PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK), petitioner, vs. HON.

COURT OF APPEALS AND FRANKLIN VIVES, respondents.

FACTS:
Sometime in 1979, private respondent Franklin Vives was asked by Angeles Sanchez to help her friend and
townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela Marketing and Services . Specifically,
Sanchez asked private respondent to deposit in a bank a certain amount of money in the bank account of Sterela for
purposes of its incorporation.
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronillas private
secretary, met and discussed the matter. Thereafter, relying on the assurances and representations of Sanchez and
Doronilla, private respondent issued a check in the amount of Two Hundred Thousand Pesos (P200,000.00) in favor
of Sterela and deposited in a savings account in the name of Sterela in the Producers Bank of the Philippines.
Subsequently, private respondent learned that Sterela was no longer holding office in the address previously given to
him. Alarmed, he and his wife went to the Bank to verify if their money was still intact. They learned from Mr.
Atienza that part of their money has already been withdrawn and that only P90,000.00 remained therein.
Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the return of his
clients money. Doronilla issued another check for P212,000.00 in private respondents favor but the check was
again dishonored for insufficiency of funds.
Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC) in Pasig,
Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The RTC of Pasig promulgated its decision
sentencing defendants Arturo J. Doronila, Estrella Dumagpi and Producers Bank of the Philippines to pay plaintiff
Franklin Vives jointly and severally .
Petitioner contends that the transaction between private respondent and Doronilla is a simple loan (mutuum) since
all the elements of a mutuum are present: first, what was delivered by private respondent to Doronilla was money, a
consumable thing; and second, the transaction was onerous as Doronilla was obliged to pay interest, as evidenced by
the check issued by Doronilla in the amount of P212,000.00, or P12,000 more than what private respondent
deposited in Sterelas bank account.15 Moreover, the fact that private respondent sued his good friend Sanchez for
his failure to recover his money from Doronilla shows that the transaction was not merely gratuitous but "had a
business angle" to it. Hence, petitioner argues that it cannot be held liable for the return of private respondents
P200,000.00 because it is not privy to the transaction between the latter and Doronilla. Petitioner also asserts that the
Court of Appeals erred in affirming the trial courts decision since the findings of fact therein were not accord with
the evidence presented by petitioner during trial to prove that the transaction between private respondent and
Doronilla was a mutuum, and that it committed no wrong in allowing Doronilla to withdraw from Sterelas savings
account.
Private respondent, on the other hand, argues that the transaction between him and Doronilla is not a mutuum but an
accommodation since he did not actually part with the ownership of his P200,000.00 and in fact asked his wife to
deposit said amount in the account of Sterela so that a certification can be issued to the effect that Sterela had
sufficient funds for purposes of its incorporation but at the same time, he retained some degree of control over his
money through his wife who was made a signatory to the savings account and in whose possession the savings
account passbook was given.
Petitioner appealed the trial courts decision to the Court of Appeals. In its Decision dated June 25, 1991, the
appellate court affirmed in toto the decision of the RTC.

ISSUE:
The honorable court of appeals erred in upholding that the transaction between the defendant doronilla and
respondent vives was one of simple loan and not accommodation.
RULING:
There is no merit in the petition.
No error was committed by the Court of Appeals when it ruled that the transaction between private respondent and
Doronilla was a commodatum and not a mutuum. A circumspect examination of the records reveals that the
transaction between them was a commodatum. Article 1933 of the Civil Code distinguishes between the two kinds
of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may
use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case
the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the
borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as money, the
contract would be a mutuum. However, there are some instances where a commodatum may have for its object a
consumable thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the
object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend
consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is a
commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the
actual character of a contract.27 In case of doubt, the contemporaneous and subsequent acts of the parties shall be
considered in such determination.28
As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private respondent
agreed to deposit his money in the savings account of Sterela specifically for the purpose of making it appear "that
said firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned within
thirty (30) days."29 Private respondent merely "accommodated" Doronilla by lending his money without
consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the transaction that the
money would not be removed from Sterelas savings account and would be returned to private respondent after
thirty (30) days.
Doronillas attempts to return to private respondent the amount of P200,000.00 which the latter deposited in
Sterelas account together with an additional P12,000.00, allegedly representing interest on the mutuum, did not
convert the transaction from a commodatum into a mutuum because such was not the intent of the parties and

because the additional P12,000.00 corresponds to the fruits of the lending of the P200,000.00. Article 1935 of the
Civil Code expressly states that "[t]he bailee in commodatum acquires the use of the thing loaned but not its fruits."
Hence, it was only proper for Doronilla to remit to private respondent the interest accruing to the latters money
deposited with petitioner.
Neither does the Court agree with petitioners contention that it is not solidarily liable for the return of private
respondents money because it was not privy to the transaction between Doronilla and private respondent. The
nature of said transaction, that is, whether it is a mutuum or a commodatum, has no bearing on the question of
petitioners liability for the return of private respondents money because the factual circumstances of the case
clearly show that petitioner, through its employee Mr. Atienza, was partly responsible for the loss of private
respondents money and is liable for its restitution.
To begin with, the deposit was made in defendants Buendia branch precisely because Atienza was a key officer
therein. The records show that plaintiff had suggested that the P200,000.00 be deposited in his bank, the Manila
Banking Corporation, but Doronilla and Dumagpi insisted that it must be in defendants branch in Makati for "it will
be easier for them to get a certification". In fact before he was introduced to plaintiff, Doronilla had already prepared
a letter addressed to the Buendia branch manager authorizing Angeles B. Sanchez and company to open a savings
account for Sterela in the amount of P200,000.00, as "per coordination with Mr. Rufo Atienza, Assistant Manager of
the Bank x x x" (Exh. 1). This is a clear manifestation that the other defendants had been in consultation with
Atienza from the inception of the scheme. Significantly, there were testimonies and admission that Atienza is the
brother-in-law of a certain Romeo Mirasol, a friend and business associate of Doronilla.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of Appeals are
AFFIRMED. SO ORDERED.
YONG CHAN KIM, petitioner, vs. PEOPLE OF THE PHILIPPINES, HON. EDGAR D. GUSTILO
FACTS:
As Head of the Economics Unit of the Research Division of the Aquaculture Department of the Southeast Asian
Fisheries Development Center (SEAFDEC), petitioner Yong Chan Kim conducted prawn surveys which required
him to travel to various selected provinces in the country where there are potentials for prawn culture.
Two travel orders were issued to him. One is TO No. 222 covering his travel in Luzon for a period of 35 days where
he received P6438.00 and the second TO No. 2268 covering his travel to from Iloilo to Roxas City for a period of
five days where he received P495.00.
When the Travel Expense Reports were audited, it was discovered that there was an overlap of four (4) days (30
June to 3 July 1982) in the two (2) travel orders for which petitioner collected per diems twice.
In September 1983, two (2) complaints for Estafa were filed against the petitioner before the Municipal Circuit Trial
Court at Guimbal, Iloilo, docketed as Criminal Case Nos. 628 and 631.
After trial in Criminal Case No. 628, the Municipal Circuit Trial Court rendered a decision finding the accused
guilty for the said crime. RTC affirmed. CA dismissed the petition for having been filed out of time. Petitioner's
motion for reconsideration was denied for lack of merit. Hence, the present recourse.

On 30 October 1987, petitioner filed with the appellate court a petition for review. As earlier stated, on 29 April
1988, the Court of Appeals dismissed the petition for having been filed out of time. Petitioner's motion for
reconsideration was denied for lack of merit.

Hence, the present recourse.

ISSUE:
I. Whether or not the decision (sic) of the municipal circuit trial court (guimbal, iloilo) and the regional trial court,
branch 28 (iloilo city) are supported by the facts and evidence or contrary to law and that the two courts a quo have
acted with grave abuse of discretion amounting to lack of jurisdiction or have acted without or in excess of
jurisdiction.
RULING:
We find merit in the petition.
It is undisputed that petitioner received a cash advance from private respondent SEAFDEC to defray his travel
expenses under T.O. 2222. It is likewise admitted that within the period covered by T.O. 2222, petitioner was
recalled to the head station in Iloilo and given another assignment which was covered by T.O. 2268. The dispute
arose when petitioner allegedly failed to return P1,230.00 out of the cash advance which he received under T.O.
2222.
For the alleged failure of petitioner to return the amount of P1,230.00, he was charged with the crime of Estafa
under Article 315, par. 1(b) of the Revised Penal Code. In order that a person can be convicted under the provision,
it must be proven that he had the obligation to deliver or return the same money, good or personal property that he
had received.
Was petitioner under obligation to return the same money (cash advance) which he had received? We believe not.
Executive Order No. 10, dated 12 February 1980 provides as follows:
B. Cash Advance for Travel
4. All cash advances must be liquidated within 30 days after date of projected return of the person. Otherwise,
corresponding salary deduction shall be made immediately following the expiration day.
Liquidation simply means the settling of an indebtedness. An employee, such as herein petitioner, who liquidates a
cash advance is in fact paying back his debt in the form of a loan of money advanced to him by his employer, asper
diems and allowances. Similarly, as stated in the assailed decision of the lower court, "if the amount of the cash
advance he received is less than the amount he spent for actual travel . . . he has the right to demand reimbursement
from his employer the amount he spent coming from his personal funds. 12 In other words, the money advanced by
either party is actually a loan to the other. Hence, petitioner was under no legal obligation to return the same cash or
money, i.e., the bills or coins, which he received from the private respondent.
Article 1933 and Article 1953 of the Civil Code define the nature of a simple loan.
Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the
latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or
money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be
paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the
borrower.
Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and
is bound to pay to the creditor an equal amount of the same kind and quality.
The ruling of the trial judge that ownership of the cash advanced to the petitioner by private respondent was not
transferred to the latter is erroneous. Ownership of the money was transferred to the petitioner.
Even the prosecution witness, Virgilio Hierro, testified thus:
Q When you gave cash advance to the accused in this Travel Order No. 2222 subject to liquidation, who owns the
funds, accused or SEAFDEC? How do you consider the funds in the possession of the accused at the time when
there is an actual transfer of cash? . . .
A The one drawing cash advance already owns the money but subject to liquidation. If he will not liquidate, be is
obliged to return the amount.
Q In other words, it is a transfer of ownership subject to a suspensive condition that he liquidates the amount of cash
advance upon return to station and completion of the travel?
A Yes, sir.
Since ownership of the money (cash advance) was transferred to petitioner, no fiduciary relationship was created.
Absent this fiduciary relationship between petitioner and private respondent, which is an essential element of the
crime of estafa by misappropriation or conversion, petitioner could not have committed estafa.
Additionally, it has been the policy of private respondent that all cash advances not liquidated are to be deducted
correspondingly from the salary of the employee concerned. The evidence shows that the corresponding salary
deduction was made in the case of petitioner vis-a-vis the cash advance in question.
WHEREFORE, the decision of MTC and RTC are both hereby SET ASIDE. Petitioner is ACQUITTED of criminal
charge filed against him. SO ORDERED.
CELESTINA T. NAGUIAT, petitioner, vs. COURT OF APPEALS and AURORA QUEAO, respondents.
FACTS:
Queao applied with Naguiat for a loan in the amount of Two Hundred Thousand Pesos (P200,000.00), which
Naguiat granted. On 11 August 1980, Naguiat indorsed to Queao Associated Bank Check No. 090990 (dated 11
August 1980) for the amount of Ninety Five Thousand Pesos (P95,000.00), which was earlier issued to Naguiat by
the Corporate Resources Financing Corporation. She also issued her own Filmanbank Check No. 065314, to the
order of Queao, also dated 11 August 1980 and for the amount of Ninety Five Thousand Pesos (P95,000.00). The
proceeds of these checks were to constitute the loan granted by Naguiat to Queao.3
To secure the loan, Queao executed a Deed of Real Estate Mortgage dated 11 August 1980 in favor of Naguiat, and
surrendered to the latter the owners duplicates of the titles covering the mortgaged properties.4 On the same day,
the mortgage deed was notarized, and Queao issued to Naguiat a promissory note for the amount of TWO
HUNDRED THOUSAND PESOS (P200,000.00), with interest at 12% per annum, payable on 11 September
1980.5Queao also issued a Security Bank and Trust Company check, postdated 11 September 1980, for the amount
of TWO HUNDRED THOUSAND PESOS (P200,000.00) and payable to the order of Naguiat.

Upon presentment on its maturity date, the Security Bank check was dishonored for insufficiency of funds. On the
following day, 12 September 1980, Queao requested Security Bank to stop payment of her postdated check, but the
bank rejected the request pursuant to its policy not to honor such requests if the check is drawn against insufficient
funds.6
On 16 October 1980, Queao received a letter from Naguiats lawyer, demanding settlement of the loan. Shortly
thereafter, Queao and one Ruby Ruebenfeldt (Ruebenfeldt) met with Naguiat. At the meeting, Queao told Naguiat
that she did not receive the proceeds of the loan, adding that the checks were retained by Ruebenfeldt, who
purportedly was Naguiats agent.7
Naguiat applied for the extrajudicial foreclosure of the mortgage with the Sheriff of Rizal Province, who then
scheduled the foreclosure sale on 14 August 1981. Three days before the scheduled sale, Queao filed the case
before the Pasay City RTC,8 seeking the annulment of the mortgage deed. The trial court eventually stopped the
auction sale.9
On 8 March 1991, the RTC rendered judgment, declaring the Deed of Real Estate Mortgage null and void, and
ordering Naguiat to return to Queao the owners duplicates of her titles to the mortgaged lots.10 Naguiat appealed
the decision before the Court of Appeals, making no less than eleven assignments of error. The Court of Appeals
promulgated the decision now assailed before us that affirmed in toto the RTC decision. Hence, the present petition.
Naguiat questions the findings of facts made by the Court of Appeals, especially on the issue of whether Queao had
actually received the loan proceeds which were supposed to be covered by the two checks Naguiat had issued or
indorsed. Naguiat claims that being a notarial instrument or public document, the mortgage deed enjoys the
presumption that the recitals therein are true. Naguiat also questions the admissibility of various representations and
pronouncements of Ruebenfeldt, invoking the rule on the non-binding effect of the admissions of third persons.11
The resolution of the issues presented before this Court by Naguiat involves the determination of facts, a function
which this Court does not exercise in an appeal by certiorari. Under Rule 45 which governs appeal by certiorari,
only questions of law may be raised12 as the Supreme Court is not a trier of facts.13 The resolution of factual issues
is the function of lower courts, whose findings on these matters are received with respect and are in fact generally
binding on the Supreme Court.14 A question of law which the Court may pass upon must not involve an
examination of the probative value of the evidence presented by the litigants.15 There is a question of law in a given
case when the doubt or difference arises as to what the law is on a certain state of facts; there is a question of fact
when the doubt or difference arises as to the truth or the falsehood of alleged facts.16
Surely, there are established exceptions to the rule on the conclusiveness of the findings of facts of the lower
courts.17 But Naguiats case does not fall under any of the exceptions. In any event, both the decisions of the
appellate and trial courts are supported by the evidence on record and the applicable laws.
Against the common finding of the courts below, Naguiat vigorously insists that Queao received the loan proceeds.
Capitalizing on the status of the mortgage deed as a public document, she cites the rule that a public document
enjoys the presumption of validity and truthfulness of its contents. The Court of Appeals, however, is correct in
ruling that the presumption of truthfulness of the recitals in a public document was defeated by the clear and
convincing evidence in this case that pointed to the absence of consideration.18 This Court has held that the
presumption of truthfulness engendered by notarized documents is rebuttable, yielding as it does to clear and
convincing evidence to the contrary, as in this case.19
On the other hand, absolutely no evidence was submitted by Naguiat that the checks she issued or endorsed were
actually encashed or deposited. The mere issuance of the checks did not result in the perfection of the contract of
loan. For the Civil Code provides that the delivery of bills of exchange and mercantile documents such as checks

shall produce the effect of payment only when they have been cashed.20 It is only after the checks have produced
the effect of payment that the contract of loan may be deemed perfected. Art. 1934 of the Civil Code provides:
"An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but
the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract."
A loan contract is a real contract, not consensual, and, as such, is perfected only upon the delivery of the object of
the contract.21 In this case, the objects of the contract are the loan proceeds which Queao would enjoy only upon
the encashment of the checks signed or indorsed by Naguiat. If indeed the checks were encashed or deposited,
Naguiat would have certainly presented the corresponding documentary evidence, such as the returned checks and
the pertinent bank records. Since Naguiat presented no such proof, it follows that the checks were not encashed or
credited to Queaos account.1awphi1.nt
Naguiat questions the admissibility of the various written representations made by Ruebenfeldt on the ground that
they could not bind her following the res inter alia acta alteri nocere non debet rule. The Court of Appeals rejected
the argument, holding that since Ruebenfeldt was an authorized representative or agent of Naguiat the situation falls
under a recognized exception to the rule.22 Still, Naguiat insists that Ruebenfeldt was not her agent.
Suffice to say, however, the existence of an agency relationship between Naguiat and Ruebenfeldt is supported by
ample evidence. As correctly pointed out by the Court of Appeals, Ruebenfeldt was not a stranger or an
unauthorized person. Naguiat instructed Ruebenfeldt to withhold from Queao the checks she issued or indorsed to
Queao, pending delivery by the latter of additional collateral. Ruebenfeldt served as agent of Naguiat on the loan
application of Queaos friend, Marilou Farralese, and it was in connection with that transaction that Queao came
to know Naguiat.23 It was also Ruebenfeldt who accompanied Queao in her meeting with Naguiat and on that
occasion, on her own and without Queao asking for it, Reubenfeldt actually drew a check for the sum
ofP220,000.00 payable to Naguiat, to cover for Queaos alleged liability to Naguiat under the loan agreement.24
The Court of Appeals recognized the existence of an "agency by estoppel25 citing Article 1873 of the Civil
Code.26Apparently, it considered that at the very least, as a consequence of the interaction between Naguiat and
Ruebenfeldt, Queao got the impression that Ruebenfeldt was the agent of Naguiat, but Naguiat did nothing to
correct Queaos impression. In that situation, the rule is clear. One who clothes another with apparent authority as
his agent, and holds him out to the public as such, cannot be permitted to deny the authority of such person to act as
his agent, to the prejudice of innocent third parties dealing with such person in good faith, and in the honest belief
that he is what he appears to be.27 The Court of Appeals is correct in invoking the said rule on agency by
estoppel.1awphi1.nt
More fundamentally, whatever was the true relationship between Naguiat and Ruebenfeldt is irrelevant in the face of
the fact that the checks issued or indorsed to Queao were never encashed or deposited to her account of Naguiat.
All told, we find no compelling reason to disturb the finding of the courts a quo that the lender did not remit and the
borrower did not receive the proceeds of the loan. That being the case, it follows that the mortgage which is
supposed to secure the loan is null and void. The consideration of the mortgage contract is the same as that of the
principal contract from which it receives life, and without which it cannot exist as an independent contract.28 A
mortgage contract being a mere accessory contract, its validity would depend on the validity of the loan secured by
it.29
WHEREFORE, the petition is denied and the assailed decision is affirmed. Costs against petitioner.
SO ORDERED.

[G.R. No. 133632. February 15, 2002]

BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and ALS MANAGEMENT &
DEVELOPMENT CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals and its resolution
dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the judgment of the Regional Trial
Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for foreclosure of mortgage by petitioner BPI
Investment Corporation (BPIIC for brevity) against private respondents ALS Management and Development
Corporation and Antonio K. Litonjua,[1] consolidated with (b) Civil Case No. 52093, for damages with prayer for
the issuance of a writ of preliminary injunction by the private respondents against said petitioner.
The trial court had held that private respondents were not in default in the payment of their monthly amortization,
hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in bad faith. It awarded private
respondents the amount of P300,000 for moral damages, P50,000 for exemplary damages, and P50,000 for attorneys
fees and expenses for litigation. It likewise dismissed the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and Development
Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a house on his lot in New Alabang
Village, Muntinlupa. Said house and lot were mortgaged to AIDC to secure the loan. Sometime in 1980, Roa sold
the house and lot to private respondents ALS and Antonio Litonjua forP850,000. They paid P350,000 in cash and
assumed the P500,000 balance of Roas indebtedness with AIDC. The latter, however, was not willing to extend the
old interest rate to private respondents and proposed to grant them a new loan of P500,000 to be applied to Roas
debt and secured by the same property, at an interest rate of 20% per annum and service fee of 1% per annum on the
outstanding principal balance payable within ten years in equal monthly amortization of P9,996.58 and penalty
interest at the rate of 21% per annum per day from the date the amortization became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed containing the above stipulations with
the provision that payment of the monthly amortization shall commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC the sum of P190,601.35. This
reduced Roas principal balance to P457,204.90 which, in turn, was liquidated when BPIIC applied thereto the
proceeds of private respondents loan ofP500,000.
On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be what was left of their
loan after full payment of Roas loan.
In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that they failed to
pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to Four Hundred Seventy Five
Thousand Five Hundred Eighty Five and 31/100 Pesos (P475,585.31). A notice of sheriffs sale was published on
August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged, among others,
that they were not in arrears in their payment, but in fact made an overpayment as of June 30, 1984. They
maintained that they should not be made to pay amortization before the actual release of the P500,000 loan in
August and September 1982. Further, out of the P500,000 loan, only the total amount of P464,351.77 was released

to private respondents. Hence, applying the effects of legal compensation, the balance ofP35,648.23 should be
applied to the initial monthly amortization for the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development Corporation and
Antonio K. Litonjua and against BPI Investment Corporation, holding that the amount of loan granted by BPI to
ALS and Litonjua was only in the principal sum of P464,351.77, with interest at 20% plus service charge of 1% per
annum, payable on equal monthly and successive amortizations at P9,283.83 for ten (10) years or one hundred
twenty (120) months. The amortization schedule attached as Annex A to the Deed of Mortgage is correspondingly
reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their publication in
a newspaper of general circulation as defaulting debtors, and therefore orders BPI to pay ALS and Litonjua the
following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorneys fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.
Costs against BPI.
SO ORDERED.[2]
Both parties appealed to the Court of Appeals. However, private respondents appeal was dismissed for non-payment
of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion reads:
WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto.
SO ORDERED.[3]
In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery of the object of
the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only on September 13, 1982,
the date when BPIIC released the purported balance of the P500,000 loan after deducting therefrom the value of
Roas indebtedness. Thus, payment of the monthly amortization should commence only a month after the said date,
as can be inferred from the stipulations in the contract. This, despite the express agreement of the parties that
payment shall commence on May 1, 1981. From October 1982 to June 1984, the total amortization due was only
P194,960.43. Evidence showed that private respondents had an overpayment, because as of June 1984, they already
paid a total amount of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the
mortgage and cause the publication in newspapers concerning private respondents delinquency in the payment of
their loan. This fact constituted sufficient ground for moral damages in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition, where BPIIC
submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT OF THE
RULE LAID DOWN INBONNEVIE VS. COURT OF APPEALS, 125 SCRA 122.

II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY DAMAGES AND
ATTORNEYS FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED TO THE
RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120 SCRA 707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a simple loan is
perfected upon the delivery of the object of the contract, the loan contract in this case was perfected only on
September 13, 1982. Petitioner claims that a contract of loan is a consensual contract, and a loan contract is
perfected at the time the contract of mortgage is executed conformably with our ruling in Bonnevie v. Court of
Appeals, 125 SCRA 122. In the present case, the loan contract was perfected on March 31, 1981, the date when the
mortgage deed was executed, hence, the amortization and interests on the loan should be computed from said date.
Petitioner also argues that while the documents showed that the loan was released only on August 1982, the loan
was actually released on March 31, 1981, when BPIIC issued a cancellation of mortgage of Frank Roas loan. This
finds support in the registration on March 31, 1981 of the Deed of Absolute Sale executed by Roa in favor of ALS,
transferring the title of the property to ALS, and ALS executing the Mortgage Deed in favor of BPIIC. Moreover,
petitioner claims, the delay in the release of the loan should be attributed to private respondents. As BPIIC only
agreed to extend a P500,000 loan, private respondents were required to reduce Frank Roas loan below said amount.
According to petitioner, private respondents were only able to do so in August 1982.
In their comment, private respondents assert that based on Article 1934 of the Civil Code,[4] a simple loan is
perfected upon the delivery of the object of the contract, hence a real contract. In this case, even though the loan
contract was signed on March 31, 1981, it was perfected only on September 13, 1982, when the full loan was
released to private respondents. They submit that petitioner misreadBonnevie. To give meaning to Article 1934,
according to private respondents, Bonnevie must be construed to mean that the contract to extend the loan was
perfected on March 31, 1981 but the contract of loan itself was only perfected upon the delivery of the full loan to
private respondents on September 13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan contract was perfected on March 31,
1981, and their payment did not start a month thereafter, still no default took place. According to private
respondents, a perfected loan agreement imposes reciprocal obligations, where the obligation or promise of each
party is the consideration of the other party. In this case, the consideration for BPIIC in entering into the loan
contract is the promise of private respondents to pay the monthly amortization. For the latter, it is the promise of
BPIIC to deliver the money. In reciprocal obligations, neither party incurs in delay if the other does not comply or is
not ready to comply in a proper manner with what is incumbent upon him. Therefore, private respondents conclude,
they did not incur in delay when they did not commence paying the monthly amortization on May 1, 1981, as it was
only on September 13, 1982 when petitioner fully complied with its obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but a real contract. It is perfected
only upon the delivery of the object of the contract.[5] Petitioner misapplied Bonnevie. The contract in Bonnevie
declared by this Court as a perfected consensual contract falls under the first clause of Article 1934, Civil Code. It is
an accepted promise to deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445, petitioner applied for
a loan ofP500,000 with respondent bank. The latter approved the application through a board resolution. Thereafter,
the corresponding mortgage was executed and registered. However, because of acts attributable to petitioner, the
loan was not released. Later, petitioner instituted an action for damages. We recognized in this case, a perfected
consensual contract which under normal circumstances could have made the bank liable for not releasing the loan.
However, since the fault was attributable to petitioner therein, the court did not award it damages.

A perfected consensual contract, as shown above, can give rise to an action for damages. However, said contract
does not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection
and which gives rise to obligations only on the part of the borrower.[6]
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, was
perfected only onSeptember 13, 1982, the date of the second release of the loan. Following the intentions of the
parties on the commencement of the monthly amortization, as found by the Court of Appeals, private respondents
obligation to pay commenced only on October 13, 1982, a month after the perfection of the contract.[7]
We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein the
obligation or promise of each party is the consideration for that of the other.[8] As averred by private respondents,
the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and Litonjua shall pay the
monthly amortization commencing on May 1, 1981, one month after the supposed release of the loan. It is a basic
principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him.[9] Only when a party has performed his part of the
contract can he demand that the other party also fulfills his own obligation and if the latter fails, default sets in.
Consequently, petitioner could only demand for the payment of the monthly amortization after September 13, 1982
for it was only then when it complied with its obligation under the loan contract. Therefore, in computing the
amount due as of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is
October 13, 1982 and not May 1, 1981.
Other points raised by petitioner in connection with the first issue, such as the date of actual release of the loan and
whether private respondents were the cause of the delay in the release of the loan, are factual. Since petitioner has
not shown that the instant case is one of the exceptions to the basic rule that only questions of law can be raised in a
petition for review under Rule 45 of the Rules of Court,[10]factual matters need not tarry us now. On these points
we are bound by the findings of the appellate and trial courts.
On the second issue, petitioner claims that it should not be held liable for moral and exemplary damages for it did
not act maliciously when it initiated the foreclosure proceedings. It merely exercised its right under the mortgage
contract because private respondents were irregular in their monthly amortization. It invoked our ruling in Social
Security System vs. Court of Appeals, 120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of Appeals the
negligence of the appellant is not so gross as to warrant moral and temperate damages, except that, said Court
reduced those damages by only P5,000.00 instead of eliminating them. Neither can we agree with the findings of
both the Trial Court and respondent Court that the SSS had acted maliciously or in bad faith. The SSS was of the
belief that it was acting in the legitimate exercise of its right under the mortgage contract in the face of irregular
payments made by private respondents and placed reliance on the automatic acceleration clause in the contract. The
filing alone of the foreclosure application should not be a ground for an award of moral damages in the same way
that a clearly unfounded civil action is not among the grounds for moral damages.
Private respondents counter that BPIIC was guilty of bad faith and should be liable for said damages because it
insisted on the payment of amortization on the loan even before it was released. Further, it did not make the
corresponding deduction in the monthly amortization to conform to the actual amount of loan released, and it
immediately initiated foreclosure proceedings when private respondents failed to make timely payment.
But as admitted by private respondents themselves, they were irregular in their payment of monthly amortization.
Conformably with our ruling in SSS, we can not properly declare BPIIC in bad faith. Consequently, we should rule
out the award of moral and exemplary damages.[11]

However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of mortgage, without
checking and correspondingly adjusting its records on the amount actually released to private respondents and the
date when it was released. Such negligence resulted in damage to private respondents, for which an award of
nominal damages should be given in recognition of their rights which were violated by BPIIC.[12] For this purpose,
the amount of P25,000 is sufficient.
Lastly, as in SSS where we awarded attorneys fees because private respondents were compelled to litigate, we
sustain the award ofP50,000 in favor of private respondents as attorneys fees.
WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution dated April 21,
1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral and exemplary
damages in favor of private respondents is DELETED, but the award to them of attorneys fees in the amount of
P50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private respondents P25,000 as nominal
damages. Costs against petitioner.
SO ORDERED.

COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE GUEVARRA,

respondents.
FACTS:
In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a certain Pedro Perez for the
rights over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a
house made of light materials on the lot. Pajuyo and his family lived in the house from 1979
to 7 December 1985.
In 1985, Pajuyo then entrusted the house to Eddie Guevara evidenced by a Kasunduan or
agreement for the latter's use provided he should return the same upon demand and with
the condition that Guevara should be responsible of the maintenance of the property. Upon
demand in 1994, Guevara refused to return the property to Pajuyo. The petitioner then filed
an ejectment case against Guevara with the MTC. In his Answer, Guevarra claimed that
Pajuyo had no valid title or right of possession over the lot where the house stands because
the lot is within the 150 hectares set aside by Proclamation No. 137 for socialized housing.
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house
and not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house
only by tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos demand made
Guevarras continued possession of the house illegal.
On appeal with the CA, the appellate court reversed the judgment of the lower court on the
ground that both parties are illegal settlers on the property thus have no legal right so that
the Court should leave the present situation with respect to possession of the property as it
is, and ruling further that the contractual relationship of Pajuyo and Guevara was that of a
commodatum because the agreement is not for a price certain.
ISSUE:
WON CA erred in reversing and setting aside the decision of the RTC in ruling that the
Kasunduan voluntarily entered into by the parties was in fact a commodatum, instead of a
Contract of Lease as found by the Metropolitan Trial Court and in holding that the ejectment
case filed against defendant-appellant is without legal and factual basis.
RULING:

We do not subscribe to the Court of Appeals theory that the Kasunduan is one of
commodatum.
In a contract of commodatum, one of the parties delivers to another something not
consumable so that the latter may use the same for a certain time and return it. [63] An
essential feature of commodatum is that it is gratuitous. Another feature of commodatum is
that the use of the thing belonging to another is for a certain period. [64] Thus, the bailor
cannot demand the return of the thing loaned until after expiration of the period stipulated,
or after accomplishment of the use for which the commodatum is constituted. [65] If the
bailor should have urgent need of the thing, he may demand its return for temporary use.
[66] If the use of the thing is merely tolerated by the bailor, he can demand the return of the
thing at will, in which case the contractual relation is called a precarium. [67] Under the Civil
Code, precarium is a kind of commodatum. [68]
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it
obligated him to maintain the property in good condition. The imposition of this obligation
makes the Kasunduan a contract different from a commodatum. The effects of the
Kasunduan are also different from that of a commodatum. Case law on ejectment has
treated relationship based on tolerance as one that is akin to a landlord-tenant relationship
where the withdrawal of permission would result in the termination of the lease. [69] The
tenants withholding of the property would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum,
Guevarra as bailee would still have the duty to turn over possession of the property to
Pajuyo, the bailor. The obligation to deliver or to return the thing received attaches to
contracts for safekeeping, or contracts of commission, administration and commodatum.
[70] These contracts certainly involve the obligation to deliver or return the thing received.
[71]
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a
squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land
they illegally occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely
entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had
benefited from it. The Kasunduan binds Guevarra.
WHEREFORE, we GRANT the petition. The Decision of the Court of Appeals are SET ASIDE.
The Decision of the Regional Trial Court of Quezon City affirming the Decision of the
Metropolitan Trial Court of Quezon City is REINSTATED with MODIFICATION. SO ORDERED.

ASEAN PACIFIC PLANNERS, APP

CONSTRUCTION AND
DEVELOPMENT CORPORATION*
AND CESAR GOCO,
Petitioners,

- versus -

G.R. No. 162525

Present:

QUISUMBING, J., Chairperson,

CARPIO MORALES,
TINGA,
VELASCO, JR., and
BRION, JJ.
CITY OF URDANETA, CEFERINO J. CAPALAD, WALDO C. DEL CASTILLO, NORBERTO M. DEL PRADO,
JESUS A. ORDONO AND AQUILINO MAGUISA,*
Respondents.
Promulgated:

September 23, 2008

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
QUISUMBING, J.:

The instant petition seeks to set aside the Resolutions[1] dated April 15, 2003 and February 4, 2004 of the Court of
Appeals in CA-G.R. SP No. 76170.
This case stemmed from a Complaint[2] for annulment of contracts with prayer for preliminary prohibitory
injunction and temporary restraining order filed by respondent Waldo C. Del Castillo, in his capacity as taxpayer,
against respondents City of Urdaneta and Ceferino J. Capalad doing business under the name JJEFWA Builders, and

petitioners Asean Pacific Planners (APP) represented by Ronilo G. Goco and Asean Pacific Planners Construction
and Development Corporation (APPCDC) represented by Cesar D. Goco.
Del Castillo alleged that then Urdaneta City Mayor Rodolfo E. Parayno entered into five contracts for the
preliminary design, construction and management of a four-storey twin cinema commercial center and hotel
involving a massive expenditure of public funds amounting to P250 million, funded by a loan from the Philippine
National Bank (PNB). For minimal work, the contractor was allegedly paid P95 million. Del Castillo also claimed
that all the contracts are void because the object is outside the commerce of men. The object is a piece of land
belonging to the public domain and which remains devoted to a public purpose as a public elementary school.
Additionally, he claimed that the contracts, from the feasibility study to management and lease of the future
building, are also void because they were all awarded solely to the Goco family.
In their Answer,[3] APP and APPCDC claimed that the contracts are valid. Urdaneta City Mayor Amadeo R. Perez,
Jr., who filed the citys Answer,[4] joined in the defense and asserted that the contracts were properly executed by
then Mayor Parayno with prior authority from the Sangguniang Panlungsod. Mayor Perez also stated that Del
Castillo has no legal capacity to sue and that the complaint states no cause of action. For respondent Ceferino J.
Capalad, Atty. Oscar C. Sahagun filed an Answer[5] with compulsory counterclaim and motion to dismiss on the
ground that Del Castillo has no legal standing to sue.
Respondents Norberto M. Del Prado, Jesus A. Ordono and Aquilino Maguisa became parties to the case when they
jointly filed, also in their capacity as taxpayers, a Complaint-in-Intervention[6] adopting the allegations of Del
Castillo.
After pre-trial, the Lazaro Law Firm entered its appearance as counsel for Urdaneta City and filed an Omnibus
Motion[7]with prayer to (1) withdraw Urdaneta Citys Answer; (2) drop Urdaneta City as defendant and be joined as
plaintiff; (3) admitUrdaneta Citys complaint; and (4) conduct a new pre-trial. Urdaneta City allegedly wanted to
rectify its position and claimed that inadequate legal representation caused its inability to file the necessary
pleadings in representation of its interests.
In its Order[8] dated September 11, 2002, the Regional Trial Court (RTC) of Urdaneta City, Pangasinan, Branch 45,
admitted the entry of appearance of the Lazaro Law Firm and granted the withdrawal of appearance of the City
Prosecutor. It also granted the prayer to drop the city as defendant and admitted its complaint for consolidation with
Del Castillos complaint, and directed the defendants to answer the citys complaint.
In its February 14, 2003 Order,[9] the RTC denied reconsideration of the September 11, 2002 Order. It also
grantedCapalads motion to expunge all pleadings filed by Atty. Sahagun in his behalf. Capalad was dropped as
defendant, and his complaint filed by Atty. Jorito C. Peralta was admitted and consolidated with the complaints of
Del Castillo and Urdaneta City. The RTC also directed APP and APPCDC to answer Capalads complaint.
Aggrieved, APP and APPCDC filed a petition for certiorari before the Court of Appeals. In its April 15, 2003
Resolution, the Court of Appeals dismissed the petition on the following grounds: (1) defective verification and
certification of non-forum shopping, (2) failure of the petitioners to submit certified true copies of the RTCs assailed
orders as mere photocopies were submitted, and (3) lack of written explanation why service of the petition to
adverse parties was not personal.[10] The Court of Appeals also denied APP and APPCDCs motion for
reconsideration in its February 4, 2004 Resolution.[11]
Hence, this petition, which we treat as one for review on certiorari under Rule 45, the proper remedy to assail the
resolutions of the Court of Appeals.[12]
Petitioners argue that:

I.
THE APPELLATE COURT PALPABLY ERRED AND GRAVELY ABUSED ITS JUDICIAL PREROGATIVES
BY SUMMARILY DISMISSING THE PETITION ON THE BASIS OF PROCEDURAL TECHNICALITIES
DESPITE SUBSTANTIAL COMPLIANCE [THEREWITH]
II.
THE TRIAL COURT PALPABLY ERRED AND GRAVELY ABUSED ITS JUDICIAL PREROGATIVES BY
CAPRICIOUSLY
(a.) Entertaining the taxpayers suits of private respondents del Castillo, del Prado, Ordono and Maguisa despite their
clear lack of legal standing to file the same.
(b.) Allowing the entry of appearance of a private law firm to represent the City of Urdaneta despite the clear
statutory and jurisprudential prohibitions thereto.
(c.) Allowing Ceferino J. Capalad and the City of Urdaneta to switch sides, by permitting the withdrawal of their
respective answers and admitting their complaints as well as allowing the appearance of Atty. Jorito C. Peralta to
represent Capalad although Atty. Oscar C. Sahagun, his counsel of record, had not withdrawn from the case, in gross
violation of well settled rules and case law on the matter.[13]
We first resolve whether the Court of Appeals erred in denying reconsideration of its April 15, 2003 Resolution
despite APP and APPCDCs subsequent compliance.
Petitioners argue that the Court of Appeals should not have dismissed the petition on mere technicalities since they
have attached the proper documents in their motion for reconsideration and substantially complied with the rules.
Respondent Urdaneta City maintains that the Court of Appeals correctly dismissed the petition because Cesar Goco
had no proof he was authorized to sign the certification of non-forum shopping in behalf of APPCDC.
Indeed, Cesar Goco had no proof of his authority to sign the verification and certification of non-forum shopping of
the petition for certiorari filed with the Court of Appeals.[14] Thus, the Court of Appeals is allowed by the rules the
discretion to dismiss the petition since only individuals vested with authority by a valid board resolution may sign
the certificate of non-forum shopping in behalf of a corporation. Proof of said authority must be attached; otherwise,
the petition is subject to dismissal.[15]
However, it must be pointed out that in several cases,[16] this Court had considered as substantial compliance with
the procedural requirements the submission in the motion for reconsideration of the authority to sign the verification
and certification, as in this case. The Court notes that the attachments in the motion for reconsideration show that on
March 5, 2003, the Board of Directors of APPCDC authorized Cesar Goco to institute the petition before the Court
of Appeals.[17] On March 22, 2003, Ronilo Goco doing business under the name APP, also appointed his father,
Cesar Goco, as his attorney-in-fact to file the petition.[18] When the petition was filed on March 26, 2003[19]
before the Court of Appeals, Cesar Goco was duly authorized to sign the verification and certification except that the
proof of his authority was not submitted together with the petition.
Similarly, petitioners submitted in the motion for reconsideration certified true copies of the assailed RTC orders and
we may also consider the same as substantial compliance.[20] Petitioners also included in the motion for
reconsideration their explanation[21] that copies of the petition were personally served on the Lazaro Law Firm and
mailed to the RTC and Atty. Peralta because of distance. The affidavit of service[22] supported the explanation.
Considering the substantial issues involved, it was thus error for the appellate court to deny reinstatement of the
petition.

Having discussed the procedural issues, we shall now proceed to address the substantive issues raised by petitioners,
rather than remand this case to the Court of Appeals. In our view, the issue, simply put, is: Did the RTC err and
commit grave abuse of discretion in (a) entertaining the taxpayers suits; (b) allowing a private law firm to represent
Urdaneta City; (c) allowing respondents Capalad and Urdaneta City to switch from being defendants to becoming
complainants; and (d) allowing Capalads change of attorneys?
On the first point at issue, petitioners argue that a taxpayer may only sue where the act complained of directly
involves illegal disbursement of public funds derived from taxation. The allegation of respondents Del Castillo, Del
Prado, Ordono and Maguisa that the construction of the project is funded by the PNB loan contradicts the claim
regarding illegal disbursement since the funds are not directly derived from taxation.
Respondents Del Castillo, Del Prado, Ordono and Maguisa counter that their personality to sue was not raised by
petitioners APP and APPCDC in their Answer and that this issue was not even discussed in the RTCs assailed orders.
Petitioners contentions lack merit. The RTC properly allowed the taxpayers suits. In Public Interest Center, Inc. v.
Roxas,[23] we held:
In the case of taxpayers suits, the party suing as a taxpayer must prove that he has sufficient interest in preventing
the illegal expenditure of money raised by taxation. Thus, taxpayers have been allowed to sue where there is a claim
that public funds are illegally disbursed or that public money is being deflected to any improper purpose, or that
public funds are wasted through the enforcement of an invalid or unconstitutional law.
xxxx
Petitioners allegations in their Amended Complaint that the loan contracts entered into by the Republic and NPC are
serviced or paid through a disbursement of public funds are not disputed by respondents, hence, they are invested
with personality to institute the same.[24]
Here, the allegation of taxpayers Del Castillo, Del Prado, Ordono and Maguisa that P95 million of the P250 million
PNB loan had already been paid for minimal work is sufficient allegation of overpayment, of illegal disbursement,
that invests them with personality to sue. Petitioners do not dispute the allegation as they merely insist, albeit
erroneously, that public funds are not involved. Under Article 1953[25] of the Civil Code, the city acquired
ownership of the money loaned from PNB, making the money public fund. The city will have to pay the loan by
revenues raised from local taxation or by its internal revenue allotment.
In addition, APP and APPCDCs lack of objection in their Answer on the personality to sue of the four complainants
constitutes waiver to raise the objection under Section 1, Rule 9 of the Rules of Court.[26]
On the second point, petitioners contend that only the City Prosecutor can represent Urdaneta City and that law and
jurisprudence prohibit the appearance of the Lazaro Law Firm as the citys counsel.
The Lazaro Law Firm, as the citys counsel, counters that the city was inutile defending its cause before the RTC for
lack of needed legal advice. The city has no legal officer and both City Prosecutor and Provincial Legal Officer are
busy. Practical considerations also dictate that the city and Mayor Perez must have the same counsel since he faces
related criminal cases.Citing Mancenido v. Court of Appeals,[27] the law firm states that hiring private counsel is
proper where rigid adherence to the law on representation would deprive a party of his right to redress a valid
grievance.[28]
We cannot agree with the Lazaro Law Firm. Its appearance as Urdaneta Citys counsel is against the law as it
provides expressly who should represent it. The City Prosecutor should continue to represent the city.

