Republic of the Philippines Supreme Court Manila EN BANC RUBEN REYNA and LLOYD SORIA, Petitioners, G.R. No.

167219 Present: CORONA, C.J., CARPIO, CARPIO MORALES, VELASCO, JR., * NACHURA, LEONARDO-DE CASTRO, BRION, PERALTA, BERSAMIN, DEL CASTILLO, ABAD, VILLARAMA, JR., PEREZ, MENDOZA, and SERENO, JJ. Promulgated: February 8, 2011 x-----------------------------------------------------------------------------------------x

- versus -

COMMISSION ON AUDIT, Respondent.

DECISION PERALTA, J.:

Before this Court is a Petition for certiorari, under Rule 64 of the Rules of Court, seeking to set aside Resolution No. 2004-046, dated December 7, 2004, of the Commission on Audit (COA).
[2]

[1]

The facts of the case are as follows:

The Land Bank of the Philippines (Land Bank) was engaged in a cattle-financing program wherein loans were granted to various cooperatives. Pursuant thereto, Land Banks Ipil, Zamboanga del Sur Branch (Ipil Branch) went into a massive information campaign offering the program to cooperatives.

Cooperatives who wish to avail of a loan under the program must fill up a Credit Facility Proposal (CFP) which will be reviewed by the Ipil Branch. As alleged by Emmanuel B. Bartocillo, Department Manager of the Ipil Branch, the CFP is a standard and prepared form provided by the Land Bank main office to be used in the loan application as mandated by the Field Operations Manual.
[3]

One of the conditions stipulated in the CFP is that prior

to the release of the loan, a Memorandum of Agreement (MOA) between the supplier of the cattle, Remad Livestock Corporation (REMAD), and the cooperative, shall have been signed providing the level of inventory of stocks to be delivered, specifications as to breed, condition of health, age, color, and weight. The MOA shall further provide for a buy-back agreement, technology, transfer, provisions for biologics requirement and technical visits and replacement of sterile, unproductive stocks.
[4]

Allegedly contained in the contracts was a stipulation that

[5]

the release of the loan shall be made sixty (60) days prior to the delivery of the stocks.

The Ipil Branch approved the applications of four cooperatives. R.T. Lim Rubber Marketing Cooperative (RT Lim RMC) and Buluan Agrarian Reform Beneficiaries MPC (BARBEMCO) were each granted two loans. Tungawan Paglaum Multi-Purpose Cooperative (Tungawan PFMPC) and Siay Farmers Multi -Purpose Cooperative (SIFAMCO) were each granted one loan. Pursuant to the terms of the CFP, the cooperatives individually entered into a contract with REMAD, denominated as a Cattle-Breeding and Buy-Back Marketing Agreement.
[6]

In December 1993, the Ipil Branch granted six loans to the four cooperative borrowers in the following amounts: Date Name Amount Amount of Amount Paid of of of Livestock to Cattle Release Borrower Loan Insurance Supplier (REMAD) 12-10-93 RTLim RMC P 795,305 P 62,305 P 733,000 12-10-93 BARBEMCO 482,825 37,825 445,000 12-16-93 Tungawan PFMPC 482,825 37,825 445,000 12-22-93 SIFAMCO 983,010 77,010 906,000 12-22-93 RTLim RMC 187,705 14,705 173,000 12-2293 BARBEMCO 448,105 35,105 413,000 [7] 375,775 264,775 3,115,000

TOTAL

P3,

As alleged by petitioners, the terms of the CFP allowed for pre-payments or advancement of the payments prior to the delivery of the cattle by the supplier REMAD. This Court notes, however, that copies of the

CFPs were not attached to the records of the case at bar. More importantly, the very contract entered into by the cooperatives and REMAD, or the Cattle-Breeding and Buy-Back Marketing Agreement did not contain a provision authorizing prepayment.
[8]

Three checks were issued by the Ipil Branch to REMAD to serve as advanced payment for the cattle. REMAD, however, failed to supply the cattle on the dates agreed upon.

In post audit, the Land Bank Auditor disallowed the amount of P3,115,000.00 under CSB No. 95-005 dated December 27, 1996 and Notices of Disallowance Nos. 96-014 to 96-019 in view of the non-delivery of the cattle.
[9]

Also made as the basis of the disallowance was the fact that advanced payment was made in violation of

bank policies and COA rules and regulations. Specifically, the auditor found deficiencies in the CFPs, to wit: The Auditor commented that the failure of such loan projects deprived the farmerbeneficiaries the opportunity to improve their economic condition. From the Credit Facilities Proposals (CFP), the Auditor noted the following deficiencies. xxxx 4. No. 1 of the loan terms and conditions allowed prepayments without taking into consideration the interest of the Bank. Nowhere in the documents reviewed disclosed about prepayment scheme with REMAD, the supplier/dealer. There was no justification for the prepayment scheme. Such is a clear deviation from existing procedures on asset financing under which the Bank will first issue a letter guarantee for the account of the borrower. Payment thereof will only be effected upon delivery of asset, inspection and acceptance of the same by the borrower. The prepayment arrangement also violates Section 88 of Presidential Decree (PD) No. 1445, to quote: Prohibition against advance payment on government Except with the prior approval of the President (Prime Minister), the government shall not be obliged to make an advance payment for services not yet rendered or for supplies and materials not yet delivered under any contract therefor. No payment, partial or final shall be made on any such contract except upon a certification by the head of the agency concerned to have effect that the services or supplies and materials have been delivered in accordance with the terms of the contract and have been duly inspected and accepted. Moreover, the Manual on FOG Lending Operations (page 35) provides the systems and procedures for releasing loans, to quote:

Loan Proceeds Released Directly to the Supplier/Dealer Proceeds of loans granted for the acquisition of farm machinery equipment; and sub-loan components for the purchase of construction materials, farm inputs, etc. shall be released directly to the accredited dealers/suppliers. Payment to the dealer shall be made after presentation of reimbursement documents (delivery/ official receipts/ purchase orders) acknowledged by the authorized LBP representative that same has been delivered. In cases where supplier requires Cash on Delivery (COD), the checks may be issued and the cooperative and a LBP representative shall release the check to the supplier and then take [10] delivery of the object of financing.

The persons found liable by the Auditor for the amount of P3,115,000.00 which was advanced to REMAD were the following employees of the Ipil Branch: 1. 2. 3. 4. 5. 6. Emmanuel B. Bartocillo Department Manager II George G. Hebrona Chief, Loans and Discounts Division Petitioner Ruben A. Reyna Senior Field Operations Specialist Petitioner Lloyd V. Soria Loans and Credit Analyst II [11] Mary Jane T. Cunting Cash Clerk IV [12] Leona O. Cabanatan Bookkeeper III/Acting Accountant.

The same employees, including petitioners, were also made respondents in a Complaint filed by the COA Regional Office No. IX, Zamboanga City, before the Office of the Ombudsman for Gross Negligence, Violation of Reasonable Office Rules and Regulations, Conduct Prejudicial to the Interest of the Bank and Giving Unwarranted Benefits to persons, causing undue injury in violation of Section 3(e) of Republic Act (R.A.) No. 3019, otherwise known as the Anti-Graft and Corrupt Practices Act.
[13]

On January 28, 1997, petitioners filed a Joint Motion for Reconsideration claiming that the issuance of the Notice of Disallowance was premature in view of the pending case in the Office of the Ombudsman. The Motion was denied by the Auditor. Unfazed, petitioners filed an appeal with the Director of COA Regional Office No. IX, Zamboanga City. On August 29, 1997, the COA Regional Office issued Decision No. 97-001 affirming the findings of the Auditor. On February 4, 1998, petitioners filed a Motion for Reconsideration, which was denied by the Regional Office in Decision No. 98-005
[14]

issued on February 18, 1998.

Petitioners did not file a Petition for Review or a Notice of Appeal from the COA Regional Office Decision as required under Section 3, Rule VI
[15]

of the 1997 Revised Rules of Procedure of the COA. Thus, the Decision of
[16]

the Director of COA Regional Office No. IX became final and executory pursuant to Section 51

of the

Government Auditing Code of the Philippines. Consequently, on April 12, 1999, the Director of the COA Regional

Office No. IX issued a Memorandum to the Auditor directing him to require the accountant of the Ipil Branch to record in their books of account the said disallowance.
[17]

On July 12, 1999, the Auditor sent a letter to the Land Bank Branch Manager requiring him to record the disallowance in their books of account. On August 10, 1999, petitioners sent a letter Ombudsman in a February 23, 1999 Resolution, writing off of the subject loans.
[19] [18]

to COA Regional Office No.

IX, seeking to have the booking of the disallowance set aside, on the grounds that they were absolved by the and that the Bangko Sentral ng Pilipinas had approved the

The February 23, 1999 Resolution of the Ombudsman was approved by Margarito P. Gervacio, Jr. the Deputy Ombudsman for Mindanao, the dispositive portion of which reads:

WHERFORE, premises considered, the instant complaint is hereby dismissed for lack of sufficient evidence. SO ORDERED.
[20]

COA Regional Office No. IX endorsed to the Commission proper the matter raised by the petitioners in their August 10, 1999 letter. This is contained in its February 28, 2000 letter/endorsement,
[21]

wherein the Director

of COA Regional Office No. IX maintained his stand that the time for filing of a petition for review had already lapsed. The Regional Director affirmed the disallowance of the transactions since the same were irregular and disadvantageous to the government, notwithstanding the Ombudsman resolution absolving petitioners from fault.

In a Notice Reply
[23]

[22]

dated June 29, 2000, the COA requested petitioners to submit a reply in response to the

letter/endorsement of the Regional Office Director. On August 10, 2000, petitioners submitted their Compliance/ , wherein they argued that the Ombudsman Resolution is a supervening event and is a sufficient ground for exemption from the requirement to submit a Petition for Review or a Notice of Appeal to the Commission proper. Petitioners also argued that by invoking the jurisdiction of the Commission proper, the Regional Director had waived the fact that the case had already been resolved for failure to submit the required Petition for Review.

On July 17, 2003, the COA rendered Decision No. 2003-107 Regional Office, to wit:

[24]

affirming the rulings of the Auditor and the

WHEREFORE, foregoing premises considered, this Commission hereby affirms both the subject disallowance amounting to P3,115,000 and the Order of the Director, COA Regional Office No. IX, Zamboanga City, directing the recording of subject disallowance in the LBP books of

accounts. This is, however, without prejudice to the right of herein appellants to run after the [25] supplier for reimbursement of the advance payment for the cattle.

In denying petitioners request for the lifting of the booking of the disallowance, the COA ruled that after a circumspect evaluation of the facts and circumstances, the dismissal by the Office of the Ombudsman of the complaint did not affect the validity and propriety of the disallowance which had become final and executory.
[26]

On August 22, 2003, petitioners filed a Motion for Reconsideration, which was, however, denied by the COA in a Resolution
[27]

dated December 7, 2004.

Hence, herein petition, with petitioners raising the following grounds in support of the petition, to wit:

RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION IN DECLARING THE PREPAYMENT STIPULATION IN THE CONTRACT BETWEEN THE BANK AND REMAD PROSCRIBED BY SECTION 103 OF P.D. NO. 1445, OTHERWISE KNOWN AS THE STATE AUDIT CODE OF THE PHILIPPINES.

RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION FOR HOLDING THE PETITIONERS ADMINISTRATIVELY LIABLE FOR HAVING PROCESSED THE LOANS OF THE BORROWING COOPERATIVES IN ACCORDANCE WITH THE BANKS MANUAL (FOG) LENDING OPERATIONS. RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION WHEN IT HELD THE PETITIONERS LIABLE AND, THEREFORE, IN EFFECT LIKEWISE OBLIGATED TO REFUND THE DISALLOWED AMOUNT EVEN AS AMONG OTHER THINGS THEY ACTED IN EVIDENT GOOD FAITH. MORE SO, AS THE COLLECTIBLES HAVE BEEN ALREADY [28] EFFECTIVELY WRITTEN-OFF.

The petition is not meritorious.

I. Anent the first issue raised by petitioners, the same is without merit. Petitioners argue said issue on three points: first, the COA is estopped from declaring the prepayment stipulation as invalid; clause in the Land Bank-REMAD contract is valid;
[30] [29]

second, the prepayment

and third, it is a matter of judicial knowledge that is not

[31]

unusual for winning bidders involving public works to enter into contracts with the government providing for partial prepayment of the contract price in the form of mobilization funds.

As to their contention that the COA is estopped from declaring the prepayment stipulation as invalid, petitioners argue in the wise:

xxxx The CATTLE BREEDING AND BUY BACK MARKETING AGREEMENT sample of which is attached as Annex I was a Contract prepared by the bank and REMAD, it was agreed to by the cooperatives. It was a standard Contract used in twenty two (22) Land Bank branches throughout the country. It provided in part: 6.1 That the release of the loan shall be made directly to the supplier 60 days prior to the delivery of stocks per prepayment term of REMAD LIVESTOCK COPORATION (supplier). Inspection shall be done before the th 60 day/delivery of the stocks. Again, these Contracts were standard bank forms from Land Bank head office. None of [32] the Petitioners participated in the drafting of the same.

In the absence of grave abuse of discretion, questions of fact cannot be raised in a petition for certiorari, under Rule 64 of the Rules of Court. The office of the petition for certiorari is not to correct simple errors of judgment; any resort to the said petition under Rule 64, in relation to Rule 65, of the 1997 Rules of Civil Procedure is limited to the resolution of jurisdictional issues.
[33]

Accordingly, since the validity of the prepayment scheme is

inherently a question of fact, the same should no longer be looked into by this Court.

In any case, even assuming that factual questions may be entertained, the facts do not help petitioners' cause for the following reasons: first, the supposed Annex I does not contain a stipulation authorizing a pre payment scheme; and second, petitioners clearly violated the procedure of releasing loans contained in the Bank's Manual on Field Office Guidelines on Lending Operations (Manual on Lending Operations).

A perusal of the aforementioned Annex I,

[34]

the Cattle-Breeding and Buy-Back Marketing Agreement,

would show that stipulation 6.1 which allegedly authorizes prepayment does not exist. To make matters problematic is that nowhere in the records of the petition can one find a document which embodies such a stipulation. It bears stressing that the Auditor noted in his report that, nowhere in the documents reviewed disclosed about prepayment scheme with REMAD, the supplier/dealer. Moreover, it is surprising that one of petitioners defense is that they processed the cooperatives' applications in accordance with their individual job descriptions as provided in the Banks Manual on Field Office

Guidelines on Lending Operations Operations, to wit:

[35]

when, on the contrary, petitioners seem to be oblivious of the fact that they

clearly violated the procedure in releasing loans which is embodied in the very same Manual on Lending

Loan Proceeds Released Directly to the Supplier/Dealer Proceeds of loans granted for the acquisition of farm machinery equipment; and sub-loan components for the purchase of construction materials, farm inputs, etc. shall be released directly to the accredited dealers/suppliers. Payment to the dealer shall be made after presentation of reimbursement documents (delivery/ official receipts/ purchase orders) acknowledged by the authorized LBP [36] representative that same has been delivered.

However, this Court is not unmindful of the fact that petitioners contend that the Legal Department of Land Bank supposedly passed upon the issue of application of Section 88 of PD 1445. Petitioners argue that in an alleged August 22, 1996 Memorandum issued by the Land Bank, it opined that Section 88 of PD 1445 is not applicable.
[37]

Be that as it may, this Court is again constrained by the fact that petitioners did not offer in

evidence the alleged August 22, 1996 Land Bank Memorandum. Therefore, the supposed tenor of the said document deserves scant consideration. In any case, even assumingarguendo that petitioners are correct in their claim, they still cannot hide from the fact that they violated the procedure in releasing loans embodied in the Manual on Lending Operations as previously discussed.

To emphasize, the Auditor noted that nowhere in the documents reviewed disclosed about prepayment scheme with REMAD. It is well settled that findings of fact of quasi-judicial agencies, such as the COA, are generally accorded respect and even finality by this Court, if supported by substantial evidence, in recognition of their expertise on the specific matters under their jurisdiction.
[38]

If the prepayment scheme was in fact

authorized, petitioners should have produced the document to prove such fact as alleged by them in the present petition. However, as stated before, even this Court is at a loss as to whether the prepayment scheme was authorized as a review of Annex I, the document to which petitio ners base their authority to make advance payments, does not contain such a stipulation or provision. Highlighted also is the fact that petitioners clearly violated the procedure in releasing loans found in the Manual on Lending Operations which provides that payments to the dealer shall only be made after presentation of reimbursement documents acknowledged by the authorized LBP representative that the same has been delivered.

In addition, this Court notes that much reliance is made by petitioners on their allegation that the terms of the CFP allowed for prepayments or advancement of the payments prior to the delivery of the cattle by the supplier REMAD. It appears, however, that a CFP, even if admittedly a pro forma contract and emanating from the Land Bank main office, is merely a facility proposal and not the contract of loan between Land Bank and the cooperatives. It is in the loan contract that the parties embody the terms and conditions of a transaction. If there

is any agreement to release the loan in advance to REMAD as a form of prepayment scheme, such a stipulation should exist in the loan contract. There is, nevertheless, no proof of such stipulation as petitioners had failed to attach the CFPs or the loan contracts relating to the present petition.

Based on the foregoing, the COA should, therefore, not be faulted for finding that petitioners facilitated the commission of the irregular transaction. The evidence they presented before the COA was insufficient to prove their case. So also, even this Court is at a loss as to the truthfulness and veracity of petitioners' allegations as they did not even present before this Court the documents that would serve as the basis for their claims.

II. Anent the second ground raised by petitioners, the same is again without merit. Petitioners impute on the COA grave abuse of discretion when it held petitioners administratively liable for having processed the loans of the borrowing cooperatives. This Court stresses, however, that petitioners cannot rely on their supposed observance of the procedure outlined in the Manual on Lending Operations when clearly the same provides that payment to the dealer shall be made after presentation of reimbursement documents (delivery/official receipts/purchase orders) acknowledged by the authorized LBP representative that the same has been delivered. Petitioners have not made a case to dispute the COA's finding that they violated the foregoing provision. Any presumption, therefore, that public officials are in the regular performance of their public functions must necessarily fail in the presence of an explicit rule that was violated.

There is no grave abuse of discretion on the part of the COA as petitioners were given all the opportunity to argue their case and present any supporting evidence with the COA Regional Director. Moreover, it bears to point out that even if petitioners' period to appeal had already lapsed, the COA Commission Proper even resolved their August 10, 1999 letter where they raised in issue the favorable ruling of the Ombudsman.

III. Anent, the last issue raised by petitioners, the same

[39]

is

without

merit.

Petitioners contend that respondents Order, requiring them to refund the disallowed transaction, is functus officio, the amount having been legally written-off.

A perusal of the records would show that Land Bank Vice-President Conrado B. Roxas sent a Memorandum
[40]

dated August 5, 1998 to the Head of the Ipil Branch, advising them that the accounts subject of

the present petition have been written-off, to wit:

We are pleased to inform you that Bangko Sentral ng Pilipinas (BSP) in its letter dated July 20, 1998 has approved the write-off of your recommended Agrarian Reform Loan Accounts and Commercial Loan Accounts as covered by LBP Board Resolution Nos. 98-291 and 98-292, [41] respectively, both dated June 18, 1998 x x x.

The Schedule of Accounts for Write-Off

[42]

attached to the August 5, 1998 Memorandum shows that the

[43]

same covered the two loans given to BARBEMCO, the two loans given to RTLim RMC, and the only loan given to Tungawan PFPMC. The total amount approved for write-off was P2,209,000.00. The total approved write-off in the second Memorandum
[44]

Moreover, petitioners contend

that the last loan given to SIFAMCO was also the subject of a write-off in a similar advice given to the Buug Branch. was for P906,000.00.

In its Comment,

[45]

the COA argues that the fact that the audit disallowance was allegedly written-

off is of no moment. Respondent

maintains that Section 66 of PD 1445 the government.

[47]

[46]

expressly granted unto it the right to compromise monetary liabilities of

[48]

The COA, thus, theorizes that without its approval, the alleged write-off is ineffectual. The

same argument was reiterated by the COA in its Memorandum.

The COAs argument deserves scant consideration.

