THIRD DIVISION In an Order dated 31 May 1995 in SEC-EB No.

In an Order dated 31 May 1995 in SEC-EB No. 393, the SEC en banc nullified the 10 March 1994
Order of SICD in SEC Case No. 02-94-4678 granting a Writ of Preliminary Injunction in favor of
respondent. Likewise, in an Order dated 14 August 1995 in SEC-EB No. 403, the SEC en banc annulled the 4
MAKATI STOCK EXCHANGE, INC., MA. VIVIAN G.R. No. 138814 May 1994 Order of SICD in SEC Case No. 02-94-4678 denying petitioners Motion to Dismiss, and accordingly
YUCHENGCO, ADOLFO M. DUARTE, MYRON C. ordered the dismissal of respondents Petition before the SICD.
PAPA, NORBERTO C. NAZARENO, GEORGE
UY-TIOCO, ANTONIO A. LOPA, RAMON B. Present: Respondent filed a Petition for Certiorari with the Court of Appeals assailing the Orders of the
ARNAIZ, LUIS J.L. VIRATA, and ANTONIO SEC en banc dated 31 May 1995 and 14 August 1995 in SEC-EB No. 393 and SEC-EB No. 403,
GARCIA, JR. respectively. Respondents Petition before the appellate court was docketed as CA-G.R. SP No. 38455.
Petitioners, YNARES-SANTIAGO, J.,
Chairperson, On 11 February 1997, the Court of Appeals promulgated its Decision in CA-G.R. SP No. 38455,
AUSTRIA-MARTINEZ, granting respondents Petition for Certiorari, thus:
- versus - CHICO-NAZARIO,
NACHURA, and WHEREFORE, the petition in so far as it prays for annulment of the Orders
PERALTA, JJ. dated May 31, 1995 and August 14, 1995 in SEC-EB Case Nos. 393 and 403 is
MIGUEL V. CAMPOS, substituted by JULIA GRANTED. The said orders are hereby rendered null and void and set aside.
ORTIGAS VDA. DE CAMPOS,[1]
Respondent.
Petitioners filed a Motion for Reconsideration of the foregoing Decision but it was denied by the
Promulgated: Court of Appeals in a Resolution dated 18 May 1999.

April 16, 2009 Hence, the present Petition for Review raising the following arguments:
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
I.

THE SEC EN BANC DID NOT COMMIT GRAVE ABUSE OF DISCRETION

DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 seeking the reversal of the
Decision[2] dated 11 February 1997 and Resolution dated 18 May 1999 of the Court of Appeals in CA-G.R. SP
No. 38455.
The facts of the case are as follows:
SEC Case No. 02-94-4678 was instituted on 10 February 1994 by respondent Miguel V. Campos,
who filed with the Securities, Investigation and Clearing Department (SICD) of the Securities and Exchange
Commission (SEC), a Petition against herein petitioners Makati Stock Exchange, Inc. (MKSE) and MKSE
directors, Ma. Vivian Yuchengco, Adolfo M. Duarte, Myron C. Papa, Norberto C. Nazareno, George Uy-Tioco,
Antonio A, Lopa, Ramon B. Arnaiz, Luis J.L. Virata, and Antonio Garcia, Jr.Respondent, in said Petition,
sought: (1) the nullification of the Resolution dated 3 June 1993 of the MKSE Board of Directors, which
allegedly deprived him of his right to participate equally in the allocation of Initial Public Offerings (IPO) of
corporations registered with MKSE; (2) the delivery of the IPO shares he was allegedly deprived of, for which
he would pay IPO prices; and (3) the payment of P2 million as moral damages, P1 million as exemplary
damages, and P500,000.00 as attorneys fees and litigation expenses.
On 14 February 1994, the SICD issued an Order granting respondents prayer for the issuance of a
Temporary Restraining Order to enjoin petitioners from implementing or enforcing the 3 June 1993 Resolution
of the MKSE Board of Directors.
The SICD subsequently issued another Order on 10 March 1994 granting respondents application
for a Writ of Preliminary Injunction, to continuously enjoin, during the pendency of SEC Case No. 02-94-4678,
the implementation or enforcement of the MKSE Board Resolution in question. Petitioners assailed this SICD
Order dated 10 March 1994 in a Petition for Certiorari filed with the SEC en banc, docketed as SEC-EB No.
393.
On 11 March 1994, petitioners filed a Motion to Dismiss respondents Petition in SEC Case No. 02-
94-4678, based on the following grounds: (1) the Petition became moot due to the cancellation of the license
of MKSE; (2) the SICD had no jurisdiction over the Petition; and (3) the Petition failed to state a cause of
action.
AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT DISMISSED THE
PETITION FILED BY RESPONDENT BECAUSE ON ITS FACE, IT FAILED TO STATE
A CAUSE OF ACTION.
II.
THE GRANT OF THE IPO ALLOCATIONS IN FAVOR OF RESPONDENT WAS A
MERE ACCOMMODATION GIVEN TO HIM BY THE BOARD OF [DIRECTORS] OF
THE MAKATI STOCK EXCHANGE, INC.
III.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE SEC EN BANC
COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION WHEN IT MADE AN EXTENDED INQUIRY AND
PROCEEDED TO MAKE A DETERMINATION AS TO THE TRUTH OF
RESPONDENTS ALLEGATIONS IN HIS PETITION AND USED AS BASIS THE
EVIDENCE ADDUCED DURING THE HEARING ON THE APPLICATION FOR THE
WRIT OF PRELIMINARY INJUNCTION TO DETERMINE THE EXISTENCE OR
VALIDITY OF A STATED CAUSE OF ACTION.
IV.
IPO ALLOCATIONS GRANTED TO BROKERS ARE NOT TO BE BOUGHT BY THE
BROKERS FOR THEMSELVES BUT ARE TO BE DISTRIBUTED TO THE
INVESTING PUBLIC. HENCE, RESPONDENTS CLAIM FOR DAMAGES IS
ILLUSORY AND HIS PETITION A NUISANCE SUIT.[3]
On 18 September 2001, counsel for respondent manifested to this Court that his client died on 7
May 2001. In a Resolution dated 24 October 2001, the Court directed the substitution of respondent by his
surviving spouse, Julia Ortigas vda. de Campos.
Petitioners want this Court to affirm the dismissal by the SEC en banc of respondents Petition in
SEC Case No. 02-94-4678 for failure to state a cause of action. On the other hand, respondent insists on the
sufficiency of his Petition and seeks the continuation of the proceedings before the SICD.

The SICD denied petitioners Motion to Dismiss in an Order dated 4 May 1994. Petitioners again
challenged the 4 May 1994 Order of SICD before the SEC en bancthrough another Petition for Certiorari,
docketed as SEC-EB No. 403.
A cause of action is the act or omission by which a party violates a right of another.[4] A complaint
states a cause of action where it contains three essential elements of a cause of action, namely: (1) the legal
right of the plaintiff, (2) the correlative obligation of the defendant, and (3) the act or omission of the defendant
in violation of said legal right. If these elements are absent, the complaint becomes vulnerable to dismissal on
the ground of failure to state a cause of action.

If a defendant moves to dismiss the complaint on the ground of lack of cause of action, he is
regarded as having hypothetically admitted all the averments thereof. The test of sufficiency of the facts found
in a complaint as constituting a cause of action is whether or not admitting the facts alleged, the court can
render a valid judgment upon the same in accordance with the prayer thereof. The hypothetical admission
extends to the relevant and material facts well pleaded in the complaint and inferences fairly deducible
therefrom. Hence, if the allegations in the complaint furnish sufficient basis by which the complaint can be
maintained, the same should not be dismissed regardless of the defense that may be assessed by the
defendant.[5]
Given the foregoing, the issue of whether respondents Petition in SEC Case No. 02-94-4678
sufficiently states a cause of action may be alternatively stated as whether, hypothetically admitting to be true
the allegations in respondents Petition in SEC Case No. 02-94-4678, the SICD may render a valid judgment in
accordance with the prayer of said Petition.
A reading of the exact text of respondents Petition in SEC Case No. 02-94-4678 is, therefore,
unavoidable. Pertinent portions of the said Petition reads:
7. In recognition of petitioners invaluable services, the general membership
of respondent corporation [MKSE] passed a resolution sometime in 1989 amending its
Articles of Incorporation, to include the following provision therein:
ELEVENTH WHEREAS, Mr. Miguel Campos is the
only surviving incorporator of the Makati Stock Exchange, Inc.
who has maintained his membership;
WHEREAS, he has unselfishly served the Exchange
in various capacities, as governor from 1977 to the present and
as President from 1972 to 1976 and again as President from
1988 to the present;
WHEREAS, such dedicated service and leadership
which has contributed to the advancement and well being not
only of the Exchange and its members but also to the Securities
industry, needs to be recognized and appreciated;
WHEREAS, as such, the Board of Governors in its
meeting held on February 09, 1989 has correspondingly
adopted a resolution recognizing his valuable service to the
Exchange, reward the same, and preserve for posterity such
recognition by proposing a resolution to the membership body
which would make him as Chairman Emeritus for life and install
in the Exchange premises a commemorative bronze plaque in
his honor;
NOW, THEREFORE, for and in consideration of the
above premises, the position of the Chairman Emeritus to be
occupied by Mr. Miguel Campos during his lifetime and
irregardless of his continued membership in the Exchange with
the Privilege to attend all membership meetings as well as the
meetings of the Board of Governors of the Exchange, is hereby
created.
8. Hence, to this day, petitioner is not only an active member of the
respondent corporation, but its Chairman Emeritus as well.
9. Correspondingly, at all times material to this petition, as an active member
and Chairman Emeritus of respondent corporation, petitioner has always enjoyed the
right given to all the other members to participate equally in the Initial Public Offerings
(IPOs for brevity) of corporations.
10. IPOs are shares of corporations offered for sale to the public, prior to the
listing in the trading floor of the countrys two stock exchanges. Normally, Twenty Five
Percent (25%) of these shares are divided equally between the two stock exchanges
which in turn divide these equally among their members, who pay therefor at the offering
price.
11. However, on June 3, 1993, during a meeting of the Board of Directors of
respondent-corporation, individual respondents passed a resolution to stop giving
petitioner the IPOs he is entitled to, based on the ground that these shares were
allegedly benefiting Gerardo O. Lanuza, Jr., who these individual respondents wanted to
get even with, for having filed cases before the Securities and Exchange (SEC) for their
disqualification as member of the Board of Directors of respondent corporation.
12. Hence, from June 3, 1993 up to the present time, petitioner has been
deprived of his right to subscribe to the IPOs of corporations listing in the stock market
at their offering prices.
13. The collective act of the individual respondents in depriving petitioner of
his right to a share in the IPOs for the aforementioned reason, is unjust, dishonest and
done in bad faith, causing petitioner substantial financial damage.[6]
There is no question that the Petition in SEC Case No. 02-94-4678 asserts a right in favor of
respondent, particularly, respondents alleged right to subscribe to the IPOs of corporations listed in the stock
market at their offering prices; and stipulates the correlative obligation of petitioners to respect respondents
right, specifically, by continuing to allow respondent to subscribe to the IPOs of corporations listed in the stock
market at their offering prices.
However, the terms right and obligation in respondents Petition are not magic words that would
automatically lead to the conclusion that such Petition sufficiently states a cause of
action. Right and obligation are legal terms with specific legal meaning. A right is a claim or title to an interest
in anything whatsoever that is enforceable by law.[7] An obligation is defined in the Civil Code as a juridical
necessity to give, to do or not to do.[8] For every right enjoyed by any person, there is a corresponding
obligation on the part of another person to respect such right. Thus, Justice J.B.L. Reyes offers[9] the definition
given by Arias Ramos as a more complete definition:
An obligation is a juridical relation whereby a person (called the creditor)
may demand from another (called the debtor) the observance of a determinative
conduct (the giving, doing or not doing), and in case of breach, may demand
satisfaction from the assets of the latter.
The Civil Code enumerates the sources of obligations:
Art. 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.
Therefore, an obligation imposed on a person, and the corresponding right granted to another,
must be rooted in at least one of these five sources. The mere assertion of a right and claim of an obligation in
an initiatory pleading, whether a Complaint or Petition, without identifying the basis or source thereof, is
merely a conclusion of fact and law.A pleading should state the ultimate facts essential to the rights of action
or defense asserted, as distinguished from mere conclusions of fact or conclusions of law.[10] Thus, a
Complaint or Petition filed by a person claiming a right to the Office of the President of this Republic, but
without stating the source of his purported right, cannot be said to have sufficiently stated a cause of
action. Also, a person claiming to be the owner of a parcel of land cannot merely state that he has a right to
the ownership thereof, but must likewise assert in the Complaint either a mode of acquisition of ownership or
at least a certificate of title in his name.
In the case at bar, although the Petition in SEC Case No. 02-94-4678 does allege respondents
right to subscribe to the IPOs of corporations listed in the stock market at their offering prices, and petitioners
obligation to continue respecting and observing such right, the Petition utterly failed to lay down the source or
basis of respondents right and/or petitioners obligation.
Respondent merely quoted in his Petition the MKSE Board Resolution, passed sometime in 1989,
granting him the position of Chairman Emeritus of MKSE for life.However, there is nothing in the said Petition
from which the Court can deduce that respondent, by virtue of his position as Chairman Emeritus of MKSE,
was granted by law, contract, or any other legal source, the right to subscribe to the IPOs of corporations
listed in the stock market at their offering prices.
A meticulous review of the Petition reveals that the allocation of IPO shares was merely alleged to
have been done in accord with a practice normally observed by the members of the stock exchange, to wit:

