I.

TRUST RECEIPTS
1. People vs. Nitafan, GR No. 75954, October 22, 1992

G.R. No. 75954 October 22, 1992

PEOPLE OF THE PHILIPPINES, petitioner,

vs.
HON. DAVID G. NITAFAN, Presiding Judge, Regional Trial Court, Branch 52, Manila, and K.T. LIM alias
MARIANO LIM, respondents.

BELLOSILLO, J.:

Failing in his argument that B.P. 22, otherwise known as the "Bouncing Check Law", is
unconstitutional, 1 private respondent now argues that the check he issued, a memorandum check, is in the
nature of a promissory note, hence, outside the purview of the statute. Here, his argument must also fail.

The facts are simple. Private respondent K.T. Lim was charged before respondent court with violation of B.P.
22 in an Information alleging ––

That on . . . January 10, 1985, in the City of Manila . . . the said accused did then and there
wilfully, unlawfully and feloniously make or draw and issue to Fatima Cortez Sasaki . . .
Philippine Trust Company Check No. 117383 dated February 9, 1985 . . . in the amount of
P143,000.00, . . . well knowing that at the time of issue he . . . did not have sufficient funds in
or credit with the drawee bank . . . which check . . . was subsequently dishonored by the
drawee bank for insufficiency of funds, and despite receipt of notice of such dishonor, said
accused failed to pay said Fatima Cortez Sasaki the amount of said check or to make
arrangement for full payment of the same within five (5) banking days after receiving said
notice. 2

On 18 July 1986, private respondent moved to quash the Information of the ground that the facts charged
did not constitute a felony as B.P. 22 was unconstitutional and that the check he issued was a
memorandum check which was in the nature of a promissory note, perforce, civil in nature. On 1 September
1986, respondent judge, ruling that B.P. 22 on which the Information was based was unconstitutional,
issued the questioned Order quashing the Information. Hence, this petition for review on certiorari filed by
the Solicitor General in behalf of the government.

Since the constitutionality of the "Bouncing Check Law" has already been sustained by this Court in Lozano
v.Martinez 3 and the seven (7) other cases decided jointly with it, 4 the remaining issue, as aptly stated by
private respondent in his Memorandum, is whether a memorandum check issued postdated in partial
payment of a pre-existing obligation is within the coverage of B.P. 22.

Citing U.S. v. Isham, 5 private respondent contends that although a memorandum check may not differ in
form and appearance from an ordinary check, such a check is given by the drawer to the payee more in the
nature of memorandum of indebtedness and, should be sued upon in a civil action.

We are not persuaded.

A memorandum check is in the form of an ordinary check, with the word "memorandum", "memo" or "mem"
written across its face, signifying that the maker or drawer engages to pay the bona fide holder absolutely,
without any condition concerning its presentment. 6 Such a check is an evidence of debt against the drawer,
and although may not be intended to be presented, 7 has the same effect as an ordinary check, 8 and if
passed to the third person, will be valid in his hands like any other check. 9

From the above definition, it is clear that a memorandum check, which is in the form of an ordinary check, is
still drawn on a bank and should therefore be distinguished from a promissory note, which is but a mere
promise to pay. If private respondent seeks to equate memorandum check with promissory note, as he does
to skirt the provisions of B.P. 22, he could very well have issued a promissory note, and this would be have
exempted him form the coverage of the law. In the business community a promissory note, certainly, has less
impact and persuadability than a check.

Verily, a memorandum check comes within the meaning of Sec. 185 of the Negotiable Instruments Law
which defines a check as "a bill of exchange drawn on a bank payable on demand." A check is also defined as
" [a] written order or request to a bank or persons carrying on the business of banking, by a party having
money in their hands, desiring them to pay, on presentment, to a person therein named or bearer, or to such
person or order, a named sum of money," citing 2 Dan. Neg. Inst. 528; Blair v. Wilson, 28 Gratt. (Va.)
170; Deener v. Brown, 1 MacArth. (D.C.) 350; In re Brown, 2 Sto. 502, Fed. Cas. No. 1,985. See Chapman
v. White, 6 N.Y. 412, 57 Am. Dec 464. 10 Another definition of check is that is "[a] draft drawn upon a bank
and payable on demand, signed by the maker or drawer, containing an unconditional promise to pay a sum
certain in money to the order of the payee," citing State v.Perrigoue, 81 Wash, 2d 640, 503 p. 2d 1063,
1066. 11
A memorandum check must therefore fall within the ambit of B.P. 22 which does not distinguish but merely
provides that "[a]ny person who makes or draws and issues any check knowing at the time of issue that he
does not have sufficient funds in or credit with the drawee bank . . . which check is subsequently dishonored
. . . shall be punished by imprisonment . . ." (Emphasis supplied ). 12 Ubi lex no distinguit nec nos distinguere
debemus.

But even if We retrace the enactment of the "Bouncing Check Law" to determine the parameters of the
concept of "check", We can easily glean that the members of the then Batasang Pambansa intended it to be
comprehensive as to include all checks drawn against banks. This was particularly the ratiocination of Mar.
Estelito P. Mendoza, co-sponsor of Cabinet Bill No. 9 which later became B.P. 22, when in response to the
interpellation of Mr. Januario T. Seño, Mr. Mendoza explained that the draft or order must be addressed to a
bank or depository, 13 and accepted the proposed amendment of Messrs. Antonio P. Roman and Arturo M.
Tolentino that the words "draft or order", and certain terms which technically meant promissory notes,
wherever they were found in the text of the bill, should be deleted since the bill was mainly directed against
the pernicious practice of issuing checks with insufficient or no funds, and not to drafts which were not
drawn against banks. 14

A memorandum check, upon presentment, is generally accepted by the bank. Hence it does not matter
whether the check issued is in the nature of a memorandum as evidence of indebtedness or whether it was
issued is partial fulfillment of a pre-existing obligation, for what the law punishes is the issuance itself of a
bouncing check 15 and not the purpose for which it was issuance. The mere act of issuing a worthless check,
whether as a deposit, as a guarantee, or even as an evidence of a pre-existing debt, is malum prohibitum. 16

We are not unaware that a memorandum check may carry with it the understanding that it is not be
presented at the bank but will be redeemed by the maker himself when the loan fall due. This understanding
may be manifested by writing across the check "Memorandum", "Memo" or "Mem." However, with the
promulgation of B.P. 22, such understanding or private arrangement may no longer prevail to exempt it from
penal sanction imposed by the law. To require that the agreement surrounding the issuance of check be first
looked into and thereafter exempt such issuance from the punitive provision of B.P. 22 on the basis of such
agreement or understanding would frustrate the very purpose for which the law was enacted — to stem the
proliferation of unfunded checks. After having effectively reduced the incidence of worthless checks changing
hands, the country will once again experience the limitless circulation of bouncing checks in the guise of
memorandum checks if such checks will be considered exempt from the operation of B.P. 22. It is common
practice in commercial transactions to require debtors to issue checks on which creditors must rely as
guarantee of payment. To determine the reasons for which checks are issued, or the terms and conditions for
their issuance, will greatly erode the faith the public responses in the stability and commercial value of
checks as currency substitutes, and bring about havoc in trade and in banking communities. 17

WHEREFORE, the petition is GRANTED and the Order of respondent Judge of 1 September 1986 is SET
ASIDE. Consequently, respondent Judge, or whoever presides over the Regional Trial Court of Manila,
Branch 52, is hereby directed forthwith to proceed with the hearing of the case until terminated.

SO ORDERED.

2. Lee vs. Court of Appeals, GR No. 117913, February 1, 2002

G.R. No. 117913 February 1, 2002

CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP, RICHARD VELASCO and ALFONSO
CO,petitioners,
vs.
COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.

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

G.R. NO. 117914

MICO METALS CORPORATION, petitioner,

vs.
COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.

DECISION

DE LEON, JR., J:

Before us is the joint and consolidated petition for review of the Decision 1 dated June 15, 1994 of the Court
of Appeals in CA-G.R. CV No. 27480 entitled, "Philippine Bank of Communications vs. Mico Metals
Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co," which
reversed the decision of the Regional Trial Court (RTC) of Manila, Branch 55 dismissing the complaint for
a sum of money filed by private respondent Philippine Bank of Communications against herein petitioners,
Mico Metals Corporation (MICO, for brevity), Charles Lee, Chua Siok Suy, 2 Mariano Sio, Alfonso Yap, Richard
Velasco and Alfonso Co.3 The dispositive portion of the said Decision of the Court of Appeals, reads:

WHEREFORE, the decision of the Regional Trial Court is hereby reversed and in lieu thereof, a new one is
entered:

a) Ordering the defendants-appellees jointly and severally to pay plaintiff PBCom the sum of Five
million four hundred fifty-one thousand six hundred sixty-three pesos and ninety centavos
(₱5,451,663.90) representing defendants-appellees unpaid obligations arising from ordinary loans
granted by the plaintiff plus legal interest until fully paid.

b) Ordering defendants-appellees jointly and severally to pay PBCom the sum of Four hundred sixty-
one thousand six hundred pesos and sixty-six centavos (₱46 1,600.66) representing defendants-
appellees unpaid obligations arising from their letters of credit and trust receipt transactions with
plaintiff PBCom plus legal interest until fully paid.

c) Ordering defendants-appellees jointly and severally to pay PBCom the sum of ₱50,000.00 as
attorney’s fees.

No pronouncement as to costs.

The facts of the case are as follows:

On March 2, 1979, Charles Lee, as President of MICO wrote private respondent Philippine Bank of
Communications (PBCom) requesting for a grant of a discounting loan/credit line in the sum of Three Million
Pesos (₱3,000,000.00) for the purpose of carrying out MICO’s line of business as well as to maintain its
volume of business.