A write-off is a financial accounting concept that allows for the reduction in value of an asset or earnings by the amount of an expense or loss. It is a means of removing bad debts from the financial records of the business.

In Land Bank of the Philippines v. Commission on Audit , and authority to write-off loans, to wit:

[49]

this Court ruled that Land Bank has the power

LBP was created as a body corporate and government instrumentality to provide timely and adequate financial support in all phases involved in the execution of needed agrarian reform (Rep. Act No. 3844, as amended, Sec. 74). Section 75 of its Charter vests in LBP specific powers normally exercised by banking institutions, such as the authority to grant short, medium and long-term loans and advances against security of real estate and/or other acceptable assets; to guarantee acceptance(s), credits, loans, transactions or obligations; and to borrow from, or rediscount notes, bills of exchange and other commercial papers with the Central Bank. In addition to the enumeration of specific powers granted to LBP, Section 75 of its Charter also authorizes it: 12. To exercise the general powers mentioned in the Corporation Law and the General Banking Act, as amended, insofar as they are not inconsistent or incompatible with this Decree. One of the general powers mentioned in the General Banking Act is that provided for in Section 84 thereof, reading: xxxx Writing-off loans and advances with an outstanding amount of one hundred thousand pesos or more shall require the prior approval of the Monetary Board (As amended by PD 71). It will, thus, be seen that LBP is a unique and specialized banking institution, not an ordinary "government agency" within the scope of Section 36 of Pres. Decree No. 1445. As a bank, it is specifically placed under the supervision and regulation of the Central Bank of the Philippines pursuant to its Charter (Sec. 97, Rep. Act No. 3844, as amended by Pres. Decree No. 251). In so far as loans and advances are concerned, therefore, it should be deemed primarily governed by Central Bank Circular No. 958, Series of 1983, which vests the determination of the frequency of writing-off loans in the Board of Directors of a bank provided that the loans written-off do not exceed a certain aggregate amount . The pertinent portion of that Circular reads:

b. Frequency/ceiling of write-off. The frequency for writing-off loans and advances shall be left to the discretion of the Board of Directors of the bank concerned. Provided, that the aggregate amount of loans and advances which may be written-off during the year, shall in no case exceed 3% of total loans and investments; Provided, further, that charge-offs are made against allowance for possible losses, earnings during the year and/or retained [50] earnings.

While the power to write-off is not expressly granted in the charter of the Land Bank, it can be logically implied, however, from the Land Bank's authority to exercise the general powers vested in banking institutions as provided in the General Banking Act (Republic Act 337). The clear intendment of its charter is for the Land Bank to be clothed not only with the express powers granted to it, but also with those implied, incidental and necessary for the exercise of those express powers.
[51]

In the case at bar, it is thus clear that the writing-off of the loans involved was a valid act of the Land Bank. In writing-off the loans, the only requirement for the Land Bank was that the same be in accordance with the applicable Bangko Sentral circulars, it being under the supervision and regulation thereof. The Land Bank recommended for write-off all six loans granted to the cooperatives, and it is worthy to note that the Bangko Sentral granted the same. The write-offs being clearly in accordance with law, the COA should, therefore, adhere to the same, unless under its general audit jurisdiction under PD 1445, it finds that under Section 25(1) the fiscal responsibility that rests directly with the head of the government agency has not been properly and effectively discharged.

On this note, the reliance of respondent on Section 66 of PD 1445 is baseless as a reading thereof would show that the same does not pertain to the COAs power to compr omise claims. Probably, what respondent wanted to refer to was Section 36 which provides: Section 36. Power to compromise claims. 1. When the interest of the government so requires, the Commission may compromise or release in whole or in part, any claim or settled liability to any government agency not exceeding ten thousand pesos and with the written approval of the Prime Minister, it may likewise compromise or release any similar claim or liability not exceeding one hundred thousand pesos, the application for relief therefrom shall be submitted, through the Commission and the Prime Minister, with their recommendations, to the National Assembly. 2. The respective governing bodies of government-owned or controlled corporations, and self-governing boards, commissions or agencies of the government shall have the exclusive power to compromise or release any similar claim or liability when expressly authorized by their charters and if in their judgment, the interest of their respective corporations or agencies so requires. When the charters do not so provide, the power to compromise shall be exercised by the Commission in accordance with the preceding paragraph.

xxxx

[52]

Under Section 36, the use of the word may shows that the power of the COA to compromise claims is only permissive, and not mandatory. Further, the second paragraph of Section 36 clearly states that respective governing bodies of government-owned or controlled corporations, and self-governing boards, commissions or agencies of the government shall have the exclusive power to compromise or release any similar claim or liability when expressly authorized by their charters. Nowhere in Section 36 does it state that the COA must approve a compromise made by a government agency; the only requirement is that it be authorized by its charter. It, therefore, bears to stress that the COA does not have the exclusive prerogative to settle and compromise liabilities to the Government. The foregoing pronouncements notwithstanding, this Court rules that writing-off a loan does not equate to a condonation or release of a debt by the creditor. As an accounting strategy, the use of write-off is a task that can help a company maintain a more accurate inventory of the worth of its current assets. In general banking practice, the write-off method is used when an account is determined to be uncollectible and an uncollectible expense is recorded in the books of account. If in the future, the debt appears to be collectible, as when the debtor becomes solvent, then the books will be adjusted to reflect the amount to be collected as an asset. In turn, income will be credited by the same amount of increase in the accounts receivable.

Write-off is not one of the legal grounds for extinguishing an obligation under the Civil Code. acceptance by the obligor are required.
[54]

[53]

It is not a

compromise of liability. Neither is it a condonation, since in condonation gratuity on the part of the obligee and In making the write-off, only the creditor takes action by removing the uncollectible account from its books even without the approval or participation of the debtor.

Furthermore, write-off cannot be likened to a novation, since the obligations of both parties have not been modified.
[55]

When a write-off occurs, the actual worth of the asset is reflected in the books of accounts of

the creditor, but the legal relationship between the creditor and the debtor still remains the same the debtor continues to be liable to the creditor for the full extent of the unpaid debt.

Based on the foregoing, as creditor, Land Bank may write-off in its books of account the advance payment released to REMAD in the interest of accounting accuracy given that the loans were already uncollectible. Such write-off, however, as previously discussed, does not equate to a release from liability of petitioners.

Accordingly, the Land Bank Ipil Branch must be required to record in its books of account the Php3,115,000.00 disallowance, and petitioners, together with their four co-employees,
[56]

should be personally

liable for the said amount. Such liability, is, however, without prejudice to petitioners right to run after REMAD, to whom they illegally disbursed the loan, for the full reimbursement of the advance payment for the cattle as correctly ruled by the COA in its July 17, 2003 Decision.
[57]

On a final note, it bears to point out that a cursory reading of the Ombudsman's resolution will show that the complaint against petitioners was dismissed not because of a finding of good faith but because of a finding of lack of sufficient evidence. While the evidence presented before the Ombudsman may not have been sufficient to overcome the burden in criminal cases of proof beyond reasonable doubt,
[58]

it does not, however, necessarily

[59]

follow, that the administrative proceedings will suffer the same fate as only substantial evidence is required, or that amount of relevant evidence which a reasonable mind might accept as adequate to justify a conclusion.

An absolution from a criminal charge is not a bar to an administrative prosecution or vice versa.

[60]

The

criminal case filed before the Office of the Ombudsman is distinct and separate from the proceedings on the disallowance before the COA. So also, the dismissal by Margarito P. Gervacio, Jr., Deputy Ombudsman for Mindanao, of the criminal charges against petitioners does not necessarily foreclose the matter of their possible liability as warranted by the findings of the COA.

In addition, this Court notes that the Ombudsman's Resolution relied on an alleged April 6, 1992 Memorandum of the Field Loans Review Department which supposedly authorized the Field Offices to undertake a prepayment scheme. On the other hand, the same Ombudsman's Resolut ion also made reference to a January 19, 1994 Memorandum of EVP Diaz and a May 31, 1994 Memorandum of VP FSD which tackled the prohibition on advance payment to suppliers. All these documents, however, were again not attached to the records of the case at bar. Particularly, the supposed April 6, 1992 Memorandum of the Field Loans Review Department was not even mentioned nor raised by petitioners as a defense in herein petition.

The decisions and resolutions emanating from the COA did not tackle the supposed April 6, 1992 Memorandum of the Field Loans Review Department which allegedly authorized the Field Offices to undertake a pre-payment scheme. While it is possible that such document would have shown that petitioners were in good faith, the same should have been presented by them in the proceedings before the Commission proper - an act which they were not able to do because of their own negligence in allowing the period to file an appeal to lapse. The April 6, 1992 Memorandum of the Field Loans Review Department would have been the best evidence to free petitioners from their liability. It appears, however, that they did not present the same before the COA and it is already too late in the day for them to present such document before this Court.

Petitioners' allegation of grave abuse of discretion by the COA implies such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction or, in other words, the exercise of the power in an arbitrary manner by reason of passion, prejudice, or personal hostility; and it must be so patent or gross as to amount to an evasion of a positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of law. case.
[61]

It is imperative for petitioners to show caprice and arbitrariness on the part of the COA

whose exercise of discretion is being assailed. Proof of such grave abuse of discretion, however, is wanting in this

WHEREFORE, premises considered, the petition is DENIED. Decision No. 2003-107 dated July 17, 2003 and Resolution No. 2004-046 dated December 7, 2004, of the Commission on Audit, are hereby AFFIRMED. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

SAMUEL U. LEE and PAULINE LEE and ASIATRUST DEVELOPMENT BANK, INC., Petitioners, - versus -

G.R. No. 173349 Present: CORONA, C.J., Chairperson, VELASCO, JR., LEONARDO-DE CASTRO, DEL CASTILLO, PEREZ, JJ. Promulgated: February 9, 2011

BANGKOK BANK PUBLIC COMPANY, LIMITED, Respondent.

x-----------------------------------------------------------------------------------------x DECISION VELASCO, JR., J.: The Case In this Petition for Review on Certiorari under Rule 45, petitioners assail the March 15, 2006 Decision of [2] the Court of Appeals (CA) in CA-G.R. CV No. 79362, which reversed and set aside the April 21, 2003 Decision of the Regional Trial Court (RTC), Branch 73 in Antipolo City, in Civil Case No. 99-5388, entitled Bangkok Bank Public Company Limited v. Spouses Samuel U. Lee and Pauline Lee and Asiatrust Development Bank for the Rescission of Real Estate Mortgage (REM), Annulment of Foreclosure Sale, Cancellation of Titles and Damages. They assail also the June 29, 2006 CA Resolution denying their motion for reconsideration. The Facts Midas Diversified Export Corporation (MDEC) and Manila Home Textile, Inc. (MHI) entered into two separate Credit Line Agreements (CLAs) with Respondent Bangkok Bank Public Company, Limited (Bangkok Bank) [3] on November 29, 1995 and April 17, 1996, respectively. MDEC and MHI are owned and controlled by the Lee [4] family: Thelma U. Lee, Maybelle L. Lim, Daniel U. Lee and Samuel U. Lee (Samuel). Both corporations have interlocking directors and management led by the Lee family; and engaged in the manufacturing and export of garments, ladies bags and apparel. Bangkok Bank required guarantees from the Lee family for the two CLAs. Consequently, the Lee family executed guarantees in favor of Bangkok Bank on December 1, 1995 for the CLA for MDEC and on April 17, 1996 for the CLA of MHI. Under the guarantees, the Lee family irrevocably and unconditionally guaranteed, as principal [5] debtors, the payment of any and all indebtedness of MDEC and MHI with Bangkok Bank. Prior to the granting of the CLAs, Bangkok Bank conducted a property check on the Lee family and required Samuel to submit a list of his properties. Bangkok Bank, however, did not require the setting aside, as collateral, of any particular property to [6] answer for any future unpaid obligation. Subsequently, MDEC and MHI made several availments from the
[1]

CLAs. In time, the advances, which MDEC and MHI had taken out from the CLAs, amounted to three million dollars [7] (USD 3,000,000). On July 25, 1996, MDEC was likewise granted a loan facility by Asiatrust Development Bank, Inc. [8] (Asiatrust). This facility had an available credit line of forty million pesos (PhP 40,000,000) for letters of credit, advances on bills and export packing; and a separate credit line of two million dollars (USD 2,000,000) for bills [9] purchase. In the meantime, in May 1997, Samuel bought several parcels of land in Cupang, Antipolo, and later entered into a joint venture with Louisville Realty and Development Corporation to develop the properties into a [10] residential subdivision, called Louisville Subdivision. These properties in Cupang, Antipolo are the subject properties in the instant case (Antipolo properties) and are covered by Transfer Certificate of Title (TCT) Nos. [11] 329663 to 329511 of the Registry of Deeds of Rizal in Marikina City (RD). Throughout 1997, MDEC availed itself of the omnibus credit line granted by Asiatrust on three occasions: ten million pesos (PhP 10,000,000) to mature on July 15, 1997; eleven million pesos (PhP 11,000,000) to mature on February 6, 1998; and another ten million pesos (PhP 10,000,000) to mature on February 20, 1998. In the same year, particularly in August 1997, when MDEC had defaulted in the payment of its loan that matured on July 15, 1997, Asiatrust initiated negotiations with MDEC and required the Lee family to provide additional collateral that would secure the loan. In December 1997, the negotiation was concluded when Asiatrust had agreed to Samuels proposition that he would mortgage the subject Antipolo properties to secure the loan, and therefore execute a [12] REM over the properties. While the titles of the Antipolo properties had been delivered by Samuel to Asiatrust and the REM had been executed in January 1998, spouses Samuel and Pauline Lee (spouses Lee) were requested to sign a new deed of mortgage on February 23, 1998, and, thus, it was only on that date that the said mortgage [13] was actually notarized, registered, and annotated at the back of the titles. Similarly, MDEC and MHI initially had made payments with their CLAs until they defaulted and incurred aggregate obligations to Bangkok Bank in the amount of USD 1,998,554.60 for MDEC and USD 800,000 for [14] MHI. Similarly, the Lee corporations defaulted in their obligations with other creditors. For example, Security Bank Corporation (SBC) filed a case against the Lee family for a sum of money resulting from the nonpayment of obligations before the RTC, Branch 132 in Makati City, entitled Security Bank Corporation v. Duty Free Superstore, Inc., Daniel U. Lee, Samuel U. Lee and Jacqueline M. Lee , docketed as Civil Case No. 98-196. On January 30, 1998, the RTC in Civil Case No. 98-196 issued a Writ of Preliminary Attachment in favor of SBC, granting attachment of [15] the defendants real and personal properties. The writ, however, was neither registered nor annotated on the titles of the subject Antipolo properties at the RD. On February 16, 1998, MDEC, MHI, and three other corporations owned by the Lee family filed before the Securities and Exchange Commission (SEC) a Consolidated Petition for the Declaration of a State of Suspension of [16] Payments and for Appointment of a Management Committee/Rehabilitation Receiver. Said petition acknowledged, among others, MDEC and MHIs indebtedness with Bangkok Bank, and admitted that matured and maturing obligations could not be met due to liquidity problems. The petition likewise had a list of creditors to [17] whom the corporations remain indebted, which included Asiatrust. The petition stated that the Lee family and their corporations had more than sufficient properties to cover all liabilities to their creditors; and presented a list of all their properties including the subject properties located in Antipolo, Rizal. Notably, the list of properties attached to the petition indicated that the subject Antipolo properties of the spouses Lee had already been [18] earmarked, or that they had already served as security, for MDECs unpaid obligation with Asiatrust.

On February 20, 1998, the SEC issued a Suspension Order enjoining the Lee corporations from disposing of their property in any manner except in the ordinary course of business, and from making any payments outside [19] the legitimate expenses of their business during the pendency of the petition. On March 12, 1998, Bangkok Bank instituted an action before the RTC, Branch 141 in Makati City to recover the loans extended to MDEC and MHI under the guarantees, docketed as Civil Case No. 98[20] 628. Bangkok Banks application for the issuance of a writ of preliminary attachment was granted through the Orders dated March 17 and 18, 1998, covering the properties of the Lee family in Antipolo,Cavite, Quezon City, [21] and Baguio, among others. While enforcing the writs of preliminary attachment, Bangkok Bank discovered that the spouses Lee had executed a REM over the subject Antipolo properties in favor of Asiatrust; and that the REM had previously been [22] annotated on the titles. Thus, the writs of preliminary attachment were also inscribed at the back of the TCTs covering the subject Antipolo properties, next to the annotation of the REM. With MDEC still unable to make payments on its defaulting loans with Asiatrust, the latter foreclosed the subject mortgaged Antipolo properties. On April 15, 1998, Asiatrust won as the highest bidder at the auction sale, [23] purchasing the said properties for PhP 20,864,735. Thereafter, Asiatrust still filed an action against MDEC and the spouses Lee to collect the deficiency amounting to at least PhP 14,800,000. Up until the filing of the [24] memoranda by the parties before this Court, the said action remained pending before the CA. Subsequently, the sale was registered on April 21, 1998. Believing the REM and the foreclosure sale to be fraudulent, Bangkok Bank did not redeem the subject properties. As there had been no effort to redeem the properties, consequently, the TCTs covering the subject properties were consolidated in the name of Asiatrust on April 30, 1999, and 120 new titles were issued in the name of Asiatrust without the annotation of the writs of [26] preliminary attachment, which were deemed canceled. Among the 120 titles foreclosed by Asiatrust in Louisville Subdivision in Antipolo, only 12 properties were sold for a maximum price of PhP 250,000 for a house and lot, and 108 titles remained. Asiatrust was still unable to sell them and convert them into cash. From then on, Asiatrust maintained security services and paid the real estate taxes of the subject Antipolo properties, among others. On July 20, 1999, Bangkok Bank filed the instant case before the RTC, Branch 73 in Antipolo City, docketed as Civil Case No. 99-5388 for the rescission of the REM over the subject properties, annulment of the April 15, 1998 foreclosure sale, cancellation of the new TCTs issued in favor of Asiatrust, and damages amounting to PhP 600,000. In its action, Bangkok Bank alleged, among others, that the presumption of fraud under Article 1387 of the Civil Code applies, considering that a writ of preliminary attachment was issued in January 1998 in favor of SBC against Samuel. It also claimed that collusion and fraud transpired between the spouses Lee and Asiatrust in the execution of the REM. On August 5, 1999, Bangkok Bank amended its complaint to implead the RD. Meanwhile, on March 23, 2000, the RTC, Branch 141 in Makati City in Civil Case No. 98-628 rendered a Partial Decision in favor of Bangkok Bank, ordering the Lee family, pursuant to the guarantees, to pay USD 1,998,554.60 for the CLA of MDEC and USD 800,000 for the CLA of MHI, with the corresponding 12% interest per annum from the date of the filing of the complaint, i.e., on March 12, 1998, until fully paid. But Bangkok Bank had only levied on the execution of the partial decision, some old equipment, office fixtures and furniture, garments, textiles, and other small production equipment with an approximate aggregate
[25]

value of PhP 600,000. Considering the total liabilities of the Lee family to Bangkok Bank, the levied properties were insufficient to satisfy the partial judgment in Civil Case No. 98-628. The Ruling of the RTC After due hearing with the parties presenting their evidence, on April 21, 2003, the RTC rendered a Decision dismissing the case, the fallo reading: WHEREFORE, premises considered, the instant case is hereby DISMISSED for lack of merit. No findings as to the counterclaim of the defendants for insufficiency of evidence to support the claim. SO ORDERED.
[28]

[27]

In dismissing the instant case, the trial court found no concrete proof of the alleged fraud committed by the Lee family and Asiatrust, more so, that of a collusion or conspiracy between them. Consequently, it ruled that Art. 1381(3) of the Civil Code does not apply. Moreover, it noted that Bangkok Bank has not proved that it cannot in any manner collect its claims from the Lee family. For one, it held that Bangkok Bank chose not to exercise its right of redemption over the subject properties; for another, the subject properties were not the only properties of the Lee family as admitted by Bangkok Banks sole witness, Susan Capalaran. The RTC explained that a mortgage contract is an onerous undertaking to secure payment of an obligation [29] and cannot be considered as a gratuitous alienation; thus, Art. 1387 of the Civil Code does not apply. Finally, it held that neither fraud nor a violation of the SEC suspension order can result from the execution of the REM and the foreclosure of the subject properties, because according to the testimony of Bangkok Banks sole witness, the subject properties are not covered by the SEC Suspension Order for which reason Bangkok Bank filed an action to attach them. As the subject properties are not covered by the SEC Suspension Order, the RTC held that there is [30] nothing that precludes the spouses Lee from mortgaging them to Asiatrust. The Ruling of the CA Aggrieved, Bangkok Bank appealed the trial courts decision before the CA; and on March 15, 2006, the appellate court rendered the assailed decision, which granted the appeal, and reversed and set aside the RTC decision. The decretal portion reads: WHEREFORE, premises considered, the instant appeal is hereby GRANTED. The assailed Decision dated April 21, 2003 of the trial court is REVERSED and SET ASIDE. A new judgment is rendered ordering the: 1. Rescission of the Real Estate Mortgage over Appellees-spouses Lees Antipolo properties in favor of appellee Asiatrust; Annulment of the Foreclosure Sale conducted on April 15, 1998; Cancellation of the Transfer Certificate of Titles in the name of Asiatrust; and Reversion of the titles in favor of appellees-spouses Lee.