IPOs are shares of corporations offered for sale to the public, prior to their listing in the
trading floor of the countrys two stock exchanges. Normally, Twenty-Five Percent
(25%) of these shares are divided equally between the two stock exchanges
which in turn divide these equally among their members, who pay therefor at the
offering price.[11] (Emphasis supplied)
A practice or custom is, as a general rule, not a source of a legally demandable or enforceable
right.[12] Indeed, in labor cases, benefits which were voluntarily given by the employer, and which have ripened
into company practice, are considered as rights that cannot be diminished by the employer. [13] Nevertheless,
even in such cases, the source of the employees right is not custom, but ultimately, the law, since Article 100
of the Labor Code explicitly prohibits elimination or diminution of benefits.
There is no such law in this case that converts the practice of allocating IPO shares to MKSE
members, for subscription at their offering prices, into an enforceable or demandable right. Thus, even if it is
hypothetically admitted that normally, twenty five percent (25%) of the IPOs are divided equally between the
two stock exchanges -- which, in turn, divide their respective allocation equally among their members,
including the Chairman Emeritus, who pay for IPO shares at the offering price -- the Court cannot grant
respondents prayer for damages which allegedly resulted from the MKSE Board Resolution dated 3 June
1993 deviating from said practice by no longer allocating any shares to respondent.
Accordingly, the instant Petition should be granted. The Petition in SEC Case No. 02-94-
4678 should be dismissed for failure to state a cause of action. It does not matter that the SEC en banc, in its
Order dated 14 August 1995 in SEC-EB No. 403, overstepped its bounds by not limiting itself to the issue of
whether respondents Petition before the SICD sufficiently stated a cause of action. The SEC en banc may
have been mistaken in considering extraneous evidence in granting petitioners Motion to Dismiss, but its
discussion thereof are merely superfluous and obiter dictum. In the main, the SEC en banc did correctly
dismiss the Petition in SEC Case No. 02-94-4678 for its failure to state the basis for respondents alleged right,
to wit:
Private respondent Campos has failed to establish the basis or authority for
his alleged right to participate equally in the IPO allocations of the Exchange. He cited
paragraph 11 of the amended articles of incorporation of the Exchange in support of
his position but a careful reading of the said provision shows nothing therein that would
bear out his claim. The provision merely created the position of chairman emeritus of
the Exchange but it mentioned nothing about conferring upon the occupant thereof the
right to receive IPO allocations.[14]
With the dismissal of respondents Petition in SEC Case No. 02-94-4678, there is no more need for
this Court to resolve the propriety of the issuance by SCID of a writ of preliminary injunction in said case.
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 11 February
1997 and its Resolution dated 18 May 1999 in CA-G.R. SP No. 38455 are REVERSED and SET ASIDE. The
Orders dated 31 May 1995 and 14 August 1995 of the Securities and Exchange Commission en banc in SEC-
EB Case No. 393 and No. 403, respectively, are hereby reinstated. No pronouncement as to costs.
SO ORDERED
THIRD DIVISION
G.R. No. 105774 April 25, 2002
GREAT ASIAN SALES CENTER CORPORATION and TAN CHONG LIN, petitioners,
vs.
THE COURT OF APPEALS and BANCASIA FINANCE AND INVESTMENT CORPORATION, respondents.
CARPIO, J.:
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Revised Rules on Civil Procedure
assailing the June 9, 1992 Decision1 of the Court of Appeals2 in CA-G.R. CV No. 20167. The Court of Appeals
affirmed the January 26, 1988 Decision3 of the Regional Trial Court of Manila, Branch 52,4 ordering petitioners
Great Asian Sales Center Corporation ("Great Asian" for brevity) and Tan Chong Lin to pay, solidarily,
respondent Bancasia Finance and Investment Corporation ("Bancasia" for brevity) the amount of
P1,042,005.00. The Court of Appeals affirmed the trial court’s award of interest and costs of suit but deleted
the award of attorney’s fees.
The Facts
Great Asian is engaged in the business of buying and selling general merchandise, in particular household
appliances. On March 17, 1981, the board of directors of Great Asian approved a resolution authorizing its
Treasurer and General Manager, Arsenio Lim Piat, Jr. ("Arsenio" for brevity) to secure a loan from Bancasia in
an amount not to exceed P1.0 million. The board resolution also authorized Arsenio to sign all papers,
documents or promissory notes necessary to secure the loan. On February 10, 1982, the board of directors of
Great Asian approved a second resolution authorizing Great Asian to secure a discounting line with Bancasia
in an amount not exceeding P2.0 million. The second board resolution also designated Arsenio as the
authorized signatory to sign all instruments, documents and checks necessary to secure the discounting line.
On March 4, 1981, Tan Chong Lin signed a Surety Agreement in favor of Bancasia to guarantee, solidarily,
the debts of Great Asian to Bancasia. On January 29, 1982, Tan Chong Lin signed a Comprehensive and
Continuing Surety Agreement in favor of Bancasia to guarantee, solidarily, the debts of Great Asian to
Bancasia. Thus, Tan Chong Lin signed two surety agreements ("Surety Agreements" for brevity) in favor of
Bancasia.
Great Asian, through its Treasurer and General Manager Arsenio, signed four (4) Deeds of Assignment of
Receivables ("Deeds of Assignment" for brevity), assigning to Bancasia fifteen (15) postdated checks. Nine of
the checks were payable to Great Asian, three were payable to "New Asian Emp.", and the last three were
payable to cash. Various customers of Great Asian issued these postdated checks in payment for appliances
and other merchandise.
Great Asian and Bancasia signed the first Deed of Assignment on January 12, 1982 covering four postdated
checks with a total face value of P244,225.82, with maturity dates not later than March 17, 1982. Of these four
postdated checks, two were dishonored. Great Asian and Bancasia signed the second Deed of Assignment
also on January 12, 1982 covering four postdated checks with a total face value of P312,819.00, with maturity
dates not later than April 1, 1982. All these four checks were dishonored. Great Asian and Bancasia signed
the third Deed of Assignment on February 11, 1982 covering eight postdated checks with a total face value of
P344,475.00, with maturity dates not later than April 30, 1982. All these eight checks were dishonored. Great
Asian and Bancasia signed the fourth Deed of Assignment on March 5, 1982 covering one postdated check
with a face value of P200,000.00, with maturity date on March 18, 1982. This last check was also dishonored.
Great Asian assigned the postdated checks to Bancasia at a discount rate of less than 24% of the face value
of the checks.
Arsenio endorsed all the fifteen dishonored checks by signing his name at the back of the checks. Eight of the
dishonored checks bore the endorsement of Arsenio below the stamped name of "Great Asian Sales Center",
while the rest of the dishonored checks just bore the signature of Arsenio. The drawee banks dishonored the
fifteen checks on maturity when deposited for collection by Bancasia, with any of the following as reason for
the dishonor: "account closed", "payment stopped", "account under garnishment", and "insufficiency of funds".
The total amount of the fifteen dishonored checks is P1,042,005.00. Below is a table of the fifteen dishonored
checks:
After the drawee bank dishonored Check No. 097480 dated March 16, 1982, Bancasia referred the matter to
its lawyer, Atty. Eladia Reyes, who sent by registered mail to Tan Chong Lin a letter dated March 18, 1982,
notifying him of the dishonor and demanding payment from him. Subsequently, Bancasia sent by personal
delivery a letter dated June 16, 1982 to Tan Chong Lin, notifying him of the dishonor of the fifteen checks and
demanding payment from him. Neither Great Asian nor Tan Chong Lin paid Bancasia the dishonored checks.
On May 21, 1982, Great Asian filed with the then Court of First Instance of Manila a petition for insolvency,
verified under oath by its Corporate Secretary, Mario Tan. Attached to the verified petition was a "Schedule
and Inventory of Liabilities and Creditors of Great Asian Sales Center Corporation," listing Bancasia as one of
the creditors of Great Asian in the amount of P1,243,632.00.
On June 23, 1982, Bancasia filed a complaint for collection of a sum of money against Great Asian and Tan
Chong Lin. Bancasia impleaded Tan Chong Lin because of the Surety Agreements he signed in favor of
Bancasia. In its answer, Great Asian denied the material allegations of the complaint claiming it was
unfounded, malicious, baseless, and unlawfully instituted since there was already a pending insolvency
proceedings, although Great Asian subsequently withdrew its petition for voluntary insolvency. Great Asian
further raised the alleged lack of authority of Arsenio to sign the Deeds of Assignment as well as the absence
of consideration and consent of all the parties to the Surety Agreements signed by Tan Chong Lin.
On appeal, the Court of Appeals sustained the decision of the lower court, deleting only the award of
attorney’s fees, as follows:
"As against appellants’ bare denial of it, the Court is more inclined to accept the appellee’s version,
to the effect that the subject deeds of assignment are but individual transactions which -- being
collectively evidentiary of the loan accommodation and/or credit line it granted the appellant
corporation -- should not be taken singly and distinct therefrom. In addition to its plausibility, the
proposition is, more importantly, adequately backed by the documentary evidence on record.
Aside from the aforesaid Deeds of Assignment (Exhs. "A", "D", "I", and "R") and the Board
Resolutions of the appellant corporation’s Board of Directors (Exhs. "T", "U" and "V"), the appellee
-- consistent with its theory -- interposed the Surety Agreements the appellant Tan Chong Lin
executed (Exhs. "W" and "X"), as well as the demand letters it served upon the latter as surety
(Exhs. "Y" and "Z"). It bears emphasis that the second Resolution of the appellant corporation’s
Board of Directors (Exh. "V") even closely coincides with the execution of the February 11, 1982
and March 5, 1982 Deeds of Assignment (Exhs. "I" and "R"). Were the appellants’ posturings true,
it seems rather strange that the appellant Tan Chong Lin did not even protest or, at least, make
known to the appellee what he -- together with the appellant corporation -- represented to be a
corporate larceny to which all of them supposedly fell prey. In the petition for voluntary insolvency
it filed, the appellant corporation, instead, indirectly acknowledged its indebtedness in terms of

Ruling of the Trial Court Drawee Bank Check No. Amount Maturity Date

1st Deed
The trial court rendered its decision on January 26, 1988 with the following findings and conclusions:
Solid Bank C-A097480 P137,500.00 March 16, 1982

"From the foregoing facts and circumstances, the Court finds that the plaintiff has established its Pacific Banking Corp. 23950 P47,211.00 March 17, 1982
causes of action against the defendants. The Board Resolution (Exh. "T"), dated March 17, 1981,
2nd Deed
authorizing Arsenio Lim Piat, Jr., general manager and treasurer of the defendant Great Asian to
apply and negotiate for a loan accommodation or credit line with the plaintiff Bancasia in an Metrobank 030925 P68,722.00 March 19, 1982
amount not exceeding One Million Pesos (P1,000,000.00), and the other Board Resolution
approved on February 10, 1982, authorizing Arsenio Lim Piat, Jr., to obtain for defendant Asian 030926 P45,230.00 March 19, 1982
Center a discounting line with Bancasia at prevailing discounting rates in an amount not to exceed
Two Million Pesos (P2,000,000.00), both of which were intended to secure money from the plaintiff Solidbank C-A097478 P140,000.00 March 23, 1982
financing firm to finance the business operations of defendant Great Asian, and pursuant to which
Arsenio Lim Piat, Jr. was able to have the aforementioned fifteen (15) checks totaling Pacific Banking Corp. CC 769910 P58,867.00 April 1, 1982
P1,042,005.00 discounted with the plaintiff, which transactions were obviously known by the
beneficiary thereof, defendant Great Asian, as in fact, in its aforementioned Schedule and 3rd Deed
Inventory of Liabilities and Creditors (Exh. DD, DD-1) attached to its Verified Petition for Phil. Trust Company 060835 P21,228.00 April 21, 1982
Insolvency, dated May 12, 1982 (pp. 50-56), the defendant Great Asian admitted an existing
liability to the plaintiff, in the amount of P1,243,632.00, secured by it, by way of ‘financing 060836 P22,187.00 April 28, 1982
accommodation,’ from the said financing institution Bancasia Finance and Investment Corporation,
plaintiff herein, sufficiently establish the liability of the defendant Great Asian to the plaintiff for the Allied Banking Corp. 11251624 P41,773.00 April 22, 1982
amount of P1,042,005.00 sought to be recovered by the latter in this case.5
11251625 P38,592.00 April 29, 1982

xxx Pacific Banking Corp. 237984 P37,886.00 April 23, 1982

237988 P47,385.00 April 28, 1982

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the two (2)
defendants ordering the latter, jointly and severally, to pay the former: 237985 P46,748.00 April 30, 1982

Security Bank & Trust Co. 22061 P88,676.00 April 30, 1982
(a) The amount of P1,042,005.00, plus interest thereon at the legal rate from the filing of the
complaint until the same is fully paid; 4th Deed

Pacific Banking Corp. 860178 P200,000.00 March 18, 1982

(b) Attorney’s fees equivalent to twenty per cent (20%) of the total amount due; and
financing accommodations to the appellee, in an amount which, while not exactly matching the
sum herein sought to be collected, approximates the same (Exhs. "CC", "DD" and "DD-1").7
(c) The costs of suit.
xxx
SO ORDERED."6
The appellants contend that the foregoing warranties enlarged or increased the surety’s risk, such
Ruling of the Court of Appeals that appellant Tan Chong Lin should be released from his liabilities (pp. 37-44, Appellant’s Brief).
Without saying more, the appellants’ position is, however, soundly debunked by the undertaking
 expressed in the Comprehensive and Continuing Surety Agreements (Exhs. "W" and "X"), to the The issues to be resolved in this petition can be summarized into three:
effect that the "xxx surety/ies, jointly and severally among themselves and likewise with the
principal, hereby agree/s and bind/s himself to pay at maturity all the notes, drafts, bills of
exchange, overdrafts and other obligations which the principal may now or may hereafter owe the 1. WHETHER ARSENIO HAD AUTHORITY TO EXECUTE THE DEEDS OF ASSIGNMENT AND
creditor xxx." With the possible exception of the fixed ceiling for the amount of loan obtainable, the THUS BIND GREAT ASIAN;
surety undertaking in the case at bar is so comprehensive as to contemplate each and every
condition, term or warranty which the principal parties may have or may be minded to agree on.
2. WHETHER GREAT ASIAN IS LIABLE TO BANCASIA UNDER THE DEEDS OF ASSIGNMENT
Having affixed his signature thereto, the appellant Tan Chong Lin is expected to have, at least,
FOR BREACH OF CONTRACT PURSUANT TO THE CIVIL CODE, INDEPENDENT OF THE
read and understood the same.
NEGOTIABLE INSTRUMENTS LAW;

xxx
3. WHETHER TAN CHONG LIN IS LIABLE TO GREAT ASIAN UNDER THE SURETY
AGREEMENTS.
With the foregoing disquisition, the Court sees little or no reason to go into the appellants’
remaining assignments of error, save the matter of attorney’s fees. For want of a statement of the
The Court’s Ruling
rationale therefore in the body of the challenged decision, the trial court’s award of attorney’s fees
should be deleted and disallowed (Abrogar vs. Intermediate Appellate Court, 157 SCRA 57).
The petition is bereft of merit.
WHEREFORE, the decision appealed from is MODIFIED, to delete the trial court’s award of
attorney’s fees. The rest is AFFIRMED in toto. First Issue: Authority of Arsenio to Sign the Deeds of Assignment

SO ORDERED."8 Great Asian asserts that Arsenio signed the Deeds of Assignment and indorsed the checks in his personal
capacity. The primordial question that must be resolved is whether Great Asian authorized Arsenio to sign the
Deeds of Assignment. If Great Asian so authorized Arsenio, then Great Asian is bound by the Deeds of
The Issues
Assignment and must honor its terms.

The petition is anchored on the following assigned errors:

"1. The respondent Court erred in not holding that the proper parties against whom this action for
collection should be brought are the drawers and indorser of the checks in question, being the real
parties in interest, and not the herein petitioners.
2. The respondent Court erred in not holding that the petitioner-corporation is discharged from
liability for failure of the private respondent to comply with the provisions of the Negotiable
Instruments Law on the dishonor of the checks.
3. The respondent Court erred in its appreciation and interpretation of the effect and legal
consequences of the signing of the deeds of assignment and the subsequent indorsement of the
checks by Arsenio Lim Piat, Jr. in his individual and personal capacity and without stating or
indicating the name of his supposed principal.
4. The respondent Court erred in holding that the assignment of the checks is a loan
accommodation or credit line accorded by the private respondent to petitioner-corporation, and not
a purchase and sale thereof.
The Corporation Code of the Philippines vests in the board of directors the exercise of the corporate powers of
the corporation, save in those instances where the Code requires stockholders’ approval for certain specific
acts. Section 23 of the Code provides:
"SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees x x x."
In the ordinary course of business, a corporation can borrow funds or dispose of assets of the corporation only
on authority of the board of directors. The board of directors normally designates one or more corporate
officers to sign loan documents or deeds of assignment for the corporation.
To secure a credit accommodation from Bancasia, the board of directors of Great Asian adopted two board
resolutions on different dates, the first on March 17, 1981, and the second on February 10, 1982. These two
board resolutions, as certified under oath by Great Asian’s Corporate Secretary Mario K. Tan, state:
First Board Resolution

5. The respondent Court erred in not holding that there was a material alteration of the risk
"RESOLVED, that the Treasurer of the corporation, Mr. Arsenio Lim Piat, Jr., be authorized as he
assumed by the petitioner-surety under his surety agreement by the terms, conditions, warranties
is authorized to apply for and negotiate for a loan accommodation or credit line in the amount not
and obligations assumed by the assignor Arsenio Lim Piat, Jr. under the deeds of assignment or
to exceed ONE MILLION PESOS (P1,000,000.00), with Bancasia Finance and Investment
receivables.
Corporation, and likewise to sign any and all papers, documents, and/or promissory notes in
connection with said loan accommodation or credit line, including the power to mortgage such
6. The respondent Court erred in holding that the petitioner-corporation impliedly admitted its properties of the corporation as may be needed to effectuate the same."10 (Emphasis supplied)
liability to private respondent when the former included the latter as one of its creditors in its
petition for voluntary insolvency, although no claim was filed and proved by the private respondent
Second Board Resolution
in the insolvency court.