On the same day, Charles Lee requested for another discounting loan/credit line of Three Million Pesos
(₱3,000,000.00) from PBCom for the purpose of opening letters of credit and trust receipts.

In connection with the requests for discounting loan/credit lines, PBCom was furnished by MICO the
following resolution which was adopted unanimously by MICO’s Board of Directors:

RESOLVED, that the President, Mr. Charles Lee, and the Vice-President and General Manager, Mr. Mariano A.
Sio, singly or jointly, be and they are duly authorized and empowered for and in behalf of this Corporation to
apply for, negotiate and secure the approval of commercial loans and other banking facilities and
accommodations, such as, but not limited to discount loans, letters of credit, trust receipts, lines for marginal
deposits on foreign and domestic letters of credit, negotiate out-of-town checks, etc. from the Philippine Bank of
Communications, 216 Juan Luna, Manila in such sums as they shall deem advantageous, the principal of all of
which shall not exceed the total amount of TEN MILLION PESOS (₱10,000,000.00), Philippine Currency, plus
any interests that may be agreed upon with said Bank in such loans and other credit lines of the same kind
and such further terms and conditions as may, upon granting of said loans and other banking facilities, be
imposed by the Bank; and to make, execute, sign and deliver any contracts of mortgage, pledge or sale of one,
some or all of the properties of the Company, or any other agreements or documents of whatever nature or
kind, including the signing, indorsing, cashing, negotiation and execution of promissory notes, checks, money
orders or other negotiable instruments, which may be necessary and proper in connection with said loans and
other banking facilities, or with their amendments, renewals and extensions of payment of the whole or any
part thereof.4

On March 26, 1979, MICO availed of the first loan of One Million Pesos (₱1,000,000.00) from PBCom. Upon
maturity of the loan, MICO caused the same to be renewed, the last renewal of which was made on May 21,
1982 under Promissory Note BNA No. 26218. 5

Another loan of One Million Pesos (₱1,000,000.00) was availed of by MICO from PBCom which was likewise
later on renewed, the last renewal of which was made on May 21, 1982 under Promissory Note BNA No.
26219.6 To complete MICO’s availment of Three Million Pesos (₱3,000,000.00) discounting loan/credit line
with PBCom, MICO availed of another loan from PBCom in the sum of One Million Pesos (₱1,000,000.00) on
May 24, 1979. As in previous loans, this was rolled over or renewed, the last renewal of which was made on
May 25, 1982 under Promissory Note BNA No. 26253. 7

As security for the loans, MICO through its Vice-President and General Manager, Mariano Sio, executed on
May 16, 1979 a Deed of Real Estate Mortgage over its properties situated in Pasig, Metro Manila covered by
Transfer Certificates of Title (TCT) Nos. 11248 and 11250.

On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap and Richard Velasco, in their
personal capacities executed a Surety Agreement8 in favor of PBCom whereby the petitioners jointly and
severally, guaranteed the prompt payment on due dates or at maturity of overdrafts, promissory notes,
discounts, drafts, letters of credit, bills of exchange, trust receipts, and other obligations of every kind and
nature, for which MICO may be held accountable by PBCom. It was provided, however, that the liability of
the sureties shall not at any one time exceed the principal amount of Three Million Pesos (₱3,000,000.00)
plus interest, costs, losses, charges and expenses including attorney’s fees incurred by PBCom in connection
therewith.

On July 14, 1980, petitioner Charles Lee, in his capacity as president of MICO, wrote PBCom and applied for
an additional loan in the sum of Four Million Pesos (₱4,000,000.00). The loan was intended for the
expansion and modernization of the company’s machineries. Upon approval of the said application for loan,
MICO availed of the additional loan of Four Million Pesos (₱4,000,000.00) as evidenced by Promissory Note
TA No. 094.9

As per agreement, the proceeds of all the loan availments were credited to MICO’s current checking account
with PBCom. To induce the PBCom to increase the credit line of MICO, Charles Lee, Chua Siok Suy, Mariano
Sio, Alfonso Yap, Richard Velasco and Alfonso Co (hereinafter referred to as petitioners-sureties), executed
another surety agreement10 in favor of PBCom on July 28, 1980, whereby they jointly and severally
guaranteed the prompt payment on due dates or at maturity of overdrafts, promissory notes, discounts,
drafts, letters of credit, bills of exchange, trust receipts and all other obligations of any kind and nature for
which MICO may be held accountable by PBCom. It was provided, however, that their liability shall not at
any one time exceed the sum of Seven Million Five Hundred Thousand Pesos (₱7,500,000.00) including
interest, costs, charges, expenses and attorney’s fees incurred by MICO in connection therewith.

On July 29, 1980, MICO furnished PBCom with a notarized certification issued by its corporate secretary,
Atty. P.B. Barrera, that Chua Siok Suy was duly authorized by the Board of Directors to negotiate on behalf
of MICO for loans and other credit availments from PBCom. Indicated in the certification was the following
resolution unanimously approved by the Board of Directors:

RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be, as he is hereby authorized and
empowered, on behalf of MICO METALS CORPORATION from time to time, to borrow money and obtain other
credit facilities, with or without security, from the PHILIPPINE BANK OF COMMUNICATIONS in such amount(s)
and under such terms and conditions as he may determine, with full power and authority to execute, sign and
deliver such contracts, instruments and papers in connection therewith, including real estate and chattel
mortgages, pledges and assignments over the properties of the Corporation; and to renew and/or extend
and/or roll-over and/or reavail of the credit facilities granted thereunder, either for lesser or for greater
amount(s), the intention being that such credit facilities and all securities of whatever kind given as collaterals
therefor shall be a continuing security.

RESOLVED FURTHER, That said bank is hereby authorized, empowered and directed to rely on the authority
given hereunder, the same to continue in full force and effect until written notice of its revocation shall be
received by said Bank.11

On July 2, 1981, MICO filed with PBCom an application for a domestic letter of credit in the sum of Three
Hundred Forty-Eight Thousand Pesos (₱348,000.00).12 The corresponding irrevocable letter of credit was
approved and opened under LC No. L-16060.13 Thereafter, the domestic letter of credit was negotiated and
accepted by MICO as evidenced by the corresponding bank draft issued for the purpose. 14 After the supplier
of the merchandise was paid, a trust receipt upon MICO’s own initiative, was executed in favor of PBCom. 15

On September 14, 1981, MICO applied for another domestic letter of credit with PBCom in the sum of Two
Hundred Ninety Thousand Pesos (₱290,000.00).16 The corresponding irrevocable letter of credit was issued
on September 22, 1981 under LC No. L-16334.17 After the beneficiary of the said letter of credit was paid by
PBCom for the price of the merchandise, the goods were delivered to MICO which executed a corresponding
trust receipt18 in favor of PBCom.

On November 10, 1981, MICO applied for authority to open a foreign letter of credit in favor of Ta Jih
Enterprises Co., Ltd.,19 and thus, the corresponding letter of credit 20 was then issued by PBCom with a cable
sent to the beneficiary, Ta Jih Enterprises Co., Ltd. advising that said beneficiary may draw funds from the
account of PBCom in its correspondent bank’s New York Office. 21 PBCom also informed its corresponding
bank in Taiwan, the Irving Trust Company, of the approved letter of credit. The correspondent bank
acknowledged PBCom’s advice through a confirmation letter 22 and by debiting from PBCom’s account with
the said correspondent bank the sum of Eleven Thousand Nine Hundred Sixty US Dollars ($11 ,960.00). 23 As
in past transactions, MICO executed in favor of PBCom a corresponding trust receipt. 24

On January 4, 1982, MICO applied, for authority to open a foreign letter of credit in the sum of One
Thousand Nine Hundred US Dollars ($1,900.00), with PBCom. 25 Upon approval, the corresponding letter of
credit denominated as LC No. 6229326 was issued whereupon PBCom advised its correspondent bank and
MICO27 of the same. Negotiation and proper acceptance of the letter of credit were then made by MICO.
Again, a corresponding trust receipt 28 was executed by MICO in favor of PBCom.

In all the transactions involving foreign letters of credit, PBCom turned over to MICO the necessary
documents such as the bills of lading and commercial invoices to enable the latter to withdraw the goods
from the port of Manila.
On May 21, 1982 MICO obtained from PBCom another loan in the sum of Three Hundred Seventy-Seven
Thousand Pesos (₱377,000.00) covered by Promissory Note BA No. 7458. 29

Upon maturity of all credit availments obtained by MICO from PBCom, the latter made a demand for
payment.30 For failure of petitioner MICO to pay the obligations incurred despite repeated demands, private
respondent PBCom extrajudicially foreclosed MICO’s real estate mortgage and sold the said mortgaged
properties in a public auction sale held on November 23, 1982. Private respondent PBCom which emerged as
the highest bidder in the auction sale, applied the proceeds of the purchase price at public auction of Three
Million Pesos (₱3,000,000.00) to the expenses of the foreclosure, interest and charges and part of the
principal of the loans, leaving an unpaid balance of Five Million Four Hundred Forty-One Thousand Six
Hundred Sixty-Three Pesos and Ninety Centavos (₱5,441,663.90) exclusive of penalty and interest charges.
Aside from the unpaid balance of Five Million Four Hundred Forty-One Thousand Six Hundred Sixty-Three
Pesos and Ninety Centavos (₱5,441,663.90), MICO likewise had another standing obligation in the sum of
Four Hundred Sixty-One Thousand Six Hundred Pesos and Six Centavos (₱461,600.06) representing its trust
receipts liabilities to private respondent. PBCom then demanded the settlement of the aforesaid obligations
from herein petitioners-sureties who, however, refused to acknowledge their obligations to PBCom under the
surety agreements. Hence, PBCom filed a complaint with prayer for writ of preliminary attachment before the
Regional Trial Court of Manila, which was raffled to Branch 55, alleging that MICO was no longer in
operation and had no properties to answer for its obligations. PBCom further alleged that petitioner Charles
Lee has disposed or concealed his properties with intent to defraud his creditors. Except for MICO and
Charles Lee, the sheriff of the RTC failed to serve the summons on herein petitioners-sureties since they were
all reportedly abroad at the time. An alias summons was later issued but the sheriff was not able to serve the
same to petitioners Alfonso Co and Chua Siok Suy who was already sickly at the time and reportedly in
Taiwan where he later died.