2. 3. 4.

No costs. SO ORDERED.
[31]

In reversing and setting aside the RTC decision, the CA held as crucial the Letter dated April 4, 1998 sent by the counsel of the Midas Group of Companies to the Office of the Clerk of Court and Ex-OfficioSheriff of the trial court relative to the extra-judicial foreclosure of the REM scheduled on April 15, 1998. The letter assailed said proceeding as bereft of legal and factual bases in the light of the February 20, 1998 Suspension Order of the [32] SEC. It held that the present counsel of petitioner-spouses Lee cannot take a 360-degree turn as regards their predecessors position, for Bangkok Bank merely adopted petitioners earlier stance. Thus, the CA ruled that petitioner-spouses Lee are in estoppel in pais, under Art. 1431 of the Civil Code and Section 2(a) of Rule 131 of the Revised Rules on Evidence. The CA found that the subject Antipolo properties, though personal assets of the spouses Lee, are covered by the February 20, 1998 Suspension Order of the SEC, since they are included in the list submitted to SEC by the Lee family; and that Samuel is a guarantor of the loans incurred by MDEC and MHI from Bangkok Bank. It ruled that Samuel, being a guarantor, is jointly and severally liable to Bangkok Bank for the corporate debts of MDEC and MHI, as he divested himself from the protection of the limited liability doctrine, which, the CA held, was shown (1) through the inclusion of the said subject Antipolo properties in the list submitted to the SEC; and (2) by Samuel, through the guarantees that he executed, thus voluntarily binding himself to the payment of the loans incurred from Bangkok Bank. The CA also rejected petitioners claim that the subject properties were allotted to Asiatrust. It reasoned that if the subject properties were indeed allotted to Asiatrust, then these would not have been included in the list of properties submitted to the SEC. It added that the absence of any encumbrance annotated on the TCTs or any document appurtenant to it prior to the January 30, 1998 writ of preliminary attachment issued in Civil Case No. 98-196 and the February 20, 1998 Suspension Order further belies petitioners claim. The CA held that fraud was perpetrated through the REM executed and registered on February 23, 1998 pursuant to the presumption in the second paragraph of Art. 1387 of the Civil Code, which provides that alienations by onerous title are also presumed fraudulent when made by persons against whom x x x some writ of attachment has been issued. Consequently, the spouses Lee filed the instant petition. The Issues I. Whether or not Bangkok Bank can maintain an action to rescind the REM on the subject Antipolo properties despite its failure to exhaust all legal remedies to satisfy its claim. II. Whether or not properties owned by private individuals should be covered by a suspension order issued by the SEC in an action for suspension of payments. III. Whether or not a surety or guarantor is guilty of defrauding creditors for executing a REM in [33] favor of one creditor prior to the filing of a Petition for Suspension of Payments.

The Courts Ruling The core issue is whether the February 23, 1998 REM executed over the subject Antipolo properties and the April 15, 1998 foreclosure sale were committed in fraud of petitioners other creditors, and, as a consequence of such fraud, the questioned mortgage could, therefore, be rescinded. Petitioners allege that no fraud exists. The petition is meritorious. Prevailing and applicable SEC laws At the outset, it must be noted that at the time the Consolidated Petition for the Declaration of a State of Suspension of Payments and for Appointment of a Management Committee/Rehabilitation Receiver was filed before the SEC on February 16, 1998 by MDEC, MHI, and three other corporations owned by the Lee family, Batas Pambansa Blg. (BP) 178 or the then Revised Securities Act was the primary governing law along with Presidential Decree No. (PD) 902-A, as amended, and the Corporation Code of the Philippines. Pertinently, among others, the SEC was also covered by the Investment House Law (PD 129), the Financing Company Act under Republic Act. No. (RA) 2626, the Foreign Investments Act (RA 7042), and the Liberalized Foreign Investments Act (RA 8179). And subsequent to the filing of the instant case, the Securitization Act of 2004 (RA 9267) and the Lending Company Regularization Act of 2007 (RA 9474) were also enacted. PD 902-A,
[34]

however, was further amended by RA 8799 or the Securities Regulation Code, approved on
[35]

July 19, 2000 by President Joseph Estrada.

Under Sec. 5.2 of RA 8799,

[37]

[36]

the SECs original and exclusive

jurisdiction over all cases enumerated under Sec. 5 of PD 902-A

was transferred to the appropriate RTC. RA

8799, Sec. 5.2, however, expressly stated as an exception, that the [t]he Commission shall retain jurisdiction over pending suspension of payment/rehabilitation cases filed as of 30 June 2000 until finally disposed. Accordingly, the Consolidated Petition for the Declaration of a State of Suspension of Payments and for Appointment of a Management Committee/Rehabilitation Receiver filed on February 16, 1998 by MDEC, MHI and three other corporations owned by the Lee family, remained under the jurisdiction of the SEC until finally disposed of pursuant to the last sentence of Sec. 5.2 of RA 8799. The subject properties are not under the purview of the SEC Suspension Order Pivotal to the resolution of the instant case is whether the subject properties owned by the spouses Lee were subject to the February 20, 1998 SEC Suspension Order. On the one hand, the CA held and found these to be subject to the Suspension Order. The RTC, on the other hand, found contrariwise in that the assailed REM and foreclosure sale did not violate the SEC Suspension Order. A review of the applicable laws and existing jurisprudence would show that the subject properties owned by the spouses Lee were not subject to the February 20, 1998 SEC Suspension Order.

PD 902-A vested the SEC with jurisdiction on petitions for suspension of payments only on corporations, partnerships and associations; not on individual persons The SECs jurisdiction is evident from the statutorily vested power of jurisdiction, supervision and control by the SEC over all corporations, partnerships or associations, which are grantees of primary franchise, license or permit issued by the government to operate in the Philippines, and its then original and exclusive jurisdiction over petitions for suspension of payments of said entities. Secs. 3 and 5 of PD 902-A pertinently provides, thus: Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships or associations, who are the grantees of primary franchise and/or a license or permit issued by the government to operate in the Philippines; and in the exercise of its authority, it shall have the power to enlist the aid and support of any and all enforcement agencies of the government, civil or military. Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: xxxx (d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree. (Emphasis Ours.) It can be clearly gleaned from the above provisions that in cases of petitions for the suspension of payments, the SEC has jurisdiction over corporations, partnerships and associations, which are grantees of primary franchise or license or permit issued by the government to operate in the Philippines, and their properties. And it is indubitably clear from the aforequoted Sec. 5(d) that only corporations, partnerships and associationsNOT private individualscan file with the SEC, petitions for declaration in a state of suspension of payments. Thus, it logically follows that the SEC does not have jurisdiction to entertain petitions for suspension of payments filed by parties other than corporations, partnerships or associations. Indeed, settled is the rule that it is axiomatic that jurisdiction is the authority to hear and determine a cause, which is conferred by law and not by the policy of any court or agency.
[38]

Private individuals and their privately owned properties cannot be placed under the jurisdiction of the SEC in a petition for suspension of payments In Chung Ka Bio v. Intermediate Appellate Court ,
[39]

this Court resolved in the negative the issue of

whether private individuals can file with the SEC petitions for declaration in a state of suspension of payments. We

held that Sec. 5(d) of PD 902-A clearly does not allow a mere individual to file the petition, which is limited to corporations, partnerships or associations. Besides, We pointed out that the SEC, being a mere administrative agency, is a tribunal of limited jurisdiction and, as such, can only exercise those powers, which are specifically granted to them by their enabling statutes. We, thus, concluded that where no authority is granted to hear petitions of individuals for suspension of payments, such petitions are beyond the competence of the SEC. In short, the SEC has no jurisdiction over private individuals relative to any petition for suspension of payments, whether the private individual is a petitioner or a co-petitioner. We have said time and again that the SECs jurisdiction is limited only to corporations and corporate assets; it has no jurisdiction over the properties of private individuals or natural persons, even if they are the corporations officers or sureties. Bank,
[41] [40]

We

have, thus, consistently applied this ruling to the subsequent Ong v. Philippine Commercial International Modern Paper Products, Inc. v. Court of Appeals,
[43] [42]

and Union Bank of the Philippines v. Court of

Appeals.

Here, it is undisputed that the petition for suspension of payments was collectively filed by the five corporations owned by the Lee family. It is likewise undisputed that together with the consolidated petition is a list of properties, which included the subject Antipolo properties owned by Samuel and Pauline Lee. The fact, however, that the subject properties were included in the list submitted to the SEC does not confer jurisdiction on the SEC over such properties. It is apparent that even if the members of the Lee family are joined as co-petitioners with the five corporations, still, this could not confer jurisdiction on the SEC over the Lee family members as private individualsnor could this affect their privately owned properties. Further, the fact that the debts of MDEC and MHI to Bangkok Bank are secured by the Lee family through the guarantees will not likewise put the Lee family and their privately owned properties under the jurisdiction of the SEC through the consolidated petition for suspension of payments. Therefore, the February 20, 1998 Suspension Order issued by the SEC did not and could not have included the subject properties. The RTC correctly grasped this point that the disposition of the subject properties did not violate the suspension order. Bangkok Bank cannot take both opposing stances Certainly, Bangkok Bank cannot take opposite positions at the same time. On the one hand, it instituted Civil Case No. 98-628 before the RTC, Branch 141 in Makati City on March 12, 1998 almost a month after the filing of the consolidated petition before the SEC and the issuance of the February 20, 1998 Suspension Order in order to recover the loans extended to MDEC and MHI under the guarantees. In it,Bangkok Bank contended that the subject lots were not part of the properties under the jurisdiction of the SEC in the case for suspension of payments. But, on the other hand, Bangkok Bank claims that the Antipolo properties are subject to the February

20, 1998 SEC Suspension Order, and, therefore, cannot be mortgaged by the spouses Lee to Asiatrust. By saying that the subject Antipolo properties are not under the jurisdiction of the SEC that is hearing the consolidated petition for suspension of payments, it necessarily follows that the same properties could not be subject to the SEC Suspension Order. This admission is also very clear in the statement made by Bangkok Banks sole witness, Susan Capalaran:
[44]

Q:

In other words, by your filing of an action in Makati on March 12, 1998, you are in effect saying that the properties owned by the individual stockholders are not covered by the Suspension Order of the Securities and Exchange Commission? Yes.

Susan Capalaran:

The allegations of fraud in the instant petition At the heart of the present controversy is the allegation of fraud by Bangkok Bank against the spouses Lee and Asiatrust. It is in this regard that the issue of fraud shall be examined here in detail. Preliminary matters, such as the applicable laws and their interpretation, shall first be explained. And subsequently, in order to fully appreciate the allegations of fraud by Bangkok Bank, they shall be discussed in three parts: (1) the existence of fraud on the part of the spouses Lee; (2) the existence of fraud on the part of Asiatrust; and separately, (3) the existence of collusion on the part of the spouses Lee and Asiatrust. It is imperative to expound on these points separately in order to illustrate that the mere existence of fraud on the part of one party, i.e., the spouses Lee (against whom some judgment or some writ of attachment has been issued), rescission of a supposed alienation, if there is any. The presumption of fraud under Art. 1387 of the Civil Code does not apply in the present case Under Art. 1381(3) of the Civil Code, contracts, which were undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them, are rescissible. Art. 1387 of the Code states when an act is presumed to be fraudulent, thus: Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence.
[45]

does not necessarily result in the

It is with regard to the foregoing provisions that the CA anchored its ruling of the existence of a presumption of fraud in the instant case. This presumption, however, finds no application to this case. The presumption of fraud established under Art. 1387 does not apply to registered lands IF the judgment or attachment made is not also registered.
[46]

In Abaya v. Enriquez,

[47]

Abaya was able to obtain a judgment

against Enriquez for a sum of money, and the judgment was partially unsatisfied after Enriquez made a partial payment. The judgment and the writ of execution, however, was never annotated on the titles of the registered lands owned by Enriquez.
[48]

Subsequently, Enriquez sold the said lands. In an action for rescission instituted by
[49]

Abaya, the Court ruled that the presumption of fraud does not apply as the judgment and the attachment have not been registered and annotated on the title. The Court held:

Where the judgment rendered against the defendant x x x has not been entered in the records of the register of deeds, relative to an immovable belonging to the judgment debtor, the subsequent sale of said property by the latter, shall not be rescinded upon the ground of fraud, unless the complicity of the buyer in the fraud imputed to said vendor is established by other [50] means than the presumption of fraud x x x.

In this case, prior to the annotation of the REM on February 23, 1998, SBC was able to successfully acquire a writ of preliminary attachment in its favor against the spouses Lee on January 30, 1998 in a case for a sum of money for nonpayment of its obligation. Bangkok Bank alleges that because of this, the presumption of fraud under Art. 1387 of the Civil Code applies. But while a judgment was made against the spouses Lee in favor of SBC on January 30, 1998, this, however, was not annotated on the titles of the subject properties. In fact, there is no showing that the judgment has ever been annotated on the titles of the subject properties. As established in the facts, there were only two annotations at the back of the titles of the Antipolo properties: first, the REM executed in favor of Asiatrust on February 23, 1998; and second, the writ of preliminary attachment in favor of Bangkok Bank on March 18, 1998. Considering that the earlier SBC judgment or attachment was not, and in fact never was, annotated on the titles of the subject Antipolo properties, prior to the execution of the REM, the presumption of fraud under Art. 1387 of the Code clearly cannot apply. Even assuming that Art. 1387 of the Code applies, the execution of a mortgage is not contemplated within the meaning of alienation by onerous title under the said provision Under Art. 1387 of the Code, fraud is presumed only in alienations by onerous title of a person against whom a judgment or attachment has been issued. The term, alienation, connotes the transfer of the property and possession of lands, tenements, or other things, from one person to another. another. a debt.
[52] [51]

This term is particularly

[53]

applied to absolute conveyances of real property and must involve a complete transfer from one person to A mortgage does not contemplate a transfer or an absolute conveyance of a real property. It is an interest in land created by a written instrument providing security for the performance of a duty or the payment of
[54]

When a debtor mortgages his property, he merely subjects it to a lien but ownership thereof is not

parted with.

[55]

It is merely a lien that neither creates a title nor an estate.

[56]

It is, therefore, certainly not the

alienation by onerous title that is contemplated in Art. 1387 where fraud is to be presumed. In this very action, Bangkok Bank claims that when the spouses Lee executed the REM in favor of Asiatrust, the presumption of fraud under Art. 1387 became applicable. We hold in the negative. As We have plainly discussed, a mortgage is not that which is contemplated in the term alienation that would make the presumption of fraud under Art. 1387 apply. It requires a full and absolute conveyance or transfer of property from one person to another, such as that in the form of a sale. As elucidated earlier, a mortgage merely creates a lien on the property that would afford the mortgagee/creditor greater security in the obligation of the mortgagor/debtor. This being so, as the REM is not the alienation contemplated in Art. 1387 of the Code, the presumption of fraud cannot apply. In any case, the application of the presumption of fraud under Art. 1387, if applicable, could only be made to apply to the spouses Lee as the person against whom a judgment or writ of attachment has been issued; not to Asiatrust

A careful reading of Art. 1387 of the Code vis--vis its Art. 1385 would plainly show that the presumption of fraud in case of alienations by onerous title only applies to the person who made such alienation, and against whom some judgment has been rendered in any instance or some writ of attachment has been issued. A third person is not and should not be automatically presumed to be in fraud or in collusion with the judgment debtor. In allowing rescission in case of an alienation by onerous title, the third person who received the property conveyed [57] should likewise be a party to the fraud. As clarified by Art. 1385(2) of the Code, so long as the person who is in legal possession of the property did not act in bad faith, rescission cannot take place. Thus, in all instances, as to the third person in legal possession of the questioned property, good faith is presumed. Accordingly, it is upon the [58] person who alleges bad faith or fraud that rests the burden of proof. Asiatrust, being a third person in good faith, should not be automatically presumed to have acted fraudulently by the mere execution of the REM over the subject Antipolo properties, there being no evidence of fraud or bad faith. Regrettably, in ratiocinating that fraud was committed by both the spouses Lee and Asiatrust, the CA merely anchored its holding on the presumption espoused under Art. 1387 of theCode, The alleged fraud on the part of the spouses Lee was not proved and substantiated It appears that the argument of Bangkok Bank on the existence of fraud on the part of the spouses [61] Lee revolves around the application of the presumption of fraud under Art. 1387 of the Code. Bangkok Bank failed to substantiate its allegations by presenting clear and convincing proof that the spouses Lee indeed committed fraud in mortgaging the subject properties to Asiatrust, and instead anchored its existence of the presumption under Art. 1387. This cannot stand before this Court.
[60] [59]

nothing more.

On the contrary, the spouses Lee proved the absence of fraud on their part. During trial, the spouses Lee and Asiatrust were able to substantially establish that, indeed, a loan agreement has been existing between them since 1996 and that MDEC made use of it on several occasions in 1997. It has likewise been established that, as

MDEC defaulted in its payment of the loan that matured in 1997, the parties began negotiations as to how MDEC could secure the loans. It was concluded in December 1997 upon Samuels proposal that his Antipolo properties be used to secure MDECs loans by means of a mortgage. This settlement has been agreed upon even before any action was filed against the Lee corporations in 1998. These facts have been established during trial without any controversy. No deception could have been used by the spouses Lee in including in the list of properties, which they submitted to the SEC, the subject Antipolo properties. First, it is undisputed that the list of properties submitted by the Lee corporations to the SEC clearly indicated that the subject Antipolo properties have already been earmarked, or have already been serving as security, for its loan obligations with Asiatrust. Second, MDEC, through its counsel, truly believed in good faith that the inclusion of the spouses Lees private properties in the list submitted to the SEC is valid and regular. As can be seen in the letter sent by the counsel of the Midas Group of Companies to the Office of the Clerk of Court and Ex-Officio Sheriff of the Antipolo RTC on April 4, 1998, at the time when the subject Antipolo properties were being foreclosed by Asiatrust, its counsel vigorously countered the actions of Asiatrust and stated that the subject Antipolo properties cannot be foreclosed pursuant to the SEC [62] Suspension Order. And as discussed infra, the alleged collusion between the spouses Lee and Asiatrust appears to be a mere figment of imagination. In any case, the facts show no presence of fraud on the part of Asiatrust; therefore, the REM was not a sham Even pushing further to say that the REM was executed by the spouses Lee to defraud creditors, the REM cannot be rescinded and shall, therefore, stand, as Asiatrust the third party, in favor of which the REM was executed, and which subsequently foreclosed the subject propertiesacted in good faith and without any badge of fraud. As a general rule, whether the person, against whom a judgment was made or some writ of attachment was issued, acted with or without fraud, so long as the third person who is in legal possession of the property in question did not act with fraud and in bad faith, an action for rescission cannot prosper. Art. 1385 of the Civil Code explicitly states this, thus: Art. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith . (Emphasis Ours.)