"RESOLVED that Great Asian Sales Center Corp. obtain a discounting line with BANCASIA
7. The respondent Court erred in holding the petitioners liable to private respondent on the
FINANCE & INVESTMENT CORPORATION, at prevailing discounting rates, in an amount not to
transactions in question."9
exceed** TWO MILLION PESOS ONLY (P2,000,000),** Philippine Currency.
 RESOLVED FURTHER, that the corporation secure such other forms of credit lines with
BANCASIA FINANCE & INVESTMENT CORPORATION in an amount not to exceed** TWO
MILLION PESOS ONLY (P2,000,000.00),** PESOS, under such terms and conditions as the
signatories may deem fit and proper.
RESOLVED FURTHER, that the following persons be authorized individually, jointly or collectively
to sign, execute and deliver any and all instruments, documents, checks, sureties, etc. necessary
or incidental to secure any of the foregoing obligation:
(signed)
Specimen Signature
1. ARSENIO LIM PIAT, JR.
2. _______________________
3. _______________________
4. _______________________
PROVIDED FINALLY that this authority shall be valid, binding and effective until revoked by the
Board of Directors in the manner prescribed by law, and that BANCASIA FINANCE &
INVESTMENT CORPORATION shall not be bound by any such revocation until such time as it is
noticed in writing of such revocation."11(Emphasis supplied)
The first board resolution expressly authorizes Arsenio, as Treasurer of Great Asian, to apply for a "loan
accommodation or credit line" with Bancasia for not more than P1.0 million. Also, the first resolution explicitly
authorizes Arsenio to sign any document, paper or promissory note, including mortgage deeds over properties
of Great Asian, to secure the loan or credit line from Bancasia.
The second board resolution expressly authorizes Great Asian to secure a "discounting line" from Bancasia for
not more than P2.0 million. The second board resolution also expressly empowers Arsenio, as the authorized
signatory of Great Asian, "to sign, execute and deliver any and all documents, checks x x x necessary or
incidental to secure" the discounting line. The second board resolution specifically authorizes Arsenio to
secure the discounting line "under such terms and conditions as (he) x x x may deem fit and proper."
As plain as daylight, the two board resolutions clearly authorize Great Asian to secure a loan or discounting
linefrom Bancasia. The two board resolutions also categorically designate Arsenio as the authorized signatory
to sign and deliver all the implementing documents, including checks, for Great Asian. There is no iota of
doubt whatsoever about the purpose of the two board resolutions, and about the authority of Arsenio to act
and sign for Great Asian. The second board resolution even gave Arsenio full authority to agree with Bancasia
on the terms and conditions of the discounting line. Great Asian adopted the correct and proper board
resolutions to secure a loan or discounting line from Bancasia, and Bancasia had a right to rely on the two
board resolutions of Great Asian. Significantly, the two board resolutions specifically refer to Bancasia as the
financing institution from whom Great Asian will secure the loan accommodation or discounting line.
Armed with the two board resolutions, Arsenio signed the Deeds of Assignment selling, and endorsing, the
fifteen checks of Great Asian to Bancasia. On the face of the Deeds of Assignment, the contracting parties are
indisputably Great Asian and Bancasia as the names of these entities are expressly mentioned therein as the
assignor and assignee, respectively. Great Asian claims that Arsenio signed the Deeds of Assignment in his
personal capacity because Arsenio signed above his printed name, below which was the word "Assignor",
thereby making Arsenio the assignor. Great Asian conveniently omits to state that the first paragraph of the
Deeds expressly contains the following words: "the ASSIGNOR, Great Asian Sales Center, a domestic
corporation x x x herein represented by its Treasurer Arsenio Lim Piat, Jr." The assignor is undoubtedly Great
Asian, represented by its Treasurer, Arsenio. The only issue to determine is whether the Deeds of Assignment
are indeed the transactions the board of directors of Great Asian authorized Arsenio to sign under the two
board resolutions.
Under the Deeds of Assignment, Great Asian sold fifteen postdated checks at a discount, over three months,
to Bancasia. The Deeds of Assignment uniformly state that Great Asian, –
"x x x for valuable consideration received, does hereby SELL, TRANSFER, CONVEY, and
ASSIGN, unto the ASSIGNEE, BANCASIA FINANCE & INVESTMENT CORP., a domestic
corporation x x x, the following ACCOUNTS RECEIVABLES due and payable to it, having an
aggregate face value of x x x."
The Deeds of Assignment enabled Great Asian to generate instant cash from its fifteen checks, which were
still not due and demandable then. In short, instead of waiting for the maturity dates of the fifteen postdated
checks, Great Asian sold the checks to Bancasia at less than the total face value of the checks. In exchange
for receiving an amount less than the face value of the checks, Great Asian obtained immediately much
needed cash. Over three months, Great Asian entered into four transactions of this nature with Bancasia,
showing that Great Asian availed of a discounting line with Bancasia.
In the financing industry, the term "discounting line" means a credit facility with a financing company or bank,
which allows a business entity to sell, on a continuing basis, its accounts receivable at a discount.12 The term
"discount" means the sale of a receivable at less than its face value. The purpose of a discounting line is to
enable a business entity to generate instant cash out of its receivables which are still to mature at future dates.
The financing company or bank which buys the receivables makes its profit out of the difference between the
face value of the receivable and the discounted price. Thus, Section 3 (a) of the Financing Company Act of
1998 provides:
"Financing companies" are corporations x x x primarily organized for the purpose of extending
credit facilities to consumers and to industrial, commercial or agricultural enterprises by
discounting or factoring commercial papers or accounts receivable, or by buying and
selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by financial
leasing of movable as well as immovable property." (Emphasis supplied)
This definition of "financing companies" is substantially the same definition as in the old Financing Company
Act (R.A. No. 5980).13
Moreover, Section 1 (h) of the New Rules and Regulations adopted by the Securities and Exchange
Commission to implement the Financing Company Act of 1998 states:
"Discounting" is a type of receivables financing whereby evidences of indebtedness of a third party, such as
installment contracts, promissory notes and similar instruments, are purchased by, or assigned to, a financing
company in an amount or for a consideration less than their face value." (Emphasis supplied)
Likewise, this definition of "discounting" is an exact reproduction of the definition of "discounting" in the
implementing rules of the old Finance Company Act.
Clearly, the discounting arrangements entered into by Arsenio under the Deeds of Assignment were the very
transactions envisioned in the two board resolutions of Great Asian to raise funds for its business. Arsenio
acted completely within the limits of his authority under the two board resolutions. Arsenio did exactly what the
board of directors of Great Asian directed and authorized him to do.
Arsenio had all the proper and necessary authority from the board of directors of Great Asian to sign the
Deeds of Assignment and to endorse the fifteen postdated checks. Arsenio signed the Deeds of Assignment
as agent and authorized signatory of Great Asian under an authority expressly granted by its board of
directors. The signature of Arsenio on the Deeds of Assignment is effectively also the signature of the board of
directors of Great Asian, binding on the board of directors and on Great Asian itself. Evidently, Great Asian
shows its bad faith in disowning the Deeds of Assignment signed by its own Treasurer, after receiving
valuable consideration for the checks assigned under the Deeds.
Second Issue: Breach of Contract by Great Asian
Bancasia’s complaint against Great Asian is founded on the latter’s breach of contract under the Deeds of
Assignment. The Deeds of Assignment uniformly stipulate14 as follows:
"If for any reason the receivables or any part thereof cannot be paid by the obligor/s, the
ASSIGNOR unconditionally and irrevocably agrees to pay the same, assuming the liability to pay,
by way of penalty three per cent (3%) of the total amount unpaid, for the period of delay until the
same is fully paid.
In case of any litigation which the ASSIGNEE may institute to enforce the terms of this agreement,
the ASSIGNOR shall be liable for all the costs, plus attorney’s fees equivalent to twenty-five (25%)
per cent of the total amount due. Further thereto, the ASSIGNOR agrees that any and all actions
which may be instituted relative hereto shall be filed before the proper courts of the City of Manila,
all other appropriate venues being hereby waived.
The last Deed of Assignment15 contains the following added stipulation:
"xxx Likewise, it is hereby understood that the warranties which the ASSIGNOR hereby made are
deemed part of the consideration for this transaction, such that any violation of any one, some, or
all of said warranties shall be deemed as deliberate misrepresentation on the part of the
ASSIGNOR. In such event, the monetary obligation herein conveyed unto the ASSIGNEE shall be
conclusively deemed defaulted, giving rise to the immediate responsibility on the part of the
ASSIGNOR to make good said obligation, and making the ASSIGNOR liable to pay the penalty
stipulated hereinabove as if the original obligor/s of the receivables actually defaulted. xxx"
Obviously, there is one vital suspensive condition in the Deeds of Assignment. That is, in case the drawers fail
to pay the checks on maturity, Great Asian obligated itself to pay Bancasia the full face value of the
dishonored checks, including penalty and attorney’s fees. The failure of the drawers to pay the checks is a
suspensive condition,16 the happening of which gives rise to Bancasia’s right to demand payment from Great
Asian. This conditional obligation of Great Asian arises from its written contracts with Bancasia as embodied in
the Deeds of Assignment. Article 1157 of the Civil Code provides that -
"Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts."
By express provision in the Deeds of Assignment, Great Asian unconditionally obligated itself to pay Bancasia
the full value of the dishonored checks. In short, Great Asian sold the postdated checks on with recourse basis
against itself. This is an obligation that Great Asian is bound to faithfully comply because it has the force of law
as between Great Asian and Bancasia. Article 1159 of the Civil Code further provides that -
"Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith."
Great Asian and Bancasia agreed on this specific with recourse stipulation, despite the fact that the
receivables were negotiable instruments with the endorsement of Arsenio. The contracting parties had the
right to adopt the with recourse stipulation which is separate and distinct from the warranties of an endorser
under the Negotiable Instruments Law. Article 1306 of the Civil Code provides that –
"The contracting parties may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public order,
or public policy."
The explicit with recourse stipulation against Great Asian effectively enlarges, by agreement of the parties, the
liability of Great Asian beyond that of a mere endorser of a negotiable instrument. Thus, whether or not
Bancasia gives notice of dishonor to Great Asian, the latter remains liable to Bancasia because of the with
recourse stipulation which is independent of the warranties of an endorser under the Negotiable Instruments
Law.
There is nothing in the Negotiable Instruments Law or in the Financing Company Act (old or new), that
prohibits Great Asian and Bancasia parties from adopting the with recourse stipulation uniformly found in the
Deeds of Assignment. Instead of being negotiated, a negotiable instrument may be assigned.17 Assignment of
a negotiable instrument is actually the principal mode of conveying accounts receivable under the Financing
Company Act. Since in discounting of receivables the assignee is subrogated as creditor of the receivable, the
endorsement of the negotiable instrument becomes necessary to enable the assignee to collect from the
drawer. This is particularly true with checks because collecting banks will not accept checks unless endorsed
by the payee. The purpose of the endorsement is merely to facilitate collection of the proceeds of the checks.
The purpose of the endorsement is not to make the assignee finance company a holder in due course
because policy considerations militate against according finance companies the rights of a holder in due
course.18 Otherwise, consumers who purchase appliances on installment, giving their promissory notes or
checks to the seller, will have no defense against the finance company should the appliances later turn out to
be defective. Thus, the endorsement does not operate to make the finance company a holder in due course.
For its own protection, therefore, the finance company usually requires the assignor, in a separate and distinct
contract, to pay the finance company in the event of dishonor of the notes or checks.
As endorsee of Great Asian, Bancasia had the option to proceed against Great Asian under the Negotiable
Instruments Law. Had it so proceeded, the Negotiable Instruments Law would have governed Bancasia’s
cause of action. Bancasia, however, did not choose this route. Instead, Bancasia decided to sue Great Asian
for breach of contract under the Civil Code, a right that Bancasia had under the express with
recourse stipulation in the Deeds of Assignment.
The exercise by Bancasia of its option to sue for breach of contract under the Civil Code will not leave Great
Asian holding an empty bag. Great Asian, after paying Bancasia, is subrogated back as creditor of the
receivables. Great Asian can then proceed against the drawers who issued the checks. Even if Bancasia
failed to give timely notice of dishonor, still there would be no prejudice whatever to Great Asian. Under the
Negotiable Instruments Law, notice of dishonor is not required if the drawer has no right to expect or require
the bank to honor the check, or if the drawer has countermanded payment.19 In the instant case, all the checks
were dishonored for any of the following reasons: "account closed", "account under garnishment", insufficiency
of funds", or "payment stopped". In the first three instances, the drawers had no right to expect or require the
bank to honor the checks, and in the last instance, the drawers had countermanded payment.
Moreover, under common law, delay in notice of dishonor, where such notice is required, discharges the
drawer only to the extent of the loss caused by the delay.20 This rule finds application in this jurisdiction
pursuant to Section 196 of the Negotiable Instruments Law which states, "Any case not provided for in this Act
shall be governed by the provisions of existing legislation, or in default thereof, by the rules of the Law
Merchant." Under Section 186 of the Negotiable Instruments Law, delay in the presentment of checks
discharges the drawer. However, Section 186 refers only to delay in presentment of checks but is silent on
delay in giving notice of dishonor. Consequently, the common law or Law Merchant can supply this gap in
accordance with Section 196 of the Negotiable Instruments Law.
One other issue raised by Great Asian, that of lack of consideration for the Deeds of Assignment, is
completely unsubstantiated. The Deeds of Assignment uniformly provide that the fifteen postdated checks
were assigned to Bancasia "for valuable consideration." Moreover, Article 1354 of the Civil Code states that,
"Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor
proves the contrary." The record is devoid of any showing on the part of Great Asian rebutting this
presumption. On the other hand, Bancasia’s Loan Section Manager, Cynthia Maclan, testified that Bancasia
paid Great Asian a consideration at the discount rate of less than 24% of the face value of the postdated
checks.21 Moreover, in its verified petition for voluntary insolvency, Great Asian admitted its debt to Bancasia
when it listed Bancasia as one of its creditors, an extra-judicial admission that Bancasia proved when it
formally offered in evidence the verified petition for insolvency.22 The Insolvency Law requires the petitioner to
submit a schedule of debts that must "contain a full and true statement of all his debts and liabilities." 23 The
Insolvency Law even requires the petitioner to state in his verification that the schedule of debts contains "a
full, correct and true discovery of all my debts and liabilities x x x."24 Great Asian cannot now claim that the
listing of Bancasia as a creditor was not an admission of its debt to Bancasia but merely an acknowledgment
that Bancasia had sent a demand letter to Great Asian.
Great Asian, moreover, claims that the assignment of the checks is not a loan accommodation but a sale of
the checks. With the sale, ownership of the checks passed to Bancasia, which must now, according to Great
Asian, sue the drawers and indorser of the check who are the parties primarily liable on the checks. Great
Asian forgets that under the Deeds of Assignment, Great Asian expressly undertook to pay the full value of the
checks in case of dishonor. Again, we reiterate that this obligation of Great Asian is separate and distinct from
its warranties as indorser under the Negotiable Instruments Law.
Great Asian is, however, correct in saying that the assignment of the checks is a sale, or more properly a
discounting, of the checks and not a loan accommodation. However, it is precisely because the transaction is
a sale or a discounting of receivables, embodied in separate Deeds of Assignment, that the relevant
provisions of the Civil Code are applicable and not the Negotiable Instruments Law.
At any rate, there is indeed a fine distinction between a discounting line and a loan accommodation. If the
accounts receivable, like postdated checks, are sold for a consideration less than their face value, the
transaction is one of discounting, and is subject to the provisions of the Financing Company Act. The assignee
is immediately subrogated as creditor of the accounts receivable. However, if the accounts receivable are
merely used as collateral for the loan, the transaction is only a simple loan, and the lender is not subrogated
as creditor until there is a default and the collateral is foreclosed.
In summary, Great Asian’s four contracts assigning its fifteen postdated checks to Bancasia expressly
stipulate the suspensive condition that in the event the drawers of the checks fail to pay, Great Asian itself will
pay Bancasia. Since the common condition in the contracts had transpired, an obligation on the part of Great
Asian arose from the four contracts, and that obligation is to pay Bancasia the full value of the checks,
including the stipulated penalty and attorney’s fees.
Third Issue: The liability of surety Tan Chong Lin
Tan Chong Lin, the President of Great Asian, is being sued in his personal capacity based on the Surety
Agreements he signed wherein he solidarily held himself liable with Great Asian for the payment of its debts to
Bancasia. The Surety Agreements contain the following common condition:
"Upon failure of the Principal to pay at maturity, with or without demand, any of the obligations
above mentioned, or in case of the Principal’s failure promptly to respond to any other lawful
demand made by the Creditor, its successors, administrators or assigns, both the Principal and the
Surety/ies shall be considered in default and the Surety/ies agree/s to pay jointly and severally to
the Creditor all outstanding obligations of the Principal, whether due or not due, and whether held
by the Creditor as Principal or agent, and it is agreed that a certified statement by the Creditor as
to the amount due from the Principal shall be accepted by the Surety/ies as correct and final for all
legal intents and purposes."
Indisputably, Tan Chong Lin explicitly and unconditionally bound himself to pay Bancasia, solidarily with Great
Asian, if the drawers of the checks fail to pay on due date. The condition on which Tan Chong Lin’s obligation
hinged had happened. As surety, Tan Chong Lin automatically became liable for the entire obligation to the
same extent as Great Asian.
Tan Chong Lin, however, contends that the following warranties in the Deeds of Assignment enlarge or
increase his risks under the Surety Agreements:
"The ASSIGNOR warrants:
1. the soundness of the receivables herein assigned;
2. that said receivables are duly noted in its books and are supported by appropriate documents;
3. that said receivables are genuine, valid and subsisting;
4. that said receivables represent bona fide sale of goods, merchandise, and/or services rendered
in the ordinary course of its business transactions;
5. that the obligors of the receivables herein assigned are solvent;
6. that it has valid and genuine title to and indefeasible right to dispose of said accounts;
7. that said receivables are free from all liens and encumbrances;
8. that the said receivables are freely and legally transferable, and that the obligor/s therein will not
interpose any objection to this assignment, and has in fact given his/their consent hereto."
Tan Chong Lin maintains that these warranties in the Deeds of Assignment materially altered his obligations
under the Surety Agreements, and therefore he is released from any liability to Bancasia. Under Article 1215
of the Civil Code, what releases a solidary debtor is a "novation, compensation, confusion or remission of the
debt" made by the creditor with any of the solidary debtors. These warranties, however, are the usual
warranties made by one who discounts receivables with a financing company or bank. The Surety
Agreements, written on the letter head of "Bancasia Finance & Investment Corporation," uniformly state that
"Great Asian Sales Center x x x has obtained and/or desires to obtain loans, overdrafts, discounts and/or
other forms of credits from" Bancasia. Tan Chong Lin was clearly on notice that he was holding himself as
surety of Great Asian which was discounting postdated checks issued by its buyers of goods and
merchandise. Moreover, Tan Chong Lin, as President of Great Asian, cannot feign ignorance of Great Asian’s
business activities or discounting transactions with Bancasia. Thus, the warranties do not increase or enlarge
the risks of Tan Chong Lin under the Surety Agreements. There is, moreover, no novation of the debt of Great
Asian that would warrant release of the surety.
In any event, the provisions of the Surety Agreements are broad enough to include the obligations of Great
Asian to Bancasia under the warranties. The first Surety Agreement states that:
"x x x herein Surety/ies, jointly and severally among themselves and likewise with principal,
hereby agree/s and bind/s himself/themselves to pay at maturity all the notes, drafts, bills of
exchange, overdraft and other obligations of every kind which the Principal may now or may
hereafter owe the Creditor, including extensions or renewals thereof in the sum *** ONE MILLION
ONLY*** PESOS (P1,000,000.00), Philippine Currency, plus stipulated interest thereon at the rate
of sixteen percent (16%) per annum, or at such increased rate of interest which the Creditor may
charge on the Principal’s obligations or renewals or the reduced amount thereof, plus all the costs
and expenses which the Creditor may incur in connection therewith.
xxx
Upon failure of the Principal to pay at maturity, with or without demand, any of the obligations
above mentioned, or in case of the Principal’s failure promptly to respond to any other lawful
demand made by the Creditor, its successors, administrators or assigns, both the Principal and the
Surety/ies shall be considered in default and the Surety/ies agree/s to pay jointly and severally to
the Creditor all outstanding obligations of the Principal, whether due or not due, and whether held
by the Creditor as Principal or agent, and it is agreed that a certified statement by the Creditor as
to the amount due from the Principal shall be accepted by the Surety/ies as correct and final for all
legal intents and purposes. (Emphasis supplied)
The second Surety Agreement contains the following provisions:
"x x x herein Surety/ies, jointly and severally among themselves and likewise with PRINCIPAL,
hereby agree and bind themselves to pay at maturity all the notes, drafts, bills of exchange,
 overdraft and other obligations of every kind which the PRINCIPAL may now or may hereafter owe
the Creditor, including extensions and/or renewals thereof in the principal sum not to exceed TWO
MILLION (P2,000,000.00) PESOS, Philippine Currency, plus stipulated interest thereon, or such
increased or decreased rate of interest which the Creditor may charge on the principal sum
outstanding pursuant to the rules and regulations which the Monetary Board may from time to time
promulgate, together with all the cost and expenses which the CREDITOR may incur in connection
therewith.
If for any reason whatsoever, the PRINCIPAL should fail to pay at maturity any of the obligations
or amounts due to the CREDITOR, or if for any reason whatsoever the PRINCIPAL fails to
promptly respond to and comply with any other lawful demand made by the CREDITOR, or if for
any reason whatsoever any obligation of the PRINCIPAL in favor of any person or entity should be
considered as defaulted, then both the PRINCIPAL and the SURETY/IES shall be considered in
default under the terms of this Agreement. Pursuant thereto, the SURETY/IES agree/s to pay
jointly and severally with the PRINCIPAL, all outstanding obligations of the CREDITOR, whether
due or not due, and whether owing to the PRINCIPAL in its personal capacity or as agent of any
person, endorsee, assignee or transferee. x x x. (Emphasis supplied)
Article 1207 of the Civil Code provides, "xxx There is a solidary liability only when the obligation expressly so
states, or when the law or nature of the obligation requires solidarity." The stipulations in the Surety
Agreements undeniably mandate the solidary liability of Tan Chong Lin with Great Asian. Moreover, the
stipulations in the Surety Agreements are sufficiently broad, expressly encompassing "all the notes, drafts,
bills of exchange, overdraft and other obligations of every kind which the PRINCIPAL may now or may
hereafter owe the Creditor". Consequently, Tan Chong Lin must be held solidarily liable with Great Asian for
the nonpayment of the fifteen dishonored checks, including penalty and attorney’s fees in accordance with the
Deeds of Assignment.
The Deeds of Assignment stipulate that in case of suit Great Asian shall pay attorney’s fees equivalent to 25%
of the outstanding debt. The award of attorney’s fees in the instant case is justified,25 not only because of such
stipulation, but also because Great Asian and Tan Chong Lin acted in gross and evident bad faith in refusing
to pay Bancasia’s plainly valid, just and demandable claim. We deem it just and equitable that the stipulated
attorney’s fee should be awarded to Bancasia.
The Deeds of Assignment also provide for a 3% penalty on the total amount due in case of failure to pay, but
the Deeds are silent on whether this penalty is a running monthly or annual penalty. Thus, the 3% penalty can
only be considered as a one-time penalty. Moreover, the Deeds of Assignment do not provide for interest if
Great Asian fails to pay. We can only award Bancasia legal interest at 12% interest per annum, and only from
the time it filed the complaint because the records do not show that Bancasia made a written demand on
Great Asian prior to filing the complaint.26 Bancasia made an extrajudicial demand on Tan Chong Lin, the
surety, but not on the principal debtor, Great Asian.
WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No. 20167 is AFFIRMED with
MODIFICATION. Petitioners are ordered to pay, solidarily, private respondent the following amounts: (a)
P1,042,005.00 plus 3% penalty thereon, (b) interest on the total outstanding amount in item (a) at the legal
rate of 12% per annum from the filing of the complaint until the same is fully paid, (c) attorney’s fees
equivalent to 25% of the total amount in item (a), including interest at 12% per annum on the outstanding
amount of the attorney’s fees from the finality of this judgment until the same is fully paid, and (c) costs of suit.
SO ORDERED.
Administrative Case No. 4943 January 26, 2001
DIANA D. DE GUZMAN, complainant,
vs.
ATTY. LOURDES I. DE DIOS, respondent.
PARDO, J.:
The case before the Court is a complaint1 for disbarment against Atty. Lourdes I. De Dios on the ground of
violation of Canon 15, Rule 15.03 of the Code of Professional Responsibility, for representing conflicting
interests, and of Article 1491 Civil Code, for acquiring property in litigation.
In 1995, complainant engaged the services of respondent as counsel in order to form a corporation, which
would engage in hotel and restaurant business in Olongapo City.1âwphi1.nêt
On January 10, 1996, with the assistance of Atty. De Dios, complainant registered Suzuki Beach Hotel, Inc.
(SBHI) with the Securities and Exchange Commission.2 Complainant paid respondent a monthly retainer fee
of P 5,000.00.
On December 15, 1997, the corporation required complainant to pay her unpaid subscribed shares of stock
amounting to two million two hundred and thirty five thousand pesos (P2,235,000.00) or 22,350 shares, on or
before December 30, 1997.
On January 29, 1998,3 complainant received notice of the public auction sale of her delinquent shares and a
copy of a board resolution dated January 6, 1998 authorizing such sale.4 Complainant soon learned that her
shares had been acquired by Ramon del Rosario, one of the incorporators of SBHI. The sale ousted
complainant from the corporation completely. While respondent rose to be president of the corporation,
complainant lost all her life's savings invested therein.
Complainant alleged that she relied on the advice of Atty. de Dios and believed that as the majority
stockholder, Atty. de Dios would help her with the management of the corporation.
Complainant pointed out that respondent appeared as her counsel and signed pleadings in a case where
complainant was one of the parties.5 Respondent, however, explained that she only appeared because the
property involved belonged to SBHI. Respondent alleged that complainant misunderstood the role of
respondent as legal counsel of Suzuki Beach Hotel, Inc. Respondent manifested that her appearance as
counsel for complainant Diana de Guzman was to protect the rights and interest of SBHI since the latter was
the real owner of the land in controversy.
Respondent further said that the land on which the resort was established belonged to the Japanese