Section 481(a)[29] of the Local Government Code (LGC) of 1991[30] mandates the appointment of a city legal
officer.Under Section 481(b)(3)(i)[31] of the LGC, the city legal officer is supposed to represent the city in all civil
actions, as in this case, and special proceedings wherein the city or any of its officials is a party. In Ramos v. Court
of Appeals,[32] we cited that under Section 19[33] of Republic Act No. 5185,[34] city governments may already
create the position of city legal officer to whom the function of the city fiscal (now prosecutor) as legal adviser and
officer for civil cases of the city shall be transferred.[35] In the case of Urdaneta City, however, the position of city
legal officer is still vacant, although its charter[36]was enacted way back in 1998.
Because of such vacancy, the City Prosecutors appearance as counsel of Urdaneta City is proper. The City
Prosecutor remains as the citys legal adviser and officer for civil cases, a function that could not yet be transferred to
the city legal officer.Under the circumstances, the RTC should not have allowed the entry of appearance of the
Lazaro Law Firm vice the City Prosecutor. Notably, the citys Answer was sworn to before the City Prosecutor by
Mayor Perez. The City Prosecutor prepared the citys pre-trial brief and represented the city in the pre-trial
conference. No question was raised against the City Prosecutors actions until the Lazaro Law Firm entered its
appearance and claimed that the city lacked adequate legal representation.
Moreover, the appearance of the Lazaro Law Firm as counsel for Urdaneta City is against the law. Section 481(b)(3)
(i) of the LGC provides when a special legal officer may be employed, that is, in actions or proceedings where a
component city or municipality is a party adverse to the provincial government. But this case is not between
Urdaneta City and the Province ofPangasinan. And we have consistently held that a local government unit cannot be
represented by private counsel[37] as only public officers may act for and in behalf of public entities and public
funds should not be spent to hire private lawyers.[38] Pro bono representation in collaboration with the municipal
attorney and prosecutor has not even been allowed.[39]
Neither is the law firms appearance justified under the instances listed in Mancenido when local government
officials can be represented by private counsel, such as when a claim for damages could result in personal liability.
No such claim against said officials was made in this case. Note that before it joined the complainants, the city was
the one sued, not its officials. That the firm represents Mayor Perez in criminal cases, suits in his personal capacity,
[40] is of no moment.
On the third point, petitioners claim that Urdaneta City is estopped to reverse admissions in its Answer that the
contracts are valid and, in its pre-trial brief, that the execution of the contracts was in good faith.
We disagree. The court may allow amendment of pleadings.
Section 5,[41] Rule 10 of the Rules of Court pertinently provides that if evidence is objected to at the trial on the
ground that it is not within the issues raised by the pleadings, the court may allow the pleadings to be amended and
shall do so with liberality if the presentation of the merits of the action and the ends of substantial justice will be
subserved thereby. Objections need not even arise in this case since the Pre-trial Order[42] dated April 1, 2002
already defined as an issue whether the contracts are valid. Thus, what is needed is presentation of the parties
evidence on the issue. Any evidence of the city for or against the validity of the contracts will be relevant and
admissible. Note also that under Section 5, Rule 10, necessary amendments to pleadings may be made to cause them
to conform to the evidence.
In addition, despite Urdaneta Citys judicial admissions, the trial court is still given leeway to consider other evidence
to be presented for said admissions may not necessarily prevail over documentary evidence,[43] e.g., the contracts
assailed. A partys testimony in open court may also override admissions in the Answer.[44]
As regards the RTCs order admitting Capalads complaint and dropping him as defendant, we find the same in
order.Capalad insists that Atty. Sahagun has no authority to represent him. Atty. Sahagun claims otherwise. We note,
however, that Atty. Sahagun represents petitioners who claim that the contracts are valid. On the other hand, Capalad

filed a complaint for annulment of the contracts. Certainly, Atty. Sahagun cannot represent totally conflicting
interests. Thus, we should expunge all pleadings filed by Atty. Sahagun in behalf of Capalad.
Relatedly, we affirm the order of the RTC in allowing Capalads change of attorneys, if we can properly call it as
such, considering Capalads claim that Atty. Sahagun was never his attorney.
Before we close, notice is taken of the offensive language used by Attys. Oscar C. Sahagun and Antonio B.
Escalante in their pleadings before us and the Court of Appeals. They unfairly called the Court of Appeals a court of
technicalities[45] for validly dismissing their defectively prepared petition. They also accused the Court of Appeals
of protecting, in their view, an incompetent judge.[46] In explaining the concededly strong language, Atty. Sahagun
further indicted himself. He said that the Court of Appeals dismissal of the case shows its impatience and readiness
to punish petitioners for a perceived slight on its dignity and such dismissal smacks of retaliation and does not augur
for the cold neutrality and impartiality demanded of the appellate court.[47]
Accordingly, we impose upon Attys. Oscar C. Sahagun and Antonio B. Escalante a fine of P2,000[48] each payable
to this Court within ten days from notice and we remind them that they should observe and maintain the respect due
to the Court of Appeals and judicial officers;[49] abstain from offensive language before the courts;[50] and not
attribute to a Judge motives not supported by the record.[51] Similar acts in the future will be dealt with more
severely.
WHEREFORE, we (1) GRANT the petition; (2) SET ASIDE the Resolutions dated April 15, 2003 and February 4,
2004 of the Court of Appeals in CA-G.R. SP No. 76170; (3) DENY the entry of appearance of the Lazaro Law Firm
in Civil Case No. U-7388 and EXPUNGE all pleadings it filed as counsel of Urdaneta City; (4) ORDER the City
Prosecutor to represent Urdaneta City in Civil Case No. U-7388; (5) AFFIRM the RTC in admitting the complaint of
Capalad; and (6)PROHIBIT Atty. Oscar C. Sahagun from representing Capalad and EXPUNGE all pleadings that he
filed in behalf of Capalad.
Let the records of Civil Case No. U-7388 be remanded to the trial court for further proceedings.
Finally, we IMPOSE a fine of P2,000 each on Attys. Oscar C. Sahagun and Antonio B. Escalante for their use of
offensive language, payable to this Court within ten (10) days from receipt of this Decision.
SO ORDERED.

PEOPLE OF THE PHILIPPINES,

Petitioners,

- versus -

TERESITA PUIG and ROMEO PORRAS,

Respondent.

G.R. No. 173654-765

Present:

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
REYES, and
DE CASTRO,* JJ.

Promulgated:

August 28, 2008

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

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner People of the Philippines,
represented by the Office of the Solicitor General, praying for the reversal of the Orders dated 30 January 2006 and
9 June 2006 of the Regional Trial Court (RTC) of the 6th Judicial Region, Branch 68, Dumangas, Iloilo, dismissing
the 112 cases of Qualified Theft filed against respondents Teresita Puig and Romeo Porras, and denying petitioners
Motion for Reconsideration, in Criminal Cases No. 05-3054 to 05-3165.

The following are the factual antecedents:

On 7 November 2005, the Iloilo Provincial Prosecutors Office filed before Branch 68 of the RTC in Dumangas,
Iloilo, 112 cases of Qualified Theft against respondents Teresita Puig (Puig) and Romeo Porras (Porras) who were
the Cashier and Bookkeeper, respectively, of private complainant Rural Bank of Pototan, Inc. The cases were
docketed as Criminal Cases No. 05-3054 to 05-3165.

The allegations in the Informations[1] filed before the RTC were uniform and pro-forma, except for the amounts,
date and time of commission, to wit:

INFORMATION

That on or about the 1st day of August, 2002, in the Municipality of Pototan, Province of Iloilo, Philippines, and
within the jurisdiction of this Honorable Court, above-named [respondents], conspiring, confederating, and helping
one another, with grave abuse of confidence, being the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,
Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank and with intent of gain, did
then and there willfully, unlawfully and feloniously take, steal and carry away the sum of FIFTEEN THOUSAND
PESOS (P15,000.00), Philippine Currency, to the damage and prejudice of the said bank in the aforesaid amount.

After perusing the Informations in these cases, the trial court did not find the existence of probable cause that would
have necessitated the issuance of a warrant of arrest based on the following grounds:

(1)
the element of taking without the consent of the owners was missing on the ground that it is the depositorsclients, and not the Bank, which filed the complaint in these cases, who are the owners of the money allegedly taken
by respondents and hence, are the real parties-in-interest; and

(2)
the Informations are bereft of the phrase alleging dependence, guardianship or vigilance between the
respondents and the offended party that would have created a high degree of confidence between them which the
respondents could have abused.

It added that allowing the 112 cases for Qualified Theft filed against the respondents to push through would be
violative of the right of the respondents under Section 14(2), Article III of the 1987 Constitution which states that in
all criminal prosecutions, the accused shall enjoy the right to be informed of the nature and cause of the accusation
against him. Following Section 6, Rule 112 of the Revised Rules of Criminal Procedure, the RTC dismissed the
cases on 30 January 2006 and refused to issue a warrant of arrest against Puig and Porras.

A Motion for Reconsideration[2] was filed on 17 April 2006, by the petitioner.

On 9 June 2006, an Order[3] denying petitioners Motion for Reconsideration was issued by the RTC, finding as
follows:

Accordingly, the prosecutions Motion for Reconsideration should be, as it hereby, DENIED. The Order dated
January 30, 2006 STANDS in all respects.

Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45, raising the sole legal issue
of:

WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT SUFFICIENTLY ALLEGE THE
ELEMENT OF TAKING WITHOUT THE CONSENT OF THE OWNER, AND THE QUALIFYING
CIRCUMSTANCE OF GRAVE ABUSE OF CONFIDENCE.

Petitioner prays that judgment be rendered annulling and setting aside the Orders dated 30 January 2006 and 9 June
2006 issued by the trial court, and that it be directed to proceed with Criminal Cases No. 05-3054 to 05-3165.

Petitioner explains that under Article 1980 of the New Civil Code, fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the provisions concerning simple loans. Corollary thereto, Article

1953 of the same Code provides that a person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. Thus, it posits
that the depositors who place their money with the bank are considered creditors of the bank. The bank acquires
ownership of the money deposited by its clients, making the money taken by respondents as belonging to the bank.

Petitioner also insists that the Informations sufficiently allege all the elements of the crime of qualified theft, citing
that a perusal of the Informations will show that they specifically allege that the respondents were the Cashier and
Bookkeeper of the Rural Bank of Pototan, Inc., respectively, and that they took various amounts of money with
grave abuse of confidence, and without the knowledge and consent of the bank, to the damage and prejudice of the
bank.

Parenthetically, respondents raise procedural issues. They challenge the petition on the ground that a Petition for
Review onCertiorari via Rule 45 is the wrong mode of appeal because a finding of probable cause for the issuance
of a warrant of arrest presupposes evaluation of facts and circumstances, which is not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ), through the Secretary of Justice, is the principal
party to file a Petition for Review on Certiorari, considering that the incident was indorsed by the DOJ.

We find merit in the petition.

The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the Informations and,
therefore, because of this defect, there is no basis for the existence of probable cause which will justify the issuance
of the warrant of arrest. Petitioner assails the dismissal contending that the Informations for Qualified Theft
sufficiently state facts which constitute (a) the qualifying circumstance of grave abuse of confidence; and (b) the
element of taking, with intent to gain and without the consent of the owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the RTC judge found the allegations in
the Information inadequate. He ruled that the Information failed to state facts constituting the qualifying
circumstance of grave abuse of confidence and the element of taking without the consent of the owner, since the
owner of the money is not the Bank, but the depositors therein. He also cites People v. Koc Song,[4] in which this
Court held:

There must be allegation in the information and proof of a relation, by reason of dependence, guardianship or
vigilance, between the respondents and the offended party that has created a high degree of confidence between
them, which the respondents abused.

At this point, it needs stressing that the RTC Judge based his conclusion that there was no probable cause simply on
the insufficiency of the allegations in the Informations concerning the facts constitutive of the elements of the
offense charged.This, therefore, makes the issue of sufficiency of the allegations in the Informations the focal point
of discussion.

Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is committed as follows, viz:
ART. 310. Qualified Theft. The crime of theft shall be punished by the penalties next higher by two degrees than
those respectively specified in the next preceding article, if committed by a domestic servant, or with grave abuse of
confidence, or if the property stolen is motor vehicle, mail matter or large cattle or consists of coconuts taken from
the premises of a plantation, fish taken from a fishpond or fishery or if property is taken on the occasion of fire,
earthquake, typhoon, volcanic eruption, or any other calamity, vehicular accident or civil disturbance.(Emphasis
supplied.)

Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of anothers property without
violence or intimidation against persons or force upon things. The elements of the crime under this Article are:

1.

Intent to gain;

2.

Unlawful taking;

3.

Personal property belonging to another;

4.

Absence of violence or intimidation against persons or force upon things.

To fall under the crime of Qualified Theft, the following elements must concur:

1.

Taking of personal property;

2.

That the said property belongs to another;

3.

That the said taking be done with intent to gain;

4.

That it be done without the owners consent;

5.

That it be accomplished without the use of violence or intimidation against persons, nor of force upon things;

6.

That it be done with grave abuse of confidence.

On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires, inter alia, that the
information must state the acts or omissions complained of as constitutive of the offense.

On the manner of how the Information should be worded, Section 9, Rule 110 of the Rules of Court, is enlightening:

Section 9. Cause of the accusation. The acts or omissions complained of as constituting the offense and the
qualifying and aggravating circumstances must be stated in ordinary and concise language and not necessarily in the
language used in the statute but in terms sufficient to enable a person of common understanding to know what
offense is being charged as well as its qualifying and aggravating circumstances and for the court to pronounce
judgment.

It is evident that the Information need not use the exact language of the statute in alleging the acts or omissions
complained of as constituting the offense. The test is whether it enables a person of common understanding to know
the charge against him, and the court to render judgment properly.[5]

The portion of the Information relevant to this discussion reads:

[A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse of confidence,
being the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or
consent of the management of the Bank x x x.

It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come into possession of
the monies deposited therein enjoy the confidence reposed in them by their employer. Banks, on the other hand,
where monies are deposited, are considered the owners thereof. This is very clear not only from the express
provisions of the law, but from established jurisprudence. The relationship between banks and depositors has been

held to be that of creditor and debtor.Articles 1953 and 1980 of the New Civil Code, as appropriately pointed out by
petitioner, provide as follows:

Article 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and
is bound to pay to the creditor an equal amount of the same kind and quality.

Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by
the provisions concerning loan.

In a long line of cases involving Qualified Theft, this Court has firmly established the nature of possession by the
Bank of the money deposits therein, and the duties being performed by its employees who have custody of the
money or have come into possession of it. The Court has consistently considered the allegations in the Information
that such employees acted with grave abuse of confidence, to the damage and prejudice of the Bank, without
particularly referring to it as owner of the money deposits, as sufficient to make out a case of Qualified Theft. For a
graphic illustration, we cite Roque v. People,[6] where the accused teller was convicted for Qualified Theft based on
this Information:

That on or about the 16th day of November, 1989, in the municipality of Floridablanca, province of Pampanga,
Philippines and within the jurisdiction of his Honorable Court, the above-named accused ASUNCION GALANG
ROQUE, being then employed as teller of the Basa Air Base Savings and Loan Association Inc. (BABSLA) with
office address at Basa Air Base, Floridablanca, Pampanga, and as such was authorized and reposed with the
responsibility to receive and collect capital contributions from its member/contributors of said corporation, and
having collected and received in her capacity as teller of the BABSLA the sum of TEN THOUSAND PESOS
(P10,000.00), said accused, with intent of gain, with grave abuse of confidence and without the knowledge and
consent of said corporation, did then and there willfully, unlawfully and feloniously take, steal and carry away the
amount of P10,000.00, Philippine currency, by making it appear that a certain depositor by the name of Antonio
Salazar withdrew from his Savings Account No. 1359, when in truth and in fact said Antonio Salazar did not
withdr[a]w the said amount of P10,000.00 to the damage and prejudice of BABSLA in the total amount of
P10,000.00, Philippine currency.

In convicting the therein appellant, the Court held that:

[S]ince the teller occupies a position of confidence, and the bank places money in the tellers possession due to the
confidence reposed on the teller, the felony of qualified theft would be committed.[7]

Also in People v. Sison,[8] the Branch Operations Officer was convicted of the crime of Qualified Theft based on
the Information as herein cited:

That in or about and during the period compressed between January 24, 1992 and February 13, 1992, both dates
inclusive, in the City of Manila, Philippines, the said accused did then and there wilfully, unlawfully and feloniously,
with intent of gain and without the knowledge and consent of the owner thereof, take, steal and carry away the
following, to wit:

Cash money amounting to P6,000,000.00 in different denominations belonging to the PHILIPPINE COMMERCIAL
INTERNATIONAL BANK (PCIBank for brevity), Luneta Branch, Manila represented by its Branch Manager,
HELEN U. FARGAS, to the damage and prejudice of the said owner in the aforesaid amount of P6,000,000.00,
Philippine Currency.

That in the commission of the said offense, herein accused acted with grave abuse of confidence and unfaithfulness,
he being the Branch Operation Officer of the said complainant and as such he had free access to the place where the
said amount of money was kept.

The judgment of conviction elaborated thus:

The crime perpetuated by appellant against his employer, the Philippine Commercial and Industrial Bank (PCIB), is
Qualified Theft. Appellant could not have committed the crime had he not been holding the position of Luneta
Branch Operation Officer which gave him not only sole access to the bank vault xxx. The management of the PCIB
reposed its trust and confidence in the appellant as its Luneta Branch Operation Officer, and it was this trust and
confidence which he exploited to enrich himself to the damage and prejudice of PCIB x x x.[9]

From another end, People v. Locson,[10] in addition to People v. Sison, described the nature of possession by the
Bank. The money in this case was in the possession of the defendant as receiving teller of the bank, and the
possession of the defendant was the possession of the Bank. The Court held therein that when the defendant, with
grave abuse of confidence, removed the money and appropriated it to his own use without the consent of the Bank,
there was taking as contemplated in the crime of Qualified Theft.[11]

Conspicuously, in all of the foregoing cases, where the Informations merely alleged the positions of the respondents;
that the crime was committed with grave abuse of confidence, with intent to gain and without the knowledge and

consent of the Bank, without necessarily stating the phrase being assiduously insisted upon by respondents, of a
relation by reason of dependence, guardianship or vigilance, between the respondents and the offended party that
has created a high degree of confidence between them, which respondents abused,[12] and without employing the
word owner in lieu of the Bank were considered to have satisfied the test of sufficiency of allegations.

As regards the respondents who were employed as Cashier and Bookkeeper of the Bank in this case, there is even no
reason to quibble on the allegation in the Informations that they acted with grave abuse of confidence. In fact, the
Information which alleged grave abuse of confidence by accused herein is even more precise, as this is exactly the
requirement of the law in qualifying the crime of Theft.

In summary, the Bank acquires ownership of the money deposited by its clients; and the employees of the Bank,
who are entrusted with the possession of money of the Bank due to the confidence reposed in them, occupy
positions of confidence.The Informations, therefore, sufficiently allege all the essential elements constituting the
crime of Qualified Theft.

On the theory of the defense that the DOJ is the principal party who may file the instant petition, the ruling in
Mobilia Products, Inc. v. Hajime Umezawa[13] is instructive. The Court thus enunciated:

In a criminal case in which the offended party is the State, the interest of the private complainant or the offended
party is limited to the civil liability arising therefrom. Hence, if a criminal case is dismissed by the trial court or if
there is an acquittal, a reconsideration of the order of dismissal or acquittal may be undertaken, whenever legally
feasible, insofar as the criminal aspect thereof is concerned and may be made only by the public prosecutor; or in the
case of an appeal, by the State only, through the OSG. x x x.

On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is well-settled that in appeals by
certiorariunder Rule 45 of the Rules of Court, only errors of law may be raised,[14] and herein petitioner certainly
raised a question of law.

As an aside, even if we go beyond the allegations of the Informations in these cases, a closer look at the records of
the preliminary investigation conducted will show that, indeed, probable cause exists for the indictment of herein
respondents.Pursuant to Section 6, Rule 112 of the Rules of Court, the judge shall issue a warrant of arrest only upon
a finding of probable cause after personally evaluating the resolution of the prosecutor and its supporting evidence.
Soliven v. Makasiar,[15] as reiterated in Allado v. Driokno,[16] explained that probable cause for the issuance of a
warrant of arrest is the existence of such facts and circumstances that would lead a reasonably discreet and prudent
person to believe that an offense has been committed by the person sought to be arrested.[17] The records
reasonably indicate that the respondents may have, indeed, committed the offense charged.

Before closing, let it be stated that while it is truly imperative upon the fiscal or the judge, as the case may be, to
relieve the respondents from the pain of going through a trial once it is ascertained that no probable cause exists to
form a sufficient belief as to the guilt of the respondents, conversely, it is also equally imperative upon the judge to
proceed with the case upon a showing that there is a prima facie case against the respondents.

WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby GRANTED. The Orders
dated30 January 2006 and 9 June 2006 of the RTC dismissing Criminal Cases No. 05-3054 to 05-3165 are
REVERSED and SET ASIDE. Let the corresponding Warrants of Arrest issue against herein respondents
TERESITA PUIG and ROMEO PORRAS.The RTC Judge of Branch 68, in Dumangas, Iloilo, is directed to proceed
with the trial of Criminal Cases No. 05-3054 to 05-3165, inclusive, with reasonable dispatch. No pronouncement as
to costs.

SO ORDERED.

MARIANO UN OCAMPO III, G.R. Nos. 156547-51

Petitioner,
- versus PEOPLE OF THE PHILIPPINES,
Respondent.
X -------------------------------------------------------------------------------------- X
ANDRES S. FLORES, G.R. Nos. 156384-85
Petitioner,
Present:

- versus - PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
LEONARDO-DE CASTRO, JJ.
PEOPLE OF THE PHILIPPINES,
Respondent. Promulgated:

February 4, 2008
X ---------------------------------------------------------------------------------------X

DECISION

AZCUNA, J.:

These are consolidated petitions for review on certiorari[1] of the Sandiganbayans Decision promulgated on March
8, 2002 and its Resolution promulgated on January 6, 2003.

The Decision and Resolution of the Sandiganbayan held petitioners Mariano Un Ocampo III and Andres S. Flores
guilty of malversation of public funds in Crim. Case Nos. 16794 and 16795.

The facts are as follows:

During the incumbency of President Corazon C. Aquino, Tarlac Province was chosen as one of the four provinces
that would serve as a test case on decentralization of local government administration.

For this purpose, the Department of Budget and Management (DBM) released National Aid for Local Government
Units (NALGU) funds in the total amount of P100 million to the Province of Tarlac. The NALGU is a fund set aside
in the General Appropriations Act to assist local governments in their various projects and services. The distribution
of this fund is entirely vested with the Secretary of the DBM.

Petitioner Ocampo, provincial governor of Tarlac from February 22, 1988 up to June 30, 1992, loaned out P56.6
million of the P100 million to the Lingkod Tarlac Foundation, Inc. (LTFI) for the implementation of various
livelihood projects. The loan was made pursuant to a Memorandum of Agreement (MOA) entered into by the
Province of Tarlac, represented by petitioner Ocampo, and LTFI, represented by petitioner Flores, on August 8,
1988.

LTFI is a private non-stock corporation with petitioner Ocampo as its first chairperson and petitioner Andres S.
Flores as its executive director. The Sandiganbayan, in its Resolution dated January 6, 2000, admitted the annexes[2]
submitted by petitioner Ocampo, which annexes proved that petitioner Ocampo resigned as chairperson and trustee
of the LTFI prior toAugust 8, 1988, the date when petitioner Ocampo and LTFI entered into the MOA.

How the P56.6 million released to LTFI was utilized became the subject matter of 25 criminal cases. In a Resolution
in G.R. Nos. 103754-78 dated October 22, 1992,[3] this Court quashed 19 of the 25 Informations filed against
petitioner Ocampo.The Fifth Division of the Sandiganbayan dismissed one case[4] on demurrer to evidence. In its
Decision promulgated on March 8, 2002, the Fifth Division of the Sandiganbayan dismissed two[5] of five criminal
cases for malversation of public funds against petitioners. On motion for reconsideration, the Sandiganbayan
dismissed one[6] more case in a Resolution promulgated onJanuary 6, 2003. The two remaining cases are the subject
matters in the instant consolidated petitions.

The Informations of the remaining two cases filed on May 28, 1991 state:

Crim. Case No. 16794

That on or about the periods between November 2, 1988 to February 27, 1989, or sometime subsequent thereto, in
the Province ofTarlac, Philippines and within the jurisdiction of this Honorable Court, accused Mariano Un Ocampo
III, then the Governor of the province of Tarlac and at the same time President-Chairman of the Board of Trustees of
the Lingkod Tarlac Foundation, Inc. (LTFI), a private entity, having received by reason of his position, public funds
amounting to more than Fifty Two Million Pesos (P52,000,000) x x x from the National Aid for Local Government
Unit (NALGU) funds, which he is accountable by reason of his official duties, did then and there with intent to
defraud the government aforethought release out of the aforesaid funds thru the said LTFI, the amount of EIGHT
MILLION EIGHT HUNDRED SIXTY THOUSAND PESOS (P8,860,000) x x x for the payment of the importation
of Juki Embroidery Machines which actually cost SEVEN MILLION SIX HUNDRED SEVENTY NINE
THOUSAND FIVE HUNDRED THIRTY PESOS AND FIFTY TWO CENTAVOS (P7,679,530.52) x x x thereby
leaving a balance of P1,180,463.48 which ought to have been returned, but far from returning the said amount,
accused Mariano Un Ocampo III, in connivance with his co-accused, Andres S. Flores and William Uy wilfully,
unlawfully and feloniously misapply, misappropriate and convert for their own personal use and benefit the said
amount resulting to the damage and prejudice of the government in the aforesaid sum of One Million One Hundred
Eighty Thousand Four Hundred Sixty Three Pesos and Forty Eight Centavos (P1,180,463.48).

CONTRARY TO LAW.

Crim. Case No. 16795

That on or about the periods between November 2, 1988 to February 27, 1989, or sometime subsequent thereto, in
the Province of Tarlac, Philippines and within the jurisdiction of this Honorable Court, accused Mariano Un Ocampo
III, then the Governor of the province of Tarlac, and at the same time President-Chairman of the Board of Trustees
of the Lingkod Tarlac Foundation, Inc. (LTFI), a private entity, having received by reason of his position, public
funds amounting to more than Fifty Two Million Pesos (P52,000,000.00) x x x from the National Aid for Local
Government Unit (NALGU) Funds, which he is accountable by reason of his official duties, caused the withdrawal
by co-accused Andres S. Flores on April 28, 1989, then Executive Officer, LTFI, from the PHILIPPINE NATIONAL
BANK LTFI account the sum of FIFTY EIGHT THOUSAND PESOS (P58,000.00), portion of the said NALGU

funds deposited by LTFI under Account No. 490-555744, both accused conniving and confederating with one
another, with intent to gain and to defraud the government, did then and there, wilfully, unlawfully and feloniously
misappropriate, misapply and convert the same to their own personal use and benefit to the damage and prejudice of
the government in the aforesaid amount of P58,000.00, Philippine Currency.

CONTRARY TO LAW.[7]

The Prosecution relied mainly on an audit conducted by the Commission on Audit on LTFI from February 12, 1990
up toApril 2, 1990. The audit covered the period from July 1, 1988 to December 31, 1989 and was confined to the
examination of the loans granted by the Provincial Government of Tarlac for the implementation of its Rural
Industrialization Can Happen Program.The result of the audit was embodied in Special Audit Report No. 90-91,
offered as Exhibit B by the prosecution.

According to the Sandiganbayan, the money trail with respect to the two cases, as proven by the prosecution, is as
follows:

(1)
Accused Ocampo released P11.5 Million to LTFI, P7,023,836.00 of which was intended for the
purchase of 400 embroidery machines;

(2)

The total amount released was deposited by LTFI to the Rural Bank of Tarlac, Inc.;

(3)
Within two (2) months from the deposit, a total of P5,465,000.00 was withdrawn and given to William
Uy (LTFIs broker for the importation of the machines);

(4)
This amount (P5,465,000) was thereafter deposited to the personal account of Willam Uy and/or Andres
Flores under S/A No. 26127;

(5)
Another account (PNB S/A No. 490-555744-6) was opened by LTFI by Andres Flores, this time with
PNB, intended solely for the purchase of the machines;

(6)
A check in the amount of P3,395,000.00 dated February 27, 1989, was remitted for the payment of the
machines;

(7)
This amount, together with the P5,465,000.00 placed on the personal account of William Uy and/or
Andres Flores, made up the cost of he machines or a total of P8,860,000.00 as recorded in the books of LTFI;

(8)
To the PNB account was added a total of P4,332,261.00 deposited on different dates from March 6 to
April 17, 1989 which funds came from S/A No. 26127;

(9)

Thus, the total amount on deposit with PNB was P7,727,261.00 plus interest;

(10)
Of this amount, P7,679,530.52 was used for the opening of the LC (for the payment of the machines)
leaving a balance ofP47,730,48.00 plus interest;

(11)
Between the amount listed in the books of the corporation (P8,860,000) and the amount of the LC
(P7,679,530), a discrepancy ofP1,180,496.48 existed.

(12)
Between the total amount deposited in PNB S/A No. 490-555744-6 (P7,727,261.00) and the total amount
withdrawn from the account for the payment of the machines (P7,679,530.52), a balance of P47,730.48 remained.
This balance (plus interest), in the amount of P58,000.00, was later withdrawn upon authorization of accused Flores.
[8]

Petitioner Ocampo did not testify regarding the subject cases on the ground that he was not competent to testify on
the disbursements made by LTFI but only as to the receipt of the NALGU funds from the government.

The Sandiganbayan declared that petitioner Ocampo as governor of Tarlac, who personally received the NALGU
funds from the DBM and thereafter released some of them to the LTFI, was duty bound to put up regular and
effective measures for the monitoring of the projects approved by him.

According to the Sandiganbayan, Sec. 203(t) of the Local Government Code obligated provincial governors to adopt
measures to safeguard all the lands, buildings, records, monies, credits and other property rights of the province.
However, petitioner Ocampo, as governor of Tarlac, neglected to set up safeguards for the proper handling of the
NALGU funds in the hands of LTFI which resulted in the disappearance of P1,132,739 and P58,000 of the said
funds. The Sandiganbayan held:

For such gross and inexcusable negligence, accused is liable for malversation. In so ruling, we are guided by the oftrepeated principle that malversation may be committed through a positive act of misappropriation of public funds or
passively though negligence by allowing another to commit such misappropriation (Cabello vs. Sandiganbayan, 197
SCRA 94 [1991]). Although accused was charged with willful malversation, he can validly be convicted of
malversation through negligence where the evidence sustains the latter mode of committing the offense (Cabello,
supra).[9]

Further, the Sandiganbayan stated that under Sec. 203(f) of the Local Government Code of 1983,[10] the provincial
governor, as chief executive of the provincial government, has the power to represent the province in all its business
transactions and sign on its behalf all bonds, contracts and obligations and other official documents made in
accordance with law or ordinance.

Sec. 2 (c) of Rule XI[11] of the Rules and Regulations Implementing the Local Government Code of 1983 provides
that the local chief executive of a local government unit shall [r]epresent the respective local units in all their
business transactions and sign on its behalf all bonds, contracts and obligations and other official documents made in
accordance with law or ordinance. Sec. 2 of Rule VI[12] states that [t]he power to sue, to acquire and convey real or
personal property, and to enter into contracts shall be exercised by the local chief executive upon authority of the
Sanggunian concerned. Thus, the Sandiganbayan declared that since the required authority from the Sangguniang
Panlalawigan was not shown to have been obtained by petitioner Ocampo, the MOA is ineffective as far as the
Province of Tarlac is concerned.

Petitioner Flores, as executive director of LTFI, was charged with malversation of public funds in connivance with a
public officer. However, the Sandiganbayan found that there was no conspiracy between the petitioners, and held
petitioner Flores guilty of malversation through his independent acts under Art. 222 of the Revised Penal Code,[13]
since the purpose of Art. 222 is to extend the provisions of the Penal Code on malversation to private individuals.
According to the Sandiganbayan, petitioner Flores bound himself, as a signatory of the MOA representing LTFI, to
receive NALGU funds from the province ofTarlac. In such capacity, he had charge of these funds.
In Crim. Case No. 16794, petitioner Flores was found to have charge of missing NALGU funds deposited in his
personal account in the amount of P1,132,739, which formed part of the discrepancy of the actual cost of the
embroidery machines and the NALGU funds released for payment of the said machines.

In defense, petitioner Flores claimed that the broker for the importation of the machines made an initial payment to
the supplier of the machines, which initial payment would explain the discrepancy between the reported cost as
stated in the books of the corporation and the letter of credit. However, the Sandiganbayan stated that the
explanation was hearsay as the broker was not presented in court, and there was no proof of the initial payment.

In Crim. Case No. 16795, the Sandiganbayan held that petitioner Flores failure to explain the purpose of the
withdrawal onApril 28, 1989 of P58,000 upon his authorization, considering that he was in charge of the PNB
savings account, made him liable for malversation of public funds.

Petitioners presented five documents to show that LTFIs obligations to the Province of Tarlac, in the amount of
P56.6 million, have been extinguished. The documents are as follows:

1)
The Tripartite Memorandum of Agreement (TMOA) dated May 23, 1990 executed by the Province of
Tarlac, LTFI and the Barangay Unity for Industrial and Leadership Development (BUILD) Foundation whereby the
liability of LTFI in favor of the Province of Tarlac was transferred and assumed by BUILD in the total amount of
P40 million.

2)
Resolution No. 76 of the Sangguniang Panlalawigan of Tarlac dated April 5, 1990 showing that the
authority of petitioner Ocampo in entering into the TMOA was with prior approval of the Sangguniang
Panlalawigan.

3)
A Deed of Assignment between Tarlac and LTFI whereby the latter assigned its loan portfolios
(including interests and certificates of time deposit), the Juki embroidery machines and other assignable documents
to the Province of Tarlac in the total amount of P16,618,403.

4)
Resolution No. 199 of the Sangguniang Panlalawigan of Tarlac dated October 18, 1990 authorizing
petitioner Ocampo to enter into the Deed of Assignment with LTFI.

5)
A certified photocopy of a document dated June 16, 1992 issued by the OIC provincial treasurer of
Tarlac whereby the treasurer affirmed the existence of the above documents.

The Sandiganbayan declared that the documents showing the extinguishment of LTFIs obligations to the Province
ofTarlace do not mitigate the liability of petitioners since the crime is consummated as of asportation, akin to the
taking of anothers property in theft. It held that the return of the amount malversed is neither an exempting
circumstance nor a ground for extinguishing the criminal liability of petitioners.

On March 8, 2002, the Fifth Division of the Sandiganbayan rendered a Decision acquitting petitioners of the crime
of malversation of public funds in Crim. Case Nos. 16796 and 16802, but finding them guilty of the crime in Crim.
Case Nos. 16787, 16794 and 16795. The dispositive portion of the Decision reads:
WHEREFORE, premises considered, accused Mariano Un Ocampo III and Andres S. Flores are hereby found
GUILTY beyond reasonable doubt of the crime of malversation of Public Funds under Crim. Case No. 16787 and
are sentenced to suffer the indeterminate penalty of (10) years, and one (1) day of prision mayor, as minimum, to
eighteen (18) years, eight (8) months and one (1) day of reclusion temporal as maximum and to pay a fine of sixtysix thousand nine hundred thirty-two pesos and seventy centavos (P66,932.70). They shall also suffer the penalty of
perpetual special disqualification. Costs against the accused.

For Crim. Case No. 16794, accused Mariano Un Ocampo III and Andres S. Flores are hereby found GUILTY
beyond reasonable doubt of the crime of Malversation of Public Funds and are sentenced to suffer the indeterminate
penalty of (10) years, and one (1) day ofprision mayor, as minimum, to eighteen (18) years, eight (8) months and
one (1) day of reclusion temporal as maximum and to pay a fine of one million one hundred thirty-two thousand
seven hundred thirty-nine pesos (P1,132,739.00). They shall also suffer the penalty of perpetual special
disqualification. Costs against the accused.

For Crim. Case No. 16795, accused Mariano Un Ocampo III and Andres S. Flores are hereby found GUILTY
beyond reasonable doubt of the crime of Malversation of Public Funds and are sentenced to suffer the indeterminate
penalty of (10) years, and one (1) day ofprision mayor, as minimum, to eighteen (18) years, eight (8) months and
one (1) day of reclusion temporal as maximum and to pay a fine of fifty-eight thousand pesos (P58,000.00). They
shall also suffer the penalty of perpetual special disqualification. Costs against the accused.

For Crim. Case No. 16796, on ground that the crime was not committed by the accused, accused Mariano Un
Ocampo III and Andres S. Flores are hereby ACQUITTED of the crime charged. The surety bonds posted by them
for their provisional liberty are cancelled.

For Crim. Case No. 16802, on ground of reasonable doubt, accused Mariano Un Ocampo III and Andres S. Flores
are hereby ACQUITTED of the crime charged. The surety bonds posted by them for their provisional liberty are
cancelled.

SO ORDERED.[14]

Petitioners separately filed a motion for reconsideration of the Decision.

In a Resolution promulgated on January 6, 2003, the Sandiganbayan reconsidered its Decision in Crim. Case No.
16787, and acquitted petitioners of the crime charged. In that case, the prosecution alleged that P5 million of the
NALGU funds loaned to LTFI were placed in time deposits with the Rural Bank of Tarlac and earned a total interest
of P116,932.77, of which amount only P50,000.00 was recorded in the books of LTFI. The unrecorded interest of
P66,932.77 was said to have been withdrawn from December 27, 1988 to February 2, 1989 and allegedly malversed
by petitioners. The Sandiganbayan held that as this Court has already labeled the subject agreement as one of loan,
the said interest are private funds, hence, not the proper subject for malversation of public funds. Thus, petitioners
were acquitted in Crim. Case No. 16787.

Petitioners thereafter filed their respective petitions, which were consolidated by the Court in a Resolution dated
February 20, 2006.

The pertinent issues raised by petitioners may be summarized as follows:

1) Whether or not petitioners Ocampo and Flores are guilty of the crime of malversation of public funds under Art.
217 and Art. 220 respectively of the Revised Penal Code;

2) Whether or not the Sandiganbayan erred in holding that the MOA is void and did not bind the Province of
Tarlac on the ground that the MOA was entered into by petitioner Ocampo without authority from the Sangguniang
Panlalawigan in violation of the Local Government Code of 1983.

First Issue: Whether or not petitioners Ocampo and Flores are guilty of the crime of malversation of public funds
under Art. 217 and Art. 220 respectively of the Revised Penal Code?

Crucial to the resolution of the first issue is the nature of the transaction entered into by the Province of Tarlac and
LTFI.

Petitioners claim that in the instant cases, the public funds alleged to have been malversed were loaned by the
Province ofTarlac to LTFI per the MOA; hence, LTFI acquired ownership of the funds which thus shed their public
character and became private funds.
Petitioner Ocampo also asserts that the Sandiganbayan impliedly ruled that the funds were private in character and
owned by LTFI when it ruled in Crim. Case No. 16787 that since this Court has already labeled the subject
agreement as one of loan, the interests from the loan are private funds; hence, not the proper subject for malversation
of public funds. Having declared the interests earned by the funds loaned to LTFI as private funds, the
Sandiganbayan should have also declared the funds loaned as private.

Petitioners arguments are meritorious.

The MOA states:

xxx
WHEREAS, the First Party [the Provincial Government of Tarlac], in order to vigorously pursue its livelihood
program for rural development, has identified the need to establish a RICH (Rural Industrialization Can Happen)
Program;

WHEREAS, the First Party now realizes the effectivity and efficiency of designating a professional private nonprofit organization to implement the various livelihood projects under the RICH Program;

WHEREAS, the Second Party [Lingkod Tarlac Foundation], has represented that it has the technical expertise
required by the First Party in the implementation of the various livelihood projects under the RICH Program;

WHEREAS, the First Party desires to engage the Second Party and the latter agrees as the implementing arm of the
Provincial Government for its livelihood projects;

NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Parties hereby agree as
follows:

ARTICLE I
UNDERTAKINGS OF THE FIRST PARTY

1.
The First Party shall provide all the data and information as may be required by [the] Second Party in the
implementation of the RICH Program;

ARTICLE III
DESCRIPTION OF THE PRIORITY PROJECTS

A.
xxx

Program For Lease Purchase Agreements on equipment, machineries, buildings and structures:

B.

Direct Lending Pogram:

Under this scheme, the Lingkod Tarlac Foundation shall engage in direct lending operations to proponents of
livelihood activities under the Rural Industrialization Can Happen (RICH PROGRAM) at variable interest rates and
loan conditions depending on the viability and nature of the livelihood projects availing of the loan.

C.

Direct Borrowing by Lingkod Tarlac Foundation:

The Lingkod Tarlac Foundation shall be allowed to borrow funds directly from the Provincial government to fund
Lingkod Tarlac Foundation projects provided the projects are livelihood projects under the Rural Industrialization
Can Happen (RICH Program).

D.

Other project financing schemes that may be developed for the RICH Program.

ARTICLE IV
CONDITIONS FOR RELEASE OF FUNDS

The First Party shall release in lump sum the appropriate funds for the approved projects covered by individual loan
documentsupon signing of [the] respective loan agreement and approval of the Commission on Audit.

ARTICLE V
TERMS OF REPAYMENT

1.
The Second Party shall repay the First Party only the total amount of capital without interest in consideration
of the following:

a)

The Second Party shall shoulder all its operating expenses.

b)

The Second Party shall not charge the Province any management fees or whatever fees.

c)
The Second Party shall, whenever necessary, assure the beneficiaries of the project interests and
management fees at rates lower than the commercial financial rates.

2.
The terms of repayment shall be based on the projects ability to pay without sacrificing on the projects
viability.

ARTICLE VI
SUCCESSORS AND ASSIGNEES

Except as may be mutually agreed in writing, neither party can assign, sublet, or transfer its interest or duties under
this Agreement.

ARTICLE VII
TERMS OF THE AGREEMENT

This Agreement shall exist for as long as the Program exists or any extension thereof.

IN WITNESS WHEREOF, the Parties have hereunto set their hands on this 8th day of August, 1988 in Tarlac,
Tarlac.

LINGKOD TARLAC FOUNDATION PROVINCE OF TARLAC

Second Party First Party
(Signed) (Signed)
ANDRES S, FLORES MARIANO UN OCAMPO III
Executive Director Governor

CONCURRED IN BY:
(Signed)
GUILLERMO N. CARAGUE

Secretary of Budget
& Management

The MOA shows that LTFI is allowed to borrow funds directly from the Provincial Government to fund Lingkod
Tarlac Foundation projects provided the projects are livelihood projects under the Rural Industrialization Can
Happen Program.Moreover, the agreement stipulates under the Conditions for Release of Funds that the Province of
Tarlac shall release in lump sum the appropriate funds for the approved projects covered by individual loan
documents upon signing of the respective loan agreement....[15]

In Crim. Case No. 16794, the fund alleged to have been malversed in the amount of P1,180,496.48 represents the
discrepancy of the cost of the Juki embroidery machines as listed in the books of LTFI and the amount actually paid
to open the letter of credit for the payment of the machines. In the books of LTFI, the cost of the Juki embroidery
machines was listed asP8,860,000, while the amount paid to open the letter of credit for the payment of the
machines was P7,679,530.52. PetitionerFlores was held liable only up to the amount of P1,132,739.

In Crim. Case No. 16795, the fund alleged to have been malversed in the amount of P58,000 is the money left
(P47,730) in PNB S/A No. 490-555744-6 after the withdrawal of the purchase price of the Juki embroidery
machines, plus interest. The amount of P58,000 was withdrawn upon the authorization of petitioner Flores. The
withdrawal was neither reflected as deposit in the bank accounts of LTFI nor spent by it.

In both cases, the money trail proven by the prosecution shows that the subject funds or the money used for the
purchase of the Juki embroidery machines came from the release of the Province of Tarlac through petitioner
Ocampo of NALGU funds in the amount of P11.5 million to LTFI on October 24, 1988. The release of the funds
was covered by a loan document in accordance with the MOA which states that the Province of Tarlac shall release
in lump sum the appropriate funds for the approved projects covered by individual loan documents upon signing of
the respective loan agreement....
The Report on the Special Audit of LTFI[16] stated:

. . . For the period July 1988 to December 1989, LTFI received a total of P56.6 million which consisted of six
releases and covered by individual loan agreements, as follows:

Date Amount
08 30 88 P7, 000, 000
10 24 88 11,500, 000

12 08 88 1,500, 000
02 22 89 4,000, 000
04 12 89 18,000, 000
06 14 89 12,718, 403
Total P56,618, 403

xxx
On October 24, 1988, the Provincial Government of Tarlac approved and released an amount of P11,500,000 to
Lingkod Tarlac Foundation, Inc. (LTFI) for the Rural Industrialization Can Happen (RICH) Program. Of the amount
released, P7,023,836 was intended for the purchase of 400 sets embroidery machines for the Embroidery Skills
Training Project.[17]

Based on the foregoing, it is clear that the funds released by the Province of Tarlac, including the money allegedly
malversed by petitioners in Crim. Case Nos. 16794 and 16795, were in the nature of a loan to LTFI.

Art. 1953 of the Civil Code provides that [a] person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.

Hence, petitioner Ocampo correctly argued that the NALGU funds shed their public character when they were lent
to LTFI as it acquired ownership of the funds with an obligation to repay the Province of Tarlac the amount
borrowed. The relationship between the Province of Tarlac and the LTFI is that of a creditor and debtor. Failure to
pay the indebtedness would give rise to a collection suit.

The Sandiganbayan convicted petitioner Ocampo of malversation of public funds under Art. 217 of the Revised
Penal Code for his gross and inexcusable negligence in not setting up safeguards in accordance with Sec. 203(t) of
the Local Government Code[18] for the proper handling of the NALGU funds in the hands of LTFI which resulted
in the disappearance of P1,132,739 allegedly malversed in Crim. Case No. 16794 and the disappearance of P58,000
in Crim. Case No. 16795.