Petitioners (MICO and herein petitioners-sureties) denied all the allegations of the complaint filed by
respondent PBCom, and alleged that: a) MICO was not granted the alleged loans and neither did it receive
the proceeds of the aforesaid loans; b) Chua Siok Suy was never granted any valid Board Resolution to sign
for and in behalf of MICO; c) PBCom acted in bad faith in granting the alleged loans and in releasing the
proceeds thereof; d) petitioners were never advised of the alleged grant of loans and the subsequent releases
therefor, if any; e) since no loan was ever released to or received by MICO, the corresponding real estate
mortgage and the surety agreements signed concededly by the petitioners-sureties are null and void.

The trial court gave credence to the testimonies of herein petitioners and dismissed the complaint filed by
PBCom. The trial court likewise declared the real estate mortgage and its foreclosure null and void. In ruling
for herein petitioners, the trial court said that PBCom failed to adequately prove that the proceeds of the
loans were ever delivered to MICO. The trial court pointed out, among others, that while PBCom claimed that
the proceeds of the Four Million Pesos (₱4,000,000.00) loan covered by promissory note TA 094 were
deposited to the current account of petitioner MICO, PBCom failed to produce the ledger account showing
such deposit. The trial court added that while PBCom may have loaned to MICO the other sums of Three
Hundred Forty-Eight Thousand Pesos (₱348,000.00) and Two Hundred Ninety Thousand Pesos
(₱290,000.00), no proof has been adduced as to the existence of the goods covered and paid by the said
amounts. Hence, inasmuch as no consideration ever passed from PBCom to MICO, all the documents
involved therein, such as the promissory notes, real estate mortgage including the surety agreements were
all void or nonexistent for lack of cause or consideration. The trial court said that the lack of proof as regards
the existence of the merchandise covered by the letters of credit bolstered the claim of herein petitioners that
no purchases of the goods were really made and that the letters of credit transactions were simply resorted to
by the PBCom and Chua Siok Suy to accommodate the latter in his financial requirements.

The Court of Appeals reversed the ruling of the trial court, saying that the latter committed an erroneous
application and appreciation of the rules governing the burden of proof. Citing Section 24 of the Negotiable
Instruments Law which provides that "Every negotiable instrument is deemed prima facie to have been
issued for valuable consideration and every person whose signature appears thereon to have become a
party thereto for value", the Court of Appeals said that while the subject promissory notes and letters of
credit issued by the PBCom made no mention of delivery of cash, it is presumed that said negotiable
instruments were issued for valuable consideration. The Court of Appeals also cited the case of Gatmaitan vs.
Court of Appeals31 which holds that "there is a presumption that an instrument sets out the true
agreement of the parties thereto and that it was executed for valuable consideration". The appellate
court noted and found that a notarized Certification was issued by MICO’s corporate secretary, P.B. Barrera,
that Chua Siok Suy, was duly authorized by the Board of Directors of MICO to borrow money and obtain
credit facilities from PBCom.

Petitioners filed a motion for reconsideration of the challenged decision of the Court of Appeals but this was
denied in a Resolution dated November 7, 1994 issued by its Former Second Division. Petitioners-sureties
then filed a petition for review on certiorari with this Court, docketed as G.R. No. 117913, assailing the
decision of the Court of Appeals. MICO likewise filed a separate petition for review on certiorari, docketed as
G.R. No. 117914, with this Court assailing the same decision rendered by the Court of Appeals. Upon motion
filed by petitioners, the two (2) petitions were consolidated on January 11, 1995. 32

Petitioners contend that there was no proof that the proceeds of the loans or the goods under the trust
receipts were ever delivered to and received by MICO. But the record shows otherwise. Petitioners-sureties
further contend that assuming that there was delivery by PBCom of the proceeds of the loans and the goods,
the contracts were executed by an unauthorized person, more specifically Chua Siok Suy who acted
fraudulently and in collusion with PBCom to defraud MICO.

The pertinent issues raised in the consolidated cases at bar are: a) whether or not the proceeds of the loans
and letters of credit transactions were ever delivered to MICO, and b) whether or not the individual
petitioners, as sureties, may be held liable under the two (2) Surety Agreements executed on March 26, 1979
and July 28, 1980.

In civil cases, the party having the burden of proof must establish his case by preponderance of
evidence.33Preponderance of evidence means evidence which is more convincing to the court as worthy of
belief than that which is offered in opposition thereto. Petitioners contend that the alleged promissory notes,
trust receipts and surety agreements attached to the complaint filed by PBCom did not ripen into valid and
binding contracts inasmuch as there is no evidence of the delivery of money or loan proceeds to MICO or to
any of the petitioners-sureties. Petitioners claim that under normal banking practice, borrowers are required
to accomplish promissory notes in blank even before the grant of the loans applied for and such documents
become valid written contracts only when the loans are actually released to the borrower.

We are not convinced.

During the trial of an action, the party who has the burden of proof upon an issue may be aided in
establishing his claim or defense by the operation of a presumption, or, expressed differently, by the
probative value which the law attaches to a specific state of facts. A presumption may operate against his
adversary who has not introduced proof to rebut the presumption. The effect of a legal presumption upon a
burden of proof is to create the necessity of presenting evidence to meet the legal presumption or the prima
facie case created thereby, and which if no proof to the contrary is presented and offered, will prevail. The
burden of proof remains where it is, but by the presumption the one who has that burden is relieved for the
time being from introducing evidence in support of his averment, because the presumption stands in the
place of evidence unless rebutted.

Under Section 3, Rule 131 of the Rules of Court the following presumptions, among others, are satisfactory if
uncontradicted: a) That there was a sufficient consideration for a contract and b) That a negotiable
instrument was given or indorsed for sufficient consideration. As observed by the Court of Appeals, a similar
presumption is found in Section 24 of the Negotiable Instruments Law which provides that every negotiable
instrument is deemed prima facie to have been issued for valuable consideration and every person whose
signature appears thereon to have become a party for value. Negotiable instruments which are meant to be
substitutes for money, must conform to the following requisites to be considered as such a) it must be in
writing; b) it must be signed by the maker or drawer; c) it must contain an unconditional promise or order to
pay a sum certain in money; d) it must be payable on demand or at a fixed or determinable future time; e) it
must be payable to order or bearer; and f) where it is a bill of exchange, the drawee must be named or
otherwise indicated with reasonable certainty. Negotiable instruments include promissory notes, bills of
exchange and checks. Letters of credit and trust receipts are, however, not negotiable instruments. But
drafts issued in connection with letters of credit are negotiable instruments.

Private respondent PBCom presented the following documentary evidence to prove petitioners’ credit
availments and liabilities:

1) Promissory Note No. BNA —26218 dated May 21, 1982 in the sum of ₱1,000,000.00 executed by
MICO in favor of PBCom.

2) Promissory Note No. BNA —26219 dated May 21, 1982 in the sum of ₱1,000,000.00 executed by
MICO in favor of PBCom.

3) Promissory Note No. BNA —26253 dated May 25, 1982 in the sum of ₱1,000,000.00 executed by
MICO in favor of PBCom.

4) Promissory Note No. BNA —7458 dated May 21, 1982 in the sum of ₱377,000.00 executed by MICO
in favor of PBCom.

5) Promissory Note No. TA — 094 dated July 29, 1980 in the sum of ₱4,000.000.00 executed by MICO
in favor of PBCom.

6) Irrevocable letter of credit No. L-16060 dated July 2,1981 issued in favor of Perez Battery Center for
account of Mico Metals Corp.

7) Draft dated July 2, 1981 in the sum of ₱348,000.00 issued by Perez Battery Center, beneficiary of
irrevocable Letter of Credit No. No. L-16060 and accepted by MICO Metals corporation.

8) Letter dated July 2, 1981 from Perez Battery Center addressed to private respondent PBCom
showing that proceeds of the irrevocable letter of credit No. L- 16060 was received by Mr. Moises
Rosete, representative of Perez Battery Center.
 9) Trust receipt dated July 2, 1981 executed by MICO in favor of PBCom covering the merchandise
purchased under Letter of Credit No. 16060.

10) Irrevocable letter of credit No. L-16334 dated September 22, 1981 issued in favor of Perez Battery
Center for account of MICO Metals Corp.

11) Draft dated September 22, 1981 in the sum of ₱290,000.00 issued by Perez Battery Center and
accepted by MICO.

12) Letter dated September 17, 1981 from Perez Battery addressed to PBCom showing that the
proceeds of credit no. L-16344 was received by Mr. Moises Rosete, a representative of Perez Battery
Center.

13) Trust Receipt dated September 22, 1981 executed by MICO in favor of PBCom covering the
merchandise under Letter of Credit No. L-16334.

14) Irrevocable Letter of Credit no. 61873 dated November 10, 1981 for US$11,960.00 issued by
PBCom in favor of TA JIH Enterprises Co. Ltd., through its correspondent bank, Irving Trust Company of
Taipei, Taiwan.