As to who or which entity is in legal possession of a property, the registration in the Registry of Deeds of [63] the subject property under the name of a third person indicates the legal possession of that person. In this case, Asiatrust is in the legal possession of the subject Antipolo properties after the titles under the name of Spouses Lee have been canceled, and new TCTs have been issued on April 20, 1999, under the name of Asiatrust. What is more, 12 title out of the 120 titles in the Antipolo properties in question have already been sold to different persons, which make them in legal possession of the properties. It is, thus, established that Asiatrust and the 12 other unnamed persons are in legal possession of the subject Antipolo properties; and it is imperative to prove that they legally took possession of them in good faith and without any badge of fraud.

Now, as to whether Asiatrust acted with fraud or bad faith, Bangkok Bank failed to present any clear and convincing evidence that would ascertain its existence. Contracts in fraud of creditors are those executed with the intention to prejudice the rights of creditors. They should not be confused with those entered into without such mal-intent, even if, as a direct consequence, a creditor may suffer some damage. More so it is, when the allegation involves not only fraud on the part of the debtor, but also that of another creditor. In determining whether or not a certain conveying contract is fraudulent, what comes to mind first is the question of whether the conveyance was a bona [64] fide transaction or a trick and contrivance to defeat creditors. Haste alone in the foreclosure of the mortgage does not constitute the existence of fraud. Considering that the totality of circumstances clearly manifests the want of fraud and bad faith on the part of the parties to the REM in question, consequently, the REM cannot be rescinded. In this case, it is clearly established that there was a bona fide transaction between the spouses Lee and Asiatrust that necessitated the negotiations resulting from the formers default in the payment of its obligations; and which brought about the execution of the REM to secure their pre-existing obligations. Particularly on the part of Asiatrust, the testimonies of Shirley Benedicto, its Vice-President, who was part of the banks account management group tasked to ensure the proper management of loans from its inception up to its collection, and of Atty. Neriza San Juan, the banks former Vice -President, and Head of its Credit Support Services and Legal Services Groups, amply proved the existence of good faith and dismissed the allegation of fraud. Asiatrust was able to establish (1) the existence of a loan agreement through a loan facility/credit line between Asiatrust and MDEC since July 25, 1996, which was guaranteed by the Lee family, including Samuel; (2) the advances made by MDEC throughout 1997, which amounted to an aggregate sum of PhP 31,000,000; (3) the default in payment of MDEC on its maturing loans; and (4) the negotiations, which took place between Asiatrust and Samuel on behalf of MDEC that led, in December 1997, to the agreement for Samuel to mortgage the subject Antipolo properties to [65] secure the defaulting loan and the loans, which were yet to mature. And as the last advances made by MDEC matured on February 20, 1998, it was just timely and appropriate for Asiatrust to foreclose the subject properties on April 15, 1998 in order to ensure that it is paid of the obligations, which MDEC owed to it. In this case, Asiatrust was left with only one clear and practicable means by which it could be paid of MDECs obligations, i.e., by foreclosing the mortgaged properties. After all, *t+he only right of a mortgagee in case of non -payment of a debt secured by mortgage would be to foreclose the mortgage and have the encumbered property sold to satisfy the [66] outstanding indebtedness. Conversely, Asiatrust did not sleep on its rights as a mortgage creditor of MDEC by foreclosing the mortgage on the spouses Lees Antipolo properties. On the contrary, it is odd but worth noting that Bangkok Bank never acted on its rights as creditor at the soonest possible time. It could have asserted it rights as creditor at the time when the Lee familys corporations started to default in their payments of the loans as early as October [67] 1997. When Bangkok Bank finally instituted an action against the Lee family on March 12, 1998 to collect the outstanding obligations of MDEC and MHI, a writ of preliminary attachment was issued by the Makati RTC in the same month covering the properties of the Lee family, including the subject Antipolo properties. And while enforcing the said writ, Bangkok Bank discovered the existing REM that had already been annotated on the titles of the subject Antipolo properties. But Bangkok Bank did nothing upon its knowledge and discovery. Worse, even at the time of the foreclosure and the redemption period, or until April 30, 1999, Bangkok Bank likewise did not act on the alleged fraudulent execution of the REM; nor did it redeem the subject properties. Rather, it was only on July 20, 1999 that Bangkok Bank seems to have belatedly realized that the subject Antipolo properties could properly be another means by which it could be paid of the defaulting obligations of MDEC and MHI. Interestingly, even on the elevation of this case to Us, Bangkok Bank s counsel had to move for four extensions, totaling to 52

days within which to file a comment on the instant petition, and has been warned for it. Asiatrust cannot be faulted for acting with prudence, in good faith, and without any badge of fraud in the creation of the REM and in the foreclosure of the mortgage to ensure the satisfaction of the debts owed to it by MDEC. Bangkok Bank should have likewise done so at the earliest possible opportunity. Furthermore, Asiatrust, in good faith, conducted the necessary diligence and meticulousness expected of it. During cross-examination, Atty. San Juan established that when the spouses Lee offered the subject Antipolo properties as collateral, Asiatrust had them appraised and required the spouses Lee to submit a photocopy of the titles, location map, and the relevant tax declarations, which was forwarded to its Appraisal Team. She further explained that credit investigation is a continuing annual process since the bank considers the market information [69] in connection with the account of the borrower. Indeed: The mortgagee has a right to rely in good faith on what appears on the certificate of title of the mortgagor to the property given as security and in the absence of anything to excite suspicion, he is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the fact of the certificate. Accordingly, the right or lien of an innocent mortgagee for value upon the mortgaged property must be respected and protected, even if the mortgagor obtained his title through fraud. The remedy of the persons prejudiced is to bring an [70] action for damages against the person who caused the fraud x x x.

[68]

There was no collusion between the spouses Lee and Asiatrust

Besides the fact that individually, fraud was not sufficiently and convincingly established on the part of the spouses Lee and Asiatrust, Bangkok Banks allegation of collusion between them was likewise unsubstantiated and therefore untenable. First, even after the subject Antipolo properties were foreclosed by Asiatrust, Asiatrust sought the recovery of the deficiency amounting to at least PhP 14,800,000. And until the filing of the memoranda by the [71] parties before this Court, the said action remains pending before the CA. Second, Asiatrust filed a criminal case against Samuel for violation of BP 22. At the time of the filing of [73] the petition for review, the case was still pending before the Metropolitan Trial Court of Quezon City. Later, at the time of the filing of the spouses Lees Memorandum, it was indicated that it has already been dismissed. Third, contrary to the CAs appreciation of the facts, the letter sent by Atty. Macam, counsel of the Midas Group of Companies, actually strengthens the proof that no collusion existed between the parties. Acting on the interest of MDEC, Atty. Macam sent a letter to the Clerk of Court and the Ex-Officio Sheriff of the Antipolo RTC, arguing that the subject Antipolo properties cannot be foreclosed as they are the subject of an existing SEC [75] [76] Suspension Order. In fact, counsel for MDEC alleged that the foreclosure sale was illegal. On the other hand, when the Ex-Officio Sheriff presented a copy of the letter to Asiatrust and asked the latter to comment, Asiatrust categorically stated that the subject properties could not be made a subject of the SEC Suspension Order, they [77] being properties of the spouses Lee, natural persons outside the jurisdiction of the SEC. In fact, it was Bangkok Banks sole witness, Capalaran, who firmly agreed that, indeed, the subject properties are not covered by the Suspension Order that is why Bangkok Bank, too, filed an action against the spouses Lee on March 12, 1998 and [78] sought the attachment of the said properties.
[74] [72]

With all the foregoing facts strongly established, We confirm the absence of fraud, bad faith, and collusion between the spouses Lee and Asiatrust. The requisite (1) good faith on the part of the third person and (2) fraud, necessary for an action to rescind under Art. 1381 of the Civil Code, were not complied with

In Siguan v. Lim, must exist:

[79]

this Court held that in an action to rescind under Art. 1381, the following requisites

The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to prosper, the following requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the alienation, although demandable later; (2) the debtor has made a subsequent contract conveying a patrimonial benefit to a third person; (3) the creditor has no other legal remedy to satisfy his claim; (4) the act being impugned is fraudulent; (5) the third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud. (Emphasis Ours; citations omitted.) Considering the discussions previously expounded, the extant records show that the fourth and fifth requisites enumerated above are absent. As between Asiatrust and Bangkok Bank, the former has a better right over the subject Antipolo properties, it being the first to annotate its lien on the titles of the properties It is evidently a well-settled and elementary principle that the rights of the first mortgage creditor or mortgagee over the mortgaged properties are superior to those of a subsequent attaching creditor and other [80] junior mortgagees. In this case, it is a fact that the REM was annotated on the titles of the subject Antipolo properties ahead of the writs of preliminary attachment issued in favor of Bangkok Bank. In fact, it was admitted by Bangkok Bank that it only knew of the existing mortgage that has already been annotated at the back of the subject titles when it [81] sought the annotation of the writs of preliminary attachment. Therefore, as between Asiatrust as mortgage creditor and Bangkok Bank as attaching creditor, it is apparent that the former has a superior right over the latter. Besides, as between two persons who both stand to suffer loss, the possessor of the prope rty should be [82] preferred in that possession, the ownership having been transferred by delivery. In this case, Asiatrust, being the entity with legal possession of the subject Antipolo properties, should be preferred in that possession. In addition, 12 of the titles in question have already been sold to 12 different persons, whose identities have not been introduced in the instant case and who have not been impleaded as parties. As these persons have been in legal possession of the said properties and are in good faith, their ownership and possession, should not be disturbed. The redemption period has already lapsed Sec. 27, Rule 39 of the Rules of Court states the persons who may redeem a real property sold, thus: Sec. 27. Who may redeem real property so sold.

Real property sold as provided in the last preceding section, or any part thereof sold separately, may be redeemed in the manner hereinafter provided, by the following persons: (a) The judgment obligor, or his successor in interest in the whole or any part of the property; (b) A creditor having a lien by virtue of an attachment, judgment or mortgage on the property sold, or on some part thereof, subsequent to the lien under which the property was sold. Such redeeming creditor is termed a redemptioner.(Emphasis Ours.) From the foregoing rule, it is clear that Bangkok Bank, as an attaching creditor, has the right to redeem [83] the subject Antipolo properties that were foreclosed by Asiatrust. In determining the period within which to redeem the foreclosed Antipolo properties in the present case, [84] RA 337 or the General Banking Act finds application. Pertinently, its Sec. 78 states: Sec. 78. x x x In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real property has been sold at public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking, or credit institution, within the purview of this Act, shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, with interest thereon at the rate specified in the mortgage, and all the costs and other judicial expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the income received from the property. However, the purchaser at the auction sale concerned shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. (Emphasis Ours.) In this case, the auction sale took place on April 15, 1998 and was registered with the RD on April 21, 1998. Subsequently, on April 30, 1999, a date already and certainly beyond the one-year redemption period [85] provided by law, new titles were issued in favor of Asiatrust. Apparently, Bangkok Bank chose not to exercise its right of redemption over the subject Antipolo properties. Even as a general rule, *t+he period of redemption is not tolled by the filing of a compla int or petition for [86] annulment of the mortgage and the foreclosure sale conducted pursuant to the said mortgage, Bangkok Bank, however, filed its action for rescission way beyond the expiration of the said redemption period on July 20, 1999. After the expiration of the redemption period, Asiatrust as purchaser, therefore, became the absolute owner of the subject properties, and whose rights necessarily include the right to be in the legal possession of the [87] properties. As a final note, in ruling for Bangkok Bank, the CA strangely did not even delve upon any fact that could have ascertained the allegation of fraud from which Bangkok Bank based its arguments. Quite the opposite, the RTC discussed in detail the facts and testimonies presented by the parties, upon which its finding of the absence of fraud was based. Indeed, factual findings by the trial court are afforded great weight by this Court especially when [88] supported by substantial evidence on record. While prejudice to Bangkok Bank ultimately resulted in the series of inopportune events that led to the present case, it cannot be denied that no clear, satisfactory and convincing evidence was presented to show fraud

on the part of both the spouses Lee and Asiatrust. Nor was bad faith on the part of Asiatrust and the 12 other subsequent purchasers established. Accordingly, the REM annotated on the titles of the subject Antipolo properties and the subsequent foreclosure of the same properties cannot and should not be rescinded.

WHEREFORE, premises considered, the petition is hereby GRANTED. Accordingly, the CAs March 15, 2006 Decision and June 29, 2006 Resolution in CA-G.R. CV No. 79362 are REVERSED andSET ASIDE. The RTCs April 21, 2003 Decision in Civil Case No. 99-5388 is hereby REINSTATED. No pronouncement as to costs. SO ORDERED.

PRESBITERO J. VELASCO, JR. Associate Justice

WE CONCUR:

Republic of the Philippines SUPREME COURT Manila

FIRST DIVISION

EUSEBIO GONZALES, Petitioner,

G.R. No. 180257 Present:

- versus -

PHILIPPINE COMMERCIAL AND INTERNATIONAL BANK, EDNA OCAMPO, and ROBERTO NOCEDA, Respondents.

CORONA, C.J., Chairperson, VELASCO, JR., * NACHURA, DEL CASTILLO, and PEREZ, JJ. Promulgated:

February 23, 2011 x-----------------------------------------------------------------------------------------x DECISION VELASCO, JR., J.: The Case This is an appeal via a Petition for Review on Certiorari under Rule 45 from the Decision
[2] [1]

dated October

22, 2007 of the Court of Appeals (CA) in CA-G.R. CV No. 74466, which denied petitioners appeal from the December 10, 2001 Decision in Civil Case No. 99-1324 of the Regional Trial Court (RTC), Branch 138 in Makati City. The RTC found justification for respondents dishonor of petitioners check and found petitioner solidarily liable with the spouses Jose and Jocelyn Panlilio (spouses Panlilio) for the three promissory notes they executed in favor of respondent Philippine Commercial and International Bank (PCIB). The Facts Petitioner Eusebio Gonzales (Gonzales) was a client of PCIB for a good 15 years before he filed the instant case. His account with PCIB was handled by respondent Edna Ocampo (Ocampo) until she was replaced by respondent Roberto Noceda (Noceda).

In October 1992, PCIB granted a credit line to Gonzales through the execution of a Credit-On-Hand Loan Agreement (COHLA), in which the aggregate amount of the accounts of Gonzales with PCIB served as collateral for and his availment limit under the credit line. Gonzales drew from said credit line through the issuance of check. At the institution of the instant case, Gonzales had a Foreign Currency Deposit (FCD) of USD 8,715.72 with PCIB. On October 30, 1995, Gonzales and his wife obtained a loan for PhP 500,000. Subsequently, on December 26, 1995 and January 3, 1999, the spouses Panlilio and Gonzales obtained two additional loans from PCIB in the amounts of PhP 1,000,000 and PhP 300,000, respectively. These three loans amounting to PhP 1,800,000 were covered by three promissory notes.
[4] [3]

To secure the loans, a real estate mortgage (REM) over a parcel of land

covered by Transfer Certificate of Title (TCT) No. 38012 was executed by Gonzales and the spouses Panlilio. Notably, the promissory notes specified, among others, the solidary liability of Gonzales and the spouses Panlilio for the payment of the loans. However, it was the spouses Panlilio who received the loan proceeds of PhP 1,800,000. The monthly interest dues of the loans were paid by the spouses Panlilio through the automatic debiting of their account with PCIB. But the spouses Panlilio, from the month of July 1998, defaulted in the payment of the periodic interest dues from their PCIB account which apparently was not maintained with enough deposits. PCIB allegedly called the attention of Gonzales regarding the July 1998 defaults and the subsequent accumulating periodic interest dues which were left still left unpaid. In the meantime, Gonzales issued a check dated September 30, 1998 in favor of Rene Unson (Unson) for PhP 250,000 drawn against the credit line (COHLA). However, on October 13, 1998, upon presentment for payment by Unson of said check, it was dishonored by PCIB due to the termination by PCIB of the credit line under COHLA on October 7, 1998 for the unpaid periodic interest dues from the loans of Gonzales and the spouses Panlilio. PCIB likewise froze the FCD account of Gonzales. Consequently, Gonzales had a falling out with Unson due to the dishonor of the check. They had a heated argument in the premises of the Philippine Columbian Association (PCA) where they are both members, which caused great embarrassment and humiliation to Gonzales. Thereafter, on November 5, 1998, Unson sent a demand letter to Gonzales for the PhP 250,000. And on December 3, 1998, the counsel of Unson sent a second demand letter to Gonzales with the threat of legal action. With his FCD account that PCIB froze, Gonzales was forced to source out and pay the PhP 250,000 he owed to Unson in cash. On January 28, 1999, Gonzales, through counsel, wrote PCIB insisting that the check he issued had been fully funded, and demanded the return of the proceeds of his FCD as well as damages for the unjust dishonor of the check.
[7] [6] [5]

PCIB replied on March 22, 1999 and stood its ground in freezing Gonzales accounts due to the

outstanding dues of the loans.

[8]

On May 26, 1999, Gonzales reiterated his demand, reminding PCIB that it knew
[9]

well that the actual borrowers were the spouses Panlilio and he never benefited from the proceeds of the loans, which were serviced by the PCIB account of the spouses Panlilio.

PCIBs refusal to heed his demands compelled Gonzales to file the instant case for damages with the RTC, on account of the alleged unjust dishonor of the check issued in favor of Unson. The Ruling of the RTC After due trial, on December 10, 2001, the RTC rendered a Decision in favor of PCIB. The decretal portion reads: WHEREFORE, judgment is rendered as follows (a) on the first issue, plaintiff is liable to pay defendant Bank as principal under the promissory notes, Exhibits A, B and C; (b) on the second issue, the Court finds that there is justification on part of the defendant Bank to dishonor the check, Exhibit H; (c) on the third issue, plaintiff and defendants are not entitled to damages from each other. No pronouncement as to costs. SO ORDERED.
[10]

The RTC found Gonzales solidarily liable with the spouses Panlilio on the three promissory notes relative to the outstanding REM loan. The trial court found no fault in the termination by PCIB of the COHLA with Gonzales and in freezing the latters accounts to answer for the pa st due PhP 1,800,000 loan. The trial court ruled that the dishonor of the check issued by Gonzales in favor of Unson was proper considering that the credit line under the COHLA had already been terminated or revoked before the presentment of the check. Aggrieved, Gonzales appealed the RTC Decision before the CA. The Ruling of the CA On September 26, 2007, the appellate court rendered its Decision dismissing Gonzales appeal and affirming in toto the RTC Decision. The fallo reads: WHEREFORE, in view of the foregoing, the decision, dated December 10, 2001, in Civil Case No. 99-1324 is hereby AFFIRMED in toto.

SO ORDERED.

[11]

In dismissing Gonzales appeal, the CA, first, confirmed the RTCs findings that Gonzales was indeed solidarily liable with the spouses Panlilio for the three promissory notes executed for the REM loan; second, it likewise found neither fault nor negligence on the part of PCIB in dishonoring the check issued by Gonzales in favor of Unson, ratiocinating that PCIB was merely exercising its rights under the contractual stipulations in the COHLA brought about by the outstanding past dues of the REM loan and interests for which Gonzales was solidarily liable with the spouses Panlilio to pay under the promissory notes. Thus, we have this petition. The Issues Gonzales, as before the CA, raises again the following assignment of errors: I - IN NOT CONSIDERING THAT THE LIABILITY ARISING FROM PROMISSORY NOTES (EXHIBITS A, B AND C, PETITIONER; EXHIBITS 1, 2 AND 3, RESPONDENT) PERTAINED TO BORROWER JOSE MA. PANLILIO AND NOT TO APPELLANT AS RECOGNIZED AND ACKNOWLEDGE[D] BY RESPONDENT PHILIPPINE COMMERCIAL & INDUSTRIAL BANK (RESPONDENT BANK). II - IN FINDING THAT THE RESPONDENTS WERE NOT AT FAULT NOR GUILTY OF GROSS NEGLIGENCE IN DISHONORING PETITIONERS CHECK DATED 30 SEPTEMBER 1998 IN THE AMOUNT OF P250,000.00 FOR THE REASON ACCOUNT CLOSED, INSTEAD OF MERELY REFER TO DRAWER GIVEN THE FACT THAT EVEN AFTER DISHONOR, RESPONDENT SIGNED A CERTIFICATION DATED 7 DECEMBER 1998 THAT CREDIT ON HAND (COH) LOAN AGREEMENT WAS STILL VALID WITH A COLLATERAL OF FOREIGN CURRENCY DEPOSIT (FCD) OF [USD] 48,715.72. III - IN NOT AWARDING DAMAGES AGAINST RESPONDENTS DESPITE PRESENTATION OF CLEAR [12] PROOF TO SUPPORT ACTION FOR DAMAGES.