In his petition, petitioner Ocampo states that he made sure that proper safeguards were in place within LTFI to
ensure the proper handling of NALGU funds by LTFI. On August 5, 1988, before the Province of Tarlac and LTFI
entered into the MOA, LTFIs Articles of Incorporation were amended to add the following:

TENTH: That no part of the net income of the Foundation shall inure to the benefit of any member of the
Foundation and that at least seventy percent (70%) of the funds shall be used for the projects and not more than
thirty percent (30%) of said funds shall be used for administrative purposes.

Petitioner Ocampo argues that since he had resigned from LTFI both as chairperson and as trustee on June 22, 1988,
he ceased to become accountable for the handling of the NALGU funds after the same were loaned to LTFI pursuant
to the MOA dated August 8, 1988. Consequently, he may not be held criminally liable for disbursements made by
LTFI since he had nothing to do with its operations after his resignation.

Malversation may be committed by appropriating public funds or property; by taking or misappropriating the same;
by consenting, or through abandonment or negligence, by permitting any other person to take such public funds or
property; or by being otherwise guilty of the misappropriation or malversation of such funds or property.[19]

The essential elements common to all acts of malversation under Art. 217 of the Revised Penal Code[20] are:

(a) That the offender be a public officer;

(b)

That he had the custody or control of funds or property by reason of the duties of his office;

(c)

That those funds or property were public funds or property for which he was accountable;

(d)
That he appropriated, took, misappropriated or consented or, through abandonment or negligence, permitted
another person to take them.[21]

There can be no malversation of public funds by petitioner Ocampo in the instant cases since the loan of P11.5
million transferred ownership and custody of the funds, which included the sum of money allegedly malversed, to
LTFI for which Ocampo could no longer be held accountable. Thus, contrary to the allegation of the Office of the
Special Prosecutor, petitioner Ocampo cannot be held culpable for malversation committed through negligence in
adopting measures to safeguard the money of the Province of Tarlac, since the same were neither in his custody nor
was he accountable therefor after the loan to LTFI.

Thus, petitioner Flores, as the executive director of LTFI, cannot also be held liable for malversation of public funds
in a contract of loan which transferred ownership of the funds to LTFI making them private in character. Liwanag v.
Court of Appeals[22] held:

. . . in a contract of loan once the money is received by the debtor, ownership over the same is transferred. Being the
owner, the borrower can dispose of it for whatever purpose he may deem proper.

The Sandiganbayan erred when it stated that the intention of the parties was for the funds to remain public, citing the
MOA which allegedly provided, thus:

The Province shall have the right to have access to all resources and records of either LTF[I] or BUILD and may
conduct COA examination or audit on any or all matter affecting the loans or assets covered by this agreement and
funds from the Province of Tarlac.

A review of the MOA did not show the presence of such provision. But the cited provision is contained in the
TMOA, which was later entered into by the Province of Tarlac, LTFI and BUILD, whereby LTFI transferred part of
its obligation to BUILD.

What is controlling in the instant cases is that the parties entered into a contract of loan for each release of NALGU
funds. The second release on October 24, 1988 included the subject funds in controversy. By virtue of the contract
of loan, ownership of the subject funds was transferred to LTFI making them private in character, and therefore not
subject of the instant cases of malversation of public funds.
The Court notes that the obligation of LTFI to repay the NALGU Funds of P56,618,403 obtained by it from the
Provinceof Tarlac pursuant to the MOA was extinguished as follows:

(1)

BUILD assumed LTFIs principal loan of P40 million;

(2) LTFI ceded, transferred and assigned to the Province of Tarlac all the rights and interests of LTFI in certain
loans including interests, certificate of time deposit and certain Juki embroidery machines in the total amount
ofP16,618,403.

Second Issue: Whether or not the Sandiganbayan erred in holding that the MOA is void and did not bind the
Provinceof Tarlac on the ground that the MOA was entered into by petitioner Ocampo without authority from the
Sangguniang Panlalawigan in violation of the Local Government Code of 1983?

In its Resolution dated January 6, 2003, the Sandiganbayan concedes that the transaction between the Province of
Tarlacthrough petitioner Ocampo and the LTFI was one of loan. However, it stated that since Ocampo was not
authorized by theSangguniang Panlalawigan to enter into the MOA as required by the Local Government Code of

1983, the MOA did not bind the province nor did it give any benefits to the LTFI because a void contract has no
effect whatsoever.

Petitioner Ocampo alleges that he had ample authority to enter into the MOA for the following reasons:

1)
NALGU funds received by the Province of Tarlac came straight from the national government and were
intended for a specific purpose, that is, the implementation of various livelihood projects in the Province of Tarlac,
as evidenced by the exchange of correspondence between him (petitioner Ocampo) and DBM Secretary Guillermo
N. Carague.[23]

2)
On July 15, 1988, the DBM released a revolving fund for the implementation of various livelihood
projects in theProvince of Tarlac under Advice Allotment No. BCS-0183-88-301.[24] In August 1988, he (petitioner
Ocampo) informed the DBM that the Province of Tarlac had designated LTFI as the implementing arm for its
livelihood projects, and requested authority to extend loans to LTFI, which request was approved by the DBM
Secretary.[25]

3)
The DBMs approval of petitioner Ocampos request constituted the authority of petitioner Ocampo to
enter into the MOA with LTFI.

4)
DBM also approved and concurred with the terms of the MOA as evidenced by the DBM Secretarys
signature on the MOA.

Petitioner Ocampo also asserts that Sec. 203(f) of the Local Government Code of 1983,[26] which authorized the
provincial governor to enter into business transactions on behalf of the province, did not expressly require the
concurrence of the provincial board unlike its counterpart provision in the Local Government Code of 1991.[27]

Further, petitioner Ocampo states that in any case, the lack of authority of one who enters into a contract in the name
of another does not render the contract void under Art. 1409 of the Civil Code,[28] as ruled by the Sandiganbayan,
but only unenforceable under Art. 1403(1) of the Civil Code. He points out that unenforceable contracts are
susceptible of ratification, and in this case, the Provincial Board of Tarlac can be deemed to have ratified the MOA
when it passed the following resolutions:

(1)
Resolution No. 76, which confirmed and ratified the TMOA among the Province of Tarlac, LTFI and the
BUILD, whereby the liability of LTFI in favor of the Province of Tarlac in the total amount of P40 million was
transferred to and assumed by BUILD;[29] and

(2)
Resolution No. 199, which authorized petitioner Ocampo to sign the Deed of Assignment between the
Province of Tarlac and LTFI, whereby LTFI assigned loans, sewing machines and other assignable documents in
favor of the Province of Tarlac to settle the balance of its obligation in the amount of P16,618,403.00. [30]

The Court holds that since petitioner Ocampo was not duly authorized by the Sangguniang Panlalawigan to enter
into the MOA, the agreement is an unenforceable contract under Sec. 1403 of the Civil Code:

Art. 403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers; x x x.

Unenforceable contracts are governed by the following provisions of the Civil Code:

Art. 1404. Unauthorized contracts are governed by article 1317 and the principles of agency in Title X of this Book.
Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by
law or right to represent him.

A contract entered into in the name of another by one who has no authority or legal representation, or who has acted
beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose
behalf it has been executed, before it is revoked by the other contracting party.[31]

The Court finds that the MOA has been impliedly ratified by the Sangguniang Panlalawigan as it has not directly
impugned the validity of the MOA despite knowledge of this controversy. Implied ratification is also shown by the
following acts:

1)
The Sangguniang Panlalawigan subsequently recognized the transfer of liabilities of LTFI in
favor of theProvince of Tarlac to BUILD in the amount of P40 million contained in a TMOA.[32]

2)
It authorized petitioner Ocampo to sign in behalf of the Province of Tarlac the Deed of
Assignment entered into by the Province of Tarlac and LTFI[33] which extinguished the remaining loan obligations
of LTFI obtained under the MOA.

WHEREFORE, the consolidated petitions are GRANTED. The Decision of the Sandiganbayan promulgated on
March 8, 2002 and its Resolution promulgated on January 6, 2003 are SET ASIDE. Petitioner Mariano Un Ocampo
III and petitioner Andres S. Flores are hereby ACQUITTED of the crime of malversation of public funds in Crim.
Case Nos. 16794 and 16795.

No costs.

SO ORDERED.

SPOUSES RAMON M. NISCE G.R. No. 167434

and A. NATIVIDAD PARASNISCE,
Petitioners, Present:

YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CALLEJO, SR., and
CHICO-NAZARIO, JJ.

EQUITABLE PCI BANK, INC.,

Respondent.
Promulgated:
February 19, 2007

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

DECISION
CALLEJO, SR., J.:

On November 26, 2002, Equitable PCI Bank[1] (Bank) as creditor-mortgagee filed a petition for extrajudicial
foreclosure before the Office of the Clerk of Court as Ex-Officio Sheriff of the Regional Trial Court (RTC) of
Makati City. It sought to foreclose the following real estate mortgage contracts executed by the spouses Ramon and
Natividad Nisce over two parcels of land covered by Transfer Certificate of Title (TCT) Nos. S-83466 and S-83467
of the Registry of Deeds of Rizal: one datedFebruary 26, 1974; two (2) sets of Additional Real Estate Mortgage
dated September 27, 1978 and June 3, 1996; and an Amendment to Real Estate Mortgage dated February 28, 2000.
The mortgage contracts were executed by the spouses Nisce to secure their obligation under Promissory Note Nos.
1042793 and BD-150369, including a Suretyship Agreement executed by Natividad. The obligation of the Nisce
spouses totaled P34,087,725.76 broken down as follows:

Spouses Ramon & Natividad Nisce - - - - - P17,422,285.99

Natividad P. Nisce (surety) - - - - - - - - - - US$57,306.59
and - - - - - - - - - - - - P16,665,439.77[2]

On December 2, 2002, the Ex-Officio Sheriff set the sale at public auction at 10:00 a.m. on January 14, 2003,[3] or
on January 30, 2003 in the event the public auction would not take place on the earlier setting.

On January 28, 2003, the Nisce spouses filed before the RTC of Makati City a complaint for nullity of the
Suretyship Agreement, damages and legal compensation with prayer for injunctive relief against the Bank and the
Ex-Officio Sheriff. They alleged the following: in a letter[4] dated December 7, 2000 they had requested the bank
(through their lawyer-son Atty. Rosanno P. Nisce) to setoff the peso equivalent of their obligation against their US
dollar account with PCI Capital Asia Limited (Hong Kong), a subsidiary of the Bank, under Certificate Deposit No.
01612[5] and Account No. 090-0104 (Passbook No. 83-3041);[6] the Bank accepted their offer and requested for an
estimate of the balance of their account; they complied with the Banks request and in a letter dated February 11,
2002, informed it that the estimated balance of their account as of December 1991 (including the 11.875% per
annum interest) was US$51,000.42,[7] and that as of December 2002, Natividads US dollar deposit with it
amounted to at least P9,000,000.00; they were surprised when they received a letter from the Bank demanding
payment of their loan account, and later a petition for extrajudicial foreclosure.

The spouses Nisce also pointed out that the petition for foreclosure filed by the Bank included the alleged obligation
of Natividad as surety for the loan of Vista Norte Trading Corporation, a company owned and managed by their son
Dino Giovanni P. Nisce (P16,665,439.77 and US$57,306.59). They insisted, however, that the suretyship agreement
was null and void for the following reasons:

(a) x x x [I]t was executed without the knowledge and consent of plaintiff Ramon M. Nisce, who is by law the
administrator of the conjugal partnership;

(b) The suretyship agreement did not redound to the benefit of the conjugal partnership and therefore did not bind
the same;

(c) Assuming, arguendo, that the suretyship contract was valid and binding, any obligation arising therefrom is not
covered by plaintiffs real estate mortgages which were constituted to secure the payment of certain specific
obligations only.[8]

The spouses Nisce likewise alleged that since they and the Bank were creditors and debtors with respect to each
other, their obligations should have been offset by legal compensation to the extent of their account with the Bank.

To support their plea for a writ of preliminary and prohibitory injunction, the spouses Nisce alleged that the amount
for which their property was being sold at public auction (P34,087,725.76) was grossly excessive; the US dollar
deposit of Natividad with PCI Capital Asia Ltd. (Hong Kong), and the obligation covered by the suretyship
agreement had not been deducted. They insisted that their property rights would be violated if the sale at public
auction would push through. Thus, the spouses Nisce prayed that they be granted the following reliefs:

(1) that upon the filing of this Complaint and/or after due notice and summary hearing, the Honorable Court
immediately issue a temporary restraining order (TRO) restraining defendants, their representatives and/or deputies,
and other persons acting for and on their behalf from proceeding with the extrajudicial foreclosure sale of plaintiffs
mortgaged properties on 30 January 2003 or on any other dates subsequent thereto;

(2) that after due notice and hearing and posting of the appropriate bond, the Honorable Court convert the TRO to a
writ of preliminary prohibitory injunction;

(3) that after trial on the merits, the Honorable Court render judgment

(a)

making the preliminary injunction final and permanent;

(b) ordering defendant Bank to set off the present peso value of Mrs. Nisces US dollar time deposit, inclusive of
stipulated interest, against plaintiffs loan obligations with defendant Bank;

(c) declaring the Deed of Suretyship dated 25 May 1998 null and valid and without any binding effect as to
plaintiff spouses, and ordering defendant Bank to exclude the amounts covered by said suretyship contract from
plaintiffs obligations with defendant Bank;

(d) ordering defendant Bank to pay plaintiffs the following sums:

(i)

at least P3,000,000.00 as moral damages;

(ii)

at least P1,500,000.00 as exemplary damages; and

(iii)

at least P500,000.00 as attorneys fees and for other expenses of litigation.

Plaintiffs further pray for costs of suit and such other reliefs as may be deemed just and equitable.[9]

On same day, the Bank filed an Amended Petition with the Office of the Executive Judge for extrajudicial
foreclosure of the Real Estate Mortgage to satisfy the spouses loan account of P30,533,552.24, exclusive of
interests, penalties and other charges; and the amounts of P16,665,439.77 and US$57,306.59 covered by the
suretyship agreement executed by Natividad Nisce.[10]

In the meantime, the parties agreed to have the sale at public auction reset to January 30, 2003.
In its Answer to the complaint, the Bank alleged that the spouses had no cause of action for legal compensation since
PCI Capital was a different corporation with a separate and distinct personality; if at all, offsetting may occur only
with respect to the spouses US$500.00 deposit account in its Paseo de Roxas branch.

In the meantime, the Ex-Officio Sheriff set the sale at public auction at 10:00 a.m. on March 5 and 27, 2003.[11] The
spouses Nisce then filed a Supplemental Complaint with plea for a temporary restraining order to enjoin the sale at
public auction.[12] Thereafter, the RTC conducted hearings on the plaintiffs plea for a temporary restraining order,
and the parties adduced testimonial and documentary evidence on their respective arguments.

The Case for the Spouses Nisce

Natividad frequently traveled abroad and needed a facility with easy access to foreign exchange. She inquired from
E.P. Nery, the Bank Manager for PCI Bank Paseo de Roxas Branch, about opening an account. He assured her that
she would be able to access it from anywhere in the world. She and Nery also agreed that any balance of account
remaining at maturity date would be rolled over until further instructions, or until she terminated the facility.[13]
Convinced, Natividad deposited US$20,500.00 on July 19, 1984, and was issued Passbook No. 83-3041.[14] Upon
her request, the bank transferred the US$20,000.00 to PCI Capital Asia Ltd. in Hong Kong via cable order.[15]
On July 11, 1996, the spouses Nisce secured a P20,000,000.00 loan from the Bank under Promissory Note No. BD150369.[16] The maturity date of the loan was July 11, 2001, payable in monthly installments at 16.731% interest
per annum. To secure the payment of the loan account, they executed an Amendment to the Real Estate Mortgage
over the properties[17]located in Makati City covered by TCT Nos. S-83466 and S-83467.[18] They later secured
another loan of P13,089,936.90 on March 1, 2000 (to mature on March 1, 2005) payable quarterly at 13.9869%
interest per annum; this loan agreement is evidenced by Promissory Note (PN) No. 1042793[19] and covered by a
Real Estate Mortgage[20] executed on February 28, 2000. They made a partial payment of P13,866,666.50 on the
principal of their loan account covered by PN No. BD-150369, andP5,348,239.82 on the interests.[21] These
payments are evidenced by receipts and checks.[22] However, there were payments totaling P4,600,000.00 received
by the Bank but were not covered by checks or receipts.[23] As of September 2000, the balance of their loan account
under PN No. BD-150369 was only P4,333,333.46.[24] They also made partial payment on their loan account under
PN No. 1042793 which, as of May 30, 2001, amounted to P2,218,793.61.[25]

On July 20, 1984, PCI Capital issued Certificate of Deposit No. CD-01612;[26] proof of receipt of the
US$20,000.00 transferred to it by PCI Bank Paseo de Roxas Branch as requested by Natividad. The deposit account
was to earn interest at the rate of 11.875% per annum, and would mature on October 22, 1984, thereafter to be
payable at the office of the depositary in Hong Kong upon presentation of the Certificate of Deposit.

In June 1991, two sons of the Nisce spouses were stranded in Hong Kong. Natividad called the Bank and requested
for a partial release of her dollar deposit to her sons. However, she was informed that according to its computer
records, no such dollar account existed. Sometime in November 1991, she submitted her US dollar passbook with a
xerox copy of the Certificate of Deposit for the PCIB to determine the whereabouts of the account.[27] She
reiterated her request to the Bank on January 27, 1992[28] and September 11, 2000.[29]

In the meantime, in 1994, the Equitable Banking Corporation and the PCIB were merged under the corporate name
Equitable PCI Bank.

In a letter dated December 7, 2000, Natividad confirmed to the Bank, through Ms. Shellane R. Casaysayan, her offer
to settle their loan account by offsetting the peso equivalent of her dollar account with PCI Capital under Account
No. 090-0104.[30] Their son, Atty. Rosanno Nisce, later wrote the Bank, declaring that the estimated balance of the
US dollar account with PCI Capital as of December 1991 was US$51,000.42.[31] Atty. Nisce corroborated this in
his testimony, and stated that Ms. Casaysayan had declared that she would refer the matter to her superiors.[32] A
certain Rene Esteven also told him that another offer to setoff his parents account had been accepted, and he was
assured that its implementation was being processed.[33] On cross examination, Atty. Nisce declared that there was
no response to his request for setoff,[34] and that Esteven assured him that the Bank would look for the records of

his mothers US dollar savings deposit.[35] He was later told that the Bank had accepted the offer to setoff the
account.[36]

The Case for the Bank

The Bank adduced evidence that, as of January 31, 2003, the balance of the spouses account under the two
promissory notes, including interest and penalties, was P30,533,552.24.[37] It had agreed to restructure their loans
on March 31, 1998, but they nevertheless failed to pay despite repeated demands.[38] The spouses had also been
furnished with a statement of their account as of June 2001. Thus, under the terms of the Real Estate Mortgage and
Promissory Notes, it had the right to the remedy of foreclosure. It insisted that there is no showing in its records that
the spouses had delivered checks amounting toP4,600,000.00.[39]

According to the Bank, Natividads US$20,000.00 deposit with the PCIB Paseo de Roxas branch was transferred to
PCI Capital via cable order,[40] and that it later issued Certificate of Deposit No. 01612 (Non-transferrable).[41] In
a letter datedMay 9, 2001, it informed Natividad that it had acted merely as a conduit in facilitating the transfer of
the funds, and that her deposit was made with PCI Capital and not with PCIB. PCI Capital had a separate and
distinct personality from the PCIB, and a claim against the former cannot be made against the latter. It was later
advised that PCI Capital had already ceased operations.[42]

The spouses Nisce presented rebuttal documentary evidence to show that PCI Capital was registered in Hong Kong
as a corporation under Registration No. 84555 on February 27, 1989[43] with an authorized capital stock of
50,000,000 (with par value of HKD1.00); the PCIB subscribed to 29,039,993 issued shares at the par value of
HKD1.00 per share;[44] on October 25, 2004, the corporate name of PCI Capital was changed to PCI Express
Padala (HK) Ltd.;[45] and the stockholdings of PCIB remained at 29,039,999 shares.[46]

On March 24, 2003, the RTC issued an Order[47] granting the spouses Nisces plea for a writ of preliminary
injunction on a bond of P10,000,000.00. The dispositive portion of the Order reads:

WHEREFORE, in order not to render the judgment ineffectual, upon filing by the plaintiffs and the approval thereof
by the court of a bond in the amount of Php10,000,000.00, which shall answer for any damage should the court
finally decide that plaintiffs are not entitled thereto, let a writ of preliminary injunction issue enjoining defendants
Equitable-PCI Bank, Atty. Engracio M. Escasinas, Jr., and any person or entity acting for and in their behalf from
proceeding with the extrajudicial foreclosure sale of TCT Nos. 437678 and 437679 registered in the names of the
plaintiffs.[48]

After weighing the parties arguments along with their documentary evidence, the RTC declared that justice would be
best served if a writ of preliminary injunction would be issued to preserve the status quo. It had yet to resolve the
issue of setoff since only Natividad dealt with the Bank regarding her dollar account. It also had to resolve the issue
of whether the Bank had failed to credit the amount of P4,600,000.00 to the spouses Nisces account under PN No.
BD-150369, and their claim that the Bank had effectively accelerated the respective maturity dates of their loan.[49]
The spouses Nisce posted the requisite bond which was approved by the RTC.

The Bank opted not to file a motion for reconsideration of the order, and instead assailed the trial courts order before
the CA via petition for certiorari under Rule 65 of the Rules of Court. The Bank alleged that the RTC had acted
without or in excess of its jurisdiction, or with grave abuse of its discretion amounting to lack or excess of
jurisdiction when it issued the assailed order;[50] the spouses Nisce had failed to prove the requisites for the
issuance of a writ of preliminary injunction; respondents claim that their account with petitioner had been
extinguished by legal compensation has no factual and legal basis. It further asserted that according to the evidence,
Natividad made the US$20,000.00 deposit with PCI Capital before it merged with Equitable Bank hence, the Bank
was not the debtor of Natividad relative to the dollar account. The Bank cited the ruling of this Court in Escao v.
Heirs of Escao and Navarro[51] to support its arguments. It insisted that the spouses Nisce had failed to establish
irreparable injury in case of denial of their plea for injunctive relief.

The spouses, for their part, pointed out that the Bank failed to file a motion for reconsideration of the trial courts
order, a condition sine qua non to the filing of a petition for certiorari under Rule 65 of the Rules of Court.
Moreover, the error committed by the trial court is a mere error of judgment not correctible by certiorari; hence, the
petition should have been dismissed outright by the CA. They reiterated their claim that they had made a partial
payment of P4,600,000.00 on their loan account which petitioner failed to credit in their favor. The Bank had agreed
to debit their US dollar savings deposit in the PCI Capital as payment of their loan account. They insisted that they
had never deposited their US dollar account with PCI Capital but with the Bank, and that they had never defaulted
on their loan account. Contrary to the Banks claim, they would have suffered irreparable injury had the trial court
not enjoined the extrajudicial foreclosure of the real estate mortgage.

On December 22, 2004, the CA rendered judgment granting the petition and nullifying the assailed Order of the
RTC.[52]The appellate court declared that a petition for certiorari under Rule 65 of the Rules of Court may be filed
despite the failure to file a motion for reconsideration,
particularly in instances where the issue raised is one of law; where the error is patent; the assailed order is void, or
the questions raised are the same as those already ruled upon by the lower court. According to the appellate court,
the issue raised before it was purely one of law: whether the loan account of the spouses was extinguished by legal
compensation. Thus, a motion for the reconsideration of the assailed order was not a prerequisite to a petition for
certiorari under Rule 65.

The appellate court further declared that the trial court committed grave abuse of its discretion in issuing the assailed
order, since no plausible reason was given by the spouses Nisce to justify the injunction of the extrajudicial
foreclosure of the real estate mortgage. Given their admission that they had not settled the obligations secured by the
mortgage, the Bank had a clear right to seek the remedy of foreclosure.

The CA further declared as devoid of factual basis the spouses Nisces argument that the Bank should have applied,
by way of legal compensation, the peso equivalent of their time deposit with PCI Capital as partial settlement of
their obligations. It held that for compensation to take place, the requirements set forth in Articles 1278 and 1279 of
the Civil Code of the Philippines must be present; in this case, the parties are not mutually creditors and debtors of
each other. It pointed out that the time deposit which the spouses Nisce sought to offset against their obligations to
the Bank is maintained with PCI Capital. Even if PCI Capital is a subsidiary of the Bank, compensation cannot
validly take place because the Bank and PCI Capital are two separate and distinct corporations. It pointed out the
settled principle that a corporation has a personality separate and distinct from its stockholders and from other
corporations to which it may be connected.
The CA further declared that the alleged P4,600,000.00 payment on PN No. BD-150369 was not pleaded in the
spouses complaint and supplemental complaint before the court a quo. What they alleged, aside from legal
compensation, was that the mortgage is not liable for the obligation of Natividad Nisce as surety for the loans
obtained by a trading firm owned and managed by their son. The CA further pointed out that the Bank precisely
amended the petition for foreclosure sale by deletingthe claim for Natividads obligation as surety. The appellate
court concluded that the injunctive writ was issued by the RTC without factual and legal basis.[53]

The spouses Nisce moved to have the decision reconsidered, but the appellate court denied the motion. They thus
filed the instant petition for review on the following grounds:

5.1. THE HONORABLE COURT OF APPEALS ERRED IN TAKING COGNIZANCE OF THE PETITION FOR
CERTIORARI DESPITE THE BANKS FAILURE TO FILE A MOTION FOR RECONSIDERATION WITH THE
TRIAL COURT.

5.2. THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT

PREMATURELY RULED ON THE MERITS OF THE MAIN CASE.

5.3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT JUDGE HAD
COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION
IN ISSUING A TEMPORARY RESTRAINING ORDER AND A WRIT OF PRELIMINARY INJUNCTION IN
FAVOR OF THE SPOUSES NISCE.[54]
Petitioners aver that the CA erred in not dismissing respondent Banks petition for certiorari outright because of the
absence of a condition precedent: the filing of a motion for reconsideration of the assailed Order of the RTC before
filing the petition for certiorari in the CA. They insist that respondent banks failure to file a motion for
reconsideration of the assailed Order deprived the RTC of its option to resolve the issue of whether it erred in
issuing the writ of preliminary injunction in their favor.

Petitioners insist that in resolving whether a petition for a writ of preliminary injunction should be granted, the trial
court and the appellate court are not to resolve the merits of the main case. In this case, however, the CA resolved

the bone of contention of the parties in the trial court: whether the loan account of petitioners with respondent bank
had been extinguished by legal compensation against petitioner Natividad Nisces US dollar savings account with
PCI Capital in Hong Kong. The CA reversed the assailed order of the trial court by resolving the main issue in the
trial court on its merits, and declaring that the US dollar savings deposit of the petitioner Natividad Nisce with the
PCI Capital cannot be used to offset the loan account of petitioners with respondent bank. In fine, according to
petitioners, the CA preempted the ruling of the RTC on the main issue even before the parties could be given an
opportunity to complete the presentation of their respective evidences. Petitioners point out that in the assailed
Order, the RTC declared that to determine whether respondent had credited petitioners for the amount of
P4,600,000.00 under PN No. BD-150369 and whether respondent as mortgagee-creditor accelerated the maturities
of the two (2) promissory notes executed by petitioner, there was a need for a full-blown trial and an exhaustive
consideration of the evidence of the parties.

Petitioners further insist that a petition for a writ of certiorari is designed solely to correct errors of jurisdiction and
not errors of judgment, such as errors in the findings and conclusions of the trial court. Petitioners maintain that the
trial courts erroneous findings and conclusions (according to respondent bank) are not the proper subjects for a
petition for certiorari. Contrary to the findings of the CA, they did not admit in the trial court that they were in
default in the payment of their loan obligations. They had always maintained that they had no outstanding obligation
to respondent bank precisely because their loan account had been offset by the US dollar deposit of petitioner
Natividad Nisce, and that they had made check payments ofP4,600,000.00 which respondent bank had not credited
in their favor. Likewise erroneous is the CA ruling that they would not suffer irreparable damage or injury if their
properties would be sold at public auction following the extrajudicial foreclosure of the mortgage. Petitioners point
out that their conjugal home stands on the subject properties and would be lost if sold at public auction. Besides,
petitioners aver, the injury to respondent bank resulting from the issuance of a writ of preliminary injunction is
amply secured by the P10,000,000.00 injunction bond which they had posted.

For its part, respondent avers that, as held by the CA, the requirement of the filing of a motion for reconsideration of
the assailed Order admits of exceptions, such as where the issue presented in the appellate court is the same issue
presented and resolved by the trial court. It insists that petitioners failed to prove a clear legal right to injunctive
relief; hence, the trial court committed grave abuse of discretion in issuing a writ of preliminary injunction.

Respondent maintains that the sole issue involved in the petition for certiorari of respondent in the CA was whether
or not the trial court committed grave abuse of its discretion in issuing the writ of preliminary injunction.
Necessarily, the CA would have to delve into the circumstances behind such issuance. In so doing, the CA had to
consider and calibrate the testimonial and documentary evidence adduced by the parties. However, the RTC and the
CA did not resolve with finality the threshold factual and legal issue of whether the loan account of petitioners had
been paid in full before it filed its petition for extrajudicial foreclosure of the real estate mortgage.

The Ruling of the Court

The Petition in the
Court of Appeals

Not Premature

The general rule is that before filing a petition for certiorari under Rule 65 of the Rules of Court, the petitioner is
mandated to comply with a condition precedent: the filing of a motion for reconsideration of the assailed order, and
the subsequent denial of the court a quo. It must be stressed that a petition for certiorari is an extraordinary remedy
and should be filed only as a last resort. The filing of a motion for reconsideration is intended to afford the public
respondent an opportunity to correct any actual error attributed to it by way of re-examination of the legal and
factual issues.[55] However, the rule is subject to the following recognized exceptions:

(a) where the order is a patent nullity, as where the court a quo has no jurisdiction; (b) where the questions raised in
the certiorariproceeding have been duly raised and passed upon by the lower court, or are the same as those raised
and passed upon in the lower court; (c) where there is an urgent necessity for the resolution of the question and any
further delay would prejudice the interests of the Government or of the petitioner or the subject matter of the action
is perishable; (d) where, under the circumstances, a motion for reconsideration would be useless; (e) where
petitioner was deprived of due process and there is extreme urgency for relief; (f) where, in a criminal case, relief
from an order of arrest is urgent and the granting of such relief by the trial court is improbable; (g) where the
proceedings in the lower court are a nullity for lack of due process; (h) where the proceedings was ex parte or in
which the petitioner had no opportunity to object; and (i) where the issue raised is one purely of law or public
interest is involved.[56]

As will be shown later, the March 24, 2003 Order of the trial court granting petitioners plea for a writ of preliminary
injunction was issued with grave abuse of discretion amounting to excess or lack of jurisdiction and thus a nullity. If
the trial court issues a writ of preliminary injunction despite the absence of proof of a legal right and the injury
sustained by the plaintiff, the writ is a nullity.[57]
Petitioners Are Not
Entitled to a Writ of
Preliminary Prohibitory
Injunction

Section 3, Rule 58 of the Rules of Court provides that a preliminary injunction may be granted when the following
have been established:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining
the commission or continuance of the act or acts complained of, or in requiring the performance of an act or acts,
either for a limited period or perpetually;

(b) That the commission, continuance or nonperformance of the act or acts complained of during the litigation
would probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or suffering to
be done, some act or acts probably in violation of the rights of the applicant respecting the subject of the action or
proceeding, and tendering to render the judgment ineffectual.

The grant of a preliminary injunction in a case rests on the sound discretion of the court with the caveat that it
should be made with great caution. The exercise of sound judicial discretion by the lower court should not be
interfered with except in cases of manifest abuse. Injunction is a preservative remedy for the protection of the parties
substantive rights and interests. The sole aim of a preliminary injunction is to preserve the status quo within the last
actual status that preceded the pending controversy until the merits of the case can be heard fully. Moreover, a
petition for a preliminary injunction is an equitable remedy, and one who comes to claim for equity must do so with
clean hands. It is to be resorted to by a litigant to prevent or preserve a right or interest where there is a pressing
necessity to avoid injurious consequences which cannot be remedied under any standard of compensation. A petition
for a writ of preliminary injunction rests upon an alleged existence of an emergency or of a special reason for such a
writ before the case can be regularly tried. By issuing a writ of preliminary injunction, the court can thereby prevent
a threatened or continued irreparable injury to the plaintiff before a judgment can be rendered on the claim.[58]

The plaintiff praying for a writ of preliminary injunction must further establish that he or she has a present and
unmistakable right to be protected; that the facts against which injunction is directed violate such right;[59] and
there is a special and paramount necessity for the writ to prevent serious damages. In the absence of proof of a legal
right and the injury sustained by the plaintiff, an order for the issuance of a writ of preliminary injunction will be
nullified. Thus, where the plaintiffs right is doubtful or disputed, a preliminary injunction is not proper. The
possibility of irreparable damage without proof of an actual existing right is not a ground for a preliminary
injunction.[60]

However, to establish the essential requisites for a preliminary injunction, the evidence to be submitted by the
plaintiff need not be conclusive and complete.[61] The plaintiffs are only required to show that they have an
ostensible right to the final relief prayed for in their complaint.[62] A writ of preliminary injunction is generally
based solely on initial or incomplete evidence.[63] Such evidence need only be a sampling intended merely to give
the court an evidence of justification for a preliminary injunction pending the decision on the merits of the case, and
is not conclusive of the principal action which has yet to be decided.[64]

It bears stressing that findings of the trial court granting or denying a petition for a writ of preliminary injunction
based on the evidence on record are merely provisional until after the trial on the merits of the case shall have been
concluded.[65]

The trial court, in granting or dismissing an application for a writ of preliminary injunction based on the pleadings of
the parties and their respective evidence must state in its order the findings and conclusions based on the evidence
and the law. This is to enable the appellate court to determine whether the trial court committed grave abuse of its
discretion amounting to excess or lack of jurisdiction in resolving, one way or the other, the plea for injunctive
relief. The trial courts exercise of its judicial discretion whether to grant or deny an application for a writ of
preliminary injunction involves the assessment and evaluation of the evidence, and its findings of facts are ordinarily
binding and conclusive on the appellate court and this Court.[66]

We agree with respondents contention that as creditor-mortgagee, it has the right under the real estate mortgage
contract and the amendment thereto to foreclose extrajudicially, the real estate mortgage and sell the property at
public auction, considering that petitioners had failed to pay their loans, plus interests and other incremental
amounts as provided for in the deeds. Petitioners contend, however, that if respondent bank extrajudicially
forecloses the real estate mortgage and has petitioners property sold at public auction for an amount in excess of the
balance of their loan account, petitioners contractual and substantive rights under the real estate mortgage would be
violated; in such a case, the extrajudicial foreclosure sale may be enjoined by a writ of preliminary injunction.

Respondent bank sought the extrajudicial foreclosure of the real estate mortgage and was to sell the property at
public auction for P30,533,552.24. The amount is based on Promissory Notes No. 1042793 and BD-150369,
interests, penalty charges, and attorneys fees, as of January 31, 2003, exclusive of all interests, penalties, other
charges, and foreclosure costs accruing thereafter.[67] Petitioners asserted before the trial court that respondents
sought the extrajudicial foreclosure of the mortgaged deed for an amount far in excess of what they owed, because
the latter failed to credit P4,600,000.00 paid in checks but without any receipts having been issued therefor; and the
P9,000,000.00 peso equivalent of the US$20,000.00 deposit of petitioner Natividad Nisce with PCIB under
Passbook No. 83-3041 and Certificate of Deposit No. CD-01612 issued by PCI Capital onJuly 23, 1984. Petitioners
maintain that the US$20,000.00 dollar deposit should be setoff against their account with respondent against their
loan account, on their claim that respondent is their debtor insofar as said deposit is concerned.
It was the burden of petitioners, as plaintiffs below, to adduce preponderant evidence to prove their claim that
respondent bank was the debtor of petitioner Natividad Nisce relative to her dollar deposit with PCIB, and later
transferred to PCI Capital inHong Kong, a subsidiary of respondent Bank. Petitioners, however, failed to discharge
their burden.

Under Article 1278 of the New Civil Code, compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. In order that compensation may be proper, petitioners were burdened to establish
the following:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated
in due time to the debtor.[68]

Compensation takes effect by operation of law when all the requisites mentioned in Article 1279 of the New Civil
Code are present and extinguishes both debts to the concurrent amount even though the creditors and debtors are not
aware of the compensation. Legal compensation operates even against the will of the interested parties and even
without their consent.[69]Such compensation takes place ipso jure; its effects arise on the very day on which all
requisites concur.[70]

As its minimum, compensation presupposes two persons who, in their own right and as principals, are mutually
indebted to each other respecting equally demandable and liquidated obligations over any of which no retention or
controversy commenced and communicated in due time to the debtor exists. Compensation, be it legal or
conventional, requires confluence in the parties of the characters of mutual debtors and creditors, although their
rights as such creditors or their obligations as such debtors need not spring from one and the same contract or
transaction.[71]

Article 1980 of the New Civil Code provides that fixed, savings and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loans. Under Article 1953, of the same Code, a
person who secures a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay
the creditor an equal amount of the same kind and quality. The relationship of the depositors and the Bank or similar
institution is that of creditor-debtor. Such deposit may be setoff against the obligation of the depositor with the bank
or similar institution.

When petitioner Natividad Nisce deposited her US$20,500.00 with the PCIB on July 19, 1984, PCIB became the
debtor of petitioner. However, when upon petitioners request, the amount of US$20,000.00 was transferred to PCI
Capital (which forthwith issued Certificate of Deposit No. 01612), PCI Capital, in turn, became the debtor of
Natividad Nisce. Indeed, a certificate of deposit is a written acknowledgment by a bank or borrower of the receipt of
a sum of money or deposit which the Bank or borrower promises to pay to the depositor, to the order of the
depositor; or to some other person; or to his order whereby the relation of debtor and creditor between the bank and
the depositor is created.[72] The issuance of a certificate of deposit in exchange for currency creates a debtorcreditor relationship.[73]

Admittedly, PCI Capital is a subsidiary of respondent Bank. Even then, PCI Capital [PCI Express Padala (HK) Ltd.]
has an independent and separate juridical personality from that of the respondent Bank, its parent company; hence,
any claim against the subsidiary is not a claim against the parent company and vice versa.[74] The evidence on
record shows that PCIB, which had been merged with Equitable Bank, owns almost all of the stocks of PCI Capital.
However, the fact that a corporation owns all of the stocks of another corporation, taken alone, is not sufficient to
justify their being treated as one entity. If used to perform legitimate functions, a subsidiarys separate existence shall
be respected, and the liability of the parent corporation, as well as the subsidiary shall be confined to those arising in
their respective business.[75] A corporation has a separate personality distinct from its stockholders and from other
corporations to which it may be conducted. This separate and distinct personality of a corporation is a fiction created
by law for convenience and to prevent injustice.

This Court, in Martinez v. Court of Appeals[76] held that, being a mere fiction of law, peculiar situations or valid
grounds can exist to warrant, albeit sparingly, the disregard of its independent being and the piercing of the
corporate veil. The veil of separate corporate personality may be lifted when, inter alia, the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation; or when the corporation is used as a cloak or cover for fraud or illegality; or to work injustice;
or where necessary to achieve equity or for the protection of the creditors. In those cases where valid grounds exist
for piercing the veil of corporate entity, the corporation will be considered as a mere association of persons. The
liability will directly attach to them.[77]

The Court likewise declared in the same case that the test in determining the application of the instrumentality or
alter ego doctrine is as follows:
1. Control, not mere majority or complete stock control, but complete dominion, not only of finances but of policy
and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complaint of.

The Court emphasized that the absence of any one of these elements prevents piercing the corporate veil. In
applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendants relationship to that operation.[78]

Petitioners failed to adduce sufficient evidence to justify the piercing of the veil of corporate entity and render
respondent Bank liable for the US$20,000.00 deposit of petitioner Natividad Nisce as debtor.

On hindsight, petitioners could have spared themselves the expenses and tribulation of a litigation had they just
withdrawn their deposit from the PCI Capital and remitted the same to respondent. However, petitioner insisted on
their contention of setoff.

On the P4,600,000.00 paid in checks allegedly remitted by petitioners to respondent in partial payment of their loan
account, petitioners failed to adduce in evidence the checks to show that, indeed, the checks were drawn by
petitioners and delivered to respondent, and that respondent was able to cash the checks. The only evidence adduced
by petitioners is a piece of paper listing the serial numbers of the checks and the amount of each check:

PAYMENTS MADE & RECEIVED BY EBC BUT W/O RECEIPTS

1. Dec. 29, 1997 - EBC-0000039462 - P2,000,000.00

2. Jan. 22, 1998 - EBC-213016118C - 1,000,000.00
3. Feb. 24, 1998 - UB -0000074619 - 800,000.00
4. Mar. 23, 1998 - EBC-213016121C - 800,000.00
----------------P4,600,000.00[79]

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. The Decision of the Court of
Appeals is AFFIRMED. Costs against petitioners.

SO ORDERED.

PHILEX MINING G.R. No. 148187

CORPORATION,
Petitioner, Present:
Ynares-Santiago, J. (Chairperson),

- versus - Carpio Morales, *

Chico-Nazario,Nachura, and,Reyes, JJ.
COMMISSIONER OF
INTERNAL REVENUE, Promulgated:
Respondent.
April 16, 2008
x ---------------------------------------------------------------------------------------- x

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review on certiorari of the June 30, 2000 Decision[1] of the Court of Appeals in CA-G.R. SP
No. 49385, which affirmed the Decision[2] of the Court of Tax Appeals in C.T.A. Case No. 5200. Also assailed is
the April 3, 2001 Resolution[3]denying the motion for reconsideration.

The facts of the case are as follows:

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an agreement[4] with Baguio
Gold Mining Company (Baguio Gold) for the former to manage and operate the latters mining claim, known as the
Sto. Nino mine, located in Atok and Tublay, Benguet Province. The parties agreement was denominated as Power of
Attorney and provided for the following terms:

4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available to the MANAGERS
(Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in such amounts as from time to time may be
required by the MANAGERS within the said 3-year period, for use in the MANAGEMENT of the STO. NINO
MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be deemed, for internal audit purposes, as the
owners account in the Sto. Nino PROJECT. Any part of any income of the PRINCIPAL from the STO. NINO
MINE, which is left with the Sto. Nino PROJECT, shall be added to such owners account.

5. Whenever the MANAGERS shall deem it necessary and convenient in connection with the MANAGEMENT of
the STO. NINO MINE, they may transfer their own funds or property to the Sto. Nino PROJECT, in accordance
with the following arrangements:

(a) The properties shall be appraised and, together with the cash, shall be carried by the Sto. Nino PROJECT as a
special fund to be known as the MANAGERS account.

(b) The total of the MANAGERS account shall not exceed P11,000,000.00, except with prior approval of the
PRINCIPAL; provided, however, that if the compensation of the MANAGERS as herein provided cannot be paid in
cash from the Sto. Nino PROJECT, the amount not so paid in cash shall be added to the MANAGERS account.

(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino PROJECT until termination of this
Agency.

(d) The MANAGERS account shall not accrue interest. Since it is the desire of the PRINCIPAL to extend to the
MANAGERS the benefit of subsequent appreciation of property, upon a projected termination of this Agency, the
ratio which the MANAGERS account has to the owners account will be determined, and the corresponding
proportion of the entire assets of the STO. NINO MINE, excluding the claims, shall be transferred to the
MANAGERS, except that such transferred assets shall not include mine development, roads, buildings, and similar
property which will be valueless, or of slight value, to the MANAGERS. The MANAGERS can, on the other hand,
require at their option that property originally transferred by them to the Sto. Nino PROJECT be re-transferred to
them. Until such assets are transferred to the MANAGERS, this Agency shall remain subsisting.

xxxx

12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the Sto. Nino PROJECT
before income tax. It is understood that the MANAGERS shall pay income tax on their compensation, while the
PRINCIPAL shall pay income tax on the net profit of the Sto. Nino PROJECT after deduction therefrom of the
MANAGERS compensation.

xxxx

16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and, in the future, may incur
other obligations in favor of the MANAGERS. This Power of Attorney has been executed as security for the
payment and satisfaction of all such obligations of the PRINCIPAL in favor of the MANAGERS and as a means to
fulfill the same. Therefore, this Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the
MANAGERS is outstanding, inclusive of the MANAGERS account. After all obligations of the PRINCIPAL in

favor of the MANAGERS have been paid and satisfied in full, this Agency shall be revocable by the PRINCIPAL
upon 36-month notice to the MANAGERS.

