COMMITTED
insisted that they had never deposited their US dollar account with REVERSIBLE ERROR WHEN IT PREMATURELY RULED ON
PCI Capital but with the Bank, and that they had never defaulted on THE MERITS OF THE MAIN CASE.
their loan account. Contrary to the Bank's claim, they would have
suffered irreparable injury had the trial court not enjoined the
extrajudicial foreclosure of the real estate mortgage. 5.3. THE HONORABLE COURT OF APPEALS ERRED IN
HOLDING THAT RESPONDENT JUDGE HAD COMMITTED
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
On December 22, 2004, the CA rendered judgment granting the EXCESS OF JURISDICTION IN ISSUING A TEMPORARY
petition and nullifying the assailed Order of the RTC. 52 The appellate
RESTRAINING ORDER AND A WRIT OF PRELIMINARY
court declared that a petition for certiorari under Rule 65 of the Rules
INJUNCTION IN FAVOR OF THE SPOUSES NISCE.54
of Court may be filed despite the failure to file a motion for
reconsideration, particularly in instances where the issue raised is one
of law; where the error is patent; the assailed order is void, or the Petitioners aver that the CA erred in not dismissing respondent Bank's
questions raised are the same as those already ruled upon by the lower petition for certiorari outright because of the absence of a condition
court. According to the appellate court, the issue raised before it was precedent: the filing of a motion for reconsideration of the assailed
purely one of law: whether the loan account of the spouses was Order of the RTC before filing the petition for certiorari in the CA.
extinguished by legal compensation. Thus, a motion for the They insist that respondent bank's failure to file a motion for
reconsideration of the assailed order was not a prerequisite to a reconsideration of the assailed Order deprived the RTC of its option to
petition for certiorari under Rule 65. resolve the issue of whether it erred in issuing the writ of preliminary
injunction in their favor.
The appellate court further declared that the trial court committed
grave abuse of its discretion in issuing the assailed order, since no Petitioners insist that in resolving whether a petition for a writ of
plausible reason was given by the spouses Nisce to justify the preliminary injunction should be granted, the trial court and the
injunction of the extrajudicial foreclosure of the real estate mortgage. appellate court are not to resolve the merits of the main case. In this
Given their admission that they had not settled the obligations secured case, however, the CA resolved the bone of contention of the parties
by the mortgage, the Bank had a clear right to seek the remedy of in the trial court: whether the loan account of petitioners with
foreclosure. respondent bank had been extinguished by legal compensation against
petitioner Natividad Nisce's US dollar savings account with PCI
Capital in Hong Kong. The CA reversed the assailed order of the trial
The CA further declared as devoid of factual basis the spouses Nisce's court by resolving the main issue in the trial court on its merits, and
argument that the Bank should have applied, by way of legal
declaring that the US dollar savings deposit of the petitioner Natividad
compensation, the peso equivalent of their time deposit with PCI
Nisce with the PCI Capital cannot be used to offset the loan account
Capital as partial settlement of their obligations. It held that for
of petitioners with respondent bank. In fine, according to petitioners,
compensation to take place, the requirements set forth in Articles
the CA preempted the ruling of the RTC on the main issue even
1278 and 1279 of the Civil Code of the Philippines must be present; in before the parties could be given an opportunity to complete the
this case, the parties are not mutually creditors and debtors of each
presentation of their respective evidences. Petitioners point out that in
other. It pointed out that the time deposit which the spouses Nisce
the assailed Order, the RTC declared that to determine whether
sought to offset against their obligations to the Bank is maintained
respondent had credited petitioners for the amount of P4,600,000.00
with PCI Capital. Even if PCI Capital is a subsidiary of the Bank,
under PN No. BD-150369 and whether respondent as mortgagee-
compensation cannot validly take place because the Bank and PCI creditor accelerated the maturities of the two (2) promissory notes
Capital are two separate and distinct corporations. It pointed out the executed by petitioner, there was a need for a full-blown trial and an
settled principle "that a corporation has a personality separate and
exhaustive consideration of the evidence of the parties.
distinct from its stockholders and from other corporations to which it
may be connected."
Petitioners further insist that a petition for a writ of certiorari is
designed solely to correct errors of jurisdiction and not errors of
The CA further declared that the alleged P4,600,000.00 payment on judgment, such as errors in the findings and conclusions of the trial
PN No. BD-150369 was not pleaded in the spouses' complaint and
court. Petitioners maintain that the trial court's erroneous findings and
supplemental complaint before the court a quo. What they alleged,
conclusions (according to respondent bank) are not the proper subjects
aside from legal compensation, was that the mortgage is not liable for
for a petition for certiorari . Contrary to the findings of the CA, they
the obligation of Natividad Nisce as surety for the loans obtained by a
did not admit in the trial court that they were in default in the payment
trading firm owned and managed by their son. The CA further pointed of their loan obligations. They had always maintained that they had no
out that the Bank precisely amended the petition for foreclosure sale outstanding obligation to respondent bank precisely because their loan
by deleting the claim for Natividad's obligation as surety. The
account had been offset by the US dollar deposit of petitioner
appellate court concluded that the injunctive writ was issued by the
Natividad Nisce, and that they had made check payments of
RTC without factual and legal basis.53
45

P4,600,000.00 which respondent bank had not credited in their favor. As will be shown later, the March 24, 2003 Order of the trial court
Likewise erroneous is the CA ruling that they would not suffer granting petitioner's plea for a writ of preliminary injunction was
irreparable damage or injury if their properties would be sold at public issued with grave abuse of discretion amounting to excess or lack of
auction following the extrajudicial foreclosure of the mortgage. jurisdiction and thus a nullity. If the trial court issues a writ of
Petitioners point out that their conjugal home stands on the subject preliminary injunction despite the absence of proof of a legal right and
properties and would be lost if sold at public auction. Besides, the injury sustained by the plaintiff, the writ is a nullity. 57
petitioners aver, the injury to respondent bank resulting from the
issuance of a writ of preliminary injunction is amply secured by the Petitioners Are Not
P10,000,000.00 injunction bond which they had posted. Entitled to a Writ of
Preliminary Prohibitory
For its part, respondent avers that, as held by the CA, the requirement Injunction
of the filing of a motion for reconsideration of the assailed Order
admits of exceptions, such as where the issue presented in the Section 3, Rule 58 of the Rules of Court provides that a preliminary
appellate court is the same issue presented and resolved by the trial injunction may be granted when the following have been established:
court. It insists that petitioners failed to prove a clear legal right to
injunctive relief; hence, the trial court committed grave abuse of (a) That the applicant is entitled to the relief demanded, and the whole
discretion in issuing a writ of preliminary injunction. or part of such relief consists in restraining the commission or
continuance of the act or acts complained of, or in requiring the
Respondent maintains that the sole issue involved in the petition for performance of an act or acts, either for a limited period or
certiorari of respondent in the CA was whether or not the trial court perpetually;
committed grave abuse of its discretion in issuing the writ of
preliminary injunction. Necessarily, the CA would have to delve into
(b) That the commission, continuance or nonperformance of the act or
the circumstances behind such issuance. In so doing, the CA had to
acts complained of during the litigation would probably work injustice
consider and calibrate the testimonial and documentary evidence
to the applicant; or
adduced by the parties. However, the RTC and the CA did not resolve
with finality the threshold factual and legal issue of whether the loan
account of petitioners had been paid in full before it filed its petition (c) That a party, court, agency or a person is doing, threatening, or is
for extrajudicial foreclosure of the real estate mortgage. attempting to do, or is procuring or suffering to be done, some act or
acts probably in violation of the rights of the applicant respecting the
subject of the action or proceeding, and tendering to render the
The Ruling of the Court
judgment ineffectual.

The Petition in the


The grant of a preliminary injunction in a case rests on the sound
Court of Appeals
discretion of the court with the caveat that it should be made with
Not Premature
great caution. The exercise of sound judicial discretion by the lower
court should not be interfered with except in cases of manifest abuse.
The general rule is that before filing a petition for certiorari under Injunction is a preservative remedy for the protection of the parties'
Rule 65 of the Rules of Court, the petitioner is mandated to comply substantive rights and interests. The sole aim of a preliminary
with a condition precedent: the filing of a motion for reconsideration injunction is to preserve the status quo within the last actual status that
of the assailed order, and the subsequent denial of the court a quo. It preceded the pending controversy until the merits of the case can be
must be stressed that a petition for certiorari is an extraordinary heard fully. Moreover, a petition for a preliminary injunction is an
remedy and should be filed only as a last resort. The filing of a motion equitable remedy, and one who comes to claim for equity must do so
for reconsideration is intended to afford the public respondent an with clean hands. It is to be resorted to by a litigant to prevent or
opportunity to correct any actual error attributed to it by way of re- preserve a right or interest where there is a pressing necessity to avoid
examination of the legal and factual issues.55 However, the rule is injurious consequences which cannot be remedied under any standard
subject to the following recognized exceptions: of compensation. A petition for a writ of preliminary injunction rests
upon an alleged existence of an emergency or of a special reason for
(a) where the order is a patent nullity, as where the court a quo has no such a writ before the case can be regularly tried. By issuing a writ of
jurisdiction; (b) where the questions raised in the certiorari preliminary injunction, the court can thereby prevent a threatened or
proceeding have been duly raised and passed upon by the lower court, continued irreparable injury to the plaintiff before a judgment can be
or are the same as those raised and passed upon in the lower court; (c) rendered on the claim.58
where there is an urgent necessity for the resolution of the question
and any further delay would prejudice the interests of the Government The plaintiff praying for a writ of preliminary injunction must further
or of the petitioner or the subject matter of the action is perishable; (d) establish that he or she has a present and unmistakable right to be
where, under the circumstances, a motion for reconsideration would protected; that the facts against which injunction is directed violate
be useless; (e) where petitioner was deprived of due process and there such right;59 and there is a special and paramount necessity for the
is extreme urgency for relief; (f) where, in a criminal case, relief from writ to prevent serious damages. In the absence of proof of a legal
an order of arrest is urgent and the granting of such relief by the trial right and the injury sustained by the plaintiff, an order for the issuance
court is improbable; (g) where the proceedings in the lower court are a of a writ of preliminary injunction will be nullified. Thus, where the
nullity for lack of due process; (h) where the proceedings was ex parte plaintiff's right is doubtful or disputed, a preliminary injunction is not
or in which the petitioner had no opportunity to object; and (i) where proper. The possibility of irreparable damage without proof of an
the issue raised is one purely of law or public interest is involved. 56 actual existing right is not a ground for a preliminary injunction. 60
46

However, to establish the essential requisites for a preliminary with PCIB, and later transferred to PCI Capital in Hong Kong, a
injunction, the evidence to be submitted by the plaintiff need not be subsidiary of respondent Bank. Petitioners, however, failed to
conclusive and complete.61 The plaintiffs are only required to show discharge their burden.
that they have an ostensible right to the final relief prayed for in their
complaint.62 A writ of preliminary injunction is generally based solely Under Article 1278 of the New Civil Code, compensation shall take
on initial or incomplete evidence.63 Such evidence need only be a place when two persons, in their own right, are creditors and debtors
sampling intended merely to give the court an evidence of justification of each other. In order that compensation may be proper, petitioners
for a preliminary injunction pending the decision on the merits of the were burdened to establish the following:
case, and is not conclusive of the principal action which has yet to be
decided.64
(1) That each one of the obligors be bound principally, and that he be
at the same time a principal creditor of the other;
It bears stressing that findings of the trial court granting or denying a
petition for a writ of preliminary injunction based on the evidence on
(2) That both debts consist in a sum of money, or if the things due are
record are merely provisional until after the trial on the merits of the
consumable, they be of the same kind, and also of the same quality if
case shall have been concluded.65
the latter has been stated;

The trial court, in granting or dismissing an application for a writ of


(3) That the two debts be due;
preliminary injunction based on the pleadings of the parties and their
respective evidence must state in its order the findings and
conclusions based on the evidence and the law. This is to enable the (4) That they be liquidated and demandable;
appellate court to determine whether the trial court committed grave
abuse of its discretion amounting to excess or lack of jurisdiction in (5) That over neither of them there be any retention or controversy,
resolving, one way or the other, the plea for injunctive relief. The trial commenced by third persons and communicated in due time to the
court's exercise of its judicial discretion whether to grant or deny an debtor.68
application for a writ of preliminary injunction involves the
assessment and evaluation of the evidence, and its findings of facts are Compensation takes effect by operation of law when all the requisites
ordinarily binding and conclusive on the appellate court and this mentioned in Article 1279 of the New Civil Code are present and
Court.66 extinguishes both debts to the concurrent amount even though the
creditors and debtors are not aware of the compensation. Legal
We agree with respondent's contention that as creditor-mortgagee, it compensation operates even against the will of the interested parties
has the right under the real estate mortgage contract and the and even without their consent.69 Such compensation takes place ipso
amendment thereto to foreclose extrajudicially, the real estate jure; its effects arise on the very day on which all requisites concur. 70
mortgage and sell the property at public auction, considering that
petitioners had failed to pay their loans, plus interests and other As its minimum, compensation presupposes two persons who, in their
incremental amounts as provided for in the deeds. Petitioners contend, own right and as principals, are mutually indebted to each other
however, that if respondent bank extrajudicially forecloses the real respecting equally demandable and liquidated obligations over any of
estate mortgage and has petitioners' property sold at public auction for which no retention or controversy commenced and communicated in
an amount in excess of the balance of their loan account, petitioner's due time to the debtor exists. Compensation, be it legal or
contractual and substantive rights under the real estate mortgage conventional, requires confluence in the parties of the characters of
would be violated; in such a case, the extrajudicial foreclosure sale mutual debtors and creditors, although their rights as such creditors or
may be enjoined by a writ of preliminary injunction. their obligations as such debtors need not spring from one and the
same contract or transaction.71
Respondent bank sought the extrajudicial foreclosure of the real estate
mortgage and was to sell the property at public auction for Article 1980 of the New Civil Code provides that fixed, savings and
P30,533,552.24. The amount is based on Promissory Notes No. current deposits of money in banks and similar institutions shall be
1042793 and BD-150369, interests, penalty charges, and attorney's governed by the provisions concerning simple loans. Under Article
fees, as of January 31, 2003, exclusive of all interests, penalties, other 1953, of the same Code, a person who secures a loan of money or any
charges, and foreclosure costs accruing thereafter.67 Petitioners other fungible thing acquires the ownership thereof, and is bound to
asserted before the trial court that respondents sought the extrajudicial pay the creditor an equal amount of the same kind and quality. The
foreclosure of the mortgaged deed for an amount far in excess of what relationship of the depositors and the Bank or similar institution is that
they owed, because the latter failed to credit P4,600,000.00 paid in of creditor-debtor. Such deposit may be setoff against the obligation
checks but without any receipts having been issued therefor; and the of the depositor with the bank or similar institution.
P9,000,000.00 peso equivalent of the US$20,000.00 deposit of
petitioner Natividad Nisce with PCIB under Passbook No. 83-3041 When petitioner Natividad Nisce deposited her US$20,500.00 with
and Certificate of Deposit No. CD-01612 issued by PCI Capital on the PCIB on July 19, 1984, PCIB became the debtor of petitioner.
July 23, 1984. Petitioners maintain that the US$20,000.00 dollar However, when upon petitioner's request, the amount of
deposit should be setoff against their account with respondent against US$20,000.00 was transferred to PCI Capital (which forthwith issued
their loan account, on their claim that respondent is their debtor Certificate of Deposit No. 01612), PCI Capital, in turn, became the
insofar as said deposit is concerned. debtor of Natividad Nisce. Indeed, a certificate of deposit is a written
acknowledgment by a bank or borrower of the receipt of a sum of
It was the burden of petitioners, as plaintiffs below, to adduce money or deposit which the Bank or borrower promises to pay to the
preponderant evidence to prove their claim that respondent bank was depositor, to the order of the depositor; or to some other person; or to
the debtor of petitioner Natividad Nisce relative to her dollar deposit
47

his order whereby the relation of debtor and creditor between the bank Petitioners failed to adduce sufficient evidence to justify the piercing
and the depositor is created.72 The issuance of a certificate of deposit of the veil of corporate entity and render respondent Bank liable for
in exchange for currency creates a debtor-creditor relationship.73 the US$20,000.00 deposit of petitioner Natividad Nisce as debtor.

Admittedly, PCI Capital is a subsidiary of respondent Bank. Even On hindsight, petitioners could have spared themselves the expenses
then, PCI Capital [PCI Express Padala (HK) Ltd.] has an independent and tribulation of a litigation had they just withdrawn their deposit
and separate juridical personality from that of the respondent Bank, its from the PCI Capital and remitted the same to respondent. However,
parent company; hence, any claim against the subsidiary is not a claim petitioner insisted on their contention of setoff.
against the parent company and vice versa.74 The evidence on record
shows that PCIB, which had been merged with Equitable Bank, owns On the P4,600,000.00 paid in checks allegedly remitted by petitioners
almost all of the stocks of PCI Capital. However, the fact that a to respondent in partial payment of their loan account, petitioners
corporation owns all of the stocks of another corporation, taken alone, failed to adduce in evidence the checks to show that, indeed, the
is not sufficient to justify their being treated as one entity. If used to checks were drawn by petitioners and delivered to respondent, and
perform legitimate functions, a subsidiary's separate existence shall be that respondent was able to cash the checks. The only evidence
respected, and the liability of the parent corporation, as well as the adduced by petitioners is a piece of paper listing the serial numbers of
subsidiary shall be confined to those arising in their respective the checks and the amount of each check:
business.75 A corporation has a separate personality distinct from its
stockholders and from other corporations to which it may be
PAYMENTS MADE & RECEIVED BY EBC BUT W/O RECEIPTS
conducted. This separate and distinct personality of a corporation is a
fiction created by law for convenience and to prevent injustice.
P2,000,000.0
1. Dec. 29, 1997 - EBC-0000039462 -
76
This Court, in Martinez v. Court of Appeals held that, being a mere 0
fiction of law, peculiar situations or valid grounds can exist to
2. Jan. 22, 1998 - EBC-213016118C - 1,000,000.00
warrant, albeit sparingly, the disregard of its independent being and
the piercing of the corporate veil. The veil of separate corporate 3. Feb. 24, 1998 - UB -0000074619 - 800,000.00
personality may be lifted when, inter alia, the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation or 4. Mar. 23, 1998 - EBC-213016121C - 800,000.00
where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit 79
P4,600,000.00
or adjunct of another corporation; or when the corporation is used as a
cloak or cover for fraud or illegality; or to work injustice; or where
necessary to achieve equity or for the protection of the creditors. In IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for
those cases where valid grounds exist for piercing the veil of lack of merit. The Decision of the Court of Appeals is AFFIRMED.
corporate entity, the corporation will be considered as a mere Costs against petitioners.
association of persons. The liability will directly attach to them. 77
SO ORDERED.
The Court likewise declared in the same case that the test in
determining the application of the instrumentality or alter ego doctrine
is as follows:

1. Control, not mere majority or complete stock control, but complete 10 PHILEX MINING CORPORATION,
dominion, not only of finances but of policy and business practice in PETITIONER, VS.
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its COMMISSIONER OF INTERNAL
own; REVENUE, RESPONDENT.
2. Such control must have been used by the defendant to commit fraud DECISION
or wrong, to perpetuate the violation of a statutory or other positive
legal duty, or dishonest and unjust act in contravention of plaintiff's
YNARES-SANTIAGO, J.:
legal rights; andcralawlibrary
This is a petition for review on certiorari of the June 30, 2000
3. The aforesaid control and breach of duty must proximately cause
Decision1 of the Court of Appeals in CA-G.R. SP No. 49385, which
the injury or unjust loss complaint of.
affirmed the Decision2 of the Court of Tax Appeals in C.T.A. Case
No. 5200. Also assailed is the April 3, 2001 Resolution3 denying the
The Court emphasized that the absence of any one of these elements motion for reconsideration.
prevents "piercing the corporate veil." In applying the
"instrumentality" or "alter ego" doctrine, the courts are concerned
The facts of the case are as follows:
with reality and not form, with how the corporation operated and the
individual defendant's relationship to that operation.78
On April 16, 1971, petitioner Philex Mining Corporation (Philex
Mining), entered into an agreement4 with Baguio Gold Mining
Company ("Baguio Gold") for the former to manage and operate the
48

latter’s mining claim, known as the Sto. Nino mine, located in Atok 12. The compensation of the MANAGER shall be fifty per
and Tublay, Benguet Province. The parties’ agreement was cent (50%) of the net profit of the Sto. Nino PROJECT
denominated as "Power of Attorney" and provided for the following before income tax. It is understood that the MANAGERS
terms: shall pay income tax on their compensation, while the
PRINCIPAL shall pay income tax on the net profit of the
4. Within three (3) years from date thereof, the PRINCIPAL Sto. Nino PROJECT after deduction therefrom of the
(Baguio Gold) shall make available to the MANAGERS MANAGERS’ compensation.
(Philex Mining) up to ELEVEN MILLION PESOS
(P11,000,000.00), in such amounts as from time to time may xxxx
be required by the MANAGERS within the said 3-year
period, for use in the MANAGEMENT of the STO. NINO 16. The PRINCIPAL has current pecuniary obligation in
MINE. The said ELEVEN MILLION PESOS favor of the MANAGERS and, in the future, may incur other
(P11,000,000.00) shall be deemed, for internal audit obligations in favor of the MANAGERS. This Power of
purposes, as the owner’s account in the Sto. Nino PROJECT. Attorney has been executed as security for the payment and
Any part of any income of the PRINCIPAL from the STO. satisfaction of all such obligations of the PRINCIPAL in
NINO MINE, which is left with the Sto. Nino PROJECT, favor of the MANAGERS and as a means to fulfill the same.
shall be added to such owner’s account. Therefore, this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS
5. Whenever the MANAGERS shall deem it necessary and is outstanding, inclusive of the MANAGERS’ account. After
convenient in connection with the MANAGEMENT of the all obligations of the PRINCIPAL in favor of the
STO. NINO MINE, they may transfer their own funds or MANAGERS have been paid and satisfied in full, this
property to the Sto. Nino PROJECT, in accordance with the Agency shall be revocable by the PRINCIPAL upon 36-
following arrangements: month notice to the MANAGERS.

(a) The properties shall be appraised and, together 17. Notwithstanding any agreement or understanding
with the cash, shall be carried by the Sto. Nino between the PRINCIPAL and the MANAGERS to the
PROJECT as a special fund to be known as the contrary, the MANAGERS may withdraw from this Agency
MANAGERS’ account. by giving 6-month notice to the PRINCIPAL. The
MANAGERS shall not in any manner be held liable to the
(b) The total of the MANAGERS’ account shall not PRINCIPAL by reason alone of such withdrawal. Paragraph
exceed P11,000,000.00, except with prior approval 5(d) hereof shall be operative in case of the MANAGERS’
of the PRINCIPAL; provided, however, that if the withdrawal.
compensation of the MANAGERS as herein
provided cannot be paid in cash from the Sto. Nino x x x x5
PROJECT, the amount not so paid in cash shall be
added to the MANAGERS’ account. In the course of managing and operating the project, Philex Mining
made advances of cash and property in accordance with paragraph 5
(c) The cash and property shall not thereafter be of the agreement. However, the mine suffered continuing losses over
withdrawn from the Sto. Nino PROJECT until the years which resulted to petitioner’s withdrawal as manager of the
termination of this Agency. mine on January 28, 1982 and in the eventual cessation of mine
operations on February 20, 1982.6
(d) The MANAGERS’ account shall not accrue
interest. Since it is the desire of the PRINCIPAL to Thereafter, on September 27, 1982, the parties executed a
extend to the MANAGERS the benefit of "Compromise with Dation in Payment" 7 wherein Baguio Gold
subsequent appreciation of property, upon a admitted an indebtedness to petitioner in the amount of
projected termination of this Agency, the ratio P179,394,000.00 and agreed to pay the same in three segments by first
which the MANAGERS’ account has to the owner’s assigning Baguio Gold’s tangible assets to petitioner, transferring to
account will be determined, and the corresponding the latter Baguio Gold’s equitable title in its Philodrill assets and
proportion of the entire assets of the STO. NINO finally settling the remaining liability through properties that Baguio
MINE, excluding the claims, shall be transferred to Gold may acquire in the future.
the MANAGERS, except that such transferred
assets shall not include mine development, roads, On December 31, 1982, the parties executed an "Amendment to
buildings, and similar property which will be Compromise with Dation in Payment"8 where the parties determined
valueless, or of slight value, to the MANAGERS. that Baguio Gold’s indebtedness to petitioner actually amounted to
The MANAGERS can, on the other hand, require at P259,137,245.00, which sum included liabilities of Baguio Gold to
their option that property originally transferred by other creditors that petitioner had assumed as guarantor. These
them to the Sto. Nino PROJECT be re-transferred to liabilities pertained to long-term loans amounting to
them. Until such assets are transferred to the US$11,000,000.00 contracted by Baguio Gold from the Bank of
MANAGERS, this Agency shall remain subsisting. America NT & SA and Citibank N.A. This time, Baguio Gold
undertook to pay petitioner in two segments by first assigning its
xxxx tangible assets for P127,838,051.00 and then transferring its equitable
title in its Philodrill assets for P16,302,426.00. The parties then
49

ascertained that Baguio Gold had a remaining outstanding respondent within which petitioner has to pay the deficiency
indebtedness to petitioner in the amount of P114,996,768.00. amount x x x up to actual date of payment.

Subsequently, petitioner wrote off in its 1982 books of account the SO ORDERED.11
remaining outstanding indebtedness of Baguio Gold by charging
P112,136,000.00 to allowances and reserves that were set up in 1981 The CTA rejected petitioner’s assertion that the advances it made for
and P2,860,768.00 to the 1982 operations. the Sto. Nino mine were in the nature of a loan. It instead
characterized the advances as petitioner’s investment in a partnership
In its 1982 annual income tax return, petitioner deducted from its with Baguio Gold for the development and exploitation of the Sto.
gross income the amount of P112,136,000.00 as "loss on settlement of Nino mine. The CTA held that the "Power of Attorney" executed by
receivables from Baguio Gold against reserves and allowances." 9 petitioner and Baguio Gold was actually a partnership agreement.
However, the Bureau of Internal Revenue (BIR) disallowed the Since the advanced amount partook of the nature of an investment, it
amount as deduction for bad debt and assessed petitioner a deficiency could not be deducted as a bad debt from petitioner’s gross income.
income tax of P62,811,161.39.
The CTA likewise held that the amount paid by petitioner for the
Petitioner protested before the BIR arguing that the deduction must be long-term loan obligations of Baguio Gold could not be allowed as a
allowed since all requisites for a bad debt deduction were satisfied, to bad debt deduction. At the time the payments were made, Baguio
wit: (a) there was a valid and existing debt; (b) the debt was Gold was not in default since its loans were not yet due and
ascertained to be worthless; and (c) it was charged off within the demandable. What petitioner did was to pre-pay the loans as
taxable year when it was determined to be worthless. evidenced by the notice sent by Bank of America showing that it was
merely demanding payment of the installment and interests due.
Petitioner emphasized that the debt arose out of a valid management Moreover, Citibank imposed and collected a "pre-termination penalty"
contract it entered into with Baguio Gold. The bad debt deduction for the pre-payment.
represented advances made by petitioner which, pursuant to the
management contract, formed part of Baguio Gold’s "pecuniary The Court of Appeals affirmed the decision of the CTA. 12 Hence,
obligations" to petitioner. It also included payments made by upon denial of its motion for reconsideration, 13 petitioner took this
petitioner as guarantor of Baguio Gold’s long-term loans which recourse under Rule 45 of the Rules of Court, alleging that:
legally entitled petitioner to be subrogated to the rights of the original
creditor. I.