The Courts Ruling The core issues can be summarized, as follows: first, whether Gonzales is liable for the three promissory notes covering the PhP 1,800,000 loan he made with the spouses Panlilio where a REM over a parcel of land covered by TCT No. 38012 was constituted as security; and second, whether PCIB properly dishonored the check of Gonzales drawn against the COHLA he had with the bank. The petition is partly meritorious. First Issue: Solidarily Liability on Promissory Notes

A close perusal of the records shows that the courts a quo correctly found Gonzales solidarily liable with the spouses Panlilio for the three promissory notes. The promissory notes covering the PhP 1,800,000 loan show the following: (1) Promissory Note BD-090-1766-95, dated October 30, 1995, for PhP 500,000 was signed by Gonzales and his wife, Jessica Gonzales; [14] (2) Promissory Note BD-090-2122-95, dated December 26, 1995, for PhP 1,000,000 was signed by Gonzales and the spouses Panlilio; and (3) Promissory Note BD-090-011-96, and the spouses Panlilio.
[15] [13]

dated January 3, 1996, for PhP 300,000 was signed by Gonzales

Clearly, Gonzales is liable for the loans covered by the above promissory notes. First, Gonzales admitted that he is an accommodation party which PCIB did not dispute. In his testimony, Gonzales admitted that he merely accommodated the spouses Panlilio at the suggestion of Ocampo, who was then handling his accounts, in order to facilitate the fast release of the loan. Gonzales testified: ATTY. DE JESUS: Now in this case you filed against the bank you mentioned there was a loan also applied for by the Panlilios in the sum of P1.8 Million Pesos. Will you please tell this Court how this came about? GONZALES: Mr. Panlilio requested his account officer . . . . at that time it is a P42.0 Million loan and if he secures another P1.8 Million loan the release will be longer because it has to pass to XO. Q: A: After that what happened? So as per suggestion since Mr. Panlilio is a good friend of mine and we co-owned the property I agreed initially to use my name so that the loan can be utilized immediately by Mr. Panlilio. Who is actually the borrower of this P1.8 Million Pesos? Well, in paper me and Mr. Panlilio. Who received the proceeds of said loan? Mr. Panlilio. Do you have any proof that it was Mr. Panlilio who actually received the proceeds of this P1.8 Million Pesos loan? [16] A check was deposited in the account of Mr. Panlilio. xxxx Q: A: Q: A: By the way upon whose suggestion was the loan of Mr. Panlilio also placed under your name initially? Well it was actually suggested by the account officer at that time Edna Ocampo. How about this Mr. Rodolfo Noceda? As you look at the authorization aspect of the loan Mr. Noceda is the boss of Edna so he has been familiar with my account ever since its inception.

Q: A: Q: A: Q: A:

Q: A:

So these two officers Ocampo and Noceda knew that this was actually the account of Mr. Panlilio and not your account? Yes, sir. In fact even if there is a change of account officer they are always informing me [17] that the account will be debited to Mr. Panlilios account.

Moreover, the first note for PhP 500,000 was signed by Gonzales and his wife as borrowers, while the two subsequent notes showed the spouses Panlilio sign as borrowers with Gonzales. It is, thus, evident that Gonzales signed, as borrower, the promissory notes covering the PhP 1,800,000 loan despite not receiving any of the proceeds. Second, the records of PCIB indeed bear out, and was admitted by Noceda, that the PhP 1,800,000 loan proceeds went to the spouses Panlilio, thus: ATTY. DE JESUS: [on Cross-Examination] Is it not a fact that as far as the records of the bank [are] concerned the proceeds of the 1.8 million loan was received by Mr. Panlilio? NOCEDA: [18] Yes sir.

The fact that the loans were undertaken by Gonzales when he signed as borrower or co-borrower for the benefit of the spouses Panlilioas shown by the fact that the proceeds went to the spouses Panlilio who were servicing or paying the monthly duesis beside the point. For signing as borrower and co-borrower on the promissory notes with the proceeds of the loans going to the spouses Panlilio, Gonzales has extended an accommodation to said spouses. Third, as an accommodation party, Gonzales is solidarily liable with the spouses Panlilio for the [19] loans. In Ang v. Associated Bank, quoting the definition of an accommodation party under Section 29 of the Negotiable Instruments Law, the Court cited that an accommodation party is a person who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of [20] lending his name to some other person. The Court further explained: [A]n accommodation party is one who meets all the three requisites, viz: (1) he must be a party to the instrument, signing as maker, drawer, acceptor, or indorser; (2) he must not receive value therefor; and (3) he must sign for the purpose of lending his name or credit to some other person. An accommodation party lends his name to enable the accommodated party to obtain credit or to raise money; he receives no part of the consideration for the instrument but assumes liability to the other party/ies thereto. The accommodation party is liable on the instrument to a holder for value even though the holder, at the time of taking the instrument, knew him or her to be merely an accommodation party, as if the contract was not for accommodation. As petitioner acknowledged it to be, the relation between an accommodation party and the accommodated party is one of principal and suretythe accommodation party being the surety. As such, he is deemed an original promisor and debtor from the beginning; he is considered in law as the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter since their liabilities are interwoven as to be inseparable. Although a

contract of suretyship is in essence accessory or collateral to a valid principal obligation, the suretys liability to the creditor is immediate, primary and absolute; he is directly and equally bound with the principal. As an equivalent of a regular party to the undertaking, a surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in the obligations nor does he receive any benefit [21] therefrom.

Thus, the knowledge, acquiescence, or even demand by Ocampo for an accommodation by Gonzales in order to extend the credit or loan of PhP 1,800,000 to the spouses Panlilio does not exonerate Gonzales from liability on the three promissory notes. Fourth, the solidary liability of Gonzales is clearly stipulated in the promissory notes which uniformly begin, For value received, the undersigned (the BORROWER) jointly and severally promise to pay x x [22] x. Solidary liability cannot be presumed but must be established by law or contract. Article 1207 of the Civil Code pertinently states that there is solidary liability only when the obligation expressly so states, or when the obligation requires solidarity. This is true in the instant case where Gonzales, as accommodation party, is immediately, equally, and absolutely bound with the spouses Panlilio on the promissory notes which indubitably stipulated solidary liability for all the borrowers. Moreover, the three promissory notes serve as the contract between the parties. Contracts have the force of law between the parties and must be complied with in good [23] faith. Second Issue: Improper Dishonor of Check Having ruled that Gonzales is solidarily liable for the three promissory notes, We shall now touch upon the question of whether it was proper for PCIB to dishonor the check issued by Gonzales against the credit line under the COHLA. We answer in the negative. As a rule, an appeal by certiorari under Rule 45 of the Rules of Court is limited to review of errors of [24] law. The factual findings of the trial court, especially when affirmed by the appellate court, are generally binding on us unless there was a misapprehension of facts or when the inference drawn from the facts was [25] manifestly mistaken. The instant case falls within the exception. The courts a quo found and held that there was a proper dishonor of the PhP 250,000 check issued by Gonzales against the credit line, because the credit line was already closed prior to the presentment of the check by Unson; and the closing of the credit line was likewise proper pursuant to the stipulations in the promissory notes on the banks right to set off or apply all moneys of the debtor in PCIBs hand and the stipulations in the COHLA on the PCIBs right to terminate the credit line on grounds of default by Gonzales. Gonzales argues otherwise, pointing out that he was not informed about the default of the spouses Panlilio and that the September 21, 1998 account statement of the credit line shows a balance of PhP 270,000 which was likewise borne out by the December 7, 1998 PCIB s certification that he has USD 8,715.72 in his FCD account which is more than sufficient collateral to guarantee the PhP 250,000 check, dated September 30, 1998, he issued against the credit line.

A careful scrutiny of the records shows that the courts a quo committed reversible error in not finding negligence by PCIB in the dishonor of the PhP 250,000 check. First. There was no proper notice to Gonzales of the default and delinquency of the PhP 1,800,000 loan. It must be borne in mind that while solidarily liable with the spouses Panlilio on the PhP 1,800,000 loan covered by the three promissory notes, Gonzales is only an accommodation party and as such only lent his name and credit to the spouses Panlilio. While not exonerating his solidary liability, Gonzales has a right to be properly apprised of the default or delinquency of the loan precisely because he is a co-signatory of the promissory notes and of his solidary liability. We note that it is indeed understandable for Gonzales to push the spouses Panlilio to pay the outstanding dues of the PhP 1,800,000 loan, since he was only an accommodation party and was not personally interested in the loan. Thus, a meeting was set by Gonzales with the spouses Panlilio and the PCIB officers, Noceda and Ocampo, in the spouses Panlilios jewelry shop in SM Megamall on October 5, 1998. Unfortunately, the meeting did not push through due to the heavy traffic Noceda and Ocampo encountered. Such knowledge of the default by Gonzales was, however, not enough to properly apprise Gonzales about the default and the outstanding dues. Verily, it is not enough to be merely informed to pay over a hundred thousand without being formally apprised of the exact aggregate amount and the corresponding dues pertaining to specific loans and the dates they became due. Gonzales testified that he was not duly notified about the outstanding interest dues of the loan: ATTY. DE JESUS: Now when Mr. Panlilios was encountering problems with the bank did the defendant bank [advise] you of any problem with the same account? GONZALES: They never [advised] me in writing. Q: A: How did you come to know that there was a problem? [26] When my check bounced sir.

On the other hand, the PCIB contends otherwise, as Corazon Nepomuceno testified: ATTY. PADILLA: Can you tell this Honorable Court what is it that you told Mr. Gonzales when you spoke to him at the celphone? NEPOMUCENO: I just told him to update the interest so that we would not have to cancel the COH Line and he could withdraw the money that was in the deposit because technically, if an account is past due we are not allowed to let the client withdraw funds because they are allowed to offset funds so, just to help him get his money, just to update the interest so that we could allow him to withdraw. Q: Withdraw what? A: His money on the COH, whatever deposit he has with us.

Q: A:

Did you inform him that if he did not update the interest he would not be able to withdraw his money? Yes sir, we will be forced to hold on to any assets that he has with us so thats why we suggested just to update the interest because at the end of everything, he would be able to withdraw more funds than the interest that the money he would be needed to [27] update the interest.

From the foregoing testimonies, between the denial of Gonzales and the assertion by PCIB that Gonzales was properly apprised, we find for Gonzales. We find the testimonies of the former PCIB employees to be selfserving and tenuous at best, for there was no proper written notice given by the bank. The record is bereft of any document showing that, indeed, Gonzales was formally informed by PCIB about the past due periodic interests. PCIB is well aware and did not dispute the fact that Gonzales is an accommodation party. It also acted in accordance with such fact by releasing the proceeds of the loan to the spouses Panlilio and likewise only informed [28] the spouses Panlilio of the interest dues. The spouses Panlilio, through their account with PCIB, were paying the periodic interest dues and were the ones periodically informed by the bank of the debiting of the amounts for the periodic interest payments. Gonzales never paid any of the periodic interest dues. PCIBs Noceda admitted as much in his cross-examination: ATTY. DE JESUS: [on Cross-Examination] And there was no instance that Mr. Gonzales ever ma de even interest for this loan, is it not, its always Mr. Panlilio who was paying the interest for this loan? NOCEDA: [29] Yes sir.

Indeed, no evidence was presented tending to show that Gonzales was periodically sent notices or notified of the various periodic interest dues covering the three promissory notes. Neither do the records show that Gonzales was aware of amounts for the periodic interests and the payment for them. Such were serviced by the spouses Panlilio. Thus, PCIB ought to have notified Gonzales about the status of the default or delinquency of the interest dues that were not paid starting July 1998. And such notification must be formal or in written form considering that the outstanding periodic interests became due at various dates, i.e., on July 8, 17, and 28, 1998, and the various amounts have to be certain so that Gonzales is not only properly apprised but is given the opportunity to pay them being solidarily liable for the loans covered by the promissory notes. It is the bank which computes these periodic interests and such dues must be put into writing and formally served to Gonzales if he were asked to pay them, more so when the payments by the spouses Panlilio were charged through the account of the spouses Panlilio where the interest dues were simply debited. Such arrangement did not cover Gonzales bank account with PCIB, since he is only an accommodation party who has no personal interest in the PhP 1,800,000 loan. Without a clear and determinate demand through a formal written notice for the exact periodic interest dues for the loans, Gonzales cannot be expected to pay for them. In business, more so for banks, the amounts demanded from the debtor or borrower have to be definite, clear, and without ambiguity. It is not sufficient simply to be informed that one must pay over a hundred thousand aggregate outstanding interest dues without clear and certain figures. Thus, We find PCIB negligent in not properly

informing Gonzales, who is an accommodation party, about the default and the exact outstanding periodic interest dues. Without being properly apprised, Gonzales was not given the opportunity to properly act on them. It was only through a letter sent by PCIB dated October 2, 1998 but incongruously showing the delinquencies of the PhP 1,800,000 loan at a much later date, i.e., as of October 31, 1998, when Gonzales was formally apprised by PCIB. In it, the interest due was PhP 106,1616.71 and penalties for the unpaid interest due of PhP 64,766.66, or a total aggregate due of PhP 171,383.37. But it is not certain and the records do not show when the letter was sent and when Gonzales received it. What is clear is that such letter was belatedly sent by PCIB and received by Gonzales after the fact that the latters FCD was already frozen, his credit line under the COHLA was terminated or suspended, and his PhP 250,000 check in favor of Unson was dishonored. And way much later, or on May 4, 1999, was a demand letter from the counsel of PCIB sent to Gonzales demanding payment of the PhP 1,800,000 loan. Obviously, these formal written notices sent to Gonzales were too late in the day for Gonzales to act properly on the delinquency and he already suffered the humiliation and embarrassment from the dishonor of his check drawn against the credit line. To reiterate, a written notice on the default and deficiency of the PhP 1,800,000 loan covered by the three promissory notes was required to apprise Gonzales, an accommodation party. PCIB is obliged to formally inform and apprise Gonzales of the defaults and the outstanding obligations, more so when PCIB was invoking the solidary liability of Gonzales. This PCIB failed to do. Second. PCIB was grossly negligent in not giving prior notice to Gonzales about its course of action to suspend, terminate, or revoke the credit line, thereby violating the clear stipulation in the COHLA. The COHLA, in its effectivity clause, clearly provides: 4. EFFECTIVITY The COH shall be effective for a period of one (1) year commencing from the receipt by the CLIENT of the COH checkbook issued by the BANK, subject to automatic renewals for same periods unless terminated by the BANK upon prior notice served [31] on CLIENT. (Emphasis ours.)
[30]

It is undisputed that the bank unilaterally revoked, suspended, and terminated the COHLA without giving Gonzales prior notice as required by the above stipulation in the COHLA. Noceda testified on cross-examination on [32] the Offering Ticket recommending the termination of the credit line, thus: ATTY. DE JESUS: [on Cross-Examination] This Exhibit 8, you have not furnished at anytime a copy to the plaintiff Mr. Gonzales is it not? NOCEDA: No sir but verbally it was relayed to him. Q: A: Q: A: Q: But you have no proof that Mr. Gonzales came to know about this Exhibit 8? It was relayed to him verbally. But there is no written proof? No sir. And it is only now that you claim that it was verbally relayed to him, its only now when you testified in Court?

A: Q: A:

Before . . . To whom did you relay this information? It was during the time that we were going to Megamall, it was relayed by Liza that he has [33] to pay his obligations or else it will adversely affect the status of the account.

On the other hand, the testimony of Corazon Nepomuceno shows: ATTY. DE JESUS: [on Cross-Examination] Now we go to the other credit facility which is the credit on hand extended solely of course to Mr. Eusebio Gonzales who is the plaintiff here, Mr. Panlilio is not included in this credit on hand facility. Did I gather from you as per your Exhibit 7 as ofOctober 2, 1998 you were the one who recommended the cancellation of this credit on hand facility?

NEPOMUCENO: It was recommended by the account officer and I supported it. Q: A: Q: A: Q: A: Q: A: And you approved it? Yes sir. Did you inform Mr. Gonzales that you have already cancelled his credit on hand facility? As far as I know, it is the account officer who will inform him. But you have no record that he was informed? I dont recall and we have to look at the folder to determine if they were informed. If you will notice, this letter . . . what do you call this letter of yours? That is our letter advising them or reminding them of their unpaid interest and that if he is able to update his interest he can extend the promissory note or restructure the outstanding. Now, I call your attention madam witness, there is nothing in this letter to the clients advising them or Mr. Gonzales that his credit on hand facility was already cancelled? I dont know if there are other letters aside from this. So in this letter there is nothing to inform or to make Mr. Eusebio aware that his credit on hand facility was already cancelled? No actually he can understand it from the last sentence. If you will be able to update your outstanding interest, we can apply the extention of your promissory note so in other words we are saying that if you dont, you cannot extend the promissory note. You will notice that the subject matter of this October 2, 1998 letter is only the loan of 1.8 million is it not, as you can see from the letter? Okay? Ah . . . Okay. There is nothing there that will show that that also refers to the credit on hand facility which was being utilized by Mr. Gonzales is it not? [34] But I dont know if there are other letters that are not presented to me now.

Q: A: Q: A:

Q: A: Q: A:

The foregoing testimonies of PCIB officers clearly show that not only did PCIB fail to give prior notice to Gonzales about the Offering Ticket for the process of termination, suspension, or revocation of the credit line under the COHLA, but PCIB likewise failed to inform Gonzales of the fact that his credit line has been terminated. Thus, we find PCIB grossly negligent in the termination, revocation, or suspension of the credit line under the COHLA. While PCIB invokes its right on the so-called cross default provisions, it may not with impunity ignore the rights of Gonzales under the COHLA. Indeed, the business of banking is impressed with public interest and great reliance is made on the banks sworn profession of diligence and meticulousness in giving irreproachable service. Like a common carrier whose business is imbued with public interest, a bank should exercise extraordinary diligence to negate its liability to the [35] depositors. In this instance, PCIB is sorely remiss in the diligence required in treating with its client, Gonzales. It may not wantonly exercise its rights without respecting and honoring the rights of its clients. Art. 19 of the New Civil Code clearly provides that *e+very person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. This is the basis of the principle of abuse of right which, in turn, is based upon the maxim suum jus summa injuria (the [36] abuse of right is the greatest possible wrong). In order for Art. 19 to be actionable, the following elements must be present: (1) the existence of a legal right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or injuring [37] another. We find that such elements are present in the instant case. The effectivity clause of the COHLA is crystal clear that termination of the COH should be done only upon prior notice served on the CLIENT. This is the legal duty of PCIBto inform Gonzales of the termination. However, as shown by the above testimonies, PCIB failed to give prior notice to Gonzales.

Malice or bad faith is at the core of Art. 19. Malice or bad faith implies a conscious and intentional design [38] to do a wrongful act for a dishonest purpose or moral obliquity. In the instant case, PCIB was able to send a [39] letter advising Gonzales of the unpaid interest on the loans but failed to mention anything about the termination of the COHLA. More significantly, no letter was ever sent to him about the termination of the COHLA. [40] The failure to give prior notice on the part of PCIB is already prima facie evidence of bad faith. Therefore, it is abundantly clear that this case falls squarely within the purview of the principle of abuse of rights as embodied in Art. 19. Third. There is no dispute on the right of PCIB to suspend, terminate, or revoke the COHLA under the cross default provisions of both the promissory notes and the COHLA. However, these cross default provisions do not confer absolute unilateral right to PCIB, as they are qualified by the other stipulations in the contracts or specific circumstances, like in the instant case of an accommodation party. The promissory notes uniformly provide: The lender is hereby authorized, at its option and without notice, to set off or apply to the payment of this Note any and all moneys which may be in its hands on deposit or otherwise belonging to the Borrower . The Borrower irrevocably appoint/s the Lender, effective upon the nonpayment of this Note on demand/at maturity or upon the happening of any of the events of default, but without any obligation on the Lenders part should it choose not to perform this mandate, as the attorney-in-fact of the Borrower, to sell and dispose of any property of the Borrower, which may be in the Lenders possession by public or private sale, and

to apply the proceeds thereof to the payment of this Note; the Borrower, however, shall remain [41] liable for any deficiency. (Emphasis ours.)