15) Trust Receipt dated December 15, 9181 executed by MICO in favor of PBCom showing that
possession of the merchandise covered by Irrevocable Letter of Credit no. 61873 was released by
PBCom to MICO.

16) Letters dated March 2, 1979 from MICO signed by its president, Charles Lee, showing that MICO
sought credit line from PBCom in the form of loans, letters of credit and trust receipt in the sum of
₱7,500,000.00.

17) Letter dated July 14, 1980 from MICO signed by its president, Charles Lee, showing that MICO
requested for additional financial assistance in the sum of ₱4,000,000.00.

18) Board resolution dated March 6, 1979 of MICO authorizing Charles Lee and Mariano Sio singly or
jointly to act and sign for and in behalf of MICO relative to the obtention of credit facilities from PBCom.

19) Duly notarized Deed of Mortgage dated May 16, 1979 executed by MICO in favor of PBCom over
MICO ‘s real properties covered by TCT Nos. 11248 and 11250 located in Pasig.

20) Duly notarized Surety Agreement dated March 26, 1979 executed by herein petitioners Charles Lee,
Mariano Sio, Alfonso Yap, Richard Velasco and Chua Siok Suy in favor of PBCom.

21) Duly notarized Surety Agreement dated July 28, 1980 executed by herein petitioners Charles Lee,
Mariano Sio, Alfonso Yap, Richard Velasco and Chua Siok Suy in favor of PBCom.

22) Duly notarized certification dated July 28, 1980 issued by MICO ‘s corporate secretary, Mr. P.B.
Barrera, attesting to the adoption of a board resolution authorizing Chua Siok Suy to sign, for and in
behalf of MICO, all the necessary documents including contracts, loan instruments and mortgages
relative to the obtention of various credit facilities from PBCom.

The above-cited documents presented have not merely created a prima facie case but have actually proved
the solidary obligation of MICO and the petitioners, as sureties of MICO, in favor of respondent PBCom.
While the presumption found under the Negotiable Instruments Law may not necessarily be applicable to
trust receipts and letters of credit, the presumption that the drafts drawn in connection with the letters of
credit have sufficient consideration. Under Section 3(r), Rule 131 of the Rules of Court there is also a
presumption that sufficient consideration was given in a contract. Hence, petitioners should have presented
credible evidence to rebut that presumption as well as the evidence presented by private respondent PBCom.
The letters of credit show that the pertinent materials/merchandise have been received by MICO. The drafts
signed by the beneficiary/suppliers in connection with the corresponding letters of credit proved that said
suppliers were paid by PBCom for the account of MICO. On the other hand, aside from their bare denials
petitioners did not present sufficient and competent evidence to rebut the evidence of private respondent
PBCom. Petitioner MICO did not proffer a single piece of evidence, apart from its bare denials, to support its
allegation that the loan transactions, real estate mortgage, letters of credit and trust receipts were issued
allegedly without any consideration.

Petitioners-sureties, for their part, presented the By-Laws34 of Mico Metals Corporation (MICO) to prove that
only the president of MICO is authorized to borrow money, arrange letters of credit, execute trust receipts,
and promissory notes and consequently, that the loan transactions, letters of credit, promissory notes and
trust receipts, most of which were executed by Chua Siok Suy in representation of MICO were not allegedly
authorized and hence, are not binding upon MICO. A perusal of the By-Laws of MICO, however, shows that
the power to borrow money for the company and issue mortgages, bonds, deeds of trust and negotiable
instruments or securities, secured by mortgages or pledges of property belonging to the company is not
confined solely to the president of the corporation. The Board of Directors of MICO can also borrow money,
arrange letters of credit, execute trust receipts and promissory notes on behalf of the
corporation.35 Significantly, this power of the Board of Directors according to the by-laws of MICO, may be
delegated to any of its standing committee, officer or agent. 36 Hence, PBCom had every right to rely on the
Certification issued by MICO's corporate secretary, P.B. Barrera, that Chua Siok Suy was duly authorized by
its Board of Directors to borrow money and obtain credit facilities in behalf of MICO from PBCom.

Petitioners-sureties also presented a letter of their counsel dated October 9, 1982, addressed to private
respondent PBCom purportedly to show that PBCom knew that Chua Siok Suy allegedly used the credit and
good names of the petitioner-sureties for his benefit, and that petitioner-sureties were made to sign blank
documents and were furnished copies of the same. The letter, however, is in fact merely a reply of
petitioners-sureties’ counsel to PBCom’s demand for payment of MICO’s obligations, and appears to be an
inconsequential piece of self-serving evidence.

In addition to the foregoing, MICO and petitioners-sureties cited the decision of the trial court which stated
that there was no proof that the proceeds of the loans were ever delivered to MICO. Although the private
respondent’s witness, Mr. Gardiola, testified that the proceeds of the loans were deposited in MICO’s current
account with PBCom, his testimony was allegedly not supported by any bank record, note or memorandum.
A careful scrutiny of the record including the transcript of stenographic notes reveals, however, that
although private respondent PBCom was willing to produce the corresponding account ledger showing that
the proceeds of the loans were credited to MICO’s current account with PBCom, MICO in fact vigorously
objected to the presentation of said document. That point is shown in the testimony of PBCom’s witness,
Gardiola, thus:

Q: Now, all of these promissory note Exhibits "I" and "J" which as you have said previously (sic) availed
originally by defendant Mico Metals Corp. sometime in 1979, my question now is, do you know what
happened to the proceeds of the original availment?

A: Well, it was credited to the current account of Mico Metals Corp.

Q: Why did it was credited to the proceeds to the account of Mico Metals Corp? (sic)

A: Well, that is our understanding.

ATTY. DURAN:

Your honor, may we be given a chance to object, the best evidence is the so-called current account...

COURT:

Can you produce the ledger account?

A: Yes, Your Honor, I will bring.

COURT:

The ledger or record of the current account of Mico Metals Corp.

A: Yes, Your Honor.

ATTY. ACEJAS:

Your Honor, these are a confidential record, and they might not be disclosed without the consent of the
person concerned. (sic)

ATTY. SANTOS:

Well, you are the one who is asking that.

ATTY. DURAN:

Your Honor, I’m precisely want to show for the ... (sic)

COURT:

But the amount covered by the current account of defendant Mico Metals Corp. is the subject matter of this
case.

xxx xxx xxx

Q: Are those availments were release? (sic)

A: Yes, Your Honor, to the defendant corporation.

Q: By what means?

A: By the credit to their current account.

ATTY. ACEJAS:

We object to that, your Honor, because the disclose is the secrecy of the bank deposit. (sic)

xxx xxx xxx

Q: Before the recess Mr. Gardiola, you stated that the proceeds of the three (3) promissory notes were
credited to the accounts of Mico Metals Corporation, now do you know what kind of current account was
that which you are referring to?

ATTY. ACEJAS:

Objection your Honor, that is the disclose of the deposit of defendant Mico Metals Corporation and it cannot
disclosed without the authority of the depositor. (sic)37

That proceeds of the loans which were originally availed of in 1979 were delivered to MICO is bolstered by the
fact that more than a year later, specifically on July 14, 1980, MICO through its president, petitioner-surety
Charles Lee, requested for an additional loan of Four Million Pesos (₱4,000,000.00) from PBCom. The fact
that MICO was requesting for an additional loan implied that it has already availed of earlier loans from
PBCom.

Petitioners allege that PBCom presented no evidence that it remitted payments to cover the domestic and
foreign letters of credit. Petitioners placed much reliance on the erroneous decision of the trial court which
stated that private respondent PBCom allegedly failed to prove that it actually made payments under the
letters of credit since the bank drafts presented as evidence show that they were made in favor of the Bank of
Taiwan and First Commercial Bank.

Petitioners’ allegations are untenable.

Modern letters of credit are usually not made between natural persons. They involve bank to bank
transactions. Historically, the letter of credit was developed to facilitate the sale of goods between, distant
and unfamiliar buyers and sellers. It was an arrangement under which a bank, whose credit was acceptable
to the seller, would at the instance of the buyer agree to pay drafts drawn on it by the seller, provided that
certain documents are presented such as bills of lading accompanied the corresponding drafts. Expansion in
the use of letters of credit was a natural development in commercial banking.38 Parties to a commercial letter
of credit include (a) the buyer or the importer, (b) the seller, also referred to as beneficiary, (c) the opening
bank which is usually the buyer’s bank which actually issues the letter of credit, (d) the notifying bank which
is the correspondent bank of the opening bank through which it advises the beneficiary of the letter of credit,
(e) negotiating bank which is usually any bank in the city of the beneficiary. The services of the notifying
bank must always be utilized if the letter of credit is to be advised to the beneficiary through cable, (f) the
paying bank which buys or discounts the drafts contemplated by the letter of credit, if such draft is to be
drawn on the opening bank or on another designated bank not in the city of the beneficiary. As a rule,
whenever the facilities of the opening bank are used, the beneficiary is supposed to present his drafts to the
notifying bank for negotiation and (g) the confirming bank which, upon the request of the beneficiary,
confirms the letter of credit issued by the opening bank.

From the foregoing, it is clear that letters of credit, being usually bank to bank transactions, involve more
than just one bank. Consequently, there is nothing unusual in the fact that the drafts presented in evidence
by respondent bank were not made payable to PBCom. As explained by respondent bank, a draft was drawn
on the Bank of Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the goods covered by the foreign
letter of credit. Having paid the supplier, the Bank of Taiwan then presented the bank draft for
reimbursement by PBCom’s correspondent bank in Taiwan, the Irving Trust Company — which explains the
reason why on its face, the draft was made payable to the Bank of Taiwan. Irving Trust Company accepted
and endorsed the draft to PBCom. The draft was later transmitted to PBCom to support the latter’s claim for
payment from MICO. MICO accepted the draft upon presentment and negotiated it to PBCom.