Petitioner also asserted that due to Baguio Gold’s irreversible losses, The Court of Appeals erred in construing that the advances
it became evident that it would not be able to recover the advances made by Philex in the management of the Sto. Nino Mine
and payments it had made in behalf of Baguio Gold. For a debt to be pursuant to the Power of Attorney partook of the nature of an
considered worthless, petitioner claimed that it was neither required to investment rather than a loan.
institute a judicial action for collection against the debtor nor to sell or
dispose of collateral assets in satisfaction of the debt. It is enough that II.
a taxpayer exerted diligent efforts to enforce collection and exhausted
all reasonable means to collect.
The Court of Appeals erred in ruling that the 50%-50%
sharing in the net profits of the Sto. Nino Mine indicates that
On October 28, 1994, the BIR denied petitioner’s protest for lack of Philex is a partner of Baguio Gold in the development of the
legal and factual basis. It held that the alleged debt was not Sto. Nino Mine notwithstanding the clear absence of any
ascertained to be worthless since Baguio Gold remained existing and
intent on the part of Philex and Baguio Gold to form a
had not filed a petition for bankruptcy; and that the deduction did not
partnership.
consist of a valid and subsisting debt considering that, under the
management contract, petitioner was to be paid fifty percent (50%) of
the project’s net profit.10 III.

Petitioner appealed before the Court of Tax Appeals (CTA) which The Court of Appeals erred in relying only on the Power of
rendered judgment, as follows: Attorney and in completely disregarding the Compromise
Agreement and the Amended Compromise Agreement when
it construed the nature of the advances made by Philex.
WHEREFORE, in view of the foregoing, the instant Petition
for Review is hereby DENIED for lack of merit. The
assessment in question, viz: FAS-1-82-88-003067 for IV.
deficiency income tax in the amount of P62,811,161.39 is
hereby AFFIRMED. The Court of Appeals erred in refusing to delve upon the
issue of the propriety of the bad debts write-off.14
ACCORDINGLY, petitioner Philex Mining Corporation is
hereby ORDERED to PAY respondent Commissioner of Petitioner insists that in determining the nature of its business
Internal Revenue the amount of P62,811,161.39, plus, 20% relationship with Baguio Gold, we should not only rely on the "Power
delinquency interest due computed from February 10, 1995, of Attorney", but also on the subsequent "Compromise with Dation in
which is the date after the 20-day grace period given by the Payment" and "Amended Compromise with Dation in Payment" that
the parties executed in 1982. These documents, allegedly evinced the
50

parties’ intent to treat the advances and payments as a loan and Perusal of the agreement denominated as the "Power of Attorney"
establish a creditor-debtor relationship between them. indicates that the parties had intended to create a partnership and
establish a common fund for the purpose. They also had a joint
The petition lacks merit. interest in the profits of the business as shown by a 50-50 sharing in
the income of the mine.
The lower courts correctly held that the "Power of Attorney" is the
instrument that is material in determining the true nature of the Under the "Power of Attorney", petitioner and Baguio Gold undertook
business relationship between petitioner and Baguio Gold. Before to contribute money, property and industry to the common fund
resort may be had to the two compromise agreements, the parties’ known as the Sto. Niño mine.17 In this regard, we note that there is a
contractual intent must first be discovered from the expressed substantive equivalence in the respective contributions of the parties
language of the primary contract under which the parties’ business to the development and operation of the mine. Pursuant to paragraphs
relations were founded. It should be noted that the compromise 4 and 5 of the agreement, petitioner and Baguio Gold were to
agreements were mere collateral documents executed by the parties contribute equally to the joint venture assets under their respective
pursuant to the termination of their business relationship created under accounts. Baguio Gold would contribute P11M under its owner’s
the "Power of Attorney". On the other hand, it is the latter which account plus any of its income that is left in the project, in addition to
established the juridical relation of the parties and defined the its actual mining claim. Meanwhile, petitioner’s contribution would
parameters of their dealings with one another. consist of its expertise in the management and operation of mines, as
well as the manager’s account which is comprised of P11M in funds
and property and petitioner’s "compensation" as manager that cannot
The execution of the two compromise agreements can hardly be
be paid in cash.
considered as a subsequent or contemporaneous act that is reflective
of the parties’ true intent. The compromise agreements were executed
eleven years after the "Power of Attorney" and merely laid out a plan However, petitioner asserts that it could not have entered into a
or procedure by which petitioner could recover the advances and partnership agreement with Baguio Gold because it did not "bind"
payments it made under the "Power of Attorney". The parties entered itself to contribute money or property to the project; that under
into the compromise agreements as a consequence of the dissolution paragraph 5 of the agreement, it was only optional for petitioner to
of their business relationship. It did not define that relationship or transfer funds or property to the Sto. Niño project "(w)henever the
indicate its real character. MANAGERS shall deem it necessary and convenient in connection
with the MANAGEMENT of the STO. NIÑO MINE." 18
An examination of the "Power of Attorney" reveals that a partnership
or joint venture was indeed intended by the parties. Under a contract The wording of the parties’ agreement as to petitioner’s contribution
of partnership, two or more persons bind themselves to contribute to the common fund does not detract from the fact that petitioner
money, property, or industry to a common fund, with the intention of transferred its funds and property to the project as specified in
dividing the profits among themselves.15 While a corporation, like paragraph 5, thus rendering effective the other stipulations of the
petitioner, cannot generally enter into a contract of partnership unless contract, particularly paragraph 5(c) which prohibits petitioner from
authorized by law or its charter, it has been held that it may enter into withdrawing the advances until termination of the parties’ business
a joint venture which is akin to a particular partnership: relations. As can be seen, petitioner became bound by its contributions
once the transfers were made. The contributions acquired an
The legal concept of a joint venture is of common law origin. obligatory nature as soon as petitioner had chosen to exercise its
option under paragraph 5.
It has no precise legal definition, but it has been generally
understood to mean an organization formed for some
temporary purpose. x x x It is in fact hardly distinguishable There is no merit to petitioner’s claim that the prohibition in
from the partnership, since their elements are similar – paragraph 5(c) against withdrawal of advances should not be taken as
community of interest in the business, sharing of profits and an indication that it had entered into a partnership with Baguio Gold;
losses, and a mutual right of control. x x x The main that the stipulation only showed that what the parties entered into was
distinction cited by most opinions in common law actually a contract of agency coupled with an interest which is not
jurisdictions is that the partnership contemplates a general revocable at will and not a partnership.
business with some degree of continuity, while the joint
venture is formed for the execution of a single transaction, In an agency coupled with interest, it is the agency that cannot be
and is thus of a temporary nature. x x x This observation is revoked or withdrawn by the principal due to an interest of a third
not entirely accurate in this jurisdiction, since under the Civil party that depends upon it, or the mutual interest of both principal and
Code, a partnership may be particular or universal, and a agent.19 In this case, the non-revocation or non-withdrawal under
particular partnership may have for its object a specific paragraph 5(c) applies to the advances made by petitioner who is
undertaking. x x x It would seem therefore that under supposedly the agent and not the principal under the contract. Thus, it
Philippine law, a joint venture is a form of partnership and cannot be inferred from the stipulation that the parties’ relation under
should be governed by the law of partnerships. The Supreme the agreement is one of agency coupled with an interest and not a
Court has however recognized a distinction between these partnership.
two business forms, and has held that although a corporation
cannot enter into a partnership contract, it may however Neither can paragraph 16 of the agreement be taken as an indication
engage in a joint venture with others. x x x (Citations that the relationship of the parties was one of agency and not a
omitted) 16 partnership. Although the said provision states that "this Agency shall
be irrevocable while any obligation of the PRINCIPAL in favor of the
MANAGERS is outstanding, inclusive of the MANAGERS’
51

account," it does not necessarily follow that the parties entered into an evidencing the terms and conditions of such loans. The parties also
agency contract coupled with an interest that cannot be withdrawn by did not provide a specific maturity date for the advances to become
Baguio Gold. due and demandable, and the manner of payment was unclear. All
these point to the inevitable conclusion that the advances were not
It should be stressed that the main object of the "Power of Attorney" loans but capital contributions to a partnership.
was not to confer a power in favor of petitioner to contract with third
persons on behalf of Baguio Gold but to create a business relationship The strongest indication that petitioner was a partner in the Sto Niño
between petitioner and Baguio Gold, in which the former was to mine is the fact that it would receive 50% of the net profits as
manage and operate the latter’s mine through the parties’ mutual "compensation" under paragraph 12 of the agreement. The entirety of
contribution of material resources and industry. The essence of an the parties’ contractual stipulations simply leads to no other
agency, even one that is coupled with interest, is the agent’s ability to conclusion than that petitioner’s "compensation" is actually its share
represent his principal and bring about business relations between the in the income of the joint venture.
latter and third persons.20 Where representation for and in behalf of
the principal is merely incidental or necessary for the proper discharge Article 1769 (4) of the Civil Code explicitly provides that the "receipt
of one’s paramount undertaking under a contract, the latter may not by a person of a share in the profits of a business is prima facie
necessarily be a contract of agency, but some other agreement evidence that he is a partner in the business." Petitioner asserts,
depending on the ultimate undertaking of the parties.21 however, that no such inference can be drawn against it since its share
in the profits of the Sto Niño project was in the nature of
In this case, the totality of the circumstances and the stipulations in compensation or "wages of an employee", under the exception
the parties’ agreement indubitably lead to the conclusion that a provided in Article 1769 (4) (b).24
partnership was formed between petitioner and Baguio Gold.
On this score, the tax court correctly noted that petitioner was not an
First, it does not appear that Baguio Gold was unconditionally employee of Baguio Gold who will be paid "wages" pursuant to an
obligated to return the advances made by petitioner under the employer-employee relationship. To begin with, petitioner was the
agreement. Paragraph 5 (d) thereof provides that upon termination of manager of the project and had put substantial sums into the venture
the parties’ business relations, "the ratio which the MANAGER’S in order to ensure its viability and profitability. By pegging its
account has to the owner’s account will be determined, and the compensation to profits, petitioner also stood not to be remunerated in
corresponding proportion of the entire assets of the STO. NINO case the mine had no income. It is hard to believe that petitioner
MINE, excluding the claims" shall be transferred to petitioner.22 As would take the risk of not being paid at all for its services, if it were
pointed out by the Court of Tax Appeals, petitioner was merely truly just an ordinary employee.
entitled to a proportionate return of the mine’s assets upon dissolution
of the parties’ business relations. There was nothing in the agreement Consequently, we find that petitioner’s "compensation" under
that would require Baguio Gold to make payments of the advances to paragraph 12 of the agreement actually constitutes its share in the net
petitioner as would be recognized as an item of obligation or profits of the partnership. Indeed, petitioner would not be entitled to
"accounts payable" for Baguio Gold. an equal share in the income of the mine if it were just an employee of
Baguio Gold.25 It is not surprising that petitioner was to receive a 50%
Thus, the tax court correctly concluded that the agreement provided share in the net profits, considering that the "Power of Attorney" also
for a distribution of assets of the Sto. Niño mine upon termination, a provided for an almost equal contribution of the parties to the St. Nino
provision that is more consistent with a partnership than a creditor- mine. The "compensation" agreed upon only serves to reinforce the
debtor relationship. It should be pointed out that in a contract of loan, notion that the parties’ relations were indeed of partners and not
a person who receives a loan or money or any fungible thing acquires employer-employee.
ownership thereof and is bound to pay the creditor an equal amount
of the same kind and quality.23 In this case, however, there was no All told, the lower courts did not err in treating petitioner’s advances
stipulation for Baguio Gold to actually repay petitioner the cash and as investments in a partnership known as the Sto. Nino mine. The
property that it had advanced, but only the return of an amount pegged advances were not "debts" of Baguio Gold to petitioner inasmuch as
at a ratio which the manager’s account had to the owner’s account. the latter was under no unconditional obligation to return the same to
the former under the "Power of Attorney". As for the amounts that
In this connection, we find no contractual basis for the execution of petitioner paid as guarantor to Baguio Gold’s creditors, we find no
the two compromise agreements in which Baguio Gold recognized a reason to depart from the tax court’s factual finding that Baguio
debt in favor of petitioner, which supposedly arose from the Gold’s debts were not yet due and demandable at the time that
termination of their business relations over the Sto. Nino mine. The petitioner paid the same. Verily, petitioner pre-paid Baguio Gold’s
"Power of Attorney" clearly provides that petitioner would only be outstanding loans to its bank creditors and this conclusion is supported
entitled to the return of a proportionate share of the mine assets to be by the evidence on record.26
computed at a ratio that the manager’s account had to the owner’s
account. Except to provide a basis for claiming the advances as a bad In sum, petitioner cannot claim the advances as a bad debt deduction
debt deduction, there is no reason for Baguio Gold to hold itself liable from its gross income. Deductions for income tax purposes partake of
to petitioner under the compromise agreements, for any amount over the nature of tax exemptions and are strictly construed against the
and above the proportion agreed upon in the "Power of Attorney". taxpayer, who must prove by convincing evidence that he is entitled to
the deduction claimed.27 In this case, petitioner failed to substantiate
Next, the tax court correctly observed that it was unlikely for a its assertion that the advances were subsisting debts of Baguio Gold
business corporation to lend hundreds of millions of pesos to another that could be deducted from its gross income. Consequently, it could
corporation with neither security, or collateral, nor a specific deed not claim the advances as a valid bad debt deduction.
52

WHEREFORE, the petition is DENIED. The decision of the Court prejudice to the State. And this, too, is the sense in which the term is
of Appeals in CA-G.R. SP No. 49385 dated June 30, 2000, which commonly understood in other jurisdictions.
affirmed the decision of the Court of Tax Appeals in C.T.A. Case No.
5200 is AFFIRMED. Petitioner Philex Mining Corporation is Same; Same; Elements.—All these judicial pronouncements demand
ORDERED to PAY the deficiency tax on its 1982 income in the two concurring elements to be present before assets or properties were
amount of P62,811,161.31, with 20% delinquency interest computed considered as ill-gotten wealth, namely: (a) they must have
from February 10, 1995, which is the due date given for the payment “originated from the government itself,” and (b) they must have been
of the deficiency income tax, up to the actual date of payment. taken by former President Marcos, his immediate family, relatives,
and close associates by illegal means.
SO ORDERED.
Same; Same; It is well to point out that the distinction laid down by
Executive Order No. 1 and its related issuances, and expounded by
11 REPUBLIC VS. SANDIGANBAYAN relevant judicial pronouncements unavoidably required competent
(FIRST DIVISION) evidentiary substantiation made in appropriate judicial proceedings
to determine: (a) whether the assets or properties involved had come
Public Officers; Ill-Gotten Wealth; Sequestration; It is already settled from the vast resources of government, and (b) whether the
that sequestration, due to its tendency to impede or limit the exercise individuals owning or holding such assets or properties were close
of proprietary rights by private citizens, is construed strictly against associates of President Marcos—the Republic should furnish to the
the State, conformably with the legal maxim that statutes in Sandiganbayan in proper judicial proceedings the competent evidence
derogation of common rights are generally strictly construed and proving who were the close associates of President Marcos who had
rigidly confined to the cases clearly within their scope and purpose.— amassed assets and properties that would be rightly considered as ill-
Plainly enough, the irregularities infirming the issuance of the several gotten wealth.—It is well to point out, consequently, that the
WOS could not be ignored in favor of the Republic and resolved distinction laid down by E.O. No. 1 and its related issuances, and
against the persons whose properties were subject of the WOS. Where expounded by relevant judicial pronouncements unavoidably required
the Rules of the PCGG instituted safeguards under Section 3, supra, competent evidentiary substantiation made in appropriate judicial
by requiring the concurrent signatures of two Commissioners to every proceedings to determine: (a) whether the assets or properties
WOS issued and the existence of a prima facie case of ill gotten involved had come from the vast resources of government, and (b)
wealth to support the issuance, the non-compliance with either of the whether the individuals owning or holding such assets or properties
safeguards nullified the WOS thus issued. It is already settled that were close associates of President Marcos. The requirement of
sequestration, due to its tendency to impede or limit the exercise of competent evidentiary substantiation made in appropriate judicial
proprietary rights by private citizens, is construed strictly against the proceedings was imposed because the factual premises for the
State, conformably with the legal maxim that statutes in derogation of reconveyance of the assets or properties in favor of the government
common rights are generally strictly construed and rigidly confined to due to their being ill-gotten wealth could not be simply assumed. x x x
the cases clearly within their scope and purpose. Accordingly, the Republic should furnish to the Sandiganbayan in
proper judicial proceedings the competent evidence proving who were
the close associates of President Marcos who had amassed assets and
Same; Same; It is clear that ill-gotten wealth would not include all the properties that would be rightly considered as ill-gotten wealth.
properties of President Marcos, his immediate family, relatives, and
close associates but only the part that originated from the “vast
resources of the government.”—Although E.O. No. 1 and the other Same; Same; Pleadings, Practice and Procedure; Three Ways of
issuances dealing with ill-gotten wealth (i.e., E.O. No. 2, E.O. No. 14, Making a Specific Denial; It is basic in remedial law that a defendant
and E.O. No. 14-A) only identified the subject matter of ill-gotten in a civil case must apprise the trial court and the adverse party of the
wealth and the persons who could amass ill-gotten wealth and did not facts alleged by the complaint that he admits and of the facts alleged
include an explicit definition of ill-gotten wealth, we can still discern by the complaint that he wishes to place into contention—only a
the meaning and concept of ill-gotten wealth from the WHEREAS specific denial shall be sufficient to place into contention an alleged
Clauses themselves of E.O. No. 1, in that ill-gotten wealth consisted fact.—It is basic in remedial law that a defendant in a civil case must
of the “vast resources of the government” amassed by “former apprise the trial court and the adverse party of the facts alleged by the
President Ferdinand E. Marcos, his immediate family, relatives and complaint that he admits and of the facts alleged by the complaint that
close associates both here and abroad.” It is clear, therefore, that ill- he wishes to place into contention. The defendant does the former
gotten wealth would not include all the properties of President either by stating in his answer that they are true or by failing to
Marcos, his immediate family, relatives, and close associates but only properly deny them. There are two ways of denying alleged facts: one
the part that originated from the “vast resources of the government.” is by general denial, and the other, by specific denial. In this
In time and unavoidably, the Supreme Court elaborated on the jurisdiction, only a specific denial shall be sufficient to place into
meaning and concept of ill-gotten wealth. In Bataan Shipyard & contention an alleged fact. Under Section 10, Rule 8 of the Rules of
Engineering Co., Inc. v. Presidential Commission on Good Court, a specific denial of an allegation of the complaint may be made
Government, or BASECO, 150 SCRA 181 (1987), for the sake of in any of three ways, namely: (a) a defendant specifies each material
brevity, the Court held that: x x x until it can be determined, through allegation of fact the truth of which he does not admit and, whenever
appropriate judicial proceedings, whether the property was in truth practicable, sets forth the substance of the matters upon which he
“ill-gotten,” i.e., acquired through or as a result of improper or illegal relies to support his denial; (b) a defendant who desires to deny only a
use of or the conversion of funds belonging to the Government or part of an averment specifies so much of it as is true and material and
denies only the remainder; and (c) a defendant who is without
any of its branches, instrumentalities, enterprises, banks or
financial institutions, or by taking undue advantage of official knowledge or information sufficient to form a belief as to the truth of
position, authority, relationship, connection or influence, resulting in a material averment made in the complaint states so, which has the
unjust enrichment of the ostensible owner and grave damage and effect of a denial.
53

Same; Same; Same; Admissions; It is fundamental that any statement, purchased the SMC shares of stock with the use of public funds; and
to be considered as an admission for purposes of judicial that the affected shares of stock constituted ill-gotten wealth. The
proceedings, should be definite, certain and unequivocal—otherwise, Republic was well apprised of its burden of proof, first through the
the disputed fact will not get settled.—The statements found in the joinder of issues made by the responsive pleadings of the defendants,
joint Pre-Trial Brief of Cojuangco, et al. were noticeably written including Cojuangco, et al. The Republic was further reminded
beneath the heading of Proposed Evidence. Such location indicated through the pre-trial order and the Resolution denying its Motion for
that the statements were only being proposed, that is, they were not Summary Judgment, supra, of the duty to prove the factual allegations
yet intended or offered as admission of any fact stated therein. In other on ill-gotten wealth against Cojuangco, et al.
words, the matters stated or set forth therein might or might not be
presented at all. Also, the text and tenor of the statements expressly Same; Same; Same; Summary Judgments; With the Republic
conditioned the proposal on the Republic ultimately presenting its nonetheless choosing not to adduce evidence proving the factual
evidence in the action. After the Republic opted not to present its allegations, particularly the aforementioned matters, and instead
evidence, the condition did not transpire; hence, the proposed opting to pursue its claims by Motion for Summary Judgment, the
admissions, assuming that they were that, did not materialize. Sandiganbayan became completely deprived of the means to know the
Obviously, too, the statements found under the heading of Proposed necessary but crucial details of the transactions on the acquisition of
Evidence in the joint Pre-Trial Brief were incomplete and inadequate the contested block of shares.—With the Republic nonetheless
on the important details of the supposed transactions (i.e., alleged choosing not to adduce evidence proving the factual allegations,
borrowings and advances). As such, they could not constitute particularly the aforementioned matters, and instead opting to pursue
admissions that the funds had come from borrowings by Cojuangco, its claims by Motion for Summary Judgment, the Sandiganbayan
et al. from the UCPB or had been credit advances from the CIIF Oil became completely deprived of the means to know the necessary but
Companies. Moreover, the purpose for presenting the records of the crucial details of the transactions on the acquisition of the contested
UCPB and the representatives of the UCPB and of the still block of shares. The Republic’s failure to adduce evidence shifted
unidentified or unnamed CIIF Oil Mills as declared in the joint Pre- noburden to the respondents to establish anything, for it was basic that
Trial Brief did not at all show whether the UCPB and/or the the party who asserts, not the party who denies, must prove. Indeed, in
unidentified or unnamed CIIF Oil Mills were the only sources of a civil action, the plaintiff has the burden of pleading every essential
funding, or that such institutions, assuming them to be the sources of fact and element of the cause of action and proving them by
the funding, had been the only sources of funding. Such preponderance of evidence. This means that if the defendant merely
ambiguousness disqualified the statements from being relied upon as denies each of the plaintiff’s allegations and neither side produces
admissions. It is fundamental that any statement, to be considered as evidence on any such element, the plaintiff must necessarily fail in the
an admission for purposes of judicial proceedings, should be definite, action. Thus, the Sandiganbayan correctly dismissed Civil Case No.
certain and unequivocal; otherwise, the disputed fact will not get 0033-F for failure of the Republic to prove its case by preponderant
settled. evidence.

Same; Same; Same; Same; The Rules of Court has no rule that treats Same; Same; Same; Same; Upon a motion for summary judgment the
the statements found under the heading Proposed Evidence as court’s sole function is to determine whether there is an issue of fact
admissions binding on the party—on the contrary, the Rules of Court to be tried, and all doubts as to the existence of an issue of fact must
has even distinguished between admitted facts and facts proposed to be resolved against the moving party—in ruling on a motion for
be admitted during the stage of pre-trial.—The Rules of Court has no summary judgment, the court should take that view of the evidence
rule that treats the statements found under the heading Proposed most favorable to the party against whom it is directed, giving that
Evidence as admissions binding Cojuangco, et al. On the contrary, the party the benefit of all favorable inferences.—A summary judgment
Rules of Court has even distinguished between admitted facts and under Rule 35 of the Rules of Court is a procedural technique that is
facts proposed to be admitted during the stage of pre-trial. Section 6 proper only when there is no genuine issue as to the existence of a
(b), Rule 18 of the Rules of Court, requires a Pre-Trial Brief to include material fact and the moving party is entitled to a judgment as a
a summary of admitted facts and a proposed stipulation offacts. matter of law. It is a method intended to expedite or promptly dispose
Complying with the requirement, the joint Pre-Trial Brief of of cases where the facts appear undisputed and certain from the
Cojuangco, et al. included the summary of admitted facts in its pleadings, depositions, admissions, and affidavits on record. Upon a
paragraph 3.00 of its Item III, separately and distinctly from the motion for summary judgment the court’s sole function is to
Proposed Evidence. determine whether there is an issue of fact to be tried, and all doubts
as to the existence of an issue of fact must be resolved against the
Same; Same; Same; Burden of Proof; The burden of proof, according moving party. In other words, a party who moves for summary
to Section 1, Rule 131 of the Rules of Court, is “the duty of a party to judgment has the burden of demonstrating clearly the absence of any
present evidence on the facts in issue necessary to establish his claim genuine issue of fact, and any doubt as to the existence of such an
or defense by the amount of evidence required by law”; That burden issue is resolved against the movant. Thus, in ruling on a motion for
requires the Republic in ill-gotten wealth cases to demonstrate summary judgment, the court should take that view of the evidence
through competent evidence that the defendants had purchased the most favorable to the party against whom it is directed, giving that
shares of stock with the use of public funds, and that the affected party the benefit of all favorable inferences.
shares of stock constituted ill-gotten wealth.—The burden of proof,
according to Section 1, Rule 131 of the Rules of Court, is “the duty of Same; Same; Same; Same; Words and Phrases; The term genuine
a party to present evidence on the facts in issue necessary to establish issue has been defined as an issue of fact that calls for the
his claim or defense by the amount of evidence required by law.” presentation of evidence as distinguished from an issue that is sham,
Here, the Republic, being the plaintiff, was the party that carried the fictitious, contrived, set up in bad faith, and patently unsubstantial so
burden of proof. That burden required it to demonstrate through as not to constitute a genuine issue for trial; The rule on summary
competent evidence that the respondents, as defendants, had judgment does not invest the trial courts with jurisdiction to try
54