17. Notwithstanding any agreement or understanding between the PRINCIPAL and the MANAGERS to the
contrary, the MANAGERS may withdraw from this Agency by giving 6-month notice to the PRINCIPAL. The
MANAGERS shall not in any manner be held liable to the PRINCIPAL by reason alone of such withdrawal.
Paragraph 5(d) hereof shall be operative in case of the MANAGERS withdrawal.

x x x x[5]

In the course of managing and operating the project, Philex Mining made advances of cash and property in
accordance with paragraph 5 of the agreement. However, the mine suffered continuing losses over the years which
resulted to petitioners withdrawal as manager of the mine on January 28, 1982 and in the eventual cessation of mine
operations on February 20, 1982.[6]

Thereafter, on September 27, 1982, the parties executed a Compromise with Dation in Payment[7] wherein Baguio
Gold admitted an indebtedness to petitioner in the amount of P179,394,000.00 and agreed to pay the same in three
segments by first assigning Baguio Golds tangible assets to petitioner, transferring to the latter Baguio Golds
equitable title in its Philodrill assets and finally settling the remaining liability through properties that Baguio Gold
may acquire in the future.

On December 31, 1982, the parties executed an Amendment to Compromise with Dation in Payment[8] where the
parties determined that Baguio Golds indebtedness to petitioner actually amounted to P259,137,245.00, which sum
included liabilities of Baguio Gold to other creditors that petitioner had assumed as guarantor. These liabilities
pertained to long-term loans amounting to US$11,000,000.00 contracted by Baguio Gold from the Bank of America
NT & SA and Citibank N.A. This time, Baguio Gold undertook to pay petitioner in two segments by first assigning
its tangible assets for P127,838,051.00 and then transferring its equitable title in its Philodrill assets for
P16,302,426.00. The parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to
petitioner in the amount of P114,996,768.00.

Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding indebtedness of Baguio
Gold by charging P112,136,000.00 to allowances and reserves that were set up in 1981 and P2,860,768.00 to the
1982 operations.

In its 1982 annual income tax return, petitioner deducted from its gross income the amount of P112,136,000.00 as
loss on settlement of receivables from Baguio Gold against reserves and allowances.[9] However, the Bureau of
Internal Revenue (BIR) disallowed the amount as deduction for bad debt and assessed petitioner a deficiency
income tax of P62,811,161.39.

Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites for a bad debt
deduction were satisfied, to wit: (a) there was a valid and existing debt; (b) the debt was ascertained to be worthless;
and (c) it was charged off within the taxable year when it was determined to be worthless.

Petitioner emphasized that the debt arose out of a valid management contract it entered into with Baguio Gold. The
bad debt deduction represented advances made by petitioner which, pursuant to the management contract, formed
part of Baguio Golds pecuniary obligations to petitioner. It also included payments made by petitioner as guarantor
of Baguio Golds long-term loans which legally entitled petitioner to be subrogated to the rights of the original
creditor.

Petitioner also asserted that due to Baguio Golds irreversible losses, it became evident that it would not be able to
recover the advances and payments it had made in behalf of Baguio Gold. For a debt to be considered worthless,
petitioner claimed that it was neither required to institute a judicial action for collection against the debtor nor to sell
or dispose of collateral assets in satisfaction of the debt. It is enough that a taxpayer exerted diligent efforts to
enforce collection and exhausted all reasonable means to collect.

On October 28, 1994, the BIR denied petitioners protest for lack of legal and factual basis. It held that the alleged
debt was not ascertained to be worthless since Baguio Gold remained existing and had not filed a petition for
bankruptcy; and that the deduction did not consist of a valid and subsisting debt considering that, under the
management contract, petitioner was to be paid fifty percent (50%) of the projects net profit.[10]

Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment, as follows:

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby DENIED for lack of merit. The
assessment in question, viz: FAS-1-82-88-003067 for deficiency income tax in the amount of P62,811,161.39 is
hereby AFFIRMED.

ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY respondent Commissioner of
Internal Revenue the amount of P62,811,161.39, plus, 20% delinquency interest due computed from February 10,
1995, which is the date after the 20-day grace period given by the respondent within which petitioner has to pay the
deficiency amount x x x up to actual date of payment.

SO ORDERED.[11]

The CTA rejected petitioners assertion that the advances it made for the Sto. Nino mine were in the nature of a loan.
It instead characterized the advances as petitioners investment in a partnership with Baguio Gold for the
development and exploitation of the Sto. Nino mine. The CTA held that the Power of Attorney executed by
petitioner and Baguio Gold was actually a partnership agreement. Since the advanced amount partook of the nature
of an investment, it could not be deducted as a bad debt from petitioners gross income.

The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of Baguio Gold could
not be allowed as a bad debt deduction. At the time the payments were made, Baguio Gold was not in default since
its loans were not yet due and demandable. What petitioner did was to pre-pay the loans as evidenced by the notice
sent by Bank of America showing that it was merely demanding payment of the installment and interests due.
Moreover, Citibank imposed and collected a pre-termination penalty for the pre-payment.

The Court of Appeals affirmed the decision of the CTA.[12] Hence, upon denial of its motion for reconsideration,
[13]petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:

I.
The Court of Appeals erred in construing that the advances made by Philex in the management of the Sto. Nino
Mine pursuant to the Power of Attorney partook of the nature of an investment rather than a loan.

II.
The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the Sto. Nino Mine indicates that
Philex is a partner of Baguio Gold in the development of the Sto. Nino Mine notwithstanding the clear absence of
any intent on the part of Philex and Baguio Gold to form a partnership.

III.
The Court of Appeals erred in relying only on the Power of Attorney and in completely disregarding the
Compromise Agreement and the Amended Compromise Agreement when it construed the nature of the advances
made by Philex.

IV.
The Court of Appeals erred in refusing to delve upon the issue of the propriety of the bad debts write-off.[14]

Petitioner insists that in determining the nature of its business relationship with Baguio Gold, we should not only
rely on the Power of Attorney, but also on the subsequent Compromise with Dation in Payment and Amended
Compromise with Dation in Payment that the parties executed in 1982. These documents, allegedly evinced the
parties intent to treat the advances and payments as a loan and establish a creditor-debtor relationship between them.

The petition lacks merit.

The lower courts correctly held that the Power of Attorney is the instrument that is material in determining the true
nature of the business relationship between petitioner and Baguio Gold. Before resort may be had to the two
compromise agreements, the parties contractual intent must first be discovered from the expressed language of the
primary contract under which the parties business relations were founded. It should be noted that the compromise
agreements were mere collateral documents executed by the parties pursuant to the termination of their business
relationship created under the Power of Attorney. On the other hand, it is the latter which established the juridical
relation of the parties and defined the parameters of their dealings with one another.

The execution of the two compromise agreements can hardly be considered as a subsequent or contemporaneous act
that is reflective of the parties true intent. The compromise agreements were executed eleven years after the Power
of Attorney and merely laid out a plan or procedure by which petitioner could recover the advances and payments it
made under the Power of Attorney. The parties entered into the compromise agreements as a consequence of the
dissolution of their business relationship. It did not define that relationship or indicate its real character.

An examination of the Power of Attorney reveals that a partnership or joint venture was indeed intended by the
parties. Under a contract of partnership, two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves.[15] While a corporation,
like petitioner, cannot generally enter into a contract of partnership unless authorized by law or its charter, it has
been held that it may enter into a joint venture which is akin to a particular partnership:

The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been
generally understood to mean an organization formed for some temporary purpose. x x x It is in fact hardly
distinguishable from the partnership, since their elements are similar community of interest in the business, sharing
of profits and losses, and a mutual right of control. x x x The main distinction cited by most opinions in common
law jurisdictions is that the partnership contemplates a general business with some degree of continuity, while the
joint venture is formed for the execution of a single transaction, and is thus of a temporary nature. x x x This
observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or
universal, and a particular partnership may have for its object a specific undertaking. x x x It would seem therefore
that under Philippine law, a joint venture is a form of partnership and should be governed by the law of partnerships.
The Supreme Court has however recognized a distinction between these two business forms, and has held that
although a corporation cannot enter into a partnership contract, it may however engage in a joint venture with others.
x x x (Citations omitted) [16]

Perusal of the agreement denominated as the Power of Attorney indicates that the parties had intended to create a
partnership and establish a common fund for the purpose. They also had a joint interest in the profits of the business
as shown by a 50-50 sharing in the income of the mine.

Under the Power of Attorney, petitioner and Baguio Gold undertook to contribute money, property and industry to
the common fund known as the Sto. Nio mine.[17] In this regard, we note that there is a substantive equivalence in
the respective contributions of the parties to the development and operation of the mine. Pursuant to paragraphs 4
and 5 of the agreement, petitioner and Baguio Gold were to contribute equally to the joint venture assets under their
respective accounts. Baguio Gold would contributeP11M under its owners account plus any of its income that is left
in the project, in addition to its actual mining claim. Meanwhile, petitioners contribution would consist of its
expertise in the management and operation of mines, as well as the managers account which is comprised of P11M
in funds and property and petitioners compensation as manager that cannot be paid in cash.

However, petitioner asserts that it could not have entered into a partnership agreement with Baguio Gold because it
did not bind itself to contribute money or property to the project; that under paragraph 5 of the agreement, it was
only optional for petitioner to transfer funds or property to the Sto. Nio project (w)henever the MANAGERS shall
deem it necessary and convenient in connection with the MANAGEMENT of the STO. NIO MINE.[18]

The wording of the parties agreement as to petitioners contribution to the common fund does not detract from the
fact that petitioner transferred its funds and property to the project as specified in paragraph 5, thus rendering
effective the other stipulations of the contract, particularly paragraph 5(c) which prohibits petitioner from
withdrawing the advances until termination of the parties business relations. As can be seen, petitioner became
bound by its contributions once the transfers were made. The contributions acquired an obligatory nature as soon as
petitioner had chosen to exercise its option under paragraph 5.

There is no merit to petitioners claim that the prohibition in paragraph 5(c) against withdrawal of advances should
not be taken as an indication that it had entered into a partnership with Baguio Gold; that the stipulation only
showed that what the parties entered into was actually a contract of agency coupled with an interest which is not
revocable at will and not a partnership.

In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the principal due to an
interest of a third party that depends upon it, or the mutual interest of both principal and agent.[19] In this case, the
non-revocation or non-withdrawal under paragraph 5(c) applies to the advances made by petitioner who is
supposedly the agent and not the principal under the contract. Thus, it cannot be inferred from the stipulation that the
parties relation under the agreement is one of agency coupled with an interest and not a partnership.

Neither can paragraph 16 of the agreement be taken as an indication that the relationship of the parties was one of
agency and not a partnership. Although the said provision states that this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS account, it

does not necessarily follow that the parties entered into an agency contract coupled with an interest that cannot be
withdrawn by Baguio Gold.

It should be stressed that the main object of the Power of Attorney was not to confer a power in favor of petitioner to
contract with third persons on behalf of Baguio Gold but to create a business relationship between petitioner and
Baguio Gold, in which the former was to manage and operate the latters mine through the parties mutual
contribution of material resources and industry. The essence of an agency, even one that is coupled with interest, is
the agents ability to represent his principal and bring about business relations between the latter and third persons.
[20] Where representation for and in behalf of the principal is merely incidental or necessary for the proper
discharge of ones paramount undertaking under a contract, the latter may not necessarily be a contract of agency, but
some other agreement depending on the ultimate undertaking of the parties.[21]

In this case, the totality of the circumstances and the stipulations in the parties agreement indubitably lead to the
conclusion that a partnership was formed between petitioner and Baguio Gold.

First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made by petitioner
under the agreement. Paragraph 5 (d) thereof provides that upon termination of the parties business relations, the
ratio which the MANAGERS account has to the owners account will be determined, and the corresponding
proportion of the entire assets of the STO. NINO MINE, excluding the claims shall be transferred to petitioner.[22]
As pointed out by the Court of Tax Appeals, petitioner was merely entitled to a proportionate return of the mines
assets upon dissolution of the parties business relations. There was nothing in the agreement that would require
Baguio Gold to make payments of the advances to petitioner as would be recognized as an item of obligation or
accounts payable for Baguio Gold.

Thus, the tax court correctly concluded that the agreement provided for a distribution of assets of the Sto. Nio mine
upon termination, a provision that is more consistent with a partnership than a creditor-debtor relationship. It should
be pointed out that in a contract of loan, a person who receives a loan or money or any fungible thing acquires
ownership thereof and is bound to pay the creditor an equal amount of the same kind and quality.[23] In this case,
however, there was no stipulation for Baguio Gold to actually repay petitioner the cash and property that it had
advanced, but only the return of an amount pegged at a ratio which the managers account had to the owners account.

In this connection, we find no contractual basis for the execution of the two compromise agreements in which
Baguio Gold recognized a debt in favor of petitioner, which supposedly arose from the termination of their business
relations over the Sto. Nino mine. The Power of Attorney clearly provides that petitioner would only be entitled to
the return of a proportionate share of the mine assets to be computed at a ratio that the managers account had to the
owners account. Except to provide a basis for claiming the advances as a bad debt deduction, there is no reason for
Baguio Gold to hold itself liable to petitioner under the compromise agreements, for any amount over and above the
proportion agreed upon in the Power of Attorney.

Next, the tax court correctly observed that it was unlikely for a business corporation to lend hundreds of millions of
pesos to another corporation with neither security, or collateral, nor a specific deed evidencing the terms and
conditions of such loans. The parties also did not provide a specific maturity date for the advances to become due
and demandable, and the manner of payment was unclear. All these point to the inevitable conclusion that the
advances were not loans but capital contributions to a partnership.

The strongest indication that petitioner was a partner in the Sto Nio mine is the fact that it would receive 50% of the
net profits as compensation under paragraph 12 of the agreement. The entirety of the parties contractual stipulations
simply leads to no other conclusion than that petitioners compensation is actually its share in the income of the joint
venture.

Article 1769 (4) of the Civil Code explicitly provides that the receipt by a person of a share in the profits of a
business isprima facie evidence that he is a partner in the business. Petitioner asserts, however, that no such
inference can be drawn against it since its share in the profits of the Sto Nio project was in the nature of
compensation or wages of an employee, under the exception provided in Article 1769 (4) (b).[24]

On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold who will be paid
wages pursuant to an employer-employee relationship. To begin with, petitioner was the manager of the project and
had put substantial sums into the venture in order to ensure its viability and profitability. By pegging its
compensation to profits, petitioner also stood not to be remunerated in case the mine had no income. It is hard to
believe that petitioner would take the risk of not being paid at all for its services, if it were truly just an ordinary
employee.

Consequently, we find that petitioners compensation under paragraph 12 of the agreement actually constitutes its
share in the net profits of the partnership. Indeed, petitioner would not be entitled to an equal share in the income of
the mine if it were just an employee of Baguio Gold.[25] It is not surprising that petitioner was to receive a 50%
share in the net profits, considering that the Power of Attorney also provided for an almost equal contribution of the
parties to the St. Nino mine. The compensation agreed upon only serves to reinforce the notion that the parties
relations were indeed of partners and not employer-employee.

All told, the lower courts did not err in treating petitioners advances as investments in a partnership known as the
Sto. Nino mine. The advances were not debts of Baguio Gold to petitioner inasmuch as the latter was under no
unconditional obligation to return the same to the former under the Power of Attorney. As for the amounts that
petitioner paid as guarantor to Baguio Golds creditors, we find no reason to depart from the tax courts factual
finding that Baguio Golds debts were not yet due and demandable at the time that petitioner paid the same. Verily,
petitioner pre-paid Baguio Golds outstanding loans to its bank creditors and this conclusion is supported by the
evidence on record.[26]

In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income. Deductions for income
tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who must prove

by convincing evidence that he is entitled to the deduction claimed.[27] In this case, petitioner failed to substantiate
its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross income.
Consequently, it could not claim the advances as a valid bad debt deduction.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP No. 49385 dated June
30, 2000, which affirmed the decision of the Court of Tax Appeals in C.T.A. Case No. 5200 is AFFIRMED.
Petitioner Philex Mining Corporation is ORDERED to PAY the deficiency tax on its 1982 income in the amount of
P62,811,161.31, with 20% delinquency interest computed from February 10, 1995, which is the due date given for
the payment of the deficiency income tax, up to the actual date of payment.

SO ORDERED.

REPUBLIC OF THE PHILIPPINES,

Petitioner,

- versus -

SANDIGANBAYAN (FIRST DIVISION), EDUARDO M. COJUANGCO, JR., AGRICULTURAL

CONSULTANCY SERVICES, INC., ARCHIPELAGO REALTY CORP., BALETE RANCH, INC., BLACK
STALLION RANCH, INC., CHRISTENSEN PLANTATION COMPANY, DISCOVERY REALTY CORP.,
DREAM PASTURES, INC., ECHO RANCH, INC., FAR EAST RANCH, INC., FILSOV SHIPPING COMPANY,
INC., FIRST UNITED TRANSPORT, INC., HABAGAT REALTY DEVELOPMENT, INC., KALAWAKAN
RESORTS, INC., KAUNLARAN AGRICULTURAL CORP., LABAYUG AIR TERMINALS, INC., LANDAIR
INTERNATIONAL MARKETING CORP., LHL CATTLE CORP., LUCENA OIL FACTORY, INC., MEADOW
LARK PLANTATIONS, INC., METROPLEX COMMODITIES, INC., MISTY MOUNTAIN AGRICULTURAL
CORP., NORTHEAST CONTRACT TRADERS, INC., NORTHERN CARRIERS CORP., OCEANSIDE
MARITIME ENTERPRISES, INC., ORO VERDE SERVICES, INC., PASTORAL FARMS, INC., PCY OIL
MANUFACTURING CORP., PHILIPPINE TECHNOLOGIES, INC., PRIMAVERA FARMS, INC., PUNONGBAYAN HOUSING DEVELOPMENT CORP., PURA ELECTRIC COMPANY, INC., RADIO AUDIENCE
DEVELOPERS INTEGRATED ORGANIZATION, INC., RADYO PILIPINO CORP., RANCHO GRANDE, INC.,
REDDEE DEVELOPERS, INC., SAN ESTEBAN DEVELOPMENT CORP., SILVER LEAF PLANTATIONS,
INC., SOUTHERN SERVICE TRADERS, INC., SOUTHERN STAR CATTLE CORP., SPADE ONE RESORTS
CORP., UNEXPLORED LAND DEVELOPERS, INC., VERDANT PLANTATIONS, INC., VESTA
AGRICULTURAL CORP. AND WINGS RESORTS CORP.,
Respondents.

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

REPUBLIC OF THE PHILIPPINES,

Petitioner,

- versus -

SANDIGANBAYAN (FIRST DIVISION), EDUARDO M. COJUANGCO, JR., MEADOW LARK

PLANTATIONS, INC., SILVER LEAF PLANTATIONS, INC., PRIMAVERA FARMS, INC., PASTORAL
FARMS, INC., BLACK STALLION RANCH, INC., MISTY MOUNTAINS AGRICULTURAL CORP.,
ARCHIPELAGO REALTY CORP., AGRICULTURAL CONSULTANCY SERVICES, INC., SOUTHERN STAR
CATTLE CORP., LHL CATTLE CORP., RANCHO GRANDE, INC., DREAM PASTURES, INC., FAR EAST
RANCH, INC., ECHO RANCH, INC., LAND AIR INTERNATIONAL MARKETING CORP., REDDEE
DEVELOPERS, INC., PCY OIL MANUFACTURING CORP., LUCENA OIL FACTORY, INC., METROPLEX
COMMODITIES, INC., VESTA AGRICULTURAL CORP., VERDANT PLANTATIONS, INC., KAUNLARAN
AGRICULTURAL CORP., ECJ & SONS AGRICULTURAL ENTERPRISES, INC., RADYO PILIPINO CORP.,
DISCOVERY REALTY CORP., FIRST UNITED TRANSPORT, INC., RADIO AUDIENCE DEVELOPERS
INTEGRATED ORGANIZATION, INC., ARCHIPELAGO FINANCE AND LEASING CORP., SAN ESTEBAN
DEVELOPMENT CORP., CHRISTENSEN PLANTATION COMPANY, NORTHERN CARRIERS CORP.,
VENTURE SECURITIES, INC., BALETE RANCH, INC., ORO VERDE SERVICES, INC., and KALAWAKAN
RESORTS, INC.,
Respondents.

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

REPUBLIC OF THE PHILIPPINES,

Petitioner,

- versus -

EDUARDO M. COJUANGCO, JR., FERDINAND E. MARCOS, IMELDA R. MARCOS, EDGARDO J.

ANGARA,* JOSE C. CONCEPCION, AVELINO V. CRUZ, EDUARDO U. ESCUETA, PARAJA G. HAYUDINI,
JUAN PONCE ENRILE, TEODORO D. REGALA, DANILO URSUA, ROGELIO A. VINLUAN,
AGRICULTURAL CONSULTANCY SERVICES, INC., ANGLO VENTURES, INC., ARCHIPELAGO REALTY
CORP., AP HOLDINGS, INC., ARC INVESTMENT, INC., ASC INVESTMENT, INC., AUTONOMOUS
DEVELOPMENT CORP., BALETE RANCH, INC., BLACK STALLION RANCH, INC., CAGAYAN DE ORO
OIL COMPANY, INC., CHRISTENSEN PLANTATION COMPANY, COCOA INVESTORS, INC., DAVAO
AGRICULTURAL AVIATION, INC., DISCOVERY REALTY CORP., DREAM PASTURES, INC., ECHO
RANCH, INC., ECJ & SONS AGRI. ENT., INC., FAR EAST RANCH, INC., FILSOV SHIPPING COMPANY,
INC., FIRST MERIDIAN DEVELOPMENT, INC., FIRST UNITED TRANSPORT, INC., GRANEXPORT
MANUFACTURING CORP., HABAGAT REALTY DEVELOPMENT, INC., HYCO AGRICULTURAL, INC.,
ILIGAN COCONUT INDUSTRIES, INC., KALAWAKAN RESORTS, INC., KAUNLARAN AGRICULTURAL
CORP., LABAYOG AIR TERMINALS, INC., LANDAIR INTERNATIONAL MARKETING CORP., LEGASPI
OIL COMPANY, LHL CATTLE CORP., LUCENA OIL FACTORY, INC., MEADOW LARK PLANTATIONS,
INC., METROPLEX COMMODITIES, INC., MISTY MOUNTAIN AGRICULTURAL CORP., NORTHEAST
CONTRACT TRADERS, INC., NORTHERN CARRIERS CORP., OCEANSIDE MARITIME ENTERPRISES,
INC., ORO VERDE SERVICES, INC., PASTORAL FARMS, INC., PCY OIL MANUFACTURING CORP.,
PHILIPPINE RADIO CORP., INC., PHILIPPINE TECHNOLOGIES, INC., PRIMAVERA FARMS, INC.,
PUNONG-BAYAN HOUSING DEVELOPMENT CORP., PURA ELECTRIC COMPANY, INC., RADIO
AUDIENCE DEVELOPERS INTEGRATED ORGANIZATION, INC., RADYO PILIPINO CORP., RANCHO
GRANDE, INC., RANDY ALLIED VENTURES, INC., REDDEE DEVELOPERS, INC., ROCKSTEEL
RESOURCES, INC., ROXAS SHARES, INC., SAN ESTEBAN DEVELOPMENT CORP., SAN MIGUEL
CORPORATION OFFICERS, INC., SAN PABLO MANUFACTURING CORP., SOUTHERN LUZON OIL
MILLS, INC., SILVER LEAF PLANTATIONS, INC., SORIANO SHARES, INC., SOUTHERN SERVICE
TRADERS, INC., SOUTHERN STAR CATTLE CORP., SPADE 1 RESORTS CORP., TAGUM AGRICULTURAL
DEVELOPMENT CORP., TEDEUM RESOURCES, INC., THILAGRO EDIBLE OIL MILLS, INC., TODA
HOLDINGS, INC., UNEXPLORED LAND DEVELOPERS, INC., VALHALLA PROPERTIES, INC.,
VENTURES SECURITIES, INC., VERDANT PLANTATIONS, INC., VESTA AGRICULTURAL CORP. and
WINGS RESORTS CORP.,
Respondents.

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

JOVITO R. SALONGA, WIGBERTO E. TAADA, OSCAR F. SANTOS, VIRGILIO M. DAVID, ROMEO C.

ROYANDAYAN for himself and for SURIGAO DEL SUR FEDERATION OF AGRICULTURAL
COOPERATIVES (SUFAC), MORO FARMERS ASSOCIATION OF ZAMBOANGA DEL SUR (MOFAZS) and
COCONUT FARMERS OF SOUTHERN LEYTE COOPERATIVE (COFA-SL); PHILIPPINE RURAL
RECONSTRUCTION MOVEMENT (PRRM), represented by CONRADO S. NAVARRO; COCONUT
INDUSTRY REFORM MOVEMENT, INC. (COIR) represented by JOSE MARIE T. FAUSTINO; VICENTE
FABE for himself and for PAMBANSANG KILUSAN NG MGA SAMAHAN NG MAGSASAKA (PAKISAMA);
NONITO CLEMENTE for himself and for the NAGKAKAISANG UGNAYAN NG MGA MALILIIT NA
MAGSASAKA AT MANGGAGAWA SA NIYUGAN (NIUGAN); DIONELO M. SUANTE, SR. for himself and
for KALIPUNAN NG MALILIIT NA MAGNINIYOG NG PILIPINAS (KAMMPIL), INC.,

Petitioners-Intervenors.

DECISION

BERSAMIN, J.:

For over two decades, the issue of whether the sequestered sizable block of shares representing 20% of the
outstanding capital stock of San Miguel Corporation (SMC) at the time of acquisition belonged to their registered
owners or to the coconut farmers has remained unresolved. Through this decision, the Court aims to finally resolve
the issue and terminate the uncertainty that has plagued that sizable block of shares since then.
These consolidated cases were initiated on various dates by the Republic of the Philippines (Republic) via petitions
forcertiorari in G.R. Nos. 166859[1] and 169023,[2] and via petition for review on certiorari in 180702,[3] the first
two petitions being brought to assail the following resolutions issued in Civil Case No. 0033-F by the
Sandiganbayan, and the third being brought to appeal the adverse decision promulgated on November 28, 2007 in
Civil Case No. 0033-F by the Sandiganbayan.

Specifically, the petitions and their particular reliefs are as follows:

(a) G.R. No. 166859 (petition for certiorari), to assail the resolution promulgated on December 10, 2004[4]
denying the Republics Motion For Partial Summary Judgment;

(b) G.R. No. 169023 (petition for certiorari), to nullify and set aside, firstly, the resolution promulgated on October
8, 2003,[5] and, secondly, the resolution promulgated on June 24, 2005[6] modifying the resolution of October 8,
2003; and

(c) G.R. No. 180702 (petition for review on certiorari), to appeal the decision promulgated on November 28,
2007.[7]

ANTECEDENTS

On July 31, 1987, the Republic commenced Civil Case No. 0033 in the Sandiganbayan by complaint, impleading as
defendants respondent Eduardo M. Cojuangco, Jr. (Cojuangco) and 59 individual defendants. On October 2, 1987,
the Republic amended the complaint in Civil Case No. 0033 to include two additional individual defendants. On
December 8, 1987, the Republic further amended the complaint through its Amended Complaint [Expanded per
Court-Approved Plaintiffs Manifestation/Motion Dated Dec. 8, 1987] albeit dated October 2, 1987.

More than three years later, on August 23, 1991, the Republic once more amended the complaint apparently to avert
the nullification of the writs of sequestration issued against properties of Cojuangco. The amended complaint dated
August 19, 1991, designated asThird Amended Complaint [Expanded Per Court-Approved Plaintiffs
Manifestation/Motion Dated Dec. 8, 1987],[8] impleaded in addition to Cojuangco, President Marcos, and First
Lady Imelda R. Marcos nine other individuals, namely: Edgardo J. Angara, Jose C. Concepcion, Avelino V. Cruz,
Eduardo U. Escueta, Paraja G. Hayudini, Juan Ponce Enrile, Teodoro D. Regala, and Rogelio Vinluan, collectively,
the ACCRA lawyers, and Danilo Ursua, and 71 corporations.

On March 24, 1999, the Sandiganbayan allowed the subdivision of the complaint in Civil Case No. 0033 into eight
complaints, each pertaining to distinct transactions and properties and impleading as defendants only the parties
alleged to have participated in the relevant transactions or to have owned the specific properties involved. The
subdivision resulted into the following subdivided complaints, to wit:

Subdivided Complaint Subject Matter

1.
Civil Case No. 0033-A
Planters Bank)

Anomalous Purchase and Use of First United Bank (now United Coconut

2.

Creation of Companies Out of Coco Levy Funds

Civil Case No. 0033-B

3.
Civil Case No. 0033-C
to Agricultural Investors, Inc.

Creation and Operation of Bugsuk Project and Award of P998 Million Damages

4.
Civil Case No. 0033-D
Coco Levy Funds

Disadvantageous Purchases and Settlement of the Accounts of Oil Mills Out of

5.
Civil Case No. 0033-E

Unlawful Disbursement and Dissipation of CocoLevy Funds

6.

Civil Case No. 0033-F

Acquisition of SMC shares of stock

7.

Civil Case No. 0033-G

Acquisition of Pepsi-Cola

8.

Civil Case No. 0033-H

Behest Loans and Contracts

In Civil Case No. 0033-F, the individual defendants were Cojuangco, President Marcos and First Lady Imelda R.
Marcos, theACCRA lawyers, and Ursua. Impleaded as corporate defendants were Southern Luzon Oil Mills,
Cagayan de Oro Oil Company, Incorporated, Iligan Coconut Industries, Incorporated, San Pablo Manufacturing
Corporation, Granexport Manufacturing Corporation, Legaspi Oil Company, Incorporated, collectively referred to
herein as the CIIF Oil Mills, and their 14 holding companies, namely: Soriano Shares, Incorporated, Roxas Shares,
Incorporated, Arc Investments, Incorporated, Toda Holdings, Incorporated, ASC Investments, Incorporated, Randy
Allied Ventures, Incorporated, AP Holdings, Incorporated, San Miguel Corporation Officers, Incorporated, Te Deum
Resources, Incorporated, Anglo Ventures, Incorporated, Rock Steel Resources, Incorporated, Valhalla Properties,
Incorporated, and First Meridian Development, Incorporated.

Allegedly, Cojuangco purchased a block of 33,000,000 shares of SMC stock through the 14 holding companies
owned by the CIIF Oil Mills. For this reason, the block of 33,133,266 shares of SMC stock shall be referred to as the
CIIF block of shares.

Also impleaded as defendants in Civil Case No. 0033-F were several corporations[9] alleged to have been under
Cojuangcos control and used by him to acquire the block of shares of SMC stock totaling 16,276,879 at the time of
acquisition (representing approximately 20% percent of the capital stock of SMC). These corporations are referred
to as Cojuangco corporations or companies, to distinguish them from the CIIF Oil Mills. Reference hereafter to
Cojuangco and the Cojuangco corporations or companies shall be as Cojuangco, et al., unless the context requires
individualization.

The material averments of the Republics Third Amended Complaint (Subdivided)[10] in Civil Case No. 0033-F
included the following:

12. Defendant Eduardo Cojuangco, Jr., served as a public officer during the Marcos administration. During the
period of his incumbency as a public officer, he acquired assets, funds, and other property grossly and manifestly
disproportionate to his salaries, lawful income and income from legitimately acquired property.

13. Having fully established himself as the undisputed coconut king with unlimited powers to deal with the coconut
levy funds, the stage was now set for Defendant Eduardo M. Cojuangco, Jr. to launch his predatory forays into
almost all aspects of Philippine economic activity namely: softdrinks, agribusiness, oil mills, shipping, cement
manufacturing, textile, as more fully described below.

14. Defendant Eduardo Cojuangco, Jr. taking undue advantage of his association, influence and connection, acting in
unlawful concert with Defendants Ferdinand E. Marcos and Imelda R. Marcos, and the individual defendants,
embarked upon devices, schemes and stratagems, including the use of defendant corporations as fronts, to unjustly
enrich themselves at the expense of Plaintiff and the Filipino people, such as when he misused coconut levy funds to
buy out majority of the outstanding shares of stock of San Miguel Corporation in order to control the largest agribusiness, foods and beverage company in the Philippines, more particularly described as follows:
(a) Having control over the coconut levy, Defendant Eduardo M. Cojuangco invested the funds in diverse activities,
such as the various businesses SMC was engaged in (e.g. large beer, food, packaging, and livestock);

(b) He entered SMC in early 1983 when he bought most of the 20 million shares Enrique Zobel owned in the
Company. The shares, worth $49 million, represented 20% of SMC;

(c) Later that year, Cojuangco also acquired the Soriano stocks through a series of complicated and secret
agreements, a key feature of which was a voting trust agreement that stipulated that Andres, Jr. or his heir would
proxy over the vote of the shares owned by Soriano and Cojuangco. This agreement, which accounted for 30% of
the outstanding shares of SMC and which lasted for five (5) years, enabled the Sorianos to retain management
control of SMC for the same period;

(d) Furthermore, in exchange for an SMC investment of $45 million in non-voting preferred shares in UCPB,
Soriano served as the vice-chairman of the supposed bank of the coconut farmers, UCPB, and in return, Cojuangco,
for investing funds from the coconut levy, was named vice-chairman of SMC;

(e) Consequently, Cojuangco enjoyed the privilege of appointing his nominees to the SMC Board, to which he
appointed key members of the ACCRA Law Firm (herein Defendants) instead of coconut farmers whose money
really funded the sale;

(f) The scheme of Cojuangco to use the lawyers of the said Firm was revealed in a document which he signed on 19
February 1983entitled Principles and Framework of Mutual Cooperation and Assistance which governed the rules
for the conduct of management of SMC and the disposition of the shares which he bought.

(g) All together, Cojuangco purchased 33 million shares of the SMC through the following 14 holding companies:

a) Soriano Shares, Inc. 1,249,163

b) ASC Investors, Inc. 1,562,449
c) Roxas Shares, Inc. 2,190,860
d) ARC Investors, Inc. 4,431,798
e) Toda Holdings, Inc. 3,424,618
f) AP Holdings, Inc. 1,580,997
g) Fernandez Holdings, Inc. 838,837
h) SMC Officers Corps., Inc. 2,385,987
i) Te Deum Resources, Inc. 2,674,899
j) Anglo Ventures Corp. 1,000.000
k) Randy Allied Ventures, Inc. 1,000,000
l) Rock Steel Resources, Inc. 2,432,625
m) Valhalla Properties Ltd., Inc. 1,361,033
n) First Meridian Development, Inc. 1,000,000
___________
33,133,266

3.1. The same fourteen companies were in turn owned by the following six (6) so-called CIIF Companies which
were:

a) San Pablo Manufacturing Corp. 19%

b) Southern Luzon Coconut Oil Mills, Inc. 11%
c) Granexport Manufacturing Corporation 19%
d) Legaspi Oil Company, Inc. 18%
e) Cagayan de Oro Oil Company, Inc. 18%
f) Iligan Coconut Industries, Inc. 15%
_____
100%

(h) Defendant Corporations are but shell corporations owned by interlocking shareholders who have previously
admitted that they are just nominee stockholders who do not have any proprietary interest over the shares in their
names. The respective affidavits of the following, namely: Jose C. Concepcion, Florentino M. Herrera III, Teresita J.
Herbosa, Teodoro D. Regala, Victoria C. de los Reyes, Manuel R. Roxas, Rogelio A. Vinluan, Eduardo U. Escuete
and Franklin M. Drilon, who were all, at the time they became such stockholders, lawyers of the Angara Abello
Concepcion Regala & Cruz (ACCRA) Law Offices, the previous counsel who incorporated said corporations, prove
that they were merely nominee stockholders thereof.

(i) Mr. Eduardo M. Cojuangco, Jr., acquired a total of 16,276,879 shares of San Miguel Corporation from the Ayala
group: of said shares, a total of 8,138,440 (broken into 7,128,227 Class A and 1,010,213 Class B shares) were placed
in the names of Meadowlark Plantations, Inc. (2,034,610) and Primavera Farms, Inc. (4,069,220). The Articles of
Incorporation of these three companies show that Atty. Jose C. Concepcion of ACCRA owns 99.6% of the entire
outstanding stock. The same shareholder executed three (3) separate Declaration of Trust and Assignment of
Subscription: in favor of a BLANK assignee pertaining to his shareholdings in Primavera Farms, Inc., Silver Leaf
Plantations, Inc. and Meadowlark Plantations, Inc.

(k) The other respondent Corporations are owned by interlocking shareholders who are likewise lawyers in the
ACCRA Law Offices and had admitted their status as nominee stockholders only.

(k-1) The corporations: Agricultural Consultancy Services, Inc., Archipelago Realty Corporation, Balete Ranch, Inc.,
Black Stallion Ranch, Inc., Discovery Realty Corporation, First United Transport, Inc., Kaunlaran Agricultural
Corporation, LandAir International Marketing Corporation, Misty Mountains Agricultural Corporation, Pastoral
Farms, Inc., Oro Verde Services, Inc. Radyo Filipino Corporation, Reddee Developers, Inc., Verdant Plantations,
Inc. and Vesta Agricultural Corporation, were incorporated by lawyers of ACCRA Law Offices.

(k-2) With respect to PCY Oil Manufacturing Corporation and Metroplex Commodities, Inc., they are controlled
respectively by HYCO, Inc. and Ventures Securities, Inc., both of which were incorporated likewise by lawyers of
ACCRALaw Offices.

(k-3) The stockholders who appear as incorporators in most of the other Respondents corporations are also lawyers
of theACCRA Law Offices, who as early as 1987 had admitted under oath that they were acting only as nominee
stockholders.

(l) These companies, which ACCRA Law Offices organized for Defendant Cojuangco to be able to control more
than 60% of SMC shares, were funded by institutions which depended upon the coconut levy such as the UCPB,
UNICOM, United Coconut Planters Assurance Corp. (COCOLIFE), among others. Cojuangco and his ACCRA
lawyers used the funds from 6 large coconut oil mills and 10 copra trading companies to borrow money from the

UCPB and purchase these holding companies and the SMC stocks. Cojuangco used $150 million from the coconut
levy, broken down as follows:

Amount Source Purpose

(in million)
$22.26 Oil Mills equity in holding
companies

$65.6 Oil Mills loan to holding

companies

$61.2 UCPB loan to holding

companies [164]

The entire amount, therefore, came from the coconut levy, some passing through the Unicom Oil mills, others
directly from the UCPB.

(m) With his entry into the said Company, it began to get favors from the Marcos government, significantly the
lowering of the excise taxes (sales and specific taxes) on beer, one of the main products of SMC.

(n) Defendant Cojuangco controlled SMC from 1983 until his co-defendant Marcos was deposed in 1986.

(o) Along with Cojuangco, Defendant Enrile and ACCRA also had interests in SMC, broken down as follows:
% of SMC Owner
Cojuangco

31.3% coconut levy money

18% companies linked to Cojuangco

5.2% government

5.2% SMC employee retirement fund

Enrile & ACCRA

1.8% Enrile
1.8% Jaka Investment Corporation

1.8% ACCRA Investment Corporation

15. Defendants Eduardo Cojuangco, Jr., Edgardo J. Angara, Jose C. Concepcion, Teodoro Regala, Avelino Cruz,
Rogelio Vinluan, Eduardo U. Escueta and Paraja G. Hayudini of the Angara Concepcion Cruz Regala and Abello
law offices (ACCRA) plotted, devised, schemed, conspired and confederated with each other in setting up, through
the use of coconut levy funds, the financial and corporate framework and structures that led to the establishment of
UCPB, UNICOM, COCOLIFE, COCOMARK. CIC, and more than twenty other coconut levy-funded corporations,
including the acquisition of San Miguel Corporation shares and its institutionalization through presidential directives
of the coconut monopoly. Through insidious means and machinations, ACCRA, being the wholly-owned investment
arm, ACCRA Investments Corporation, became the holder of approximately fifteen million shares representing
roughly 3.3% of the total outstanding capital stock of UCPB as of 31 March 1987. This ranks ACCRA Investments
Corporation number 44 among the top 100 biggest stockholders of UCPB which has approximately 1,400,000
shareholders. On the other hand, the corporate books show the name Edgardo J. Angara as holding approximately
3,744 shares as of February, 1984.

16. The acts of Defendants, singly or collectively, and/or in unlawful concert with one another, constitute gross
abuse of official position and authority, flagrant breach of public trust and fiduciary obligations, brazen abuse of
right and power, unjust enrichment, violation of the constitution and laws of the Republic of the Philippines, to the
grave and irreparable damage of Plaintiff and the Filipino people.[11]

On June 17, 1999, Ursua and Enrile each filed his separate Answer with Compulsory Counterclaims.

Before filing their answer, the ACCRA lawyers sought their exclusion as defendants in Civil Case No. 0033,
averring that even as they admitted having assisted in the organization and acquisition of the companies included in
Civil Case No. 0033, they had acted as mere nominees-stockholders of corporations involved in the sequestration
proceedings pursuant to office practice. After the Sandiganbayan denied their motion, they elevated their cause to
this Court, which ultimately ruled in their favor in the related cases ofRegala, et al. v. Sandiganbayan, et al.[12] and
Hayudini v. Sandiganbayan, et al.,[13] as follows:

WHEREFORE, IN VIEW OF THE FOREGOING, the Resolutions of respondent Sandiganbayan (First Division)
promulgated on March 18, 1992 and May 21, 1992 are hereby ANNULLED and SET ASIDE. Respondent
Sandiganbayan is further ordered to exclude petitioners Teodoro D. Regala, Edgardo J. Angara, Avelino V. Cruz,
Jose C. Concepcion, Victor P. Lazatin, Eduardo U. Escueta and Paraja G. Hayudini as parties-defendants in SB Civil
Case No. 0033 entitled Republic of the Philippines v. Eduardo Cojuangco, Jr., et al.

SO ORDERED.

Conformably with the ruling, the Sandiganbayan excluded the ACCRA lawyers from the case on May 24, 2000.[14]

On June 23, 1999, Cojuangco filed his Answer to the Third Amended Complaint,[15] averring the following
affirmative defenses, to wit:

7.00. The Presidential Commission on Good Government (PCGG) is without authority to act in the name and in
behalf of the Republic of thePhilippines.

7.01. As constituted in E.O. No. 1, the PCGG was composed of Minister Jovito R. Salonga, as Chairman, Mr.
Ramon Diaz, Mr. Pedro L. Yap, Mr. Raul Daza and Ms. Mary Concepcion Bautista, as Commissioners. When the
complaint in the instant case was filed, Minister Salonga, Mr. Pedro L. Yap and Mr. Raul Daza had already left the
PCGG. By then the PCGG had become functus officio.

7.02. The Sandiganbayan has no jurisdiction over the complaint or over the transaction alleged in the complaint.

7.03. The complaint does not allege any cause of action.

7.04. The complaint is not brought in the name of the real parties in interest, assuming any cause of action exists.

7.05. Indispensable and necessary parties have not been impleaded.

7.06. There is improper joinder of causes of action (Sec. 6, Rule 2, Rules of Civil Procedure). The causes of action
alleged, if any, do not arise out of the same contract, transaction or relation between the parties, nor are they simply
for money, or are of the same nature and character.

7.07. There is improper joinder of parties defendants (Sec. 11, Rule 3, Rules of Civil Procedure).The causes of
action alleged as to defendants, if any, do not involve a single transaction or a related series of transactions.
Defendant is thus compelled to litigate in a suit regarding matters as to which he has no involvement. The questions
of fact and law involved are not common to all defendants.

7.08. In so far as the complaint seeks the forfeiture of assets allegedly acquired by defendant manifestly out of
proportion to their salaries, to their other lawful income and income from legitimately acquired property, under R.A.
1379, the previous inquiry similar to preliminary investigation in criminal cases required to be conducted under Sec.
2 of that law before any suit for forfeiture may be instituted, was not conducted; as a consequence, the Court may
not acquire and exercise jurisdiction over such a suit.
7.09. The complaint in the instant suit was filed July 31, 1987, or within one year before the local election held on
January 18, 1988. If this suit involves an action under R.A. 1379, its institution was also in direct violation of Sec. 2,
R.A. No. 1379.

7.10. E.O. No. 1, E.O. No. 2, E.O. No. 14 and 14-A, are unconstitutional. They violate due process, equal protection,
ex post facto and bill of attainder provisions of the Constitution.

7.11. Acts imputed to defendant which he had committed were done pursuant to law and in good faith.

The Cojuangco corporations Answer[16] had the same tenor as the Answer of Cojuangco.

In his own Answer with Compulsory Counterclaims,[17] Ursua averred affirmative and special defenses.