Petitioners further aver that MICO never requested that legal possession of the merchandise be transferred to
PBCom by way of trust receipts. Petitioners insist that assuming that MICO transferred possession of the
merchandise to PBCom by way of trust receipts, the same would be illegal since PBCom, being a banking
institution, is not authorized by law to engage in the business of importing and selling goods.
A trust receipt is considered as a security transaction intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise,
and who may not be able to acquire credit except through utilization, as collateral of the merchandise
imported or purchased.39 A trust receipt, therefor, is a document of security pursuant to which a bank
acquires a "security interest" in the goods under trust receipt. Under a letter of credit-trust receipt
arrangement, a bank extends a loan covered by a letter of credit, with the trust receipt as a security for the
loan. The transaction involves a loan feature represented by a letter of credit, and a security feature which is
in the covering trust receipt which secures an indebtedness.

Petitioners’ averments with regard to the second issue are no less incredulous.1âwphi1 Petitioners’ contend
that the letters of credit, surety agreements and loan transactions did not ripen into valid and binding
contracts since no part of the proceeds of the loan transactions were delivered to MICO or to any of the
petitioners-sureties. Petitioners-sureties allege that Chua Siok Suy was the beneficiary of the proceeds of the
loans and that the latter made them sign the surety agreements in blank. Thus, they maintain that they
should not be held accountable for any liability that might arise therefrom.

It has not escaped our notice that it was petitioner-surety Charles Lee, as president of MICO Metals
Corporation, who first requested for a discounting loan of Three Million Pesos (₱3,000,000.00) from PBCom
as evidenced by his letter dated March 2, 1979. 40 On the same day, Charles Lee, as President of MICO,
requested for a Letter of Credit and Trust Receipt line in the sum of Three Million Pesos
(₱3,000,000.00).41 Still, on the same day, Charles Lee again as President of MICO, wrote another letter to
PBCOM requesting for a financing line in the sum of One Million Five Hundred Thousand Pesos
(₱1,500,000.00) to be used exclusively as marginal deposit for the opening of MICO’s foreign and local letters
of credit with PBCom.42 More than a year later, it was also Charles Lee, again in his capacity as president of
MICO, who asked for an additional loan in the sum of Four Million Pesos (₱4,000,000.00). The claim
therefore of petitioners that it was Chua Siok Suy, in connivance with the respondent PBCom, who applied
for and obtained the loan transactions and letters of credit strains credulity considering that even the Deed
of the Real Estate Mortgage in favor of PBCom was executed by petitioner-surety Mariano Sio in his capacity
as general manager of MICO43 to secure the loan accommodations obtained by MICO from PBCom.

Petitioners-sureties allege that they were made to sign the surety agreements in blank by Chua Siok Suy.
Petitioner Alfonso Yap, the corporate treasurer, for his part testified that he signed booklets of checks, surety
agreements and promissory notes in blank; that he signed the documents in blank despite his misgivings
since Chua Siok Suy assured him that the transaction can easily be taken cared of since Chua Siok Suy
personally knew the Chairman of the Board of PBCom; that he was not receiving salary as treasurer of Mico
Metals and since Chua Siok Suy had a direct hand in the management of Malayan Sales Corporation, of
which Yap is an employee, he (Yap) signed the documents in blank as consideration for his continued
employment in Malayan Sales Corporation. Petitioner Antonio Co testified that he worked as office manager
for MICO from 1978-1982. As office manager, he was the one in charge of transacting business like
purchasing, selling and paying the salary of the employees. He was also in charge of the handling of
documents pertaining to surety agreements, trust receipts and promissory notes; 44 that when he first joined
MICO Metals Corporation, he was able to read the by-laws of the corporation and he came to know that only
the chairman and the president can borrow money in behalf of the corporation; that Chua Siok Suy once
called him up and told him to secure an invoice so that a credit line can be opened in the bank with a local
letter of credit; that when the invoice was secured, he (Co) brought it together with the application for a
credit line to Chua Siok Suy, and that he questioned the authority of Chua Siok Suy pointing out that he
(Co) is not empowered to sign the document inasmuch as only the latter, as president, was authorized to do
so. However, Chua Siok Suy allegedly just said that he had already talked with the Chairman of the Board of
PBCom; and that Chua Siok Suy reportedly said that he needed the money to finance a project that he had
with the Taipei government. Co also testified that he knew of the application for domestic letter of credit in
the sum of Three Hundred Forty-Eight Thousand Pesos (₱348,000.00); and that a certain Moises Rosete was
authorized to claim the check covering the Three Hundred Forty-Eight Thousand Pesos (₱348,000.00) from
PBCom; and that after claiming the check Rosete brought it to Perez Battery Center for indorsement after
which the same was deposited to the personal account of Chua Siok Suy. 45

We consider as incredible and unacceptable the claim of petitioners-sureties that the Board of Directors of
MICO was so careless about the business affairs of MICO as well as about their own personal reputation and
money that they simply relied on the say so of Chua Siok Suy on matters involving millions of pesos. Under
Section 3 (d), Rule 131 of the Rules of Court, it is presumed that a person takes ordinary care of his
concerns. Hence, the natural presumption is that one does not sign a document without first informing
himself of its contents and consequences. Said presumption acquires greater force in the case at bar where
not only one but several documents were executed at different times and at different places by the petitioner
sureties and Chua Siok Suy as president of MICO.

MICO and herein petitioners-sureties insist that Chua Siok Suy was not duly authorized to negotiate for
loans in behalf of MICO from PBCom. Petitioners’ allegation, however, is belied by the July 28, 1980
Certification issued by the corporate secretary of PBCom, Atty. P.B. Barrera, that MICO's Board of Directors
gave Chua Siok Suy full authority to negotiate for loans in behalf of MICO with PBCom. In fact, the
Certification even provided that Chua Siok Suy’s authority continues until and unless PBCom is notified in
writing of the withdrawal thereof by the said Board. Notably, petitioners failed to contest the genuineness of
the said Certification which is notarized and to show any written proof of any alleged withdrawal of the said
authority given by the Board of Directors to Chua Siok Suy to negotiate for loans in behalf of MICO.
There was no need for PBCom to personally inform the petitioners-sureties individually about the terms of
the loans, letters of credit and other loan documents. The petitioners-sureties themselves happen to
comprise the Board of Directors of MICO, which gave full authority to Chua Siok Suy to negotiate for loans in
behalf of MICO. Notice to MICO’s authorized representative, Chua Siok Suy, was notice to MICO. The
Certification issued by PBCom’s corporate secretary, Atty. P.B. Barrera, indicated that Chua Siok Suy had
full authority to negotiate and sign the necessary documents, in behalf of MICO for loans from PBCom.
Respondent PBCom therefore had the right to rely on the said notarized Certification of MICO’s Corporate
Secretary.

Anent petitioners-sureties contention that they obtained no consideration whatsoever on the surety
agreements, we need only point out that the consideration for the sureties is the very consideration for the
principal obligor, MICO, in the contracts of loan. In the case of Willex Plastic Industries Corporation vs. Court
of Appeals,46 we ruled that the consideration necessary to support a surety obligation need not pass directly
to the surety, a consideration moving to the principal alone being sufficient. For a guarantor or surety is
bound by the same consideration that makes the contract effective between the parties thereto. It is not
necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his
principal.

Petitioners placed too much reliance on the rule in evidence that the burden of proof does not shift whereas
the burden of going forward with the evidence does pass from party to party. It is true that said rule is not
changed by the fact that the party having the burden of proof has introduced evidence which
established prima facie his assertion because such evidence does not shift the burden of proof; it merely puts
the adversary to the necessity of producing evidence to meet the prima facie case. Where the defendant
merely denies, either generally or otherwise, the allegations of the plaintiff’s pleadings, the burden of proof
continues to rest on the plaintiff throughout the trial and does not shift to the defendant until the plaintiff’s
evidence has been presented and duly offered. The defendant has then no burden except to produce evidence
sufficient to create a state of equipoise between his proof and that of the plaintiff to defeat the latter, whereas
the plaintiff has the burden, as in the beginning, of establishing his case by a preponderance of
evidence.47 But where the defendant has failed to present and marshall evidence sufficient to create a state of
equipoise between his proof and that of plaintiff, the prima facie case presented by the plaintiff will prevail.

In the case at bar, respondent PBCom, as plaintiff in the trial court, has in fact presented sufficient
documentary and testimonial evidence that proved by preponderance of evidence its subject collection case
against the defendants who are the petitioners herein. In view of all the foregoing, the Court of Appeals
committed no reversible error in its appealed Decision.

WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No. 27480 entitled, "Philippine
Bank of Communications vs. Mico Metals Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso
Yap, Richard Velasco and Alfonso Co," is AFFIRMED in toto.

Costs against the petitioners.

SO ORDERED.

3. Colinares vs. Court of Appeals, GR No. 90828

G.R. No. 90828 September 5, 2000

MELVIN COLINARES and LORDINO VELOSO, petitioners,

vs.
HONORABLE COURT OF APPEALS, and THE PEOPLE OF THE PHILIPPINES, respondents.

DECISION

DAVIDE, JR., C.J.:

In 1979 Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for a consideration of
₱40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the latter’s convent at Camaman-an,
Cagayan de Oro City.