The above provisos are indeed qualified with the specific circumstance of an accommodation party who, as such, has not been servicing the payment of the dues of the loans, and must first be properly apprised in writing of the outstanding dues in order to answer for his solidary obligation. The same is true for the COHLA, which in its default clause provides: 16. DEFAULT The CLIENT shall be considered in default under the COH if any of the following events shall occur: 1. 2. xxx Violation of the terms and conditions of this Agreement or any contract of the CLIENT with the BANK or any bank, persons, corporations or entities for the payment of borrowed [42] money, or any other event of default in such contracts.

The above pertinent default clause must be read in conjunction with the effectivity clause (No. 4 of the COHLA, quoted above), which expressly provides for the right of client to prior notice. The rationale is simple: in cases where the bank has the right to terminate, revoke, or suspend the credit line, the client must be notified of such intent in order for the latter to act accordingly whether to correct any ground giving rise to the right of the bank to terminate the credit line and to dishonor any check issued or to act in accord with such termination, i.e., not to issue any check drawn from the credit line or to replace any checks that had been issued. This, the bank with gross negligencefailed to accord Gonzales, a valued client for more than 15 years. Fourth. We find the testimony of Ocampo incredible on the point that the principal borrower of the PhP 1,800,000 loan covered by the three promissory notes is Gonzales for which the bank officers had special instructions to grant and that it was through the instructions of Gonzales that the payment of the periodic interest dues were debited from the account of the spouses Panlilio. For one, while the first promissory note dated October 30, 1995 indeed shows Gonzales as the principal borrower, the other promissory notes dated December 26, 1995 and January 3, 1996 evidently show that it was Jose Panlilio who was the principal borrower with Gonzales as co-borrower. For another, Ocampo cannot feign ignorance on the arrangement of the payments by the spouses Panlilio through the debiting of their bank account. It is incredulous that the payment arrangement is merely at the behest of Gonzales and at a mere verbal directive to do so. The fact that the spouses Panlilio not only received the proceeds of the loan but were servicing the periodic interest dues reinforces the fact that Gonzales was only an accommodation party. Thus, due to PCIBs negligence in not giving Gonzalesan accommodation partyproper notice relative to the delinquencies in the PhP 1,800,000 loan covered by the three promissory notes, the unjust termination, revocation, or suspension of the credit line under the COHLA from PCIBs gross negligence in not honoring its obligation to give prior notice to Gonzales about such termination and in not informing Gonzales of the fact of such termination, treating Gonzales account as closed and dishonoring his PhP 250,000 check, was certainly a reckless act by PCIB. This resulted in the actual injury of PhP 250,000 to Gonzales whose FCD account was frozen and had to look elsewhere for money to pay Unson.
[43]

With banks, the degree of diligence required is more than that of a good father of the family considering that the business of banking is imbued with public interest due to the nature of their function. The law imposes on banks a high degree of obligation to treat the accounts of its depositors with meticulous care, always having in [44] mind the fiduciary nature of banking. Had Gonzales been properly notified of the delinquencies of the PhP 1,800,000 loan and the process of terminating his credit line under the COHLA, he could have acted accordingly and the dishonor of the check would have been avoided. Third Issue: Award of Damages The banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized societybanks have attained a ubiquitous presence among the people, who have come to regard them with respect and even gratitude and most of all, confidence, and it is for this reason, [45] banks should guard against injury attributable to negligence or bad faith on its part. In the instant case, Gonzales suffered from the negligence and bad faith of PCIB. From the testimonies of [46] [47] Gonzales witnesses, particularly those of Dominador Santos and Freddy Gomez, the embarrassment and humiliation Gonzales has to endure not only before his former close friend Unson but more from the members and families of his friends and associates in the PCA, which he continues to experience considering the confrontation he had with Unson and the consequent loss of standing and credibility among them from the fact of the apparent bouncing check he issued. Credit is very important to businessmen and its loss or impairment needs to be [48] recognized and compensated. The termination of the COHLA by PCIB without prior notice and the subsequent dishonor of the check issued by Gonzales constitute acts of contra bonus mores. Art. 21 of the Civil Code refers to such acts when it says, Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for damage. Accordingly, this Court finds that such acts warrant the payment of indemnity in the form of nominal damages. Nominal damages are recoverable where a legal right is technically violated and must be vindicated [49] against an invasion that has produced no actual present loss of any kind x x x. We further explained the nature of nominal damages in Almeda v. Cario: x x x Its award is thus not for the purpose of indemnification for a loss but for the recognition and vindication of a right. Indeed, nominal damages are damages in name only and not in fact. When granted by the courts, they are not treated as an equivalent of a wrong inflicted but simply a recognition of the existence of a technical injury. A violation of the plaintiffs right, even if only technical, is sufficient to support an award of nominal damages. Conversely, so long as there is a showing of a violation of the right of the plaintiff, an [50] award of nominal damages is proper. (Emphasis Ours.) In the present case, Gonzales had the right to be informed of the accrued interest and most especially, for the suspension of his COHLA. For failure to do so, the bank is liable to pay nominal damages. The amount of such [51] damages is addressed to the sound discretion of the court, taking into account the relevant circumstances. In this case, the Court finds that the grant of PhP 50,000 as nominal damages is proper. Moreover, as We held in MERALCO v. CA, failure to give prior notice when required, such as in the instant case, constitutes a breach of contract and is a clear violation of Art. 21 of the Code. In cases such as this,
[52]

Art. 2219 of the Code provides that moral damages may be recovered in acts referred to in its Art. 21. Further, Art. 2220 of the Code provides that *w+illful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith . Similarly, every person who, contrary to law, willfully or negligently causes damage to another, shall indemnify the latter for the [53] same. Evidently, Gonzales is entitled to recover moral damages. Even in the absence of malice or bad faith, a depositor still has the right to recover reasonable moral [54] damages, if the depositor suffered mental anguish, serious anxiety, embarrassment, and humiliation. Although incapable of pecuniary estimation, moral damages are certainly recoverable if they are the proximate result of the defendants wrongful act or omission. The factual antecedents bolstered by undisputed testimonies likewise show the mental anguish and anxiety Gonzales had to endure with the threat of Unson to file a suit. Gonzales had to pay Unson PhP 250,000, while his FCD account in PCIB was frozen, prompting Gonzales to demand from PCIB and to file the instant suit. The award of moral damages is aimed at a restoration within the limits of the possible, of the spiritual status quo anteit must always reasonably approximate the extent of injury and be proportional to the [55] wrong committed. Thus, an award of PhP 50,000 is reasonable moral damages for the unjust dishonor of the PhP 250,000 which was the proximate cause of the consequent humiliation, embarrassment, anxiety, and mental anguish suffered by Gonzales from his loss of credibility among his friends, colleagues and peers. Furthermore, the initial carelessness of the banks omission in not properly informing Gonzales of the outstanding interest duesaggravated by its gross neglect in omitting to give prior notice as stipulated under the COHLA and in not giving actual notice of the termination of the credit line justifies the grant of exemplary damages of PhP 10,000. Such an award is imposed by way of example or correction for the public good. Finally, an award for attorneys fees is likewise called for from PCIBs negligence which compelled Gonzales to litigate to protect his interest. In accordance with Art. 2208(1) of the Code, attorneys fees may be recovered when exemplary damages are awarded. We find that the amount of PhP 50,000 as attorneys fees is reasonable. WHEREFORE, this petition is PARTLY GRANTED. Accordingly, the CA Decision dated October 22, 2007 in CA-G.R. CV No. 74466 is hereby REVERSED and SET ASIDE. The Philippine Commercial and International Bank (now Banco De Oro) is ORDERED to pay Eusebio Gonzales PhP 50,000 as nominal damages, PhP 50,000 as moral damages, PhP 10,000 as exemplary damages, and PhP 50,000 as attorneys fees. No pronouncement as to costs. SO ORDERED.

PRESBITERO J. VELASCO, JR. Associate Justice

Republic of the Philippines Supreme Court Manila

SECOND DIVISION

SPOUSES FERNANDO and LOURDES VILORIA, Petitioners,

G.R. No. 188288

Present:

CARPIO, J., Chairperson, PEREZ, - versus SERENO, REYES, and BERNABE, JJ.

Promulgated: CONTINENTAL AIRLINES, INC., Respondent. January 16, 2012

x------------------------------------------------------------------------------------x

DECISION

REYES, J.:

This is a petition for review under Rule 45 of the Rules of Court from the January 30, 2009 Decision of the Special Thirteenth Division of the Court of Appeals (CA) in CA-G.R. CV No. 88586 entitled Spouses Fernando and Lourdes Viloria v. Continental Airlines, Inc., the dispositive portion of which states:

WHEREFORE, the Decision of the Regional Trial Court, Branch 74, dated 03 April 2006, awarding US$800.00 or its peso equivalent at the time of payment, plus legal rate of interest from 21 July 1997 until fully paid, [P]100,000.00 as moral damages, [P]50,000.00 as exemplary damages, [P+40,000.00 as attorneys fees and costs of suit to plaintiffs-appellees is hereby REVERSED and SET ASIDE.

Defendant-appellants counterclaim is DENIED.

Costs against plaintiffs-appellees.

SO ORDERED.

On April 3, 2006, the Regional Trial Court of Antipolo City, Branch 74 (RTC) rendered a Decision, giving due course to the complaint for sum of money and damages filed by petitioners Fernando Viloria (Fernando) and Lourdes Viloria (Lourdes), collectively called Spouses Viloria, against respondent Continental Airlines, Inc. (CAI). As culled from the records, below are the facts giving rise to such complaint.

On or about July 21, 1997 and while in the United States, Fernando purchased for himself and his wife, Lourdes, two (2) round trip airline tickets from San Diego, California to Newark, New Jersey on board Continental Airlines. Fernando purchased the tickets at US$400.00 each from a travel agency called Holiday Travel and was attended to by a certain Margaret Mager (Mager). According to Spouses Viloria, Fernando agreed to buy the said tickets after Mager informed them that there were no available seats at Amtrak, an intercity passenger train service provider in the United States. Per the tickets, Spouses Viloria were scheduled to leave for Newark on August 13, 1997 and return to San Diego on August 21, 1997.

Subsequently, Fernando requested Mager to reschedule their flight to Newark to an earlier date or August 6, 1997. Mager informed him that flights to Newark via Continental Airlines were already fully booked and offered the alternative of a round trip flight via Frontier Air. Since flying with Frontier Air called for a higher fare of US$526.00 per passenger and would mean traveling by night, Fernando opted to request for a refund. Mager, however, denied his request as the subject tickets are non-refundable and the only option that Continental Airlines can offer is the re-issuance of new tickets within one (1) year from the date the subject tickets were issued. Fernando decided to reserve two (2) seats with Frontier Air.

As he was having second thoughts on traveling via Frontier Air, Fernando went to the Greyhound Station where he saw an Amtrak station nearby. Fernando made inquiries and was told that there are seats available and he can travel on Amtrak anytime and any day he pleased. Fernando then purchased two (2) tickets for Washington, D.C.

From Amtrak, Fernando went to Holiday Travel and confronted Mager with the Amtrak tickets, telling her that she had misled them into buying the Continental Airlines tickets by misrepresenting that Amtrak was already fully booked. Fernando reiterated his demand for a refund but Mager was firm in her position that the subject tickets are non-refundable.

Upon returning to the Philippines, Fernando sent a letter to CAI on February 11, 1998, demanding a refund and alleging that Mager had deluded them into purchasing the subject tickets.
3

In a letter dated February 24, 1998, Continental Micronesia informed Fernando that his complaint had been referred to the Customer Refund Services of Continental Airlines at Houston, Texas.
4

In a letter dated March 24, 1998, Continental Micronesia denied Fernandos request for a refund and advised him that he may take the subject tickets to any Continental ticketing location for the re-issuance of new tickets within two (2) years from the date they were issued. Continental Micronesia informed Fernando that the subject tickets may be used as a form of payment for the purchase of another Continental ticket, albeit with a reissuance fee.
5

On June 17, 1999, Fernando went to Continentals ticketing office at Ayala Avenue, Makati City to have the subject tickets replaced by a single round trip ticket to Los Angeles, California under his name. Therein, Fernando was informed that Lourdes ticket was non-transferable, thus, cannot be used for the purchase of a ticket in his favor. He was also informed that a round trip ticket to Los Angeles was US$1,867.40 so he would have to pay what will not be covered by the value of his San Diego to Newark round trip ticket.

In a letter dated June 21, 1999, Fernando demanded for the refund of the subject tickets as he no longer wished to have them replaced. In addition to the dubious circumstances under which the subject tickets were issued, Fernando claimed that CAIs act of charging him with US$1,867.40 for a round trip ticket to Los Angeles, which other airlines priced at US$856.00, and refusal to allow him to use Lourdes ticket, breached its undertaking under its March 24, 1998 letter.
6

On September 8, 2000, Spouses Viloria filed a complaint against CAI, praying that CAI be ordered to refund the money they used in the purchase of the subject tickets with legal interest from July 21, 1997 and to pay P1,000,000.00 as moral damages, P500,000.00 as exemplary damages and P250,000.00 as attorneys fees.
7

CAI interposed the following defenses: (a) Spouses Viloria have no right to ask for a refund as the subject tickets are non-refundable; (b) Fernando cannot insist on using the ticket in Lourdes name for the purchase of a

round trip ticket to Los Angeles since the same is non-transferable; (c) as Mager is not a CAI employee, CAI is not liable for any of her acts; (d) CAI, its employees and agents did not act in bad faith as to entitle Spouses Viloria to moral and exemplary damages and attorneys fees. CAI also invoked the following clause printed on the subject tickets:

3. To the extent not in conflict with the foregoing carriage and other services performed by each carrier are subject to: (i) provisions contained in this ticket, (ii) applicable tarif fs, (iii) carriers conditions of carriage and related regulations which are made part hereof (and are available on application at the offices of carrier), except in transportation between a place in the United 8 States or Canada and any place outside thereof to which tariffs in force in those countries apply.

According to CAI, one of the conditions attached to their contract of carriage is the non-transferability and non-refundability of the subject tickets.

The RTCs Ruling

Following a full-blown trial, the RTC rendered its April 3, 2006 Decision, holding that Spouses Viloria are entitled to a refund in view of Magers misrepresentation in obtaining their consent in the purchase of the subject tickets. The relevant portion of the April 3, 2006 Decision states:
9

Continental Airlines agent Ms. Mager was in bad faith when she was less candid and diligent in presenting to plaintiffs spouses their booking options. Plaintiff Fernando clearly wanted to travel via AMTRAK, but defendants agent misled him into purchasing Continental Airlines tickets instead on the fraudulent misrepresentation that Amtrak was fully booked. In fact, defendant Airline did not specifically denied (sic) this allegation.

Plainly, plaintiffs spouses, particularly plaintiff Fernando, were tricked into buying Continental Airline tickets on Ms. Magers misleading misrepresentations. Continental Airlines agent Ms. Mager further relied on and exploited plaintiff Fernandos need and told him that they must book a flight immediately or risk not being able to travel at all on the couples preferred

date. Unfortunately, plaintiffs spouses fell prey to the airlines and its agents unethical tactics for 10 baiting trusting customers.

Citing Articles 1868 and 1869 of the Civil Code, the RTC ruled that Mager is CAIs agent, hence, bound by her bad faith and misrepresentation. As far as the RTC is concerned, there is no issue as to whether Mager was CAIs agent in view of CAIs implied recognition of her status as such in its March 24, 1998 letter.

The act of a travel agent or agency being involved here, the following are the pertinent New Civil Code provisions on agency:

Art. 1868. By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter.

Art. 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of action, or his failure to repudiate the agency, knowing that another person is acting on his behalf without authority.

Agency may be oral, unless the law requires a specific form.

As its very name implies, a travel agency binds itself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. This court takes judicial notice of the common services rendered by travel agencies that represent themselves as such, specifically the reservation and booking of local and foreign tours as well as the issuance of airline tickets for a commission or fee.

The services rendered by Ms. Mager of Holiday Travel agency to the plaintiff spouses on July 21, 1997 were no different from those offered in any other travel agency. Defendant airline impliedly if not expressly acknowledged its principal-agent relationship with Ms. Mager by its offer in the letter dated March 24, 1998 an obvious attempt to assuage plaintiffs spouses hurt 11 feelings.

Furthermore, the RTC ruled that CAI acted in bad faith in reneging on its undertaking to replace the subject tickets within two (2) years from their date of issue when it charged Fernando with the amount of US$1,867.40 for a round trip ticket to Los Angeles and when it refused to allow Fernando to use Lourdes ticket. Specifically:

Tickets may be reissued for up to two years from the original date of issue. When defendant airline still charged plaintiffs spouses US$1,867.40 or more than double the then going rate of US$856.00 for the unused tickets when the same were presented within two (2) years from date 12 of issue, defendant airline exhibited callous treatment of passengers.

The Appellate Courts Ruling

On appeal, the CA reversed the RTCs April 3, 2006 Decision, holding that CAI cannot be held liable for Magers act in the absence of any proof that a principal-agent relationship existed between CAI and Holiday Travel. According to the CA, Spouses Viloria, who have the burden of proof to establish the fact of agency, failed to present evidence demonstrating that Holiday Travel is CAIs agent. Furthermore, contrary to Spouses Vilorias claim, the contractual relationship between Holiday Travel and CAI is not an agency but that of a sale.

Plaintiffs-appellees assert that Mager was a sub-agent of Holiday Travel who was in turn a ticketing agent of Holiday Travel who was in turn a ticketing agent of Continental Airlines. Proceeding from this premise, they contend that Continental Airlines should be held liable for the acts of Mager. The trial court held the same view.

We do not agree. By the contract of agency, a person binds him/herself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. The elements of agency are: (1) consent, express or implied, of the parties to establish the relationship; (2) the object is the execution of a juridical act in relation to a third person; (3) the agent acts as a representative and not for him/herself; and (4) the agent acts within the scope of his/her authority. As the basis of agency is representation, there must be, on the part of the principal, an actual intention to appoint, an intention naturally inferable from the principals words or actions. In the same manner, there must be an intention on the part of the

agent to accept the appointment and act upon it. Absent such mutual intent, there is generally no agency. It is likewise a settled rule that persons dealing with an assumed agent are bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it. Agency is never presumed, neither is it created by the mere use of the word in a trade or business name. We have perused the evidence and documents so far presented. We find nothing except bare allegations of plaintiffs-appellees that Mager/Holiday Travel was acting in behalf of Continental Airlines. From all sides of legal prism, the transaction in issue was simply a contract of sale, wherein Holiday Travel buys airline tickets from Continental 13 Airlines and then, through its employees, Mager included, sells it at a premium to clients.

The CA also ruled that refund is not available to Spouses Viloria as the word non -refundable was clearly printed on the face of the subject tickets, which constitute their contract with CAI. Therefore, the grant of their prayer for a refund would violate the proscription against impairment of contracts.

Finally, the CA held that CAI did not act in bad faith when they charged Spouses Viloria with the higher amount of US$1,867.40 for a round trip ticket to Los Angeles. According to the CA, there is no compulsion for CAI to charge the lower amount of US$856.00, which Spouses Viloria claim to be the fee charged by other airlines. The matter of fixing the prices for its services is CAIs prerogative, which Spouses Viloria cannot intervene. In particular:

It is within the respective rights of persons owning and/or operating business entities to peg the premium of the services and items which they provide at a price which they deem fit, no matter how expensive or exhorbitant said price may seem vis--vis those of the competing companies. 14 The Spouses Viloria may not intervene with the business judgment of Continental Airlines.