incorporators, not to complainant. The relationship of the complainant and the Japanese investors turned sour
because complainant misappropriated the funds and property of the corporation. To save the corporation from
bankruptcy, respondent advised all concerned stockholders that it was proper to call for the payment of unpaid
subscriptions and subsequent sale of the delinquent shares. These led to the auction of the unpaid shares of
complainant and hence, the ouster of complainant from the corporation.
Meantime, Mr. Del Rosario transferred one hundred (100) shares to respondent in payment of legal services
as evidenced by a Deed of Waiver and Transfer of Corporate Shares of Stock.
On October 22, 1999, the Integrated Bar of the Philippines issued a resolution6 finding that the acts of
respondent were not motivated by ill will as she acted in the best interest of her client, SBHI. The IBP found
that complainant failed to present convincing proof of her attorney-client relationship with respondent other
than the pleadings respondent filed in the trial court where complainant was one of the parties.
We disagree.
We find merit in the complaint. There are certain facts presented before us that created doubt on the propriety
of the declaration of delinquent shares and subsequent sale of complainant's entire subscription. Complainant
subscribed to 29,800 shares equivalent to two million nine hundred and eighty thousand pesos
(P2,980,000.00). She was the majority stockholder. Out of the subscribed shares, she paid up seven hundred
forty-five thousand pesos (P745,000.00) during the stage of incorporation.
How complainant got ousted from the corporation considering the amount she had invested in it is beyond us.
Granting that the sale of her delinquent shares was valid, what happened to her original shares? This, at least,
should have been explained.
Respondent claims that there was no attorney-client relationship between her and complainant. The claim has
no merit. It was complainant who retained respondent to form a corporation. She appeared as counsel in
behalf of complainant.
There was evidence of collusion between the board of directors and respondent. Indeed, the board of
directors now included respondent as the president, Ramon del Rosario as secretary, Hikoi Suzuki as
chairman, Agnes Rodriguez as treasurer and Takayuki Sato as director.7 The present situation shows a clear
case of conflict of interest of the respondent.
Lawyers must conduct themselves, especially in their dealings with their clients and the public at large, with
honesty and integrity in a manner beyond reproach.8
We said:
"To say that lawyers must at all times uphold and respect the law is to state the obvious, but such
statement can never be overemphasized. Considering that, 'of all classes and professions,
[lawyers are] most sacredly bound to uphold the law,' it is imperative that they live by the law.
Accordingly, lawyers who violate their oath and engage in deceitful conduct have no place in the
legal profession."9
Clearly, respondent violated the prohibition against representing conflicting interests and engaging in unlawful,
dishonest, immoral or deceitful conduct.10
As a lawyer, respondent is bound by her oath to do no falsehood or consent to its commission and to conduct
herself as a lawyer according to the best of her knowledge and discretion. The lawyer's oath is a source of
obligations and violation thereof is a ground for suspension, disbarment,11 or other disciplinary action.12 The
acts of respondent Atty. de Dios are clearly in violation of her solemn oath as a lawyer that this Court will not
tolerate.
WHEREFORE, the Court finds respondent. Atty. Lourdes I. de Dios remiss in her sworn duty to her client, and
to the bar. The Court hereby SUSPENDS her from the practice of law for six (6) months, with warning that a
repetition of the charges will be dealt with more severely.
Let a copy of this decision be entered in the personal records of respondent as an attorney and as a member
of the Bar, and furnish the Bar Confidant, the Integrated Bar of the Philippines, and the Court Administrator for
circulation to all courts in the country.1âwphi1.nêt
SO ORDERED.
[G.R. No. 152317. November 10, 2004]
VICTORIA MOREO-LENTFER,* GUNTER LENTFER and JOHN CRAIGIE YOUNG CROSS, petitioners, vs.
HANS JURGEN WOLFF, respondent.
DECISION
QUISUMBING, J.:
For review on certiorari are the Decision[1] dated June 14, 2001, and Resolution[2] dated February 22,
2002, of the Court of Appeals in CA-G.R. CV No. 48272. The decision reversed the judgment[3] of the Regional
Trial Court of Calapan City, Oriental Mindoro, Branch 39, in Civil Case No. R-4219.
The facts are as follows:
The petitioners are Gunter Lentfer, a German citizen; his Filipina wife, Victoria Moreo-Lentfer; and John
Craigie Young Cross, an Australian citizen, all residing in Sabang, Puerto Galera, Oriental Mindoro.
Respondent Hans Jurgen Wolff is a German citizen, residing in San Lorenzo Village, Makati City.
Petitioners alleged that with respondent, on March 6, 1992, they engaged the notarial services of Atty.
Rodrigo C. Dimayacyac for: (1) the sale of a beach house owned by petitioner Cross in Sabang, Puerto
Galera, Oriental Mindoro, and (2) the assignment of Cross contract of lease on the land where the house
stood. The sale of the beach house and the assignment of the lease right would be in the name of petitioner
Victoria Moreo-Lentfer, but the total consideration of 220,000 Deutschmarks (DM) would be paid by
respondent Hans Jurgen Wolff. A promissory note was executed by said respondent in favor of petitioner
Cross.
According to respondent, however, the Lentfer spouses were his confidants who held in trust for him, a
time deposit account in the amount of DM 200,000[4] at Solid Bank Corporation. Apprised of his interest to own
a house along a beach, the Lentfer couple urged him to buy petitioner Cross beach house and lease rights in
Puerto Galera. Respondent agreed and through a bank-to-bank transaction, he paid Cross the amount of DM
221,700[5] as total consideration for the sale and assignment of the lease rights. However, Cross, Moreo-
Lentfer and Atty. Dimayacyac surreptitiously executed a deed of sale whereby the beach house was made to
appear as sold to Moreo-Lentfer for only P100,000.[6] The assignment of the lease right was likewise made in
favor of Moreo-Lentfer.[7] Upon learning of this, respondent filed a Complaint docketed as Civil Case No. R-
4219 with the lower court for annulment of sale and reconveyance of property with damages and prayer for a
writ of attachment.
After trial, the court a quo dismissed the complaint for failure to establish a cause of action, thus:
ACCORDINGLY, judgment is hereby rendered in favor of the defendants and against the plaintiff, dismissing
the complaint for the reason that plaintiff has not established a cause of action against the defendants with
costs against the plaintiff.
SO ORDERED.[8]
Aggrieved, respondent appealed to the Court of Appeals.[9]
But in its Decision[10] dated June 14, 2001, the appellate court reversed the decision of the trial court,
thus:
WHEREFORE, the judgment appealed from is hereby REVERSED and a new one is hereby rendered, as
follows:
1. Defendants-appellees spouses Genter[11] and Victoria Moreno-Lentfer and John Craigie
Young Cross are jointly and severally held liable to pay plaintiff-appellant the amount of
220,000.00 DM German Currency or its present peso equivalent plus legal interest starting
from March 8, 1993, the date of the last final demand letter;
2. The above defendants-appellees are jointly and severally held liable to pay plaintiff-appellant
the amount of P200,000.00 Philippine Currency, representing the amount of expenses
incurred in the repairs and maintenance of the property plus legal interest starting from
October 28, 1992, the date the amount was received by defendant-appellee Victoria
Moreno-Lentfer; and
3. The case against defendant-appellee Rodrigo Dimayacyac is dismissed.
SO ORDERED.[12]
Hence, the instant petition raising the following issues:
1) DOES ARTICLE 1238 OF THE NEW CIVIL CODE APPLY IN THE CASE AT BAR?[13]
 2) DOES THE PRINCIPLE OF SOLUTIO INDEBITI UNDER ARTICLE 2154 OF THE NEW
CIVIL CODE, THE PRINCIPLE OF JUSTICE AND EQUITY, APPLY IN THE CASE AT
BAR?[14]
Article 1238 of the New Civil Code provides:
ART. 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed
to be a donation, which requires the debtors consent. But the payment is in any case valid as to the creditor
who has accepted it.
Petitioners posit that in a contract of sale, the seller is the creditor, who in this case is Cross, and the
buyer is the debtor, namely Moreo-Lentfer in this case. Respondent is the third person who paid the
consideration on behalf of Moreo-Lentfer, the debtor. Petitioners insist that respondent did not intend to be
reimbursed for said payment and debtor Moreo-Lentfer consented to it. Thus, by virtue of Article 1238,
payment by respondent is considered a donation.
Respondent counters that Article 1238 bears no relevance to the case since it applies only to contracts
of loan where payment is made by a third person to a creditor in favor of a debtor of a previously incurred
obligation. The instant case, in contrast, involves a contract of sale where no real creditor-debtor relationship
exists between the parties. Further, respondent argues his conduct never at any time intimated any intention
to donate in favor of petitioner Moreo-Lentfer.
Moreover, respondent contends that the alleged donation is void for non-compliance with the formal
requirements set by law. Citing Article 748[15] of the New Civil Code, respondent avers that since the amount
involved exceeds P5,000, both the donation and its acceptance must be in writing for the donation to be valid.
Respondent further says there was no simultaneous delivery of the money as required by Art. 748 for
instances of oral donation. Respondent also calls our attention to the sudden change in petitioners theory.
Previously, before the Court of Appeals, the petitioners claimed that what was donated were the subject
properties. But before this Court, they insist that what was actually donated was the money used in the
purchase of subject properties.
On this point, we find petitioners stance without merit. Article 1238 of the New Civil Code is not
applicable in this case.
Trying to apply Art. 1238 to the instant case is like forcing a square peg into a round hole. The absence
of intention to be reimbursed, the qualifying circumstance in Art. 1238, is negated by the facts of this case.
Respondents acts contradict any intention to donate the properties to petitioner Moreo-Lentfer. When
respondent learned that the sale of the beach house and assignment of the lease right were in favor of
Victoria Moreo-Lentfer, he immediately filed a complaint for annulment of the sale and reconveyance of the
property with damages and prayer for a writ of attachment. Respondent Moreo-Lentfer at that time claimed the
beach house, together with the lease right, was donated to her. Noteworthy, she had changed her theory, to
say that it was only the money used in the purchase that was donated to her. But in any event, respondent
actually stayed in the beach house in the concept of an owner and shouldered the expenses for its
maintenance and repair amounting to P200,000 for the entire period of his stay for ten weeks. Moreover, the
appellate court found that respondent is not related or even close to the Lentfer spouses. Obviously,
respondent had trusted the Lentfer spouses to keep a time deposit account for him with Solid Bank for the
purpose of making the purchase of the cited properties.
Petitioner Moreo-Lentfers claim of either cash or property donation rings hollow. A donation is a simple
act of liberality where a person gives freely of a thing or right in favor of another, who accepts it.[16] But when a
large amount of money is involved, equivalent to P3,297,800, based on the exchange rate in the year 1992,
we are constrained to take the petitioners claim of liberality of the donor with more than a grain of salt.
Petitioners could not brush aside the fact that a donation must comply with the mandatory formal
requirements set forth by law for its validity. Since the subject of donation is the purchase money, Art. 748 of
the New Civil Code is applicable. Accordingly, the donation of money equivalent to P3,297,800 as well as its
acceptance should have been in writing. It was not. Hence, the donation is invalid for non-compliance with the
formal requisites prescribed by law.
Anent the second issue, petitioners insist that since the deed of sale in favor of Moreo-Lentfer was
neither identified or marked nor formally offered in evidence, the same cannot be given any evidentiary value.
They add that since it was not annulled, it remains valid and binding. Hence, petitioners argue, the principle
of solutio indebiti under Article 2154[17] of the New Civil Code should be the applicable provision in the
resolution of this controversy. If so, the parties unjustly enriched would be liable to the other party who
suffered thereby by being correspondingly injured or damaged.
The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself
unjustly at the expense of another.[18] It applies where (1) a payment is made when there exists no binding
relation between the payor, who has no duty to pay, and the person who received the payment, and (2) the
payment is made through mistake, and not through liberality or some other cause.[19]
In the instant case, records show that a bank-to-bank payment was made by respondent Wolff to
petitioner Cross in favor of co-petitioner Moreo-Lentfer. Respondent was under no duty to make such payment
for the benefit of Moreo-Lentfer. There was no binding relation between respondent and the beneficiary,
Moreo-Lentfer. The payment was clearly a mistake. Since Moreo-Lentfer received something when there was
no right to demand it, she had an obligation to return it.[20]
Following Article 22[21] of the New Civil Code, two conditions must concur to declare that a person has
unjustly enriched himself or herself, namely: (a) a person is unjustly benefited, and (b) such benefit is derived
at the expense of or to the damage of another.[22]
We are convinced petitioner Moreo-Lentfer had been unjustly enriched at the expense of respondent.
She acquired the properties through deceit, fraud and abuse of confidence. The principle of justice and equity
does not work in her favor but in favor of respondent Wolff. Whatever she may have received by mistake from
and at the expense of respondent should thus be returned to the latter, if the demands of justice are to be
served.
The Court of Appeals held that respondent was not entitled to the reconveyance of the properties
because, inter alia, of the express prohibition under the Constitution[23] that non-Filipino citizens cannot acquire
land in the Philippines. We note, however, that subject properties consist of a beach house and the lease
right over the land where the beach house stands. The constitutional prohibition against aliens from owning
land in the Philippines has no actual bearing in this case. A clear distinction exists between the ownership of a
piece of land and the mere lease of the land where the foreigners house stands. Thus, we see no legal reason
why reconveyance could not be allowed.
Since reconveyance is the proper remedy, respondents expenses for the maintenance and repair of the
beach house is for his own account as owner thereof. It need not be an issue for now.
However, we deem it just and equitable under the circumstances to award respondent nominal
damages in the amount of P50,000,[24] pursuant to Articles 2221[25] and 2222[26] of the New Civil Code, since
respondents property right has been invaded through defraudation and abuse of confidence committed by
petitioners.
WHEREFORE, the petition is hereby DENIED. The assailed Decision, dated June 14, 2001 and
Resolution dated February 22, 2002, of the Court of Appeals in CA-G.R. CV No. 48272 reversing the lower
courts judgment are AFFIRMED with MODIFICATION. Petitioners--particularly the spouses Gunter Lentfer
and Victoria Moreo-Lentfer--are hereby ORDERED to:
1. RECONVEY to respondent Hans Jurgen Wolff the beach house and the lease right over the
land on which it is situated; and
2. PAY respondent Wolff nominal damages in the amount of P50,000.00.
Costs against petitioners.
SO ORDERED.
[G.R. No. 134241. August 11, 2003]
DAVID REYES (Substituted by Victoria R. Fabella), petitioner, vs. JOSE LIM, CHUY CHENG KENG and
HARRISON LUMBER, INC., respondents.
DECISION
CARPIO, J.:
 The Case
This is a petition for review on certiorari of the Decision[1] dated 12 May 1998 of the Court of Appeals in
CA-G.R. SP No. 46224. The Court of Appeals dismissed the petition for certiorari assailing the Orders dated 6
March 1997, 3 July 1997 and 3 October 1997 of the Regional Trial Court of Paranaque, Branch 260 [2] (trial
court) in Civil Case No. 95-032.
The Facts
On 23 March 1995, petitioner David Reyes (Reyes) filed before the trial court a complaint for annulment
of contract and damages against respondents Jose Lim (Lim), Chuy Cheng Keng (Keng) and Harrison
Lumber, Inc. (Harrison Lumber).
The complaint[3] alleged that on 7 November 1994, Reyes as seller and Lim as buyer entered into a
contract to sell (Contract to Sell) a parcel of land (Property) located along F.B. Harrison Street, Pasay City.
Harrison Lumber occupied the Property as lessee with a monthly rental of P35,000. The Contract to Sell
provided for the following terms and conditions:
1. The total consideration for the purchase of the aforedescribed parcel of land together with the perimeter
walls found therein is TWENTY EIGHT MILLION (P28,000,000.00) PESOS payable as follows:
(a) TEN MILLION (P10,000,000.00) PESOS upon signing of this Contract to Sell;
(b) The balance of EIGHTEEN MILLION (P18,000,000.00) PESOS shall be paid on or before March 8,
1995 at 9:30 A.M. at a bank to be designated by the Buyer but upon the complete vacation of all the tenants or
occupants of the property and execution of the Deed of Absolute Sale. However, if the tenants or occupants
have vacated the premises earlier than March 8, 1995, the VENDOR shall give the VENDEE at least one
week advance notice for the payment of the balance and execution of the Deed of Absolute Sale.
2. That in the event, the tenants or occupants of the premises subject of this sale shall not vacate the
premises on March 8, 1995 as stated above, the VENDEE shall withhold the payment of the balance of
P18,000,000.00 and the VENDOR agrees to pay a penalty of Four percent (4%) per month to the herein
VENDEE based on the amount of the downpayment of TEN MILLION (P10,000,000.00) PESOS until the
complete vacation of the premises by the tenants therein.[4]
The complaint claimed that Reyes had informed Harrison Lumber to vacate the Property before the end
of January 1995. Reyes also informed Keng[5] and Harrison Lumber that if they failed to vacate by 8 March
1995, he would hold them liable for the penalty of P400,000 a month as provided in the Contract to Sell. The
complaint further alleged that Lim connived with Harrison Lumber not to vacate the Property until the
P400,000 monthly penalty would have accumulated and equaled the unpaid purchase price of P18,000,000.
On 3 May 1995, Keng and Harrison Lumber filed their Answer[6] denying they connived with Lim to
defraud Reyes. Keng and Harrison Lumber alleged that Reyes approved their request for an extension of time
to vacate the Property due to their difficulty in finding a new location for their business. Harrison Lumber
claimed that as of March 1995, it had already started transferring some of its merchandise to its new business
location in Malabon.[7]
On 31 May 1995, Lim filed his Answer[8] stating that he was ready and willing to pay the balance of the
purchase price on or before 8 March 1995. Lim requested a meeting with Reyes through the latters daughter
on the signing of the Deed of Absolute Sale and the payment of the balance but Reyes kept postponing their
meeting. On 9 March 1995, Reyes offered to return the P10 million down payment to Lim because Reyes was
having problems in removing the lessee from the Property. Lim rejected Reyes offer and proceeded to verify
the status of Reyes title to the Property. Lim learned that Reyes had already sold the Property to Line One
Foods Corporation (Line One) on 1 March 1995 for P16,782,840. After the registration of the Deed of Absolute
Sale, the Register of Deeds issued to Line One TCT No. 134767 covering the Property. Lim denied conniving
with Keng and Harrison Lumber to defraud Reyes.
On 2 November 1995, Reyes filed a Motion for Leave to File Amended Complaint due to supervening
facts. These included the filing by Lim of a complaint for estafa against Reyes as well as an action for specific
performance and nullification of sale and title plus damages before another trial court.[9] The trial court granted
the motion in an Order dated 23 November 1995.
In his Amended Answer dated 18 January 1996,[10] Lim prayed for the cancellation of the Contract to
Sell and for the issuance of a writ of preliminary attachment against Reyes. The trial court denied the prayer
for a writ of preliminary attachment in an Order dated 7 October 1996.
On 6 March 1997, Lim requested in open court that Reyes be ordered to deposit the P10 million down
payment with the cashier of the Regional Trial Court of Paraaque. The trial court granted this motion.
On 25 March 1997, Reyes filed a Motion to Set Aside the Order dated 6 March 1997 on the ground the
Order practically granted the reliefs Lim prayed for in his Amended Answer. [11]The trial court denied Reyes
motion in an Order[12] dated 3 July 1997. Citing Article 1385 of the Civil Code, the trial court ruled that an
action for rescission could prosper only if the party demanding rescission can return whatever he may be
obliged to restore should the court grant the rescission.
The trial court denied Reyes Motion for Reconsideration in its Order[13] dated 3 October 1997. In the
same order, the trial court directed Reyes to deposit the P10 million down payment with the Clerk of Court on
or before 30 October 1997.
On 8 December 1997, Reyes[14] filed a Petition for Certiorari[15] with the Court of Appeals. Reyes prayed
that the Orders of the trial court dated 6 March 1997, 3 July 1997 and 3 October 1997 be set aside for having
been issued with grave abuse of discretion amounting to lack of jurisdiction. On 12 May 1998, the Court of
Appeals dismissed the petition for lack of merit.
Hence, this petition for review.
The Ruling of the Court of Appeals
The Court of Appeals ruled the trial court could validly issue the assailed orders in the exercise of its
equity jurisdiction. The court may grant equitable reliefs to breathe life and force to substantive law such as
Article 1385[16] of the Civil Code since the provisional remedies under the Rules of Court do not apply to this
case.
The Court of Appeals held the assailed orders merely directed Reyes to deposit the P10 million to the
custody of the trial court to protect the interest of Lim who paid the amount to Reyes as down payment. This
did not mean the money would be returned automatically to Lim.
The Issues
Reyes raises the following issues:
1. Whether the Court of Appeals erred in holding the trial court could issue the questioned
Orders dated March 6, 1997, July 3, 1997 and October 3, 1997, requiring petitioner
David Reyes to deposit the amount of Ten Million Pesos (P10,000,000.00) during the
pendency of the action, when deposit is not among the provisional remedies
enumerated in Rule 57 to 61 of the 1997 Rules on Civil Procedure.
2. Whether the Court of Appeals erred in finding the trial court could issue the questioned
Orders on grounds of equity when there is an applicable law on the matter, that is,
Rules 57 to 61 of the 1997 Rules on Civil Procedure.[17]
The Courts Ruling
 Reyes contentions are without merit.
Reyes points out that deposit is not among the provisional remedies enumerated in the 1997 Rules of
Civil Procedure. Reyes stresses the enumeration in the Rules is exclusive. Not one of the provisional
remedies in Rules 57 to 61[18] applies to this case. Reyes argues that a court cannot apply equity and require
deposit if the law already prescribes the specific provisional remedies which do not include deposit. Reyes
invokes the principle that equity is applied only in the absence of, and never against, statutory law or x x x
judicial rules of procedure.[19] Reyes adds the fact that the provisional remedies do not include deposit is a
matter of dura lex sed lex.[20]
The instant case, however, is precisely one where there is a hiatus in the law and in the Rules of Court.
If left alone, the hiatus will result in unjust enrichment to Reyes at the expense of Lim. The hiatus may also
imperil restitution, which is a precondition to the rescission of the Contract to Sell that Reyes himself seeks.
This is not a case of equity overruling a positive provision of law or judicial rule for there is none that governs
this particular case. This is a case of silence or insufficiency of the law and the Rules of Court. In this case,
Article 9 of the Civil Code expressly mandates the courts to make a ruling despite the silence, obscurity or
insufficiency of the laws.[21] This calls for the application of equity,[22] which fills the open spaces in the law.[23]
Thus, the trial court in the exercise of its equity jurisdiction may validly order the deposit of the P10
million down payment in court. The purpose of the exercise of equity jurisdiction in this case is to prevent
unjust enrichment and to ensure restitution. Equity jurisdiction aims to do complete justice in cases where a
court of law is unable to adapt its judgments to the special circumstances of a case because of the inflexibility
of its statutory or legal jurisdiction.[24] Equity is the principle by which substantial justice may be attained in
cases where the prescribed or customary forms of ordinary law are inadequate.[25]
Reyes is seeking rescission of the Contract to Sell. In his amended answer, Lim is also seeking
cancellation of the Contract to Sell. The trial court then ordered Reyes to deposit in court the P10 million down
payment that Lim made under the Contract to Sell. Reyes admits receipt of the P10 million down payment but
opposes the order to deposit the amount in court. Reyes contends that prior to a judgment annulling the
Contract to Sell, he has the right to use, possess and enjoy[26] the P10 million as its owner[27] unless the court
orders its preliminary attachment.[28]
To subscribe to Reyes contention will unjustly enrich Reyes at the expense of Lim. Reyes sold to Line
One the Property even before the balance of P18 million under the Contract to Sell with Lim became due on 8
March 1995. On 1 March 1995, Reyes signed a Deed of Absolute Sale [29] in favor of Line One. On 3 March
1995, the Register of Deeds issued TCT No. 134767[30] in the name of Line One.[31] Reyes cannot claim
ownership of the P10 million down payment because Reyes had already sold to another buyer the Property for
which Lim made the down payment. In fact, in his Comment[32] dated 20 March 1996, Reyes reiterated his
offer to return to Lim the P10 million down payment.
On balance, it is unreasonable and unjust for Reyes to object to the deposit of the P10 million down
payment. The application of equity always involves a balancing of the equities in a particular case, a matter
addressed to the sound discretion of the court. Here, we find the equities weigh heavily in favor of Lim, who
paid the P10 million down payment in good faith only to discover later that Reyes had subsequently sold the
Property to another buyer.
In Eternal Gardens Memorial Parks Corp. v. IAC,[33] this Court held the plaintiff could not continue to
benefit from the property or funds in litigation during the pendency of the suit at the expense of whomever the
court might ultimately adjudge as the lawful owner. The Court declared:
In the case at bar, a careful analysis of the records will show that petitioner admitted among others in its
complaint in Interpleader that it is still obligated to pay certain amounts to private respondent; that it claims no
interest in such amounts due and is willing to pay whoever is declared entitled to said amounts. x x x
Under the circumstances, there appears to be no plausible reason for petitioners objections to the deposit of
the amounts in litigation after having asked for the assistance of the lower court by filing a complaint for
interpleader where the deposit of aforesaid amounts is not only required by the nature of the action but is a
contractual obligation of the petitioner under the Land Development Program (Rollo, p. 252).
There is also no plausible or justifiable reason for Reyes to object to the deposit of the P10 million
down payment in court. The Contract to Sell can no longer be enforced because Reyes himself subsequently
sold the Property to Line One. Both Reyes and Lim are now seeking rescission of the Contract to Sell. Under
Article 1385 of the Civil Code, rescission creates the obligation to return the things that are the object of the
contract. Rescission is possible only when the person demanding rescission can return whatever he may be
obliged to restore. A court of equity will not rescind a contract unless there is restitution, that is, the parties are
restored to the status quo ante.[34]
Thus, since Reyes is demanding to rescind the Contract to Sell, he cannot refuse to deposit the P10
million down payment in court.[35] Such deposit will ensure restitution of the P10 million to its rightful owner.
Lim, on the other hand, has nothing to refund, as he has not received anything under the Contract to Sell.[36]
In Government of the Philippine Islands v. Wagner and Cleland Wagner,[37] the Court ruled the
refund of amounts received under a contract is a precondition to the rescission of the contract. The Court
declared:
The Government, having asked for rescission, must restore to the defendants whatever it has received under
the contract. It will only be just if, as a condition to rescission, the Government be required to refund to the
defendants an amount equal to the purchase price, plus the sums expended by them in improving the land.
(Civil Code, art. 1295.)
The principle that no person may unjustly enrich himself at the expense of another is embodied in
Article 22[38] of the Civil Code. This principle applies not only to substantive rights but also to procedural
remedies. One condition for invoking this principle is that the aggrieved party has no other action based on
contract, quasi-contract, crime, quasi-delict or any other provision of law.[39] Courts can extend this condition to
the hiatus in the Rules of Court where the aggrieved party, during the pendency of the case, has no other
recourse based on the provisional remedies of the Rules of Court.
Thus, a court may not permit a seller to retain, pendente lite, money paid by a buyer if the seller himself
seeks rescission of the sale because he has subsequently sold the same property to another buyer.[40] By
seeking rescission, a seller necessarily offers to return what he has received from the buyer. Such a seller
may not take back his offer if the court deems it equitable, to prevent unjust enrichment and ensure restitution,
to put the money in judicial deposit.