On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical board 2’x4’x½", 300 SF tanguile
wood tiles 12"x12", 260 SF Marcelo economy tiles and 2 gallons UMYLIN cement adhesive from CM Builders
Centre for the construction project.1 The following day, 31 October 1979, Petitioners applied for a
commercial letter of credit2 with the Philippine Banking Corporation, Cagayan de Oro City branch (hereafter
PBC) in favor of CM Builders Centre. PBC approved the letter of credit3 for ₱22,389.80 to cover the full
invoice value of the goods. Petitioners signed a pro-forma trust receipt4 as security. The loan was due on 29
January 1980.

On 31 October 1979, PBC debited ₱6,720 from Petitioners’ marginal deposit as partial payment of the loan.5
On 7 May 1980, PBC wrote6 to Petitioners demanding that the amount be paid within seven days from
notice. Instead of complying with PBC’s demand, Veloso confessed that they lost ₱19,195.83 in the Carmelite
Monastery Project and requested for a grace period of until 15 June 1980 to settle the account.7

PBC sent a new demand letter8 to Petitioners on 16 October 1980 and informed them that their outstanding
balance as of 17 November 1979 was ₱20,824.40 exclusive of attorney’s fees of 25%.9

On 2 December 1980, Petitioners proposed10 that the terms of payment of the loan be modified as follows:
₱2,000 on or before 3 December 1980, and ₱1,000 per month starting 31 January 1980 until the account is
fully paid. Pending approval of the proposal, Petitioners paid ₱1,000 to PBC on 4 December 1980,11 and
thereafter ₱500 on 11 February 1981,12 16 March 1981,13 and 20 April 1981.14 Concurrently with the
separate demand for attorney’s fees by PBC’s legal counsel, PBC continued to demand payment of the
balance.15

On 14 January 1983, Petitioners were charged with the violation of P.D. No. 115 (Trust Receipts Law) in
relation to Article 315 of the Revised Penal Code in an Information which was filed with Branch 18, Regional
Trial Court of Cagayan de Oro City. The accusatory portion of the Information reads:

That on or about October 31, 1979, in the City of Cagayan de Oro, Philippines, and within the jurisdiction of
this Honorable Court, the above-named accused entered into a trust receipt agreement with the Philippine
Banking Corporation at Cagayan de Oro City wherein the accused, as entrustee, received from the entruster
the following goods to wit:

Solatone Acoustical board

Tanguile Wood Tiles
Marcelo Cement Tiles
Umylin Cement Adhesive

with a total value of P22,389.80, with the obligation on the part of the accused-entrustee to hold the
aforesaid items in trust for the entruster and/or to sell on cash basis or otherwise dispose of the said items
and to turn over to the entruster the proceeds of the sale of said goods or if there be no sale to return said
items to the entruster on or before January 29, 1980 but that the said accused after receipt of the goods,
with intent to defraud and cause damage to the entruster, conspiring, confederating together and mutually
helping one another, did then and there wilfully, unlawfully and feloniously fail and refuse to remit the
proceeds of the sale of the goods to the entruster despite repeated demands but instead converted,
misappropriated and misapplied the proceeds to their own personal use, benefit and gain, to the damage and
prejudice of the Philippine Banking Corporation, in the aforesaid sum of P22,389.80, Philippine Currency.

Contrary to PD 115 in relation to Article 315 of the Revised Penal Code.16

The case was docketed as Criminal Case No. 1390.

During trial, petitioner Veloso insisted that the transaction was a "clean loan" as per verbal guarantee of
Cayo Garcia Tuiza, PBC’s former manager. He and petitioner Colinares signed the documents without
reading the fine print, only learning of the trust receipt implication much later. When he brought this to the
attention of PBC, Mr. Tuiza assured him that the trust receipt was a mere formality.17

On 7 July 1986, the trial court promulgated its decision18 convicting Petitioners of estafa for violating P.D.
No. 115 in relation to Article 315 of the Revised Penal Code and sentencing each of them to suffer
imprisonment of two years and one day of prision correccional as minimum to six years and one day of
prision mayor as maximum, and to solidarily indemnify PBC the amount of ₱20,824.44, with legal interest
from 29 January 1980, 12 % penalty charge per annum, 25% of the sums due as attorney’s fees, and costs.

The trial court considered the transaction between PBC and Petitioners as a trust receipt transaction under
Section 4, P.D. No. 115. It considered Petitioners’ use of the goods in their Carmelite monastery project an
act of "disposing" as contemplated under Section 13, P.D. No. 115, and treated the charge invoice19 for
goods issued by CM Builders Centre as a "document" within the meaning of Section 3 thereof. It concluded
that the failure of Petitioners to turn over the amount they owed to PBC constituted estafa.

Petitioners appealed from the judgment to the Court of Appeals which was docketed as CA-G.R. CR No.
05408. Petitioners asserted therein that the trial court erred in ruling that they violated the Trust Receipt
Law, and in holding them criminally liable therefor. In the alternative, they contend that at most they can
only be made civilly liable for payment of the loan.

In its decision20 6 March 1989, the Court of Appeals modified the judgment of the trial court by increasing
the penalty to six years and one day of prision mayor as minimum to fourteen years eight months and one
day of reclusion temporal as maximum. It held that the documentary evidence of the prosecution prevails
over Veloso’s testimony, discredited Petitioners’ claim that the documents they signed were in blank, and
disbelieved that they were coerced into signing them.

On 25 March 1989, Petitioners filed a Motion for New Trial/Reconsideration21 alleging that the "Disclosure
Statement on Loan/Credit Transaction"22 (hereafter Disclosure Statement) signed by them and Tuiza was
suppressed by PBC during the trial. That document would have proved that the transaction was indeed a
loan as it bears a 14% interest as opposed to the trust receipt which does not at all bear any interest.
Petitioners further maintained that when PBC allowed them to pay in installment, the agreement was
novated and a creditor-debtor relationship was created.

In its resolution23 of 16 October 1989 the Court of Appeals denied the Motion for New Trial/Reconsideration
because the alleged newly discovered evidence was actually forgotten evidence already in existence during
the trial, and would not alter the result of the case.

Hence, Petitioners filed with us the petition in this case on 16 November 1989. They raised the following
issues:

1. WHETHER OR NOT THE DENIAL OF THE MOTION FOR NEW TRIAL ON THE GROUND OF NEWLY
DISCOVERED EVIDENCE, NAMELY, "DISCLOSURE ON LOAN/CREDIT TRANSACTION," WHICH IF
INTRODUCED AND ADMITTED, WOULD CHANGE THE JUDGMENT, DOES NOT CONSTITUTE A DENIAL
OF DUE PROCESS.

2. ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR NOT THE ACCUSED WERE
PROPERLY CHARGED, TRIED AND CONVICTED FOR VIOLATION OF SEC. 13, PD NO. 115 IN RELATION TO
ARTICLE 315 PARAGRAPH (I) (B) NOTWITHSTANDING THE NOVATION OF THE SO-CALLED TRUST
RECEIPT CONVERTING THE TRUSTOR-TRUSTEE RELATIONSHIP TO CREDITOR-DEBTOR SITUATION.

In its Comment of 22 January 1990, the Office of the Solicitor General urged us to deny the petition for lack
of merit.

On 28 February 1990 Petitioners filed a Motion to Dismiss the case on the ground that they had already fully
paid PBC on 2 February 1990 the amount of ₱70,000 for the balance of the loan, including interest and other
charges, as evidenced by the different receipts issued by PBC,24 and that the PBC executed an Affidavit of
desistance.25

We required the Solicitor General to comment on the Motion to Dismiss.

In its Comment of 30 July 1990, the Solicitor General opined that payment of the loan was akin to a
voluntary surrender or plea of guilty which merely serves to mitigate Petitioners’ culpability, but does not in
any way extinguish their criminal liability.

In the Resolution of 13 August 1990, we gave due course to the Petition and required the parties to file their
respective memoranda.

The parties subsequently filed their respective memoranda.

It was only on 18 May 1999 when this case was assigned to the ponente. Thereafter, we required the parties
to move in the premises and for Petitioners to manifest if they are still interested in the further prosecution of
this case and inform us of their present whereabouts and whether their bail bonds are still valid.

Petitioners submitted their Compliance.

The core issues raised in the petition are the denial by the Court of Appeals of Petitioners’ Motion for New
Trial and the true nature of the contract between Petitioners and the PBC. As to the latter, Petitioners assert
that it was an ordinary loan, not a trust receipt agreement under the Trust Receipts Law.

The grant or denial of a motion for new trial rests upon the discretion of the judge. New trial may be granted
if: (1) errors of law or irregularities have been committed during the trial prejudicial to the substantial rights
of the accused; or (2) new and material evidence has been discovered which the accused could not with
reasonable diligence have discovered and produced at the trial, and which, if introduced and admitted,
would probably change the judgment.26

For newly discovered evidence to be a ground for new trial, such evidence must be (1) discovered after trial;
(2) could not have been discovered and produced at the trial even with the exercise of reasonable diligence;
and (3) material, not merely cumulative, corroborative, or impeaching, and of such weight that, if admitted,
would probably change the judgment.27 It is essential that the offering party exercised reasonable diligence
in seeking to locate the evidence before or during trial but nonetheless failed to secure it.28

We find no indication in the pleadings that the Disclosure Statement is a newly discovered evidence.

Petitioners could not have been unaware that the two-page document exists. The Disclosure Statement itself
states, "NOTICE TO BORROWER: YOU ARE ENTITLED TO A COPY OF THIS PAPER WHICH YOU SHALL
SIGN."29 Assuming Petitioners’ copy was then unavailable, they could have compelled its production in
court,30 which they never did. Petitioners have miserably failed to establish the second requisite of the rule
on newly discovered evidence.