summarily the factual issues upon affidavits, but authorizes summary the UCPB in favor of Cojuangco. There must be competent evidence
judgment only when it appears clear that there is no genuine issue as to that effect. And, finally, the loans, assuming that they were of a
to any material fact.—The term genuine issue has been defined as an DOSRI nature or without the benefit of the required approvals or in
issue of fact that calls for the presentation of evidence as distinguished excess of the Single Borrower’s Limit, would not be void for that
from an issue that is sham, fictitious, contrived, set up in bad faith, reason. Instead, the bank or the officers responsible for the approval
and patently unsubstantial so as not to constitute a genuine issue for and grant of the DOSRI loan would be subject only to sanctions under
trial. The court can determine this on the basis of the pleadings, the law.
admissions, documents, affidavits, and counter-affidavits submitted
by the parties to the court. Where the facts pleaded by the parties are Same; Same; Same; Concluding that Cojuangco breached fiduciary
disputed or contested, proceedings for a summary judgment cannot duties as an officer and member of the Board of Directors of the
take the place of a trial. Well-settled is the rule that a party who United Coconut Planters Bank (UCPB) without competent evidence
moves for summary judgment has the burden of demonstrating clearly thereon would be unwarranted and unreasonable.—The conditions
the absence of any genuine issue of fact. Upon that party’s shoulders for the application of Articles 1455 and 1456 of the Civil Code (like
rests the burden to prove the cause of action, and to show that the the trustee using trust funds to purchase, or a person acquiring
defense is interposed solely for the purpose of delay. After the burden property through mistake or fraud), and Section 31 of the Corporation
has been discharged, the defendant has the burden to show facts Code (like a director or trustee willfully and knowingly voting for or
sufficient to entitle him to defend. Any doubt as to the propriety of a assenting to patently unlawful acts of the corporation, among others)
summary judgment shall be resolved against the moving party. We require factual foundations to be first laid out in appropriate judicial
need not stress that the trial courts have limited authority to render proceedings. Hence, concluding that Cojuangco breached fiduciary
summary judgments and may do so only in cases where no genuine duties as an officer and member of the Board of Directors of the
issue as to any material fact clearly exists between the parties. The UCPB without competent evidence thereon would be unwarranted and
rule on summary judgment does not invest the trial courts with unreasonable.
jurisdiction to try summarily the factual issues upon affidavits, but
authorizes summary judgment only when it appears clear that there is
Loans; Owing to the consumable nature of the thing loaned, the
no genuine issue as to any material fact.
resulting duty of the borrower in a contract of loan is to pay, not to
return, to the creditor or lender the very thing loaned, and this
Same; Same; Sandiganbayan; Coconut Levy Fund; The Court cannot explains why the ownership of the thing loaned is transferred to the
reverse the decision of the Sandiganbayan on the basis alone of debtor upon perfection of the contract; Evidently, the resulting
judicial pronouncements to the effect that the coconut levy funds were relationship between a creditor and debtor in a contract of loan
prima facie public funds, but without any competent evidence linking cannot be characterized as fiduciary; Absent any special facts and
the acquisition of the block of San Miguel Corporation (SMC) shares circumstances proving a higher degree of responsibility, any dealings
by Cojuangco, et al. to the coconut levy funds.—Madame Justice between a lender and borrower are not fiduciary in nature.—The
Carpio-Morales argues in her dissent that although the contested SMC thrust of the Republic that the funds were borrowed or lent might even
shares could be inescapably treated as fruits of funds that are prima preclude any consequent trust implication. In a contract of loan, one
facie public in character, Cojuangco, et al. abstained from presenting of the parties (creditor) delivers money or other consumable thing to
countervailing evidence; and that with the Republic having shown that another (debtor) on the condition that the same amount of the same
the SMC shares came into fruition from coco levy funds that are kind and quality shall be paid. Owing to the consumable nature of the
prima facie public funds, Cojuangco, et al. had to go forward with thing loaned, the resulting duty of the borrower in a contract of loan is
contradicting evidence, but did not. The Court disagrees. We cannot to pay, not to return, to the creditor or lender the very thing loaned.
reverse the decision of November 28, 2007 on the basis alone of This explains why the ownership of the thing loaned is transferred to
judicial pronouncements to the effect that the coconut levy funds were the debtor upon perfection of the contract. Ownership of the thing
prima facie public funds, but without any competent evidence linking loaned having transferred, the debtor enjoys all the rights conferred to
the acquisition of the block of SMC shares by Cojuangco, et al. to the an owner of property, including the right to use and enjoy (jus utendi),
coconut levy funds. to consume the thing by its use (jus abutendi), and to dispose (jus
disponendi), subject to such limitations as may be provided by law.
Same; Same; Banks and Banking; The loans, assuming that they were Evidently, the resulting relationship between a creditor and debtor in a
of a Directors, Officers, Stockholders and their Related Interests contract of loan cannot be characterized as fiduciary. To say that a
(DOSRI) nature or without the benefit of the required approvals or in relationship is fiduciary when existing laws do not provide for such
excess of the Single Borrower’s Limit, would not be void for that requires evidence that confidence is reposed by one party in another
reason—instead, the bank or the officers responsible for the approval who exercises dominion and influence. Absent any special facts and
and grant of the DOSRI loan would be subject only to sanctions under circumstances proving a higher degree of responsibility, any dealings
the law.—The Republic’s lack of proof on the source of the funds by between a lender and borrower are not fiduciary in nature. This
which Cojuangco, et al. had acquired their block of SMC shares has explains why, for example, a trust receipt transaction is not classified
made it shift its position, that it now suggests that Cojuangco had been as a simple loan and is characterized as fiduciary, because the Trust
enabled to obtain the loans by the issuance of LOI 926 exempting the Receipts Law (P.D. No. 115) punishes the dishonesty and abuse of
UCPB from the DOSRI and the Single Borrower’s Limit restrictions. confidence in the handling of money or goods to the prejudice of
We reject the Republic’s suggestion. Firstly, as earlier pointed out, the another regardless of whether the latter is the owner.
Republic adduced no evidence on the significant particulars of the
supposed loan, like the amount, the actual borrower, the approving Same; A debtor can appropriate the thing loaned without any
official, etc. It did not also establish whether or not the loans were responsibility or duty to his creditor to return the very thing that was
DOSRI or issued in violation of the Single Borrower’s Limit. loaned or to report how the proceeds were used—nor can he be
Secondly, the Republic could not outrightly assume that President compelled to return the proceeds and fruits of the loan, for there is
Marcos had issued LOI 926 for the purpose of allowing the loans by nothing under our laws that compel a debtor in a contract of loan to
55

do so.—Based on the foregoing, a debtor can appropriate the thing however. Under the third, fourth and fifth causes of action of the
loaned without any responsibility or duty to his creditor to return the Complaint, there are allegations of breach of trust and confidence and
very thing that was loaned or to report how the proceeds were used. usurpation of business opportunities in conflict with petitioners’
Nor can he be compelled to return the proceeds and fruits of the loan, fiduciary duties to the corporation, resulting in damage to the
for there is nothing under our laws that compel a debtor in a contract Corporation. Under these causes of action, respondents are asking for
of loan to do so. As owner, the debtor can dispose of the thing the delivery to the Corporation of possession of the parcels of land
borrowed and his act will not be considered misappropriation of the and their corresponding certificates of title. Hence, the suit necessarily
thing. The only liability on his part is to pay the loan together with the affects the title to or right of possession of the real property sought to
interest that is either stipulated or provided under existing laws. be reconveyed. The Rules of Court allows the annotation of a
notice of lis pendens in actions affecting the title or right of
CARPIO-MORALES, J., Dissenting Opinion: possession of real property. x x x (italics in the original omitted;
underscoring and emphasis supplied) Even in cases of attachment,
both the Revised Rules of Court and Corporation Code do not require
Public Officers; Ill-Gotten Wealth; Sequestration; Sandiganbayan;
annotation on the corporation’s stock and transfer books for the
Nowhere in Republic v. Sandiganbayan, 258 SCRA 685 (1996), was it
attachment of shares of stock to be valid and binding on the
mentioned that the Sandiganbayan has the power to issue a writ of
corporation and third party.
sequestration similar to that vested in the Presidential Commission on
Good Government (PCGG).—The Republic goes on to fault the
Sandiganbayan for denying its alternative prayer in its motion for Same; Same; Admissions; Pre-Trial; I take exception to the majority’s
reconsideration—for the issuance by the Sandiganbayan of an order of holding limiting the admissions from statements in a pre-trial brief to
sequestration against the subject SMC shares in accordance with this those clearly identified by a submitting party as expressly admitted
Court’s decision in the 1996 case of Republic v. Sandiganbayan, 258 facts.—While the majority agrees that certain statements in a pre-trial
SCRA 685 (1996), the pertinent portion of which reads: x x x brief can be the source of admissions, it limits them to those clearly
Nowhere in the immediately-quoted portion of this Court’s decision identified by a submitting party as expressly admitted facts. I do take
was it mentioned that the Sandiganbayan has the power to issue a writ exception to this hard-and-fast rule. Bearing in mind the purpose of
of sequestration similar to that vested in the PCGG. The quoted pre-trial which is full disclosure to avoid surprise, Cojuangco, et al.’s
portion relates solely to the resolution of the second issue in that Pre-Trial Brief undoubtedly presents in a capsule the defense’s
case—whether the Sandiganbayan has “jurisdiction over a motion version of the case. In Republic v. Sarabia, 468 SCRA 142 (2005), the
questioning the validity of a ‘sequestration order’ issued by a duly Court found further enlightenment from a party’s Pre-trial Brief in
authorized representative of the PCGG”. In ruling in the affirmative, arriving as to the precise time at which just compensation should be
this Court settled that the matter of the legality and propriety of a fixed (i.e., as of the time of actual taking of possession by the
sequestration, being an incident of the case, is subject “exclusively to expropriating entity), which was found to be sometime in 1956. The
judicial adjudication” by the Sandiganbayan. The Court therein Court therein did not stop with the admissions in the Answer but
emphatically reiterated that the remedies are always subject to the appreciated the submissions in the Pre-Trial Brief to buttress the
control of the Sandiganbayan which acts as the arbiter between the same. Aside from lifting those under the sub-heading of
PCGG and the claimants. Moreover, the Court,in no uncertain terms, “Admissions,” it considered those under “Brief Statement of
recognized that under no circumstance can a sequestration or freeze Respondent’s Claim” that presented the proposed version of the party
order be validly issued by one who is not a Commissioner of the without the benefit of having elicited an acceptance of the stipulation
PCGG. The Sandiganbayan’s ample power referred to therein to from the other party.
control the proceedings refers to the issuance of ancillary orders or
writs of attachment, upon proper application, to effectuate its Same; Same; Same; The Sandiganbayan erred when it still counted on
judgment, but does not include the power to seize in the first instance the plaintiff to prove the already admitted fact that such loans and
properties purporting to be ill-gotten. credit advances funded, in whole or in part, the acquisition of subject
San Miguel Corporation (SMC) shares.—In the Resolution assailed in
Same; Same; Same; Same; Corporation Law; While the G.R. No. 166859, the Sandiganbayan committed no grave abuse of
Sandiganbayan has ample power to make such interlocutory orders as discretion in giving respondents—the party against whom the motion
may be necessary to ensure that its judgment would not be rendered for summary judgment was directed—the benefit of all favorable
ineffective, that is not a license for it to motu proprio issue every inferences in viewing the evidence. Any doubt as to the existence of
order it may deem fit, such as ordering an annotation of restrictive an issue of fact must be resolved against the movant. In G.R. No.
conditions on the relevant corporate books of a corporation despite 180702, however, the Sandiganbayan erred when it still adopted the
the lifting of the writs of sequestration; Even in cases of attachment, same position, despite the conduct or opportunity of trial. Particularly,
both the Revised Rules of Court and Corporation Code do not require the Sandiganbayan erred when it still counted on the plaintiff to prove
annotation on the corporation’s stock and transfer books for the the already admitted fact that such loans and credit advances funded,
attachment of shares of stock to be valid and binding on the in whole or in part, the acquisition of subject SMC shares. Notably,
corporation and third party.—With regard to the order for the respondents failed to negate, vary or override, on grounds allowed by
annotation of the four restrictive conditions on the relevant corporate the rules, their standing admission. That such loans and credit
books of the SMC, despite the lifting of the writs of sequestration, the advances fully or partially bankrolled the stock purchase can thus
Sandiganbayan was bereft of jurisdiction to do so. While it has ample no longer be contradicted. On the exclusivity of the funds, it is not
power to make such interlocutory orders as may be necessary to in the plaintiff’s interest to prove the allegation that private funds
ensure that its judgment would not be rendered ineffective, that is not partly financed the stock purchase. Conversely stated, the plaintiff-
a license for it to motu proprio issue every order it may deem fit. The Republic may not be expected to prove the negative assertion that no
intended annotation of the four conditions is akin to a notice of lis other source of funding was utilized to buy the subject SMC shares. It
pendens, which applies only in an action affecting the title or right of need not go forward to prove that respondents did not use private
possession of real property. The case involves personal property, funds. That the stock purchase was not exclusively funded by such
56

loans and credit advances is a matter of defense on the part of verdict must be returned in favor of the plaintiff. It is the burden of
respondents, upon which case the burden of evidence shifts. evidence which shifts from party to party depending upon the
exigencies of the case in the course of trial. The term prima facie
Same; Same; Pleadings, Practice and Procedure; Burden of Proof; In evidence denotes evidence which, if unexplained or uncontradicted, is
the final analysis, the party upon whom the ultimate burden lies is to sufficient to sustain the proposition it supports or to establish the facts.
be determined by the pleadings, not by who is the plaintiff or the Prima facie means it is “sufficient to establish a fact or raise a
defendant.—Cojuangco admitted in the present case that he purchased presumption unless disproved or rebutted.” In fine, plaintiff having
the SMC shares of stock but averred that he used the proceeds of shown that the SMC shares came into fruition from coco levy
certain loans to finance the purchase of the SMC shares. This defense funds that are prima facie public funds, it was incumbent upon
by way of avoidance of the plaintiff’s claim could have buttressed the respondents to go forward with contradicting evidence. This they
defendants’ claim that not a single peso of public money was used in did not do.
buying the shares. Cojuangco, however, took a similar route in the
present case, despite the myriad of admissions, judicial notices, and Same; Same; The scope of inquiry on ill-gotten shares of stock is not
prima facie circumstances that, absent any varying evidence, restricted to those that were personally “acquired through” public
consequently fortified the Republic’s case. Indeed, “in the final funds in the form of a simple direct purchase which, crude and
analysis, the party upon whom the ultimate burden lies is to be unsophisticated it may seem, is illegal per se—having conceivably
determined by the pleadings, not by who is the plaintiff or the taken into account the ingenious and “organized pillage” perpetrated
defendant.” After the trial (or the lack thereof despite the trial by the Marcos regime, Executive Order No. 2 saw it fit to include
settings), it became clear that the borrowings from CIIF Oil Mills those that were “acquired as a result of the improper or illegal use
and UCPB exclusively funded the purchase of the SMC shares. of” public funds.—E.O. No. 2 describes ill-gotten assets as, inter alia,
shares of stock acquired through or as a result of the improper or
Same; Same; Coconut Levy Fund; United Coconut Planters Bank illegal use of or the conversion of funds or properties owned by the
(UCPB) and CIIF Oil Mills, all of which are coconut levy companies, Government or its branches, instrumentalities, enterprises, banks or
had financed the purchase by respondents of the subject San Miguel financial institutions. The scope of inquiry on ill-gotten shares of
Corporation (SMC) shares—undeniably, the subject SMC shares can stock is not restricted to those that were personally “acquired through”
be inescapably treated as fruits of funds that are prima facie public in public funds in the form of a simple direct purchase which, crude and
character.—Since the UCPB was acquired by the government using unsophisticated it may seem, is illegal per se. Having conceivably
the coconut levy funds, and “all assets acquired therefrom” are prima taken into account the ingenious and “organized pillage” perpetrated
facie public in character, it follows that the coco levy funds remained by the Marcos regime, E.O. No. 2 saw it fit to include those that were
public in character upon their transfer,pursuant to Presidential Decree “acquired as a result of the improper or illegal use of” public funds.
(P.D.) No. 755, from the Philippine Coconut Authority to the UCPB. Notably, E.O. No. 2 covers acquisitions resulting not only from illegal
The funds remained in the government’s possession throughout the use but also from improper use of public funds or properties, not to
entire transaction. UCPB and CIIF Oil Mills, all of which are coconut mention conversion thereof. That the law includes funds from
levy companies, had financed the purchase by respondents of the government banks and financial institutions bolsters this conclusion
subject SMC shares. Undeniably, the subject SMC shares can be and readily negates respondents’ vivid illustrations of bank loan
inescapably treated as fruits of funds that are prima facie public in transactions. Respondents’ position only attempts to explain that the
character. Have the subject SMC shares, as the by-product of the subject SMC shares were not directly acquired through public funds,
proceeds of the loan and credit advances, legitimately become private but it does not negate the other modes of acquisition (i.e., acquired as
in character? Given the Court’s pronouncement that coconut levy a result of the improper or illegal use or conversion of public funds)
funds are prima facie public in nature, the holder of shares of stock which could take on several forms.
that trace their roots from such funds must, in light of the
immediately-quoted portion of the Court’s decision in the 2007 case Same; Same; Cojuangco, not having specifically denied or even
of Republic v. Sandiganbayan (First Division), overcome the prima qualifiedly admitted his tenure as public officer during the Marcos
facie presumption or otherwise prove that the shares are legitimately Administration vis-à-vis his earlier admissions on the specific public
privately owned. offices or directorships he had held, the ineluctable conclusion is that
he held the positions of President and Member of the Board of
Same; Same; Pleadings, Practice and Procedure; Burden of Proof; Directors of the United Coconut Planters Bank (UCPB) and of
Words and Phrases; Burden of proof is the duty of any party to Director of the Philippine Coconut Authority (PCA) during the
present evidence to establish his claim or defense by the amount of Marcos Administration or, at the very least, in 1983.—Cojuangco’s
evidence required by law, which is preponderance of evidence in civil specific denial concerns only the matter of the acquisition of his
cases; The term prima facie evidence denotes evidence which, if assets. Without specifically denying the matter of his having
unexplained or uncontradicted, is sufficient to sustain the proposition served “as a public officer during the Marcos Administration,” the
it supports or to establish the facts—prima facie means it is same is deemed admitted. Judicial notice can be taken of the
“sufficient to establish a fact or raise a presumption unless disproved political history that 1983 (when the subject SMC shares were
or rebutted.”—Burden of proof is the duty of any party to present acquired) formed part of the Marcos Administration. Cojuangco, not
evidence to establish his claim or defense by the amount of evidence having specifically denied or even qualifiedly admitted his tenure as
required by law, which is preponderance of evidence in civil cases. public officer during the Marcos Administration vis-à-vis his earlier
The party, whether plaintiff or defendant, who asserts the affirmative admissions on the specific public offices or directorships he had held,
of the issue has the burden of proof to obtain a favorable judgment. the ineluctable conclusion is that he held the positions of President
Upon the plaintiff in a civil case, the burden of proof never parts, and Member of the Board of Directors of the UCPB and of Director of
though in the course of trial, once the plaintiff makes out a prima facie the PCA during the Marcos Administration or, at the very least, in
case in his favor, the duty or the burden of evidence shifts to the 1983.
defendant to controvert the plaintiff’s prima facie case; otherwise, a
57

Same; Same; The argument that Cojuangco was not a subordinate or (GOCC). Cojuangco, as then President and Member of the Board of
close associate of the Marcoses is the biggest joke to hit the Directors of UCPB, was thus, indeed, a public officer during the
century.—The argument that Cojuangco was not a subordinate or Marcos Administration.67
close associate of the Marcoses is the biggest joke to hit the century.
Aside from the cited offices or positions of power over coconut levy Same; Same; It having been established that Cojuangco was a
funds, Cojuangco admitted in Paragraph 3.01 of his Answer that on Director of Philippine Coconut Authority (PCA), a government entity,
February 25, 1986, Cojuangco left the Philippines with former and a President and Director of United Coconut Planters Bank
President Ferdinand Marcos. Clearly, the intimate relationship (UCPB), a government-owned and controlled corporation (GOCC),
between Cojuangco and Marcos equates or exceeds that of a family his act of acquiring loans and credit advances from UCPB and the
member or cabinet member, since not all of Marcos’s relatives or high CIIF Oil Mills in order to purchase the subject San Miguel
government ministers went with him in exile on that fateful date. If Corporation (SMC) shares through the various Cojuangco companies
this will not prove the more than close association between Cojuangco was in violation of his fiduciary duty as director.—In light of the
and Marcos, I do not know what will. admissions as discussed, it was no longer incumbent upon the
Republic to prove that Cojuangco was an officer and member of the
Same; Same; Judicial Notice; Since appointment as member of the governing boards of these bodies at that time. Cojuangco could, of
Philippine Coconut Authority (PCA) Board is made by the President, course, it bears reiteration, have adduced evidence to contradict, on
judicial notice of Cojuangco’s appointment by then President Marcos grounds allowed by the rules, his admissions in order to otherwise
as PCA Director must be also taken, it being an official act of the show that he was not connected to these entities during the Marcos
executive department of the Philippines.—From these amendments to regime. But he did not. It having been established that Cojuangco was
the PCA charter, two things remain crystal clear—first, that the a Director of PCA, a government entity, and a President and Director
members of PCA Board were to be appointed by the President either of UCPB, a GOCC, his act of acquiring loans and credit advances
for a given term or, at the very least, at his pleasure as the appointing from UCPB and the CIIF Oil Mills in order to purchase the subject
authority; and second, that the members of the PCA Board had been SMC shares through the various Cojuangco companies was in
given vast authority in managing and disbursing the coconut levy violation of his fiduciary duty as director.
funds, which includes the corporations formed and organized
therefrom and all assets acquired therefrom, such as the CIIF Oil Same; Same; Words and Phrases; “Fiduciary duty” has been defined
Mills. Since appointment as member of the PCA Board is made by the as a duty to act for someone else’s benefit, while subordinating one’s
President, judicial notice of Cojuangco’s appointment by then personal interests to that of the other person—it is the highest
President Marcos as PCA Director must be also taken, it being an standard of duty implied by law.—Fiduciary duty” has been defined
official act of the executive department of the Philippines. A sampling as “a duty to act for someone else’s benefit, while subordinating one’s
of available public records in the form of PCA annual reports personal interests to that of the other person. It is the highest standard
confirms that Cojuangco was a member of the governing board of the of duty implied by law. “Fiduciary” connotes a very broad term
PCA in the early 1980s. embracing both technical relations and those informal relations which
exist wherever one person trusts in or relies upon another; one
Same; Same; Same; United Coconut Planters Bank (UCPB) was a founded on trust or confidence reposed by one person in the integrity
public corporation during the period material to the complaint.— and fidelity of another. Such relationship arises whenever confidence
With respect to the UCPB, Cojuangco’s description of it as a “private is reposed on one side, and domination and influence result on the
corporation” does not bind the Court and cannot lend support to the other; the relation can be legal, social, domestic, or merely personal. It
proposition that the period during which he was the UCPB President is a relation subsisting between two persons in regard to a business,
and Director is not within the scope of his subsequent admission as a contract, or piece of property, or in regard to the general business or
“public officer during the Marcos Administration.” UCPB was a estate of one of them, of such a character that each must repose trust
public corporation during the period material to the complaint. and confidence in the other and must exercise a corresponding degree
of fairness and good faith. Out of such a relation, the law raises the
Same; Same; Government-Owned and Controlled Corporations rule that neither party may exert influence or pressure upon the other,
(GOCCs); Given the extent of government ownership of its shares of take selfish advantage of his trust, or dealwith the subject-matter of
stock, the public nature of the funds in its control, the purpose for the trust in such a way as to benefit himself or prejudice the other
which it was acquired, and the manner of its acquisition, United except in the exercise of the utmost good faith and with the full
Coconut Planters Bank (UCPB) was thus a government-owned and knowledge and consent of that other, business shrewdness, hard
controlled corporation (GOCC).—UCPB suited the classification of a bargaining, and astuteness to take advantage of the forgetfulness or
government-owned and controlled corporation. UCPB, then known as negligence of another being totally prohibited as between persons
the First United Bank, was acquired by the government in 1975 by standing in such a relation to each other.
virtue of P.D. No. 755 and the “Agreement for the Acquisition of a
Commercial Bank for the benefit of the Coconut Farmers” dated May Same; Same; In view of the public nature of the funds involved,
25, 1975 entered into by the PCA and Cojuangco using coco levy Cojuangco became a fiduciary not only of the entities involved but
funds to serve as the repository of the coco levy funds and to also of the public funds.—In view of the public nature of the funds
administer said public funds. Under said Agreement, the PCA bought involved, Cojuangco became a fiduciary not only of the entities
72.2% of the UCPB from Cojuangco who retained for himself 7.2% involved but also of the public funds. As stated in Gokongwei, a
as “payment for management services.” On this score alone, director cannot serve himself first and his cestuis (the corporations
Cojuangco indeed exercised management authority from 1975 to 1980 and the public) second or use his power as such director or officer for
and from 1981 to 1985. Given the extent of government ownership of his personal advantage or preference. Since the avowed purpose for
its shares of stock, the public nature of the funds in its control, the which UCPB was acquired by the government was to administer the
purpose for which it was acquired, and the manner of its acquisition, coco levy funds to provide them with “readily available credit
UCPB was thus a government-owned and controlled corporation facilities at preferential rates,” Cojuangco, in buying the SMC shares
58