In his own Answer with Compulsory Counterclaims,[18] Enrile specifically denied the material averments of the
Third Amended Complaint and asserted affirmative defenses.

The CIIF Oil Mills Answer[19] also contained affirmative defenses.

On December 20, 1999, the Sandiganbayan scheduled the pre-trial in Civil Case No. 0033-F on March 8, 2000,
giving the parties sufficient time to file their Pre-Trial Briefs prior to that date. Subsequently, the parties filed their
respective Pre-Trial Briefs, as follows: Cojuangco and the Cojuangco corporations, jointly on February 14, 2000;
Enrile, on March 1, 2000; the CIIF Oil Mills, onMarch 3, 2000; and Ursua, on March 6, 2000. However, the
Republic sought several extensions to file its own Pre-Trial Brief, and eventually did so on May 9, 2000.

In the meanwhile, some non-parties sought to intervene. On November 22, 1999, GABAY Foundation, Inc.
(GABAY) filed its complaint-in-intervention. On February 24, 2000, the Philippine Coconut Producers Federation,
Inc., Maria Clara L. Lobregat, Jose R. Eleazar, Jr., Domingo Espina, Jose Gomez, Celestino Sabate, Manuel del
Rosario, Jose Martinez, Jr., and Eladio Chato (collectively referred to as COCOFED, considering that the cointervenors were its officers) also sought to intervene, citing the October 2, 1989 ruling in G.R. No. 75713 entitled
COCOFED v. PCGG whereby the Court recognized COCOFED as the private national association of coconut
producers certified in 1971 by the PHILCOA as having the largest membership among such producers and as such
entrusted it with the task of maintaining continuing liaison with the different sectors of the industry, the government
and its mass base. Pending resolution of its motion for intervention, COCOFED filed a Pre-Trial Brief on March 2,
2000.

On May 24, 2000, the Sandiganbayan denied GABAYs intervention without prejudice because it found that the
allowance of GABAY to enter under the special character in which it presents itself would be to open the doors to
other groups of coconut farmers whether of the same kind or of any other kind which could be considered a subclass or a sub-classification of the coconut planters or the coconut industry of this country.[20]

COCOFEDs intervention as defendant was allowed on May 24, 2000, however, because the position taken by the
COCOFED is relevant to the proceedings herein, if only to state that there is a special function which the
COCOFED and the coconut planters have in the matter of the coconut levy funds and the utilization of those funds,
part of which is in dispute in the instant matter.[21]

The pre-trial was actually held on May 24, 2000,[22] during which the Sandiganbayan sought clarification from the
parties, particularly the Republic, on their respective positions, but at the end it found the clarifications inadequately
enlightening. Nonetheless, the Sandiganbayan, not disposed to reset, terminated the pre-trial:

xxx primarily because the Court is given a very clear impression that the plaintiff does not know what documents
will be or whether they are even available to prove the causes of action in the complaint. The Court has pursued and
has exerted every form of inquiry to see if there is a way by which the plaintiff could explain in any significant
particularity the acts and the evidence which will support its claim of wrong-doing by the defendants.The plaintiff
has failed to do so.[23]

The following material portions of the pre-trial order[24] are quoted to provide a proper perspective of what
transpired during the pre-trial, to wit:

Upon oral inquiry from the Court, the issues which were being raised by plaintiff appear to have been made on a
very generic character. Considering that any claim for violation or breach of trust or deception cannot be made on
generic statements but rather by specific acts which would demonstrate fraud or breach of trust or deception,
together with the evidence in support thereof, the same was not acceptable to the Court.

The plaintiff through its designated counsel for this morning, Atty. Dennis Taningco, has represented to this Court
that the annexes to its pre-trial brief, more particularly the findings of the COA in its various examinations, copies of
which COA reports are attached to the pre-trial brief, would demonstrate the wrong, the act or omission attributed to
the defendants or to several of them and the basis, therefore, for the relief that plaintiff seeks in its complaint. It
would appear, however, that the plaintiff through its counsel at this time is not prepared to go into the specifics of
the identification of these wrongs or omissions attributed to plaintiff.

The Court has reminded the plaintiff that a COA report proves itself only in proceedings where the issue arises from
a review of the accountability of particular officers and, therefore, to show the existence of shortages or deficiencies
in an examination conducted for that purpose, provided that such a report is accompanied by its own working papers
and other supporting documents.

In civil cases such as this, a COA report would not have the same independent probative value since it is not a
review of the accountability of public officers for public property in their custody as accountable officers. It has
been the stated view of this Court that a COA report, to be of significant evidence, may itself stand only on the basis
of the supporting documents that upon which it is based and upon an analysis made by those who are competent to
do so. The Court, therefore, sought a more specific statement from plaintiff as to what these documents were and
which of them would prove a particular act or omission or a series of acts or omissions purportedly committed by
any, by several or by all of the defendants in any particular stage of the chain of alleged wrong-doing in this case.

The plaintiff was not in a position to do so.

The Court has remonstrated with the plaintiff, insofar as its inadequacy is concerned, primarily because this case
was set for pre-trial as far back as December and has been reset from its original setting, with the undertaking by the
plaintiff to prepare itself for these proceedings. It appears to this Court at this time that the failure of the plaintiff to
have available responses and specific data and documents at this stage is not because the matter has been the product
of oversight or notes and papers left elsewhere; rather, the agitation of this Court arises from the fact that at this very
stage, the plaintiff through its counsel does not know what these documents are, where these documents will be and
is still anticipating a submission or a delivery thereof by COA at an undetermined time. The justification made by
counsel for this stance is that this is only pre-trial and this information and the documents are not needed yet.

The Court is not prepared to postpone the pre-trial anew primarily because the Court is given a very clear impression
that the plaintiff does not know what documents will be or whether they are even available to prove the causes of
action in the complaint. The Court has pursued and has exerted every form of inquiry to see if there is a way by
which the plaintiff could explain in any significant particularity the acts and the evidence which will support its
claim of wrong-doing by the defendants. The plaintiff has failed to do so.

Defendants Cojuangco have come back and reiterated their previous inquiry as to the statement of the cause of
action and the description thereof.While the Court acknowledges that logically, that statement along that line would
be primary, the Court also recognizes that sometimes the phrasing of the issue may be determined or may arise after
a statement of the evidence is determined by this Court because the Court can put itself in a position of more clearly
and perhaps more accurately stating what the issues are. The Pre-Trial Order, after all, is not so much a reflection of
merely separate submissions by all of the parties involved, witnesses by the Court, as to what the subject matter of
litigation will be, including the determination of what matters of fact remain unresolved. At this time, the plaintiff
has not taken the position on any factual statement or any piece of evidence which can be subject of admission or
denial, nor any specifics of any act which could be disputed by the defendants; what plaintiff through counsel has
stated are general conclusions, general statements of abuse and misuse and opportunism.

After an extended break requested by some of the parties, the sessions were resumed and nothing anew arose from
the plaintiff. The plaintiff sought fifteen (15) days to file a reply to the comments and observations made by
defendant Cojuangco to the pre-trial brief of the plaintiff. This Court denied this Request since the submissions in
preparation for pre-trial are not litigious or contentious matters. They are mere assertions or positions which may or
may not be meritorious depending upon the view of the Court of the entire case and if useful at the pre-trial. At this
stage, the plaintiff then reiterated its earlier request to consider the pre-trial terminated. The Court sought the
positions of the other parties, whether or not they too were prepared to submit their respective positions on the basis
of what was before the Court at pre-trial. All of the parties, in the end, have come to an agreement that they were
submitting their own respective positions for purpose of pre-trial on the basis of the submissions made of record.

With all of the above, the pre-trial is now deemed terminated.

This Order has been overly extended simply because there has been a need to put on record all of the events that
have taken place leading to the conclusions which were drawn herein.

The parties have indicated a desire to make their submissions outside of trial as a consequence of this terminated
pre-trial, with the plea that the transcript of the proceedings this morning be made available to them, so that they
may have the basis for whatever assertions they will have to make either before this Court or elsewhere. The Court
deems the same reasonable and the Court now gives the parties fifteen (15) days after notice to them that the
transcript of stenographic notes of the proceedings herein are complete and ready for them to be retrieved. Settings
for trial or for any other proceeding hereafter will be fixed by this Court either upon request of the parties or when
the Court itself shall have determined that nothing else has to be done.

The Court has sought confirmation from the parties present as to the accuracy of the recapitulation herein of the
proceedings this morning and the Court has gotten assent from all of the parties.

xxx

SO ORDERED.[25]
In the meanwhile, the Sandiganbayan, in order to conform with the ruling in Presidential Commission on Good
Government v. Cojuangco, et al.,[26] resolved COCOFEDs Omnibus Motion (with prayer for preliminary
injunction) relative to who should vote the UCPB shares under sequestration, holding as follows: [27]

In the light of all of the above, the Court submits itself to jurisprudence and with the statements of the Supreme
Court in G.R. No. 115352 entitledEnrique Cojuangco, Jr., et al. vs. Jaime Calpo, et al. dated January 27, 1997, as
well as the resolution of the Supreme Court promulgated on January 27, 1999 in the case of PCGG vs. Eduardo
Cojuangco, Jr., et al., G.R. No. 13319 which included the Sandiganbayan as one of the respondents. In these two
cases, the Supreme Court ruled that the voting of sequestered shares of stock is governed by two considerations,
namely:

1. whether there is prima facie evidence showing that the said shares are ill-gotten and thus belong to the State; and

2. whether there is an imminent danger of dissipation thus necessitating their continued sequestration and voting by
the PCGG while the main issue pends with the Sandiganbayan.

xxx xxx xxx.

In view hereof, the movants COCOFED, et al and Ballares, et al. as well as Eduardo Cojuangco, et al. who were
acknowledged to be registered stockholders of the UCPB are authorized, as are all other registered stockholders of
the United Coconut Planters Bank, until further orders from this Court, to exercise their rights to vote their shares of
stock and themselves to be voted upon in the United Coconut Planters Bank (UCPB) at the scheduled Stockholders
Meeting on March 6, 2001 or on any subsequent continuation or resetting thereof, and to perform such acts as will
normally follow in the exercise of these rights as registered stockholders.

xxx xxx xxx.

Consequently, on March 1, 2001, the Sandiganbayan issued a writ of preliminary injunction to enjoin the PCGG
from voting the sequestered shares of stock of the UCPB.

On July 25, 2002, before Civil Case No. 0033-F could be set for trial, the Republic filed a Motion for Judgment on
the Pleadings and/or for Partial Summary Judgment (Re: Defendants CIIF Companies, 14 Holding Companies and
COCOFED, et al.).[28]

Cojuangco, Enrile, and COCOFED separately opposed the motion. Ursua adopted COCOFEDs opposition.

Thereafter, the Republic likewise filed a Motion for Partial Summary Judgment [Re: Shares in San Miguel
Corporation Registered in the Respective Names of Defendant Eduardo M. Cojuangco, Jr. and the Defendant
Cojuangco Companies].[29]

Cojuangco, et al. opposed the motion,[30] after which the Republic submitted its reply.[31]

On February 23, 2004, the Sandiganbayan issued an order,[32] in which it enumerated the admitted facts or facts
that appeared to be without substantial controversy in relation to the Republics Motion for Judgment on the
Pleadings and/or for Partial Summary Judgment [Re: Defendants CIIF Companies, 14 Holding Companies and
COCOFED, et al.].

Commenting on the order of February 23, 2004, Cojuangco, et al. specified the items they considered as inaccurate,
but particularly interposed no objection to item no. 17 (to the extent that item no. 17 stated that Cojuangco had
disclaimed any interest in the CIIF block SMC shares of stock registered in the names of the 14 corporations listed
in item no. 1 of the order).[33]

The Republic also filed its Comment,[34] but COCOFED denied the admitted facts summarized in the order of
February 23, 2004.[35]

Earlier, on October 8, 2003,[36] the Sandiganbayan resolved the various pending motions and pleadings relative to
the writs of sequestration issued against the defendants, disposing:
IN VIEW OF THE FOREGOING, the Writs of Sequestration Nos. (a) 86-0042 issued on April 8, 1986, (b) 86-0062
issued on April 21, 1986, (c) 86-0069 issued on April 22, 1986, (d) 86-0085 issued on May 9, 1986, (e) 86-0095
issued on May 16, 1986, (f) 86-0096 dated May 16, 1986, (g) 86-0097 issued on May 16, 1986, (h) 86-0098 issued
on May 16, 1986 and (i) 87-0218 issued on May 27, 1987 are hereby declared automatically lifted for being null and
void.

Despite the lifting of the writs of sequestration, since the Republic continues to hold a claim on the shares which is
yet to be resolved, it is hereby ordered that the following shall be annotated in the relevant corporate books of San
Miguel Corporation:

(1) any sale, pledge, mortgage or other disposition of any of the shares of the Defendants Eduardo Cojuangco, et al.
shall be subject to the outcome of this case;

(2) the Republic through the PCGG shall be given twenty (20) days written notice by Defendants Eduardo
Cojuangco, et al. prior to any sale, pledge, mortgage or other disposition of the shares;

(3) in the event of sale, mortgage or other disposition of the shares, by the Defendants Cojuangco, et al., the
consideration therefore, whether in cash or in kind, shall be placed in escrow with Land Bank of the Philippines,
subject to disposition only upon further orders of this Court; and

(4) any cash dividends that are declared on the shares shall be placed in escrow with the Land Bank of the
Philippines, subject to disposition only upon further orders of this Court. If in case stock dividends are declared, the
conditions on the sale, pledge, mortgage and other disposition of any of the shares as above-mentioned in conditions
1, 2 and 3, shall likewise apply.

In so far as the matters raised by Defendants Eduardo Cojuangco, et al. in their Omnibus Motion dated September
23, 1996 and Reply to PCGGs Comment/Opposition with Motion to Order PCGG to Complete Inventory, to Nullify
Writs of Sequestration and to Enjoin PCGG from Voting Sequestered Shares of Stock dated January 3, 1997,
considering the above conclusion, this Court rules that it is no longer necessary to delve into the matters raised in the
said Motions.

SO ORDERED.[37]

Cojuangco, et al. moved for the modification of the resolution,[38] praying for the deletion of the conditions for
allegedly restricting their rights. The Republic also sought reconsideration of the resolution.[39]

Eventually, on June 24, 2005, the Sandiganbayan denied both motions, but reduced the restrictions thuswise:

WHEREFORE, the Motion for Reconsideration (Re: Resolution dated September 17, 2003 Promulgated on October
8, 2003) dated October 24, 2003 of Plaintiff Republic is hereby DENIED for lack of merit. As to the Motion for
Modification (Re: Resolution Promulgated on October 8, 2003) dated October 22, 2003, the same is hereby
DENIED for lack of merit. However, the restrictions imposed by this Court in its Resolution datedSeptember 17,
2003 and promulgated on October 8, 2003 shall now read as follows:

Despite the lifting of the writs of sequestration, since the Republic continues to hold a claim on the shares which is
yet to be resolved, it is hereby ordered that the following shall be annotated in the relevant corporate books of San
Miguel Corporation:

a) any sale, pledge, mortgage or other disposition of any of the shares of the Defendants Eduardo Cojuangco, et al.
shall be subject to the outcome of this case.

b) the Republic through the PCGG shall be given twenty (20) days written notice by Defendants Eduardo
Cojuangco, et al. prior to any sale, pledge, mortgage or other disposition of the shares.

SO ORDERED.[40]

Pending resolution of the motions relative to the lifting of the writs of sequestration, SMC filed a Motion for
Intervention with attached Complaint-in-Intervention,[41] alleging, among other things, that it had an interest in the
matter in dispute between the Republic and defendants CIIF Companies for being the owner by purchase of a
portion (i.e., 25,450,000 SMC shares covered by Stock Certificate Nos. A0004129 and B0015556 of the so-called
CIIF block of SMC shares of stock sought to be recovered as alleged ill-gotten wealth).

Although Cojuangco, et al. interposed no objection to SMCs intervention, the Republic opposed,[42] averring that
the intervention would be improper and was a mere attempt to litigate anew issues already raised and passed upon
by the Supreme Court. COCOFED similarly opposed SMCs intervention,[43] and Ursua adopted its opposition.

On May 6, 2004, the Sandiganbayan denied SMCs motion to intervene.[44] SMC sought reconsideration,[45] and
its motion to that effect was opposed by COCOFED and the Republic.

On May 7, 2004, the Sandiganbyan granted the Republics Motion for Judgment on the Pleadings and/or Partial
Summary Judgment (Re: Defendants CIIF Companies, 14 Holding Companies and COCOFED, et al.) and rendered
a Partial Summary Judgment,[46] the dispositive portion of which reads as follows:

WHEREFORE, in view of the foregoing, we hold that:

The Motion for Partial Summary Judgment (Re: Defendants CIIF Companies, 14 Holding Companies and Cocofed,
et al.) filed by Plaintiff is hereby GRANTED. ACCORDINGLY, THE CIIF COMPANIES, NAMELY:

1. Southern Luzon Coconut Oil Mills (SOLCOM);

2. Cagayan de Oro Oil Co., Inc. (CAGOIL);
3. Iligan Coconut Industries, Inc. (ILICOCO);
4. San Pablo Manufacturing Corp. (SPMC);
5. Granexport Manufacturing Corp. (GRANEX); and
6. Legaspi Oil Co., Inc. (LEGOIL),

AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:

1. Soriano Shares, Inc.;

2. ACS Investors, Inc.;
3. Roxas Shares, Inc.;
4. Arc Investors, Inc.;
5. Toda Holdings, Inc.;
6. AP. Holdings, Inc.;
7. Fernandez Holdings, Inc.;
8. SMC Officers Corps. Inc.;
9. Te Deum Resources, Inc.;
10. Anglo Ventures, Inc.;
11. Randy Allied Ventures, Inc.;
12. Rock Steel Resources, Inc.;
13. Valhalla Properties Ltd., Inc.; and
14. First Meridian Development, Inc.

AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION (SMC) SHARES OF STOCK TOTALING
33,133,266 SHARES AS OF 1983 TOGETHER WITH ALL DIVIDENDS DECLARED, PAID AND ISSUED
THEREON AS WELL AS ANY INCREMENTS THERETO ARISING FROM, BUT NOT LIMITED TO,
EXERCISE OF PRE-EMPTIVE RIGHTS ARE DECLARED OWNED BY THE GOVERNMENT IN-TRUST FOR
ALL THE COCONUT FARMERS AND ORDERED RECONVEYED TO THE GOVERNMENT.

Let the trial of this Civil Case proceed with respect to the issues which have not been disposed of in this partial
Summary Judgment, including the determination of whether the CIIF Block of SMC Shares adjudged to be owned
by the Government represents 27% of the issued and outstanding capital stock of SMC according to plaintiff or
31.3% of said capital stock according to COCOFED, et al. and Ballares, et al.

SO ORDERED.[47]

In the same resolution of May 7, 2004, the Sandiganbayan considered the Motions to Dismiss filed by Cojuangco, et
al. on August 2, 2000 and by Enrile on September 4, 2000 as overtaken by the Republics Motion for Judgment on
the Pleadings and/or Partial Summary Judgment.[48]

On May 25, 2004, Cojuangco, et al. filed their Motion for Reconsideration.[49]

COCOFED filed its so-called Class Action Omnibus Motion: (a) Motion to Dismiss for Lack of Subject Matter
Jurisdiction and Alternatively, (b) Motion for Reconsideration dated May 26, 2004.[50]

The Republic submitted its Consolidated Comment.[51]

Relative to the resolution of May 7, 2004, the Sandiganbayan issued its resolution of December 10, 2004,[52]
denying the Republics Motion for Partial Summary Judgment (Re: Shares in San Miguel Corporation Registered in
the Respective Names of Defendants Eduardo M. Cojuangco, Jr. and the defendant Cojuangco Companies) upon the
following reasons:

In the instant case, a circumspect review of the records show that while there are facts which appear to be
undisputed, there are also genuine factual issues raised by the defendants which need to be threshed out in a fullblown trial. Foremost among these issues are the following:

1) What are the various sources of funds, which the defendant Cojuangco and his companies claim they utilized
to acquire the disputed SMC shares?

2)

Whether or not such funds acquired from alleged various sources can be considered coconut levy funds;

3) Whether or not defendant Cojuangco had indeed served in the governing bodies of PC, UCPB and/or CIIF Oil
Mills at the time the funds used to purchase the SMC shares were obtained such that he owed a fiduciary duty to
render an account to these entities as well as to the coconut farmers;

4) Whether or not defendant Cojuangco took advantage of his position and/or close ties with then President
Marcos to obtain favorable concessions or exemptions from the usual financial requirements from the lending banks
and/or coco-levy funded companies, in order to raise the funds to acquire the disputed SMC shares; and if so, what
are these favorable concessions or exemptions?

Answers to these issues are not evident from the submissions of the plaintiff and must therefore be proven through
the presentation of relevant and competent evidence during trial. A perusal of the subject Motion shows that the
plaintiff hastily derived conclusions from the defendants statements in their previous pleadings although such
conclusions were not supported by categorical facts but only mere inferences. In the Reply dated October 2, 2003,
the plaintiff construed the supposed meaning of the phrase various sources (referring to the source of defendant
Cojuangcos funds which were used to acquire the subject SMC shares), which plaintiff said was quite obvious from
the defendants admission in his Pre-Trial Brief, which we quote:

According to Cojuangcos own Pre-Trial Brief, these so-called various sources, i.e., the sources from which he
obtained the funds he claimed to have used in buying the 20% SMC shares are not in fact various as he claims them
to be. He says he obtained loans from UCPB and advances from the CIIF Oil Mills. He even goes as far as to admit
that his only evidence in this case would have been records of UCPB and a representative of the CIIF Oil Mills
obviously the records of UCPB relate to the loans that Cojuangco claims to have obtained from UCPB of which he
was President and CEO while the representative of the CIIF Oil Mills will obviously testify on the advances
Cojuangco obtained from CIIF Oil Mills of which he was also the President and CEO.

From the foregoing premises, plaintiff went on to conclude that:

These admissions of defendant Cojuangco are outright admissions that he (1) took money from the bank entrusted
by law with the administration of coconut levy funds and (2) took more money from the very corporations/oil mills
in which part of those coconut levy funds (the CIIF) was placed treating the funds of UCPB and the CIIF as his own
personal capital to buy his SMC shares.

We cannot agree with the plaintiffs contention that the defendants statements in his Pre-Trial Brief regarding the
presentation of a possible CIIF witness as well as UCPB records, can already be considered as admissions of the
defendants exclusive use and misuse of coconut levy funds to acquire the subject SMC shares and defendant
Cojuangcos alleged taking advantage of his positions to acquire the subject SMC shares. Moreover, in ruling on a
motion for summary judgment, the court should take that view of the evidence most favorable to the party against
whom it is directed, giving such party the benefit of all inferences. Inasmuch as this issue cannot be resolved merely
from an interpretation of the defendants statements in his brief, the UCPB records must be produced and the CIIF
witness must be heard to ensure that the conclusions that will be derived have factual basis and are thus, valid.

WHEREFORE, in view of the forgoing, the Motion for Partial Summary Judgment dated July 11, 2003 is hereby
DENIED for lack of merit.

SO ORDERED.

Thereafter, on December 28, 2004, the Sandiganbayan resolved the other pending motions,[53] viz:

WHEREFORE, in view of the foregoing, the Motion for Reconsideration dated May 25, 2004 filed by defendant
Eduardo M. Cojuangco, Jr., et al. and the Class Action Omnibus Motion: (a) Motion to Dismiss for Lack of Subject
Matter Jurisdiction and Alternatively, (b) Motion for Reconsideration dated May 26, 2004 filed by COCOFED, et al.
and Ballares, et al. are hereby DENIED for lack of merit.

SO ORDERED.[54]

COCOFED moved to set the case for trial,[55] but the Republic opposed the motion.[56] On their part, Cojuangco,
et al. also moved to set the trial,[57] with the Republic similarly opposing the motion.[58]

On March 23, 2006, the Sandiganbayan granted the motions to set for trial and set the trial on August 8, 10, and 11,
2006.[59]

In the meanwhile, on August 9, 2005, the Republic filed a Motion for Execution of Partial Summary Judgment (re:
CIIF block of SMC Shares of Stock),[60] contending that an execution pending appeal was justified because any
appeal by the defendants of the Partial Summary Judgment would be merely dilatory.

Cojuangco, et al. opposed the motion.[61]

The Sandiganbayan denied the Republics Motion for Execution of Partial Summary Judgment (re: CIIF block of
SMC Shares of Stock),[62] to wit:

WHEREFORE, the MOTION FOR EXECUTION OF PARTIAL SUMMARY JUDGMENT (RE: CIIF BLOCK OF
SMC SHARES OF STOCK) dated August 8, 2005 of the plaintiff is hereby denied for lack of merit. However, this
Court orders the severance of this particular claim of Plaintiff. The Partial Summary Judgment dated May 7, 2004 is

now considered a separate final and appealable judgment with respect to the said CIIF Block of SMC shares of
stock.

The Partial Summary Judgment rendered on May 7, 2004 is modified by deleting the last paragraph of the
dispositive portion which will now read, as follows:

WHEREFORE, in view of the foregoing, we hold that:

The Motion for Partial Summary Judgment (Re: Defendants CIIF Companies, 14 Holding Companies and Cocofed,
et al.) filed by Plaintiff is hereby GRANTED. ACCORDINGLY, THE CIIF COMPANIES, NAMELY:

1. Southern Coconut Oil Mills (SOLCOM);

2. Cagayan de Oro Oil Co., Inc. (CAGOIL);
3. Iligan Coconut Industries, Inc. (ILICOCO);
4. San Pablo Manufacturing Corp. (SPMC);
5. Granexport Manufacturing Corp.
(GRANEX); and
6. Legaspi Oil Co., Inc. (LEGOIL),

AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:

1. Soriano Shares, Inc.;

2. ACS Investors, Inc.;
3. Roxas Shares, Inc.;
4. Arc Investors, Inc.;
5. Toda Holdings, Inc.;
6. AP Holdings, Inc.;
7. Fernandez Holdings, Inc.;
8. SMC Officers Corps, Inc.;

9. Te Deum Resources, Inc.;

10. Anglo Ventures, Inc.;
11. Randy Allied Ventures, Inc.;
12. Rock Steel Resources, Inc.;
13. Valhalla Properties Ltd., Inc.; and
14. First Meridian Development, Inc.

AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION (SMC) SHARES OF STOCK TOTALING
33,133,266 SHARES AS OF 1983 TOGETHER WITH ALL DIVIDENDS DECLARED, PAID AND ISSUED
THEREON AS WELL AS ANY INCREMENTS THERETO ARISING FROM, BUT NOT LIMITED TO,
EXERCISE OF PRE-EMPTIVE RIGHTS ARE DECLARED OWNED BY THE GOVERNMENT IN TRUST FOR
ALL THE COCONUT FARMERS AND ORDERED RECONVEYED TO THE GOVERNMENT.

The aforementioned Partial Summary Judgment is now deemed a separate appealable judgment which finally
disposes of the ownership of the CIIF Block of SMC Shares, without prejudice to the continuation of proceedings
with respect to the remaining claims particularly those pertaining to the Cojuangco, et al. block of SMC shares.

SO ORDERED.[63]

During the pendency of the Republics motion for execution, Cojuangco, et al. filed a Motion for Authority to Sell
San Miguel Corporation (SMC) shares, praying for leave to allow the sale of SMC shares to proceed, exempted
from the conditions set forth in the resolutions promulgated on October 3, 2003 and June 24, 2005.[64] The
Republic opposed, contending that the requested leave to sell would be tantamount to removing jurisdiction over the
res or the subject of litigation.[65]

However, the Sandiganbayan eventually granted the Motion for Authority to Sell San Miguel Corporation (SMC)
shares.[66]

Thereafter, Cojuangco, et al. manifested to the Sandiganbayan that the shares would be sold to the San Miguel
Corporation Retirement Plan.[67] Ruling on the manifestations of Cojuangco, et al., the Sandiganbayan issued its
resolution of July 30, 2007allowing the sale of the shares, to wit:
This notwithstanding however, while the Court exempts the sale from the express condition that it shall be subject to
the outcome of the case, defendants Cojuangco, et al. may well be reminded that despite the deletion of the said
condition, they cannot transfer to any buyer any interest higher than what they have. No one can transfer a right to
another greater than what he himself has. Hence, in the event that the Republic prevails in the instant case,

defendants Cojuangco, et al. hold themselves liable to their transferees-buyers, especially if they are buyers in good
faith and for value. In such eventuality, defendants Cojuangco, et al. cannot be shielded by the cloak of principle of
caveat emptor because case law has it that this rule only requires the purchaser to exercise such care and attention as
is usually exercised by ordinarily prudent men in like business affairs, and only applies to defects which are open
and patent to the service of one exercising such care.

Moreover, said defendants Eduardo M. Cojuangco, et al. are hereby ordered to render their report on the sale within
ten (10) days from completion of the payment by the San Miguel Corporation Retirement Plan.

SO ORDERED.[68]

Cojuangco, et al. later rendered a complete accounting of the proceeds from the sale of the Cojuangco block of
shares of SMC stock, informing that a total amount of P 4,786,107,428.34 had been paid to the UCPB as loan
repayment.[69]

It appears that the trial concerning the disputed block of shares was not scheduled because the consideration and
resolution of the aforecited motions for summary judgment occupied much of the ensuing proceedings.

At the hearing of August 8, 2006, the Republic manifested[70] that it did not intend to present any testimonial
evidence and asked for the marking of certain exhibits that it would have the Sandiganbayan take judicial notice of.
The Republic was then allowed to mark certain documents as its Exhibits A to I, inclusive, following which it sought
and was granted time within which to formally offer the exhibits.

On August 31, 2006, the Republic filed its Manifestation of Purposes (Re: Matters Requested or Judicial Notice on
the 20% Shares in San Miguel Corporation Registered in the Respective Names of defendant Eduardo M.
Cojuangco, Jr. and the defendant Cojuangco Companies).[71]

On September 18, 2006, the Sandiganbayan issued the following resolution,[72] to wit:

Acting on the Manifestation of Purposes (Re: Matters Requested or Judicial Notice on the 20% Shares in San
Miguel Corporation Registered in the Respective names of Defendant Eduardo M. Cojuangco, Jr. and the Defendant
Cojuangco Companies) dated 28 August 2006 filed by the plaintiff, which has been considered its formal offer of
evidence, and the Comment of Defendants Eduardo M. Cojuangco, Jr., et al. on Plaintiffs Manifestation of Purposes
Dated August 30, 2006 dated September 15, 2006, the court resolves to ADMIT all the exhibits offered, i.e.:
Exhibit A the Answer of defendant Eduardo M. Cojuangco, Jr. to the Third Amended Complaint (Subdivided) dated
June 23, 1999, as well as the sub-markings (Exhibit A-1 to A-4;

Exhibit B the Pre-Trial Brief dated January 11, 2000 of defendant CIIF Oil Mills and fourteen (14) CIIF Holding
Companies, as well as the sub-markings Exhibits B-1 and B-2
Exhibit C the Pre-Trial Brief dated January 11, 2000 of defendant Eduardo M. Cojuangco, Jr. as well as the submarkings Exhibits C-1, C-1-a and C-1-b;
Exhibit D the Plaintiffs Motion for Summary Judgment [Re: Shares in San Miguel Corporation Registered in the
Respective Names of Defendant Eduardo M. Cojuangco, Jr. and the Defendant Cojuangco Companies] dated July
11, 2003, as well as the sub-markings Exhibits D-1 to D-4

the said exhibits being part of the record of the case, as well as
Exhibit E Presidential Decree No. 961 dated July 11, 1976;
Exhibit F Presidential Decree No. 755 dated July 29, 1975;
Exhibit G Presidential Decree No. 1468 dated June 11, 1978;
Exhibit H Decision of the Supreme Court in Republic vs. COCOFED, et al., G.R. Nos. 147062-64, December 14,
2001, 372 SCRA 462

the aforementioned exhibits being matters of public record.

The admission of these exhibits is being made over the objection of the defendants Cojuangco, et al. as to the
relevance thereof and as to the purposes for which they were offered in evidence, which matters shall be taken into
consideration by the Court in deciding the case on the merits.

The trial hereon shall proceed on November 21, 2006, at 8:30 in the morning as previously scheduled.[73]

During the hearing on November 24, 2006, Cojuangco, et al. filed their Submission and Offer of Evidence of
Defendants,[74]formally offering in evidence certain documents to substantiate their counterclaims, and informing
that they found no need to present countervailing evidence because the Republics evidence did not prove the
allegations of the Complaint. On December 5, 2006, after the Republic submitted its Comment,[75] the
Sandiganbayan admitted the exhibits offered by Cojuangco, et al., and granted the parties a non-extendible period
within which to file their respective memoranda and reply-memoranda.

Thereafter, on February 23, 2007, the Sandiganbayan considered the case submitted for decision.[76]

ISSUES

The various issues submitted for consideration by the Court are summarized hereunder.

G.R. No. 166859

The Republic came to the Court via petition for certiorari[77] to assail the denial of its Motion for Partial Summary
Judgmentthrough the resolution promulgated on December 10, 2004, insisting that the Sandiganbayan thereby
committed grave abuse of discretion: (a) in holding that the various sources of funds used in acquiring the SMC
shares of stock remained disputed; (b) in holding that it was disputed whether or not Cojuangco had served in the
governing bodies of PCA, UCPB, and/or the CIIF Oil Mills; and (c) in not finding that Cojuangco had taken
advantage of his position and had violated his fiduciary obligations in acquiring the SMC shares of stock in issue.

The Court will consider and resolve the issues thereby raised alongside the issues presented in G.R. No. 180702.

G.R. No. 169203

In the resolution promulgated on October 8, 2003, the Sandiganbayan declared as automatically lifted for being null
and void nine writs of sequestration (WOS) issued against properties of Cojuangco and Cojuangco companies,
considering that: (a) eight of them (i.e., WOS No. 86-0062 dated April 21, 1986; WOS No. 86-0069 dated April 22,
1986; WOS No. 86-0085 dated May 9, 1986; WOS No. 86-0095 dated May 16, 1986; WOS No. 86-0096 dated May
16, 1986; WOS No. 86-0097 dated May 16, 1986; WOS No. 86-0098 dated May 16, 1986; and WOS No. 87-0218
dated May 27, 1987) had been issued by only one PCGG Commissioner, contrary to the requirement of Section 3 of
the Rules of the PCGG for at least two Commissioners to issue the WOS; and (b) the ninth (i.e., WOS No. 86-0042
dated April 8, 1986), although issued prior to the promulgation of the Rules of the PCGG requiring at least two
Commissioners to issue the WOS, was void for being issued without prior determination by the PCGG of a prima
faciebasis for sequestration.

Nonetheless, despite its lifting of the nine WOS, the Sandiganbayan prescribed four conditions to be still annotated
in the relevant corporate books of San Miguel Corporation considering that the Republic continues to hold a claim
on the shares which is yet to be resolved.[78]

In its resolution promulgated on June 24, 2005, the Sandiganbayan denied the Republics Motion for Reconsideration
filed vis-a-vis the resolution promulgated on October 8, 2003, but reduced the conditions earlier imposed to only
two.[79]

On September 1, 2005, the Republic filed a petition for certiorari[80] to annul the resolutions promulgated on
October 8, 2003 and on June 24, 2005 on the ground that the Sandiganbayan had thereby committed grave abuse of
discretion:

I.
XXX IN LIFTING WRIT OF SEQUESTRATION NOS. 86-0042 AND 87-0218 DESPITE EXISTENCE OF THE
BASIC REQUISITES FOR THE VALIDITY OF SEQUESTRATION.

II.
XXX WHEN IT DENIED PETITIONERS ALTERNATIVE PRAYER IN ITS MOTION FOR
RECONSIDERATION FOR THE ISSUANCE OF AN ORDER OF SEQUESTRATION AGAINST ALL THE
SUBJECT SHARES OF STOCK IN ACCORDNCE WITH THE RULING IN REPUBLIC VS.
SANDIGANBAYAN, 258 SCRA 685 (1996).

III.
XXX IN SUBSEQUENTLY DELETING THE LAST TWO (2) CONDITIONS WHICH IT EARLIER IMPOSED
ON THE SUBJECT SHARES OF STOCK.[81]

G.R. No. 180702

On November 28, 2007, the Sandiganbayan promulgated its decision,[82] decreeing as follows:

WHEREFORE, in view of all the foregoing, the Court is constrained to DISMISS, as it hereby DISMISSES, the
Third Amended Complaint in subdivided Civil Case No. 0033-F for failure of plaintiff to prove by preponderance of
evidence its causes of action against defendants with respect to the twenty percent (20%) outstanding shares of stock
of San Miguel Corporation registered in defendants names, denominated herein as the Cojuangco, et al. block of
SMC shares. For lack of satisfactory warrant, the counterclaims in defendants Answers are likewise ordered
dismissed.

SO ORDERED.
Hence, the Republic appeals, positing:

I.
COCONUT LEVY FUNDS ARE PUBLIC FUNDS. THE SMC SHARES, WHICH WERE ACQUIRED BY
RESPONDENTS COJUANGCO, JR. AND THE COJUANGCO COMPANIES WITH THE USE OF COCONUT
LEVY FUNDS IN VIOLATION OF RESPONDENT COJUANGCO, JR.S FIDUCIARY OBLIGATION ARE,
NECESSARILY, PUBLIC IN CHARACTER AND SHOULD BE RECONVEYED TO THE GOVERNMENT.

II.
PETITIONER HAS CLEARLY DEMONSTRATED ITS ENTITLEMENT, AS A MATTER OF LAW, TO THE
RELIEFS PRAYED FOR.[83]

and urging the following issues to be resolved, to wit:

I.
WHETHER THE HONORABLE SANDIGANBAYAN COMMITTED A REVERSIBLE ERROR WHEN IT
DISMISSED CIVIL CASE NO. 0033-F; AND

II.
WHETHER OR NOT THE SUBJECT SHARES IN SMC, WHICH WERE ACQUIRED BY, AND ARE IN THE
RESPECTIVE NAMES OF RESPONDENTS COJUANGCO, JR. AND THE COJUANGCO COMPANIES,
SHOULD BE RECONVEYED TO THE REPUBLIC OF THE PHILIPPINES FOR HAVING BEEN ACQUIRED
USING COCONUT LEVY FUNDS.[84]

On their part, the petitioners-in-intervention[85] submit the following issues, to wit:

I
WHETHER OR NOT THE COURT A QUO GRAVELY ERRED AND DECIDED THE CASE A QUO IN
VIOLATION OF LAW AND APPLICABLE RULINGS OF THE HONORABLE COURT IN RULING THAT,
WHILE ADMITTEDLY THE SUBJECT SMC SHARES WERE PURCHASED FROM LOAN PROCEEDS FROM
UCPB AND ADVANCES FROM THE CIIF OIL MILLS, SAID SUBJECT SMC SHARES ARE NOT PUBLIC
PROPERTY

II
WHETHER OR NOT THE COURT A QUO GRAVELY ERRED AND DECIDED THE CASE A QUO IN
VIOLATION OF LAW AND APPLICABLE RULINGS OF THE HONORABLE COURT IN FAILING TO RULE
THAT, EVEN ASSUMING FOR THE SAKE OF ARGUMENT THAT LOAN PROCEEDS FROM UCPB ARE
NOT PUBLIC FINDS, STILL, SINCE RESPONDENT COJUANGCO, IN THE PURCHASE OF THE SUBJECT
SMC SHARES FROM SUCH LOAN PROCEEDS, VIOLATED HIS FIDUCIARY DUTIES AND TOOK A
COMMERCIAL OPPORTUNITY THAT RIGHTFULLY BELONGED TO UCPB (A PUBLIC CORPORATION),
THE SUBJECT SMC SHARES SHOULD REVERT BACK TO THE GOVERNMENT.

RULING

We deny all the petitions of the Republic.

I
Lifting of nine WOS for violation of PCGG Rules
did not constitute grave abuse of discretion

Through its resolution promulgated on June 24, 2005, assailed on certiorari in G.R. No. 169203, the Sandiganbayan
lifted the nine WOS for the following reasons, to wit:

Having studied the antecedent facts, this Court shall now resolve the pending incidents especially defendants Motion
to Affirm that the Writs or Orders of Sequestration Issued on Defendants Properties Were Unauthorized, Invalid and
Never Became Effective dated March 5, 1999.

Section 3 of the PCGG Rules and Regulations promulgated on April 11, 1986, provides:

Sec. 3. Who may issue. A writ of sequestration or a freeze or hold order may be issued by the Commission upon the
authority of at least two Commissioners, based on the affirmation or complaint of an interested party or motu propio
(sic) the issuance thereof is warranted.

In this present case, of all the questioned writs of sequestration issued after the effectivity of the PCGG Rules and
Regulations or after April 11, 1986, only writ no. 87-0218 issued on May 27, 1987 complied with the requirement
that it be issued by at least two Commissioners, the same having been issued by Commissioners Ramon E. Rodrigo
and Quintin S. Doromal. However, even if Writ of Sequestration No. 87-0218 complied with the requirement that
the same be issued by at least two Commissioners, the records fail to show that it was issued with factual basis or
with factual foundation as can be seen from the Certification of the Commission Secretary of the PCGG of the
excerpt of the minutes of the meeting of the PCGG held on May 26, 1987, stating therein that:

The Commission approved the recommendation of Dir. Cruz to sequester all the shares of stock, assets, records, and
documents of Balete Ranch, Inc. and the appointment of the Fiscal Committee with ECI Challenge, Inc./Pepsi-Cola
for Balete Ranch, Inc. and the Aquacor Marketing Corp. vice Atty. S. Occena. The objective is to consolidate the
Fiscal Committee activities covering three associated entities of Mr. Eduardo Cojuangco.Upon recommendation of
Comm. Rodrigo, the reconstitution of the Board of Directors of the three companies was deferred for further study.

Nothing in the above-quoted certificate shows that there was a prior determination of a factual basis or factual
foundation. It is the absence of aprima facie basis for the issuance of a writ of sequestration and not the lack of
authority of two (2) Commissioners which renders the said writ voidab initio. Thus, being the case, Writ of
Sequestration No. 87-0218 must be automatically lifted.

As declared by the Honorable Supreme Court in two cases it has decided,

The absence of a prior determination by the PCGG of a prima facie basis for the sequestration order is, unavoidably,
a fatal defect which rendered the sequestration of respondent corporation and its properties void ab initio. And

The corporation or entity against which such writ is directed will not be able to visually determine its validity, unless
the required signatures of at least two commissioners authorizing its issuance appear on the very document itself.
The issuance of sequestration orders requires the existence of a prima facie case. The two commissioner rule is
obviously intended to assure a collegial determination of such fact. In this light, a writ bearing only one signature is
an obvious transgression of the PCGG Rules.

Consequently, the writs of sequestration nos. 86-0062, 86-0069, 86-0085, 86-0095, 86-0096, 86-0097 and 86-0098
must be lifted for not having complied with the pertinent provisions of the PCGG Rules and Regulations, all of
which were issued by only one Commissioner and after April 11, 1986 when the PCGG Rules and Regulations took
effect, an utter disregard of the PCGGs Rules and Regulations. The Honorable Supreme Court has stated that:

Obviously, Section 3 of the PCGG Rules was intended to protect the public from improvident, reckless and needless
sequestrations of private property. And since these Rules were issued by Respondent Commission, it should be the
first entity to observe them.

Anent the writ of sequestration no. 86-0042 which was issued on April 8, 1986 or prior to the promulgation of the
PCGG Rules and Regulations on April 11, 1986, the same cannot be declared void on the ground that it was signed
by only one Commissioner because at the time it was issued, the Rules and Regulations of the PCGG were not yet in
effect. However, it again appears that there was no prior determination of the existence of a prima facie basis or
factual foundation for the issuance of the said writ. The PCGG, despite sufficient time afforded by this Court to
show that a prima facie basis existed prior to the issuance of Writ No. 86-0042, failed to do so. Nothing in the
records submitted by the PCGG in compliance of the Resolutions and Order of this Court would reveal that a
meeting was held by the Commission for the purpose of determining the existence of a prima facie evidence prior to
its issuance. In a case decided by the Honorable Supreme Court, wherein it involved a writ of sequestration issued
by the PCGG on March 19, 1986 against all assets, movable and immovable, of Provident International Resources
Corporation and Philippine Casino Operators Corporation, the Honorable Supreme Court enunciated:

The questioned sequestration order was, however issued on March 19, 1986, prior to the promulgation of the PCGG
Rules and Regulations. As a consequence, we cannot reasonably expect the commission to abide by said rules,
which were nonexistent at the time the subject writ was issued by then Commissioner Mary Concepcion Bautista.
Basic is the rule that no statute, decree, ordinance, rule or regulation (and even policies) shall be given retrospective
effect unless explicitly stated so. We find no provision in said Rules which expressly gives them retroactive effect,
or implies the abrogation of previous writs issued not in accordance with the same Rules. Rather, what said Rules
provide is that they shall be effective immediately, which in legal parlance, is understood as upon promulgation.
Only penal laws are given retroactive effect insofar as they favor the accused.