Petitioners themselves admitted that "they searched again their voluminous records, meticulously and
patiently, until they discovered this new and material evidence" only upon learning of the Court of Appeals’
decision and after they were "shocked by the penalty imposed."31 Clearly, the alleged newly discovered
evidence is mere forgotten evidence that jurisprudence excludes as a ground for new trial.32

However, the second issue should be resolved in favor of Petitioners.

Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt transaction as any transaction by and
between a person referred to as the entruster, and another person referred to as the entrustee, whereby the
entruster who owns or holds absolute title or security interest over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee upon the latter’s execution and delivery to
the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the
designated goods, documents or instruments with the obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods,
documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the
terms and conditions specified in the trust receipt.

There are two possible situations in a trust receipt transaction. The first is covered by the provision which
refers to money received under the obligation involving the duty to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision which refers to merchandise received under the
obligation to "return" it (devolvera) to the owner.33

Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the trust receipt to the
entruster or to return said goods if they were not disposed of in accordance with the terms of the trust
receipt shall be punishable as estafa under Article 315 (1) of the Revised Penal Code,34 without need of
proving intent to defraud.

A thorough examination of the facts obtaining in the case at bar reveals that the transaction intended by the
parties was a simple loan, not a trust receipt agreement.

Petitioners received the merchandise from CM Builders Centre on 30 October 1979. On that day, ownership
over the merchandise was already transferred to Petitioners who were to use the materials for their
construction project. It was only a day later, 31 October 1979, that they went to the bank to apply for a loan
to pay for the merchandise.

This situation belies what normally obtains in a pure trust receipt transaction where goods are owned by the
bank and only released to the importer in trust subsequent to the grant of the loan. The bank acquires a
"security interest" in the goods as holder of a security title for the advances it had made to the entrustee.35
The ownership of the merchandise continues to be vested in the person who had advanced payment until he
has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned
over to him by the importer or by his representative or successor in interest.36 To secure that the bank shall
be paid, it takes full title to the goods at the very beginning and continues to hold that title as his
indispensable security until the goods are sold and the vendee is called upon to pay for them; hence, the
importer has never owned the goods and is not able to deliver possession.37 In a certain manner, trust
receipts partake of the nature of a conditional sale where the importer becomes absolute owner of the
imported merchandise as soon as he has paid its price.38

Trust receipt transactions are intended to aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be
able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased.39

The antecedent acts in a trust receipt transaction consist of the application and approval of the letter of
credit, the making of the marginal deposit and the effective importation of goods through the efforts of the
importer.40

PBC attempted to cover up the true delivery date of the merchandise, yet the trial court took notice even
though it failed to attach any significance to such fact in the judgment. Despite the Court of Appeals’
contrary view that the goods were delivered to Petitioners previous to the execution of the letter of credit and
trust receipt, we find that the records of the case speak volubly and this fact remains uncontroverted. It is
not uncommon for us to peruse through the transcript of the stenographic notes of the proceedings to be
satisfied that the records of the case do support the conclusions of the trial court.41 After such perusal
Grego Mutia, PBC’s credit investigator, admitted thus:

ATTY. CABANLET: (continuing)

Q Do you know if the goods subject matter of this letter of credit and trust receipt agreement were received
by the accused?

A Yes, sir

Q Do you have evidence to show that these goods subject matter of this letter of credit and trust receipt were
delivered to the accused?

A Yes, sir.
Q I am showing to you this charge invoice, are you referring to this document?

A Yes, sir.

xxx

Q What is the date of the charge invoice?

A October 31, 1979.

COURT:

Make it of record as appearing in Exhibit D, the zero in 30 has been superimposed with numeral 1.42

During the cross and re-direct examinations he also impliedly admitted that the transaction was indeed a
loan. Thus:

Q In short the amount stated in your Exhibit C, the trust receipt was a loan to the accused you admit that?

A Because in the bank the loan is considered part of the loan.

xxx

RE-DIRECT BY ATTY. CABANLET:

ATTY. CABANLET (to the witness)

Q What do you understand by loan when you were asked?

A Loan is a promise of a borrower from the value received. The borrower will pay the bank on a certain
specified date with interest43

Such statement is akin to an admission against interest binding upon PBC.

Petitioner Veloso’s claim that they were made to believe that the transaction was a loan was also not denied
by PBC. He declared:

Q Testimony was given here that that was covered by trust receipt. In short it was a special kind of
loan.1âwphi1 What can you say as to that?

A I don’t think that would be a trust receipt because we were made to understand by the manager who
encouraged us to avail of their facilities that they will be granting us a loan44

PBC could have presented its former bank manager, Cayo Garcia Tuiza, who contracted with Petitioners, to
refute Veloso’s testimony, yet it only presented credit investigator Grego Mutia. Nowhere from Mutia’s
testimony can it be gleaned that PBC represented to Petitioners that the transaction they were entering into
was not a pure loan but had trust receipt implications.

The Trust Receipts Law does not seek to enforce payment of the loan, rather it 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.45 Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor
abuse of confidence in the handling of money to the prejudice of PBC. Petitioners continually endeavored to
meet their obligations, as shown by several receipts issued by PBC acknowledging payment of the loan.

The Information charges Petitioners with intent to defraud and misappropriating the money for their
personal use. The mala prohibita nature of the alleged offense notwithstanding, intent as a state of mind was
not proved to be present in Petitioners’ situation. Petitioners employed no artifice in dealing with PBC and
never did they evade payment of their obligation nor attempt to abscond. Instead, Petitioners sought
favorable terms precisely to meet their obligation.

Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale, contrary to the
express provision embodied in the trust receipt. They are contractors who obtained the fungible goods for
their construction project. At no time did title over the construction materials pass to the bank, but directly
to the Petitioners from CM Builders Centre. This impresses upon the trust receipt in question vagueness and
ambiguity, which should not be the basis for criminal prosecution in the event of violation of its
provisions.46

The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them
under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if
not reprehensible. Such agreements are contracts of adhesion which borrowers have no option but to sign
lest their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy of
banks, and is prone to misinterpretation, as had happened in this case. Eventually, PBC showed its true
colors and admitted that it was only after collection of the money, as manifested by its Affidavit of
Desistance.

WHEREFORE, the challenged Decision of 6 March 1989 and the Resolution of 16 October 1989 of the Court
of Appeals in CA-GR. No. 05408 are REVERSED and SET ASIDE. Petitioners are hereby ACQUITTED of the
crime charged, i.e., for violation of P.D. No. 115 in relation to Article 315 of the Revised Penal Code.

No costs.

SO ORDERED.

4. Ng vs. People, GR No. 173905, April 23, 2010

G.R. No. 173905 April 23, 2010

ANTHONY L. NG, Petitioner,

vs.
PEOPLE OF THE PHILIPPINES, Respondent.

DECISION

VELASCO, JR.

The Case

This is a Petition for Review on Certiorari under Rule 45 seeking to reverse and set aside the August 29,
2003 Decision1 and July 25, 2006 Resolution of the Court of Appeals (CA) in CA-G.R. CR No. 25525, which
affirmed the Decision2 of the Regional Trial Court (RTC), Branch 95 in Quezon City, in Criminal Case No. Q-
99-85133 for Estafa under Article 315, paragraph 1(b) of the Revised Penal Code (RPC) in relation to Section
3 of Presidential Decree No. (PD) 115 or the Trust Receipts Law.

The Facts

Sometime in the early part of 1997, petitioner Anthony Ng, then engaged in the business of building and
fabricating telecommunication towers under the trade name "Capitol Blacksmith and Builders," applied for a
credit line of PhP 3,000,000 with Asiatrust Development Bank, Inc. (Asiatrust). In support of Asiatrust’s
credit investigation, petitioner voluntarily submitted the following documents: (1) the contracts he had with
Islacom, Smart, and Infocom; (2) the list of projects wherein he was commissioned by the said
telecommunication companies to build several steel towers; and (3) the collectible amounts he has with the
said companies.3

On May 30, 1997, Asiatrust approved petitioner’s loan application. Petitioner was then required to sign
several documents, among which are the Credit Line Agreement, Application and Agreement for Irrevocable
L/C, Trust Receipt Agreements,4 and Promissory Notes. Though the Promissory Notes matured on
September 18, 1997, the two (2) aforementioned Trust Receipt Agreements did not bear any maturity dates
as they were left unfilled or in blank by Asiatrust.5

After petitioner received the goods, consisting of chemicals and metal plates from his suppliers, he utilized
them to fabricate the communication towers ordered from him by his clients which were installed in three
project sites, namely: Isabel, Leyte; Panabo, Davao; and Tongonan.

As petitioner realized difficulty in collecting from his client Islacom, he failed to pay his loan to Asiatrust.
Asiatrust then conducted a surprise ocular inspection of petitioner’s business through Villarva S. Linga,
Asiatrust’s representative appraiser. Linga thereafter reported to Asiatrust that he found that approximately
97% of the subject goods of the Trust Receipts were "sold-out and that only 3 % of the goods pertaining to PN
No. 1963 remained." Asiatrust then endorsed petitioner’s account to its Account Management Division for
the possible restructuring of his loan. The parties thereafter held a series of conferences to work out the
problem and to determine a way for petitioner to pay his debts. However, efforts towards a settlement failed
to be reached.