There is unjust enrichment when a person unjustly retains a benefit to the loss of another, or when a
person retains money or property of another against the fundamental principles of justice, equity and good
conscience.[41] In this case, it was just, equitable and proper for the trial court to order the deposit of the P10
million down payment to prevent unjust enrichment by Reyes at the expense of Lim.[42]
WHEREFORE, we AFFIRM the Decision of the Court of Appeals.
SO ORDERED.
G.R. No. 135644 September 17, 2001
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,
vs.
SPOUSES GONZALO and MATILDE LABUNG-DEANG, respondents.
PARDO, J.:
The petitioner in the case is the Government Service Insurance System (hereafter, "GSIS"). Having lost the
case in the trial court and the Court of Appeals, it now comes to this Court for redress.
At the onset, we state that the issue is not "suability" or whether GSIS may be sued despite the doctrine of
state immunity from suit, but liability, whether or not GSIS may be liable to pay damages to respondent
spouses given the applicable law and the circumstances of the case.1
The Case
The case is a petition2 for review on certiorari of the decision of the Court of Appeals3 affirming the decision of
the Regional Trial Court, Angeles City4 ordering GSIS to pay respondents Gonzalo (now deceased)5 and
Matilde Labung-Deang (hereafter, "spouses Deang") temperate damages, attorney's fees, legal interests and
costs of suit for the loss of their title to real property mortgaged to the GSIS.
 The Facts
Sometime in December 1969, the spouses Deang obtained a housing loan from the GSIS in the amount of
eight thousand five hundred pesos (P8,500.00). Under the agreement, the loan was to mature on December
23, 1979. The loan was secured by a real estate mortgage constituted over the spouses' property covered by
Transfer Certificate of Title No. 14926-R issued by the Register of Deeds of Pampanga.6 As required by the
mortgage deed, the spouses Daeng deposited the owner's duplicate copy of the title with the GSIS.7
On January 19, 1979, eleven (11) months before the maturity of the loan, the spouses Deang settled their
debt with the GSIS8 and requested for the release of the owner's duplicate copy of the title since they intended
to secure a loan from a private lender and use the land covered by it as collateral security for the loan of fifty
thousand pesos (P50,000.00)9 which they applied for with one Milagros Runes. 10 They would use the
proceeds of the loan applied for the renovation of the spouses' residential house and for business.11
However, personnel of the GSIS were not able to release the owner's duplicate of the title as it could not be
found despite diligent search.12 As stated earlier, the spouses as mortgagors deposited the owner's duplicate
copy of the title with the GSIS located at its office in San Fernando, Pampanga.13
Satisfied that the owner's duplicate copy of the title was really lost, in 1979, GSIS commenced the
reconstitution proceedings with the Court of First Instance of Pampanga for the issuance of a new owner's
copy of the same.14
On June 22, 1979, GSIS issued a certificate of release of mortgage.15
On June 26, 1979, after the completion of judicial proceedings, GSIS finally secured and released the
reconstituted copy of the owner's duplicate of Transfer Certificate of Title No. 14926-R to the spouses
Deang.16
On July 6, 1979, the spouses Deang filed with the Court of First Instance, Angeles City a complaint against
GSIS for damages, claiming that as result of the delay in releasing the duplicate copy of the owner's title, they
were unable to secure a loan from Milagros Runes, the proceeds of which could have been used in defraying
the estimated cost of the renovation of their residential house and which could have been invested in some
profitable business undertaking.17
In its defense, GSIS explained that the owners' duplicate copy of the title was released within a reasonable
time since it had to conduct standard pre-audit and post-audit procedures to verify if the spouses Deang's
account had been fully settled.18
On July 31, 1995, the trial court rendered a decision ruling for the spouses Deang. The trial court reasoned
that the loss of the owner's duplicate copy of the title "in the possession of GSIS as security for the mortgage...
without justifiable cause constitutes negligence on the part of the employee of GSIS who lost it," making GSIS
liable for damages.19 We quote the dispositive portion of the decision:20
"IN VIEW OF THE FOREGOING, the Court renders judgment ordering the GSIS:
"a) To pay the plaintiffs-spouses the amount of P20,000.00 as temperate damages;
"b) To pay plaintiffs-spouses the amount of P15,000.00 as attorney's fees;
"c) To pay legal interest on the award in paragraphs a) and b) from the filing of the complaint; and,
"d) To pay cost of the suit.
"SO ORDERED."
On August 30, 1995, GSIS appealed the decision to the Court of Appeals.21
On September 21, 1998, the Court of Appeals promulgated a decision affirming the appealed judgment, ruling:
First, since government owned and controlled corporations (hereafter, "GOCCs") whose charters provide that
they can sue and be sued have a legal personality separate and distinct from the government, GSIS is not
covered by Article 218022 of the Civil Code, and it is liable for damages caused by their employees acting
within the scope of their assigned tasks. Second, the GSIS is liable to pay a reasonable amount of damages
and attorney's fees, which the appellate court will not disturb. We quote the dispositive portion:23
"WHEREFORE, finding no reversible error in the appealed judgment, the same is hereby
AFFIRMED.
"SO ORDERED."
Hence, this appeal.24
The Issue
Whether the GSIS, as a GOCC primarily performing governmental functions, is liable for a negligent act of its
employee acting within the scope of his assigned tasks.25
The Court's Ruling
We rule that the GSIS is liable for damages. We deny the petition for lack of merit.
GSIS, citing the sixth paragraph of Article 2180 of the Civil Code argues that as a GOCC, it falls within the
term "State" and cannot be held vicariously liable for negligence committed by its employee acting within his
functions.26
"Article 2180. The obligation imposed by Article 2176 is demandable not only for one's own acts or
omissions, but also for those of persons for whom one is responsible.
xxx
"Employers shall be liable for the damages caused by their employees and household helpers
acting within the scope of their assigned tasks, even though the former are not engaged in any
business of industry.
"The State is responsible in like manner when it acts though a special agent, but not when the
damage has been caused by the official to whom the task was done properly pertains, in which
case what is provided in Article 2176 shall be applicable.
xxx (italics ours)"
The argument is untenable. The cited provision of the Civil Code is not applicable to the case at bar. However,
the trial court and the Court of Appeals erred in citing it as the applicable law. Nonetheless, the conclusion is
the same. As heretofore stated, we find that GSIS is liable for damages.
The trial court and the Court of Appeals treated the obligation of GSIS as one springing from quasi-delict.27 We
do not agree. Article 2176 of the Civil Code defines quasi-delict as follows:
"Whoever by act or omission causes damages to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual
 relation between the parties, is called a quasi-delict and is governed by the provisions of this
Chapter (italics ours)."
Under the facts, there was a pre-existing contract between the parties. GSIS and the spouses Deang had a
loan agreement secured by a real estate mortgage. The duty to return the owner's duplicate copy of title arose
as soon as the mortgage was released.28 GSIS insists that it was under no obligation to return the owner's
duplicate copy of the title immediately. This insistence is not warranted. Negligence is obvious as the owners'
duplicate copy could not be returned to the owners. Thus, the more applicable provisions of the Civil Code
are:
"Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or
delay and those who in any manner contravene the tenor thereof are liable for damages."
"Article 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in
good faith is liable shall be those that are the natural and probable consequences of the breach of
the obligation, and which the parties have foreseen or could have reasonably foreseen at the time
the obligation was constituted x x x."
Since good faith is presumed and bad faith is a matter of fact which should be proved,29 we shall treat GSIS as
a party who defaulted in its obligation to return the owners' duplicate copy of the title. As an obligor in good
faith, GSIS is liable for all the "natural and probable consequences of the breach of the obligation." The
inability of the spouses Deang to secure another loan and the damages they suffered thereby has its roots in
the failure of the GSIS to return the owners' duplicate copy of the title.
We come now to the amount of damages. In a breach of contract, moral damages are not awarded if the
defendant is not shown to have acted fraudulently or with malice or bad faith.30 The fact that the complainant
suffered economic hardship31 or worries and mental anxiety32 is not enough.
There is likewise no factual basis for an award of actual damages. Actual damages to be compensable must
be proven by clear evidence.33 A court can not rely on "speculation, conjecture or guess work" as to the fact
and amount of damages, but must depend on actual proof.34
However, it is also apparent that the spouses Deang suffered financial damage because of the loss of the
owners' duplicate copy of the title. Temperate damages may be granted.
"Article 2224. Temperate or moderate damages, which are more than nominal but less than
compensatory damages, may be recovered when the court finds that some pecuniary loss has
been suffered but its amount cannot, from the nature of the case, be proved with certainty."
GSIS submits that there must be proof of pecuniary loss. This is untenable. The rationale behind temperate
damages is precisely that from the nature of the case, definite proof of pecuniary loss cannot be offered.
When the court is convinced that there has been such loss, the judge is empowered to calculate moderate
damages, rather than let the complainant suffer without redress from the defendant's wrongful act.35
The award of twenty thousand pesos (P20,000.00) in temperate damages is reasonable considering that
GSIS spent for the reconstitution of the owners' duplicate copy of the title.
Next, the attorney's fees. Attorney's fees which are granted as an item of damages are generally not
recoverable.36The award of attorney's fees is the exception rather than the rule and counsel's fees are not to
be awarded every time a party wins a suit. The award of attorney's fees demands factual, legal and equitable
justification; its basis cannot be left to speculation or conjecture.37
We find no circumstance to justify the award of attorney's fees. We delete the same.
The Fallo
WHEREFORE, we DENY the petition. We AFFIRM the decision of the Court of Appeals in CA-G.R. CV No.
51240 with the MODIFICATION that award of attorney's fees is DELETED.
No costs.
SO ORDERED.
G.R. No. 97626 March 14, 1997
PHILIPPINE BANK OF COMMERCE, now absorbed by PHILIPPINE COMMERCIAL INTERNATIONAL
BANK, ROGELIO LACSON, DIGNA DE LEON, MARIA ANGELITA PASCUAL, et al., petitioners,
vs.
THE COURT OF APPEALS, ROMMEL'S MARKETING CORP., represented by ROMEO LIPANA, its
President & General Manager, respondents.
HERMOSISIMA, JR., J.:
Challenged in this petition for review is the Decision dated February 28, 19911 rendered by public respondent
Court of Appeals which affirmed the Decision dated November 15, 1985 of the Regional Trial Court, National
Capital Judicial Region, Branch CLX (160), Pasig City, in Civil Case No. 27288 entitled "Rommel's Marketing
Corporation, etc. v. Philippine Bank of Commerce, now absorbed by Philippine Commercial and Industrial
Bank."
The case stemmed from a complaint filed by the private respondent Rommel's Marketing Corporation (RMC
for brevity), represented by its President and General Manager Romeo Lipana, to recover from the former
Philippine Bank of Commerce (PBC for brevity), now absorbed by the Philippine Commercial International
Bank, the sum of P304,979.74 representing various deposits it had made in its current account with said bank
but which were not credited to its account, and were instead deposited to the account of one Bienvenido
Cotas, allegedly due to the gross and inexcusable negligence of the petitioner bank.
RMC maintained two (2) separate current accounts, Current Account Nos. 53-01980-3 and 53-01748-7, with
the Pasig Branch of PBC in connection with its business of selling appliances.
In the ordinary and usual course of banking operations, current account deposits are accepted by the bank on
the basis of deposit slips prepared and signed by the depositor, or the latter's agent or representative, who
indicates therein the current account number to which the deposit is to be credited, the name of the depositor
or current account holder, the date of the deposit, and the amount of the deposit either in cash or checks. The
deposit slip has an upper portion or stub, which is detached and given to the depositor or his agent; the lower
portion is retained by the bank. In some instances, however, the deposit slips are prepared in duplicate by the
depositor. The original of the deposit slip is retained by the bank, while the duplicate copy is returned or given
to the depositor.
From May 5, 1975 to July 16, 1976, petitioner Romeo Lipana claims to have entrusted RMC funds in the form
of cash totalling P304,979.74 to his secretary, Irene Yabut, for the purpose of depositing said funds in the
current accounts of RMC with PBC. It turned out, however, that these deposits, on all occasions, were not
credited to RMC's account but were instead deposited to Account No. 53-01734-7 of Yabut's husband,
Bienvenido Cotas who likewise maintains an account with the same bank. During this period, petitioner bank
had, however, been regularly furnishing private respondent with monthly statements showing its current
accounts balances. Unfortunately, it had never been the practice of Romeo Lipana to check these monthly
statements of account reposing complete trust and confidence on petitioner bank.
Irene Yabut's modus operandi is far from complicated. She would accomplish two (2) copies of the deposit
slip, an original and a duplicate. The original showed the name of her husband as depositor and his current
account number. On the duplicate copy was written the account number of her husband but the name of the
account holder was left blank. PBC's teller, Azucena Mabayad, would, however, validate and stamp both the
original and the duplicate of these deposit slips retaining only the original copy despite the lack of information
on the duplicate slip. The second copy was kept by Irene Yabut allegedly for record purposes. After validation,
Yabut would then fill up the name of RMC in the space left blank in the duplicate copy and change the account
number written thereon, which is that of her husband's, and make it appear to be RMC's account number, i.e.,
C.A. No. 53-01980-3. With the daily remittance records also prepared by Ms. Yabut and submitted to private
respondent RMC together with the validated duplicate slips with the latter's name and account number, she
made her company believe that all the while the amounts she deposited were being credited to its account
when, in truth and in fact, they were being deposited by her and credited by the petitioner bank in the account
of Cotas. This went on in a span of more than one (1) year without private respondent's knowledge.
Upon discovery of the loss of its funds, RMC demanded from petitioner bank the return of its money, but as its
demand went unheeded, it filed a collection suit before the Regional Trial Court of Pasig, Branch 160. The trial
court found petitioner bank negligent and ruled as follows:
WHEREFORE, judgment is hereby rendered sentencing defendant Philippine Bank of
Commerce, now absorbed by defendant Philippine Commercial & Industrial Bank, and
defendant Azucena Mabayad to pay the plaintiff, jointly and severally, and without
prejudice to any criminal action which may be instituted if found warranted:
1. The sum of P304,979.72, representing plaintiffs lost deposit, plus interest thereon at
the legal rate from the filing of the complaint;
2. A sum equivalent to 14% thereof, as exemplary damages;
3. A sum equivalent to 25% of the total amount due, as and for attorney's fees; and
4. Costs.
Defendants' counterclaim is hereby dismissed for lack of merit.2
On appeal, the appellate court affirmed the foregoing decision with modifications, viz:
WHEREFORE, the decision appealed from herein is MODIFIED in the sense that the
awards of exemplary damages and attorney's fees specified therein are eliminated and
instead, appellants are ordered to pay plaintiff, in addition to the principal sum of
P304,979.74 representing plaintiff's lost deposit plus legal interest thereon from the
filing of the complaint, P25,000.00 attorney's fees and costs in the lower court as well
as in this Court.3
Hence, this petition anchored on the following grounds:
1) The proximate cause of the loss is the negligence of respondent Rommel Marketing
Corporation and Romeo Lipana in entrusting cash to a dishonest employee.
2) The failure of respondent Rommel Marketing Corporation to cross-check the bank's
statements of account with its own records during the entire period of more than one
(1) year is the proximate cause of the commission of subsequent frauds and
misappropriation committed by Ms. Irene Yabut.
3) The duplicate copies of the deposit slips presented by respondent Rommel
Marketing Corporation are falsified and are not proof that the amounts appearing
thereon were deposited to respondent Rommel Marketing Corporation's account with
the bank,
4) The duplicate copies of the deposit slips were used by Ms. Irene Yabut to cover up
her fraudulent acts against respondent Rommel Marketing Corporation, and not as
records of deposits she made with the bank.4
The petition has no merit.
Simply put, the main issue posited before us is: What is the proximate cause of the loss, to the tune of
P304,979.74, suffered by the private respondent RMC — petitioner bank's negligence or that of private
respondent's?
Petitioners submit that the proximate cause of the loss is the negligence of respondent RMC and Romeo
Lipana in entrusting cash to a dishonest employee in the person of Ms. Irene Yabut.5 According to them, it was
impossible for the bank to know that the money deposited by Ms. Irene Yabut belong to RMC; neither was the
bank forewarned by RMC that Yabut will be depositing cash to its account. Thus, it was impossible for the
bank to know the fraudulent design of Yabut considering that her husband, Bienvenido Cotas, also maintained
an account with the bank. For the bank to inquire into the ownership of the cash deposited by Ms. Irene Yabut
would be irregular. Otherwise stated, it was RMC's negligence in entrusting cash to a dishonest employee
which provided Ms. Irene Yabut the opportunity to defraud RMC.6
Private respondent, on the other hand, maintains that the proximate cause of the loss was the negligent act of
the bank, thru its teller Ms. Azucena Mabayad, in validating the deposit slips, both original and duplicate,
presented by Ms. Yabut to Ms. Mabayad, notwithstanding the fact that one of the deposit slips was not
completely accomplished.
We sustain the private respondent.
Our law on quasi-delicts states:
Art. 2176. Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or negligence, if there is
no pre-existing contractual relation between the parties, is called a quasi-delict and is
governed by the provisions of this Chapter.
There are three elements of a quasi-delict: (a) damages suffered by the plaintiff; (b) fault or negligence of the
defendant, or some other person for whose acts he must respond; and (c) the connection of cause and effect
between the fault or negligence of the defendant and the damages incurred by the plaintiff.7
In the case at bench, there is no dispute as to the damage suffered by the private respondent (plaintiff in the
trial court) RMC in the amount of P304,979.74. It is in ascribing fault or negligence which caused the damage
where the parties point to each other as the culprit.
Negligence is the omission to do something which a reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and
reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case of Picart v. Smith,8 provides
the test by which to determine the existence of negligence in a particular case which may be stated as follows:
Did the defendant in doing the alleged negligent act use that reasonable care and caution which an ordinarily
prudent person would have used in the same situation? If not, then he is guilty of negligence. The law here in
effect adopts the standard supposed to be supplied by the imaginary conduct of the discreet paterfamilias of
the Roman law. The existence of negligence in a given case is not determined by reference to the personal
judgment of the actor in the situation before him. The law considers what would be reckless, blameworthy, or
negligent in the man of ordinary intelligence and prudence and determines liability by that.
Applying the above test, it appears that the bank's teller, Ms. Azucena Mabayad, was negligent in validating,
officially stamping and signing all the deposit slips prepared and presented by Ms. Yabut, despite the glaring
fact that the duplicate copy was not completely accomplished contrary to the self-imposed procedure of the
bank with respect to the proper validation of deposit slips, original or duplicate, as testified to by Ms. Mabayad
herself, thus:
Q: Now, as teller of PCIB, Pasig Branch, will you please tell us
Mrs. Mabayad your important duties and functions?
 A: I accept current and savings deposits from depositors and
encashments.
Q: Now in the handling of current account deposits of bank
clients, could you tell us the procedure you follow?
A: The client or depositor or the authorized representative
prepares a deposit slip by filling up the deposit slip with the
name, the account number, the date, the cash breakdown, if it
is deposited for cash, and the check number, the amount and
then he signs the deposit slip.
Q: Now, how many deposit slips do you normally require in
accomplishing current account deposit, Mrs. Mabayad?
A: The bank requires only one copy of the deposit although
some of our clients prepare the deposit slip in duplicate.
Q: Now in accomplishing current account deposits from your
clients, what do you issue to the depositor to evidence the
deposit made?
A: We issue or we give to the clients the depositor's stub as a
receipt of the deposit.
Q: And who prepares the deposit slip?
A: The depositor or the authorized representative sir?
Q: Where does the depositor's stub comes (sic) from Mrs.
Mabayad, is it with the deposit slip?
A: The depositor's stub is connected with the deposit slip or the
bank's copy. In a deposit slip, the upper portion is the
depositor's stub and the lower portion is the bank's copy, and
you can detach the bank's copy from the depositor's stub by
tearing it sir.
Q: Now what do you do upon presentment of the deposit slip by
the depositor or the depositor's authorized representative?
A: We see to it that the deposit slip9 is properly accomplished
and then we count the money and then we tally it with the
deposit slip sir.
Q: Now is the depositor's stub which you issued to your clients
validated?
A: Yes, sir. 10 [Emphasis ours]
Clearly, Ms. Mabayad failed to observe this very important procedure. The fact that the duplicate
slip was not compulsorily required by the bank in accepting deposits should not relieve the
petitioner bank of responsibility. The odd circumstance alone that such duplicate copy lacked one
vital information — that of the name of the account holder — should have already put Ms.
Mabayad on guard. Rather than readily validating the incomplete duplicate copy, she should have
proceeded more cautiously by being more probing as to the true reason why the name of the
account holder in the duplicate slip was left blank while that in the original was filled up. She
should not have been so naive in accepting hook, line and sinker the too shallow excuse of Ms.
Irene Yabut to the effect that since the duplicate copy was only for her personal record, she would
simply fill up the blank space later on. 11 A "reasonable man of ordinary prudence" 12 would not
have given credence to such explanation and would have insisted that the space left blank be filled
up as a condition for validation. Unfortunately, this was not how bank teller Mabayad proceeded
thus resulting in huge losses to the private respondent.
Negligence here lies not only on the part of Ms. Mabayad but also on the part of the bank itself in its
lackadaisical selection and supervision of Ms. Mabayad. This was exemplified in the testimony of Mr. Romeo
Bonifacio, then Manager of the Pasig Branch of the petitioner bank and now its Vice-President, to the effect
that, while he ordered the investigation of the incident, he never came to know that blank deposit slips were
validated in total disregard of the bank's validation procedures, viz:
Q: Did he ever tell you that one of your cashiers affixed the
stamp mark of the bank on the deposit slips and they validated
the same with the machine, the fact that those deposit slips
were unfilled up, is there any report similar to that?
A: No, it was not the cashier but the teller.
Q: The teller validated the blank deposit slip?
A: No it was not reported.
Q: You did not know that any one in the bank tellers or cashiers
validated the blank deposit slip?
A: I am not aware of that.
Q: It is only now that you are aware of that?
A: Yes, sir. 13
Prescinding from the above, public respondent Court of Appeals aptly observed:
xxx xxx xxx
It was in fact only when he testified in this case in February, 1983, or after the lapse of
more than seven (7) years counted from the period when the funds in question were
deposited in plaintiff's accounts (May, 1975 to July, 1976) that bank manager Bonifacio
admittedly became aware of the practice of his teller Mabayad of validating blank
deposit slips. Undoubtedly, this is gross, wanton, and inexcusable negligence in the
appellant bank's supervision of its employees. 14
It was this negligence of Ms. Azucena Mabayad, coupled by the negligence of the petitioner bank in the
selection and supervision of its bank teller, which was the proximate cause of the loss suffered by the private
respondent, and not the latter's act of entrusting cash to a dishonest employee, as insisted by the petitioners.
Proximate cause is determined on the facts of each case upon mixed considerations of logic, common sense,
policy and precedent. 15 Vda. de Bataclan v. Medina, 16 reiterated in the case of Bank of the Phil. Islands
v. Court of Appeals, 17 defines proximate cause as "that cause, which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury, and without which the result would not have
occurred. . . ." In this case, absent the act of Ms. Mabayad in negligently validating the incomplete duplicate
copy of the deposit slip, Ms. Irene Yabut would not have the facility with which to perpetrate her fraudulent
scheme with impunity. Apropos, once again, is the pronouncement made by the respondent appellate court, to
wit:
. . . . Even if Yabut had the fraudulent intention to misappropriate the funds entrusted to
her by plaintiff, she would not have been able to deposit those funds in her husband's
current account, and then make plaintiff believe that it was in the latter's accounts
wherein she had deposited them, had it not been for bank teller Mabayad's aforesaid
gross and reckless negligence. The latter's negligence was thus the proximate,
immediate and efficient cause that brought about the loss claimed by plaintiff in this
case, and the failure of plaintiff to discover the same soon enough by failing to
scrutinize the monthly statements of account being sent to it by appellant bank could
not have prevented the fraud and misappropriation which Irene Yabut had already
completed when she deposited plaintiff's money to the account of her husband instead
of to the latter's accounts. 18
Furthermore, under the doctrine of "last clear chance" (also referred to, at times as "supervening negligence"
or as "discovered peril"), petitioner bank was indeed the culpable party. This doctrine, in essence, states that
where both parties are negligent, but the negligent act of one is appreciably later in time than that of the other,
or when it is impossible to determine whose fault or negligence should be attributed to the incident, the one
who had the last clear opportunity to avoid the impending harm and failed to do so is chargeable with the
consequences thereof. 19Stated differently, the rule would also mean that an antecedent negligence of a
person does not preclude the recovery of damages for the supervening negligence of, or bar a defense
against liability sought by another, if the latter, who had the last fair chance, could have avoided the impending
harm by the exercise of due diligence. 20Here, assuming that private respondent RMC was negligent in
entrusting cash to a dishonest employee, thus providing the latter with the opportunity to defraud the
company, as advanced by the petitioner, yet it cannot be denied that the petitioner bank, thru its teller, had the
last clear opportunity to avert the injury incurred by its client, simply by faithfully observing their self-imposed
validation procedure.
At this juncture, it is worth to discuss the degree of diligence ought to be exercised by banks in dealing with
their clients.
The New Civil Code provides:
Art. 1173. The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds with the
circumstances of the persons, of the time and of the place. When negligence shows
bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be required.
(1104a)
In the case of banks, however, the degree of diligence required is more than that of a good father of a family.
Considering the fiduciary nature of their relationship with their depositors, banks are duty bound to treat the
accounts of their clients with the highest degree of care. 21
As elucidated in Simex International (Manila), Inc. v. Court of Appeals, 22 in every case, the depositor expects
the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred
pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and
as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money
the depositor can dispose as he sees fit, confident that the bank will deliver it as and to whomever he directs.
A blunder on the part of the bank, such as the failure to duly credit him his deposits as soon as they are made,
can cause the depositor not a little embarrassment if not financial loss and perhaps even civil and criminal
litigation.
The point is that as a business affected with public interest and because of the nature of its functions, the bank
is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship. In the case before us, it is apparent that the petitioner bank was remiss in