We distinguish this case from Republic vs. Sandiganbayan, Romualdez and Dio Island Resort, G.R. No. 88126, July
12, 1996 where the sequestration order against Dio Island Resort, dated April 14, 1986, was prepared, issued and
signed not by two commissioners of the PCGG, but by the head of its task force in Region VIII. In holding that said
order was not valid since it was not issued in accordance with PCGG Rules and Regulations, we explained:

(Sec. 3 of the PCGG Rules and Regulations), couched in clear and simple language, leaves no room for
interpretation. On the basis thereof, it is indubitable that under no circumstances can a sequestration or freeze order
be validly issued by one not a commissioner of the PCGG.

xxxxxxxxx

Even assuming arguendo that Atty. Ramirez had been given prior authority by the PCGG to place Dio Island Resort
under sequestration, nevertheless, the sequestration order he issued is still void since PCGG may not delegate its
authority to sequester to its representatives and subordinates, and any such delegation is valid and ineffective.

We further said:

In the instant case, there was clearly no prior determination made by the PCGG of a prima facie basis for the
sequestration of Dio Island Resort, Inc. x x x

xxxxxxxxx

The absence of a prior determination by the PCGG of a prima facie basis for the sequestration order is, unavoidably,
a fatal defect which rendered the sequestration of respondent corporation and its properties void ab initio. Being
void ab initio, it is deemed nonexistent, as though it had never been issued, and therefore is not subject to ratification
by the PCGG.

What were obviously lacking in the above case were the basic requisites for the validity of a sequestration order
which we laid down inBASECO vs. PCGG, 150 SCRA 181, 216, May 27, 1987, thus:

Section (3) of the Commissions Rules and regulations provides that sequestration or freeze (and takeover) orders
issue upon the authority of at least two commissioners, based on the affirmation or complaint of an interested party,
or motu propio (sic) when the Commission has reasonable grounds to believe that the issuance thereof is warranted.

In the case at bar, there is no question as to the presence of prima facie evidence justifying the issuance of the
sequestration order against respondent corporations. But the said order cannot be nullified for lack of the other
requisite (authority of at least two commissioners) since, as explained earlier, such requisite was nonexistent at the
time the order was issued.

As to the argument of the Plaintiff Republic that Defendants Cojuangco, et al. have not shown any contrary prima
facie proof that the properties subject matter of the writs of sequestration were legitimate acquisitions, the same is
misplaced. It is a basic legal doctrine, as well as many times enunciated by the Honorable Supreme Court that when
a prima facie proof is required in the issuance of a writ, the party seeking such extraordinary writ must establish that
it is entitled to it by complying strictly with the requirements for its issuance and not the party against whom the writ
is being sought for to establish that the writ should not be issued against it.

According to the Republic, the Sandiganbayan thereby gravely abused its discretion in: (a) in lifting WOS No. 860042 and No. 87-0218 despite the basic requisites for the validity of sequestration being existent; (b) in denying the
Republics alternative prayer for the issuance of an order of sequestration against all the subject shares of stock in
accordance with the ruling in Republic v. Sandiganbayan, 258 SCRA 685, as stated in its Motion For
Reconsideration; and (c) in deleting the last two conditions the Sandiganbayan had earlier imposed on the subject
shares of stock.

We sustain the lifting of the nine WOS for the reasons made extant in the assailed resolution of October 8, 2003,
supra.

Section 3 of the Rules of the PCGG, promulgated on April 11, 1986, provides:

Section 3. Who may issue. A writ of sequestration or a freeze or hold order may be issued by the Commission upon
the authority of at least two Commissioners, based on the affirmation or complaint of an interested party or motu
proprio when the Commission has reasonable grounds to believe that the issuance thereof is warranted.

Conformably with Section 3, supra, WOS No. 86-0062 dated April 21, 1986; WOS No. 86-0069 dated April 22,
1986; WOS No. 86-0085 dated May 9, 1986; WOS No. 86-0095 dated May 16, 1986; WOS No. 86-0096 dated May
16, 1986; WOS No. 86-0097 dated May 16, 1986; and WOS No. 86-0098 dated May 16, 1986 were lawfully and
correctly nullified considering that only one PCGG Commissioner had issued them.

Similarly, WOS No. 86-0042 dated April 8, 1986 and WOS No. 87-0218 dated May 27, 1987 were lawfully and
correctly nullified notwithstanding that WOS No. 86-0042, albeit signed by only one Commissioner (i.e.,
Commissioner Mary Concepcion Bautista), was not at the time of its issuance subject to the two-Commissioners
rule, and WOS No. 87-0218, albeit already issued under the signatures of two Commissioners considering that both
had been issued without a prior determination by the PCGG of aprima facie basis for the sequestration.

Plainly enough, the irregularities infirming the issuance of the several WOS could not be ignored in favor of the
Republic and resolved against the persons whose properties were subject of the WOS. Where the Rules of the PCGG
instituted safeguards under Section 3, supra, by requiring the concurrent signatures of two Commissioners to every
WOS issued and the existence of a prima facie case of ill gotten wealth to support the issuance, the non-compliance
with either of the safeguards nullified the WOS thus issued. It is already settled that sequestration, due to its
tendency to impede or limit the exercise of proprietary rights by private citizens, is construed strictly against the
State, conformably with the legal maxim that statutes in derogation of common rights are generally strictly
construed and rigidly confined to the cases clearly within their scope and purpose.[86]

Consequently, the nullification of the nine WOS, being in implementation of the safeguards the PCGG itself had
instituted, did not constitute any abuse of its discretion, least of all grave, on the part of the Sandiganbayan.

Nor did the Sandiganbayan gravely abuse its discretion in reducing from four to only two the conditions imposed for
the lifting of the WOS. The Sandiganbayan thereby acted with the best of intentions, being all too aware that the
claim of the Republic to the sequestered assets and properties might be prejudiced or harmed pendente lite unless the

protective conditions were annotated in the corporate books of SMC. Moreover, the issue became academic
following the Sandiganbayans promulgation of its decision dismissing the Republics Amended Complaint, which
thereby removed the stated reason the Republic continues to hold a claim on the shares which is yet to be resolved
underlying the need for the annotation of the conditions (whether four or two).

II
The Concept and Genesis of
Ill-Gotten Wealth in the Philippine Setting

A brief review of the Philippine law and jurisprudence pertinent to ill-gotten wealth should furnish an illuminating
backdrop for further discussion.

In the immediate aftermath of the peaceful 1986 EDSA Revolution, the administration of President Corazon C.
Aquino saw to it, among others, that rules defining the authority of the government and its instrumentalities were
promptly put in place. It is significant to point out, however, that the administration likewise defined the limitations
of the authority.

The first official issuance of President Aquino, which was made on February 28, 1986, or just two days after the
EDSA Revolution, was Executive Order (E.O.) No. 1, which created the Presidential Commission on Good
Government (PCGG). Ostensibly, E.O. No. 1 was the first issuance in light of the EDSA Revolution having come
about mainly to address the pillage of the nations wealth by President Marcos, his family, and cronies.

E.O. No. 1 contained only two WHEREAS Clauses, to wit:

WHEREAS, vast resources of the government have been amassed by former President Ferdinand E. Marcos, his
immediate family, relatives, and close associates both here and abroad;

WHEREAS, there is an urgent need to recover all ill-gotten wealth;[87]

Paragraph (4) of E.O. No. 2[88] further required that the wealth, to be ill-gotten, must be acquired by them through
or as a result of improper or illegal use of or the conversion of funds belonging to the Government of the Philippines
or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of

their official position, authority, relationship, connection or influence to unjustly enrich themselves at the expense
and to the grave damage and prejudice of the Filipino people and the Republic of the Philippines.

Although E.O. No. 1 and the other issuances dealing with ill-gotten wealth (i.e., E.O. No. 2, E.O. No. 14, and E.O.
No. 14-A) only identified the subject matter of ill-gotten wealth and the persons who could amass ill-gotten wealth
and did not include an explicit definition of ill-gotten wealth, we can still discern the meaning and concept of illgotten wealth from the WHEREAS Clauses themselves of E.O. No. 1, in that ill-gotten wealth consisted of the vast
resources of the government amassed by former President Ferdinand E. Marcos, his immediate family, relatives and
close associates both here and abroad. It is clear, therefore, that ill-gotten wealth would not include all the properties
of President Marcos, his immediate family, relatives, and close associates but only the part that originated from the
vast resources of the government.

In time and unavoidably, the Supreme Court elaborated on the meaning and concept of ill-gotten wealth. In Bataan
Shipyard & Engineering Co., Inc. v. Presidential Commission on Good Government,[89] or BASECO, for the sake
of brevity, the Court held that:

xxx until it can be determined, through appropriate judicial proceedings, whether the property was in truth ill-gotten,
i.e., acquired through or as a result of improper or illegal use of or the conversion of funds belonging to the
Government or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue
advantage of official position, authority, relationship, connection or influence, resulting in unjust enrichment of the
ostensible owner and grave damage and prejudice to the State. And this, too, is the sense in which the term is
commonly understood in other jurisdictions.[90]

The BASECO definition of ill-gotten wealth was reiterated in Presidential Commission on Good Government v.
Lucio C. Tan,[91] where the Court said:

On this point, we find it relevant to define ill-gotten wealth. In Bataan Shipyard and Engineering Co., Inc., this
Court described ill-gotten wealth as follows:

Ill-gotten wealth is that acquired through or as a result of improper or illegal use of or the conversion of funds
belonging to the Government or any of its branches, instrumentalities, enterprises, banks or financial institutions, or
by taking undue advantage of official position, authority, relationship, connection or influence, resulting in unjust
enrichment of the ostensible owner and grave damage and prejudice to the State. And this, too, is the sense in which
the term is commonly understood in other jurisdiction.

Concerning respondents shares of stock here, there is no evidence presented by petitioner that they belong to the
Government of thePhilippines or any of its branches, instrumentalities, enterprises, banks or financial institutions.
Nor is there evidence that respondents, taking undue advantage of their connections or relationship with former
President Marcos or his family, relatives and close associates, were able to acquire those shares of stock.

Incidentally, in its 1998 ruling in Chavez v. Presidential Commission on Good Government,[92] the Court rendered
an identical definition of ill-gotten wealth, viz:

xxx. We may also add that ill-gotten wealth, by its very nature, assumes a public character. Based on the
aforementioned Executive Orders, ill-gotten wealth refers to assets and properties purportedly acquired, directly or
indirectly, by former President Marcos, his immediate family, relatives and close associates through or as a result of
their improper or illegal use of government funds or properties; or their having taken undue advantage of their
public office; or their use of powers, influence or relationships, resulting in their unjust enrichment and causing
grave damage and prejudice to the Filipino people and the Republic of the Philippines. Clearly, the assets and
properties referred to supposedly originated from the government itself. To all intents and purposes, therefore, they
belong to the people. As such, upon reconveyance they will be returned to the public treasury, subject only to the
satisfaction of positive claims of certain persons as may be adjudged by competent courts. Another declared
overriding consideration for the expeditious recovery of ill-gotten wealth is that it may be used for national
economic recovery.

All these judicial pronouncements demand two concurring elements to be present before assets or properties were
considered as ill-gotten wealth, namely: (a) they must have originated from the government itself, and (b) they must
have been taken by former President Marcos, his immediate family, relatives, and close associates by illegal means.
But settling the sources and the kinds of assets and property covered by E.O. No. 1 and related issuances did not
complete the definition of ill-gotten wealth. The further requirement was that the assets and property should have
been amassed by former President Marcos, his immediate family, relatives, and close associates both here and
abroad. In this regard, identifying former President Marcos, his immediate family, and relatives was not difficult, but
identifying other persons who might be the close associates of former President Marcos presented an inherent
difficulty, because it was not fair and just to include within the termclose associates everyone who had had any
association with President Marcos, his immediate family, and relatives.

Again, through several rulings, the Court became the arbiter to determine who were the close associates within the
coverage of E.O. No. 1.

In Republic v. Migrio,[93] the Court held that respondents Migrio, et al. were not necessarily among the persons
covered by the term close subordinate or close associate of former President Marcos by reason alone of their having
served as government officials or employees during the Marcos administration, viz:

It does not suffice, as in this case, that the respondent is or was a government official or employee during the
administration of former Pres. Marcos. There must be a prima facie showing that the respondent unlawfully
accumulated wealth by virtue of his close association or relation with former Pres. Marcos and/or his wife. This is so
because otherwise the respondents case will fall under existing general laws and procedures on the matter. xxx

In Cruz, Jr. v. Sandiganbayan,[94] the Court declared that the petitioner was not a close associate as the term was
used in E.O. No. 1 just because he had served as the President and General Manager of the GSIS during the Marcos
administration.

In Republic v. Sandiganbayan,[95] the Court stated that respondent Maj. Gen. Josephus Q. Ramas having been a
Commanding General of the Philippine Army during the Marcos administration d[id] not automatically make him a
subordinate of former President Ferdinand Marcos as this term is used in Executive Order Nos. 1, 2, 14 and 14-A
absent a showing that he enjoyed close association with former President Marcos.

It is well to point out, consequently, that the distinction laid down by E.O. No. 1 and its related issuances, and
expounded by relevant judicial pronouncements unavoidably required competent evidentiary substantiation made in
appropriate judicial proceedings to determine: (a) whether the assets or properties involved had come from the vast
resources of government, and (b) whether the individuals owning or holding such assets or properties were close
associates of President Marcos. The requirement ofcompetent evidentiary substantiation made in appropriate judicial
proceedings was imposed because the factual premises for the reconveyance of the assets or properties in favor of
the government due to their being ill-gotten wealth could not be simply assumed. Indeed, in BASECO,[96] the
Court made this clear enough by emphatically observing:

6. Governments Right and Duty to Recover All Ill-gotten Wealth

There can be no debate about the validity and eminent propriety of the Governments plan to recover all ill-gotten
wealth.

Neither can there be any debate about the proposition that assuming the above described factual premises of the
Executive Orders and Proclamation No. 3 to be true, to be demonstrable by competent evidence, the recovery from
Marcos, his family and his minions of the assets and properties involved, is not only a right but a duty on the part of
Government.

But however plain and valid that right and duty may be, still a balance must be sought with the equally compelling
necessity that a proper respect be accorded and adequate protection assured, the fundamental rights of private
property and free enterprise which are deemed pillars of a free society such as ours, and to which all members of
that society may without exception lay claim.

xxx Democracy, as a way of life enshrined in the Constitution, embraces as its necessary components freedom of
conscience, freedom of expression, and freedom in the pursuit of happiness. Along with these freedoms are included
economic freedom and freedom of enterprise within reasonable bounds and under proper control. xxx Evincing
much concern for the protection of property, the Constitution distinctly recognizes the preferred position which real
estate has occupied in law for ages. Property is bound up with every aspect of social life in a democracy as
democracy is conceived in the Constitution. The Constitution realizes the indispensable role which property, owned
in reasonable quantities and used legitimately, plays in the stimulation to economic effort and the formation and
growth of a solid social middle class that is said to be the bulwark of democracy and the backbone of every
progressive and happy country.

a.

Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be assumed. They will have to be duly
established by adequate proof in each case, in a proper judicial proceeding, so that the recovery of the ill-gotten
wealth may be validly and properly adjudged and consummated; although there are some who maintain that the fact
that an immense fortune, and vast resources of the government have been amassed by former President Ferdinand E.
Marcos, his immediate family, relatives, and close associates both here and abroad, and they have resorted to all
sorts of clever schemes and manipulations to disguise and hide their illicit acquisitions is within the realm of judicial
notice, being of so extensive notoriety as to dispense with proof thereof. Be this as it may, the requirement of
evidentiary substantiation has been expressly acknowledged, and the procedure to be followed explicitly laid down,
in Executive Order No. 14. [97]

Accordingly, the Republic should furnish to the Sandiganbayan in proper judicial proceedings the competent
evidence proving who were the close associates of President Marcos who had amassed assets and properties that
would be rightly considered as ill-gotten wealth.

III.
Summary Judgment was not warranted;
The Republic should have adduced evidence
to substantiate its allegations against the Respondents

We affirm the decision of November 28, 2007, because the Republic did not discharge its burden as the plaintiff to
establish by preponderance of evidence that the respondents SMC shares were illegally acquired with coconut-levy
funds.

The decision of November 28, 2007 fully explained why the Sandiganbayan dismissed the Republics case against
Cojuangco, et al.,viz:

Going over the evidence, especially the laws, i.e., P.D. No. 961, P.D. No. 755, and P.D. No. 1468, over which
plaintiff prayed that Court to take judicial notice of, it is worth noting that these same laws were cited by plaintiff
when it filed its motion for judgment on the pleadings and/or summary judgment regarding the CIIF block of SMC
shares of stock. Thus, the Court has already passed upon the same laws when it arrived at judgment determining
ownership of the CIIF block of SMC shares of stock. Pertinently, in the Partial Summary Judgment promulgated on
May 7, 2004, the Court gave the following rulings finding certain provisions of the above-cited laws to be
constitutionally infirmed, thus:

In this case, Section 2(d) and Section 9 and 10, Article III, of P.D. Nos. 961 and 1468 mandated the UCPB to utilize
the CIIF, an accumulation of a portion of the CCSF and the CIDF, for investment in the form of shares of stock in
corporations organized for the purpose of engaging in the establishment and the operation of industries and
commercial activities and other allied business undertakings relating to coconut and other palm oils industry in all
aspects. The investments made by UCPB in CIIF companies are required by the said Decrees to be equitably
distributed for free by the said bank to the coconut farmers (Sec. 10, P.D. No. 961 and Sec. 10, P.D. No. 1468). The
public purpose sought to be served by the free distribution of the shares of stock acquired with the use of public
funds is not evident in the laws mentioned. More specifically, it is not clear how private ownership of the shares of
stock acquired with public funds can serve a public purpose. The mode of distribution of the shares of stock also left
much room for the diversion of assets acquired through public funds into private uses or to serve directly private
interests, contrary to the Constitution. In the said distribution, defendants COCOFED, et al. and Ballares, et al.
admitted that UCPB followed the administrative issuances of PCA which we found to be constitutionally
objectionable in our Partial Summary Judgment in Civil Case No. 0033-A, the pertinent portions of which are
quoted hereunder:

xxx xx xxx.

The distribution for free of the shares of stock of the CIIF Companies is tainted with the above-mentioned
constitutional infirmities of the PCA administrative issuances. In view of the foregoing, we cannot consider the
provision of P.D. No. 961 and P.D. No. 1468 and the implementing regulations issued by the PCA as valid legal
basis to hold that assets acquired with public funds have legitimately become private properties.

The CIIF Companies having been acquired with public funds, the 14 CIIF-owned Holding Companies and all their
assets, including the CIIF Block of SMC Shares, being public in character, belong to the government. Even granting
that the 14 Holding Companies acquired the SMC Shares through CIIF advances and UCPB loans, said advances
and loans are still the obligations of the said companies. The incorporating equity or capital of the 14 Holding
Companies, which were allegedly used also for the acquisition of the subject SMC shares, being wholly owned by
the CIIF Companies, likewise form part of the coconut levy funds, and thus belong to the government in trust for the
ultimate beneficiaries thereof, which are all the coconut farmers.

xxx xxx xxx.

And, with the above-findings of the Court, the CIIF block of SMC shares were subsequently declared to be of public
character and should be reconveyed to the government in trust for coconut farmers. The foregoing findings
notwithstanding, a question now arises on whether the same laws can likewise serve as ultimate basis for a finding
that the Cojuangco, et al. block of SMC shares are also imbued with public character and should rightfully be
reconveyed to the government.

On this point, the Court disagrees with plaintiff that reliance on said laws would suffice to prove that defendants
Cojuangco, et al.s acquisition of SMC shares of stock was illegal as public funds were used. For one, plaintiffs
reliance thereon has always had reference only to the CIIF block of shares, and the Court has already settled the
same by going over the laws and quoting related findings in the Partial Summary judgment rendered in Civil Case
No. 0033-A. For another, the allegations of plaintiff pertaining to the Cojuangco block representing twenty percent
(20%) of the outstanding capital stock of SMC stress defendant Cojuangcos acquisition by virtue of his positions as
Chief Executive Officer of UCPB, a member-director of the Philippine Coconut Authority (PCA) Governing Board,
and a director of the CIIF Oil Mills. Thus, reference to the said laws would not settle whether there was abuse on the
part of defendants Cojuangco, et al. of their positions to acquire the SMC shares. [98]

Besides, in the Resolution of the Court on plaintiffs Motion for Parial Summary Judgment (Re: Shares in San
Miguel Corporation Registered in the Respective Names of Defendants Eduardo M. Cojuangco, Jr. and the
defendant Cojuangco Companies), the Court already rejected plaintiffs reference to said laws. In fact, the Court
declined to grant plaintiffs motion for partial summary judgment because it simply contended that defendant
Cojuangcos statements in his pleadings, which plaintiff again offered in evidence herein, regarding the presentation
of a possible CIIF witness as well as UCPB records can already be considered admissions of defendants exclusive
use and misuse of coconut levy funds. In the said resolution, the Court already reminded plaintiff that the issues
cannot be resolved by plaintiffs interpretation of defendant Cojuangcos statements in his brief. Thus, the substantial
portion of the Resolution of the Court denying plaintiffs motion for partial summary judgment is again quoted for
emphasis: [99]

We cannot agree with the plaintiffs contention that the defendants statements in his Pre-Trial Brief regarding the
presentation of a possible CIIF witness as well as UCPB records, can already be considered as admissions of the
defendants exclusive use and misuse of coconut levy funds to acquire the subject SMC shares and defendant
Cojuangcos alleged taking advantage of his positions to acquire the subject SMC shares. Moreover, in ruling on a
motion for summary judgment, the court should take that view of the evidence most favorable to the party against
whom it is directed, giving such party the benefit of all favorable inferences. Inasmuch as this issue cannot be
resolved merely from an interpretation of the defendants statements in his brief, the UCPB records must be produced
and the CIIF witness must be heard to ensure that the conclusions that will be derived have factual basis and are
thus, valid. [100]

WHEREFORE, in view of the foregoing, the Motion for Partial Summary Judgment dated July 11, 2003 is hereby
DENIED for lack of merit.

SO ORDERED.

(Emphasis supplied)

Even assuming that, as plaintiff prayed for, the Court takes judicial notice of the evidence it offered with respect to
the Cojuangco block of SMC shares of stock, as contained in plaintiffs manifestation of purposes, still its evidence
do not suffice to prove the material allegations in the complaint that Cojuangco took advantage of his positions in
UCPB and PCA in order to acquire the said shares. As above-quoted, the Court, itself, has already ruled, and hereby
stress that UCPB records must be produced and the CIIF witness must be heard to ensure that the conclusions that
will be derived have factual basis and are thus, valid. Besides, the Court found that there are genuine factual issues
raised by defendants that need to be threshed out in a full-blown trial, and which plaintiff had the burden to
substantially prove. Thus, the Court outlined these genuine factual issues as follows:

1) What are the various sources of funds, which defendant Cojuangco and his companies claim they utilized to
acquire the disputed SMC shares?

2) Whether or not such funds acquired from alleged various sources can be considered coconut levy funds;

3) Whether or not defendant Cojuangco had indeed served in the governing bodies of PCA, UCPB and/or CIIF Oil
Mills at the time the funds used to purchase the SMC shares were obtained such that he owed a fiduciary duty to
render an account to these entities as well as to the coconut farmers;

4) Whether or not defendant Cojuangco took advantage of his position and/or close ties with then President Marcos
to obtain favorable concessions or exemptions from the usual financial requirements from the lending banks and/or
coco-levy funded companies, in order to raise the funds to acquire the disputed SMC shares; and if so, what are
these favorable concessions or exemptions?[101]

Answers to these issues are not evident from the submissions of plaintiff and must therefore be proven through the
presentation of relevant and competent evidence during trial. A perusal of the subject Motion shows that the plaintiff
hastily derived conclusions from the defendants statements in their previous pleadings although such conclusions
were not supported by categorical facts but only mere inferences. xxx xxx xxx. (Emphasis supplied) [102]

Despite the foregoing pronouncement of the Court, plaintiff did not present any other evidence during the trial of
this case but instead made its manifestation of purposes, that later served as its offer of evidence in the instant case,
that merely used the same evidence it had already relied upon when it moved for partial summary judgment over the
Cojuangco block of SMC shares. Altogether, the Court finds the same insufficient to prove plaintiffs allegations in
the complaint because more than judicial notices, the factual issues require the presentation of admissible, competent
and relevant evidence in accordance with Sections 3 and 4, Rule 128 of the Rules on Evidence.

Moreover, the propriety of taking judicial notice of plaintiffs exhibits is aptly questioned by defendants Cojuangco,
et al. Certainly, the Court can take judicial notice of laws pertaining to the coconut levy funds as well as decisions of
the Supreme Court relative thereto, but taking judicial notice does not mean that the Court would accord full
probative value to these exhibits. Judicial notice is based upon convenience and expediency for it would certainly be
superfluous, inconvenient, and expensive both to parties and the court to require proof, in the ordinary way, of facts
which are already known to courts. However, a court cannot take judicial notice of a factual matter in controversy.
Certainly, there are genuine factual matters in the instant case, as above-cited, which plaintiff ought to have proven
with relevant and competent evidence other than the exhibits it offered.

Referring to plaintiffs causes of action against defendants Cojuangco, et al., the Court finds its evidence insufficient
to prove that the source of funds used to purchase SMC shares indeed came from coconut levy funds. In fact, there is
no direct link that the loans obtained by defendant Cojuangco, Jr. were the same money used to pay for the SMC
shares. The scheme alleged to have been taken by defendant Cojuangco, Jr. was not even established by any paper
trail or testimonial evidence that would have identified the same. On account of his positions in the UCPB, PCA and
the CIIF Oil Mills, the Court cannot conclude that he violated the fiduciary obligations of the positions he held in the
absence of proof that he was so actuated and that he abused his positions.[103]

It was plain, indeed, that Cojuangco, et al. had tendered genuine issues through their responsive pleadings and did
not admit that the acquisition of the Cojuangco block of SMC shares had been illegal, or had been made with public
funds. As a result, the Republic needed to establish its allegations with preponderant competent evidence, because,
as earlier stated, the fact that property was ill gotten could not be presumed but must be substantiated with
competent proof adduced in proper judicial proceedings. That the Republic opted not to adduce competent evidence
thereon despite stern reminders and warnings from the Sandiganbayan to do so revealed that the Republic did not
have the competent evidence to prove its allegations against Cojuangco, et al.

Still, the Republic, relying on the 2001 holding in Republic v. COCOFED,[104] pleads in its petition for review
(G.R. No. 180702) that:

With all due respect, the Honorable Sandiganbayan failed to consider legal precepts and procedural principles
vis--vis the records of the case showing that the funds or various loans or advances used in the acquisition of the
disputed SMC Shares ultimately came from the coconut levy funds.

As discussed hereunder, respondents own admissions in their Answers and Pre-Trial Briefs confirm that the various
sources of funds utilized in the acquisition of the disputed SMC shares came from borrowings and advances from
the UCPB and the CIIF Oil Mills.[105]

Thereby, the Republic would have the Sandiganbayan pronounce the block of SMC shares of stock acquired by
Cojuangco, et al.as ill-gotten wealth even without the Republic first presenting preponderant evidence establishing
that such block had been acquired illegally and with the use of coconut levy funds.

The Court cannot heed the Republics pleas for the following reasons:

To begin with, it is notable that the decision of November 28, 2007 did not rule on whether coconut levy funds were
public funds or not. The silence of the Sandiganbayan on the matter was probably due to its not seeing the need for
such ruling following its conclusion that the Republic had not preponderantly established the source of the funds
used to pay the purchase price of the concerned SMC shares, and whether the shares had been acquired with the use
of coconut levy funds.

Secondly, the ruling in Republic v. COCOFED[106] determined only whether certain stockholders of the UCPB
could vote in the stockholders meeting that had been called. The issue now before the Court could not be controlled
by the ruling in Republic v. COCOFED, however, for even as that ruling determined the issue of voting, the Court
was forthright enough about not thereby preempting the Sandiganbayans decisions on the merits on ill-gotten wealth
in the several cases then pending, including this one, viz:

In making this ruling, we are in no way preempting the proceedings the Sandiganbayan may conduct or the final
judgment it may promulgate in Civil Case No. 0033-A, 0033-B and 0033-F. Our determination here is merely prima
facie, and should not bar the anti-graft court from making a final ruling, after proper trial and hearing, on the issues
and prayers in the said civil cases, particularly in reference to the ownership of the subject shares.

We also lay down the caveat that, in declaring the coco levy funds to be prima facie public in character, we are not
ruling in any final manner on their classification whether they are general or trust or special funds since such
classification is not at issue here. Suffice it to say that the public nature of the coco levy funds is decreed by the
Court only for the purpose of determining the right to vote the shares, pending the final outcome of the said civil
cases.

Neither are we resolving in the present case the question of whether the shares held by Respondent Cojuangco are,
as he claims, the result of private enterprise. This factual matter should also be taken up in the final decision in the

cited cases that are pending in the court a quo. Again, suffice it to say that the only issue settled here is the right of
PCGG to vote the sequestered shares, pending the final outcome of said cases.

Thirdly, the Republics assertion that coconut levy funds had been used to source the payment for the Cojuangco
block of SMC shares was premised on its allegation that the UCPB and the CIIF Oil Mills were public corporations.
But the premise was grossly erroneous and overly presumptuous, because:

(a) The fact of the UCPB and the CIIF Oil Mills being public corporations or government-owned or governmentcontrolled corporations precisely remained controverted by Cojuangco, et al. in light of the lack of any competent to
that effect being in the records;

(b) Cojuangco explicitly averred in paragraph 2.01.(b) of his Answer that the UCPB was a private corporation; and

(c) The Republic did not competently identify or establish which ones of the Cojuangco corporations had
supposedly received advances from the CIIF Oil Mills.

Fourthly, the Republic asserts that the contested block of shares had been paid for with borrowings from the UCPB
and advances from the CIIF Oil Mills, and that such borrowings and advances had been illegal because the shares
had not been purchased for the benefit of the Coconut Farmers. To buttress its assertion, the Republic relied on the
admissions supposedly made in paragraph 2.01 of Cojuangcos Answer in relation to paragraph 4 of the Republics
Amended Complaint.

The best way to know what paragraph 2.01 of Cojuangcos Answer admitted is to refer to both paragraph 4 of the
AmendedComplaint and paragraph 2.01 of his Answer, which are hereunder quoted:

Paragraph 4 of the Amended Complaint

4. Defendant EDUARDO M. COJUANGCO, JR., was Governor of Tarlac, Congressman of then First District of
Tarlac and Ambassador-at-Large in the Marcos Administration. He was commissioned Lieutenant Colonel in the
Philippine Air Force, Reserve. Defendant Eduardo M. Cojuangco, Jr., otherwise known as the Coconut King was
head of the coconut monopoly which was instituted by Defendant Ferdinand E. Marcos, by virtue of the Presidential
Decrees. Defendant Eduardo E. Cojuangco, Jr., who was also one of the closest associates of the Defendant
Ferdinand E. Marcos, held the positions of Director of the Philippine Coconut Authority, the United Coconut Mills,

Inc., President and Board Director of the United Coconut Planters Bank, United Coconut Planters Life Assurance
Corporation, and United Coconut Chemicals, Inc. He was also the Chairman of the Board and Chief Executive
Officer and the controlling stockholder of the San Miguel Corporation. He may be served summons at45 Balete
Drive, Quezon City or at 136 East 9th Street, Quezon City.

Paragraph 2.01 of Respondent Cojuangcos Answer

2.01. Herein defendant admits paragraph 4 only insofar as it alleges the following:

(a) That herein defendant has held the following positions in government: Governor of Tarlac, Congressman of the
then First District of Tarlac, Ambassador-at-Large, Lieutenant Colonel in the Philippine Air Force and Director of
the Philippines Coconut Authority;

(b) That he held the following positions in private corporations: Member of the Board of Directors of the United
Coconut Oil Mills, Inc.; President and member of the Board of Directors of the United Coconut Planters Bank,
United Coconut Planters Life Assurance Corporation, and United Coconut Chemicals, Inc.; Chairman of the Board
and Chief Executive of San Miguel Corporation; and

(c) That he may be served with summons at 136 East 9th Street, Quezon City.

Herein defendant specifically denies the rest of the allegations of paragraph 4, including any insinuation that
whatever association he may have had with the late Ferdinand Marcos or Imelda Marcos has been in connection
with any of the acts or transactions alleged in the complaint or for any unlawful purpose.

It is basic in remedial law that a defendant in a civil case must apprise the trial court and the adverse party of the
facts alleged by the complaint that he admits and of the facts alleged by the complaint that he wishes to place into
contention. The defendant does the former either by stating in his answer that they are true or by failing to properly
deny them. There are two ways of denying alleged facts: one is by general denial, and the other, by specific denial.
[107]

In this jurisdiction, only a specific denial shall be sufficient to place into contention an alleged fact.[108] Under
Section 10,[109]Rule 8 of the Rules of Court, a specific denial of an allegation of the complaint may be made in any
of three ways, namely: (a) a defendant specifies each material allegation of fact the truth of which he does not admit
and, whenever practicable, sets forth the substance of the matters upon which he relies to support his denial; (b) a
defendant who desires to deny only a part of an averment specifies so much of it as is true and material and denies

only the remainder; and (c) a defendant who is without knowledge or information sufficient to form a belief as to the
truth of a material averment made in the complaint states so, which has the effect of a denial.

The express qualifications contained in paragraph 2.01 of Cojuangcos Answer constituted efficient specific denials
of the averments of paragraph 2 of the Republics Amended Complaint under the first method mentioned in Section
10 of Rule 8, supra. Indeed, the aforequoted paragraphs of the Amended Complaint and of Cojuangcos Answer
indicate that Cojuangco therebyexpressly qualified his admission of having been the President and a Director of the
UCPB with the averment that the UCPB was a private corporation; that his Answers allegation of his being a
member of the Board of Directors of the United Coconut Oil Mills, Inc. did not admit that he was a member of the
Board of Directors of the CIIF Oil Mills, because the United Coconut Oil Mills, Inc. was not one of the CIIF Oil
Mills; and that his Answer nowhere contained any admission or statement that he had held the various positions in
the government or in the private corporations at the same time and in 1983, the time when the contested acquisition
of the SMC shares of stock took place.

What the Court stated in Bitong v. Court of Appeals (Fifth Division)[110] as to admissions is illuminating:

When taken in its totality, the Amended Answer to the Amended Petition, or even the Answer to the Amended
Petition alone, clearly raises an issue as to the legal personality of petitioner to file the complaint. Every alleged
admission is taken as an entirety of the fact which makes for the one side with the qualifications which limit, modify
or destroy its effect on the other side. The reason for this is, where part of a statement of a party is used against him
as an admission, the court should weigh any other portion connected with the statement, which tends to neutralize or
explain the portion which is against interest.

In other words, while the admission is admissible in evidence, its probative value is to be determined from the whole
statement and others intimately related or connected therewith as an integrated unit. Although acts or facts admitted
do not require proof and cannot be contradicted, however, evidence aliunde can be presented to show that the
admission was made through palpable mistake. The rule is always in favor of liberality in construction of pleadings
so that the real matter in dispute may be submitted to the judgment of the court.

And, lastly, the Republic cites the following portions of the joint Pre-Trial Brief of Cojuangco, et al.,[111] to wit:

IV.
PROPOSED EVIDENCE
xxx
4.01. xxx Assuming, however, that plaintiff presents evidence to support its principal contentions, defendants
evidence in rebuttal would include testimonial and documentary evidence showing: a) the ownership of the shares of

stock prior to their acquisition by respondents (listed in Annexes A and B); b) the consideration for the acquisition of
the shares of stock by the persons or companies in whose names the shares of stock are now registered; and c) the
source of the funds used to pay the purchase price.

4.02. Herein respondents intend to present the following evidence:

xxx
b. Proposed Exhibits ____, ____, ____

Records of the United Coconut Planters Bank which would show borrowings of the companies listed in Annexes A
and B, or companies affiliated or associated with them, which were used to source payment of the shares of stock of
the San Miguel Corporation subject of this case.

4.03. Witnesses.
xxx
(b) A representative of the United Coconut Planters Bank who will testify in regard the loans which were used to
source the payment of the price of SMC shares of stock.

(c) A representative from the CIIF Oil Mills who will testify in regard the loans or credit advances which were used
to source the payment of the purchase price of the SMC shares of stock.

The Republic insists that the aforequoted portions of the joint Pre-Trial Brief were Cojuangco, et al.s admission that:

(a) Cojuangco had received money from the UCPB, a bank entrusted by law with the administration of the coconut
levy funds; and

(b) Cojuangco had received more money from the CIIF Oil Mills in which part of the CIIF funds had been placed,
and thereby used the funds of the UCPB and the CIIF as capital to buy his SMC shares.[112]

We disagree with the Republics posture.

The statements found in the joint Pre-Trial Brief of Cojuangco, et al. were noticeably written beneath the heading of
Proposed Evidence. Such location indicated that the statements were only being proposed, that is, they were not yet
intended or offered as admission of any fact stated therein. In other words, the matters stated or set forth therein
might or might not be presented at all. Also, the text and tenor of the statements expressly conditioned the proposal
on the Republic ultimately presenting its evidence in the action. After the Republic opted not to present its evidence,
the condition did not transpire; hence, the proposed admissions, assuming that they were that, did not materialize.

Obviously, too, the statements found under the heading of Proposed Evidence in the joint Pre-Trial Brief were
incomplete and inadequate on the important details of the supposed transactions (i.e., alleged borrowings and
advances). As such, they could not constitute admissions that the funds had come from borrowings by Cojuangco, et
al. from the UCPB or had been credit advances from the CIIF Oil Companies. Moreover, the purpose for presenting
the records of the UCPB and the representatives of the UCPB and of the still unidentified or unnamed CIIF Oil Mills
as declared in the joint Pre-Trial Brief did not at all show whether the UCPB and/or the unidentified or unnamed
CIIF Oil Mills were the only sources of funding, or that such institutions, assuming them to be the sources of the
funding, had been the only sources of funding. Such ambiguousness disqualified the statements from being relied
upon as admissions. It is fundamental that any statement, to be considered as an admission for purposes of judicial
proceedings, should be definite, certain and unequivocal;[113] otherwise, the disputed fact will not get settled.

Another reason for rejecting the Republics posture is that the Sandiganbayan, as the trial court, was in no position to
second-guess what the non-presented records of the UCPB would show as the borrowings made by the corporations
listed in Annexes A and B, or by the companies affiliated or associated with them, that were used to source payment
of the shares of stock of the San Miguel Corporation subject of this case, or what the representative of the UCPB or
the representative of the CIIF Oil Mills would testify about loans or credit advances used to source the payment of
the price of SMC shares of stock.

Lastly, the Rules of Court has no rule that treats the statements found under the heading Proposed Evidence as
admissions binding Cojuangco, et al. On the contrary, the Rules of Court has even distinguished between admitted
facts and facts proposed to be admitted during the stage of pre-trial. Section 6 (b),[114] Rule 18 of the Rules of
Court, requires a Pre-Trial Brief to include asummary of admitted facts and a proposed stipulation of facts.
Complying with the requirement, the joint Pre-Trial Brief of Cojuangco, et al. included the summary of admitted
facts in its paragraph 3.00 of its Item III, separately and distinctly from theProposed Evidence, to wit:

III.
SUMMARY OF UNDISPUTED FACTS

3.00. Based on the complaint and the answer, the acquisition of the San Miguel shares by, and their registration in
the names of, the companies listed in Annexes A and B may be deemed undisputed.

3.01. All other allegations in the complaint are disputed.[115]

The burden of proof, according to Section 1, Rule 131 of the Rules of Court, is the duty of a party to present
evidence on the facts in issue necessary to establish his claim or defense by the amount of evidence required by law.
Here, the Republic, being the plaintiff, was the party that carried the burden of proof. That burden required it to
demonstrate through competent evidence that the respondents, as defendants, had purchased the SMC shares of
stock with the use of public funds; and that the affected shares of stock constituted ill-gotten wealth. The Republic
was well apprised of its burden of proof, first through the joinder of issues made by the responsive pleadings of the
defendants, including Cojuangco, et al. The Republic was further reminded through the pre-trial order and the
Resolution denying its Motion for Summary Judgment, supra, of the duty to prove the factual allegations on illgotten wealth against Cojuangco, et al., specifically the following disputed matters:

(a) When the loans or advances were incurred;

(b) The amount of the loans from the UCPB and of the credit advances from the CIIF Oil Mills, including the
specific CIIF Oil Mills involved;

(c) The identities of the borrowers, that is, all of the respondent corporations together, or separately; and the amounts
of the borrowings;

(d) The conditions attendant to the loans or advances, if any;

(e) The manner, form, and time of the payments made to Zobel or to the Ayala Group, whether by check, letter of
credit, or some other form; and

(f) Whether the loans were paid, and whether the advances were liquidated.

With the Republic nonetheless choosing not to adduce evidence proving the factual allegations, particularly the
aforementioned matters, and instead opting to pursue its claims by Motion for Summary Judgment, the
Sandiganbayan became completely deprived of the means to know the necessary but crucial details of the
transactions on the acquisition of the contested block of shares. The Republics failure to adduce evidence shifted no
burden to the respondents to establish anything, for it was basic that the party who asserts, not the party who denies,
must prove.[116] Indeed, in a civil action, the plaintiff has the burden of pleading every essential fact and element of
the cause of action and proving them by preponderance of evidence. This means that if the defendant merely denies
each of the plaintiffs allegations and neither side produces evidence on any such element, the plaintiff must
necessarily fail in the action.[117] Thus, the Sandiganbayan correctly dismissed Civil Case No. 0033-F for failure of
the Republic to prove its case by preponderant evidence.

A summary judgment under Rule 35 of the Rules of Court is a procedural technique that is proper only when there is
no genuine issue as to the existence of a material fact and the moving party is entitled to a judgment as a matter of
law.[118] It is a method intended to expedite or promptly dispose of cases where the facts appear undisputed and
certain from the pleadings, depositions, admissions, and affidavits on record.[119] Upon a motion for summary
judgment the courts sole function is to determine whether there is an issue of fact to be tried, and all doubts as to the
existence of an issue of fact must be resolved against the moving party. In other words, a party who moves for
summary judgment has the burden of demonstrating clearly the absence of any genuine issue of fact, and any doubt
as to the existence of such an issue is resolved against the movant. Thus, in ruling on a motion for summary
judgment, the court should take that view of the evidence most favorable to the party against whom it is directed,
giving that party the benefit of all favorable inferences.[120]

The term genuine issue has been defined as an issue of fact that calls for the presentation of evidence as
distinguished from an issue that is sham, fictitious, contrived, set up in bad faith, and patently unsubstantial so as not
to constitute a genuine issue for trial. The court can determine this on the basis of the pleadings, admissions,
documents, affidavits, and counter-affidavits submitted by the parties to the court. Where the facts pleaded by the
parties are disputed or contested, proceedings for a summary judgment cannot take the place of a trial.[121] Wellsettled is the rule that a party who moves for summary judgment has the burden of demonstrating clearly the
absence of any genuine issue of fact.[122] Upon that partys shoulders rests the burden to prove the cause of action,
and to show that the defense is interposed solely for the purpose of delay. After the burden has been discharged, the
defendant has the burden to show facts sufficient to entitle him to defend.[123] Any doubt as to the propriety of a
summary judgment shall be resolved against the moving party.

We need not stress that the trial courts have limited authority to render summary judgments and may do so only in
cases where no genuine issue as to any material fact clearly exists between the parties. The rule on summary
judgment does not invest the trial courts with jurisdiction to try summarily the factual issues upon affidavits, but
authorizes summary judgment only when it appears clear that there is no genuine issue as to any material fact.[124]

IV.
Republics burden to establish by preponderance of evidence that respondents SMC shares had been illegally
acquired with coconut-levy funds was not discharged

Madame Justice Carpio Morales argues in her dissent that although the contested SMC shares could be inescapably
treated as fruits of funds that are prima facie public in character, Cojuangco, et al. abstained from presenting
countervailing evidence; and that with the Republic having shown that the SMC shares came into fruition from coco
levy funds that are prima facie public funds, Cojuangco, et al. had to go forward with contradicting evidence, but did
not.

The Court disagrees. We cannot reverse the decision of November 28, 2007 on the basis alone of judicial
pronouncements to the effect that the coconut levy funds were prima facie public funds,[125] but without any

competent evidence linking the acquisition of the block of SMC shares by Cojuangco, et al. to the coconut levy
funds.