The Petitioners Case

In this Petition, this Court is being asked to review the findings and conclusions of the CA, as the latters reversal of the RTCs April 3, 2006 Decision allegedly lacks factual and legal bases. Spouses Viloria claim that CAI acted in bad faith when it required them to pay a higher amount for a round trip ticket to Los Angeles considering CAIs undertaking to re-issue new tickets to them within the period stated in their March 24, 1998 letter. CAI

likewise acted in bad faith when it disallowed Fernando to use Lourdes ticket to purchase a round trip to Los Angeles given that there is nothing in Lourdes ticket indicating that it is non -transferable. As a common carrier, it is CAIs duty to inform its passengers of the terms and conditions of their contract and passengers cannot be bound by such terms and conditions which they are not made aware of. Also, the subject contract of carriage is a contract of adhesion; therefore, any ambiguities should be construed against CAI. Notably, the petitioners are no longer questioning the validity of the subject contracts and limited its claim for a refund on CAIs alleged breach of its undertaking in its March 24, 1998 letter.

The Respondents Case

In its Comment, CAI claimed that Spouses Vilorias allegation of bad fa ith is negated by its willingness to issue new tickets to them and to credit the value of the subject tickets against the value of the new ticket Fernando requested. CAI argued that Spouses Vilorias sole basis to claim that the price at which CAI was will ing to issue the new tickets is unconscionable is a piece of hearsay evidence an advertisement appearing on a newspaper stating that airfares from Manila to Los Angeles or San Francisco cost US$818.00. Also, the advertisement pertains to airfares in September 2000 and not to airfares prevailing in June 1999, the time when Fernando asked CAI to apply the value of the subject tickets for the purchase of a new one. CAI likewise argued that it did not undertake to protect Spouses Viloria from any changes or fluctuations in the prices of airline tickets and its only obligation was to apply the value of the subject tickets to the purchase of the newly issued tickets.
16 15

With respect to Spouses Vilorias claim that they are not aware of CAIs restrictions on the subject tickets and that the terms and conditions that are printed on them are ambiguous, CAI denies any ambiguity and alleged that its representative informed Fernando that the subject tickets are non-transferable when he applied for the issuance of a new ticket. On the other hand, the word no n-refundable clearly appears on the face of the subject tickets.

CAI also denies that it is bound by the acts of Holiday Travel and Mager and that no principal-agency relationship exists between them. As an independent contractor, Holiday Travel was without capacity to bind CAI.

Issues

To determine the propriety of disturbing the CAs January 30, 2009 Decision and whether Spouses Viloria have the right to the reliefs they prayed for, this Court deems it necessary to resolve the following issues:

a. Does a principal-agent relationship exist between CAI and Holiday Travel? b. Assuming that an agency relationship exists between CAI and Holiday Travel, is CAI bound by the acts of Holiday Travels agents and employees such as Mager? c. Assuming that CAI is bound by the acts of Holiday Travels agents and employees, can the representation of Mager as to unavailability of seats at Amtrak be considered fraudulent as to vitiate the consent of Spouse Viloria in the purchase of the subject tickets? d. Is CAI justified in insisting that the subject tickets are non-transferable and non-refundable? e. Is CAI justified in pegging a different price for the round trip ticket to Los Angeles requested by Fernando? f. Alternatively, did CAI act in bad faith or renege its obligation to Spouses Viloria to apply the value of the subject tickets in the purchase of new ones when it refused to allow Fernando to use Lourdes ticket and in charging a higher price for a round trip ticket to Los Angeles?

This Courts Ruling

I. A principal-agent relationship exists between CAI and Holiday Travel.

With respect to the first issue, which is a question of fact that would require this Court to review and reexamine the evidence presented by the parties below, this Court takes exceptio n to the general rule that the CAs findings of fact are conclusive upon Us and our jurisdiction is limited to the review of questions of law. It is wellsettled to the point of being axiomatic that this Court is authorized to resolve questions of fact if confronted with contrasting factual findings of the trial court and appellate court and if the findings of the CA are contradicted by the evidence on record.
17

According to the CA, agency is never presumed and that he who alleges that it exists has the burden of proof. Spouses Viloria, on whose shoulders such burden rests, presented evidence that fell short of indubitably demonstrating the existence of such agency.

We disagree. The CA failed to consider undisputed facts, discrediting CAIs denial that Holiday Travel is one of its agents. Furthermore, in erroneously characterizing the contractual relationship between CAI and Holiday Travel as a contract of sale, the CA failed to apply the fundamental civil law principles governing agency and differentiating it from sale.

In Rallos v. Felix Go Chan & Sons Realty Corporation, this Court explained the nature of an agency and spelled out the essential elements thereof:

18

Out of the above given principles, sprung the creation and acceptance of the relationship of agency whereby one party, called the principal (mandante), authorizes another, called the agent (mandatario), to act for and in his behalf in transactions with third persons. The essential elements of agency are: (1) there is consent, express or implied of the parties to establish the relationship; (2) the object is the execution of a juridical act in relation to a third person; (3) the agent acts as a representative and not for himself, and (4) the agent acts within the scope of his authority.

Agency is basically personal, representative, and derivative in nature. The authority of the agent to act emanates from the powers granted to him by his principal; his act is the act of the principal if done within the scope of the authority. Qui facit per alium facit se. "He who acts 19 through another acts himself."

Contrary to the findings of the CA, all the elements of an agency exist in this case. The first and second elements are present as CAI does not deny that it concluded an agreement with Holiday Travel, whereby Holiday Travel would enter into contracts of carriage with third persons on CAIs behalf. The third element is also present as it is undisputed that Holiday Travel merely acted in a representative capacity and it is CAI and not Holiday Travel who is bound by the contracts of carriage entered into by Holiday Travel on its behalf. The fourth element is also present considering that CAI has not made any allegation that Holiday Travel exceeded the authority that was granted to it. In fact, CAI consistently maintains the validity of the contracts of carriage that Holiday Travel executed with Spouses Viloria and that Mager was not guilty of any fraudulent misrepresentation. That CAI admits the authority of Holiday Travel to enter into contracts of carriage on its behalf is easily discernible from its February 24, 1998 and March 24, 1998 letters, where it impliedly recognized the validity of the contracts entered into by Holiday Travel with Spouses Viloria. When Fernando informed CAI that it was Holiday Travel who issued to them the subject tickets, CAI did not deny that Holiday Travel is its authorized agent.

Prior to Spouses Vilorias filing of a complaint against it, CAI never refu ted that it gave Holiday Travel the power and authority to conclude contracts of carriage on its behalf. As clearly extant from the records, CAI recognized the validity of the contracts of carriage that Holiday Travel entered into with Spouses Viloria and considered itself bound with Spouses Viloria by the terms and conditions thereof; and this constitutes an unequivocal testament to Holiday Travels authority to act as its agent. This Court cannot therefore allow CAI to take an altogether different position and deny that Holiday Travel is its agent without condoning or giving imprimatur to whatever damage or prejudice that may result from such denial or retraction to Spouses Viloria, who relied on good faith on CAIs acts in recognition of Holiday Travels authority. Estoppel is primarily based on the doctrine of good faith and the avoidance of harm that will befall an innocent party due to its injurious reliance, the failure to apply it in this case would result in gross travesty of justice. Estoppel bars CAI from making such denial.
20

As categorically provided under Article 1869 of the Civil Code, *a+gency may be express, or implied from the acts of the principal, from his silence or lack of action, or his failure to repudiate the agency, knowing that another person is acting on his behalf without authority.

Considering that the fundamental hallmarks of an agency are present, this Court finds it rather peculiar that the CA had branded the contractual relationship between CAI and Holiday Travel as one of sale. The

distinctions between a sale and an agency are not difficult to discern and this Court, as early as 1970, had already formulated the guidelines that would aid in differentiating the two (2) contracts. In Commissioner of Internal Revenue v. Constantino, this Court extrapolated that the primordial differentiating consideration between the two (2) contracts is the transfer of ownership or title over the property subject of the contract. In an agency, the principal retains ownership and control over the property and the agent merely acts on the principals behalf and under his instructions in furtherance of the objectives for which the agency was established. On the other hand, the contract is clearly a sale if the parties intended that the delivery of the property will effect a relinquishment of title, control and ownership in such a way that the recipient may do with the property as he pleases.
21

Since the company retained ownership of the goods, even as it delivered possession unto the dealer for resale to customers, the price and terms of which were subject to the company's control, the relationship between the company and the dealer is one of agency, tested under the following criterion:

The difficulty in distinguishing between contracts of sale and the creation of an agency to sell has led to the establishment of rules by the application of which this difficulty may be solved. The decisions say the transfer of title or agreement to transfer it for a price paid or promised is the essence of sale. If such transfer puts the transferee in the attitude or position of an owner and makes him liable to the transferor as a debtor for the agreed price, and not merely as an agent who must account for the proceeds of a resale, the transaction is a sale; while the essence of an agency to sell is the delivery to an agent, not as his property, but as the property of the principal, who remains the owner and has the right to control sales, fix the price, and terms, demand and receive the proceeds less the agent's commission upon sales made. 1 Mechem on Sales, Sec. 43; 1 Mechem on Agency, Sec. 48; Williston on Sales, 1; Tiedeman on Sales, 22 1. (Salisbury v. Brooks, 94 SE 117, 118-119)

As to how the CA have arrived at the conclusion that the contract between CAI and Holiday Travel is a sale is certainly confounding, considering that CAI is the one bound by the contracts of carriage embodied by the tickets being sold by Holiday Travel on its behalf. It is undisputed that CAI and not Holiday Travel who is the party to the contracts of carriage executed by Holiday Travel with third persons who desire to travel via Continental Airlines, and this conclusively indicates the existence of a principal-agent relationship. That the principal is bound by all the obligations contracted by the agent within the scope of the authority granted to him is clearly provided under Article 1910 of the Civil Code and this constitutes the very notion of agency.

II. In actions based on quasi-delict, a principal can only be held liable for the tort committed by its agents employees if it has been established by preponderance of evidence that the principal was also at fault or negligent or that the principal exercise control and supervision over them.

Considering that Holiday Travel is CAIs agent, does it necessarily follow that CAI is liable for the fault or negligence of Holiday Travels employees? Citing China Air Lines, Ltd. v. Court of Appeals, et al., CAI argues that it cannot be held liable for the actions of the employee of its ticketing agent in the absence of an employeremployee relationship.
23

An examination of this Courts pronouncements in China Air Lines will reveal that an airline company is not completely exonerated from any liability for the tort committed by its agents employees. A prior determination of the nature of the passengers cause of action is necessary. If the passengers cause of action against the airline company is premised on culpa aquiliana or quasi-delict for a tort committed by the employee of the airline companys agent, there must be an independent showing that the airline company was at fault or negligent or has contributed to the negligence or tortuous conduct committed by the employee of its agent. The mere fact that the employee of the airline companys agent has committed a tort is not s ufficient to hold the airline company liable. There is no vinculum juris between the airline company and its agents employees and the contractual relationship between the airline company and its agent does not operate to create a juridical tie between the airline company and its agents employees. Article 2180 of the Civil Code does not make the principal vicariously liable for the tort committed by its agents employees and the principal -agency relationship per se does not make the principal a party to such tort; hence, the need to prove the principals own fault or negligence.

On the other hand, if the passengers cause of action for damages against the airline company is based on contractual breach or culpa contractual, it is not necessary that there be evidence of the airline companys fault or negligence. As this Court previously stated in China Air Lines and reiterated in Air France vs. Gillego, in an action based on a breach of contract of carriage, the aggrieved party does not have to prove that the common carrier was at fault or was negligent. All that he has to prove is the existence of the contract and the fact of its nonperformance by the carrier.
24

Spouses Vilorias cause of action on the basis of Magers alleged fraudulent misrepresentation is clearly one of tort or quasi-delict, there being no pre-existing contractual relationship between them. Therefore, it was incumbent upon Spouses Viloria to prove that CAI was equally at fault.

However, the records are devoid of any evidence by which CAIs alleged liability can be substantiated. Apart from their claim that CAI must be held liable for Magers supposed fraud because Holiday Travel is CAIs agent, Spouses Viloria did not present evidence that CAI was a party or had contributed to Magers complained act either by instructing or authorizing Holiday Travel and Mager to issue the said misrepresentation.

It may seem unjust at first glance that CAI would consider Spouses Viloria bound by the terms and conditions of the subject contracts, which Mager entered into with them on CAIs behalf, in order to deny Spouses Vilorias request for a refund or Fernandos use of Lourdes ticket for the re -issuance of a new one, and simultaneously claim that they are not bound by Magers supposed misrepresentation for purposes of avoiding Spouses Vilorias claim for damages and maintaining the validity of the subject contracts. It may likewise be argued that CAI cannot deny liability as it benefited from Magers acts, which were performed in compliance with Holiday Travels obligations as CAIs agent.

However, a persons vicarious liability is anchored on his possession of control, whether absolute or limited, on the tortfeasor. Without such control, there is nothing which could justify extending the liability to a person other than the one who committed the tort. As this Court explained in Cangco v. Manila Railroad Co.:
25

With respect to extra-contractual obligation arising from negligence, whether of act or omission, it is competent for the legislature to elect and our Legislature has so elected to limit such liability to cases in which the person upon whom such an obligation is imposed is morally culpable or, on the contrary, for reasons of public policy, to extend that liability, without regard to the lack of moral culpability, so as to include responsibility for the negligence of those persons whose acts or omissions are imputable, by a legal fiction, to others who are in a position to exercise an absolute or limited control over them. The legislature which adopted our Civil Code has elected to limit extra-contractual liability with certain well-defined exceptions to cases in which moral culpability can be directly imputed to the persons to be charged. This moral responsibility may consist in having failed to exercise due care in one's own acts, or in having failed to exercise due care in the selection and control of one's agent or servants, or in the control of persons who, by reasons of their status, occupy a position of 26 dependency with respect to the person made liable for their conduct. (emphasis supplied)

It is incumbent upon Spouses Viloria to prove that CAI exercised control or supervision over Mager by preponderant evidence. The existence of control or supervision cannot be presumed and CAI is under no obligation to prove its denial or nugatory assertion. Citing Belen v. Belen, this Court ruled in Jayme v. Apostol, that:
28 27

In Belen v. Belen, this Court ruled that it was enough for defendant to deny an alleged employment relationship. The defendant is under no obligation to prove the negative averment. This Court said:

It is an old and well-settled rule of the courts that the burden of proving the action is upon the plaintiff, and that if he fails satisfactorily to show the facts upon which he bases his claim, the defendant is under no obligation to prove his exceptions. This [rule] is in harmony with the provisions of Section 297 of the Code of Civil Procedure holding that each party must prove his own 29 affirmative allegations, etc. (citations omitted)

Therefore, without a modicum of evidence that CAI exercised control over Holiday Travels employees or that CAI was equally at fault, no liability can be imposed on CAI for Magers supposed misrepresentation.

III.

Even on the assumption that CAI may be held liable for the acts of Mager, still, Spouses Viloria are not entitled to a refund. Magers statement cannot be considered a causal fraud that would justify the annulment of the subject contracts that would oblige CAI to indemnify Spouses Viloria and return the money they paid for the subject tickets.

Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent of the contracting parties was obtained through fraud, the contract is considered voidable and may be annulled within four (4) years from the time of the discovery of the fraud. Once a contract is annulled, the parties are obliged under Article 1398 of the same Code to restore to each other the things subject matter of the contract, including their fruits and interest.

On the basis of the foregoing and given the allegation of Spouses Viloria that Fernandos consent to the subject contracts was supposedly secured by Mager through fraudulent means, it is plainly apparent that their demand for a refund is tantamount to seeking for an annulment of the subject contracts on the ground of vitiated consent.

Whether the subject contracts are annullable, this Court is required to determine whether Magers alleged misrepresentation constitutes causal fraud. Similar to the dispute on the existence of an agency, whether fraud attended the execution of a contract is factual in nature and this Court, as discussed above, may scrutinize the records if the findings of the CA are contrary to those of the RTC.

Under Article 1338 of the Civil Code, there is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. In order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of the contract. In Samson v. Court of Appeals, causal fraud was defined as a deception employed by one party prior to or simultaneous to the contract in order to secure the consent of the other.
32 30 31

Also, fraud must be serious and its existence must be established by clear and convincing evidence. As ruled by this Court in Sierra v. Hon. Court of Appeals, et al., mere preponderance of evidence is not adequate:
33

Fraud must also be discounted, for according to the Civil Code:

Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which without them, he would not have agreed to.

Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties.

To quote Tolentino again, the misrepresentation constituting the fraud must be established by full, clear, and convincing evidence, and not merely by a preponderance thereof. The deceit must be serious. The fraud is serious when it is sufficient to impress, or to lead an ordinarily prudent person into error; that which cannot deceive a prudent person cannot be a ground for nullity. The circumstances of each case should be considered, taking into account the 34 personal conditions of the victim.

After meticulously poring over the records, this Court finds that the fraud alleged by Spouses Viloria has not been satisfactorily established as causal in nature to warrant the annulment of the subject contracts. In fact, Spouses Viloria failed to prove by clear and convincing evidence that Magers statement was fraudulent. Specifically, Spouses Viloria failed to prove that (a) there were indeed available seats at Amtrak for a trip to New Jersey on August 13, 1997 at the time they spoke with Mager on July 21, 1997; (b) Mager knew about this; and (c) that she purposely informed them otherwise.

This Court finds the only proof of Magers alleged fraud, which is Fernandos testimony that an Amtrak had assured him of the perennial availability of seats at Amtrak, to be wanting. As CAI correctly pointed out and as Fernando admitted, it was possible that during the intervening period of three (3) weeks from the time Fernando purchased the subject tickets to the time he talked to said Amtrak employee, other passengers may have cancelled their bookings and reservations with Amtrak, making it possible for Amtrak to accommodate them. Indeed, the existence of fraud cannot be proved by mere speculations and conjectures. Fraud is never lightly inferred; it is good faith that is. Under the Rules of Court, it is presumed that "a person is innocent of crime or wrong" and that "private transactions have been fair and regular." Spouses Viloria failed to overcome this presumption.
35

IV. Assuming the contrary, Spouses Viloria are nevertheless deemed to have ratified the subject contracts.

Even assuming that Magers representation is causal fraud, the subject contracts have been impliedly ratified when Spouses Viloria decided to exercise their right to use the subject tickets for the purchase of new ones. Under Article 1392 of the Civil Code, ratification extinguishes the action to annul a voidable contract.

Ratification of a voidable contract is defined under Article 1393 of the Civil Code as follows:

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right.

Implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom.
36

Simultaneous with their demand for a refund on the ground of Fernandos vitiated consent, Spouses Viloria likewise asked for a refund based on CAIs supposed bad faith in reneging on its undertaking to replace the subject tickets with a round trip ticket from Manila to Los Angeles.

In doing so, Spouses Viloria are actually asking for a rescission of the subject contracts based on contractual breach. Resolution, the action referred to in Article 1191, is based on the defendants breach of faith, a violation of the reciprocity between the parties and in Solar Harvest, Inc. v. Davao Corrugated Carton Corporation, this Court ruled that a claim for a reimbursement in view of the other partys failure to comply with his obligations under the contract is one for rescission or resolution.
38 37

However, annulment under Article 1390 of the Civil Code and rescission under Article 1191 are two (2) inconsistent remedies. In resolution, all the elements to make the contract valid are present; in annulment, one of the essential elements to a formation of a contract, which is consent, is absent. In resolution, the defect is in the consummation stage of the contract when the parties are in the process of performing their respective obligations; in annulment, the defect is already present at the time of the negotiation and perfection stages of the contract. Accordingly, by pursuing the remedy of rescission under Article 1191, the Vilorias had impliedly admitted the validity of the subject contracts, forfeiting their right to demand their annulment. A party cannot rely on the contract and claim rights or obligations under it and at the same time impugn its existence or validity. Indeed, litigants are enjoined from taking inconsistent positions.
39

V. Contracts cannot be rescinded for a slight or casual breach.

CAI cannot insist on the non-transferability of the subject tickets.

Considering that the subject contracts are not annullable on the ground of vitiated consent, the next question is: Do Spouses Viloria have the right to rescind the contract on the ground of CAIs supposed breach of its undertaking to issue new tickets upon surrender of the subject tickets?

Article 1191, as presently worded, states:

The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfilment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

According to Spouses Viloria, CAI acted in bad faith and breached the subject contracts when it refused to apply the value of Lourdes ticket for Fernandos purchase of a round trip ticket to Los Angeles and in requiring him to pay an amount higher than the price fixed by other airline companies.