that duty and violated that relationship.
Petitioners nevertheless aver that the failure of respondent RMC to cross-check the bank's statements of
account with its own records during the entire period of more than one (1) year is the proximate cause of the
commission of subsequent frauds and misappropriation committed by Ms. Irene Yabut.
We do not agree.
While it is true that had private respondent checked the monthly statements of account sent by the petitioner
bank to RMC, the latter would have discovered the loss early on, such cannot be used by the petitioners to
escape liability. This omission on the part of the private respondent does not change the fact that were it not
for the wanton and reckless negligence of the petitioners' employee in validating the incomplete duplicate
deposit slips presented by Ms. Irene Yabut, the loss would not have occurred. Considering, however, that the
fraud was committed in a span of more than one (1) year covering various deposits, common human
experience dictates that the same would not have been possible without any form of collusion between Ms.
Yabut and bank teller Mabayad. Ms. Mabayad was negligent in the performance of her duties as bank teller
nonetheless. Thus, the petitioners are entitled to claim reimbursement from her for whatever they shall be
ordered to pay in this case.
The foregoing notwithstanding, it cannot be denied that, indeed, private respondent was likewise negligent in
not checking its monthly statements of account. Had it done so, the company would have been alerted to the
series of frauds being committed against RMC by its secretary. The damage would definitely not have
ballooned to such an amount if only RMC, particularly Romeo Lipana, had exercised even a little vigilance in
their financial affairs. This omission by RMC amounts to contributory negligence which shall mitigate the
damages that may be awarded to the private respondent 23 under Article 2179 of the New Civil Code, to wit:
. . . When the plaintiff's own negligence was the immediate and proximate cause of his
injury, he cannot recover damages. But if his negligence was only contributory, the
immediate and proximate cause of the injury being the defendant's lack of due care,
the plaintiff may recover damages, but the courts shall mitigate the damages to be
awarded.
In view of this, we believe that the demands of substantial justice are satisfied by allocating the
damage on a 60-40 ratio. Thus, 40% of the damage awarded by the respondent appellate court,
except the award of P25,000.00 attorney's fees, shall be borne by private respondent RMC; only
the balance of 60% needs to be paid by the petitioners. The award of attorney's fees shall be
borne exclusively by the petitioners.
WHEREFORE, the decision of the respondent Court of Appeals is modified by reducing the amount of actual
damages private respondent is entitled to by 40%. Petitioners may recover from Ms. Azucena Mabayad the
amount they would pay the private respondent. Private respondent shall have recourse against Ms. Irene
Yabut. In all other respects, the appellate court's decision is AFFIRMED.
Proportionate costs.
SO ORDERED.
SAFEGUARD SECURITY G.R. NO. 165732
AGENCY, INC., and ADMER
PAJARILLO,
Petitioners,
Present:
PANGANIBAN, C.J.*
YNARES-SANTIAGO, (Working Chairperson)
- versus - AUSTRIA-MARTINEZ,
CALLEJO, SR., and
CHICO-NAZARIO, JJ.
LAURO TANGCO, VAL TANGCO,
VERN LARRY TANGCO, VAN
LAURO TANGCO, VON LARRIE
TANGCO, VIEN LARI TANGCO
and VIVIEN LAURIZ TANGCO, Promulgated:
Respondents. December 14, 2006
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a petition for review on certiorari filed by Safeguard Security Agency, Inc. (Safeguard)
and Admer Pajarillo (Pajarillo) assailing the Decision[1] dated July 16, 2004 and the Resolution[2] dated October
20, 2004 issued by the Court of Appeals (CA) in CA-G.R. CV No. 77462.
On November 3, 1997, at about 2:50 p.m., Evangeline Tangco (Evangeline) went to Ecology
Bank, Katipunan Branch, Quezon City, to renew her time deposit per advise of the banks cashier as she
would sign a specimen card. Evangeline, a duly licensed firearm holder with corresponding permit to carry the
same outside her residence, approached security guard Pajarillo, who was stationed outside the bank, and
pulled out her firearm from her bag to deposit the same for safekeeping. Suddenly, Pajarillo shot Evangeline
with his service shotgun hitting her in the abdomen instantly causing her death.
Lauro Tangco, Evangelines husband, together with his six minor children (respondents) filed with the Regional
Trial Court (RTC) of Quezon City, a criminal case of Homicide against Pajarillo, docketed as Criminal Case
No. 0-97-73806 and assigned to Branch 78. Respondents reserved their right to file a separate civil action in
the said criminal case. The RTC of Quezon City subsequently convicted Pajarillo of Homicide in its Decision
dated January 19, 2000.[3] On appeal to the CA, the RTC decision was affirmed with modification as to the
penalty in a Decision[4] dated July 31, 2000. Entry of Judgment was made on August 25, 2001.
Meanwhile, on January 14, 1998, respondents filed with RTC, Branch 273, Marikina City, a
complaint[5] for damages against Pajarillo for negligently shooting Evangeline and against Safeguard for failing
to observe the diligence of a good father of a family to prevent the damage committed by its security guard.
Respondents prayed for actual, moral and exemplary damages and attorneys fees.
[6]
In their Answer, petitioners denied the material allegations in the complaint and alleged that
Safeguard exercised the diligence of a good father of a family in the selection and supervision of Pajarillo; that
Evangelines death was not due to Pajarillos negligence as the latter acted only in self-defense. Petitioners set
up a compulsory counterclaim for moral damages and attorneys fees.
Trial thereafter ensued. On January 10, 2003, the RTC
[7]
Decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs, the
heirs of Evangeline Tangco, and against defendants Admer Pajarillo and Safeguard
Security Agency, Inc. ordering said defendants to pay the plaintiffs, jointly and
severally, the following:
1. ONE HUNDRED FIFTY SEVEN THOUSAND FOUR
HUNDRED THIRTY PESOS (P157,430.00), as actual damages
2. FIFTY THOUSAND PESOS (P50,000.00) as death indemnity;
3. ONE MILLION PESOS (P1,000,000.00), as moral damages;
4. THREE HUNDRED THOUSAND PESOS (P300,000.00), as
exemplary damages;
5. THIRTY THOUSAND PESOS (P30,000.00), as attorneys
fees; and
6. costs of suit.
For lack of merit, defendants counterclaim is hereby DISMISSED.
[8]
SO ORDERED.
The RTC found respondents to be entitled to damages. It rejected Pajarillos claim that he merely
acted in self-defense. It gave no credence to Pajarillos bare claim that Evangeline was seen roaming around
the area prior to the shooting incident since Pajarillo had not made such report to the head office and the
police authorities. The RTC further ruled that being the guard on duty, the situation demanded that he should
have exercised proper prudence and necessary care by asking Evangeline for him to ascertain the matter
instead of shooting her instantly; that Pajarillo had already been convicted of Homicide in Criminal Case No. 0-
97-73806; and that he also failed to proffer proof negating liability in the instant case.
The RTC also found Safeguard as employer of Pajarillo to be jointly and severally liable
with Pajarillo. It ruled that while it may be conceded that Safeguard had perhaps exercised care in the
selection of its employees, particularly of Pajarillo, there was no sufficient evidence to show that Safeguard
exercised the diligence of a good father of a family in the supervision of its employee; that Safeguards
evidence simply showed that it required its guards to attend trainings and seminars which is not the
supervision contemplated under the law; that supervision includes not only the issuance of regulations and
instructions designed for the protection of persons and property, for the guidance of their servants and
employees, but also the duty to see to it that such regulations and instructions are faithfully complied with.
Petitioners appealed the RTC decision to the CA. On July 16, 2004, the CA issued its assailed
Decision, the dispositive portion of which reads:
IN VIEW OF ALL THE FOREGOING, the appealed decision is
hereby AFFIRMED, with the modification that Safeguard Security Agency, Inc.s civil
liability in this case is only subsidiary under Art. 103 of the Revised Penal Code. No
pronouncement as to costs.[9]
In finding that Safeguard is only subsidiarily liable, the CA held that the applicable provisions are
not Article 2180 in relation to Article 2176 of the Civil Code, on quasi-delicts, but the provisions on civil liability
arising from felonies under the Revised Penal Code; that since Pajarillo had been found guilty of Homicide in a
final and executoryjudgment and is said to be serving sentence in Muntinlupa, he must be adjudged civilly
liable under the provisions of Article 100 of the Revised Penal Code since the civil liability recoverable in the
criminal action is one solely dependent upon conviction, because said liability arises from the offense charged
and no other; that this is also the civil liability that is deemed extinguished with the extinction of the penal
liability with a pronouncement that the fact from which the civil action might proceed does not exist; that unlike
in civil liability arising from quasi-delict, the defense of diligence of a good father of a family in the employment
and supervision of employees is inapplicable and irrelevant in civil liabilities based on crimes or ex-delicto; that
Article 103 of the Revised Penal Code provides that the liability of an employer for the civil liability of their
employees is only subsidiary, not joint or solidary.
Petitioners filed their Motion for Reconsideration which the CA denied in a Resolution
dated October 20, 2004.
Hence, the instant Petition for Review on Certiorari with the following assignment of errors, to wit:
The Honorable Court of Appeals gravely erred in finding
rendered its petitioner Pajarillo liable to respondents for the payment of damages and other money
claims.
The Honorable Court of Appeals gravely erred when it applied Article 103
of the Revised Penal Code in holding petitioner Safeguard solidarily [sic] liable with
petitioner Pajarillo for the payment of damages and other money claims.
The Honorable Court of Appeals gravely erred in failing to find that petitioner
Safeguard Security Agency, Inc. exercised due diligence in the selection and
supervision of its employees, hence, should be excused from any liability.[10]
The issues for resolution are whether (1) Pajarillo is guilty of negligence in shooting Evangeline;
and (2) Safeguard should be held solidarily liable for the damages awarded to respondents.
Safeguard insists that the claim for damages by respondents is based on culpa aquiliana under
Article 2176[11] of the Civil Code, in which case, its liability is jointly and severally with Pajarillo. However, since
it has established that it had exercised due diligence in the selection and supervision of Pajarillo, it should be
exonerated from civil liability.
We will first resolve whether the CA correctly held that respondents, in filing a separate civil action
against petitioners are limited to the recovery of damages arising from a crime or delict, in which case the
liability of Safeguard as employer under Articles 102 and 103 of the Revised Penal Code [12] is subsidiary and
the defense of due diligence in the selection and supervision of employee is not available to it.
The CA erred in ruling that the liability of Safeguard is only subsidiary.
The law at the time the complaint for damages was filed is Rule 111 of the 1985 Rules on Criminal
Procedure, as amended, to wit:
 SECTION 1. Institution of criminal and civil actions. - When a The scope of Article 2176 is not limited to acts or omissions resulting from negligence. In Dulay v.
criminal action is instituted, the civil action for the recovery of civil
liability is impliedly instituted with the criminal action, unless the offended party waives
the civil action, reserves his right to institute it separately, or institutes the civil action
prior to the criminal action.
Such civil action includes recovery of indemnity under the Revised Penal
Code, and damages under Articles 32, 33, 34, and 2176 of the Civil Code of
the Philippines arising from the same act or omission of the accused.
Respondents reserved the right to file a separate civil action and in fact filed the same on January
14, 1998.
The CA found that the source of damages in the instant case must be the crime of homicide, for
which he had already been found guilty of and serving sentence thereof, thus must be governed by the
Revised Penal Code.
We do not agree.
An act or omission causing damage to another may give rise to two separate civil liabilities on the
part of the offender, i.e., (1) civil liability ex delicto, under Article 100 of the Revised Penal Code; and (2)
independent civil liabilities, such as those (a) not arising from an act or omission complained of as a
felony, e.g., culpa contractual or obligations arising from law under Article 31 of the Civil Code, intentional torts
under Articles 32 and 34, and culpa aquiliana under Article 2176 of the Civil Code; or (b) where the injured
party is granted a right to file an action independent and distinct from the criminal action under Article 33 of the
Civil Code. Either of these liabilities may be enforced against the offender subject to the caveat under Article
2177 of the Civil Code that the offended party cannot recover damages twice for the same act or omission or
under both causes.[13]
It is important to determine the nature of respondents cause of action. The nature of a cause of
action is determined by the facts alleged in the complaint as constituting the cause of action.[14] The purpose of
an action or suit and the law to govern it is to be determined not by the claim of the party filing the action,
made in his argument or brief, but rather by the complaint itself, its allegations and prayer for relief.[15]
The pertinent portions of the complaint read:
7. That Defendant Admer A. Pajarillo was the guard assigned and posted in
the Ecology Bank Katipunan Branch, Quezon City, who was employed and under
employment of Safeguard Security Agency, Inc. hence there is employer-employee
relationship between co-defendants.
The Safeguard Security Agency, Inc. failed to observe the diligence of a good father of
a family to prevent damage to herein plaintiffs.
8. That defendant Admer Pajarillo upon seeing Evangeline Tangco, who
brought her firearm out of her bag, suddenly without exercising necessary
caution/care, and in idiotic manner, with the use of his
shotgun, fired and burst bullets upon Evangeline M. Tangco, killing her instantly. x x x
xxxx
16. That defendants, being employer and the employee are jointly and
severally liable for the death of Evangeline M. Tangco.[16]
Thus, a reading of respondents complaint shows that the latter are invoking their right to recover damages
against Safeguard for their vicarious responsibility for the injury caused by Pajarillos act of shooting and killing
Evangeline under Article 2176, Civil Code which provides:
ARTICLE 2176. Whoever by act or omission causes damage to another,
there being fault or negligence, is obliged to pay for the damage done. Such fault or
negligence, if there is no pre-existing contractual relation between the parties is called
a quasi-delict and is governed by the provisions of this Chapter.
Court of Appeals,[17] we held:
x x x Well-entrenched is the doctrine that Article 2176 covers not only acts
committed with negligence, but also acts which are voluntary and intentional. As far
back as the definitive case of Elcano v. Hill (77 SCRA 98 [1977]), this Court already
held that:
"x x x Article 2176, where it refers to "fault or negligence," covers not
only acts "not punishable by law" but also acts criminal in character, whether
intentional and voluntary or negligent. Consequently, a separate civil action lies
against the offender in a criminal act, whether or not he is criminally prosecuted and
found guilty or acquitted, provided that the offended party is not allowed, if he is
actually charged also criminally, to recover damages on both scores, and would be
entitled in such eventuality only to the bigger award of the two, assuming the awards
made in the two cases vary. In other words, the extinction of civil liability referred to in
Par. (e) of Section 3, Rule 111, refers exclusively to civil liability founded on Article 100
of the Revised Penal Code, whereas the civil liability for the same act considered as
quasi-delict only and not as a crime is not extinguished even by a declaration in the
criminal case that the criminal act charged has not happened or has not been
committed by the accused. Briefly stated, We here hold, in reiteration of Garcia, that
culpa aquiliana includes voluntary and negligent acts which may be punishable by
law." (Emphasis supplied)
The civil action filed by respondents was not derived from the criminal liability of Pajarillo in the
criminal case but one based on culpa aquiliana or quasi-delict which is separate and distinct from the civil
liability arising from crime.[18] The source of the obligation sought to be enforced in the civil case is a quasi-
delict not an act or omission punishable by law.
In Bermudez v. Melencio-Herrera,[19] where the issue involved was whether the civil action filed by
plaintiff-appellants is founded on crime or on quasi-delict, we held:
x x x The trial court treated the case as an action based on a crime in view
of the reservation made by the offended party in the criminal case (Criminal Case No.
92944), also pending before the court, to file a separate civil action. Said the trial court:
It would appear that plaintiffs instituted this action on the assumption that
defendant Pontino's negligence in the accident of May 10, 1969 constituted a quasi-
delict. The Court cannot accept the validity of that assumption. In Criminal Case No.
92944 of this Court, plaintiffs had already appeared as complainants. While that case
was pending, the offended parties reserved the right to institute a separate civil action.
If, in a criminal case, the right to file a separate civil action for damages is reserved,
such civil action is to be based on crime and not on tort. That was the ruling in Joaquin
vs. Aniceto, L-18719, Oct. 31, 1964.
We do not agree. The doctrine in the case cited by the trial court is
inapplicable to the instant case x x x.
xxxx
In cases of negligence, the injured party or his heirs has the choice
between an action to enforce the civil liability arising from crime under Article 100 of
the Revised Penal Code and an action for quasi-delict under Article 2176-2194 of the
Civil Code. If a party chooses the latter, he may hold the employer solidarily liable for
the negligent act of his employee, subject to the employer's defense of exercise of the
diligence of a good father of the family.
In the case at bar, the action filed by appellant was an action for damages
based on quasi-delict. The fact that appellants reserved their right in the criminal
case to file an independent civil action did not preclude them from choosing to
file a civil action for quasi-delict.[20] (Emphasis supplied)
Although the judgment in the criminal case finding Pajarillo guilty of Homicide is already final
and executory, such judgment has no relevance or importance to this case.[21] It would have been entirely
different if respondents cause of action was for damages arising from a delict, in which case the CA is correct
in finding Safeguard to be only subsidiary liable pursuant to Article 103 of the Revised Penal Code.[22]
As clearly shown by the allegations in the complaint, respondents cause of action is based
on quasi-delict. Under Article 2180 of the Civil Code, when the injury is caused by the negligence of the
employee, there instantly arises a presumption of law that there was negligence on the part of the master or
the employer either in the selection of the servant or employee, or in the supervision over him after selection
or both. The liability of the employer under Article 2180 is direct and immediate. Therefore, it is incumbent
upon petitioners to prove that they exercised the diligence of a good father of a family in the selection and
supervision of their employee.
We must first resolve the issue of whether Pajarillo was negligent in shooting Evangeline.
The issue of negligence is factual in nature. Whether a person is negligent or not is a question of
fact, which, as a general rule, we cannot pass upon in a petition for review on certiorari, as our jurisdiction is
limited to reviewing errors of law.[23] Generally, factual findings of the trial court, affirmed by the CA, are final
and conclusive and may not be reviewed on appeal. The established exceptions are: (1) when the inference
made is manifestly mistaken, absurd or impossible; (2) when there is grave abuse of discretion; (3) when the
findings are grounded entirely on speculations, surmises or conjectures; (4) when the judgment of the CA is
based on misapprehension of facts; (5) when the findings of fact are conflicting; (6) when the CA, in making its
findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant
and appellee; (7) when the findings of fact are conclusions without citation of specific evidence on which they
are based; (8) when the CA manifestly overlooked certain relevant facts not disputed by the parties and which,
if properly considered, would justify a different conclusion; and (9) when the findings of fact of the CA are
premised on the absence of evidence and are contradicted by the evidence on record. [24]
A thorough review of the records of the case fails to show any cogent reason for us to deviate from
the factual finding of the trial court and affirmed by the CA that petitioner Pajarillo was guilty of negligence in
shooting Evangeline.
Respondents evidence established that Evangelines purpose in going to the bank was to renew
her time deposit.[25] On the other hand, Pajarillo claims that Evangeline drew a gun from her bag and aimed
the same at him, thus, acting instinctively, he shot her in self-defense.
Pajarillo testified that when Evangeline aimed the gun at him at a distance of about one meter or
one arms length[26] he stepped backward, loaded the chamber of his gun and shot her.[27] It is however
unimaginable that petitioner Pajarillo could still make such movements if indeed the gun was already pointed
at him. Any movement could have prompted Evangeline to pull the trigger to shoot him.
Petitioner Pajarillo would like to justify his action in shooting Evangeline on his mere apprehension
that Evangeline will stage a bank robbery. However, such claim is befuddled by his
own testimony. Pajarillo testified that prior to the incident, he saw Evangeline roaming under the fly over which
was about 10 meters away from the bank[28]and saw her talking to a man thereat;[29] that she left the man
under the fly-over, crossed the street and approached the bank. However, except for the bare testimony
of Pajarillo, the records do not show that indeed Evangeline was seen roaming near the vicinity of the bank
and acting suspiciously prior to the shooting incident. In fact, there is no evidence that Pajarillo called the
attention of his head guard or the banks branch manager regarding his concerns or that he reported the same
to the police authorities whose outpost is just about 15 meters from the bank.
Moreover, if Evangeline was already roaming the vicinity of the bank, she could have already
apprised herself that Pajarillo, who was posted outside the bank, was armed with a shotgun; that there were
two guards inside the bank[30] manning the entrance door. Thus, it is quite incredible that if she really had a
companion, she would leave him under the fly-over which is 10 meters far from the bank and stage a bank
robbery all by herself without a back-up. In fact, she would have known, after surveying the area, thataiming
her gun at Pajarillo would not ensure entrance to the bank as there were guards manning the entrance door.
Evidence, to be believed, must not only proceed from the mouth of a credible witness, but it must
be credible in itself such as the common experience and observation of mankind can approve as probable
under the circumstances. We have no test of the truth of human testimony, except its conformity to our
knowledge, observation and experience. Whatever is repugnant to these belongs to the miraculous and is
outside judicial cognizance.[31]
That Evangeline just wanted to deposit her gun before entering the bank and was actually in the
act of pulling her gun from her bag when petitioner Pajarillo recklessly shot her, finds support from the
contentions raised in petitioners petition for review where they argued that when Evangeline approached the
bank, she was seen pulling a gun from inside her bag and petitioner Pajarillo who was suddenly beset by fear
and perceived the act as a dangerous threat, shot and killed the deceased out of pure instinct; [32] that the act
of drawing a gun is a threatening act, regardless of whether or not the gun was intended to be used against
petitioner Pajarillo;[33] that the fear that was created in the mind of petitioner Pajarillo as he saw
Evangeline Tangco drawing a gun from her purse was suddenly very real and the former merely reacted out of
pure self-preservation.[34]
Considering that unlawful aggression on the part of Evangeline is absent, Pajarillos claim of self-
defense cannot be accepted specially when such claim was uncorroborated by any separate competent
evidence other than his testimony which was even doubtful. Pajarillos apprehension that Evangeline will shoot
him to stage a bank robbery has no basis at all. It is therefore clear that the alleged threat of bank robbery was
just a figment of Pajarillos imagination which caused such unfounded unlawful aggression on his part.
Petitioners argue that Evangeline was guilty of contributory negligence. Although she was a
licensed firearm holder, she had no business bringing the gun in such establishment where people would
react instinctively upon seeing the gun; that had Evangeline been prudent, she could have
warned Pajarillo before drawing the gun and did not conduct herself with suspicion by roaming outside the
vicinity of the bank; that she should not have held the gun with the nozzle pointed at Pajarillo who mistook the
act as hold up or robbery.
We are not persuaded.
As we have earlier held, Pajarillo failed to substantiate his claim that Evangeline was seen roaming
outside the vicinity of the bank and acting suspiciously prior to the shooting incident. Evangelines death was
merely due to Pajarillos negligence in shooting her on his imagined threat that Evangeline will rob the bank.
Safeguard contends that it cannot be jointly held liable since it had adequately shown that it had
exercised the diligence required in the selection and supervision of its employees. It claims that it had required
the guards to undergo the necessary training and to submit the requisite qualifications and credentials which
even the RTC found to have been complied with; that the RTC erroneously found that it did not exercise the
diligence required in the supervision of its employee. Safeguard further claims that it conducts monitoring of
the activities of its personnel, wherein supervisors are assigned to routinely check the activities of the security
guards which include among others, whether or not they are in their proper post and with proper equipment,
as well as regular evaluations of the employees performances; that the fact that Pajarillo loaded his firearm
contrary to Safeguards operating procedure is not sufficient basis to say that Safeguard had failed its duty of
proper supervision; that it was likewise error to say that Safeguard was negligent in seeing to it that the
procedures and policies were not properly implemented by reason of one unfortunate event.
We are not convinced.
Article 2180 of the Civil Code provides:
Art. 2180. The obligation imposed by Article 2176 is demandable not only
for ones own acts or omissions, but also for those of persons for whom one is
responsible.
xxxx
Employers shall be liable for the damages caused by their employees and
household helpers acting within the scope of their assigned tasks, even though the
former are not engaged in any business or industry.
xxxx
The responsibility treated of in this article shall cease when the persons
herein mentioned prove that they observed all the diligence of a good father of a family
to prevent damage.
As the employer of Pajarillo, Safeguard is primarily and solidarily liable for the quasi-
delict committed by the former. Safeguard is presumed to be negligent in the selection and supervision of his
employee by operation of law. This presumption may be overcome only by satisfactorily showing that the
employer exercised the care and the diligence of a good father of a family in the selection and the supervision
of its employee.
In the selection of prospective employees, employers are required to examine them as to their
qualifications, experience, and service records.[35] On the other hand, due diligence in the supervision of
employees includes the formulation of suitable rules and regulations for the guidance of employees and the
issuance of proper instructions intended for the protection of the public and persons with whom the employer
has relations through his or its employees and the imposition of necessary disciplinary measures upon
employees in case of breach or as may be warranted to ensure the performance of acts indispensable to the
business of and beneficial to their employer. To this, we add that actual implementation and monitoring of
consistent compliance with said rules should be the constant concern of the employer, acting through
dependable supervisors who should regularly report on their supervisory functions.[36] To establish these
factors in a trial involving the issue of vicarious liability, employers must submit concrete proof, including
documentary evidence.
We agree with the RTCs finding that Safeguard had exercised the diligence in the selection
of Pajarillo since the record shows that Pajarillo underwent a psychological and neuro-psychiatric evaluation
conducted by the St. Martin de Porres Center where no psychoses ideations were noted, submitted a
certification on the Pre-licensing training course for security guards, as well as police and NBI clearances.
in addition to moral, temperate, liquidated or compensatory damages.[49] It is awarded as a deterrent to
socially deleterious actions. In quasi-delict, exemplary damages may be granted if the defendant acted with
gross negligence.[50]
Pursuant to Article 2208 of the Civil Code, attorney's fees may be recovered when, as in the
instant case, exemplary damages are awarded. Hence, we affirm the award of attorney's fees in the amount
of P30,000.00.
WHEREFORE, the petition for review is DENIED. The Decision dated July 16, 2004 of the Court of
Appeals is AFFIRMED with MODIFICATION that the civil liability of petitioner Safeguard Security Agency, Inc.
is SOLIDARY and PRIMARY under Article 2180 of the Civil Code.