V.
No violation of the DOSRI and
Single Borrowers Limit restrictions

The Republics lack of proof on the source of the funds by which Cojuangco, et al. had acquired their block of SMC
shares has made it shift its position, that it now suggests that Cojuangco had been enabled to obtain the loans by the
issuance of LOI 926 exempting the UCPB from the DOSRI and the Single Borrowers Limit restrictions.

We reject the Republics suggestion.

Firstly, as earlier pointed out, the Republic adduced no evidence on the significant particulars of the supposed loan,
like the amount, the actual borrower, the approving official, etc. It did not also establish whether or not the loans
were DOSRI[126] or issued in violation of the Single Borrowers Limit. Secondly, the Republic could not outrightly
assume that President Marcos had issued LOI 926 for the purpose of allowing the loans by the UCPB in favor of
Cojuangco. There must be competent evidence to that effect. And, finally, the loans, assuming that they were of a
DOSRI nature or without the benefit of the required approvals or in excess of the Single Borrowers Limit, would not
be void for that reason. Instead, the bank or the officers responsible for the approval and grant of the DOSRI loan
would be subject only to sanctions under the law.[127]

VI.
Cojuangco violated no fiduciary duties

The Republic invokes the following pertinent statutory provisions of the Civil Code, to wit:

Article 1455. When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the
purchase of property and causes the conveyance to be made to him or to a third person, a trust is established by
operation of law in favor of the person to whom the funds belong.

Article 1456. If property is acquired through mistake or fraud, the person obtaining it s by force of law, considered a
trustee of an implied trust for the benefit of the person from whom the property comes.

and the Corporation Code, as follows:

Section 31. Liability of directors, trustees or officers.Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors, or
trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation.

Did Cojuangco breach his fiduciary duties as an officer and member of the Board of Directors of the UCPB? Did his
acquisition and holding of the contested SMC shares come under a constructive trust in favor of the Republic?

The answers to these queries are in the negative.

The conditions for the application of Articles 1455 and 1456 of the Civil Code (like the trustee using trust funds to
purchase, or a person acquiring property through mistake or fraud), and Section 31 of the Corporation Code (like a
director or trustee willfully and knowingly voting for or assenting to patently unlawful acts of the corporation,
among others) require factual foundations to be first laid out in appropriate judicial proceedings. Hence, concluding
that Cojuangco breached fiduciary duties as an officer and member of the Board of Directors of the UCPB without
competent evidence thereon would be unwarranted and unreasonable.

Thus, the Sandiganbayan could not fairly find that Cojuangco had committed breach of any fiduciary duties as an
officer and member of the Board of Directors of the UCPB. For one, the Amended Complaint contained no clear
factual allegation on which to predicate the application of Articles 1455 and 1456 of the Civil Code, and Section 31
of the Corporation Code. Although the trust relationship supposedly arose from Cojuangcos being an officer and
member of the Board of Directors of the UCPB, the linkbetween this alleged fact and the borrowings or advances
was not established. Nor was there evidence on the loans or borrowings, their amounts, the approving authority, etc.
As trial court, the Sandiganbayan could not presume his breach of fiduciary duties without evidence showing so, for
fraud or breach of trust is never presumed, but must be alleged and proved.[128]

The thrust of the Republic that the funds were borrowed or lent might even preclude any consequent trust
implication. In a contract of loan, one of the parties (creditor) delivers money or other consumable thing to another
(debtor) on the condition that the same amount of the same kind and quality shall be paid.[129] Owing to the
consumable nature of the thing loaned, the resulting duty of the borrower in a contract of loan is to pay, not to return,

to the creditor or lender the very thing loaned. This explains why the ownership of the thing loaned is transferred to
the debtor upon perfection of the contract.[130] Ownership of the thing loaned having transferred, the debtor enjoys
all the rights conferred to an owner of property, including the right to use and enjoy (jus utendi), to consume the
thing by its use (jus abutendi), and to dispose (jus disponendi), subject to such limitations as may be provided by
law.[131] Evidently, the resulting relationship between a creditor and debtor in a contract of loan cannot be
characterized as fiduciary.[132]

To say that a relationship is fiduciary when existing laws do not provide for such requires evidence that confidence
is reposed by one party in another who exercises dominion and influence. Absent any special facts and
circumstances proving a higher degree of responsibility, any dealings between a lender and borrower are not
fiduciary in nature.[133] This explains why, for example, a trust receipt transaction is not classified as a simple loan
and is characterized as fiduciary, because the Trust Receipts Law (P.D. No. 115) punishes the dishonesty and abuse
of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the
owner.[134]

Based on the foregoing, a debtor can appropriate the thing loaned without any responsibility or duty to his creditor
to return the very thing that was loaned or to report how the proceeds were used. Nor can he be compelled to return
the proceeds and fruits of the loan, for there is nothing under our laws that compel a debtor in a contract of loan to
do so. As owner, the debtor can dispose of the thing borrowed and his act will not be considered misappropriation of
the thing.[135] The only liability on his part is to pay the loan together with the interest that is either stipulated or
provided under existing laws.

WHEREFORE, the Court dismisses the petitions for certiorari in G.R. Nos. 166859 and 169023; denies the petition
for review on certiorari in G.R. No. 180702; and, accordingly, affirms the decision promulgated by the
Sandiganbayan on November 28, 2007 in Civil Case No. 0033-F.

The Court declares that the block of shares in San Miguel Corporation in the names of respondents Cojuangco, et al.
subject of Civil Case No. 0033-F is the exclusive property of Cojuangco, et al. as registered owners.

Accordingly, the lifting and setting aside of the Writs of Sequestration affecting said block of shares (namely: Writ
of Sequestration No. 86-0062 dated April 21, 1986; Writ of Sequestration No. 86-0069 dated April 22, 1986; Writ of
Sequestration No. 86-0085 dated May 9, 1986; Writ of Sequestration No. 86-0095 dated May 16, 1986; Writ of
Sequestration No. 86-0096 dated May 16, 1986; Writ of Sequestration No. 86-0097 dated May 16, 1986; Writ of
Sequestration No. 86-0098 dated May 16, 1986; Writ of Sequestration No. 86-0042 dated April 8, 1986; and Writ of
Sequestration No. 87-0218 dated May 27, 1987) are affirmed; and the annotation of the conditions prescribed in the
Resolutions promulgated on October 8, 2003 and June 24, 2005 is cancelled.

SO ORDERED.

ALLIED BANKING G.R. No. 133179

CORPORATION,
Petitioner, Present:
QUISUMBING, J., Chairperson,
- versus - CARPIO MORALES,
TINGA,
VELASCO, JR., and
CHICO-NAZARIO,* JJ.
LIM SIO WAN, METROPOLITAN
BANK AND TRUST CO., and Promulgated:
PRODUCERS BANK,
Respondents. March 27, 2008
x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

To ingratiate themselves to their valued depositors, some banks at times bend over backwards that they unwittingly
expose themselves to great risks.
The Case

This Petition for Review on Certiorari under Rule 45 seeks to reverse the Court of Appeals (CAs) Decision
promulgated onMarch 18, 1998[1] in CA-G.R. CV No. 46290 entitled Lim Sio Wan v. Allied Banking Corporation,
et al. The CA Decision modified the Decision dated November 15, 1993[2] of the Regional Trial Court (RTC),
Branch 63 in Makati City rendered in Civil Case No. 6757.
The Facts

The facts as found by the RTC and affirmed by the CA are as follows:

On November 14, 1983, respondent Lim Sio Wan deposited with petitioner Allied Banking Corporation (Allied) at
its Quintin Paredes Branch in Manila a money market placement of PhP 1,152,597.35 for a term of 31 days to
mature on December 15, 1983,[3]as evidenced by Provisional Receipt No. 1356 dated November 14, 1983.[4]

On December 5, 1983, a person claiming to be Lim Sio Wan called up Cristina So, an officer of Allied, and
instructed the latter to pre-terminate Lim Sio Wans money market placement, to issue a managers check representing
the proceeds of the placement, and to give the check to one Deborah Dee Santos who would pick up the check.[5]
Lim Sio Wan described the appearance of Santos so that So could easily identify her.[6]

Later, Santos arrived at the bank and signed the application form for a managers check to be issued.[7] The bank
issued Managers Check No. 035669 for PhP 1,158,648.49, representing the proceeds of Lim Sio Wans money
market placement in the name of Lim Sio Wan, as payee.[8] The check was cross-checked For Payees Account Only
and given to Santos.[9]

Thereafter, the managers check was deposited in the account of Filipinas Cement Corporation (FCC) at respondent
Metropolitan Bank and Trust Co. (Metrobank),[10] with the forged signature of Lim Sio Wan as indorser.[11]

Earlier, on September 21, 1983, FCC had deposited a money market placement for PhP 2 million with respondent
Producers Bank.Santos was the money market trader assigned to handle FCCs account.[12] Such deposit is
evidenced by Official Receipt No. 317568[13] and a Letter dated September 21, 1983 of Santos addressed to Angie
Lazo of FCC, acknowledging receipt of the placement.[14] The placement matured on October 25, 1983 and was
rolled-over until December 5, 1983 as evidenced by a Letter dated October 25, 1983.[15] When the placement
matured, FCC demanded the payment of the proceeds of the placement.[16] OnDecember 5, 1983, the same date
that So received the phone call instructing her to pre-terminate Lim Sio Wans placement, the managers check in the
name of Lim Sio Wan was deposited in the account of FCC, purportedly representing the proceeds of FCCs money
market placement with Producers Bank.[17] In other words, the Allied check was deposited with Metrobank in the
account of FCC as Producers Banks payment of its obligation to FCC.

To clear the check and in compliance with the requirements of the Philippine Clearing House Corporation (PCHC)
Rules and Regulations, Metrobank stamped a guaranty on the check, which reads: All prior endorsements and/or
lack of endorsement guaranteed.[18]

The check was sent to Allied through the PCHC. Upon the presentment of the check, Allied funded the check even
without checking the authenticity of Lim Sio Wans purported indorsement. Thus, the amount on the face of the
check was credited to the account of FCC.[19]

On December 9, 1983, Lim Sio Wan deposited with Allied a second money market placement to mature on January
9, 1984.[20]

On December 14, 1983, upon the maturity date of the first money market placement, Lim Sio Wan went to Allied to
withdraw it.[21]She was then informed that the placement had been pre-terminated upon her instructions. She
denied giving any instructions and receiving the proceeds thereof. She desisted from further complaints when she
was assured by the banks manager that her money would be recovered.[22]

When Lim Sio Wans second placement matured on January 9, 1984, So called Lim Sio Wan to ask for the latters
instructions on the second placement. Lim Sio Wan instructed So to roll-over the placement for another 30 days.[23]
On January 24, 1984, Lim Sio Wan, realizing that the promise that her money would be recovered would not
materialize, sent a demand letter to Allied asking for the payment of the first placement.[24] Allied refused to pay
Lim Sio Wan, claiming that the latter had authorized the pre-termination of the placement and its subsequent release
to Santos.[25]

Consequently, Lim Sio Wan filed with the RTC a Complaint dated February 13, 1984[26] docketed as Civil Case
No. 6757 against Allied to recover the proceeds of her first money market placement. Sometime in February 1984,
she withdrew her second placement from Allied.

Allied filed a third party complaint[27] against Metrobank and Santos. In turn, Metrobank filed a fourth party
complaint[28] against FCC. FCC for its part filed a fifth party complaint[29] against Producers Bank. Summonses
were duly served upon all the parties except for Santos, who was no longer connected with Producers Bank.[30]

On May 15, 1984, or more than six (6) months after funding the check, Allied informed Metrobank that the
signature on the check was forged.[31] Thus, Metrobank withheld the amount represented by the check from FCC.
Later on, Metrobank agreed to release the amount to FCC after the latter executed an Undertaking, promising to
indemnify Metrobank in case it was made to reimburse the amount.[32]

Lim Sio Wan thereafter filed an amended complaint to include Metrobank as a party-defendant, along with Allied.
[33] The RTC admitted the amended complaint despite the opposition of Metrobank.[34] Consequently, Allieds third
party complaint against Metrobank was converted into a cross-claim and the latters fourth party complaint against
FCC was converted into a third party complaint.[35]

After trial, the RTC issued its Decision, holding as follows:

WHEREFORE, judgment is hereby rendered as follows:

1. Ordering defendant Allied Banking Corporation to pay plaintiff the amount of P1,158,648.49 plus 12% interest
per annum from March 16, 1984until fully paid;
2. Ordering defendant Allied Bank to pay plaintiff the amount of P100,000.00 by way of moral damages;
3. Ordering defendant Allied Bank to pay plaintiff the amount of P173,792.20 by way of attorneys fees; and,
4. Ordering defendant Allied Bank to pay the costs of suit.

Defendant Allied Banks cross-claim against defendant Metrobank is DISMISSED.

Likewise defendant Metrobanks third-party complaint as against Filipinas Cement Corporation is DISMISSED.

Filipinas Cement Corporations fourth-party complaint against Producers Bank is also DISMISSED.

SO ORDERED.[36]

The Decision of the Court of Appeals

Allied appealed to the CA, which in turn issued the assailed Decision on March 18, 1998, modifying the RTC
Decision, as follows:

WHEREFORE, premises considered, the decision appealed from is MODIFIED. Judgment is rendered ordering and
sentencing defendant-appellant Allied Banking Corporation to pay sixty (60%) percent and defendant-appellee
Metropolitan Bank and Trust Company forty (40%) of the amount of P1,158,648.49 plus 12% interest per annum
from March 16, 1984 until fully paid. The moral damages, attorneys fees and costs of suit adjudged shall likewise be
paid by defendant-appellant Allied Banking Corporation and defendant-appellee Metropolitan Bank and Trust
Company in the same proportion of 60-40. Except as thus modified, the decision appealed from is AFFIRMED.

SO ORDERED.[37]

Hence, Allied filed the instant petition.

The Issues

Allied raises the following issues for our consideration:

The Honorable Court of Appeals erred in holding that Lim Sio Wan did not authorize [Allied] to pre-terminate the
initial placement and to deliver the check to Deborah Santos.

The Honorable Court of Appeals erred in absolving Producers Bank of any liability for the reimbursement of
amount adjudged demandable.

The Honorable Court of Appeals erred in holding [Allied] liable to the extent of 60% of amount adjudged
demandable in clear disregard to the ultimate liability of Metrobank as guarantor of all endorsement on the check, it
being the collecting bank.[38]

The petition is partly meritorious.

A Question of Fact

Allied questions the finding of both the trial and appellate courts that Allied was not authorized to release the
proceeds of Lim Sio Wans money market placement to Santos. Allied clearly raises a question of fact. When the CA
affirms the findings of fact of the RTC, the factual findings of both courts are binding on this Court.[39]

We also agree with the CA when it said that it could not disturb the trial courts findings on the credibility of witness
So inasmuch as it was the trial court that heard the witness and had the opportunity to observe closely her
deportment and manner of testifying.Unless the trial court had plainly overlooked facts of substance or value, which,

if considered, might affect the result of the case,[40]we find it best to defer to the trial court on matters pertaining to
credibility of witnesses.
Additionally, this Court has held that the matter of negligence is also a factual question.[41] Thus, the finding of the
RTC, affirmed by the CA, that the respective parties were negligent in the exercise of their obligations is also
conclusive upon this Court.

The Liability of the Parties

As to the liability of the parties, we find that Allied is liable to Lim Sio Wan. Fundamental and familiar is the
doctrine that the relationship between a bank and a client is one of debtor-creditor.

Articles 1953 and 1980 of the Civil Code provide:

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same kind and quality.

Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loan.

Thus, we have ruled in a line of cases that a bank deposit is in the nature of a simple loan or mutuum.[42] More
succinctly, inCitibank, N.A. (Formerly First National City Bank) v. Sabeniano, this Court ruled that a money market
placement is a simple loan or mutuum.[43] Further, we defined a money market in Cebu International Finance
Corporation v. Court of Appeals, as follows:

[A] money market is a market dealing in standardized short-term credit instruments (involving large amounts) where
lenders and borrowers do not deal directly with each other but through a middle man or dealer in open market. In a
money market transaction, the investor is a lender who loans his money to a borrower through a middleman or
dealer.

In the case at bar, the money market transaction between the petitioner and the private respondent is in the nature of
a loan.[44]

Lim Sio Wan, as creditor of the bank for her money market placement, is entitled to payment upon her request, or
upon maturity of the placement, or until the bank is released from its obligation as debtor. Until any such event, the
obligation of Allied to Lim Sio Wan remains unextinguished.

Art. 1231 of the Civil Code enumerates the instances when obligations are considered extinguished, thus:

Art. 1231. Obligations are extinguished:

(1)

By payment or performance;

(2)

By the loss of the thing due;

(3)

By the condonation or remission of the debt;

(4)

By the confusion or merger of the rights of creditor and debtor;

(5)

By compensation;

(6)

By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition,
and prescription, are governed elsewhere in this Code. (Emphasis supplied.)

From the factual findings of the trial and appellate courts that Lim Sio Wan did not authorize the release of her
money market placement to Santos and the bank had been negligent in so doing, there is no question that the
obligation of Allied to pay Lim Sio Wan had not been extinguished. Art. 1240 of the Code states that payment shall
be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person
authorized to receive it. As commented by Arturo Tolentino:

Payment made by the debtor to a wrong party does not extinguish the obligation as to the creditor, if there is no fault
or negligence which can be imputed to the latter. Even when the debtor acted in utmost good faith and by mistake as
to the person of his creditor, or through error induced by the fraud of a third person, the payment to one who is not in
fact his creditor, or authorized to receive such payment, is void, except as provided in Article 1241. Such payment
does not prejudice the creditor, and accrual of interest is not suspended by it.[45] (Emphasis supplied.)

Since there was no effective payment of Lim Sio Wans money market placement, the bank still has an obligation to
pay her at six percent (6%) interest from March 16, 1984 until the payment thereof.

We cannot, however, say outright that Allied is solely liable to Lim Sio Wan.

Allied claims that Metrobank is the proximate cause of the loss of Lim Sio Wans money. It points out that
Metrobank guaranteed all prior indorsements inscribed on the managers check, and without Metrobanks guarantee,
the present controversy would never have occurred. According to Allied:

Failure on the part of the collecting bank to ensure that the proceeds of the check is paid to the proper party is, aside
from being an efficient intervening cause, also the last negligent act, x x x contributory to the injury caused in the
present case, which thereby leads to the conclusion that it is the collecting bank, Metrobank that is the proximate
cause of the alleged loss of the plaintiff in the instant case.[46]

We are not persuaded.

Proximate cause is that cause, which, in natural and continuous sequence, unbroken by any efficient intervening
cause, produces the injury and without which the result would not have occurred.[47] Thus, there is an efficient
supervening event if the event breaks the sequence leading from the cause to the ultimate result. To determine the
proximate cause of a controversy, the question that needs to be asked is: If the event did not happen, would the
injury have resulted? If the answer is NO, then the event is the proximate cause.

In the instant case, Allied avers that even if it had not issued the check payment, the money represented by the check
would still be lost because of Metrobanks negligence in indorsing the check without verifying the genuineness of the
indorsement thereon.

Section 66 in relation to Sec. 65 of the Negotiable Instruments Law provides:

Section 66. Liability of general indorser.Every indorser who indorses without qualification, warrants to all
subsequent holders in due course;

a)

The matters and things mentioned in subdivisions (a), (b) and (c) of the next preceding section; and

b)

That the instrument is at the time of his indorsement valid and subsisting;

And in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be
according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.

Section 65. Warranty where negotiation by delivery, so forth.Every person negotiating an instrument by delivery or
by a qualified indorsement, warrants:

a)

That the instrument is genuine and in all respects what it purports to be;

b)

That he has a good title of it;

c)

That all prior parties had capacity to contract;

d)

That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless.

But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate
transferee.

The provisions of subdivision (c) of this section do not apply to persons negotiating public or corporation securities,
other than bills and notes.(Emphasis supplied.)

The warranty that the instrument is genuine and in all respects what it purports to be covers all the defects in the
instrument affecting the validity thereof, including a forged indorsement. Thus, the last indorser will be liable for the
amount indicated in the negotiable instrument even if a previous indorsement was forged. We held in a line of cases
that a collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank
guarantees all prior indorsements, including the forged indorsement itself, and ultimately should be held liable
therefor.[48]

However, this general rule is subject to exceptions. One such exception is when the issuance of the check itself was
attended with negligence. Thus, in the cases cited above where the collecting bank is generally held liable, in two of
the cases where the checks were negligently issued, this Court held the institution issuing the check just as liable as
or more liable than the collecting bank.

In isolated cases where the checks were deposited in an account other than that of the payees on the strength of
forged indorsements, we held the collecting bank solely liable for the whole amount of the checks involved for
having indorsed the same. InRepublic Bank v. Ebrada,[49] the check was properly issued by the Bureau of Treasury.
While in Banco de Oro Savings and Mortgage Bank (Banco de Oro) v. Equitable Banking Corporation,[50] Banco
de Oro admittedly issued the checks in the name of the correct payees. And in Traders Royal Bank v. Radio
Philippines Network, Inc.,[51] the checks were issued at the request of Radio Philippines Network, Inc. from
Traders Royal Bank.
However, in Bank of the Philippine Islands v. Court of Appeals, we said that the drawee bank is liable for 60% of
the amount on the face of the negotiable instrument and the collecting bank is liable for 40%. We also noted the
relative negligence exhibited by two banks, to wit:

Both banks were negligent in the selection and supervision of their employees resulting in the encashment of the
forged checks by an impostor. Both banks were not able to overcome the presumption of negligence in the selection
and supervision of their employees. It was the gross negligence of the employees of both banks which resulted in the
fraud and the subsequent loss. While it is true that petitioner BPIs negligence may have been the proximate cause of
the loss, respondent CBCs negligence contributed equally to the success of the impostor in encashing the proceeds
of the forged checks. Under these circumstances, we apply Article 2179 of the Civil Code to the effect that while
respondent CBC may recover its losses, such losses are subject to mitigation by the courts. (See Phoenix
Construction Inc. v. Intermediate Appellate Courts, 148 SCRA 353 [1987]).

Considering the comparative negligence of the two (2) banks, we rule that the demands of substantial justice are
satisfied by allocating the loss of P2,413,215.16 and the costs of the arbitration proceeding in the amount of
P7,250.00 and the cost of litigation on a 60-40 ratio.[52]

Similarly, we ruled in Associated Bank v. Court of Appeals that the issuing institution and the collecting bank should
equally share the liability for the loss of amount represented by the checks concerned due to the negligence of both
parties:

The Court finds as reasonable, the proportionate sharing of fifty percent-fifty percent (50%-50%). Due to the
negligence of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in
allowing the retired hospital cashier to receive the checks for the payee hospital for a period close to three years and
in not properly ascertaining why the retired hospital cashier was collecting checks for the payee hospital in addition
to the hospitals real cashier, respondent Province contributed to the loss amounting to P203,300.00 and shall be
liable to the PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent
(50%) of P203,300.00 from PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on
its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the
genuineness of all prior indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas. Associated
Bank was also remiss in its duty to ascertain the genuineness of the payees indorsement.[53]

A reading of the facts of the two immediately preceding cases would reveal that the reason why the bank or
institution which issued the check was held partially liable for the amount of the check was because of the
negligence of these parties which resulted in the issuance of the checks.
In the instant case, the trial court correctly found Allied negligent in issuing the managers check and in transmitting
it to Santoswithout even a written authorization.[54] In fact, Allied did not even ask for the certificate evidencing the
money market placement or call up Lim Sio Wan at her residence or office to confirm her instructions. Both actions
could have prevented the whole fraudulent transaction from unfolding. Allieds negligence must be considered as the
proximate cause of the resulting loss.

To reiterate, had Allied exercised the diligence due from a financial institution, the check would not have been
issued and no loss of funds would have resulted. In fact, there would have been no issuance of indorsement had
there been no check in the first place.

The liability of Allied, however, is concurrent with that of Metrobank as the last indorser of the check. When
Metrobank indorsed the check in compliance with the PCHC Rules and Regulations[55] without verifying the
authenticity of Lim Sio Wans indorsement and when it accepted the check despite the fact that it was cross-checked
payable to payees account only,[56] its negligent and cavalier indorsement contributed to the easier release of Lim
Sio Wans money and perpetuation of the fraud. Given the relative participation of Allied and Metrobank to the
instant case, both banks cannot be adjudged as equally liable. Hence, the 60:40 ratio of the liabilities of Allied and
Metrobank, as ruled by the CA, must be upheld.

FCC, having no participation in the negotiation of the check and in the forgery of Lim Sio Wans indorsement, can
raise the real defense of forgery as against both banks.[57]

As to Producers Bank, Allied Banks argument that Producers Bank must be held liable as employer of Santos under
Art. 2180 of the Civil Code is erroneous. Art. 2180 pertains to the vicarious liability of an employer for quasi-delicts
that an employee has committed. Such provision of law does not apply to civil liability arising from delict.

One also cannot apply the principle of subsidiary liability in Art. 103 of the Revised Penal Code in the instant case.
Such liability on the part of the employer for the civil aspect of the criminal act of the employee is based on the
conviction of the employee for a crime. Here, there has been no conviction for any crime.

As to the claim that there was unjust enrichment on the part of Producers Bank, the same is correct. Allied correctly
claims in its petition that Producers Bank should reimburse Allied for whatever judgment that may be rendered
against it pursuant to Art. 22 of the Civil Code, which provides: Every person who through an act of performance by
another, or any other means, acquires or comes into possession of something at the expense of the latter without just
cause or legal ground, shall return the same to him.

The above provision of law was clarified in Reyes v. Lim, where we ruled that [t]here is unjust enrichment when a
person unjustly retains a benefit to the loss of another, or when a person retains money or property of another against
the fundamental principles of justice, equity and good conscience.[58]

In Tamio v. Ticson, we further clarified the principle of unjust enrichment, thus: Under Article 22 of the Civil Code,
there is unjust enrichment when (1) a person is unjustly benefited, and (2) such benefit is derived at the expense of
or with damages to another.[59]

In the instant case, Lim Sio Wans money market placement in Allied Bank was pre-terminated and withdrawn
without her consent. Moreover, the proceeds of the placement were deposited in Producers Banks account in
Metrobank without any justification. In other words, there is no reason that the proceeds of Lim Sio Wans placement
should be deposited in FCCs account purportedly as payment for FCCs money market placement and interest in
Producers Bank. With such payment, Producers Banks indebtedness to FCC was extinguished, thereby benefitting
the former. Clearly, Producers Bank was unjustly enriched at the expense of Lim Sio Wan. Based on the facts and
circumstances of the case, Producers Bank should reimburse Allied and Metrobank for the amounts the two latter
banks are ordered to pay Lim Sio Wan.

It cannot be validly claimed that FCC, and not Producers Bank, should be considered as having been unjustly
enriched. It must be remembered that FCCs money market placement with Producers Bank was already due and
demandable; thus, Producers Banks payment thereof was justified. FCC was entitled to such payment. As earlier
stated, the fact that the indorsement on the check was forged cannot be raised against FCC which was not a part in
any stage of the negotiation of the check. FCC was not unjustly enriched.

From the facts of the instant case, we see that Santos could be the architect of the entire controversy. Unfortunately,
since summons had not been served on Santos, the courts have not acquired jurisdiction over her.[60] We, therefore,
cannot ascribe to her liability in the instant case.

Clearly, Producers Bank must be held liable to Allied and Metrobank for the amount of the check plus 12% interest
per annum, moral damages, attorneys fees, and costs of suit which Allied and Metrobank are adjudged to pay Lim
Sio Wan based on a proportion of 60:40.

WHEREFORE, the petition is PARTLY GRANTED. The March 18, 1998 CA Decision in CA-G.R. CV No. 46290
and the November 15, 1993 RTC Decision in Civil Case No. 6757 are AFFIRMED with MODIFICATION.

Thus, the CA Decision is AFFIRMED, the fallo of which is reproduced, as follows:

WHEREFORE, premises considered, the decision appealed from is MODIFIED. Judgment is rendered ordering and
sentencing defendant-appellant Allied Banking Corporation to pay sixty (60%) percent and defendant-appellee
Metropolitan Bank and Trust Company forty (40%) of the amount of P1,158,648.49 plus 12% interest per annum
from March 16, 1984 until fully paid. The moral damages, attorneys fees and costs of suit adjudged shall likewise be
paid by defendant-appellant Allied Banking Corporation and defendant-appellee Metropolitan Bank and Trust
Company in the same proportion of 60-40. Except as thus modified, the decision appealed from is AFFIRMED.

SO ORDERED.

Additionally and by way of MODIFICATION, Producers Bank is hereby ordered to pay Allied and Metrobank the
aforementioned amounts. The liabilities of the parties are concurrent and independent of each other.

SO ORDERED.

DORIE ABESA NICOLAS, G.R. No. 158026

Petitioner,
Present:
PUNO, C.J., Chairperson,
CARPIO,
- versus - *CORONA,
AZCUNA, and
LEONARDO-DE CASTRO, JJ.

DEL-NACIA CORPORATION, Promulgated:

Respondent. April 23, 2008

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

DECISION

PUNO, C.J.:

This case arose from a complaint for unfair business practice[1] filed by petitioner Dorie Abesa Nicolas (Mrs.
Nicolas) against respondent Del-Nacia Corporation (Del-Nacia) before the Housing and Land Use Regulatory Board
(HLURB).
On February 20, 1988, the spouses Armando Nicolas and Dorie Abesa Nicolas (Spouses Nicolas) and Del-Nacia
entered into a Land Purchase Agreement[2] (Agreement) for the sale by the latter to the former of a parcel of land,
covered by Transfer Certificate of Title No. 233702, consisting of 10,000 square meters, situated at Lot No. 3-B-4,
Del Nacia Ville No. 5, San Jose del Monte, Bulacan.
The relevant parts of the Agreement are:
(1) The PURCHASER agrees to pay to the OWNER upon execution of this Contract the sum of FORTY
THOUSAND PESOS (P40,000) as first payment on account of the purchase price and agrees to pay the balance of
FIVE HUNDRED TEN THOUSAND PESOS (P510,000) at the office of the OWNER in the City of Quezon,
Philippines, or such other office as the OWNER may designate in 120 equal monthly installment of NINE
THOUSAND ONE HUNDRED EIGHTY NINE AND 45/100 PESOS (P9,189.45) interest being included on
successive monthly balance at 18% per annum, and payments to be made on the _____ day of each month thereafter
beginning April 20, 1988.

xxxx

(5) In the event that any of the payments as stipulated be not paid when, where, and as the same become due; it is
agreed that sums in arrears shall bear interest at the rate of EIGHTEEN (18%) per centum per annum payable
monthly from the date on which said sums is due and payable.

(6) If any such payment or payments shall continue in arrears for more than sixty-days, or if the PURCHASER shall
violate any of the conditions herein set forth then the entire unpaid balance due under this contract, with any interest
which may have attached shall at once become due and payable and shall bear interest at the rate of TWELVE (12%)
per centum per annum until paid, and in such case, the PURCHASER further agrees to pay to the OWNER a sum
equal to ten (10%) per centum of the amount due as attorneys fees.[3]

Under the Agreement, the ownership of the land remains with Del-Nacia until full payment of the stipulated
purchase price under the following terms and conditions:
(3) Title to said parcel of land shall remain in the name of the OWNER until complete payment by the
PURCHASER of all obligations herein stipulated, at which time the OWNER agree to execute a final deed of sale in
favor of the PURCHASER and cause the issuance of a certificate of title in the name of the latter, free from liens
and encumbrances except those provided in the Land Registration Act, those imposed by the authorities, and those
contained in Clauses (10) and (16) of this agreement. Registration fees and documentary stamps of the deed of sale
shall be paid by the PURCHASER.

(4) Only the PURCHASER shall be deemed for all legal purposes to take possession of the parcel of land upon
payment of the down payment provided, however, that his/her possession under this section shall be only that of a
tenant or lessee, and subject to ejectment proceedings during all the period of this agreement.
xxxx
(7) In case the PURCHASER fails to comply with any conditions of this contract and/or to pay any payments herein
agreed upon, the PURCHASER shall be granted a period or periods of grace which in no case shall exceed (60) days
to be counted from the condition breached ought to be complied with or the said payments ought have been made,
during which period of grace the PURCHASER must comply with the said condition or satisfy all due monetary
obligations including those which correspond to the period of grace. OTHERWISE, the Contract shall be
automatically cancelled and rescinded and of no force and effect, and as a consequence therefore, the OWNER may
dispose of the parcels of land covered by this Contract in favor of other persons, as if this Contract had never been
entered into. In case of such cancellation of this Contract all amounts paid in accordance with this agreement,
together with all the improvements introduced in the premises, shall be considered as rents for the use and
occupation of the abovementioned premises and as payments for the damages suffered on the OWNER on account
of the failure of the PURCHASER to fulfill his part of this Contract and the PURCHASER hereby renounces all his
rights to demand or reclaim the return of the same and further obligates himself to peacefully vacate the premises
and deliver the same to the OWNER; PROVIDED, HOWEVER, that any consideration, concession, tolerance or
relaxation of provisions shall not be interpreted as a renunciation on the part of OWNER of any rights granted in this
Contract.[4]

Upon signing of the Agreement, the Spouses Nicolas paid the down payment of P40,000. Thereupon, the Spouses
Nicolas took possession of the land, and for several months thereafter, paid on or before the 20th of each month, the
monthly amortizations.[5]
Unfortunately, however, Armando Nicolas died shortly after the signing of the Agreement and Mrs. Nicolas began to
falter in her payments. As found by Arbiter Jose A. Atencio, Jr. (HLURB Arbiter) of the Office of Appeals,
Adjudication and Legal Affairs (OAAL), HLURB Region III, the records of Del-Nacia indicate that Mrs. Nicolas is

delinquent in her monthly amortization for the following months: November 1988; March 1989; May 1989; June
1989-July 1989; September 1989; October 1989; November 1989-December 1989; February 1990-September 1990;
October 1990-November 1990; December 1990-April 1991. The last payment of Mrs. Nicolas was made on July 19,
1991.[6]
Del-Nacia sent Mrs. Nicolas notice to pay her arrearages with a grace period of sixty (60) days within which to
make payment but to no avail. Del-Nacia then caused the notarial cancellation of the Agreement on December 3,
1991.[7]
Subsequently, Del-Nacia verbally informed Mrs. Nicolas to get the cash surrender value of her payment at its office.
However, Mrs. Nicolas did not claim the same. Del-Nacia prepared a check in the amount of P270,651.88
representing the cash surrender value of Mrs. Nicolass payment and sent it to her by registered mail. The check was
received by Mrs. Nicolas and until now it remains in her possession.[8]
On February 23, 1993, Mrs. Nicolas filed a Complaint[9] against Del-Nacia before the HLURB. On December 15,
1994, the HLURB Arbiter rendered a Decision[10] (Arbiter Decision) with the following disposition:
PREMISES considered, judgment is hereby rendered as follows:
a. Declaring the notarial cancellation of the contract on December 3, 1991 as null and void.
b. Ordering respondent to fortwith furnish complainant accounting of the paid and unpaid amortizations including
interests and penalty interests and other stipulated fees or charges covering the period or delinquent payments, as a
consequence of the latters default stating clearly and specifically the bases as stated in the contract and for the
complainant to pay her unpaid obligations within forty five (45) days from receipt of the said
computation/accounting.
c. Ordering the same respondent to execute the pertinent deed in favor of the complainant within fifteen (15) days
from receipt of complainants full payment under paragraph b aforementioned and thereafter to deliver to the latter
the Transfer Certificate of Title of the lot in question.
d. Remedies provided under R.A. 6552 and other legal remedies may be resorted to, at the option of the respondent,
if complainant fails or refuses to pay within the period provided under paragraph b.
So Ordered.[11]

Mrs. Nicolas sought review of the Arbiter Decision by the HLURB Board of Commissions (HLURB Board) on the
following assignment of errors:
FIRST ASSIGNMENT OF ERROR
THE HON. ARBITER ERRED IN ORDERING THE INCLUSION OF INTERESTS, PENALTY INTERESTS
AND OTHER STIPULATED FEES OR CHARGES IN THE UNILATERAL COMPUTATION TO BE MADE BY
THE RESPONDENT-APPELLEE AS THE UNPAID OBLIGATION OF COMPLAINANT-APPELLANT.

SECOND ASSIGNMENT OF ERROR

THE HON. ARBITER ERRED IN ORDERING THE COMPLAINANT-APPELLANT TO PAY HER SUPPOSED
UNPAID OBLIGATION BASED UPON THE UNILATERAL COMPUTATION OF RESPONDENT-APPELLEE
WITHIN FORTY FIVE (45) DAYS FROM RECEIPT OF SAID COMPUTATION/ACCOUNTING.

THIRD ASSIGNMENT OF ERROR

THE HON. ARBITER ERRED IN GIVING RESPONDENT-APPELLEE THE RIGHT TO RESORT TO
REMEDIES PROVIDED UNDER R.A. 6552 AND OTHER LEGAL REMEDIES.

FOURTH ASSIGNMENT OF ERROR

THE HON. ARBITER ERRED IN NOT AWARDING ATTORNEYS FEES IN THE SUM OF P50,000.00 TO
COMPLAINANT-APPELLANT.

FIFTH ASSIGNMENT OF ERROR

THE HON. ARBITER ERRED IN NOT GRANTING THE PRAYER OF COMPLAINANT-APPELLANT IN HER
COMPLAINT.[12]

The HLURB Board was partly receptive of the appeal and, on December 1, 1995, it handed down a Decision[13]
(HLURB Board Decision) adjudging that:
WHEREFORE, in light of the foregoing premises, we hereby MODIFY the Decision dated 15 December 1994 of
the Office a Quo, insofar as paragraph (b) of the dispositive portion is concerned and an additional paragraph e, to
wit:

(b)
Ordering complainant to pay respondent within sixty (60) days from receipt hereof the amount of one
hundred seventy three thousand nine hundred fifty seven pesos and 29/1000 (P173,957.29) representing the
remaining balance of the installment purchase price of the land inclusive of legal interests at the rate of twelve
percent (12%) per annum.

(e)
Ordering respondent to pay this Board the amount of ten thousand (P10,000) as an administrative fine
for violation of Section 5 of P.D. 957 within thirty (30) days from finality hereof.

SO ORDERED. Quezon City.[14]

Del-Nacia filed a Motion for Reconsideration[15] and a Supplement to Motion for Reconsideration.[16] Meanwhile,
Mrs. Nicolas filed a motion for the consignment of P173,957.29, representing the balance of the purchase price of
the land as found by the HLURB Board.
On June 21, 1996, the HLURB Board resolved to deny Del-Nacias motion for reconsideration and ordered Mrs.
Nicolas to deposit with it for safekeeping the amount indicated in its Decision until Del-Nacia is willing to accept
the same.[17]
Consequently, Del-Nacia appealed to the Office of the President which, however, was dismissed by its Decision
dated March 4, 1998 (O.P. Original Decision).[18] Upon motion for reconsideration, however, the Office of the
President, in a Resolution datedJanuary 5, 2001[19] (O.P. Resolution), set aside the O.P. Original Decision and
affirmed the Arbiter Decision in toto.
Unsuccessful in her bid at overturning the O.P. Resolution, Mrs. Nicolas filed a Petition for Review[20] with the
Court of Appeals (CA) docketed as CA-G.R. SP No. 68407. The CA initially dismissed her petition for failing to
comply with the procedural requirements of Section 6(c) of Rule 43 of the Revised Rules of Court.[21] Mrs. Nicolas
filed an omnibus motion praying that the CA reconsider and set aside the dismissal of her petition and to admit her
amended petition.[22] The CA then required Del-Nacia to submit its comment to the petition.[23]
On January 23, 2003, the CA rendered its Decision,[24] affirming the O.P. Resolution, to wit:
WHEREFORE, finding no flaw in the appealed O.P. Resolution, the same is hereby AFFIRMED in toto, with costs
against Mrs. Nicolas.

SO ORDERED.

The Motion for Reconsideration[25] filed by Mrs. Nicolas was denied by the CA in its Resolution dated April 29,
2003.[26]
Hence, this Petition for Review on Certiorari[27], raising the lone issue of:
WHETHER OR NOT complainant (now petitioner) is bound to pay the interests, penalty interests and other
stipulated charges based on the unilateral accounting or computation made by respondent.[28]

The instant petition prays that the O.P. Original Decision, which affirmed the HLURB Board Decision, be reinstated
by this Court.
In its Comment, Del-Nacia argues that the instant petition be denied for the following reasons: (1) failure to comply
with section 4, Rule 45, and (2) failure to advance any special reason that would warrant the exercise by this Court
of its discretionary power of review.
Before discussing the merits of the case, we shall first discuss its procedural aspect.
Del-Nacia urges this Court to dismiss the instant petition for failing to attach material portions of the records of the
case that will support the same as required under Section 6 of Rule 46 of the Revised Rules of Court, such as, for
instance, copies of her own pleadings filed before the proceedings below.[29] It appears that the Agreement of the
parties, subject of the dispute, was not attached to the petition. Nevertheless, since the Agreement and the other

documents that were not attached to the petition are already part of the records of this case, and could easily be
referred to by this Court if necessary, a dismissal of the instant petition purely on technical grounds is not warranted.
Indeed, the Court has, in past cases, granted relief in favor of the petitioner despite this procedural infirmity.[30]
Thus, we explained the rationale behind the Courts liberal stance as follows:
We must stress that cases should be determined on the merits, after all parties have been given full opportunity to
ventilate their causes and defenses, rather than on technicalities or procedural imperfections. In that way, the ends of
justice would be served better. Rules of procedure are mere tools designed to expedite the decision or resolution of
cases and other matters pending in court. A strict and rigid application of rules, resulting in technicalities that tend to
frustrate rather than promote substantial justice, must be avoided. In fact, Section 6 of Rule 1 states that the Rules
shall be liberally construed in order to promote their objective of ensuring the just, speedy and inexpensive
disposition of every action and proceeding.[31]
Now on the merits of the case. The issue is whether Mrs. Nicolas is liable to pay interests, penalty interests and other
stipulated charges to Del-Nacia.
We rule in the affirmative.
Mrs. Nicolas contends that based on the payments she already made, she has overpaid the purchase price due under
the Agreement.[32] She assails the application of her payments made by Del-Nacia since the latter applied the bulk
of her payments to interest rather than the principal.[33] According to her, therefore, the penalties, interests and
surcharges being collected by Del-Nacia have no basis in fact or in law.[34] In this regard, she urges this Court to
affirm the HLURB Board Decision[35] which reads:
Cursory reading of the abovementioned document reveal that there is indeed no specific date indicated, as to when
complainant should pay her monthly installments. It is clear that that the space provided for in Paragraph 1 of said
document for the date or day of the month on which payment is to be made has been left blank.

Considering that the Land Purchase Agreement is a pro-forma document prepared by respondent, any ambiguity
therein should be interpreted in favor of the complainant.

On the basis of the foregoing, we find that complainant did not incur any delay, hence, the imposition of surcharges
and penalty interests are unjustified.[36]

According to Del-Nacia, however, Mrs. Nicolas disregarded paying the regular rate of interest, overdue interest and
penalty interest which were voluntarily agreed upon under paragraphs (1), (5) and (6), respectively, of their
Agreement.[37] Del-Nacia contends that the records clearly establish that Mrs. Nicolas was in delay in her payments
of the monthly amortizations and she has not disputed the same.[38]
As found by the HLURB Arbiter, the records of Del-Nacia shows that Mrs. Nicolas incurred delay in the payment of
her monthly amortizations.[39] It is a well-settled rule that factual findings of administrative agencies are conclusive
and binding on the Court when supported by substantial evidence. We agree with the O.P. Resolution,[40] which
was adopted and affirmed by the CA,to wit:
Appellants [Del-Nacia] submission, however, that appellee [Mrs. Nicolas] incurred delay in the manner of payment
of her monthly installment obligations is impressed with merit. The Housing Arbiter, in his evaluation as trier of

facts of appellees records of payment, was of the same view.Under #1 of the basic purchase agreement, supra,
appellee undertook to pay 120 equal monthly installments of P9,189.45, payments to be made on the __ day of each
month thereafter beginning April 20, 1988. A fair understanding of this provision would simply mean that payment
should be made effected every 20th day of each month following April 20, 1988. Based on the records, one can
safely presume that the same was fully understood by appellee, as she had repeatedly paid her monthly amortization
on the 20th day of each, or a few days thereafter. Neither did she question the interest imposed by appellant for her
payments made after the 20th. Be that as it may, this Office is at a loss to understand the HLURBs conclusion about
appellee not having defaulted in her installment payments. The explanation given by the HLURB Proper why it
considered appellee not to have been in delay, i. e., because no specific date [ is] indicated [in the purchase
agreement] as to when complainant should pay her monthly installments adding that the space provided for . . . the
date or day of the month which payment is to be made has been left blank,strikes this Office as too simplistic to be
accorded cogency. The adverted fact of a space in blank is of no moment for, to reiterate, the agreement was for
appellee to [the] pay the balance (P510,000.00) of the purchase price in 120 equal monthly installments, the
installment period to start fromApril 20, 1988. The use of the phrase 120 equal monthly installments and thereafter
beginning April 20, 1988 can mean only one thing that after April 20, 1988, the monthly installment is to fall due
and be payable on the 20th day of the succeeding months. The explanation adverted to above of the HLURB, if
pursued to its logical conclusion, would virtually allow appellee to perpetually withhold installment payment
without risk of being considered in default. The absurdity of this explanation needs no belaboring.[41]

Clearly, under paragraphs (1), (5) and (6) of the Agreement, supra, Mrs. Nicolas was bound to pay regular interest,
and in case of delay, overdue interest and penalty. It cannot be overemphasized that a contract is the law between the
parties,[42] and courts have no choice but to enforce such contract so long as they are not contrary to law, morals,
good customs or public policy.[43]
In this connection, a stipulation for the payment of interest and penalty apart from interest in case of delay is not
contrary to law, moral, good customs or public policy. To be sure, the same is sanctioned by the following provisions
of the Civil Code:
Article 1956. No interest shall be due unless it has been expressly stipulated in writing.
Article 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of non-compliance, if there is no stipulation to the contrary.