through the loans he obtained from UCPB and CIIF Oil Mills for his and NOT for the benefit of any particular individual or entity. IN
own benefit, violated his fiduciary obligations by self-dealing, an SUM, in acquiring the loans for himself while he was an officer of
act proscribed under the Corporation Code.
UCPB, Cojuangco VIOLATED not only HIS FIDUCIARY
Same; Same; Banks and Banking; That President Marcos issued OBLIGATION under the Corporation Code and the
Letter of Instructions (LOI) No. 926 (September 3, 1979) that paved PROHIBITION ON SELF-DEALING under the banking law, but
the way for the acquisition of United Coconut Planters Bank (UCPB) also the PROVISION IN THE LOI ON HOW THE LOANS ARE
as the bank that would administer the lending of coco levy funds and TO BE ADMINISTERED. The avowed legal intention or policy
which, in effect, exempted borrowings from the UCPB from the usual behind the LOI in fact goes against factual reality, as even the
loan restrictions, is of no moment—the exemption granted in LOI No. financial borrowings were supposedly intended “to finance their
926 only extended to corporate borrowings, not to individual [Participating Mills’] capital expenditures.” It having been established
borrowings.—Cojuangco and the Cojuangco companies having that Cojuangco engaged in prohibited conflict-of-interest transactions
admitted in their joint Pre-Trial Brief that the SMC shares were by buying the SMC shares using coco levy funds being administered
actually purchased with proceeds from loans and credit advances from by the UCPB and CIIF Oil Mills for his own benefit, it follows that a
UCPB and the CIIF Oil Mills, and having foregone the opportunity constructive trust was formed in favor of the coconut farmers who
during trial to show that a written authority from the UCPB’s Board of should have benefited from such funds.
Directors was secured before contracting said loans, ineluctably,
Cojuangco violated the old banking law. That President Marcos Same; Same; Same; Words and Phrases; A constructive trust is “a
issued Letter of Instructions (LOI) No. 926 (September 3, 1979) that right of property, real or personal, held by one party for the benefit of
paved the way for the acquisition of UCPB as the bank that would another; that there is a fiduciary relation between a trustee and a
administer the lending of coco levy funds and which, in effect, cestui que trust as regards certain property, real, personal, money or
exempted borrowings from the UCPB from the usual loan restrictions, choses in action.”—A constructive trust is “a right of property, real or
is of no moment. Section 4 of LOI No. 926 provides: Sec. personal, held by one party for the benefit of another; that there is a
fiduciary relation between a trustee and a cestui que trust as regards
4. Financial Borrowings—All financial borrowings of the private certain property, real, personal, money or choses in action.” That
corporation authorized to be organized as well as any under Article 1455 there must be a breach of fiduciary relation and
Participating Mill to finance their respective capital expenditures profit or gain resulting therefrom in order for a constructive trust to be
including purchase of spare parts and inventories shall be created in favor of that legally entitled to it, Huang v. Court of
expeditiously and promptly approved, and such borrowings are Appeals, 236 SCRA 420 (1994), underscores: A constructive trust is
hereby declared exempt from restrictions/ imposed where a person holding title to property is subject to an
limitations: on simple borrower’s limitations; and on loans to equitable duty to convey it to another on the ground that he would be
corporations with interlocking directors, officers, stockholders, related unjustly enriched if he were permitted to retain it. The duty to convey
interests and subsidiaries and affiliates, it being understood that the property arises because it was acquired through fraud, duress, or
such lendings are in effect made to the coconut industry as a abuse of confidence, undue influence or mistake or breach of
whole and not to any particular individual or entity. (emphasis and fiduciary duty or through the wrongful disposition of another’s
underscoring supplied) Clearly, the exemption granted in LOI No. 926 property.
only extended to corporate borrowings, not to individual borrowings.
Same; Same; Same; Burden of Proof; Fraud; Even assuming
Same; Same; Trusts; In sum, in acquiring the loans for himself while arguendo that fraud is material, the rule on the burden of proof of
he was an officer of United Coconut Planters Bank (UCPB), fraud, as the majority insists, does not apply in the present case—
Cojuangco violated not only his fiduciary obligation under the authorities on evidence cite the existence of a fiduciary relation as an
Corporation Code and the prohibition on self-dealing under the exception; When a fiduciary relation exists between the parties to a
banking law, but also the provision in the loi on how the loans are to transaction, the burden of proof of its fairness is upon the fiduciary.—
be administered; It having been established that Cojuangco engaged Even assuming arguendo that fraud is material, the rule on the burden
in prohibited conflict-of-interest transactions by buying the San of proof of fraud, as the majority insists, does not apply in the present
Miguel Corporation (SMC) shares using coco levy funds being case. Authorities on evidence cite the existence of a fiduciary relation
administered by the United Coconut Planters Bank (UCPB) and CIIF as an exception: The law, in the absence of the existence of any
Oil Mills for his own benefit, it follows that a constructive trust was fiduciary relation, never presumes fraud, dishonesty, or bad faith; on
formed in favor of the coconut farmers who should have benefited the contrary, the presumption is in favor of good faith and honesty
from such funds.—Since Cojuangco admitted having acquired the until the contrary appears x x x However, when a fiduciary relation
loans for himself, albeit through various dummy corporations, and exists between the parties to a transaction, the burden of proof of
absent written authority from UCPB’s then Board of Directors, it its fairness is upon the fiduciary. He must show that there was no
becomes evident that he violated the restrictions on bank exposure abuse of confidence, that he has acted in good faith, and the act by
under the old banking law. The issuance of the LOI by then which he is benefited was the free, voluntary, and independent act
President Marcos, rather than exempting from the restrictions imposed of the other party, done with full knowledge of its purpose and
on loans being acquired by officers and directors of banks, only effect. Examples of such relationships may be seen in the case of
underscored the obvious: that Cojuangco was a close ally of Marcos husband and wife, attorney and client, directors of a corporation
and gained undue advantage due to such close relationship; and that and the corporation, or any other relationship of an intimate and
UCPB was primarily acquired to siphon off the coco levy funds. fiduciary character. A fiduciary seeking to profit by a transaction with
Significantly, as the above-quoted Section 4 of LOI No. 926 itself the one who confided in him has the burden of showing that he
provides, the borrowings or loans were intended “in effect” for the communicated to the other not only the fact of his interest in the
benefit of the coconut industry and the coconut farmers as a whole transaction, but all information he had which it was important for the
other to know in order to enable him to judge the value of the
59

property. The formal creation of a fiduciary relationship is not national budget. Thus, I vote to grant the petition for purposes of the
essential to the application of this rule. The principles apply to all remand of the case for hearing on the merits through competent
cases in which confidence is reposed by one party in another, and the counsels whose integrity are beyond question.
trust or confidence is accepted under circumstances which show that it
was founded on intimate, personal, and business relations existing Same; Same; A reminder of the wider view of the case as originally
between the parties, which give the one advantage or superiority over filed is offered as an opening in these Reflections in order to ensure
the other, and impose the burden of proving that the transaction was that the original big picture is not forgotten; The original picture the
fair and just on the person acquiring the benefit. Republic painted through the complaint is about a series of
interconnected moves—both at the CIIF end and from the end of
Same; Same; Same; Same; Contrary to the view of the majority, it was Cojuangco, the United Coconut Planters Bank (UCPB), and the allied
not incumbent upon the Republic to adduce evidence on the particular Cojuangco companies—where Cojuangco was at the center to use the
details of the loans and credit advances for it was Cojuangco’s coconut levy funds, or the companies funded or supported by coconut
burden to establish the regularity of these transactions.—Since levy funds, for the purchase of San Miguel Corporation (SMC)
Cojuangco was a fiduciary, the burden of evidence on the fairness of shares.—A reminder of the wider view of the case as originally filed
the questionable transactions was shifted to him. He failed to is offered as an opening in these Reflections in order to ensure that the
discharge this burden. In other words, contrary to the view of the original big picture is not forgotten. The original picture the Republic
majority, it was not incumbent upon the Republic to adduce evidence painted through the complaint is about a series of interconnected
on the particular details of the loans and credit advances for it was moves—both at the CIIF end and from the end of Cojuangco, the
Cojuangco’s burden to establish the regularity of these transactions. I UCPB, and the allied Cojuangco companies—where Cojuangco was
am not “second-guessing,” as the majority points out, for I am at the center to use the coconut levy funds, or the companies funded
justified to deem the irregularity or illegality thereof as established or supported by coconut levy funds, for the purchase of SMC shares.
after Cojuangco refused to discharge his burden. The intentional While the Republic itself, wittingly or unwittingly, has partitioned this
concealment of facts as to render secretive the assailed loan big picture into a forgotten first cause of action and a second cause of
transactions entered into by a fiduciary must be, as enunciated by the action that was divided into two aspects, this big picture and the
above-cited rule, taken against Cojuangco, he being the fiduciary. grand and coordinated moves that it drew at the beginning should
remain in mind as a background in viewing the remaining aspect
Same; Criminal Law; Anti-Graft and Corrupt Practices Act (R.A. No. under litigation. This background may be useful in sifting through the
3019); Aside from the violating the above-enumerated laws in facts established by the Partial Summary Judgment on the CIIF block
purchasing the San Miguel Corporation (SMC) shares, Cojuangco of SMC shares for use in considering the present Cojuangco block
also violated penal laws in his capacity as a public officer, namely aspect; facts established between the same parties in one aspect of
Section 3(i) of Republic Act No. 3019, and Article 216 of the Revised the same case should be conclusive in the remaining aspect of the
Penal Code.—Aside from the violating the above-enumerated laws in case. Advances from the CIIF Oil Mills were, after all, admitted by
purchasing the SMC shares, Cojuangco also violated penal laws in his Cojuangco, as discussed below; the interconnectedness of the two
capacity as a public officer. First, Section 3(i) of Republic Act No. aspects of the second cause of action are plain and evident and only
3019 prohibits a public officer from becoming interested for personal remains to be linked by evidence. These established facts may also
gain, or having a material interest in any transaction or act requiring somehow contribute to a deeper understanding of the turn of events in
the approval of a board, panel or group of which he is a member, and the Republic’s handling of and the developments in the case, leading
which exercises discretion in such approval, even if he votes against to an unappealed partial summary judgment and the virtual refusal of
the same or does not participate in the action of the board, committee, the Republic’s counsels to proceed to trial. Certainly, these
panel or group. Second, Article 216 of the Revised Penal Code established facts as well as the attendant circumstances and
prohibits public officers from directly or indirectly, becoming developments in the remaining Cojuangco block aspect of the case
interested in any contract or business in which it is his official duty to can be very useful in appreciating and judging the actions of the
intervene. Cojuangco’s participation in the performance of public lawyers of the Republic in terms of the competence, degree of care
functions in a branch of the government was through his appointment and even the integrity they exhibited in handling the case.
by then President Marcos to the identified positions. Clearly, whether
by the definition under R.A. 3019 or the Revised Penal Code, Same; Same; Pleadings, Practice and Procedure; Stipulations; By a
Cojuangco is deemed to be a public officer. party’s stipulation, he thereby claims—and thus admits—that the
evidence he pointed to would substantiate the material averments in
BRION, J., Dissenting Opinion: his pleadings.—Justice Bersamin dismisses these statements as mere
proposals of Cojuangco which do not constitute an admission that the
funds in the purchase of the SMC shares came from the UCPB loans
Public Officers; Ill-Gotten Wealth; Legal Ethics; Attorneys; Gross
and the CIIF Oil Mills advances. “[T]he statement were merely being
Negligence; I dissent in light of the gross negligence the counsel for
proposed, that is, they were not yet offered or were not yet intended as
the Republic committed in the course of the handling of the case—a
admissions of any fact stated therein.” With due respect, Justice
circumstance that denied the Republic its day in court in a claim for
recovery that involves an approximate present-day value of P84.56 Bersamin’s contention fails to consider a party’s intent and
billion or 5.49% of the 2010 entire national budget.—This Opinion representation in stipulating on the evidence he proposes to present
during trial; by his stipulation, the party thereby claims—and thus
refers to three consolidated petitions—G.R. No. 166859, G.R. No.
admits—that the evidence he pointed to would substantiate the
169203, and G.R. No. 180702—involving related issues raised in the
material averments in his pleadings.
Sandiganbayan Civil Case No. 0033-F. I dissent in light of the gross
negligence the counsel for the Republic committed in the course of
the handling of the case—a circumstance that denied the Republic its Same; Same; Coconut Levy Fund; Words and Phrases; The coconut
day in court in a claim for recovery that involves an approximate levy fund is a collective term referring to various funds that came
present-day value of P84.56 billion or 5.49% of the 2010 entire from “levies on sale of copra or equivalent coconut products exacted
60

for the most part from coconut farmers.”—The determination of government exercises, and the purposes that it serves; it is specifically
whether CIIF Oil Mills advances are public funds does not present a a government arm in the banking industry to serve the specific needs
major hurdle. A simple tracing of the organization and funding of the of coconut farmers through the administration of the deposited coco
CIIF Oil Mills to the coconut levy fund establishes the link that marks levy funds and by serving as a specialized coconut farmers’ bank. As
the fund as public. The coconut levy fund is a collective term referring a government-owned or controlled corporation, UCPB’s assets are
to various funds that came from “levies on sale of copra or equivalent government assets and its funds are subject to audit by the
coconut products exacted for the most part from coconut farmers.” Commission on Audit. Thus, the funds that it lends out are public
Specifically, the coconut levy fund refers to: (1) the Coconut funds; any private ownership in its corporate structure is confined to
Investment Fund (CIF) created under R.A. No. 6260; the Coconut the minority privately-held shares, which do not detract from the
Consumers Stabilization Fund (CCSF) created under PD 276; (2) the character of the bank as a government-owned and controlled
Coconut Industry Development Fund (CIDF) created under PD 582; corporation.
and (3) the Coconut Industry Stabilization Fund (CISF) created under
PD 1841. Same; Same; Same; If the Republic had been able to prove that the
amount of the loans to Cojuangco were so substantial that they
Same; Same; Same; Same; The surplus of the Coconut Consumers covered the funds reserved for the use of coconut farmers, then a case
Stabilization Fund (CCSF) and the Coconut Industry Develop-ment can be made that the grant of the loan was an ultra vires act, but if the
Fund (CIDF) came to be known as the Coconut Industry Investment amount that Cojuangco borrowed consisted of funds that the United
Fund or CIIF, and the corporations in which the CIIF was invested Coconut Planters Bank (UCPB) could use for other investments, then
were known as CIIF companies; Since the CIIF Oil Mills and the no sufficient basis exists under the ultra vires rule to claim that the
holding companies were organized/acquired and funded using the loans granted to Cojuangco for the purchase of San Miguel
coconut levy funds, it follows that the oil mills and all their assets, Corporation (SMC) shares had been contrary to UCPB’s purpose
including their investments, are public funds.—The CCSF was created under Presidential Decree (PD) No. 755.—Under these terms, if the
in 1973 and was set up to “subsidize the sale of coconut-based Republic had been able to prove that the amount of the loans to
products at prices set by the Price Control Council.” On the other Cojuangco were so substantial that they covered the funds reserved
hand, the CIDF was created in 1974 to “finance the establishment, for the use of coconut farmers, then a case can be made that the grant
operation, and maintenance of a hybrid coconut seednut farm x x x of the loan was an ultra vires act. What the Republic claimed in its
(which shall be used for the) nationwide coconut replanting program.” Memorandum of January 19, 2007—that it should have been UCPB
Pursuant to PD No. 1468 (which revised PD No. 961 or the Coconut and CIIF Oil Mills and not the respondents who should have
Industry Code), portions of the CCSF and the CIDF that were not purchased the subject shares—would also apply. However, if the
required for the replanting program and other authorized projects shall amount that Cojuangco borrowed consisted of funds that the UCPB
be used to “make investments in the form of shares of stock in could use for other investments, then no sufficient basis exists under
corporations organized for the purpose of engaging in the the ultra vires rule to claim that the loans granted to Cojuangco for the
establishment and operation of industries and commercial activities purchase of SMC shares had been contrary to UCPB’s purpose under
and other allied business undertakings relating to the coconut and PD No. 755. Under this situation, UCPB’s grant of the loan for the
other palm oil industries.” The surplus of the CCSF and the CIDF purchase of SMC shares, by itself, would not constitute an ultra vires
came to be known as the Coconut Industry Investment Fund or CIIF, act, unless the Republic specifies some other irregularity whose
and the corporations in which the CIIF was invested were known as consequence is to make the act ultra vires.
CIIF companies. In the 1993 Republic v. Sandiganbayan, declared
that—“x x x coconut levy funds being clearly affected with public Same; Same; Not every senior official of the Marcos government falls
interest, it follows that the corporations formed and organized from under the category of a “close associate”—proof of this type of
those funds, and all assets acquired therefrom, should also be regarded association has to be adduced. Again, the Republic failed on this
as clearly affected with public interest.” Since the CIIF Oil Mills and point.—A close examination of the records fails to reveal any specific
the holding companies were organized/acquired and funded using the allegation, much less proof, that Cojuangco amassed ill-gotten SMC
coconut levy funds, it follows that the oil mills and all their assets, shares because he is a relative or was a close associate of the late
including their investments, are public funds. This is the basic reason President Ferdinand Marcos. While the media may be replete with
underlying the partial judgment on the CIIF block of SMC shares; the stories of Cojuangco’s close relationship with President Marcos and
funds used in the purchase of these shares are public so that the shares his family, these stories are not evidence unless testified to by a
purchased rightfully belong to the Republic. competent witness or are materials that can be subject of judicial
notice. At the most, what appears in the offered evidence in this case
Same; Same; Same; Based on its genesis and the purposes it serves, are admissions by Cojuangco of the positions he assumed in
the United Coconut Planters Bank (UCPB) is not simply a government, specifically at the PCA and at the UCPB. The Republic’s
commercial bank—it is a bank owned and controlled by the Reply dated October 2, 2003, too, contained attached documents
government because of the ownership of its shares, the control that indicating the positions he assumed at the UCPB and its allied
government exercises, and the purposes that it serves, and it is companies and in the CIIF Oil Mills or its holding companies. These
specifically a government arm in the banking industry to serve the documents, however, were never marked as exhibits and offered as
specific needs of coconut farmers through the administration of the evidence. Even if they had been so marked and offered, however,
deposited coco levy funds and by serving as a specialized coconut these may not suffice to prove “close association” under the standards
farmers’ bank.—While functioning as depositary and administrator of of the jurisprudence on this point—not every senior official of the
the coconut levy fund, UCPB also continued to function as a Marcos government falls under the category of a “close associate”;
commercial bank one of whose activities is the extension of loans to proof of this type of association has to be adduced. Again, the
clients. Based on its genesis and the purposes it serves, UCPB is not Republic failed on this point.
simply a commercial bank; it is a bank owned and controlled by the
government because of the ownership of its shares, the control that
61

Same; Same; Legal Ethics; Attorneys; Gross Negligence; The from questioning the acts of its officials, if they are erroneous, and
question of whether the government’s counsel can so prejudice the more so if they are irregular. Such acts involve plain bureaucratic
government’s claim for recovery of valuable assets through the gross venality which leaves large and easily identifiable traces of neglect of
negligence of its counsel must be addressed by this Court as a duty. In Republic v. Aquino, 120 SCRA 186 (1983), we applied this
measure to secure a full determination and closure of this case.—To principle to the failure of the government to oppose an application for
summarize, the records of the proceedings before the Sandiganbayan land registration. In Sharp International Marketing v. Court of
show that the Republic had not presented relevant evidence within its Appeals, 201 SCRA 299 (1991), we held that the government is not
possession and crucial evidence that it could have obtained. It also bound by a highly irregular contract entered into by a former
neglected to pursue a cause of action that it could have proven or take Secretary. We also declared, in Heirs of Reyes v. Republic, 497 SCRA
corrective action to continue to pursue this cause of action. The 520 (2006), that even if the Office of the Solicitor General failed to
stubborn refusal of the Republic despite the warnings of the question a patently unconstitutional compromise agreement between
Sandiganbayan during pre-trial and thereafter, cannot be considered as the Director of Lands and Forest Development with private
anything but gross negligence. The question of whether the individuals, the government cannot be bound by it; we branded the
government’s counsel can so prejudice the government’s claim for acts of the government agent as a “blatant abandonment of their
recov-ery of valuable assets through the gross negligence of its [duties]” and a display of their “gross incompetence.”
counsel must be addressed by this Court as a measure to secure a full
determination and closure of this case. Same; Same; Same; Same; Same; Due Process; Procedurally, the
fundamental requirement of due process involves the opportunity to
Same; Same; Same; Same; Same; The uniqueness of the negligence in be heard at a meaningful time and in a meaningful manner—whether
this case lies in the patent ineptitude that counsel for the Republic in the substantive or in the procedural signification, due process must
committed, as it passively allowed the government to be stripped of its comport with the deepest notions of what is fair and right and just.—
interests in valuable assets claimed to be ill gotten wealth; Under the The requirements of due process are satisfied if the following
circumstances obtaining in the case, it becomes the duty of the Court conditions are present: (1) there is a court or tribunal clothed with
to ensure that the Republic is not prejudiced by a grossly incompetent judicial power to hear and determine the matter before it; (2)
or negligent counsel and is not thereby cheated out of its proper jurisdiction is lawfully acquired over the person of the defendant or
claims—for this Court to gloss over this incompetence, negligence, over the property which is the subject of the proceedings; (3) the
apathy and unconcern, and not to act on what clearly appears to be defendant is given an opportunity to be heard; and (4) judgment is
an aberrant situation, would simply run counter to its duty to uphold rendered upon a lawful hearing. Substantively, what underlies due
justice.—The uniqueness of the negligence in this case lies in the process is the rule of reason; it is a rule against arbitrariness and
patent ineptitude that counsel for the Republic committed, as it injustice measured under the standards of reason. Procedurally, the
passively allowed the government to be stripped of its interests in fundamental requirement of due process involves the opportunity to
valuable assets claimed to be ill gotten wealth. The glaring errors of be heard at a meaningful time and in a meaningful manner. Whether
the counsel for the Republic were not minor errors in the exercise of in the substantive or in the procedural signification, due process must
discretion; the voluminous records of this case are replete with comport with the deepest notions of what is fair and right and just.
instances when counsel’s attention was called concerning gaps in its
case and its evidence, both by the Sandiganbayan and by the Same; Same; Same; Same; Same; Same; The right to due process in
respondents. The Sandiganbayan even noted the apparent ignorance of our legal system does not merely rely on technical and pedantic
the Republic’s counsel regarding the case that it handled—its application of procedural formalities—it involves as well the
inability, despite the lapse of a substantial length of time, to respond consideration of the substance of the affected underlying rights whose
to the questions of the Sandiganbayan and to identify the documents denial under unreasonable circumstances is equivalent to the loss of
that it would present. These warnings alone should serve as a gauge to day in court that is entitled to redress and correction to afford justice
the Court of how egregious the negligence had been. The party to all; The Court is now faced with a situation where the conclusions
aggrieved in this case, it must be remembered, is not an ordinary of the Sandiganbayan are valid, based on the evidence formally
client; it is the Republic of the Philippines. Unlike other parties who offered, but are contradicted by existing evidence that counsel chose
may cry out and insist on changing an incompetent counsel in order to not to offer and evidence that, by omission, it chose not to explore;
protect its claims, the Republic cannot as easily do so. It is bound by The Court stands to participate in this unfairness and injustice if it
law to rely on the skill, honesty, and diligence of the agency assigned stands idly and let the government be deprived of valuable assets, or
to represent it. Under these circumstances, it becomes the duty of the the chance to prove its interest in these assets, knowing fully well the
Court to ensure that the Republic is not prejudiced by a grossly gross incompetence and negligence of its counsel that brought on the
incompetent or negligent counsel and is not thereby cheated out of its injustice; If the Court is convinced that gross injustice transpired
proper claims. For this Court to gloss over this incompetence, brought on by the failure on the part of the Republic to present its
negligence, apathy and unconcern, and not to act on what clearly case due to the gross negligence of its counsel, an outright dismissal
appears to be an aberrant situation, would simply run counter to its of the present petition would not comply with the due process
duty to uphold justice. If the incompetence, ignorance or inexperience requirements enshrined in our Constitution.—On a superficial
of counsel is so great and his errors are so serious that the client who consideration, the proceedings before the Sandiganbayan appear to
otherwise has a good cause, is prejudiced and denied his day in court, have complied with all that due process demands in a judicial
the litigation may be reopened to give the client another chance to proceeding. The Sandiganbayan granted the government the
present his case. opportunity to be heard and was not remiss in reminding the
Republic’s counsel of its view of the status of the government’s case.
Same; Same; Same; Same; Same; Estoppel; The State is never That counsel chose to formally offer as evidence documents that were
estopped from questioning the acts of its officials, if they are already on record or subject to judicial notice, and that it miserably
erroneous, and more so if they are irregular.—As a last word on this failed to support its stated claims, do not appear to be a violation of
point, our jurisprudence teaches us that the State is never estopped the requirements of procedural due process. However, the right to due
62

process in our legal system does not merely rely on technical and equitable relief to parties aggrieved by perfidy, fraud, reckless
pedantic application of procedural formalities; it involves as well the inattention and the downright incompetence of lawyers whose
consideration of the substance of the affected underlying rights consequence is the deprivation of their clients’ day in court.
whose denial under unreasonable circumstances is equivalent to the Following this lead, a remand of the case to the Sandiganbayan for
loss of day in court that is entitled to redress and correction to afford further hearing on the evidence of both parties is only proper. The
justice to all. The denial, as it transpired in this case, is unique but remand would permit the Republic to properly present its case in
is not any less a basic and inherent unfairness. The Court is now accordance with the dictates of due process, and the courts to decide
faced with a situation where the conclusions of the Sandiganbayan are this important case based on real evidence and not merely by the
valid, based on the evidence formally offered, but are contradicted by omissions on the part of the Republic’s counsel.
existing evidence that counsel chose not to offer and evidence that, by
omission, it chose not to explore. Effectively, it is a situation of Read it to ur phone….
abandonment by the Republic’s counsel of causes of action that it
could have successfully proven, and the loss by government of a real
opportunity to be heard, especially after its counsel opted not to 12.ALLIED BANKING CORPORATION,
pursue its remedies under RA No. 1379 and after it obstinately refused
to present the most basic documents to prove its claim under EO No. 1 PETITIONER, VS. LIM SIO WAN,
despite the dire warnings of the Sandiganbayan. The Court stands to
participate in this unfairness and injustice if it stands idly and let the
METROPOLITAN BANK AND TRUST CO.,
government be deprived of valuable assets, or the chance to prove its AND PRODUCERS BANK, RESPONDENTS.
interest in these assets, knowing fully well the gross incompetence
and negligence of its counsel that brought on the injustice.
Banks and Banking; Fundamental and familiar is the doctrine that the
relationship between a bank and a client is one of debtor-creditor.—
Same; Same; Same; Same; Same; Same; Remand of Cases; If the As to the liability of the parties, we find that Allied is liable to Lim
Court is convinced that gross injustice transpired brought on by the Sio Wan. Fundamental and familiar is the doctrine that the
failure on the part of the Republic to present its case due to the gross relationship between a bank and a client is one of debtor-creditor.
negligence of its counsel, an outright dismissal of the present petition Articles 1953 and 1980 of the Civil Code provide: Art. 1953. A
would not comply with the due process requirements enshrined in our person who receives a loan of money or any other fungible thing
Constitution—under these circumstances, the Court’s remedy can be
no less than a continuation of the proceedings through its remand for
acquires the ownership thereof, and is bound to pay to the creditor an
a full-blown trial on the merits in proceedings that accord the
equal amount of the same kind and quality. Art. 1980. Fixed, savings,
government a real chance to present all of its evidence.—If the Court
and current deposits of money in banks and similar institutions shall
is convinced that gross injustice transpired brought on by the failure
be governed by the provisions concerning simple loan.
on the part of the Republic to present its case due to the gross
negligence of its counsel, an outright dismissal of the present petition
would not comply with the due process requirements enshrined in our Same; Money Market Transactions; Words and Phrases; A money
Constitution. Let it be noted that the Republic’s case is not totally market is a market dealing in standardized short-term credit
without merit. Records are replete with indications that a meritorious instruments (involving large amounts) where lenders and borrowers
case can be made out for the recovery sought if only the Republic can do not deal directly with each other but through a middle man or
have its day in court. Under these circumstances, the Court’s remedy dealer in open market—in a money market transaction, the investor is
can be no less than a continuation of the proceedings of this case a lender who loans his money to a borrower through a middleman or
through its remand of the case for a full-blown trial on the merits in dealer; The creditor of the bank for her money market placement is
proceedings that accord the government a real chance to present all entitled to payment upon her request, or upon the maturity of the
of its evidence. placement, or until the bank is released from its obligation as
debtor.—We have ruled in a line of cases that a bank deposit is in the
nature of a simple loan or mutuum. More succinctly, in Citibank, N.A.
Procedural Rules and Technicalities; It is a well-established and
(Formerly First National City Bank) v. Sabeniano, 504 SCRA 378
accepted doctrine that rules of procedure may be modified at any time
(2006), this Court ruled that a money market placement is a simple
to become effective at once, so long as the change does not affect
loan or mutuum. Further, we defined a money market in Cebu
vested rights.—To be sure, the Court is not wanting in authority to
International Finance Corporation v. Court of Appeals, 316 SCRA
impose this remedy; it is a well-established and accepted doctrine that
488 (1999), as follows: [A] money market is a market dealing in
rules of procedure may be modified at any time to become effec- tive
standardized short-term credit instruments (involving large amounts)
at once, so long as the change does not affect vested rights. In short,
where lenders and borrowers do not deal directly with each other but
this Court can adapt the rules of procedure, as its response to the duty
through a middle man or dealer in open market. In a money market
and obligation to act in the higher interests of justice.
transaction, the investor is a lender who loans his money to a
borrower through a middleman or dealer. In the case at bar, the money
Due Process; A remand of the case to the Sandiganbayan for further market transaction between the petitioner and the private respondent
hearing on the evidence of both parties is only proper—the remand is in the nature of a loan. Lim Sio Wan, as creditor of the bank for her
would permit the Republic to properly present its case in accordance money market placement, is entitled to payment upon her request, or
with the dictates of due process, and the courts to decide this upon maturity of the placement, or until the bank is released from its
important case based on real evidence and not merely by the obligation as debtor. Until any such event, the obligation of Allied to
omissions on the part of the Republic’s counsel.—In its Third Lim Sio Wan remains unextinguished.
Amended Complaint, the Republic included in its prayer “such further
relief as may appear to the Honorable Court to be just and equitable
under the premises.” This Court has always been disposed to grant
63