The RTC did not err in ruling that Safeguard fell short of the diligence required in the supervision of SO ORDERED.
its employee, particularly Pajarillo. In this case, while Safeguard presented Capt. James Camero, its Director
for Operations, who testified on the issuance of company rules and regulations, such as the Guidelines of
Guards Who Will Be Assigned To Banks,[37] Weapons Training,[38] Safeguard Training Center Marksmanship
Training Lesson Plan,[39] Disciplinary/Corrective Sanctions,[40] it had also been established
during Cameros cross-examination that Pajarillo was not aware of such rules and
regulations.[41] Notwithstanding Cameros clarification on his re-direct examination that these company rules
and regulations are lesson plans as a basis of guidelines of the instructors during classroom instructions and
not necessary to give students copy of the same,[42] the records do not show that Pajarillo had attended such
classroom instructions.
The records also failed to show that there was adequate training and continuous evaluation of the
security guards performance. Pajarillo had only attended an in-service training on March 1, 1997 conducted by
Toyota Sta. Rosa, his first assignment as security guard of Safeguard, which was in collaboration with
Safeguard. It was established that the concept of such training was purely on security of equipments to be
guarded and protection of the life of the employees.[43]

It had not been established that after Pajarillos training in Toyota, Safeguard had ever conducted
further training of Pajarillo when he was later assigned to guard a bank which has a different nature of
business with that of Toyota. In fact, Pajarillo testified that being on duty in a bank is different from being on
duty in a factory since a bank is a very sensitive area.[44]