Article 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon x
x x.

In Bachrach Motor Company v. Espiritu,[44] the Court ruled that the Civil Code permits the agreement upon a
penalty apart from the interest. Should there be such an agreement, the penalty does not include the interest, and as
such the two are different and distinct things which may be demanded separately. The same principle was reiterated
in Equitable Banking Corp. v. Liwanag et al.,[45] where this Court held that the stipulation about payment of such
additional rate partakes of the nature of a penalty clause, which is sanctioned by law.

On Mrs. Nicolas contention that she should not pay interest and the other charges based on the unilateral accounting
or computation made by Del-Nacia, a perusal of the formula[46] for the computation of regular interest, overdue
interest and penalty interest used by Del-Nacia reveal that the same is in accord with the provisions of the
Agreement and cannot be said to have been unilaterally imposed by Del-Nacia.
Moreover, the case of Relucio v. Brillante-Garfin (Relucio),[47] involves similar facts to the case at bar where we
ruled as follows:
Examination of the record shows that the questioned Contract to Buy and Sell the subdivision lots provided for
payment by private respondent of the sum of P200.00 as downpayment, and that "the balance [of P10,600.00] shall
be paid in 180 monthly installments at P89.45 per month, including interest rate at six percent (6%) per annum, until
the purchase price is fully paid." This stipulation clearly specified that an interest charge of six percent (6%) per
annum was included in the monthly installment price: private respondent could not have helped noticing that P89.45
multiplied by 180 monthly installments equals P16,101.00, and not P10,600.00. The contract price of P10,800.00
may thus be seen to be the cash price of the subdivision lots, that is, the amount payable if the price of the lots were
to be paid in cash and in full at the execution of the contract; it is not the amount that the vendor will have received
in the aggregate after fifteen (15) years if the vendee shall have religiously paid the monthly installments. The
installment price, upon the other hand, of the subdivision lots the sum total of the monthly installments (i.e.,
P16,101.00) typically, as in the instant case, has an interest component which compensates the vendor for waiting
fifteen (15) years before receiving the total principal amount of P10,600.00. Economically or financially, P10,600.00
delivered in full today is simply worth much more than a long series of small payments totalling, after fifteen (15)
years, P10,600.00. For the vendor, upon receiving the full cash price, could have deposited that amount in a bank,
for instance, and earned interest income which at six percent (6%) per year and for fifteen (15) years, would
precisely total P5,501.00 (the difference between the installment price of P16,101.00 and the cash price of
P10,600.00 ) To suppose, as private respondent argues, that mere prompt payment of the monthly installments as
they fell due would obviate application of the interest charge of six percent (6%) per annum, is to ignore that simple
economic fact. That economic fact is, of course, recognized by law, which authorizes the payment of interest when
contractually stipulated for by the parties or when implied in recognized commercial custom or usage.

Vendor and vendee are legally free to stipulate for the payment of either the cash price of a subdivision lot or its
installment price. Should the vendee opt to purchase a subdivision lot via the installment payment system, he is in
effect paying interest on the cash price, whether the fact and rate of such interest payment is disclosed in the contract
or not. The contract for the purchase and sale of a piece of land on the installment payment system in the case at bar
is not only quite lawful; it also reflects a very wide spread usage or custom in our present day commercial life.[48]
In Relucio, the Court also sustained the sellers theory of declining balance whereby the seller credited a bigger sum
of the monthly amortization to interest rather than the principal, such that in [During] the succeeding monthly
payments, however, as the outstanding balance on the principal gradually declined, the interest component (in
absolute terms) correspondingly fell while the component credited to the principal increased proportionately, thus
amortizing the balance of the principal purchase price as that balance gradually declined.[49]
In the same vein, an examination of the application of Mrs. Nicolas payments by Del-Nacia in the table[50] the latter
prepared as reflected in the records of the case, shows that the same is in accord with the theory of declining balance
which was affirmed by this Court in Relucio.
Given the foregoing, it appears that the only dilemma which Mrs. Nicolas currently finds herself in is that the
obligations which she voluntary undertook under the Agreement turned out to be more onerous than what she

expected. Doctrinal is the rule that courts may not extricate parties from the necessary consequences of their acts.
[51] That the terms of a contract turn out to be financially disadvantageous to them will not relieve them of their
obligations therein.[52]
IN VIEW WHEREOF, the petition is DISMISSED. The decision of the Court of Appeals is affirmed. Costs against
the petitioner.
SO ORDERED.

[G.R. No. 130994. September 18, 2002]

SPOUSES FELIMON and MARIA BARRERA, petitioners, vs. SPOUSES EMILIANO and MARIA
CONCEPCION LORENZO, respondents.
DECISION
SANDOVAL-GUTIERREZ, J.:
On December 4, 1990, spouses Felimon and Maria Barrera, petitioners, borrowed P230,000.00 from spouses Miguel
and Mary Lazaro.The loan was secured by a real estate mortgage[1] over petitioners residential lot consisting of 432
square meters located at Bunlo, Bocaue, Bulacan and registered in their names under Transfer Certificate of Title
(TCT) T-42.373 (M)[2] of the Registry of Deeds of Bulacan.
A month and a half later, the Lazaro spouses needed money and informed petitioners that they would transfer the
loan to spouses Emiliano and Maria Concepcion Lorenzo, respondents. Consequently, on May 14, 1991, petitioners
executed another real estate mortgage[3] over their lot, this time in favor of the respondents to secure the loan of
P325,000.00, which the latter claimed as the amount they paid spouses Lazaro.The mortgage contract provides,
among others, that the new loan shall be payable within three (3) months, or until August 14, 1991; that it shall earn
interest at 5% per month; and that should petitioners fail to pay their loan within the said period, the mortgage shall
be foreclosed.
When petitioners failed to pay their loan in full on August 14, 1991, respondents allowed them to complete their
payment until December 23, 1993. On this date, they made a total payment of P687,000.00.
On January 17, 1994, respondents wrote petitioners demanding payment of P325,000.00, plus interest, otherwise
they would foreclose the mortgage.[4] In turn, petitioners responded, claiming that they have overpaid their
obligation and demanding the return of their land title and refund of their excess payment.[5] This prompted
respondents to file a petition[6] for extrajudicial foreclosure of mortgage with the Office of the Ex-Officio Sheriff,
Malolos, Bulacan, docketed therein as EJF 19-94.
For their part, petitioners filed with the Regional Trial Court (RTC), Branch 17, Malolos, Bulacan, a complaint for
the return of their TCT No. T-42.373 (M), sum of money and damages, with application for a temporary restraining
order and preliminary injunction, docketed as Civil Case No. 156-M-94.[7]
In their opposition[8] to the application for a preliminary injunction, respondents alleged that petitioners loan has
been restructured three times and that their unpaid balance as of March 14, 1994 was P543,622.00.
After hearing petitioners application for a preliminary injunction, the RTC issued an order,[9] enjoining the sheriff
from proceeding with the foreclosure of mortgage, upon their posting of a bond in the amount of P543,622.00.

Thereafter, trial on the merits ensued.

On July 31, 1995, the RTC rendered judgment,[10] the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs (now petitioners) and
against the defendants (now respondents), ordering the latter:
1. to return to the plaintiffs the amount of P215,750.00 representing the overpaid amount;
2. to return to the plaintiffs the owners copy of TCT No. T-42.373 (M) offered as security;
3. to pay P20,000.000 as attorneys fees;
4. to pay the costs of the suit.
The writ of preliminary injunction issued on March 21, 1994 is hereby made permanent.
SO ORDERED."[11]
The trial court held that the stipulated 5% monthly interest to be paid by petitioners corresponds only to the period
from May 14, 1991 up to August 14, 1991, the term of the loan. Thereafter, the monthly interest should be 12% per
annum. The trial court concluded that petitioners made an overpayment of P214,750.00.
Upon appeal, docketed as CA GR-CV No. 51095, the Court of Appeals, in a Decision[12] dated June 18, 1997, held:
We reverse.
The law and jurisprudence clearly provide that if the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered. (Article 1253, New Civil Code; Gobonseng, Jr. vs.
Court of Appeals, 246 SCRA 472). Once it is admitted that an obligation bears interest, partial payments are to be
applied first on account of the interest and then to reduce the principal. (San Jose vs. Ortega, 11 Phil. 442; Sunico vs.
Ramirez, 14 Phil. 500).We thus find no support, whether in law or in jurisprudence, for the Decision of the court a
quo to apply the bigger amounts of P40,000.00, P37,000.00, P50,000.00 among others, given several times by the
Barrera spouses x x x for the payment of the principal loan when the interests due on the loan that have accumulated
through the years have not been fully satisfied.
We also do not agree that the stipulated monthly interest of 5% was to apply only to the 3-month effectivity period
of the loan. This is a flawed and a grossly unfair interpretation of the terms and conditions of the agreement of the
parties. To rule in this wise is to sanction the irregular performance of ones obligation. The Barrera spouses will be
emboldened not to pay their loan within the agreed period of 3-months since on the fourth month and thereafter, they
do not have to pay anymore the 5% monthly interest, but only the 12% legal interest per annum, or a measly 1%
interest per month. Such an interpretation is totally unfair and unjust to the creditors who could have used their
money in some other ways. Until such time that the Barreras have fully paid their total indebtedness, the 5%
monthly interest subsists, there being no stipulation to the contrary.
While we commiserate with the plight of the Barrera spouses, we cannot change the terms of the loan agreement
between them and the Lorenzos as the courts have no right to make contracts for (the) parties. (Tolentino and Manio
vs. Gonzales Sy Chian, 5 Phil. 577). A contract is the law between the parties which not even this Court can interfere
with. The only requirement is that the same be not contrary to law, morals and good customs x x x (Article 1306,
New Civil Code). We find the agreement to pay a 5% monthly interest until the loan is fully paid to be reasonable
and sanctioned by regular usage and practice.

The Barreras should, therefore, be required to pay the balance of their indebtedness, including the interests thereof.
Failure to pay the same should warrant the foreclosure of their mortgaged property to satisfy their obligation to the
Lorenzo spouses.[13]
Petitioners filed a motion for reconsideration but was denied.[14]
Hence this petition.
The sole issue for our resolution is whether the 5% monthly interest on the loan was only for three (3) months, or
from May 14, 1991 up to August 14, 1991, as maintained by petitioners, or until the loan was fully paid, as claimed
by respondents.
When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal
meaning of its stipulations governs.[15] In such cases, courts have no authority to alter a contract by construction or
to make a new contract for the parties; its duty is confined to the interpretation of the one which they have made for
themselves without regard to its wisdom or folly as the court cannot supply material stipulations or read into the
contract words which it does not contain.[16] It is only when the contract is vague and ambiguous that courts are
permitted to resort to construction of its terms and determine the intention of the parties therein.
The salient provisions of the mortgage contract read:
a) Ang sanglaang ito ay sa loob lamang ng tatlong (3) buwan, o hanggang sa Agosto 14, 1991.
b) Ang tubo na aming napagkasunduan ay 5%, o cinco por ciento isang buwan.
c) Na sakaling mabayaran ko ang aming pagkakautang sa mag-asawa na P325,000.00 ang kasulatang ito ay wala ng
lakas at kabuluhan, subalit kung hindi ko mabayaran ang aming pinagkakautangan sa takdang panahong 3 buwan
sila ay binibigyan ko nang laya at kapangyarihan na masubasta nila ang lupang aming ipinanagot sa labas ng
hukuman sa bisa ng Batas Blg. 3135 at susog nito at akong may utang ang siyang sagot sa lahat ng gastos at pati
bayad sa abogado sa nasabing subasta sa labas ng hukuman.[17] (emphasis supplied)
It is clear from the above stipulations that the loan shall be payable within three (3) months, or from May 14, 1991
up to August 14, 1991.During such period, the loan shall earn an interest of 5% per month. Furthermore, the contract
shall have no force and effect once the loan shall have been fully paid within the three-month period, otherwise, the
mortgage shall be foreclosed extrajudicially under Act No. 3135.
Records show that upon maturity of the loan on August 14, 1991, petitioners failed to pay their entire obligation.
Instead of exercising their right to have the mortgage foreclosed, respondents allowed petitioners to pay the loan on
a monthly installment basis until December, 1993. It bears emphasis that there is no written agreement between the
parties that the loan will continue to bear 5% monthly interest beyond the agreed three-month period. Respondent
Ma. Concepcion Lorenzo testified as follows:
Atty. Marcos:
Q Now, based on this document which was marked as Exh. 1, there is no dispute that the monthly interest for the
three month period that is from May 14, 1991 to August 14, 1991 is 5% monthly interest, there is no dispute about
that. Now, Miss Witness, my question is, could you go over the entire document that Exh. 1 and please tell this Hon.
Court whether there is a provision in clear and unequivocal terms providing for that monthly interest after August
14, 1991?
A No, sir, there is none.

Q Are you sure of that?

A Yes, sir.
Q You mean to say there is no stipulation in that document providing for the 5% monthly interest to the loan after
August 14, 1991?
A Yes, sir, they are supposed to return my money.
Court:
Q After they failed to comply with that provision, was there any subsequent agreement between you and the
plaintiffs?
xxx
Q Was there an agreement?
A There was, your Honor.
Q What was that agreement about?
A Verbal agreement, your Honor?
Q Why was that agreement not reduced into writing?
A It was not reduced into writing, your Honor.
Q Why?
A I am in good faith, your Honor.[18]
Article 1956 of the Civil Code mandates that (n)o interest shall be due unless it has been expressly stipulated in
writing. Applying this provision, the trial court correctly held that the monthly interest of 5% corresponds only to the
three-month period of the loan, or from May 14, 1991 to August 14, 1991, as agreed upon by the parties in writing.
Thereafter, the interest rate for the loan is 12% per annum. In Eastern Shipping Lines, Inc. vs. Court of Appeals,[19]
this Court laid down the following doctrine:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code. (emphasis supplied)
The above ruling was reiterated in Sulit vs. Court of Appeals,[20] Crismina Garments vs. Court of Appeals,[21]
Eastern Assurance and Surety Corporation vs. Court of Appeals,[22] Catungal vs. Hao,[23] and Yong et al. vs. Tiu et
al..[24] Thus, the Court of Appeals erred in reversing the RTC Decision and holding that the 5% monthly interest
should be paid by petitioners even beyond August 14, 1991.
WHEREFORE, the assailed Decision of the Court of Appeals dated June 18, 1997 and its Resolution dated October
17, 1997 are REVERSED and SET ASIDE. The Decision of the Regional Trial Court, Branch 17, Malolos, Bulacan
dated July 31, 1995 is REINSTATED.

SO ORDERED.

G.R. No. 113412 April 17, 1996

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

KAPUNAN, J.:p
On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses Ponciano L.
Almeda and Eufemia P. Almeda several loan/credit accommodations totaling P18.0 Million pesos payable in a
period of six years at an interest rate of 21% per annum. To secure the loan, the spouses Almeda executed a Real
Estate Mortgage Contract covering a 3,500 square meter parcel of land, together with the building erected thereon
(the Marvin Plaza) located at Pasong Tamo, Makati, Metro Manila. A credit agreement embodying the terms and
conditions of the loan was executed between the parties. Pertinent portions of the said agreement are quoted below:
SPECIAL CONDITIONS
xxx xxx xxx
The loan shall be subject to interest at the rate of twenty one per cent (21%) per annum, payable semi-annually in
arrears, the first interest payment to become due and payable six (6) months from date of initial release of the loan.
The loan shall likewise be subject to the appropriate service charge and a penalty charge of three per cent (30%) per
annum to be imposed on any amount remaining unpaid or not rendered when due.
xxx xxx xxx
III. OTHER CONDITIONS
(c) Interest and Charges
(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending
on whatever policy it may adopt in the future; provided, that the interest rate on this/these accommodations shall be
correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity
date of the increase or decrease of the maximum interest rate. 1
Between 1981 and 1984, petitioners made several partial payments on the loan totaling. P7,735,004.66, 2 a
substantial portion of which was applied to accrued interest. 3 On March 31, 1984, respondent bank, over
petitioners' protestations, raised the interest rate to 28%, allegedly pursuant to Section III-c (1) of its credit
agreement. Said interest rate thereupon increased from an initial 21% to a high of 68% between March of 1984 to
September, 1986. 4
Petitioner protested the increase in interest rates, to no avail. Before the loan was to mature in March, 1988, the
spouses filed on February 6, 1988 a petition for declaratory relief with prayer for a writ of preliminary injunction
and temporary restraining order with the Regional Trial Court of Makati, docketed as Civil Case No. 18872. In said

petition, which was raffled to Branch 134 presided by Judge Ignacio Capulong, the spouses sought clarification as to
whether or not the PNB could unilaterally raise interest rates on the loan, pursuant to the credit agreement's
escalation clause, and in relation to Central Bank Circular No. 905. As a preliminary measure, the lower court, on
March 3, 1988, issued a writ of preliminary injunction enjoining the Philippine National Bank from enforcing an
interest rate above the 21% stipulated in the credit agreement. By this time the spouses were already in default of
their loan obligations.
Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB countered by ordering
the extrajudicial foreclosure of petitioner's mortgaged properties and scheduled an auction sale for March 14, 1989.
Upon motion by petitioners, however, the lower court, on April 5, 1989, granted a supplemental writ of preliminary
injunction, staying the public auction of the mortgaged property.
On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court dissolved the supplemental writ
of preliminary injunction. Petitioners filed a motion for reconsideration. In the interim, respondent bank once more
set a new date for the foreclosure sale of Marvin Plaza which was March 12, 1990. Prior to the scheduled date,
however, petitioners tendered to respondent bank the amount of P40,142,518.00, consisting of the principal
(P18,000,000.00) and accrued interest calculated at the originally stipulated rate of 21%. The PNB refused to accept
the payment. 5
As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990, formally consigned the amount
of P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-663. They prayed therein for a writ of
preliminary injunction with a temporary restraining order. The case was raffled to Branch 147, presided by Judge
Teofilo Guadiz. On March 15, 1990, respondent bank sought the dismissal of the case.
On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the writ of preliminary
injunction enjoining the foreclosure sale of "Marvin Plaza" scheduled on March 12, 1990. On April 17, 1990
respondent bank filed a motion for reconsideration of the said order.
On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by Judge Eriberto Rosario who
issued an order consolidating said case with Civil Case 18871 presided by Judge Ignacio Capulong.
For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30, 1990, respondent bank filed a
petition for Certiorari, Prohibition and Mandamus with respondent Court of Appeals, assailing the following orders
of the Regional Trial Court:
1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary injunction restraining the
foreclosure sale of Mavin Plaza set on March 12, 1990;
2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent bank's motion to lift the writ of
injunction issued by Judge Guadiz as well as its motion to dismiss Civil Case No. 90-663;
3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's subsequent motion to lift the writ of
preliminary injunction; and
4. Order of Judge Capulong dated October 20, 1992 denying respondent bank's motion for reconsideration.
On August 27, 1993, respondent court rendered its decision setting aside the assailed orders and upholding
respondent bank's right to foreclose the mortgaged property pursuant to Act 3135, as amended and P.D. 385.
Petitioners' Motion for Reconsideration and Supplemental Motion for Reconsideration, dated September 15, 1993
and October 28, 1993, respectively, were denied by respondent court in its resolution dated January 10, 1994.
Hence the instant petition.

This appeal by certiorari from the respondent court's decision dated August 27, 1993 raises two principal issues
namely: 1) Whether or not respondent bank was authorized to raise its interest rates from 21% to as high as 68%
under the credit agreement; and 2) Whether or not respondent bank is granted the authority to foreclose the Marvin
Plaza under the mandatory foreclosure provisions of P.D. 385.
In its comment dated April 19, 1994, respondent bank vigorously denied that the increases in the interest rates were
illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of interest it imposed was based on the
agreement of the parties. Respondent bank further contends that it had a right to foreclose the mortgaged property
pursuant to P.D. 385, after petitioners were unable to pay their loan obligations to the bank based on the increased
rates upon maturity in 1984.
The instant petition is impressed with merit.
The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any
obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality
between the parties based on their essential equality. 6 Any contract which appears to be heavily weighed in favor of
one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or
compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the
terms of its contract with petitioners by increasing the interest rates on the loan without the prior assent of the latter.
In fact, the manner of agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956
that "No interest shall be due unless it has been expressly stipulated in writing." What has been "stipulated in
writing" from a perusal of interest rate provision of the credit agreement signed between the parties is that
petitioners were bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the
circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this case was the
21% rate stipulated in the interest provision. Any doubt about this is in fact readily resolved by a careful reading of
the credit agreement because the same plainly uses the phrase "interest rate agreed upon," in reference to the original
21% interest rate. The interest provision states:
(c) interest and Charges
(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending
on whatever policy it may adopt in the future; provided, that the interest rate on this/these accommodations shall be
correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity
date of the increase or decrease of the maximum interest rate.
In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent bank from unilaterally
raising the interest rate in the borrower's loan from 18% to 32%, 41% and 48% partly because the aforestated
increases violated the principle of mutuality of contracts expressed in Article 1308 of the Civil Code. The Court
held:
CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates
. . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law.

but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the agreed
interest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116 which limits such changes
to once every twelve months.
Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private respondent's
loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:
Art. 308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one
of them.
In order that obligations arising from contracts may have the force of law between the parties, there must be
mutuality between the parties based on their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs.
Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB
and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at
will during the term of the loan, that license would have been null and void for being violative of the principle of
mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being
reduced to the alternative "to take it or lease it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a
contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and
imposition.
PNB's successive increases of the interest rate on the private respondent's loan, over the latter's protest, were
arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may be
amended only by an instrument in writing signed by the party to be bound as burdened by such amendment." The
increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that "no interest shall be due
unless it has been expressly stipulated in writing."
The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24%per annum,
hence, he is not bound to pay a higher rate than that.
That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as found by
the Court of Appeals, is indisputable.
Clearly, the galloping increases in interest rate imposed by respondent bank on petitioners' loan, over the latter's
vehement protests, were arbitrary.
Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not authorize the bank, or any
lending institution for that matter, to progressively increase interest rates on borrowings to an extent which would
have made it virtually impossible for debtors to comply with their own obligations. True, escalation clauses in credit
agreements are perfectly valid and do not contravene public policy. Such clauses, however, (as are stipulations in
other contracts) are nonetheless still subject to laws and provisions governing agreements between parties, which
agreements while they may be the law between the contracting parties implicitly incorporate provisions of
existing law. Consequently, while the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in
the said circular could possibly be read as granting respondent bank carte blanche authority to raise interest rates to
levels which would either enslave its borrowers or lead to a hemorrhaging of their assets. Borrowing represents a
transfusion of capital from lending institutions to industries and businesses in order to stimulate growth. This would
not, obviously, be the effect of PNB's unilateral and lopsided policy regarding the interest rates of petitioners'
borrowings in the instant case.

Apart from violating the principle of mutuality of contracts, there is authority for disallowing the interest rates
imposed by respondent bank, for the credit agreement specifically requires that the increase be "within the limits
allowed by law". In the case of PNB v. Court of Appeals, cited above, this Court clearly emphasized that C.B.
Circular No. 905 could not be properly invoked to justify the escalation clauses of such contracts, not being a grant
of specific authority.
Furthermore, the escalation clause of the credit agreement requires that the same be made "within the limits allowed
by law," obviously referring specifically to legislative enactments not administrative circulars. Note that the phrase
"limits imposed by law," refers only to the escalation clause. However, the same agreement allows reduction on the
basis of law or the Monetary Board. Had the parties intended the word "law" to refer to both legislative enactments
and administrative circulars and issuances, the agreement would not have gone as far as making a distinction
between "law or the Monetary Board Circulars" in referring to mutually agreed upon reductions in interest rates.
This distinction was the subject of the Court's disquisition in the case of Banco Filipino Savings and Mortgage Bank
v. Navarro 8 where the Court held that:
What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to
17% per annum under the Escalation Clause. It is our considered opinion that it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino to correspondingly increase.
the interest rate stipulated in this contract without advance notice to me/us in the event.
a law
increasing
the lawful rates of interest that may be charged
on this particular
kind of loan. (Paragraphing and emphasis supplied)
It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should
be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." The Escalation
Clause was dependent on an increase of rate made by "law" alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a
statute or a law, it has, however, the force and effect of law." (Emphasis supplied). "An administrative regulation
adopted pursuant to law has the force and effect of law." "That administrative rules and regulations have the force of
law can no longer be questioned."
The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines
quoted in the latter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines,
for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation
Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the
maximum rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any
law."
The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the
Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed

upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the
Monetary Board." To quote:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that
the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest
is increased by law or by the Monetary Board:
Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of
interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or
by the Monetary Board;
Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of
the increase or decrease in the maximum rate of interest.' (Paragraphing and emphasis supplied).
It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can
be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be
valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum
rate of interest is reduced by law or by the Monetary Board."
Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in contravention
to the tenor of their credit agreement. That an increase in interest rates from 18% to as much as 68% is excessive and
unconscionable is indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to virtually half
of the entire principal (P7,735,004.66) which was applied to interest alone. By the time the spouses tendered the
amount of P40,142,518.00 in settlement of their obligations; respondent bank was demanding P58,377,487.00 over
and above those amounts already previously paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but
based on reasonable and valid grounds. 9 Here, as clearly demonstrated above, not only the increases of the interest
rates on the basis of the escalation clause patently unreasonable and unconscionable, but also there are no valid and
reasonable standards upon which the increases are anchored.
We go now to respondent bank's claim that the principal issue in the case at bench involves its right to foreclose
petitioners' properties under P.D. 385. We find respondent's pretense untenable.
Presidential Decree No. 385 was issued principally to guarantee that government financial institutions would not be
denied substantial cash inflows necessary to finance the government's development projects all over the country by
large borrowers who resort to litigation to prevent or delay the government's collection of their debts or loans.10 In
facilitating collection of debts through its automatic foreclosure provisions, the government is however, not
exempted from observing basic principles of law, and ordinary fairness and decency under the due process clause of
the Constitution.11
In the first place, because of the dispute regarding the interest rate increases, an issue which was never settled on
merit in the courts below, the exact amount of petitioner's obligations could not be determined. Thus, the foreclosure
provisions of P.D. 385 could be validly invoked by respondent only after settlement of the question involving the
interest rate on the loan, and only after the spouses refused to meet their obligations following such determination.
In Filipinas Marble Corporation v. Intermediate Appellate Court, 12 involving P.D. 385's provisions on mandatory
foreclosure, we held that:
We cannot, at this point, conclude that respondent DBP together with the Bancom people actually misappropriated
and misspent the $5 million loan in whole or in part although the trial court found that there is "persuasive" evidence

that such acts were committed by the respondent. This matter should rightfully be litigated below in the main action.
Pending the outcome of such litigation, P.D. 385 cannot automatically be applied for if it is really proven that
respondent DBP is responsible for the misappropriation of the loan, even if only in part, then the foreclosure of the
petitioner's properties under the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross
mistake. It would unduly prejudice the petitioner, its employees and their families.
Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or not, for
the benefit of the petitioner be determined. Consequently, the extent of the loan where there was no failure of
consideration and which may be properly satisfied by foreclosure proceedings under P.D. 385 will have to await the
presentation of evidence in a trial on the merits.
In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in Filipinas Marble Corporation,
held:
The enforcement of P.D. 385 will sweep under the rug' this iceberg of a scandal in the sugar industry during the
Marcos Martial Law years. This we can not allow to happen. For the benefit of future generations, all the dirty linen
in the PHILSUCUCOM/NASUTRA/RPB closets have to be exposed in public so that the same may NEVER be
repeated.
It is of paramount national interest, that we allow the trial court to proceed with dispatch to allow the parties below
to present their evidence.
Furthermore, petitioners made a valid consignation of what they, in good faith and in compliance with the letter of
the Credit Agreement, honestly believed to be the real amount of their remaining obligations with the respondent
bank. The latter could not therefore claim that there was no honest-to-goodness attempt on the part of the spouse to
settle their obligations. Respondent's rush to inequitably invoke the foreclosure provisions of P.D. 385 through its
legal machinations in the courts below, in spite of the unsettled differences in interpretation of the credit agreement
was obviously made in bad faith, to gain the upper hand over petitioners.
In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the parties to
agree to changes in the interest rate in writing, we hold that the unilateral and progressive increases imposed by
respondent PNB were null and void. Their effect was to increase the total obligation on an eighteen million peso
loan to an amount way over three times that which was originally granted to the borrowers. That these increases,
occasioned by crafty manipulations in the interest rates is unconscionable and neutralizes the salutary policies of
extending loans to spur business cannot be disputed.
WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August 27, 1993, as well as
the resolution dated February 10, 1994 is hereby REVERSED AND SET ASIDE. The case is remanded to the
Regional Trial Court of Makati for further proceedings.
SO ORDERED.

FIRST DIVISION

[G.R. No. 88880. April 30, 1991.]

PHILIPPINE NATIONAL BANK, Petitioner, v. THE HON. COURT OF APPEALS and AMBROSIO PADILLA,
Respondents.

The Chief Legal Counsel for Petitioner.

Ambrosio Padilla, Mempin & Reyes Law Offices for Private Respondent.

SYLLABUS

1. COMMERCIAL LAW; BANKING LAWS; RATE OF INTEREST; INCREASE OF INTEREST RATE; NOT TO
BE MADE OFTENER THAN ONCE A YEAR. PNB, over the objection of the private respondent, and without
authority from the Monetary Board, within a period of only four (4) months, increased the 18% interest rate on the
private respondents loan obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) to
48% in November 1984. Those increases were null and void. Although Section 2, P.D. No. 116 of January 29, 1973,
authorizes the Monetary Board to prescribe the maximum rate or rates of interest for loans or renewal thereof and to
change such rate or rates whenever warranted by prevailing economic and social conditions, it expressly provides
that "such changes shall not be made oftener than once every twelve months. "If the Monetary Board itself was not
authorized to make such changes oftener than once a year, even less so may a bank which is subordinate to the
Board.

2. ID.; ID.; ID.; ID.; MAY BE INCREASED WITHIN LIMITS OF LAW; PNB CIRCULARS AND RESOLUTION
ARE NEITHER LAWS NOR RESOLUTIONS OF MONETARY BOARD. While the private respondent-debtor
did agree in the Deed of Real Estate Mortgage (Exh. 5) that the interest rate may be increased during the life of the
contract "to such increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may
prescribe" (Exh. 5-e-1) or "within the limits allowed by law" (Promissory Notes, Exhs. 2, 3, and 4), no laws was
ever passed in July to November 1984 increasing the interest rates on loans or renewals thereof to 32%, 41% and
48% (per annum), and no documents were executed and delivered by the debtor to effectuate the increases. The PNB
relied on its own Board Resolution No. 681 (Exh. 10), PNB Circular No. 40-79-84 (Exh. 13), and PNB Circular No.
40-129-84 (Exh. 15), but those resolution and circulars are neither laws nor resolutions of the Monetary Board.

3. ID.; ID.; ID.; REMOVAL OF USURY LAW CEILING ON INTEREST RATES DOES NOT AUTHORIZE
BANKS TO UNILATERALLY AND SUCCESSIVELY INCREASE INTEREST RATES. CB Circular No. 905,
Series of 1982 (Exh. 11) removed the Usury law ceiling on interest rates but it did not authorize the PNB, or any
bank for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a
span of four (4) months, in violation of P.D. 116 which limits such changes to "once every twelve months."cralaw
virtua1aw library

4. ID.; ID.; ID.; UNILATERAL ACTION TO INCREASE INTEREST RATES, A VIOLATION OF ARTICLE 1308
OF CIVIL CODE. Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on
the private respondents loan, violated the mutuality of contracts ordained in Article 1308 of the civil Code: "ART.
1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of
them."cralaw virtua1aw library

5. ID.; ID.; ID.; SUCCESSIVE INCREASE OF INTEREST RATES, A VIOLATION OF ARTICLE 1956 OF CIVIL
CODE. PNBs successive increases of the interest rate on the private respondents loan, over the latters protest,
were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms
"may be amended only by an instrument in writing signed by the party to be bound as burdened by such
amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that "no
interest shall be due unless it has been expressly stipulated in writing."

DECISION

GRIO-AQUINO, J.:

The Philippine National Bank (PNB) has appealed by certiorari from the decision promulgated on June 27, 1989 by
the Court of Appeals in CA-G.R. CV No. 09791 entitled, "AMBROSIO PADILLA, plaintiff-appellant versus
PHILIPPINE NATIONAL BANK, defendant-appellee," reversing the decision of the trial court which had dismissed
the private respondents complaint "to annul interest increases." (p. 32, Rollo.) The Court of Appeals rendered
judgment:jgc:chanrobles.com.ph

". . . declaring the questioned increases of interest as unreasonable, excessive and arbitrary and ordering the
defendant-appellee [PNB] to refund to the plaintiff-appellant the amount of interest collected from July, 1984 in
excess of twenty-four percent (24%) per annum. Costs against the defendant-appellee." (pp 14-15, Rollo.)

In July 1982, the private respondent applied for, and was granted by petitioner PNB, a credit line of 321.8 million,
secured by a real estate mortgage, for a term of two (2) years, with 18% interest per annum. Private respondent
executed in favor of the PNB a Credit Agreement, two (2) promissory notes in the amount of P900,000.00 each, and
a Real Estate Mortgage Contract.

The Credit Agreement provided that

"9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations of the Central Bank
and the current and general policies of the Bank and those which the Bank may adopt in the future, which may have
relation to or in any way affect the Line, which rules, regulations and policies are incorporated herein by reference

as if set forth herein in full. Promptly upon receipt of a written request from the Bank, the Borrowers shall execute
and deliver such documents and instruments, in form and substance satisfactory to the Bank, in order to effectuate or
otherwise comply with such rules, regulations and policies." (p. 85, Rollo.)

The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated 18% interest per annum
"within the limits allowed by law at any time depending on whatever policy it [PNB] may adopt in the future;
Provided, that, the interest rate on this note shall be correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary Board." (pp. 85-86, Rollo; Emphasis ours.)

The Real Estate Mortgage Contract likewise provided that:jgc:chanrobles.com.ph

"(k) INCREASE OF INTEREST RATE

"The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which
may have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject during
the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors." (p. 86, Rollo;Emphasis supplied.)

Four (4) months advance interest and incidental expenses/charges were deducted from the loan, the net proceeds of
which were released to the private respondent by crediting or transferring the amount to his current account with the
bank.chanrobles.com : virtual law library

On June 20, 1984, PNB informed the private respondent that (1) his credit line of P1.8 million "will expire on July
4, 1984," (2)" [i]f renewal of the line for another year is intended, please submit soonest possible your request," and
(3) the "present policy of the Bank requires at least 30% reduction of principal before your line can be renewed."
(pp. 86-87, Rollo.) Complying, private respondent on June 25, 1984, paid PNB P540,000 00 (30% of P1.8 million)
and requested that "the balance of P1,260,000.00 be renewed for another period of two (2) years under the same
arrangement" and that "the increase of the interest rate of my mortgage loan be from 18% to 21%" (p. 87, Rollo.).

On July 4, 1984, private respondent paid PNB P360,000.00.

On July 18, 1984, private respondent reiterated in writing his request that "the increase in the rate of interest from
18% be fixed at 21% of 24%. (p. 87, Rollo.)

On July 26, 1984, private respondent made an additional payment of P100,000.

On August 10, 1984, PNB informed private respondent that "we can not give due course to your request for
preferential interest rate in view of the following reasons: Existing Loan Policies of the bank requires 32% for loan
of more than one year; our present cost of funds has substantially increased." (pp. 8788, Rollo.)

On August 17, 1984, private respondent further paid PNB P150,000.00.

In a letter dated August 24, 1984 to PNB, private respondent announced that he would "continue making further
payments, and instead of a loan of more than one year, I shall pay the said loan before the lapse of one year or
before July 4, 1985. . . . I reiterate my request that the increase of my rate of interest from 18% be fixed at 21% or
24%." (p. 88, Rollo.)

On September 12, 1984, private respondent paid PNB P160,000.00.

In letters dated September 12, 1984 and September 13, 1984, PNB informed private respondent that "the interest rate
on your outstanding line/loan is hereby adjusted from 32% p.a. to 41% p.a. (35% prime rate + 6%) effective
September 6, 1984;" and further explained "why we can not grant your request for a lower rate of 21% or 24%." (pp.
88-89, Rollo.)

In a letter dated September 24, 1984 to PNB, private respondent registered his protest against the increase of interest
rate from 18% to 32% on July 4, 1984 and from 32% to 41% on September 6, 1984.

On October 15, 1984, private respondent reiterated his request that the interest rate should not be increased from
18% to 32% and from 32% to 41%. He also attached (as payment) a check for P140,000.00.chanrobles.com.ph :
virtual law library

Like rubbing salt on the private respondents wound, the petitioner informed private respondent on October 29,
1984, that "the interest rate on your outstanding line/loan is hereby adjusted from 41% p.a. to 48% p.a. (42% prime
rate plus 6% spread) effective 25 October 1984." (p. 89, Rollo.)

In November 1984, private respondent paid PNB P50,000.00 thus reducing his principal loan obligation to
P300,000.00.

On December 18, 1984, private respondent filed in the Regional Trial Court of Manila a complaint against PNB
entitled, "AMBROSIO PADILLA v. PHILIPPINE NATIONAL BANK" (Civil Case No. 84-28391), praying that
judgment be rendered:jgc:chanrobles.com.ph

"a. Declaring that the unilateral increase of interest rates from 18% to 32%, then to 41% and again to 48% are
illegal, not valid nor binding on plaintiff, and that an adjustment of his interest rate from 18% to 24% is reasonable,
fair and just;

"b. The interest rate on the P900,000.00 released on September 27, 1982 be counted from said date and not from
July 4, 1984;

"c. The excess of interest payment collected by defendant bank by debiting plaintiffs current account be refunded to
plaintiff or credited to his current account;

"d. Pending the determination of the merits of this case, a restraining order and or a writ of preliminary injunction be
issued (1) to restrain and or enjoin defendant bank for [sic] collecting from plaintiff and/or debiting his current
account with illegal and excessive increases of interest rates; and (2) to prevent defendant bank from declaring
plaintiff in default for non-payment and from instituting any foreclosure proceeding, extrajudicial or judicial, of the
valuable commercial property of plaintiff." (pp. 89-90, Rollo.)

In its answer to the complaint, PNB denied that the increases in interest rates were illegal, unilateral excessive and
arbitrary and recited the reasons justifying said increases.

On March 31, 1985, the private respondent paid the P300,000 balance of his obligation to PNBN (Exh. 5).

The trial court rendered judgment on April 14, 1986, dismissing the complaint because the increases of interest were
properly made.

The private respondent appealed to the Court of Appeals. On June 27, 1989, the Court of Appeals reversed the trial
court, hence, NBs recourse to this Court by a petition for review under Rule 45 of the Rules of Court.

The assignments of error raised in PNBs petition for review can be resolved into a single legal issue of whether the
bank, within the term of the loan which it granted to the private respondent, may unilaterally change or increase the
interest rate stipulated therein at will and as often as it pleased.

The answer to that question is no.

In the first place, although Section 2, PD. No. 116 of January 29, 1973, authorizes the Monetary Board to prescribe
the maximum rate or rates of interest for loans or renewal thereof and to change such rate or rates whenever
warranted by prevailing economic and social conditions, it expressly provides that "such changes shall not be made
oftener than once every twelve months."cralaw virtua1aw library

In this case, PNB, over the objection of the private respondent, and without authority from the Monetary Board,
within a period of only four (4) months, increased the 18% interest rate on the private respondents loan obligation
three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984. Those
increases were null and void, for if the Monetary Board itself was not authorized to make such changes oftener than
once a year, even less so may a bank which is subordinate to the Board.chanrobles law library : red

Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor did agree in the Deed of Real
Estate Mortgage (Exh. 5) that the interest rate may be increased during the life of the contract "to such increase
within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe" (Exh. 5-e-1) or
"within the limits allowed by law" (Promissory Notes, Exs. 2, 3, and 4), no law was ever passed in July to
November 1984 increasing the interest rates on loans or renewals thereof to 32%, 41% and 48% (per annum), and no
documents were executed and delivered by the debtor to effectuate the increases. The Court of Appeals observed.

". . . We focus Our attention first of all on the agreement between the parties as embodied in the following
instruments, to wit: (1) Exhibit 1 Credit Agreement dated July 1, 1982; (2) Exhibit 2 Promissory Note
dated July 5, 1982; (3) Exhibit (3) Promissory Note dated January 3, 1983; (4) Exhibit 4 Promissory Note,
dated December 13, 1983; and (5) Exhibit 5 Real Estate Mortgage contract dated July 1, 1982.

"Exhibit 1 states in its portion marked Exhibit 1-g-1:chanrob1es virtual 1aw library

9 .06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations of the Central Bank
and the current and general policies of the Bank and those which the Bank may adopt in the future, which may have
relation to or in any way affect the Line, which rules, regulations and policies are incorporated herein by reference
as if set forth herein in full. Promptly upon receipt of a written request from the Bank, the Borrowers shall execute
and deliver such documents and instruments, in form and substance satisfactory to the Bank, in order to effectuate or
otherwise comply with such rules, regulations and policies.

"Exhibits 2, 3, and 4 in their portions respectively marked Exhibits 2-B, 3-B, and 4-B uniformly authorize
the defendant bank to increase the stipulated interest rate of 18% per annum within the limits allowed by law at any

time depending on whatever policy it may adopt in the future: Provided, that, the interest rate on this note shall be
correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board.

"Exhibit 5 in its portion marked Exhibit 5-e-1 stipulates:chanrob1es virtual 1aw library

(k) INCREASE OF INTEREST RATE

The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which
may have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject during
the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.

"Clearly, then, the agreement between the parties authorized the defendant bank to increase the interest rate beyond
the original rate of 18% per annum but within the limits allowed by law or within the rate allowed by law, it
being declared the obligation of the plaintiff as borrower to execute and deliver the corresponding documents and
instruments to effectuate the increase." (pp. 11-12, Rollo.)

In Banco Filipino Savings and Mortgage Bank v. Navarro, 15 SCRA 346 (1987), this Court disauthorized the bank
from raising the interest rate on the borrowers loan from 12% to 17% despite an escalation clause in the loan
agreement signed by the debtors authorizing Banco Filipino "to correspondingly increase the interest rate stipulated
in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of
interest that may be charged on this particular kind of loan." (Emphasis supplied.)chanrobles virtual lawlibrary

In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494 dated July 1, 1976 (72 O.G. No. 3,
p. 676-J) which provided that "the maximum rate of interest, including commissions premiums, fees and other
charges on loans with a maturity of more than 730 days by banking institution . . . shall be 19%."cralaw virtua1aw
library

This Court disallowed the increase for the simple reason that said "Circular No. 494, although it has the effect of law
is not a law." Speaking through Mme. Justice Ameurfina M. Herrera, this Court held:jgc:chanrobles.com.ph

"It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there
can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to
be valid, it must include a provision for reduction of the stipulated interest in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary Board." p. 111, Rollo.).

In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB Circular No. 40-79-84
(Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution and circulars are neither laws nor
resolutions of the Monetary Board.

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates

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

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

Besides violating PD. 116, the unilateral action of the PNB in increasing the interest rate on the private respondents
loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:jgc:chanrobles.com.ph

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

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

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

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

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

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

SO ORDERED.