Same; Same; Payment made by the debtor to a wrong party does not and in transmitting it to Santos without even a written authorization.
extinguish the obligation as to the creditor, if there is no fault or In fact, Allied did not even ask for the certificate evidencing the
negligence which can be imputed to the latter.—From the factual money market placement or call up Lim Sio Wan at her residence or
findings of the trial and appellate courts that Lim Sio Wan did not office to confirm her instructions. Both actions could have prevented
authorize the release of her money market placement to Santos and the whole fraudulent transaction from unfolding. Allied’s negligence
the bank had been negligent in so doing, there is no question that the must be considered as the proximate cause of the resulting loss. To
obligation of Allied to pay Lim Sio Wan had not reiterate, had Allied exercised the diligence due from a financial
institution, the check would not have been issued and no loss of funds
been extinguished. Art. 1240 of the Code states that “payment shall be would have resulted. In fact, there would have been no issuance of
made to the person in whose favor the obligation has been constituted, indorsement had there been no check in the first place. The liability of
or his successor in interest, or any person authorized to receive it.” As Allied, however, is concurrent with that of Metrobank as the last
commented by Arturo Tolentino: Payment made by the debtor to a indorser of the check. When Metrobank indorsed the check in
wrong party does not extinguish the obligation as to the creditor, if compliance with the PCHC Rules and Regulations without verifying
there is no fault or negligence which can be imputed to the latter. the authenticity of Lim Sio Wan’s indorsement and when it accepted
Even when the debtor acted in utmost good faith and by mistake as to the check despite the fact that it was cross-checked payable to payee’s
the person of his creditor, or through error induced by the fraud of a account only, its negligent and cavalier indorsement contributed to the
third person, the payment to one who is not in fact his creditor, or easier release of Lim Sio Wan’s money and perpetuation of the fraud.
authorized to receive such payment, is void, except as provided in Given the relative participation of Allied and Metrobank to the instant
Article 1241. Such payment does not prejudice the creditor, and case, both banks cannot be adjudged as equally liable. Hence, the
accrual of interest is not suspended by it. (Emphasis supplied.) 60:40 ratio of the liabilities of Allied and Metrobank, as ruled by the
CA, must be upheld.
Same; Proximate Cause; Words and Phrases; Proximate cause is
“that cause, which, in natural and continuous sequence, unbroken by Same; Quasi-Delicts; Art. 2180 of the Civil Code pertains to the
any efficient intervening cause, produces the injury and without which vicarious liability of an employer for quasi-delicts that an employee
the result would not have occurred”; To determine the proximate has committed—such provision of law does not apply to civil liability
cause of a controversy, the question that needs to be asked is: If the
event did not happen, would the injury have resulted? If the answer is arising from delict.—As to Producers Bank, Allied Bank’s argument
NO, then the event is the proximate cause.—Proximate cause is “that that Producers Bank must be held liable as employer of Santos under
cause, which, in natural and continuous sequence, unbroken by any Art. 2180 of the Civil Code is erroneous. Art. 2180 pertains to the
efficient intervening cause, produces the injury and without which the vicarious liability of an employer for quasi-delicts that an employee
result would not have occurred.” Thus, there is an efficient has committed. Such provision of law does not apply to civil liability
supervening event if the event breaks the sequence leading from the arising from delict. One also cannot apply the principle of subsidiary
cause to the ultimate result. To determine the proximate cause of a liability in Art. 103 of the Revised Penal Code in the instant case.
controversy, the question that needs to be asked is: If the event did not Such liability on the part of the employer for the civil aspect of the
happen, would the injury have resulted? If the answer is NO, then the criminal act of the employee is based on the conviction of the
event is the proximate cause. employee for a crime. Here, there has been no conviction for any
crime.
Same; Negotiable Instruments; Checks; An exception to the rule that
the collecting bank which indorses a check bearing a forged Same; Unjust Enrichment; Words and Phrases; There is unjust
indorsement and presents it to the drawee bank guarantees all prior enrichment when a person unjustly retains a benefit to the loss of
indorsements, including the forged indorsement itself, and ultimately another, or when a person retains money or property of another
should be held liable therefor is when the issuance of the check itself against the fundamental principles of justice, equity and good
was attended with negligence.—The warranty “that the instrument is conscience.—As to the claim that there was unjust enrichment on the
genuine and in all respects what it purports to be” covers all the part of Producers Bank, the same is correct. Allied correctly claims in
defects in the instrument affecting the validity thereof, including a its petition that Producers Bank should reimburse Allied for whatever
forged indorsement. Thus, the last indorser will be liable for the judgment that may be rendered against it pursuant to Art. 22 of the
amount indicated in the negotiable instrument even if a previous Civil Code, which provides: “Every person who through an act of
indorsement was forged. We held in a line of cases that “a collecting performance by another, or any other means, acquires or comes into
possession of something at the expense of the latter without just cause
bank which indorses a check bearing a forged indorsement and or legal ground, shall return the same to him.” The above provision of
presents it to the drawee bank guarantees all prior indorsements, law was clarified in Reyes v. Lim, 408 SCRA 560 (2003), where we
including the forged indorsement itself, and ultimately should be held ruled that “[t]here is unjust enrichment when a person unjustly retains
liable therefor.” However, this general rule is subject to exceptions. a benefit to the loss of another, or when a person retains money or
One such exception is when the issuance of the check itself was property of another against the fundamental principles of justice,
attended with negligence. Thus, in the cases cited above where the equity and good conscience.” In Tamio v. Ticson, 443 SCRA 44
collecting bank is generally held liable, in two of the cases where the (2004), we further clarified the principle of unjust enrichment, thus:
checks were negligently issued, this Court held the institution issuing “Under Article 22 of the Civil Code, there is unjust enrichment when
the check just as liable as or more liable than the collecting bank. (1) a person is unjustly benefited, and (2) such benefit is derived at the
expense of or with damages to another.”
Same; Same; Same; Given the relative participation of two banks to
the instant case, both banks cannot be adjudged as equally liable— VELASCO, JR., J.:
hence, the 60:40 ratio of the liabilities.—In the instant case, the trial
court correctly found Allied negligent in issuing the manager’s check
64

To ingratiate themselves to their valued depositors, some banks at To clear the check and in compliance with the requirements of the
times bend over backwards that they unwittingly expose themselves to Philippine Clearing House Corporation (PCHC) Rules and
great risks. Regulations, Metrobank stamped a guaranty on the check, which
reads: "All prior endorsements and/or lack of endorsement
The Case guaranteed."18

This Petition for Review on Certiorari under Rule 45 seeks to reverse The check was sent to Allied through the PCHC. Upon the
the Court of Appeals’ (CA’s) Decision promulgated on March 18, presentment of the check, Allied funded the check even without
19981 in CA-G.R. CV No. 46290 entitled Lim Sio Wan v. Allied checking the authenticity of Lim Sio Wan’s purported indorsement.
Banking Corporation, et al. The CA Decision modified the Decision Thus, the amount on the face of the check was credited to the account
dated November 15, 19932 of the Regional Trial Court (RTC), Branch of FCC.19
63 in Makati City rendered in Civil Case No. 6757.
On December 9, 1983, Lim Sio Wan deposited with Allied a second
The Facts money market placement to mature on January 9, 1984. 20

The facts as found by the RTC and affirmed by the CA are as follows: On December 14, 1983, upon the maturity date of the first money
market placement, Lim Sio Wan went to Allied to withdraw it.21 She
was then informed that the placement had been pre-terminated upon
On November 14, 1983, respondent Lim Sio Wan deposited with
her instructions. She denied giving any instructions and receiving the
petitioner Allied Banking Corporation (Allied) at its Quintin Paredes
Branch in Manila a money market placement of PhP 1,152,597.35 for proceeds thereof. She desisted from further complaints when she was
assured by the bank’s manager that her money would be recovered. 22
a term of 31 days to mature on December 15, 1983,3 as evidenced by
Provisional Receipt No. 1356 dated November 14, 1983. 4
When Lim Sio Wan’s second placement matured on January 9, 1984,
On December 5, 1983, a person claiming to be Lim Sio Wan called up So called Lim Sio Wan to ask for the latter’s instructions on the
Cristina So, an officer of Allied, and instructed the latter to pre- second placement. Lim Sio Wan instructed So to roll-over the
placement for another 30 days.23 On January 24, 1984, Lim Sio Wan,
terminate Lim Sio Wan’s money market placement, to issue a
realizing that the promise that her money would be recovered would
manager’s check representing the proceeds of the placement, and to
not materialize, sent a demand letter to Allied asking for the payment
give the check to one Deborah Dee Santos who would pick up the
of the first placement.24 Allied refused to pay Lim Sio Wan, claiming
check.5 Lim Sio Wan described the appearance of Santos so that So
could easily identify her.6 that the latter had authorized the pre-termination of the placement and
its subsequent release to Santos.25
Later, Santos arrived at the bank and signed the application form for a
Consequently, Lim Sio Wan filed with the RTC a Complaint dated
manager’s check to be issued.7 The bank issued Manager’s Check No.
February 13, 198426 docketed as Civil Case No. 6757 against Allied to
035669 for PhP 1,158,648.49, representing the proceeds of Lim Sio
Wan’s money market placement in the name of Lim Sio Wan, as recover the proceeds of her first money market placement. Sometime
payee.8 The check was cross-checked "For Payee’s Account Only" in February 1984, she withdrew her second placement from Allied.
and given to Santos.9
Allied filed a third party complaint27 against Metrobank and Santos.
In turn, Metrobank filed a fourth party complaint 28 against FCC. FCC
Thereafter, the manager’s check was deposited in the account of
Filipinas Cement Corporation (FCC) at respondent Metropolitan Bank for its part filed a fifth party complaint29 against Producers Bank.
and Trust Co. (Metrobank),10 with the forged signature of Lim Sio Summonses were duly served upon all the parties except for Santos,
who was no longer connected with Producers Bank. 30
Wan as indorser.11

On May 15, 1984, or more than six (6) months after funding the
Earlier, on September 21, 1983, FCC had deposited a money market
placement for PhP 2 million with respondent Producers Bank. Santos check, Allied informed Metrobank that the signature on the check was
forged.31 Thus, Metrobank withheld the amount represented by the
was the money market trader assigned to handle FCC’s account. 12
check from FCC. Later on, Metrobank agreed to release the amount to
Such deposit is evidenced by Official Receipt No. 31756813 and a
FCC after the latter executed an Undertaking, promising to indemnify
Letter dated September 21, 1983 of Santos addressed to Angie Lazo
Metrobank in case it was made to reimburse the amount.32
of FCC, acknowledging receipt of the placement.14 The placement
matured on October 25, 1983 and was rolled-over until December 5,
1983 as evidenced by a Letter dated October 25, 1983. 15 When the Lim Sio Wan thereafter filed an amended complaint to include
placement matured, FCC demanded the payment of the proceeds of Metrobank as a party-defendant, along with Allied.33 The RTC
the placement.16 On December 5, 1983, the same date that So received admitted the amended complaint despite the opposition of
the phone call instructing her to pre-terminate Lim Sio Wan’s Metrobank.34 Consequently, Allied’s third party complaint against
placement, the manager’s check in the name of Lim Sio Wan was Metrobank was converted into a cross-claim and the latter’s fourth
deposited in the account of FCC, purportedly representing the party complaint against FCC was converted into a third party
proceeds of FCC’s money market placement with Producers Bank.17 complaint.35
In other words, the Allied check was deposited with Metrobank in the
account of FCC as Producers Bank’s payment of its obligation to After trial, the RTC issued its Decision, holding as follows:
FCC.
WHEREFORE, judgment is hereby rendered as follows:
65

1. Ordering defendant Allied Banking Corporation to pay The petition is partly meritorious.
plaintiff the amount of P1,158,648.49 plus 12% interest per
annum from March 16, 1984 until fully paid; A Question of Fact

2. Ordering defendant Allied Bank to pay plaintiff the Allied questions the finding of both the trial and appellate courts that
amount of P100,000.00 by way of moral damages; Allied was not authorized to release the proceeds of Lim Sio Wan’s
money market placement to Santos. Allied clearly raises a question of
3. Ordering defendant Allied Bank to pay plaintiff the fact. When the CA affirms the findings of fact of the RTC, the factual
amount of P173,792.20 by way of attorney’s fees; and, findings of both courts are binding on this Court. 39

4. Ordering defendant Allied Bank to pay the costs of suit. We also agree with the CA when it said that it could not disturb the
trial court’s findings on the credibility of witness So inasmuch as it
Defendant Allied Bank’s cross-claim against defendant Metrobank is was the trial court that heard the witness and had the opportunity to
DISMISSED. observe closely her deportment and manner of testifying. Unless the
trial court had plainly overlooked facts of substance or value, which,
if considered, might affect the result of the case, 40 we find it best to
Likewise defendant Metrobank’s third-party complaint as against
defer to the trial court on matters pertaining to credibility of witnesses.
Filipinas Cement Corporation is DISMISSED.

Filipinas Cement Corporation’s fourth-party complaint against Additionally, this Court has held that the matter of negligence is also a
Producer’s Bank is also DISMISSED. factual question.41 Thus, the finding of the RTC, affirmed by the CA,
that the respective parties were negligent in the exercise of their
obligations is also conclusive upon this Court.
SO ORDERED.36
The Liability of the Parties
The Decision of the Court of Appeals
As to the liability of the parties, we find that Allied is liable to Lim
Allied appealed to the CA, which in turn issued the assailed Decision Sio Wan. Fundamental and familiar is the doctrine that the
on March 18, 1998, modifying the RTC Decision, as follows: relationship between a bank and a client is one of debtor-creditor.

WHEREFORE, premises considered, the decision appealed from is Articles 1953 and 1980 of the Civil Code provide:
MODIFIED. Judgment is rendered ordering and sentencing
defendant-appellant Allied Banking Corporation to pay sixty (60%)
percent and defendant-appellee Metropolitan Bank and Trust Art. 1953. A person who receives a loan of money or any other
Company forty (40%) of the amount of P1,158,648.49 plus 12% fungible thing acquires the ownership thereof, and is bound to pay to
the creditor an equal amount of the same kind and quality.
interest per annum from March 16, 1984 until fully paid. The moral
damages, attorney’s fees and costs of suit adjudged shall likewise be
paid by defendant-appellant Allied Banking Corporation and Art. 1980. Fixed, savings, and current deposits of money in banks and
defendant-appellee Metropolitan Bank and Trust Company in the similar institutions shall be governed by the provisions concerning
same proportion of 60-40. Except as thus modified, the decision simple loan.
appealed from is AFFIRMED.
Thus, we have ruled in a line of cases that a bank deposit is in the
SO ORDERED. 37 nature of a simple loan or mutuum.42 More succinctly, in Citibank,
N.A. (Formerly First National City Bank) v. Sabeniano, this Court
Hence, Allied filed the instant petition. ruled that a money market placement is a simple loan or mutuum. 43
Further, we defined a money market in Cebu International Finance
Corporation v. Court of Appeals, as follows:
The Issues
[A] money market is a market dealing in standardized short-term
Allied raises the following issues for our consideration: credit instruments (involving large amounts) where lenders and
borrowers do not deal directly with each other but through a middle
The Honorable Court of Appeals erred in holding that Lim Sio Wan man or dealer in open market. In a money market transaction, the
did not authorize [Allied] to pre-terminate the initial placement and to investor is a lender who loans his money to a borrower through a
deliver the check to Deborah Santos. middleman or dealer.

The Honorable Court of Appeals erred in absolving Producers Bank In the case at bar, the money market transaction between the petitioner
of any liability for the reimbursement of amount adjudged and the private respondent is in the nature of a loan.44
demandable.
Lim Sio Wan, as creditor of the bank for her money market
The Honorable Court of Appeals erred in holding [Allied] liable to the placement, is entitled to payment upon her request, or upon maturity
extent of 60% of amount adjudged demandable in clear disregard to of the placement, or until the bank is released from its obligation as
the ultimate liability of Metrobank as guarantor of all endorsement on debtor. Until any such event, the obligation of Allied to Lim Sio Wan
the check, it being the collecting bank.38 remains unextinguished.
66

Art. 1231 of the Civil Code enumerates the instances when We are not persuaded.
obligations are considered extinguished, thus:
Proximate cause is "that cause, which, in natural and continuous
Art. 1231. Obligations are extinguished: sequence, unbroken by any efficient intervening cause, produces the
injury and without which the result would not have occurred." 47 Thus,
(1) By payment or performance; there is an efficient supervening event if the event breaks the sequence
leading from the cause to the ultimate result. To determine the
proximate cause of a controversy, the question that needs to be asked
(2) By the loss of the thing due;
is: If the event did not happen, would the injury have resulted? If the
answer is NO, then the event is the proximate cause.
(3) By the condonation or remission of the debt;
In the instant case, Allied avers that even if it had not issued the check
(4) By the confusion or merger of the rights of creditor and payment, the money represented by the check would still be lost
debtor; because of Metrobank’s negligence in indorsing the check without
verifying the genuineness of the indorsement thereon.
(5) By compensation;
Section 66 in relation to Sec. 65 of the Negotiable Instruments Law
(6) By novation. provides:

Other causes of extinguishment of obligations, such as annulment, Section 66. Liability of general indorser.—Every indorser who
rescission, fulfillment of a resolutory condition, and prescription, are indorses without qualification, warrants to all subsequent holders in
governed elsewhere in this Code. (Emphasis supplied.) due course;

From the factual findings of the trial and appellate courts that Lim Sio a) The matters and things mentioned in subdivisions (a), (b)
Wan did not authorize the release of her money market placement to and (c) of the next preceding section; and
Santos and the bank had been negligent in so doing, there is no
question that the obligation of Allied to pay Lim Sio Wan had not b) That the instrument is at the time of his indorsement valid
been extinguished. Art. 1240 of the Code states that "payment shall be and subsisting;
made to the person in whose favor the obligation has been constituted,
or his successor in interest, or any person authorized to receive it." As
And in addition, he engages that on due presentment, it shall be
commented by Arturo Tolentino:
accepted or paid, or both, as the case may be according to its tenor,
and that if it be dishonored, and the necessary proceedings on
Payment made by the debtor to a wrong party does not extinguish the dishonor be duly taken, he will pay the amount thereof to the holder,
obligation as to the creditor, if there is no fault or negligence which or to any subsequent indorser who may be compelled to pay it.
can be imputed to the latter. Even when the debtor acted in utmost
good faith and by mistake as to the person of his creditor, or through
Section 65. Warranty where negotiation by delivery, so forth.—Every
error induced by the fraud of a third person, the payment to one who
person negotiating an instrument by delivery or by a qualified
is not in fact his creditor, or authorized to receive such payment, is
void, except as provided in Article 1241. Such payment does not indorsement, warrants:
prejudice the creditor, and accrual of interest is not suspended by it.45
(Emphasis supplied.) a) That the instrument is genuine and in all respects what it
purports to be;
Since there was no effective payment of Lim Sio Wan’s money
market placement, the bank still has an obligation to pay her at six b) That he has a good title of it;
percent (6%) interest from March 16, 1984 until the payment thereof.
c) That all prior parties had capacity to contract;
We cannot, however, say outright that Allied is solely liable to Lim
Sio Wan. d) That he has no knowledge of any fact which would impair
the validity of the instrument or render it valueless.
Allied claims that Metrobank is the proximate cause of the loss of Lim
Sio Wan’s money. It points out that Metrobank guaranteed all prior But when the negotiation is by delivery only, the warranty extends in
indorsements inscribed on the manager’s check, and without favor of no holder other than the immediate transferee.
Metrobank’s guarantee, the present controversy would never have
occurred. According to Allied: The provisions of subdivision (c) of this section do not apply to
persons negotiating public or corporation securities, other than bills
Failure on the part of the collecting bank to ensure that the proceeds and notes. (Emphasis supplied.)
of the check is paid to the proper party is, aside from being an
efficient intervening cause, also the last negligent act, x x x The warranty "that the instrument is genuine and in all respects what
contributory to the injury caused in the present case, which thereby it purports to be" covers all the defects in the instrument affecting the
leads to the conclusion that it is the collecting bank, Metrobank that is validity thereof, including a forged indorsement. Thus, the last
the proximate cause of the alleged loss of the plaintiff in the instant indorser will be liable for the amount indicated in the negotiable
case.46
67

instrument even if a previous indorsement was forged. We held in a P203,300.00 and shall be liable to the PNB for fifty (50%) percent
line of cases that "a collecting bank which indorses a check bearing a thereof. In effect, the Province of Tarlac can only recover fifty percent
forged indorsement and presents it to the drawee bank guarantees all (50%) of P203,300.00 from PNB.
prior indorsements, including the forged indorsement itself, and
ultimately should be held liable therefor." 48 The collecting bank, Associated Bank, shall be liable to PNB for fifty
(50%) percent of P203,300.00. It is liable on its warranties as indorser
However, this general rule is subject to exceptions. One such of the checks which were deposited by Fausto Pangilinan, having
exception is when the issuance of the check itself was attended with guaranteed the genuineness of all prior indorsements, including that of
negligence. Thus, in the cases cited above where the collecting bank is the chief of the payee hospital, Dr. Adena Canlas. Associated Bank
generally held liable, in two of the cases where the checks were was also remiss in its duty to ascertain the genuineness of the payee’s
negligently issued, this Court held the institution issuing the check indorsement.53
just as liable as or more liable than the collecting bank.
A reading of the facts of the two immediately preceding cases would
In isolated cases where the checks were deposited in an account other reveal that the reason why the bank or institution which issued the
than that of the payees on the strength of forged indorsements, we check was held partially liable for the amount of the check was
held the collecting bank solely liable for the whole amount of the because of the negligence of these parties which resulted in the
checks involved for having indorsed the same. In Republic Bank v. issuance of the checks.
Ebrada,49 the check was properly issued by the Bureau of Treasury.
While in Banco de Oro Savings and Mortgage Bank (Banco de Oro) In the instant case, the trial court correctly found Allied negligent in
v. Equitable Banking Corporation,50 Banco de Oro admittedly issued issuing the manager’s check and in transmitting it to Santos without
the checks in the name of the correct payees. And in Traders Royal even a written authorization.54 In fact, Allied did not even ask for the
Bank v. Radio Philippines Network, Inc.,51 the checks were issued at certificate evidencing the money market placement or call up Lim Sio
the request of Radio Philippines Network, Inc. from Traders Royal Wan at her residence or office to confirm her instructions. Both
Bank.1avvphi1 actions could have prevented the whole fraudulent transaction from
unfolding. Allied’s negligence must be considered as the proximate
However, in Bank of the Philippine Islands v. Court of Appeals, we cause of the resulting loss.
said that the drawee bank is liable for 60% of the amount on the face
of the negotiable instrument and the collecting bank is liable for 40%. To reiterate, had Allied exercised the diligence due from a financial
We also noted the relative negligence exhibited by two banks, to wit: institution, the check would not have been issued and no loss of funds
would have resulted. In fact, there would have been no issuance of
Both banks were negligent in the selection and supervision of their indorsement had there been no check in the first place.
employees resulting in the encashment of the forged checks by an
impostor. Both banks were not able to overcome the presumption of The liability of Allied, however, is concurrent with that of Metrobank
negligence in the selection and supervision of their employees. It was as the last indorser of the check. When Metrobank indorsed the check
the gross negligence of the employees of both banks which resulted in in compliance with the PCHC Rules and Regulations55 without
the fraud and the subsequent loss. While it is true that petitioner BPI’s verifying the authenticity of Lim Sio Wan’s indorsement and when it
negligence may have been the proximate cause of the loss, respondent accepted the check despite the fact that it was cross-checked payable
CBC’s negligence contributed equally to the success of the impostor to payee’s account only,56 its negligent and cavalier indorsement
in encashing the proceeds of the forged checks. Under these contributed to the easier release of Lim Sio Wan’s money and
circumstances, we apply Article 2179 of the Civil Code to the effect perpetuation of the fraud. Given the relative participation of Allied
that while respondent CBC may recover its losses, such losses are and Metrobank to the instant case, both banks cannot be adjudged as
subject to mitigation by the courts. (See Phoenix Construction Inc. v. equally liable. Hence, the 60:40 ratio of the liabilities of Allied and
Intermediate Appellate Courts, 148 SCRA 353 [1987]). Metrobank, as ruled by the CA, must be upheld.

Considering the comparative negligence of the two (2) banks, we rule FCC, having no participation in the negotiation of the check and in the
that the demands of substantial justice are satisfied by allocating the forgery of Lim Sio Wan’s indorsement, can raise the real defense of
loss of P2,413,215.16 and the costs of the arbitration proceeding in the forgery as against both banks.57
amount of P7,250.00 and the cost of litigation on a 60-40 ratio.52
As to Producers Bank, Allied Bank’s argument that Producers Bank
Similarly, we ruled in Associated Bank v. Court of Appeals that the must be held liable as employer of Santos under Art. 2180 of the Civil
issuing institution and the collecting bank should equally share the Code is erroneous. Art. 2180 pertains to the vicarious liability of an
liability for the loss of amount represented by the checks concerned employer for quasi-delicts that an employee has committed. Such
due to the negligence of both parties: provision of law does not apply to civil liability arising from delict.