In its March 24, 1998 letter, CAI stated that non-refundable tickets may be used as a form of payment toward the purchase of another Continental ticket for $75.00, per ticket, reissue fee ($50.00, per ticket, for tickets purchased prior to October 30, 1997).

Clearly, there is nothing in the above-quoted section of CAIs letter from which the restriction on the non transferability of the subject tickets can be inferred. In fact, the words used by CAI in its letter supports the position of Spouses Viloria, that each of them can use the ticket under their name for the purchase of new tickets whether for themselves or for some other person.

Moreover, as CAI admitted, it was only when Fernando had expressed his interest to use the subject tickets for the purchase of a round trip ticket between Manila and Los Angeles that he was informed that he cannot use the ticket in Lourdes name as payment.

Contrary to CAIs claim, that the subject tickets are non-transferable cannot be implied from a plain reading of the provision printed on the subject tickets stating that *t+o the extent not in conflict with the foregoing carriage and other services performed by each carrier are subject to: (a) provisions contained in this

ticket, x x x (iii) carriers conditions of carriage and related regulations which are made part hereof (and are available on application at the offices of carrier) x x x. As a common carrier whose business is imb ued with public interest, the exercise of extraordinary diligence requires CAI to inform Spouses Viloria, or all of its passengers for that matter, of all the terms and conditions governing their contract of carriage. CAI is proscribed from taking advantage of any ambiguity in the contract of carriage to impute knowledge on its passengers of and demand compliance with a certain condition or undertaking that is not clearly stipulated. Since the prohibition on transferability is not written on the face of the subject tickets and CAI failed to inform Spouses Viloria thereof, CAI cannot refuse to apply the value of Lourdes ticket as payment for Fernandos purchase of a new ticket.

CAIs refusal to accept Lourdes ticket for the purchase of a new ticket for Fernando is only a casual breach.

Nonetheless, the right to rescind a contract for non-performance of its stipulations is not absolute. The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental violations as would defeat the very object of the parties in making the agreement. Whether a breach is substantial is largely determined by the attendant circumstances.
40 41

While CAIs refusal to allow Fernando to use the value of Lourdes ticket as payment for the pur chase of a new ticket is unjustified as the non-transferability of the subject tickets was not clearly stipulated, it cannot, however be considered substantial. The endorsability of the subject tickets is not an essential part of the underlying contracts and CAIs failure to comply is not essential to its fulfillment of its undertaking to issue new tickets upon Spouses Vilorias surrender of the subject tickets. This Court takes note of CAIs willingness to perform its principal obligation and this is to apply the price of the ticket in Fernandos name to the price of the round trip ticket between Manila and Los Angeles. CAI was likewise willing to accept the ticket in Lourdes name as full or partial payment as the case may be for the purchase of any ticket, albeit under her name and for her exclusive use. In other words, CAIs willingness to comply with its undertaking under its March 24, 1998 cannot be doubted, albeit tainted with its erroneous insistence that Lourdes ticket is non -transferable.

Moreover, Spouses Vilorias demand for rescission cannot prosper as CAI cannot be solely faulted for the fact that their agreement failed to consummate and no new ticket was issued to Fernando. Spouses Viloria have no

right to insist that a single round trip ticket between Manila and Los Angeles should be priced at around $856.00 and refuse to pay the difference between the price of the subject tickets and the amount fixed by CAI. The petitioners failed to allege, much less prove, that CAI had obliged itself to issue to them tickets for any flight anywhere in the world upon their surrender of the subject tickets. In its March 24, 1998 letter, it was clearly stated that *n+on-refundable tickets may be used as a form of payment toward the purchase of another Continental ticket and there is nothing in it suggesting that CAI had obliged itself to protect Spouses Viloria from any fluctuation in the prices of tickets or that the surrender of the subject tickets will be considered as full payment for any ticket that the petitioners intend to buy regardless of actual price and destination. The CA was correct in holding that it is CAIs right and exclusive prerogative to fix the prices for its services and it may not be compelled to observe and maintain the prices of other airline companies.
43 42

The conflict as to the endorsability of the subject tickets is an altogether different matter, which does not preclude CAI from fixing the price of a round trip ticket between Manila and Los Angeles in an amount it deems proper and which does not provide Spouses Viloria an excuse not to pay such price, albeit subject to a reduction coming from the value of the subject tickets. It cannot be denied that Spouses Viloria had the concomitant obligation to pay whatever is not covered by the value of the subject tickets whether or not the subject tickets are transferable or not.

There is also no showing that Spouses Viloria were discriminated against in bad faith by being charged with a higher rate. The only evidence the petitioners presented to prove that the price of a round trip ticket between Manila and Los Angeles at that time was only $856.00 is a newspaper advertisement for another airline company, which is inadmissible for being hearsay evidence, twice removed. Newspaper clippings are hearsay if they were offered for the purpose of proving the truth of the matter alleged. As ruled in Feria v. Court of Appeals,:
44

*N+ewspaper articles amount to hearsay evidence, twice removed and are therefore not only inadmissible but without any probative value at all whether objected to or not, unless offered for a purpose other than proving the truth of the matter asserted. In this case, the news article is admissible only as evidence that such publication does exist with the tenor of the news therein 45 stated. (citations omitted)

The records of this case demonstrate that both parties were equally in default; hence, none of them can seek judicial redress for the cancellation or resolution of the subject contracts and they are therefore bound to their respective obligations thereunder. As the 1 sentence of Article 1192 provides: Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts . If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. (emphasis supplied)
st

Therefore, CAIs liability for damages for its refusal to accept Lourdes ticket for the purchase of Fernandos round trip ticket is offset by Spouses Vilorias liability for their refusal to pay the amount, which is not covered by the subject tickets. Moreover, the contract between them remains, hence, CAI is duty bound to issue new tickets for a destination chosen by Spouses Viloria upon their surrender of the subject tickets and Spouses Viloria are obliged to pay whatever amount is not covered by the value of the subject tickets.

This Court made a similar ruling in Central Bank of the Philippines v. Court of Appeals. Thus:

46

Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the 47 form of penalties and surcharges, for not paying his overdue P17,000.00 debt. x x x.

Another consideration that militates against the propriety of holding CAI liable for moral damages is the absence of a showing that the latter acted fraudulently and in bad faith. Article 2220 of the Civil Code requires evidence of bad faith and fraud and moral damages are generally not recoverable in culpa contractual except when bad faith had been proven. The award of exemplary damages is likewise not warranted. Apart from the
48

requirement that the defendant acted in a wanton, oppressive and malevolent manner, the claimant must prove his entitlement to moral damages.
49

WHEREFORE, premises considered, the instant Petition is DENIED.

SO ORDERED.

Republic of the Philippines Supreme Court Baguio City

SECOND DIVISION THE ROMAN CATHOLIC CHURCH, represented by the Archbishop of Caceres, Petitioner, G.R. No. 174118

Present: CARPIO, J., Chairperson, BRION, PEREZ, SERENO, and REYES, JJ. Promulgated: REGINO PANTE, Respondent. x-------------------------------------------------------------------------------------------------------------- x DECISION BRION, J.:
[1]

- versus -

April 11, 2012

Through a petition for review on certiorari, the petitioner Roman Catholic Church (Church) seeks to set aside the May 18, 2006 decision and the August 11, 2006 resolution of the Court of Appeals (CA) in CA-G.R.-CV No. 65069. The CA reversed the July 30, 1999 decision of the Regional Trial Court (RTC) of Naga City, Branch 24, in Civil Case No. 94-3286.
[4] [2] [3]

THE FACTUAL ANTECEDENTS

The Church, represented by the Archbishop of Caceres, owned a 32-square meter lot that measured 2x16 meters located in Barangay Dinaga, Canaman, Camarines Sur. On September 25, 1992, the Church contracted with respondent Regino Pante for the sale of the lot (thru a Contract to Sell and to Buy ) on the belief that the latter was an actual occupant of the lot. The contract between them fixed the purchase price at P11,200.00, with the initial P1,120.00 payable as down payment, and the remaining balance payable in three years or until September 25, 1995.
[6] [5]

On June 28, 1994, the Church sold in favor of the spouses Nestor and Fidela Rubi ( spouses Rubi) a 215-square meter lot that included the lot previously sold to Pante. The spouses Rubi asserted their ownership by erecting a concrete fence over the lot sold to Pante, effectively blocking Pante and his familys access from their family home to the municipal road. As no settlement could be reached between the parties, Pante instituted with the RTC an action to annul the sale between the Church and the spouses Rubi, insofar as it included the lot previously sold to him.
[7]

The Church filed its answer with a counterclaim, seeking the annulment of its contract with Pante. The Church alleged that its consent to the contract was obtained by fraud when Pante, in bad faith, misrepresented that he had been an actual occupant of the lot sold to him, when in truth, he was merely using the 32-square meter lot as a passageway from his house to the town proper. It contended that it was its policy to sell its lots only to actual occupants. Since the spouses Rubi and their predecessors-in-interest have long been occupying the 215square meter lot that included the 32-square meter lot sold to Pante, the Church claimed that the spouses Rubi were the rightful buyers. During pre-trial, the following admissions and stipulations of facts were made:

1. 2. 3. 4.

The lot claimed by Pante is a strip of land measuring only 2x16 meters; The lot had been sold by the Church to Pante on September 25, 1992; The lot was included in the sale to the spouses Rubi by the Church; and Pante expressly manifested and represented to the Church that he had been actually occupying the lot he offered to buy.
[8]

In a decision dated July 30, 1999, the RTC ruled in favor of the Church, finding that the Churchs consent to the sale was secured through Pantes misrepresentation that he was an occu pant of the 32-square meter lot. Contrary to his claim, Pante was only using the lot as a passageway; the Churchs policy, however, was to sell its lots only to those who actually occupy and reside thereon. As the Churchs consent was secured through its mistaken belief that Pante was a qualified occupant, the RTC annulled the contract between the Church and Pante, pursuant to Article 1390 of the Civil Code.
[10]

[9]

The RTC further noted that full payment of the purchase price was made only on September 23, 1995, when Pante consigned the balance of P10,905.00 with the RTC, after the Church refused to accept the tendered amount . It considered the three-year delay in completing the payment fatal to Pantes claim over the subject lot; it ruled that if Pante had been prompt in paying the price, then the Church would have been estopped from selling the lot to the spouses Rubi. In light of Pantes delay and his admission that the subject lot had been actually occupied by the spouses Rubis predecessors, the RTC upheld the sale in favor of the spouses Rubi.

Pante appealed the RTCs decision with the CA. In a decision dated May 18, 2006,

[11]

the CA granted Pantes

appeal and reversed the RTCs ruling. The CA characterized the contract between Pante and the Church as a contract of sale, since the Church made no express reservation of ownership until full payment of the price is made. In fact, the contract gave the Church the right to repurchase in case Pante fails to pay the installments within the grace period provided; the CA ruled that the right to repurchase is unnecessary if ownership has not already been transferred to the buyer.

Even assuming that the contract had been a contract to sell, the CA declared that Pante fulfilled the condition precedent when he consigned the balance within the three-year period allowed under the parties agreement; upon full payment, Pante fully complied with the terms of his contract with the Church.

After recognizing the validity of the sale to Pante and noting the subsequent sale to the spouses Rubi, the CA proceeded to apply the rules on double sales in Article 1544 of the Civil Code: Article 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first taken possession thereof in good faith, if it should be movable property. Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith. [Emphasis ours.]

Since neither of the two sales was registered, the CA upheld the full effectiveness of the sale in favor of Pante who first possessed the lot by using it as a passageway since 1963.

The Church filed the present petition for review on certiorari under Rule 45 of the Rules of Court to contest the CAs ruling.

THE PETITION

The Church contends that the sale of the lot to Pante is voidable under Article 1390 of the Civil Code, which states: Article 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: (1) Those where one of the parties is incapable of giving consent to a contract; (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. [Emphasis ours.]

It points out that, during trial, Pante already admitted knowing that the spouses Rubi have been residing on the lot. Despite this knowledge, Pante misrepresented himself as an occupant because he knew of the Churchs policy to sell lands only to occupants or residents thereof. It thus claims that Pantes misrepresentation effectively vitiated its consent to the sale; hence, the contract should be nullified.

For the Church, the presence of fraud and misrepresentation that would suffice to annul the sale is the primary issue that the tribunals below should have resolved. Instead, the CA opted to characterize the contract between the Church and Pante, considered it as a contract of sale, and, after such characterization, proceeded to resolve the case in Pantes favor. The Church objects to this approach, on the principal argument that ther e could not have been a contract at all considering that its consent had been vitiated.

THE COURTS RULING

The Court resolves to deny the petition. No misrepresentation existed vitiating the sellers consent and invalidating the contract

Consent is an essential requisite of contracts

[12]

as it pertains to the meeting of the offer and the

[13]

acceptance upon the thing and the cause which constitute the contract.

To create a valid contract, the meeting

of the minds must be free, voluntary, willful and with a reasonable understanding of the various obligations the parties assumed for themselves.
[14]

Where consent, however, is given through mistake, violence, intimidation,

[15]

undue influence, or fraud, the contract is deemed voidable.

However, not every mistake renders a contract

voidable. The Civil Code clarifies the nature of mistake that vitiates consent: Article 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract. Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or qualifications have been the principal cause of the contract. A simple mistake of account shall give rise to its correction. [Emphasis ours.]

For mistake as to the qualification of one of the parties to vitiate consent, two requisites must concur: 1. the mistake must be either with regard to the identity or with regard to the qualification of one of the contracting parties; and 2. the identity or qualification must have been the principal consideration for the celebration of the contract.
[16]

In the present case, the Church contends that its consent to sell the lot was given on the mistaken impression arising from Pantes fraudulent misrepresentation that he had been the actual occupant of the lot. Willful misrepresentation existed because of its policy to sell its lands only to their actual occupants or residents. Thus, it considers the buyers actual occupancy or residence over the subject lot a qualification necessary to induce it to sell the lot.

Whether the facts, established during trial, support this contention shall determine if the contract between the Church and Pante should be annulled. In the process of weighing the evidentiary value of these established facts, the courts should consider both the parties objectives and the subjective aspects of the transaction, specifically, the parties circumstances their condition, relationship, and other attributes and their conduct at the time of and subsequent to the contract. These considerations will show what influence the alleged error exerted on the parties and their intelligent, free, and voluntary consent to the contract.
[17]

Contrary to the Churchs contention, the actual occupancy or residency of a buyer over the land does not appear to be a necessary qualification that the Church requires before it could sell its land. Had this been indeed its policy, then neither Pante nor the spouses Rubi would qualify as buyers of the 32-square meter lot, as none of them actually occupied or resided on the lot. We note in this regard that the lot was only a 2x16-meter strip of rural land used as a passageway from Pantes house to the municipal road. We find well-taken Pantes argument that, given the size of the lot, it could serve no other purpose than as a mere passageway; it is unthinkable to consider that a 2x16-meter strip of land could be mistaken as anyones residence. In fact, the spouses Rubi were in possession of the adjacent lot, but they never asserted possession over the 2x16-meter lot when the 1994 sale was made in their favor; it was only then that they constructed the concrete fence blocking the passageway.

We find it unlikely that Pante could successfully misrepresent himself as the actual occupant of the lot; this was a fact that the Church (which has a parish chapel in the same barangay where the lot was located) could easily verify had it conducted an ocular inspection of its own property. The surrounding circumstances actually indicate that the Church was aware that Pante was using the lot merely as a passageway.

The above view is supported by the sketch plan,

[18]

attached to the contract executed by the Church and

Pante, which clearly labeled the 2x16-meter lot as a RIGHT OF WAY; below these words was written the name of Mr. Regino Pante. Asked during cross-examination where the sketch plan came from, Pante answered that it was from the Archbishops Palace; neither the Church nor the spouses Rubi contradicted this statement.
[19]

The records further reveal that the sales of the Churchs lots were made after a series of conferences with the occupants of the lots.
[20]

The then parish priest of Canaman, Fr. Marcaida, was apparently aware that Pante

was not an actual occupant, but nonetheless, he allowed the sale of the lot to Pante, subject to the approval of

the Archdioceses Oeconomous. Relying on Fr. Marcaidas recommendation and finding nothing objectionab le, Fr. Ragay (the Archdioceses Oeconomous) approved the sale to Pante.

The above facts, in our view, establish that there could not have been a deliberate, willful, or fraudulent act committed by Pante that misled the Church into giving its consent to the sale of the subject lot in his favor. That Pante was not an actual occupant of the lot he purchased was a fact that the Church either ignored or waived as a requirement. In any case, the Church was by no means led to believe or do so by Pantes act; there had been no vitiation of the Churchs consent to the sale of the lot to Pante.

From another perspective, any finding of bad faith, if one is to be made, should be imputed to the Church. Without securing a court ruling on the validity of its contract with Pante, the Church sold the subject property to the spouses Rubi. Article 1390 of the Civil Code declares that voidable contracts are binding, unless annulled by a proper court action. From the time the sale to Pante was made and up until it sold the subject property to the spouses Rubi, the Church made no move to reject the contract with Pante; it did not even return the down payment he paid. The Churchs bad faith in selling the lot to Rubi without annulling its contract with Pante negates its claim for damages.

In the absence of any vitiation of consent, the contract between the Church and Pante stands valid and existing. Any delay by Pante in paying the full price could not nullify the contract, since (as correctly observed by the CA) it was a contract of sale. By its terms, the contract did not provide a stipulation that the Church retained ownership until full payment of the price. within the grace period provided
[22] [21]

The right to repurchase given to the Church in case Pante fails to pay

would have been unnecessary had ownership not already passed to Pante.

The rule on double sales

The sale of the lot to Pante and later to the spouses Rubi resulted in a double sale that called for the application of the rules in Article 1544 of the Civil Code: Article 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first taken possession thereof in good faith, if it should be movable property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property. Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith. [Emphasis ours.]

As neither Pante nor the spouses Rubi registered the sale in their favor, the question now is who, between the two, was first in possession of the property in good faith.

Jurisprudence has interpreted possession in Article 1544 of the Civil Code to mean both actual physical delivery and constructive delivery. acquire possession of the lot.
[23]

Under either mode of delivery, the facts show that Pante was the first to

Actual delivery of a thing sold occurs when it is placed under the control and possession of the vendee.
[24]

Pante claimed that he had been using the lot as a passageway, with the Churchs permission, since

1963. After purchasing the lot in 1992, he continued using it as a passageway until he was prevented by the spouses Rubis concrete fence over the lot in 1994. Pantes use of the lot as a passageway after the 1992 sale in his favor was a clear assertion of his right of ownership that preceded the spouses Rubis c laim of ownership.

Pante also stated that he had placed electric connections and water pipes on the lot, even before he purchased it in 1992, and the existence of these connections and pipes was known to the spouses Rubi.
[25]

Thus,

any assertion of possession over the lot by the spouses Rubi ( e.g., the construction of a concrete fence) would be considered as made in bad faith because works had already existed on the lot indicating possession by another. *A+ buyer of real property in the possession of persons other than the seller must be wary and should investigate the rights of those in possession. Without such inquiry, the buyer can hardly be regarded as a buyer in good faith and cannot have any right over the property."
[26]

Delivery of a thing sold may also be made constructively. Article 1498 of the Civil Code states that: Article 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred.

Under this provision, the sale in favor of Pante would have to be upheld since the contract executed between the Church and Pante was duly notarized, converting the deed into a public instrument. Appeals,
[28] [27]

In Navera v. Court of

the Court ruled that:

[A]fter the sale of a realty by means of a public instrument, the vendor, who resells it to another, does not transmit anything to the second vendee, and if the latter, by virtue of this second sale, takes material possession of the thing, he does it as mere detainer, and it would be unjust to protect this detention against the rights of the thing lawfully acquired by the first vendee. Thus, under either mode of delivery, Pante acquired prior possession of the lot.

WHEREFORE, we DENY the petition for review on certiorari, and AFFIRM the decision of the Court of Appeals dated May 18, 2006, and its resolution dated August 11, 2006, issued in CA-G.R.-CV No. 65069. Costs against the Roman Catholic Church.

SO ORDERED.