Moreover, considering his reactions to Evangelines act of just depositing her firearm for
safekeeping, i.e., of immediately shooting her, confirms that there was no training or seminar given on how to
handle bank clients and on human psychology.

Furthermore, while Safeguard would like to show that there were inspectors who go around the
bank two times a day to see the daily performance of the security guards assigned therein, there was no
record ever presented of such daily inspections. In fact, if there was really such inspection made, the alleged
suspicious act of Evangeline could have been taken noticed and reported.

Turning now to the award of damages, we find that the award of actual damages in the
amount P157,430.00 which were the expenses incurred by respondents in connection with the burial of
Evangeline were supported by receipts. The award of P50,000.00 as civil indemnity for the death of
Evangeline is likewise in order.

As to the award of moral damages, Article 2206 of the Civil Code provides that the spouse,
legitimate children and illegitimate descendants and ascendants of the deceased may demand moral
damages for mental anguish by reason of the death of the deceased. Moral damages are awarded to enable
the injured party to obtain means, diversions or amusements that will serve to alleviate the moral suffering
he/she has undergone, by reason of the defendants culpable action. Its award is aimed at restoration, as
much as possible, of the spiritual status quo ante; thus it must be proportionate to the suffering inflicted.[45] The
intensity of the pain experienced by the relatives of the victim is proportionate to the intensity of affection for
him and bears no relation whatsoever with the wealth or means of the offender.[46]

In this case, respondents testified as to their moral suffering caused by Evangelines death was so
sudden causing respondent Lauro to lose a wife and a mother to six children who were all minors at the time
of her death. In People v. Teehankee, Jr.,[47] we awarded one million pesos as moral damages to the heirs of a
seventeen-year-old girl who was murdered. In Metro Manila Transit Corporation v. Court of Appeals,[48] we
likewise awarded the amount of one million pesos as moral damages to the parents of a third year high school
student and who was also their youngest child who died in a vehicular accident since the girls death left a void
in their lives. Hence, we hold that the respondents are also entitled to the amount of one million pesos as
Evangelines death left a void in the lives of her husband and minor children as they were deprived of her love
and care by her untimely demise.

We likewise uphold the award of exemplary damages in the amount of P300,000.00. Under Article
2229 of the Civil Code, exemplary damages are imposed by way of example or correction for the public good,