The Court finds as reasonable, the proportionate sharing of fifty One also cannot apply the principle of subsidiary liability in Art. 103
percent-fifty percent (50%-50%). Due to the negligence of the of the Revised Penal Code in the instant case. Such liability on the
Province of Tarlac in releasing the checks to an unauthorized person part of the employer for the civil aspect of the criminal act of the
(Fausto Pangilinan), in allowing the retired hospital cashier to receive employee is based on the conviction of the employee for a crime.
the checks for the payee hospital for a period close to three years and Here, there has been no conviction for any crime.
in not properly ascertaining why the retired hospital cashier was
collecting checks for the payee hospital in addition to the hospital’s
As to the claim that there was unjust enrichment on the part of
real cashier, respondent Province contributed to the loss amounting to Producers Bank, the same is correct. Allied correctly claims in its
68

petition that Producers Bank should reimburse Allied for whatever WHEREFORE, premises considered, the decision appealed from is
judgment that may be rendered against it pursuant to Art. 22 of the MODIFIED. Judgment is rendered ordering and sentencing
Civil Code, which provides: "Every person who through an act of defendant-appellant Allied Banking Corporation to pay sixty (60%)
performance by another, or any other means, acquires or comes into percent and defendant-appellee Metropolitan Bank and Trust
possession of something at the expense of the latter without just cause Company forty (40%) of the amount of P1,158,648.49 plus 12%
or legal ground, shall return the same to him."1avvphi1 interest per annum from March 16, 1984 until fully paid. The moral
damages, attorney’s fees and costs of suit adjudged shall likewise be
The above provision of law was clarified in Reyes v. Lim, where we paid by defendant-appellant Allied Banking Corporation and
ruled that "[t]here is unjust enrichment when a person unjustly retains defendant-appellee Metropolitan Bank and Trust Company in the
a benefit to the loss of another, or when a person retains money or same proportion of 60-40. Except as thus modified, the decision
property of another against the fundamental principles of justice, appealed from is AFFIRMED.
equity and good conscience."58
SO ORDERED.
In Tamio v. Ticson, we further clarified the principle of unjust
enrichment, thus: "Under Article 22 of the Civil Code, there is unjust
enrichment when (1) a person is unjustly benefited, and (2) such
13. Nicolas vs. Del-Nacia Corporation
benefit is derived at the expense of or with damages to another." 59
Civil Law; Contracts; Interests; A contract is the law between the
In the instant case, Lim Sio Wan’s money market placement in Allied parties, and courts have no choice but to enforce such contract so
Bank was pre-terminated and withdrawn without her consent. long as they are not contrary to law, morals, good customs or public
Moreover, the proceeds of the placement were deposited in Producers policy; A stipulation for the payment of interest and penalty apart
Bank’s account in Metrobank without any justification. In other from interest in case of delay is not contrary to law, moral, good
words, there is no reason that the proceeds of Lim Sio Wans’ customs or public policy.—Under paragraphs (1), (5) and (6) of the
placement should be deposited in FCC’s account purportedly as Agreement, Mrs. Nicolas was bound to pay regular interest, and in
payment for FCC’s money market placement and interest in Producers case of delay, overdue interest and penalty. It cannot be
Bank.lavvphil With such payment, Producers Bank’s indebtedness to overemphasized that a contract is the law between the parties, and
FCC was extinguished, thereby benefitting the former. Clearly, courts have no choice but to enforce such contract so long as they are
Producers Bank was unjustly enriched at the expense of Lim Sio Wan. not contrary to law, morals, good customs or public policy. In this
Based on the facts and circumstances of the case, Producers Bank connection, a stipulation for the payment of interest and penalty apart
should reimburse Allied and Metrobank for the amounts the two latter from interest in case of delay is not contrary to law, moral, good
banks are ordered to pay Lim Sio Wan. customs or public policy. To be sure, the same is sanctioned by the
provisions of the Civil Code.
It cannot be validly claimed that FCC, and not Producers Bank,
should be considered as having been unjustly enriched. It must be Same; Same; Same; The Civil Code permits the agreements upon a
remembered that FCC’s money market placement with Producers penalty apart from the interest.—In Bachrach Motor Company v.
Bank was already due and demandable; thus, Producers Bank’s Espiritu, 52 Phil. 347 (1928), the Court ruled that the Civil Code
payment thereof was justified. FCC was entitled to such payment. As permits the agreement upon a penalty apart from the interest. Should
earlier stated, the fact that the indorsement on the check was forged there be such an agreement, the penalty does not include the interest,
cannot be raised against FCC which was not a part in any stage of the and as such the two are different and distinct things which may be
negotiation of the check. FCC was not unjustly enriched. demanded separately. The same principle was reiterated in Equitable
Banking Corp. v. Liwanag, et al., 32 SCRA 293 (1970) where this
Court held that the stipulation about payment of such additional rate
From the facts of the instant case, we see that Santos could be the partakes of the nature of a penalty clause, which is sanctioned by law.
architect of the entire controversy. Unfortunately, since summons had
not been served on Santos, the courts have not acquired jurisdiction
over her.60 We, therefore, cannot ascribe to her liability in the instant Same; Same; Doctrinal is the rule that the courts may not extricate
case. parties from the necessary consequences of their acts; That the terms
of a contract turn out to be financially disadvantageous to them will
not relieve them of their obligations therein.—It appears that the only
Clearly, Producers Bank must be held liable to Allied and Metrobank dilemma which Mrs. Nicolas currently finds herself in is that the
for the amount of the check plus 12% interest per annum, moral obligations which she voluntary undertook under the Agreement
damages, attorney’s fees, and costs of suit which Allied and turned out to be more onerous than what she expected. Doctrinal is the
Metrobank are adjudged to pay Lim Sio Wan based on a proportion of rule that courts may not extricate parties from the necessary
60:40. consequences of their acts. That the terms of a contract turn out to be
financially disadvantageous to them will not relieve them of their
WHEREFORE, the petition is PARTLY GRANTED. The March 18, obligations therein.
1998 CA Decision in CA-G.R. CV No. 46290 and the November 15,
1993 RTC Decision in Civil Case No. 6757 are AFFIRMED with PUNO, C.J.:
MODIFICATION.
This case arose from a complaint for unfair business practice1 filed by
Thus, the CA Decision is AFFIRMED, the fallo of which is petitioner Dorie Abesa Nicolas (Mrs. Nicolas) against respondent Del-
reproduced, as follows: Nacia Corporation (Del-Nacia) before the Housing and Land Use
Regulatory Board (HLURB).
69

On February 20, 1988, the spouses Armando Nicolas and Dorie Abesa tenant or lessee, and subject to ejectment proceedings during
Nicolas (Spouses Nicolas) and Del-Nacia entered into a Land all the period of this agreement.
Purchase Agreement2 (Agreement) for the sale by the latter to the
former of a parcel of land, covered by Transfer Certificate of Title No. xxxx
233702, consisting of 10,000 square meters, situated at Lot No. 3-B-4,
Del Nacia Ville No. 5, San Jose del Monte, Bulacan. (7) In case the PURCHASER fails to comply with any
conditions of this contract and/or to pay any payments herein
The relevant parts of the Agreement are: agreed upon, the PURCHASER shall be granted a period or
periods of grace which in no case shall exceed (60) days to
(1) The PURCHASER agrees to pay to the OWNER upon be counted from the condition breached ought to be complied
execution of this Contract the sum of FORTY THOUSAND with or the said payments ought have been made, during
PESOS (P40,000) as first payment on account of the which period of grace the PURCHASER must comply with
purchase price and agrees to pay the balance of FIVE the said condition or satisfy all due monetary obligations
HUNDRED TEN THOUSAND PESOS (P510,000) at the including those which correspond to the period of grace.
office of the OWNER in the City of Quezon, Philippines, or OTHERWISE, the Contract shall be automatically cancelled
such other office as the OWNER may designate in 120 equal and rescinded and of no force and effect, and as a
monthly installment of NINE THOUSAND ONE consequence therefore, the OWNER may dispose of the
HUNDRED EIGHTY NINE AND 45/100 PESOS parcels of land covered by this Contract in favor of other
(P9,189.45) interest being included on successive monthly persons, as if this Contract had never been entered into. In
balance at 18% per annum, and payments to be made on the case of such cancellation of this Contract all amounts paid in
_____ day of each month thereafter beginning April 20, accordance with this agreement, together with all the
1988. improvements introduced in the premises, shall be
considered as rents for the use and occupation of the
xxxx abovementioned premises and as payments for the damages
suffered on the OWNER on account of the failure of the
(5) In the event that any of the payments as stipulated be not PURCHASER to fulfill his part of this Contract and the
paid when, where, and as the same become due; it is agreed PURCHASER hereby renounces all his rights to demand or
reclaim the return of the same and further obligates himself
that sums in arrears shall bear interest at the rate of
to peacefully vacate the premises and deliver the same to the
EIGHTEEN (18%) per centum per annum payable monthly
OWNER; PROVIDED, HOWEVER, that any consideration,
from the date on which said sums is due and payable.
concession, tolerance or relaxation of provisions shall not be
interpreted as a renunciation on the part of OWNER of any
(6) If any such payment or payments shall continue in arrears rights granted in this Contract.4
for more than sixty-days, or if the PURCHASER shall
violate any of the conditions herein set forth then the entire
Upon signing of the Agreement, the Spouses Nicolas paid the down
unpaid balance due under this contract, with any interest
payment of P40,000. Thereupon, the Spouses Nicolas took possession
which may have attached shall at once become due and
payable and shall bear interest at the rate of TWELVE (12%) of the land, and for several months thereafter, paid on or before the
per centum per annum until paid, and in such case, the 20th of each month, the monthly amortizations.5
PURCHASER further agrees to pay to the OWNER a sum
equal to ten (10%) per centum of the amount due as Unfortunately, however, Armando Nicolas died shortly after the
attorney's fees.3 signing of the Agreement and Mrs. Nicolas began to falter in her
payments. As found by Arbiter Jose A. Atencio, Jr. (HLURB Arbiter)
of the Office of Appeals, Adjudication and Legal Affairs (OAAL),
Under the Agreement, the ownership of the land remains with Del-
HLURB Region III, the records of Del-Nacia indicate that Mrs.
Nacia until full payment of the stipulated purchase price under the
Nicolas is delinquent in her monthly amortization for the following
following terms and conditions:
months: November 1988; March 1989; May 1989; June 1989-July
1989; September 1989; October 1989; November 1989-December
(3) Title to said parcel of land shall remain in the name of the 1989; February 1990-September 1990; October 1990-November
OWNER until complete payment by the PURCHASER of all 1990; December 1990-April 1991. The last payment of Mrs. Nicolas
obligations herein stipulated, at which time the OWNER was made on July 19, 1991.6
agree to execute a final deed of sale in favor of the
PURCHASER and cause the issuance of a certificate of title
in the name of the latter, free from liens and encumbrances Del-Nacia sent Mrs. Nicolas notice to pay her arrearages with a grace
except those provided in the Land Registration Act, those period of sixty (60) days within which to make payment but to no
avail. Del-Nacia then caused the notarial cancellation of the
imposed by the authorities, and those contained in Clauses
Agreement on December 3, 1991.7
(10) and (16) of this agreement. Registration fees and
documentary stamps of the deed of sale shall be paid by the
PURCHASER. Subsequently, Del-Nacia verbally informed Mrs. Nicolas to get the
cash surrender value of her payment at its office. However, Mrs.
Nicolas did not claim the same. Del-Nacia prepared a check in the
(4) Only the PURCHASER shall be deemed for all legal
amount of P270,651.88 representing the cash surrender value of Mrs.
purposes to take possession of the parcel of land upon
Nicolas's payment and sent it to her by registered mail. The check was
payment of the down payment provided, however, that
received by Mrs. Nicolas and until now it remains in her possession.8
his/her possession under this section shall be only that of a
70

On February 23, 1993, Mrs. Nicolas filed a Complaint 9 against Del- FOURTH ASSIGNMENT OF ERROR
Nacia before the HLURB. On December 15, 1994, the HLURB
Arbiter rendered a Decision10 (Arbiter Decision) with the following THE HON. ARBITER ERRED IN NOT AWARDING
disposition: ATTORNEY'S FEES IN THE SUM OF P50,000.00 TO
COMPLAINANT-APPELLANT.
PREMISES considered, judgment is hereby rendered as
follows: FIFTH ASSIGNMENT OF ERROR

a. Declaring the notarial cancellation of the contract on THE HON. ARBITER ERRED IN NOT GRANTING THE
December 3, 1991 as null and void. PRAYER OF COMPLAINANT-APPELLANT IN HER
COMPLAINT.12
b. Ordering respondent to fortwith furnish complainant
accounting of the paid and unpaid amortizations including The HLURB Board was partly receptive of the appeal and, on
interests and penalty interests and other stipulated fees or December 1, 1995, it handed down a Decision13 (HLURB Board
charges covering the period or delinquent payments, as a Decision) adjudging that:
consequence of the latter's default stating clearly and
specifically the bases as stated in the contract and for the
WHEREFORE, in light of the foregoing premises, we hereby
complainant to pay her unpaid obligations within forty five
MODIFY the Decision dated 15 December 1994 of the
(45) days from receipt of the said computation/accounting.
Office a Quo, insofar as paragraph (b) of the dispositive
portion is concerned and an additional paragraph e, to wit:
c. Ordering the same respondent to execute the pertinent
deed in favor of the complainant within fifteen (15) days
(b) Ordering complainant to pay respondent within sixty (60)
from receipt of complainant's full payment under paragraph b
days from receipt hereof the amount of one hundred seventy
aforementioned and thereafter to deliver to the latter the three thousand nine hundred fifty seven pesos and 29/1000
Transfer Certificate of Title of the lot in question. (P173,957.29) representing the remaining balance of the
installment purchase price of the land inclusive of legal
d. Remedies provided under R.A. 6552 and other legal interests at the rate of twelve percent (12%) per annum.
remedies may be resorted to, at the option of the respondent,
if complainant fails or refuses to pay within the period (e) Ordering respondent to pay this Board the amount of ten
provided under paragraph b. thousand (P10,000) as an administrative fine for violation of
Section 5 of P.D. 957 within thirty (30) days from finality
So Ordered.11 hereof.

Mrs. Nicolas sought review of the Arbiter Decision by the HLURB SO ORDERED. Quezon City.14
Board of Commissions (HLURB Board) on the following assignment
of errors:
Del-Nacia filed a Motion for Reconsideration15 and a Supplement to
Motion for Reconsideration.16 Meanwhile, Mrs. Nicolas filed a
FIRST ASSIGNMENT OF ERROR motion for the "consignment" of P173,957.29, representing the
balance of the purchase price of the land as found by the HLURB
THE HON. ARBITER ERRED IN ORDERING THE Board.
INCLUSION OF INTERESTS, PENALTY INTERESTS
AND OTHER STIPULATED FEES OR CHARGES IN On June 21, 1996, the HLURB Board resolved to deny Del-Nacia's
THE UNILATERAL COMPUTATION TO BE MADE BY motion for reconsideration and ordered Mrs. Nicolas to deposit with it
THE RESPONDENT-APPELLEE AS THE UNPAID for safekeeping the amount indicated in its Decision until Del-Nacia is
OBLIGATION OF COMPLAINANT-APPELLANT. willing to accept the same.17

SECOND ASSIGNMENT OF ERROR Consequently, Del-Nacia appealed to the Office of the President
which, however, was dismissed by its Decision dated March 4, 1998
THE HON. ARBITER ERRED IN ORDERING THE (O.P. Original Decision).18 Upon motion for reconsideration,
COMPLAINANT-APPELLANT TO PAY HER SUPPOSED however, the Office of the President, in a Resolution dated January 5,
UNPAID OBLIGATION BASED UPON THE 200119 (O.P. Resolution), set aside the O.P. Original Decision and
UNILATERAL COMPUTATION OF RESPONDENT- affirmed the Arbiter Decision in toto.
APPELLEE WITHIN FORTY FIVE (45) DAYS FROM
RECEIPT OF SAID COMPUTATION/ACCOUNTING. Unsuccessful in her bid at overturning the O.P. Resolution, Mrs.
Nicolas filed a Petition for Review20 with the Court of Appeals (CA)
THIRD ASSIGNMENT OF ERROR docketed as CA-G.R. SP No. 68407. The CA initially dismissed her
petition for failing to comply with the procedural requirements of
THE HON. ARBITER ERRED IN GIVING Section 6(c) of Rule 43 of the Revised Rules of Court. 21 Mrs. Nicolas
RESPONDENT-APPELLEE THE RIGHT TO RESORT TO filed an omnibus motion praying that the CA reconsider and set aside
REMEDIES PROVIDED UNDER R.A. 6552 AND OTHER the dismissal of her petition and to admit her amended petition. 22 The
LEGAL REMEDIES. CA then required Del-Nacia to submit its comment to the petition.23
71

On January 23, 2003, the CA rendered its Decision,24 affirming the Now on the merits of the case. The issue is whether Mrs. Nicolas is
O.P. Resolution, to wit: liable to pay interests, penalty interests and other stipulated charges to
Del-Nacia.
WHEREFORE, finding no flaw in the appealed O.P.
Resolution, the same is hereby AFFIRMED in toto, with We rule in the affirmative.
costs against Mrs. Nicolas.
Mrs. Nicolas contends that based on the payments she already made,
SO ORDERED. she has overpaid the purchase price due under the Agreement.32 She
assails the application of her payments made by Del-Nacia since the
The Motion for Reconsideration25 filed by Mrs. Nicolas was denied latter applied the bulk of her payments to interest rather than the
by the CA in its Resolution dated April 29, 2003.26 principal.33 According to her, therefore, the penalties, interests and
surcharges being collected by Del-Nacia have no basis in fact or in
law.34 In this regard, she urges this Court to affirm the HLURB Board
Hence, this Petition for Review on Certiorari27, raising the lone issue
Decision35 which reads:
of:

Cursory reading of the abovementioned document reveal that


"WHETHER OR NOT complainant (now petitioner) is
there is indeed no specific date indicated, as to when
bound to pay the interests, penalty interests and other
complainant should pay her monthly installments. It is clear
stipulated charges based on the unilateral accounting or
that that the space provided for in Paragraph 1 of said
computation made by respondent." 28
document for the date or day of the month on which payment
is to be made has been left blank.
The instant petition prays that the O.P. Original Decision, which
affirmed the HLURB Board Decision, be reinstated by this Court.
Considering that the Land Purchase Agreement is a pro-
forma document prepared by respondent, any ambiguity
In its Comment, Del-Nacia argues that the instant petition be denied therein should be interpreted in favor of the complainant.
for the following reasons: (1) failure to comply with section 4, Rule
45, and (2) failure to advance any special reason that would warrant
On the basis of the foregoing, we find that complainant did
the exercise by this Court of its discretionary power of review.
not incur any delay, hence, the imposition of surcharges and
penalty interests are unjustified.36
Before discussing the merits of the case, we shall first discuss its
procedural aspect.
According to Del-Nacia, however, Mrs. Nicolas disregarded paying
the regular rate of interest, overdue interest and penalty interest which
Del-Nacia urges this Court to dismiss the instant petition for failing to were voluntarily agreed upon under paragraphs (1), (5) and (6),
attach material portions of the records of the case that will support the respectively, of their Agreement.37 Del-Nacia contends that the
same as required under Section 6 of Rule 46 of the Revised Rules of records clearly establish that Mrs. Nicolas was in delay in her
Court, such as, for instance, copies of her own pleadings filed before payments of the monthly amortizations and she has not disputed the
the proceedings below.29 It appears that the Agreement of the parties, same.38
subject of the dispute, was not attached to the petition. Nevertheless,
since the Agreement and the other documents that were not attached
to the petition are already part of the records of this case, and could As found by the HLURB Arbiter, the records of Del-Nacia shows
easily be referred to by this Court if necessary, a dismissal of the that Mrs. Nicolas incurred delay in the payment of her monthly
amortizations.39 It is a well-settled rule that factual findings of
instant petition purely on technical grounds is not warranted. Indeed,
administrative agencies are conclusive and binding on the Court when
the Court has, in past cases, granted relief in favor of the petitioner
supported by substantial evidence. We agree with the O.P.
despite this procedural infirmity.30 Thus, we explained the rationale
Resolution,40 which was adopted and affirmed by the CA, to wit:
behind the Court's liberal stance as follows:

Appellant's [Del-Nacia] submission, however, that appellee


We must stress that cases should be determined on the
[Mrs. Nicolas] incurred delay in the manner of payment of
merits, after all parties have been given full opportunity to
her monthly installment obligations is impressed with merit.
ventilate their causes and defenses, rather than on
technicalities or procedural imperfections. In that way, the The Housing Arbiter, in his evaluation as trier of facts of
ends of justice would be served better. Rules of procedure appellee's records of payment, was of the same view. Under
#1 of the basic purchase agreement, supra, appellee
are mere tools designed to expedite the decision or resolution
undertook to pay "120 equal monthly installments" of
of cases and other matters pending in court. A strict and rigid
P9,189.45, "payments to be made on the __ day of each
application of rules, resulting in technicalities that tend to
month thereafter beginning April 20, 1988." A fair
frustrate rather than promote substantial justice, must be
avoided. In fact, Section 6 of Rule 1 states that the Rules understanding of this provision would simply mean that
shall be liberally construed in order to promote their payment should be made effected every 20th day of each
month following April 20, 1988. Based on the records, one
objective of ensuring the just, speedy and inexpensive
can safely presume that the same was fully understood by
disposition of every action and proceeding.31
appellee, as she had repeatedly paid her monthly
amortization on the 20th day of each, or a few days thereafter.
Neither did she question the interest imposed by appellant for
her payments made after the 20th. Be that as it may, this
72

Office is at a loss to understand the HLURB's conclusion regular interest, overdue interest and penalty interest used by Del-
about appellee not having defaulted in her installment Nacia reveal that the same is in accord with the provisions of the
payments. The explanation given by the HLURB Proper why Agreement and cannot be said to have been unilaterally imposed by
it considered appellee not to have been in delay, i. e., because Del-Nacia.
"no specific date [ is] indicated [in the purchase agreement]
as to when complainant should pay her monthly Moreover, the case of Relucio v. Brillante-Garfin (Relucio),47
installments" adding that "the space provided for . . . the date involves similar facts to the case at bar where we ruled as follows:
or day of the month which payment is to be made has been
left blank," strikes this Office as too simplistic to be accorded
Examination of the record shows that the questioned
cogency. The adverted fact of a "space in blank" is of no
Contract to Buy and Sell the subdivision lots provided for
moment for, to reiterate, the agreement was for appellee to payment by private respondent of the sum of P200.00 as
[the] pay the balance (P510,000.00) of the purchase price in downpayment, and that "the balance [of P10,600.00] shall be
120 equal monthly installments, the installment period to
paid in 180 monthly installments at P89.45 per month,
start from April 20, 1988. The use of the phrase "120 equal
including interest rate at six percent (6%) per annum, until
monthly installments" and "thereafter beginning April 20,
the purchase price is fully paid." This stipulation clearly
1988" can mean only one thing - that after April 20, 1988,
specified that an interest charge of six percent (6%) per
the monthly installment is to fall due and be payable on the annum was included in the monthly installment price: private
20th day of the succeeding months. The explanation adverted
respondent could not have helped noticing that P89.45
to above of the HLURB, if pursued to its logical conclusion,
multiplied by 180 monthly installments equals P16,101.00,
would virtually allow appellee to perpetually withhold
and not P10,600.00. The contract price of P10,800.00 may
installment payment without risk of being considered in
thus be seen to be the cash price of the subdivision lots, that
default. The absurdity of this explanation needs no is, the amount payable if the price of the lots were to be paid
belaboring.41 in cash and in full at the execution of the contract; it is not
the amount that the vendor will have received in the
Clearly, under paragraphs (1), (5) and (6) of the Agreement, supra, aggregate after fifteen (15) years if the vendee shall have
Mrs. Nicolas was bound to pay regular interest, and in case of delay, religiously paid the monthly installments. The installment
overdue interest and penalty. It cannot be overemphasized that a price, upon the other hand, of the subdivision lots - the sum
contract is the law between the parties,42 and courts have no choice total of the monthly installments (i.e., P16,101.00) -
but to enforce such contract so long as they are not contrary to law, typically, as in the instant case, has an interest component
morals, good customs or public policy.43 which compensates the vendor for waiting fifteen (15) years
before receiving the total principal amount of P10,600.00.
In this connection, a stipulation for the payment of interest and Economically or financially, P10,600.00 delivered in full
penalty apart from interest in case of delay is not contrary to law, today is simply worth much more than a long series of small
moral, good customs or public policy. To be sure, the same is payments totalling, after fifteen (15) years, P10,600.00. For
sanctioned by the following provisions of the Civil Code: the vendor, upon receiving the full cash price, could have
deposited that amount in a bank, for instance, and earned
Article 1956. No interest shall be due unless it has been interest income which at six percent (6%) per year and for
expressly stipulated in writing. fifteen (15) years, would precisely total P5,501.00 (the
difference between the installment price of P16,101.00 - and
the cash price of P10,600.00 - ) To suppose, as private
Article 1226. In obligations with a penal clause, the penalty
respondent argues, that mere prompt payment of the monthly
shall substitute the indemnity for damages and the payment
installments as they fell due would obviate application of the
of interests in case of non-compliance, if there is no
stipulation to the contrary. interest charge of six percent (6%) per annum, is to ignore
that simple economic fact. That economic fact is, of course,
recognized by law, which authorizes the payment of interest
Article 2209. If the obligation consists in the payment of a when contractually stipulated for by the parties or when
sum of money, and the debtor incurs in delay, the indemnity implied in recognized commercial custom or usage.
for damages, there being no stipulation to the contrary, shall
be the payment of the interest agreed upon x x x.
Vendor and vendee are legally free to stipulate for the
payment of either the cash price of a subdivision lot or its
In Bachrach Motor Company v. Espiritu,44 the Court ruled that the installment price. Should the vendee opt to purchase a
Civil Code permits the agreement upon a penalty apart from the subdivision lot via the installment payment system, he is
interest. Should there be such an agreement, the penalty does not in effect paying interest on the cash price, whether the
include the interest, and as such the two are different and distinct fact and rate of such interest payment is disclosed in the
things which may be demanded separately. The same principle was contract or not. The contract for the purchase and sale of
reiterated in Equitable Banking Corp. v. Liwanag et al.,45 where a piece of land on the installment payment system in the
this Court held that the stipulation about payment of such additional case at bar is not only quite lawful; it also reflects a very
rate partakes of the nature of a penalty clause, which is sanctioned by wide spread usage or custom in our present day
law. commercial life.48

On Mrs. Nicolas' contention that she should not pay interest and the In Relucio, the Court also sustained the seller's theory of declining
other charges based on the unilateral accounting or computation made balance whereby the seller credited a bigger sum of the monthly
by Del-Nacia, a perusal of the formula46 for the computation of amortization to interest rather than the principal, such that in
73

"[During] the succeeding monthly payments, however, as the months, or until August 14, 1991; that it shall earn interest at 5% per
outstanding balance on the principal gradually declined, the interest month; and that should petitioners fail to pay their loan within the said
component (in absolute terms) correspondingly fell while the period, the mortgage shall be foreclosed.
component credited to the principal increased proportionately, thus
amortizing the balance of the principal purchase price as that balance When petitioners failed to pay their loan in full on August 14, 1991,
gradually declined."49 respondents allowed them to complete their payment until December
23, 1993. On this date, they made a total payment of P687,000.00.
In the same vein, an examination of the application of Mrs. Nicolas'
payments by Del-Nacia in the table50 the latter prepared as reflected in On January 17, 1994, respondents wrote petitioners demanding
the records of the case, shows that the same is in accord with the payment of P325,000.00, plus interest, otherwise they would foreclose
theory of declining balance which was affirmed by this Court in the mortgage. 4 In turn, petitioners responded, claiming that they have
Relucio. overpaid their obligation and demanding the return of their land title
and refund of their excess payment. 5 This prompted respondents to
file a petition 6 for extrajudicial foreclosure of mortgage with the
Given the foregoing, it appears that the only dilemma which Mrs.
Office of the Ex-Officio Sheriff, Malolos, Bulacan, docketed therein
Nicolas currently finds herself in is that the obligations which she
as EJF 19-94.
voluntary undertook under the Agreement turned out to be more
onerous than what she expected. Doctrinal is the rule that courts may
For their part, petitioners filed with the Regional Trial Court (RTC),
not extricate parties from the necessary consequences of their acts. 51
Branch 17, Malolos, Bulacan, a complaint for the return of their TCT
That the terms of a contract turn out to be financially disadvantageous
No. T-42.373 (M), sum of money and damages, with application for a
to them will not relieve them of their obligations therein. 52
temporary restraining order and preliminary injunction, docketed as
Civil Case No. 156-M-94. 7
IN VIEW WHEREOF, the petition is DISMISSED. The decision of
the Court of Appeals is affirmed. Costs against the petitioner. In their opposition 8 to the application for a preliminary injunction,
respondents alleged that petitioners’ loan has been restructured three
SO ORDERED. times and that their unpaid balance as of March 14, 1994 was
P543,622.00.
14. Barrera vs. Lorenzo After hearing petitioners’ application for a preliminary injunction, the
RTC issued an order, 9 enjoining the sheriff from proceeding with the
Civil Law; Contracts; When the terms of a contract are clear and foreclosure of mortgage, upon their posting of a bond in the amount of
leave no doubt as to the intention of the contracting parties, the literal P543,622.00.
meaning of its stipulations governs; It is only when the contract is
vague and ambiguous that courts are permitted to resort to Thereafter, trial on the merits ensued.
construction of its terms and determine the intention of the parties
therein.—When the terms of a contract are clear and leave no doubt as On July 31, 1995, the RTC rendered judgment, 10 the dispositive
to the intention of the contracting parties, the literal meaning of its portion of which reads:jgc:chanrobles.com.ph
stipulations governs. In such cases, courts have no authority to alter a
contract by construction or to make a new contract for the parties; its "WHEREFORE, premises considered, judgment is hereby rendered in
duty is confined to the interpretation of the one which they have made favor of the plaintiffs (now petitioners) and against the defendants
for themselves without regard to its wisdom or folly as the court (now respondents), ordering the latter:chanrob1es virtual 1aw library
cannot supply material stipulations or read into the contract words
which it does not contain. It is only when the contract is vague and 1. to return to the plaintiffs the amount of P215,750.00 representing
ambiguous that courts are permitted to resort to construction of its the overpaid amount;
terms and determine the intention of the parties therein.
2. to return to the plaintiffs the owner’s copy of TCT No. T-42.373
SANDOVAL-GUTIERREZ, J.: (M) offered as security;
On December 4, 1990, spouses Felimon and Maria Barrera,
Petitioners, borrowed P230,000.00 from spouses Miguel and Mary 3. to pay P20,000.000 as attorney’s fees;
Lazaro. The loan was secured by a real estate mortgages 1 over
petitioners’ residential lot consisting of 432 square meters located at 4. to pay the costs of the suit.
Bunlo, Bocaue, Bulacan and registered in their names under Transfer
Certificate of Title (TCT) T-42.373 (M) 2 of the Registry of Deeds of "The writ of preliminary injunction issued on March 21, 1994 is
Bulacan.chanrob1es virtua1 1aw 1ibrary hereby made permanent.

A month and a half later, the Lazaro spouses needed money and "SO ORDERED." 11
informed petitioners that they would transfer the loan to spouses
Emiliano and Maria Concepcion Lorenzo, Respondents. The trial court held that the stipulated 5% monthly interest to be paid
Consequently, on May 14, 1991, petitioners executed another real by petitioners corresponds only to the period from May 14, 1991 up to
estate mortgage 3 over their lot, this time in favor of the respondents August 14, 1991, the term of the loan. Thereafter, the monthly interest
to secure the loan of P325,000.00, which the latter claimed as the should be 12% per annum. The trial court concluded that petitioners
amount they paid spouses Lazaro. The mortgage contract provides, made an overpayment of P214,750.00.
among others, that the new loan shall be payable within three (3)
Upon appeal, docketed as CA GR-CV No. 51095, the Court of
74

Appeals, in a Decision 12 dated June 18, 1997, court cannot supply material stipulations or read into the contract
held:jgc:chanrobles.com.ph words which it does not contain. 16 It is only when the contract is
vague and ambiguous that courts are permitted to resort to
"We reverse. construction of its terms and determine the intention of the parties
therein.
"The law and jurisprudence clearly provide that ‘if the debt produces
interest, payment of the principal shall not be deemed to have been The salient provisions of the mortgage contract
made until the interests have been covered.’ (Article 1253, New Civil read:jgc:chanrobles.com.ph
Code; Gobonseng, Jr. v. Court of Appeals, 246 SCRA 472). Once it is
admitted that an obligation bears interest, partial payments are to be "a) Ang sanglaang ito ay sa loob lamang ng tatlong (3) buwan, o
applied first on account of the interest and then to reduce the hanggang sa Agosto 14, 1991.
principal. (San Jose v. Omega, 11 Phil. 442; Sunico v. Ramirez, 14
Phil. 500). We thus find no support, whether in law or in b) Ang tubo na aming napagkasunduan ay 5%, o cinco por ciento
jurisprudence, for the Decision of the court a quo to apply ‘the bigger isang buwan.
amounts of P40,000.00, P37,000.00, P50,000.00 among others, given
several times by the Barrera spouses . . . for the payment of the c) Na sakaling mabayaran ko ang aming pagkakautang sa mag-asawa
principal loan’ when the interests due on the loan that have na P325,000.00 ang kasulatang ito ay wala ng lakas at kabuluhan,
accumulated through the years have not been fully satisfied. subalit kung hindi ko mabayaran ang aming pinagkakautangan sa
takdang panahong 3 buwan sila ay binibigyan ko nang laya at
"We also do not agree that the stipulated monthly interest of 5% was kapangyarihan na masubasta nila ang lupang aming ipinanagot sa
to apply only to the 3-month effectivity period of the loan. This is a labas ng hukuman sa bisa ng Batas Blg. 3135 at susog nito at akong
flawed and a grossly unfair interpretation of the terms and conditions may utang ang siyang sagot sa lahat ng gastos at pati bayad sa
of the agreement of the parties. To rule in this wise is to sanction the abogado sa nasabing subasta sa labas ng hukuman." 17 (Emphasis
irregular performance of one’s obligation. The Barrera spouses will be supplied)
emboldened not to pay their loan within the agreed period of 3-
months since on the fourth month and thereafter, they do not have to It is clear from the above stipulations that the loan shall be payable
pay anymore the 5% monthly interest, but only the 12% legal interest within three (3) months, or from May 14, 1991 up to August 14, 1991.
per annum, or a measly 1% interest per month. Such an interpretation During such period, the loan shall earn an interest of 5% per month.
is totally unfair and unjust to the creditors who could have used their Furthermore, the contract shall have no force and effect once the loan
money in some other ways. Until such time that the Barreras have shall have been fully paid within the three-month period, otherwise,
fully paid their total indebtedness, the 5% monthly interest subsists, the mortgage shall be foreclosed extrajudicially under Act No. 3135.
there being no stipulation to the contrary.
Records show that upon maturity of the loan on August 14, 1991,
"While we commiserate with the plight of the Barrera spouses, we petitioners failed to pay their entire obligation. Instead of exercising
cannot change the terms of the loan agreement between them and the their right to have the mortgage foreclosed, respondents allowed
Lorenzos as ‘the courts have no right to make contracts for (the) petitioners to pay the loan on a monthly installment basis until
parties.’ (Tolentino and Manio v. Gonzales Sy Chian, 5 Phil. 577). A December, 1993. It bears emphasis that there is no written agreement
contract is the law between the parties which not even this Court can between the parties that the loan will continue to bear 5% monthly
interfere with. The only requirement is that the same be not contrary interest beyond the agreed three-month period. Respondent Ma.
to law, morals and good customs . . . (Article 1306, New Civil Code). Concepcion Lorenzo testified as follows:jgc:chanrobles.com.ph
We find the agreement to pay a 5% monthly interest until the loan is
fully paid to be reasonable and sanctioned by regular usage and "Atty. Marcos:chanrob1es virtual 1aw library
practice.
Q Now, based on this document which was marked as Exh.’1,’ there
"The Barreras should, therefore, be required to pay the balance of is no dispute that the monthly interest for the three month period that
their indebtedness, including the interests thereof. Failure to pay the is from May 14, 1991 to August 14, 1991 is 5% monthly interest,
same should warrant the foreclosure of their mortgaged property to there is no dispute about that. Now, Miss Witness, my question is,
satisfy their obligation to the Lorenzo spouses." 13 could you go over the entire document that Exh. `1’ and please tell
this Hon. Court whether there is a provision in clear and unequivocal
Petitioners filed a motion for reconsideration but was denied. 14 terms providing for that monthly interest after August 14,1991?

Hence this petition. A No, sir, there is none.

The sole issue for our resolution is whether the 5% monthly interest Q Are you sure of that?
on the loan was only for three (3) months, or from May 14, 1991 up to
August 14, 1991, as maintained by petitioners, or until the loan was A Yes, sir.
fully paid, as claimed by respondents.
Q You mean to say there is no stipulation in that document providing
When the terms of a contract are clear and leave no doubt as to the for the 5% monthly interest to the loan after August 14, 1991?
intention of the contracting parties, the literal meaning of its
stipulations governs. 15 In such cases, courts have no authority to A Yes, sir, they are supposed to return my money.
alter a contract by construction or to make a new contract for the
parties; its duty is confined to the interpretation of the one which they Court:chanrob1es virtual 1aw library
have made for themselves without regard to its wisdom or folly as the
75

Q After they failed to comply with that provision, was there any as to lead to an unconscionable result is void.—The binding effect of
subsequent agreement between you and the plaintiffs? any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force
x x x of law between the parties; and (2) that there must be mutuality
between the parties based on their essential equality. Any contract
which appears to be heavily weighed in favor of one of the parties so
Q Was there an agreement? as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left
A There was, your Honor. solely to the will of one of the parties, is likewise, invalid.

Q What was that agreement about? Same; Same; Banks and Banking; Loans; Interests; Galloping
increases in interest rate unilaterally imposed by a bank on a
A Verbal agreement, your Honor?
customer’s loan, over the latter’s vehement protests, are arbitrary.—
Q Why was that agreement not reduced into writing? It is plainly obvious, therefore, from the undisputed facts of the case
that respondent bank unilaterally altered the terms of its contract with
A It was not reduced into writing, your Honor. petitioners by increasing the interest rates on the loan without the
prior assent of the latter. In fact, the manner of agreement is itself
Q Why? explicitly stipulated by the Civil Code when it provides, in Article
1956 that “No interest shall be due unless it has been expressly
A I am in good faith, your Honor." 18 stipulated in writing.” What has been “stipulated in writing” from a
perusal of interest rate provision of the credit agreement signed
Article 1956 of the Civil Code mandates that" (n)o interest shall be between the parties is that petitioners were bound merely to pay 21%
due unless it has been expressly stipulated in writing." Applying this interest, subject to a possible escalation or de-escalation, when 1) the
provision, the trial court correctly held that the monthly interest of 5% circumstances warrant such escalation or de-escalation; 2) within the
corresponds only to the three-month period of the loan, or from May limits allowed by law; and 3) upon agreement. Indeed, the interest rate
14, 1991 to August 14, 1991, as agreed upon by the parties in writing. which appears to have been agreed upon by the parties to the contract
Thereafter, the interest rate for the loan is 12% per annum. In Eastern in this case was the 21% rate stipulated in the interest provision. Any
Shipping Lines, Inc. v. Court of Appeals, 19 this Court laid down the doubt about this is in fact readily resolved by a careful reading of the
following doctrine:jgc:chanrobles.com.ph credit agreement because the same plainly uses the phrase “interest
rate agreed upon,” in reference to the original 21% interest rate.
"When the obligation is breached, and it consists in the payment of a Clearly, the galloping increases in interest rate imposed by respondent
sum of money, i.e., a loan or forbearance of money, the interest due bank on petitioners’ loan, over the latter’s vehement protests, were
should be that which may have been stipulated in writing. arbitrary.
Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., Same; Same; Same; Same; Same; Usury Law; Escalation Clauses;
from judicial or extrajudicial demand under and subject to the While the Usury Law ceiling on interest rates was lifted by C.B.
provisions of Article 1169 of the Civil Code." (Emphasis supplied) Circular No. 905, nothing in the said circular could possibly be read
as granting carte blanche authority to lenders to raise interest rates to
The above ruling was reiterated in Sulit v. Court of Appeals, 20 levels which would either enslave their borrowers or lead to a
Crismina Garments v. Court of Appeals, 21 Eastern Assurance and hemorrhaging of their assets.—Moreover, respondent bank’s reliance
Surety Corporation v. Court of Appeals, 22 Catungal v. Hao, 23 and on C.B. Circular No. 905, Series of 1982 did not authorize the bank,
Yong Et. Al. v. Tiu Et. Al. 24 Thus, the Court of Appeals erred in or any lending institution for that matter, to progressively increase
reversing the RTC Decision and holding that the 5% monthly interest interest rates on borrowings to an extent which would have made it
should be paid by petitioners even beyond August 14, 1991. virtually impossible for debtors to comply with their own obligations.
True, escalation clauses in credit agreements are perfectly valid and
WHEREFORE, the assailed Decision of the Court of Appeals dated do not contravene public policy. Such clauses, however, (as are
June 18, 1997 and its Resolution dated October 17, 1997 are stipulations in other contracts) are nonetheless still subject to laws and
REVERSED and SET ASIDE. The Decision of the Regional Trial provisions governing agreements between parties, which
Court, Branch 17, Malolos, Bulacan dated July 31, 1995 is agreements—while they may be the law between the contracting
REINSTATED.chanrob1es virtua1 1aw 1ibrary parties—implicitly incorporate provisions of existing law.
Consequently, while the Usury Law ceiling on interest rates was lifted
SO ORDERED. by C.B. Circular No. 905, nothing in the said circular could possibly
be read as granting respondent bank carte blanche authority to raise
interest rates to levels which would either enslave its borrowers or

lead to a hemorrhaging of their assets. Borrowing represents a


15. Almeda vs. Court of Appeals transfusion of capital from lending institutions to industries and
businesses in order to stimulate growth. This would not, obviously, be
the effect of PNB’s unilateral and lopsided policy regarding the
Contracts; Principle of Mutuality; Principles governing the binding interest rates of petitioners’ borrowings in the instant case.
effect of any agreement between parties to a contract; Any contract
which appears to be heavily weighed in favor of one of the parties so
76

Same; Same; Same; Same; Same; Same; Same; C.B. Circular No. 905 exempted from observing basic principles of law, and ordinary
could not be properly invoked to justify the escalation clauses fairness and decency under the due process clause of the Constitution.
requiring that the increase be ”within the limits allowed by law,”
such circular not being a grant of specific authority.—Apart from KAPUNAN, J.:p
violating the principle of mutuality of contracts, there is authority for
disallowing the interest rates imposed by respondent bank, for the
On various dates in 1981, the Philippine National Bank granted
credit agreement specifically requires that the increase be “within the
to herein petitioners, the spouses Ponciano L. Almeda and
limits allowed by law.” In the case of PNB v. Court of Appeals, cited
Eufemia P. Almeda several loan/credit accommodations
above, this Court clearly emphasized that C.B. Circular No. 905 could
totaling P18.0 Million pesos payable in a period of six years at
not be properly invoked to justify the escalation clauses of such
an interest rate of 21% per annum. To secure the loan, the
contracts, not being a grant of specific authority.
spouses Almeda executed a Real Estate Mortgage Contract
covering a 3,500 square meter parcel of land, together with the
Same; Same; Same; Same; Same; Same; Same; Administrative Law; building erected thereon (the Marvin Plaza) located at Pasong
Words and Phrases; Where the escalation clause of the credit Tamo, Makati, Metro Manila. A credit agreement embodying the
agreement in the instant case required that the same be made ”within terms and conditions of the loan was executed between the
the limits allowed by law,” it obviously referred specifically to parties. Pertinent portions of the said agreement are quoted
legislative enactments not administrative circulars.—Furthermore, the below:
escalation clause of the credit agreement requires that the same be
made “within the limits allowed by law,” obviously referring
SPECIAL CONDITIONS
specifically to legislative enactments not administrative circulars.
Note that the phrase “limits imposed by law,” refers only to the
escalation clause. However, the same agreement allows reduction on The loan shall be subject to interest at the rate
the basis of law or the Monetary Board. Had the parties intended the of twenty one per cent (21%) per annum,
word “law” to refer to both legislative enactments and administrative payable semi-annually in arrears, the first
circulars and issuances, the agreement would not have gone as far as interest payment to become due and payable
making a distinction between “law or the Monetary Board Circulars” six (6) months from date of initial release of the
in referring to mutually agreed upon reductions in interest rates. loan. The loan shall likewise be subject to the
appropriate service charge and a penalty
charge of three per cent (30%) per annum to
Same; Same; Same; Same; Same; Same; Same; Escalation clauses
be imposed on any amount remaining unpaid
are not basically wrong or legally objectionable so long as they are
or not rendered when due.
not solely potestative but based on reasonable and valid grounds; An
increase in interest rates from 18% to 68% is excessive and
unconscionable.—Petitioners never agreed in writing to pay the III. OTHER CONDITIONS
increased interest rates demanded by respondent bank in
contravention to the tenor of their credit agreement. That an increase (c) Interest and Charges
in interest rates from 18% to as much as 68% is excessive and uncon-
(1) The Bank reserves the right
scionable is indisputable. Between 1981 and 1984, petitioners had to increase the interest rate
paid an amount equivalent to virtually half of the entire principal within the limits allowed by law
(P7,735,004.66) which was applied to interest alone. By the time the at any time depending on
spouses tendered the amount of P40,142,518.00 in settlement of their whatever policy it may adopt in
obligations, respondent bank was demanding P58,377,487.00 over the future; provided, that the
and above those amounts already previously paid by the spouses. interest rate on this/these
Escalation clauses are not basically wrong or legally objectionable so accommodations shall be
long as they are not solely potestative but based on reasonable and correspondingly decreased in
valid grounds. Here, as clearly demonstrated above, not only the the event that the applicable
increases of the interest rates on the basis of the escalation clause maximum interest rate is
patently unreasonable and unconscionable, but also there are no valid reduced by law or by the
and reasonable standards upon which the increases are anchored. Monetary Board. In either
case, the adjustment in the
Loans; Banks and Banking; Presidential Decree No. 385; Due interest rate agreed upon shall
Process; In facilitating collection of debts through the automatic take effect on the effectivity
foreclosure provisions of P.D. 385, the government is, however, not date of the increase or
exempted from observing basic principles of law, and ordinary decrease of the maximum
fairness and decency under the due process clause of the interest rate.1
Constitution.—Presidential Decree No. 385 was issued principally to
guarantee that government financial institutions would not be denied Between 1981 and 1984, petitioners made several partial
substantial cash inflows necessary to finance the government’s payments on the loan totaling. P7,735,004.66,2 a substantial
development projects all over the country by large borrowers who portion of which was applied to accrued interest.3 On March 31,
resort to litigation to prevent or delay the government’s collection of 1984, respondent bank, over petitioners' protestations, raised
their debts or loans. In facilitating collection of debts through its the interest rate to 28%, allegedly pursuant to Section III-c (1)
automatic foreclosure provisions, the government is however, not of its credit agreement. Said interest rate thereupon increased
77

from an initial 21% to a high of 68% between March of 1984 to respondent Court of Appeals, assailing the following orders of
September, 1986.4 the Regional Trial Court:

Petitioner protested the increase in interest rates, to no avail. 1. Order dated March 30, 1990 of Judge
Before the loan was to mature in March, 1988, the spouses Guadiz granting the writ of preliminary
filed on February 6, 1988 a petition for declaratory relief with injunction restraining the foreclosure sale of
prayer for a writ of preliminary injunction and temporary Mavin Plaza set on March 12, 1990;
restraining order with the Regional Trial Court of Makati,
docketed as Civil Case No. 18872. In said petition, which was 2. Order of Judge Ignacio Capulong dated
raffled to Branch 134 presided by Judge Ignacio Capulong, the January 10, 1992 denying respondent bank's
spouses sought clarification as to whether or not the PNB could motion to lift the writ of injunction issued by
unilaterally raise interest rates on the loan, pursuant to the Judge Guadiz as well as its motion to dismiss
credit agreement's escalation clause, and in relation to Central Civil Case No. 90-663;
Bank Circular No. 905. As a preliminary measure, the lower
court, on March 3, 1988, issued a writ of preliminary injunction
3. Order of Judge Capulong dated July 3, 1992
enjoining the Philippine National Bank from enforcing an denying respondent bank's subsequent motion
interest rate above the 21% stipulated in the credit agreement. to lift the writ of preliminary injunction; and
By this time the spouses were already in default of their loan
obligations.
4. Order of Judge Capulong dated October 20,
1992 denying respondent bank's motion for
Invoking the Law on Mandatory Foreclosure (Act 3135, as reconsideration.
amended and P.D. 385), the PNB countered by ordering the
extrajudicial foreclosure of petitioner's mortgaged properties
and scheduled an auction sale for March 14, 1989. Upon On August 27, 1993, respondent court rendered its decision
motion by petitioners, however, the lower court, on April 5, setting aside the assailed orders and upholding respondent
1989, granted a supplemental writ of preliminary injunction, bank's right to foreclose the mortgaged property pursuant to Act
staying the public auction of the mortgaged property. 3135, as amended and P.D. 385. Petitioners' Motion for
Reconsideration and Supplemental Motion for Reconsideration,
dated September 15, 1993 and October 28, 1993, respectively,
On January 15, 1990, upon the posting of a counterbond by the
were denied by respondent court in its resolution dated January
PNB, the trial court dissolved the supplemental writ of
10, 1994.
preliminary injunction. Petitioners filed a motion for
reconsideration. In the interim, respondent bank once more set
a new date for the foreclosure sale of Marvin Plaza which was Hence the instant petition.
March 12, 1990. Prior to the scheduled date, however,
petitioners tendered to respondent bank the amount of This appeal by certiorari from the respondent court's
P40,142,518.00, consisting of the principal (P18,000,000.00) decision dated August 27, 1993 raises two principal issues
and accrued interest calculated at the originally stipulated rate namely: 1) Whether or not respondent bank was authorized
of 21%. The PNB refused to accept the payment.5 to raise its interest rates from 21% to as high as 68% under
the credit agreement; and 2) Whether or not respondent
As a result of PNB's refusal of the tender of payment, bank is granted the authority to foreclose the Marvin Plaza
petitioners, on March 8, 1990, formally consigned the amount of under the mandatory foreclosure provisions of P.D. 385.
P40,142,518.00 with the Regional Trial Court in Civil Case No.
90-663. They prayed therein for a writ of preliminary injunction In its comment dated April 19, 1994, respondent bank
with a temporary restraining order. The case was raffled to vigorously denied that the increases in the interest rates were
Branch 147, presided by Judge Teofilo Guadiz. On March 15, illegal, unilateral, excessive and arbitrary, it argues that the
1990, respondent bank sought the dismissal of the case. escalated rates of interest it imposed was based on the
agreement of the parties. Respondent bank further contends
On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 that it had a right to foreclose the mortgaged property pursuant
issued an order granting the writ of preliminary injunction to P.D. 385, after petitioners were unable to pay their loan
enjoining the foreclosure sale of "Marvin Plaza" scheduled on obligations to the bank based on the increased rates upon
March 12, 1990. On April 17, 1990 respondent bank filed a maturity in 1984.
motion for reconsideration of the said order.
The instant petition is impressed with merit.
On August 16, 1991, Civil Case No. 90-663 we transferred to
Branch 66 presided by Judge Eriberto Rosario who issued an The binding effect of any agreement between parties to a
order consolidating said case with Civil Case 18871 presided contract is premised on two settled principles: (1) that any
by Judge Ignacio Capulong. obligation arising from contract has the force of law between
the parties; and (2) that there must be mutuality between the
For Judge Ignacio's refusal to lift the writ of preliminary parties based on their essential equality.6 Any contract which
injunction issued March 30, 1990, respondent bank filed a appears to be heavily weighed in favor of one of the parties so
petition for Certiorari, Prohibition and Mandamus with as to lead to an unconscionable result is void. Any stipulation
78

regarding the validity or compliance of the contract which is left Besides violating P.D. 116, the unilateral action
solely to the will of one of the parties, is likewise, invalid. of the PNB in increasing the interest rate on the
private respondent's loan, violated the
It is plainly obvious, therefore, from the undisputed facts of the mutuality of contracts ordained in Article 1308
case that respondent bank unilaterally altered the terms of its of the Civil Code:
contract with petitioners by increasing the interest rates on the
loan without the prior assent of the latter. In fact, the manner of Art. 308. The contract must bind both
agreement is itself explicitly stipulated by the Civil Code when it contracting parties; its validity or compliance
provides, in Article 1956 that "No interest shall be due unless it cannot be left to the will of one of them.
has been expressly stipulated in writing." What has been
"stipulated in writing" from a perusal of interest rate provision of In order that obligations arising from contracts
the credit agreement signed between the parties is that may have the force of law between the parties,
petitioners were bound merely to pay 21% interest, subject to a there must be mutuality between the parties
possible escalation or de-escalation, when 1) the based on their essential equality. A contract
circumstances warrant such escalation or de-escalation; 2) containing a condition which makes its
within the limits allowed by law; and 3) upon agreement. fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting
Indeed, the interest rate which appears to have been agreed parties, is void (Garcia vs. Rita Legarda, Inc.,
upon by the parties to the contract in this case was the 21% 21 SCRA 555). Hence, even assuming that the
rate stipulated in the interest provision. Any doubt about this is P1.8 million loan agreement between the PNB
in fact readily resolved by a careful reading of the credit and the private respondent gave the PNB a
agreement because the same plainly uses the phrase "interest license (although in fact there was none) to
rate agreed upon," in reference to the original 21% interest rate. increase the interest rate at will during the term
The interest provision states: of the loan, that license would have been null
and void for being violative of the principle of
(c) interest and Charges mutuality essential in contracts. It would have
invested the loan agreement with the character
of a contract of adhesion, where the parties do
(1) The Bank reserves the right to increase the
interest rate within the limits allowed by law at not bargain on equal footing, the weaker party's
(the debtor) participation being reduced to the
any time depending on whatever policy it may
alternative "to take it or lease it" (Qua vs. Law
adopt in the future; provided, that the interest
rate on this/these accommodations shall be Union & Rock Insurance Co., 95 Phil. 85). Such
correspondingly decreased in the event that the a contract is a veritable trap for the weaker
party whom the courts of justice must protect
applicable maximum interest rate is reduced by
against abuse and imposition.
law or by the Monetary Board. In either case,
the adjustment in the interest rate agreed upon
shall take effect on the effectivity date of the PNB's successive increases of the interest rate
increase or decrease of the maximum interest on the private respondent's loan, over the
rate. latter's protest, were arbitrary as they violated
an express provision of the Credit Agreement
In Philippine National Bank v. Court of Appeals, 7 this Court (Exh. 1) Section 9.01 that its terms "may be
amended only by an instrument in writing
disauthorized respondent bank from unilaterally raising the
interest rate in the borrower's loan from 18% to 32%, 41% and signed by the party to be bound as burdened
by such amendment." The increases imposed
48% partly because the aforestated increases violated the
by PNB also contravene Art. 1956 of the Civil
principle of mutuality of contracts expressed in Article 1308 of
Code which provides that "no interest shall be
the Civil Code. The Court held:
due unless it has been expressly stipulated in
writing."
CB Circular No. 905, Series of
1982 (Exh. 11) removed the
The debtor herein never agreed in writing to
Usury Law ceiling on interest
pay the interest increases fixed by the PNB
rates —
beyond 24% per annum, hence, he is not
bound to pay a higher rate than that.
. . . increases in interest rates
are not subject to any ceiling
That an increase in the interest rate from 18%
prescribed by the Usury Law.
to 48% within a period of four (4) months is
excessive, as found by the Court of Appeals, is
but it did not authorize the PNB, or any bank for indisputable.
that matter, to unilaterally and successively
increase the agreed interest rates from 18% to
Clearly, the galloping increases in interest rate imposed by
48% within a span of four (4) months, in
respondent bank on petitioners' loan, over the latter's vehement
violation of P.D. 116 which limits such changes
protests, were arbitrary.
to once every twelve months.
79

Moreover, respondent bank's reliance on C.B. Circular No. 905, increasing


Series of 1982 did not authorize the bank, or any lending
institution for that matter, to progressively increase interest the lawful rates of interest that may be charged
rates on borrowings to an extent which would have made it
virtually impossible for debtors to comply with their own on this particular
obligations. True, escalation clauses in credit agreements are
perfectly valid and do not contravene public policy. Such
clauses, however, (as are stipulations in other contracts) are kind of loan. (Paragraphing and emphasis
nonetheless still subject to laws and provisions governing supplied)
agreements between parties, which agreements — while they
may be the law between the contracting parties — implicitly It is clear from the stipulation between the
incorporate provisions of existing law. Consequently, while the parties that the interest rate may be increased
Usury Law ceiling on interest rates was lifted by C.B. Circular "in the event a law should be enacted
905, nothing in the said circular could possibly be read as increasing the lawful rate of interest that may
granting respondent bank carte blanche authority to raise be charged on this particular kind of loan." The
interest rates to levels which would either enslave its borrowers Escalation Clause was dependent on an
or lead to a hemorrhaging of their assets. Borrowing represents increase of rate made by "law" alone.
a transfusion of capital from lending institutions to industries
and businesses in order to stimulate growth. This would not, CIRCULAR No. 494, although it has the effect
obviously, be the effect of PNB's unilateral and lopsided policy of law, is not a law. "Although a circular duly
regarding the interest rates of petitioners' borrowings in the issued is not strictly a statute or a law, it has,
instant case. however, the force and effect of law."
(Emphasis supplied). "An administrative
Apart from violating the principle of mutuality of contracts, there regulation adopted pursuant to law has the
is authority for disallowing the interest rates imposed by force and effect of law." "That administrative
respondent bank, for the credit agreement specifically requires rules and regulations have the force of law can
that the increase be "within the limits allowed by law". In the no longer be questioned."
case of PNB v. Court of Appeals, cited above, this Court clearly
emphasized that C.B. Circular No. 905 could not be properly The distinction between a law and an
invoked to justify the escalation clauses of such contracts, not administrative regulation is recognized in the
being a grant of specific authority. Monetary Board guidelines quoted in the latter
to the BORROWER of Ms. Paderes of
Furthermore, the escalation clause of the credit agreement September 24, 1976 (supra). According to the
requires that the same be made "within the limits allowed by guidelines, for a loan's interest to be subject to
law," obviously referring specifically to legislative enactments the increases provided in CIRCULAR No. 494,
not administrative circulars. Note that the phrase "limits there must be an Escalation Clause allowing
imposed by law," refers only to the escalation clause. However, the increase "in the event that any law or
the same agreement allows reduction on the basis of law or the Central Bank regulation is promulgated
Monetary Board. Had the parties intended the word "law" to increasing the maximum rate for loans." The
refer to both legislative enactments and administrative circulars guidelines thus presuppose that a Central Bank
and issuances, the agreement would not have gone as far as regulation is not within the term "any law."
making a distinction between "law or the Monetary Board
Circulars" in referring to mutually agreed upon reductions in The distinction is again recognized by P.D. No.
interest rates. This distinction was the subject of the Court's 1684, promulgated on March 17, 1980, adding
disquisition in the case of Banco Filipino Savings and Mortgage section 7-a to the Usury Law, providing that
Bank v. Navarro8 where the Court held that: parties to an agreement pertaining to a loan
could stipulate that the rate of interest agreed
What should be resolved is whether BANCO upon may be increased in the event that the
FILIPINO can increase the interest rate on the applicable maximum rate of interest is
LOAN from 12% to 17% per annum under the increased "by law or by the Monetary Board."
Escalation Clause. It is our considered opinion To quote:
that it may not.
Sec. 7-a. Parties to an
The Escalation Clause reads as follows: agreement pertaining to a loan
or forbearance of money,
I/We hereby authorize Banco Filipino to goods or credits may stipulate
correspondingly increase. that the rate of interest agreed
upon may be increased in the
event that the applicable
the interest rate stipulated in this contract
maximum rate of interest
without advance notice to me/us in the event.
is increased by law or by the
a law Monetary Board:
80

Provided, That such stipulation the government is however, not exempted from observing basic
shall be valid only if there is principles of law, and ordinary fairness and decency under the
also a stipulation in the due process clause of the Constitution. 11
agreement that the rate of
interest agreed upon shall be In the first place, because of the dispute regarding the interest
reduced in the event that the rate increases, an issue which was never settled on merit in the
applicable maximum rate of courts below, the exact amount of petitioner's obligations could
interest is reduced by law or by not be determined. Thus, the foreclosure provisions of P.D. 385
the Monetary Board; could be validly invoked by respondent only after settlement of
the question involving the interest rate on the loan, and only
Provided, further, That the after the spouses refused to meet their obligations following
adjustment in the rate of such determination. In Filipinas Marble Corporation v.
interest agreed upon shall take Intermediate Appellate Court, 12 involving P.D. 385's provisions
effect on or after the effectivity on mandatory foreclosure, we held that:
of the increase or decrease in
the maximum rate of interest.' We cannot, at this point, conclude that
(Paragraphing and emphasis respondent DBP together with the Bancom
supplied). people actually misappropriated and misspent
the $5 million loan in whole or in part although
It is now clear that from March 17, 1980, the trial court found that there is "persuasive"
escalation clauses to be valid should evidence that such acts were committed by the
specifically provide: (1) that there can be an respondent. This matter should rightfully be
increase in interest if increased by law or by the litigated below in the main action. Pending the
Monetary Board; and (2) in order for such outcome of such litigation, P.D. 385 cannot
stipulation to be valid, it must include a automatically be applied for if it is really proven
provision for reduction of the stipulated interest that respondent DBP is responsible for the
"in the event that the applicable maximum rate misappropriation of the loan, even if only in
of interest is reduced by law or by the Monetary part, then the foreclosure of the petitioner's
Board." properties under the provisions of P.D. 385 to
satisfy the whole amount of the loan would be a
Petitioners never agreed in writing to pay the increased interest gross mistake. It would unduly prejudice the
rates demanded by respondent bank in contravention to the petitioner, its employees and their families.
tenor of their credit agreement. That an increase in interest
rates from 18% to as much as 68% is excessive and Only after trial on the merits of the main case
unconscionable is indisputable. Between 1981 and 1984, can the true amount of the loan which was
petitioners had paid an amount equivalent to virtually half of the applied wisely or not, for the benefit of the
entire principal (P7,735,004.66) which was applied to interest petitioner be determined. Consequently, the
alone. By the time the spouses tendered the amount of extent of the loan where there was no failure of
P40,142,518.00 in settlement of their obligations; respondent consideration and which may be properly
bank was demanding P58,377,487.00 over and above those satisfied by foreclosure proceedings under P.D.
amounts already previously paid by the spouses. 385 will have to await the presentation of
evidence in a trial on the merits.
Escalation clauses are not basically wrong or legally
objectionable so long as they are not solely potestative but In Republic Planters Bank v. Court of Appeals 13 the Court
based on reasonable and valid grounds.9 Here, as clearly reiterating the dictum in Filipinas Marble Corporation, held:
demonstrated above, not only the increases of the interest rates
on the basis of the escalation clause patently unreasonable and The enforcement of P.D. 385 will sweep under
unconscionable, but also there are no valid and reasonable the rug' this iceberg of a scandal in the sugar
standards upon which the increases are anchored. industry during the Marcos Martial Law years.
This we can not allow to happen. For the
We go now to respondent bank's claim that the principal issue benefit of future generations, all the dirty linen
in the case at bench involves its right to foreclose petitioners' in the PHILSUCUCOM/NASUTRA/RPB closets
properties under P.D. 385. We find respondent's pretense have to be exposed in public so that the same
untenable. may NEVER be repeated.

Presidential Decree No. 385 was issued principally to It is of paramount national interest, that we
guarantee that government financial institutions would not be allow the trial court to proceed with dispatch to
denied substantial cash inflows necessary to finance the allow the parties below to present their
government's development projects all over the country by evidence.
large borrowers who resort to litigation to prevent or delay the
government's collection of their debts or loans. 10 In facilitating Furthermore, petitioners made a valid consignation of what
collection of debts through its automatic foreclosure provisions, they, in good faith and in compliance with the letter of the Credit
81

Agreement, honestly believed to be the real amount of their essential equality. A contract containing a condition which makes its
remaining obligations with the respondent bank. The latter fulfillment dependent exclusively upon the uncontrolled will of one of
could not therefore claim that there was no honest-to-goodness the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21
attempt on the part of the spouse to settle their obligations. SCRA 555). Hence, even assuming that the P1.8 million loan
Respondent's rush to inequitably invoke the foreclosure agreement between the PNB and the private respondent gave the PNB
provisions of P.D. 385 through its legal machinations in the a license (although in fact there was none) to increase the interest rate
courts below, in spite of the unsettled differences in at will during the term of the loan, that license would have been null
interpretation of the credit agreement was obviously made in and void for being violative of the principle of mutuality essential in
bad faith, to gain the upper hand over petitioners. contracts. It would have invested the loan agreement with the
character of a contract of adhesion, where the parties do not bargain
In the face of the unequivocal interest rate provisions in the on equal footing, the weaker party’s (the debtor) participation being
credit agreement and in the law requiring the parties to agree to reduced to the alternative “to take it or leave it” (Qua vs. Law Union
changes in the interest rate in writing, we hold that the unilateral & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap
and progressive increases imposed by respondent PNB were for the weaker party whom the courts of justice must protect against
null and void. Their effect was to increase the total obligation on abuse and imposition.
an eighteen million peso loan to an amount way over three
times that which was originally granted to the borrowers. That Same; Same; Increase of interest rate; The increases imposed by PNB
these increases, occasioned by crafty manipulations in the contravene Art. 1956 of the Civil Code.—PNB’s successive increases
interest rates is unconscionable and neutralizes the salutary of the interest rate on the private respondent’s loan, over the latter’s
policies of extending loans to spur business cannot be protest, were arbitrary as they violated an express provision of the
disputed. Credit Agreement (Exh. 1) Section 9.01 that its terms “may be
amended only by an instrument in writing signed by the party to be
WHEREFORE, PREMISES CONSIDERED, the decision of the bound as burdened by such amendment.” The increases imposed by
Court of Appeals dated August 27, 1993, as well as the PNB also contravene Art. 1956 of the Civil Code which provides that
resolution dated February 10, 1994 is hereby REVERSED AND
SET ASIDE. The case is remanded to the Regional Trial Court “no interest shall be due unless it has been expressly stipulated in
of Makati for further proceedings. writing.”

SO ORDERED. GRIÑO-AQUINO, J.:

16. Philippine National Bank vs. CA The Philippine National Bank (PNB) has appealed by certiorari from
the decision promulgated on June 27, 1989 by the Court of Appeals in
Commercial Law; CB Circular No. 905; PD 116; Although CB CA-G.R. CV No. 09791 entitled, "AMBROSIO PADILLA, plaintiff-
Circular No. 905 Series of 1982 removed the Usury Law ceiling on appellant versus PHILIPPINE NATIONAL BANK, defendant-
interest rates, it did not authorize the PNB or any bank to increase the appellee," reversing the decision of the trial court which had
agreed interest rates from 18% to 48% within 4 months, in violation dismissed the private respondent’s complaint "to annul interest
of PD 116 which limits such charges to “once every twelve increases." (p. 32, Rollo.) The Court of Appeals rendered
months”.—In the present case, the PNB relied on its own Board judgment:jgc:chanrobles.com.ph
Resolution No. 681 (Exh. 10), PNB Circular No. 40-79-84 (Exh. 13),
and PNB Circular No. 40-129-84 (Exh. 15), but those resolution and ". . . declaring the questioned increases of interest as unreasonable,
circulars are neither excessive and arbitrary and ordering the defendant-appellee [PNB] to
refund to the plaintiff-appellant the amount of interest collected from
laws nor resolutions of the Monetary Board. CB Circular No. 905, July, 1984 in excess of twenty-four percent (24%) per annum. Costs
Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest against the defendant-appellee." (pp 14-15, Rollo.)
rates—“x x x increases in interest rates are not subject to any ceiling
prescribed by the Usury Law.” but it did not authorize the PNB, or In July 1982, the private respondent applied for, and was granted by
any bank for that matter, to unilaterally and successively increase the petitioner PNB, a credit line of 321.8 million, secured by a real estate
agreed interest rates from 18% to 48% within a span of four (4) mortgage, for a term of two (2) years, with 18% interest per annum.
months, in violation of P.D. 116 which limits such changes to “once Private respondent executed in favor of the PNB a Credit Agreement,
every twelve months.” two (2) promissory notes in the amount of P900,000.00 each, and a
Real Estate Mortgage Contract.
Same; Civil Law; Mutuality of Contracts; A contract containing a
condition which makes its fulfillment dependent exclusively upon the The Credit Agreement provided that
uncontrolled will of one of the contracting parties is void.—Besides
violating P.D. 116, the unilateral action of the PNB in increasing the "9.06 Other Conditions. The Borrowers hereby agree to be bound by
interest rate on the private respondent’s loan, violated the mutuality of the rules and regulations of the Central Bank and the current and
contracts ordained in Article 1308 of the Civil Code: “ART. 1308. general policies of the Bank and those which the Bank may adopt in
The contract must bind both contracting parties; its validity or the future, which may have relation to or in any way affect the Line,
compliance cannot be left to the will of one of them.” In order that which rules, regulations and policies are incorporated herein by
obligations arising from contracts may have the force of law between reference as if set forth herein in full. Promptly upon receipt of a
the parties, there must be mutuality between the parties based on their written request from the Bank, the Borrowers shall execute and
deliver such documents and instruments, in form and substance
82

satisfactory to the Bank, in order to effectuate or otherwise comply 21% or 24%.’" (p. 88, Rollo.)
with such rules, regulations and policies." (p. 85, Rollo.)
On September 12, 1984, private respondent paid PNB P160,000.00.
The Promissory Notes, in turn, uniformly authorized the PNB to
increase the stipulated 18% interest per annum "within the limits In letters dated September 12, 1984 and September 13, 1984, PNB
allowed by law at any time depending on whatever policy it [PNB] informed private respondent that "the interest rate on your outstanding
may adopt in the future; Provided, that, the interest rate on this note line/loan is hereby adjusted from 32% p.a. to 41% p.a. (35% prime
shall be correspondingly decreased in the event that the applicable rate + 6%) effective September 6, 1984;" and further explained "why
maximum interest rate is reduced by law or by the Monetary Board." we can not grant your request for a lower rate of 21% or 24%." (pp.
(pp. 85-86, Rollo; Emphasis ours.) 88-89, Rollo.)

The Real Estate Mortgage Contract likewise provided In a letter dated September 24, 1984 to PNB, private respondent
that:jgc:chanrobles.com.ph registered his protest against the increase of interest rate from 18% to
32% on July 4, 1984 and from 32% to 41% on September 6, 1984.
"(k) INCREASE OF INTEREST RATE
On October 15, 1984, private respondent reiterated his request that the
"The rate of interest charged on the obligation secured by this interest rate should not be increased from 18% to 32% and from 32%
mortgage as well as the interest on the amount which may have been to 41%. He also attached (as payment) a check for
advanced by the MORTGAGEE, in accordance with the provisions P140,000.00.chanrobles.com.ph : virtual law library
hereof, shall be subject during the life of this contract to such an
increase within the rate allowed by law, as the Board of Directors of Like rubbing salt on the private respondent’s wound, the petitioner
the MORTGAGEE may prescribe for its debtors." (p. 86, Rollo; informed private respondent on October 29, 1984, that "the interest
Emphasis supplied.) rate on your outstanding line/loan is hereby adjusted from 41% p.a. to
48% p.a. (42% prime rate plus 6% spread) effective 25 October
Four (4) months advance interest and incidental expenses/charges 1984." (p. 89, Rollo.)
were deducted from the loan, the net proceeds of which were released
to the private respondent by crediting or transferring the amount to his In November 1984, private respondent paid PNB P50,000.00 thus
current account with the bank.chanrobles.com : virtual law library reducing his principal loan obligation to P300,000.00.

On June 20, 1984, PNB informed the private respondent that (1) his On December 18, 1984, private respondent filed in the Regional Trial
credit line of P1.8 million "will expire on July 4, 1984," (2)" [i]f Court of Manila a complaint against PNB entitled, "AMBROSIO
renewal of the line for another year is intended, please submit soonest PADILLA v. PHILIPPINE NATIONAL BANK" (Civil Case No. 84-
possible your request," and (3) the "present policy of the Bank 28391), praying that judgment be rendered:jgc:chanrobles.com.ph
requires at least 30% reduction of principal before your line can be
renewed." (pp. 86-87, Rollo.) Complying, private respondent on June "a. Declaring that the unilateral increase of interest rates from 18% to
25, 1984, paid PNB P540,000 00 (30% of P1.8 million) and requested 32%, then to 41% and again to 48% are illegal, not valid nor binding
that "the balance of P1,260,000.00 be renewed for another period of on plaintiff, and that an adjustment of his interest rate from 18% to
two (2) years under the same arrangement" and that "the increase of 24% is reasonable, fair and just;
the interest rate of my mortgage loan be from 18% to 21%" (p. 87,
Rollo.). "b. The interest rate on the P900,000.00 released on September 27,
1982 be counted from said date and not from July 4, 1984;
On July 4, 1984, private respondent paid PNB P360,000.00.
"c. The excess of interest payment collected by defendant bank by
On July 18, 1984, private respondent reiterated in writing his request debiting plaintiffs current account be refunded to plaintiff or credited
that "the increase in the rate of interest from 18% be fixed at 21% of to his current account;
24%. (p. 87, Rollo.)
"d. Pending the determination of the merits of this case, a restraining
On July 26, 1984, private respondent made an additional payment of order and or a writ of preliminary injunction be issued (1) to restrain
P100,000. and or enjoin defendant bank for [sic] collecting from plaintiff and/or
debiting his current account with illegal and excessive increases of
On August 10, 1984, PNB informed private respondent that "we can interest rates; and (2) to prevent defendant bank from declaring
not give due course to your request for preferential interest rate in plaintiff in default for non-payment and from instituting any
view of the following reasons: Existing Loan Policies of the bank foreclosure proceeding, extrajudicial or judicial, of the valuable
requires 32% for loan of more than one year; our present cost of funds commercial property of plaintiff." (pp. 89-90, Rollo.)
has substantially increased." (pp. 8788, Rollo.)
In its answer to the complaint, PNB denied that the increases in
On August 17, 1984, private respondent further paid PNB interest rates were illegal, unilateral excessive and arbitrary and
P150,000.00. recited the reasons justifying said increases.

In a letter dated August 24, 1984 to PNB, private respondent On March 31, 1985, the private respondent paid the P300,000 balance
announced that he would "continue making further payments, and of his obligation to PNBN (Exh. 5).
instead of a ‘loan of more than one year,’ I shall pay the said loan
before the lapse of one year or before July 4, 1985. . . . I reiterate my The trial court rendered judgment on April 14, 1986, dismissing the
request that the increase of my rate of interest from 18% ‘be fixed at complaint because the increases of interest were properly made.
83

"Exhibits ‘2,’ ‘3,’ and ‘4’ in their portions respectively marked


The private respondent appealed to the Court of Appeals. On June 27, Exhibits ‘2-B,’ ‘3-B,’ and ‘4-B’ uniformly authorize the defendant
1989, the Court of Appeals reversed the trial court, hence, NB’s bank to increase the stipulated interest rate of 18% per annum ‘within
recourse to this Court by a petition for review under Rule 45 of the the limits allowed by law at any time depending on whatever policy it
Rules of Court. may adopt in the future: Provided, that, the interest rate on this note
shall be correspondingly decreased in the event that the applicable
The assignments of error raised in PNB’s petition for review can be maximum interest rate is reduced by law or by the Monetary Board.’
resolved into a single legal issue of whether the bank, within the term
of the loan which it granted to the private respondent, may unilaterally "Exhibit ‘5’ in its portion marked Exhibit ‘5-e-1’
change or increase the interest rate stipulated therein at will and as stipulates:chanrob1es virtual 1aw library
often as it pleased.
‘(k) INCREASE OF INTEREST RATE
The answer to that question is no.
‘The rate of interest charged on the obligation secured by this
In the first place, although Section 2, PD. No. 116 of January 29, mortgage as well as the interest on the amount which may have been
1973, authorizes the Monetary Board to prescribe the maximum rate advanced by the MORTGAGEE, in accordance with the provisions
or rates of interest for loans or renewal thereof and to change such rate hereof, shall be subject during the life of this contract to such an
or rates whenever warranted by prevailing economic and social increase within the rate allowed by law, as the Board of Directors of
conditions, it expressly provides that "such changes shall not be made the MORTGAGEE may prescribe for its debtors.’
oftener than once every twelve months."cralaw virtua1aw library
"Clearly, then, the agreement between the parties authorized the
In this case, PNB, over the objection of the private respondent, and defendant bank to increase the interest rate beyond the original rate of
without authority from the Monetary Board, within a period of only 18% per annum but ‘within the limits allowed by law’ or ‘within the
four (4) months, increased the 18% interest rate on the private rate allowed by law,’ it being declared the obligation of the plaintiff as
respondent’s loan obligation three (3) times: (a) to 32% in July 1984; borrower to execute and deliver the corresponding documents and
(b) to 41% in October 1984; and (c) to 48% in November 1984. Those instruments to effectuate the increase." (pp. 11-12, Rollo.)
increases were null and void, for if the Monetary Board itself was not
authorized to make such changes oftener than once a year, even less In Banco Filipino Savings and Mortgage Bank v. Navarro, 15 SCRA
so may a bank which is subordinate to the Board.chanrobles law 346 (1987), this Court disauthorized the bank from raising the interest
library : red rate on the borrowers’ loan from 12% to 17% despite an escalation
clause in the loan agreement signed by the debtors authorizing Banco
Secondly, as pointed out by the Court of Appeals, while the private Filipino "to correspondingly increase the interest rate stipulated in this
respondent-debtor did agree in the Deed of Real Estate Mortgage contract without advance notice to me/us in the event a law should be
(Exh. 5) that the interest rate may be increased during the life of the enacted increasing the lawful rates of interest that may be charged on
contract "to such increase within the rate allowed by law, as the Board this particular kind of loan." (Emphasis supplied.)chanrobles virtual
of Directors of the MORTGAGEE may prescribe" (Exh. 5-e-1) or lawlibrary
"within the limits allowed by law" (Promissory Notes, Ex’s. 2, 3, and
4), no law was ever passed in July to November 1984 increasing the In the Banco Filipino case, the bank relied on Section 3 of CB
interest rates on loans or renewals thereof to 32%, 41% and 48% (per Circular No. 494 dated July 1, 1976 (72 O.G. No. 3, p. 676-J) which
annum), and no documents were executed and delivered by the debtor provided that "the maximum rate of interest, including commissions
to effectuate the increases. The Court of Appeals observed. premiums, fees and other charges on loans with a maturity of more
than 730 days by banking institution . . . shall be 19%."cralaw
". . . We focus Our attention first of all on the agreement between the virtua1aw library
parties as embodied in the following instruments, to wit: (1) Exhibit
‘1’ — Credit Agreement dated July 1, 1982; (2) Exhibit ‘2’ — This Court disallowed the increase for the simple reason that said
Promissory Note dated July 5, 1982; (3) Exhibit ‘(3)’ — Promissory "Circular No. 494, although it has the effect of law is not a law."
Note dated January 3, 1983; (4) Exhibit ‘4’ — Promissory Note, dated Speaking through Mme. Justice Ameurfina M. Herrera, this Court
December 13, 1983; and (5) Exhibit ‘5’ — Real Estate Mortgage held:jgc:chanrobles.com.ph
contract dated July 1, 1982.
"It is now clear that from March 17, 1980, escalation clauses to be
"Exhibit ‘1’ states in its portion marked Exhibit ‘1-g-1’:chanrob1es valid should specifically provide: (1) that there can be an increase in
virtual 1aw library interest if increased by law or by the Monetary Board; and (2) in order
for such stipulation to be valid, it must include a provision for
‘9 .06 Other Conditions. The Borrowers hereby agree to be bound by reduction of the stipulated interest ‘in the event that the applicable
the rules and regulations of the Central Bank and the current and maximum rate of interest is reduced by law or by the Monetary
general policies of the Bank and those which the Bank may adopt in Board.’" p. 111, Rollo.).
the future, which may have relation to or in any way affect the Line,
which rules, regulations and policies are incorporated herein by In the present case, the PNB relied on its own Board Resolution No.
reference as if set forth herein in full. Promptly upon receipt of a 681 (Exh. 10), PNB Circular No. 40-79-84 (Exh. 13), and PNB
written request from the Bank, the Borrowers shall execute and Circular No. 40-129-84 (Exh. 15), but those resolution and circulars
deliver such documents and instruments, in form and substance are neither laws nor resolutions of the Monetary Board.
satisfactory to the Bank, in order to effectuate or otherwise comply
with such rules, regulations and policies.’ CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury
Law ceiling on interest rates —
84

". . . increases in interest rates are not subject to any ceiling prescribed
by the Usury Law."cralaw virtua1aw library

but it did not authorize the PNB, or any bank for that matter, to
unilaterally and successively increase the agreed interest rates from
18% to 48% within a span of four (4) months, in violation of PD. 116
which limits such changes to "once every twelve months."cralaw
virtua1aw library

Besides violating PD. 116, the unilateral action of the PNB in


increasing the interest rate on the private respondent’s loan, violated
the mutuality of contracts ordained in Article 1308 of the Civil
Code:jgc:chanrobles.com.ph

"ART. 1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of
them."cralaw virtua1aw library

In order that obligations arising from contracts may have the force of
law between the parties, there must be mutuality between the parties
based on their essential equality. A contract containing a condition
which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void (Garcia v.
Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the
P1.8 million loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there was none)
to increase the interest rate at will during the term of the loan, that
license would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have invested
the loan agreement with the character of a contract of adhesion, where
the parties do not bargain on equal footing, the weaker party’s (the
debtor) participation being reduced to the alternative "to take it or
leave it" (Qua v. Law Union & Rock Insurance Co., 95 Phil. 85). Such
a contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.

PNB’S successive increases of the interest rate on the private


respondent’s loan, over the latter’s protest, were arbitrary as they
violated an express provision of the Credit Agreement (Exh. 1)
Section 9.01 that its terms "may be amended only by an instrument in
writing signed by the party to be bound as burdened by such
amendment." The increases imposed by PNB also contravene Art.
1956 of the Civil Code which provides that "no interest shall be due
unless it has been expressly stipulated in writing."cralaw virtua1aw
library

The debtor herein never agreed in writing to pay the interest increases
fixed by the PNB beyond 24% per annum, hence, he is not bound to
pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a period
of four (4) months is excessive, as found by the Court of Appeals, is
indisputable.

WHEREFORE, finding no reversible error in the decision of the


Court of Appeals in CA-G.R. CV No. 09791, the Court resolved to
deny the petition for review for lack of merit, with costs against the
petitioner.

SO ORDERED.

Anda mungkin juga menyukai