On March 16, 1999, Remedial Account Officer Ma. Girlie C. Bernardez filed a Complaint-Affidavit before the
Office of the City Prosecutor of Quezon City. Consequently, on September 12, 1999, an Information for
Estafa, as defined and penalized under Art. 315, par. 1(b) of the RPC in relation to Sec. 3, PD 115 or the
Trust Receipts Law, was filed with the RTC. The said Information reads:

That on or about the 30th day of May 1997, in Quezon City, Philippines, the above-named petitioner, did
then and there willfully, unlawfully, and feloniously defraud Ma. Girlie C. Bernardez by entering into a Trust
Receipt Agreement with said complainant whereby said petitioner as entrustee received in trust from the said
complainant various chemicals in the total sum of P4.5 million with the obligation to hold the said chemicals
in trust as property of the entruster with the right to sell the same for cash and to remit the proceeds thereof
to the entruster, or to return the said chemicals if unsold; but said petitioner once in possession of the same,
contrary to his aforesaid obligation under the trust receipt agreement with intent to defraud did then and
there misappropriated, misapplied and converted the said amount to his own personal use and benefit and
despite repeated demands made upon him, said petitioner refused and failed and still refuses and fails to
make good of his obligation, to the damage and prejudice of the said Ma. Girlie C. Bernardez in the amount
of P2,971,650.00, Philippine Currency.

CONTRARY TO LAW.

Upon arraignment, petitioner pleaded not guilty to the charges. Thereafter, a full-blown trial ensued.

During the pendency of the abovementioned case, conferences between petitioner and Asiatrust’s Remedial
Account Officer, Daniel Yap, were held. Afterward, a Compromise Agreement was drafted by Asiatrust. One of
the requirements of the Compromise Agreement was for petitioner to issue six (6) postdated checks.
Petitioner, in good faith, tried to comply by issuing two or three checks, which were deposited and made
good. The remaining checks, however, were not deposited as the Compromise Agreement did not push
through.

For his defense, petitioner argued that: (1) the loan was granted as his working capital and that the Trust
Receipt Agreements he signed with Asiatrust were merely preconditions for the grant and approval of his
loan; (2) the Trust Receipt Agreement corresponding to Letter of Credit No. 1963 and the Trust Receipt
Agreement corresponding to Letter of Credit No. 1964 were both contracts of adhesion, since the stipulations
found in the documents were prepared by Asiatrust in fine print; (3) unfortunately for petitioner, his contract
worth PhP 18,000,000 with Islacom was not yet paid since there was a squabble as to the real ownership of
the latter’s company, but Asiatrust was aware of petitioner’s receivables which were more than sufficient to
cover the obligation as shown in the various Project Listings with Islacom, Smart Communications, and
Infocom; (4) prior to the Islacom problem, he had been faithfully paying his obligation to Asiatrust as shown
in Official Receipt Nos. 549001, 549002, 565558, 577198, 577199, and 594986,6 thus debunking
Asiatrust’s claim of fraud and bad faith against him; (5) during the pendency of this case, petitioner even
attempted to settle his obligations as evidenced by the two United Coconut Planters Bank Checks7 he issued
in favor of Asiatrust; and (6) he had already paid PhP 1.8 million out of the PhP 2.971 million he owed as per
Statement of Account dated January 26, 2000.

Ruling of the Trial Court

After trial on the merits, the RTC, on May 29, 2001, rendered a Decision, finding petitioner guilty of the
crime of Estafa. The fallo of the Decision reads as follows:

WHEREFORE, judgment is hereby rendered finding the petitioner, Anthony L. Ng GUILTY beyond reasonable
doubt for the crime of Estafa defined in and penalized by Article 315, paragraph 1(b) of the Revised Penal
Code in relation to Section 3 of Presidential Decree 115, otherwise known as the Trust Receipts Law, and is
hereby sentenced to suffer the indeterminate penalty of from six (6) years, eight (8) months, and twenty one
(21) days of prision mayor, minimum, as the minimum penalty, to twenty (20) years of reclusion temporal
maximum, as the maximum penalty.

The petitioner is further ordered to return to the Asiatrust Development Bank Inc. the amount of Two
Million, Nine Hundred Seventy One and Six Hundred Fifty Pesos (P2,971,650.00) with legal rate of interest
computed from the filing of the information on September 21,1999 until the amount is fully paid.

IT IS SO ORDERED.

In rendering its Decision, the trial court held that petitioner could not simply argue that the contracts he had
entered into with Asiatrust were void as they were contracts of adhesion. It reasoned that petitioner is
presumed to have read and understood and is, therefore, bound by the provisions of the Letters of Credit and
Trust Receipts. It said that it was clear that Asiatrust had furnished petitioner with a Statement of Account
enumerating therein the precise figures of the outstanding balance, which he failed to pay along with the
computation of other fees and charges; thus, Asiatrust did not violate Republic Act No. 3765 (Truth in
Lending Act). Finally, the trial court declared that petitioner, being the entrustee stated in the Trust Receipts
issued by Asiatrust, is thus obliged to hold the goods in trust for the entruster and shall dispose of them
strictly in accordance with the terms and conditions of the trust receipts; otherwise, he is obliged to return
the goods in the event of non-sale or upon demand of the entruster, failing thus, he evidently violated the
Trust Receipts Law.

Ruling of the Appellate Court

Petitioner then elevated the case to the CA by filing a Notice of Appeal on August 6, 2001. In his Appellant’s
Brief dated March 25, 2002, petitioner argued that the court a quo erred: (1) in changing the name of the
offended party without the benefit of an amendment of the Information which violates his right to be
informed of the nature and cause of accusation against him; (2) in making a finding of facts not in accord
with that actually proved in the trial and/or by the evidence provided; (3) in not considering the material
facts which if taken into account would have resulted in his acquittal; (4) in being biased, hostile, and
prejudiced against him; and (5) in considering the prosecution’s evidence which did not prove the guilt of
petitioner beyond reasonable doubt.1avvphi1

On August 29, 2003, the CA rendered a Decision affirming that of the RTC, the fallo of which reads:
WHEREFORE, the foregoing considered, the instant appeal is DENIED. The decision of the Regional Trial
Court of Quezon City, Branch 95 dated May 29, 2001 is AFFIRMED.

SO ORDERED.

The CA held that during the course of the trial, petitioner knew that the complainant Bernardez and the
other co-witnesses are all employees of Asiatrust and that she is suing in behalf of the bank. Since petitioner
transacted with the same employees for the issuance of the subject Trust Receipts, he cannot feign ignorance
that Asiatrust is not the offended party in the instant case. The CA further stated that the change in the
name of the complainant will not prejudice and alter the fact that petitioner was being charged with the
crime of Estafa in relation to the Trust Receipts Law, since the information clearly set forth the essential
elements of the crime charged, and the constitutional right of petitioner to be informed of the nature and
cause of his accusations is not violated.8

As to the alleged error in the appreciation of facts by the trial court, the CA stated that it was undisputed
that petitioner entered into a trust receipt agreement with Asiatrust and he failed to pay the bank his
obligation when it became due. According to the CA, the fact that petitioner acted without malice or fraud in
entering into the transactions has no bearing, since the offense is punished as malum prohibitum regardless
of the existence of intent or malice; the mere failure to deliver the proceeds of the sale or the goods if not sold
constitutes the criminal offense.

With regard to the failure of the RTC to consider the fact that petitioner’s outstanding receivables are
sufficient to cover his indebtedness and that no written demand was made upon him hence his obligation
has not yet become due and demandable, the CA stated that the mere query as to the whereabouts of the
goods and/or money is tantamount to a demand.9

Concerning the alleged bias, hostility, and prejudice of the RTC against petitioner, the CA said that petitioner
failed to present any substantial proof to support the aforementioned allegations against the RTC.

After the receipt of the CA Decision, petitioner moved for its reconsideration, which was denied by the CA in
its Resolution dated July 25, 2006. Thereafter, petitioner filed this Petition for Review on Certiorari. In his
Memorandum, he raised the following issues:

Issues:

1. The prosecution failed to adduce evidence beyond a reasonable doubt to satisfy the 2nd essential element
that there was misappropriation or conversion of subject money or property by petitioner.

2. The state was unable to prove the 3rd essential element of the crime that the alleged misappropriation or
conversion is to the prejudice of the real offended property.

3. The absence of a demand (4th essential element) on petitioner necessarily results to the dismissal of the
criminal case.

The Court’s Ruling

We find the petition to be meritorious.

Essentially, the issues raised by petitioner can be summed up into one—whether or not petitioner is liable
for Estafa under Art. 315, par. 1(b) of the RPC in relation to PD 115.

It is a well-recognized principle that factual findings of the trial court are entitled to great weight and respect
by this Court, more so when they are affirmed by the appellate court. However, the rule is not without
exceptions, such as: (1) when the conclusion is a finding grounded entirely on speculations, surmises, and
conjectures; (2) the inferences made are manifestly mistaken; (3) there is grave abuse of discretion; and (4)
the judgment is based on misapprehension of facts or premised on the absence of evidence on record.10
Especially in criminal cases where the accused stands to lose his liberty by virtue of his conviction, the Court
must be satisfied that the factual findings and conclusions of the lower courts leading to his conviction must
satisfy the standard of proof beyond reasonable doubt.

In the case at bar, petitioner was charged with Estafa under Art. 315, par. 1(b) of the RPC in relation to PD
115. The RPC defines Estafa as:

ART. 315. Swindling (estafa).—Any person who shall defraud another by any of the means mentioned
hereinbelow x x x

1. With unfaithfulness or abuse of confidence, namely:

a. x x x

b. By misappropriating or converting, to the prejudice of another, money, goods, or any other personal
property received by the offender in trust or on commission, or for administration, or under any other
obligation involving the duty to make delivery of or to return the same, even though such obligation be totally
or partially guaranteed by a bond; or by denying having received such money, goods, or other property x x
x.11

Based on the definition above, the essential elements of Estafa are: (1) that money, goods or other personal
property is received by the offender in trust or on commission, or for administration, or under any obligation
involving the duty to make delivery of or to return it; (2) that there be misappropriation or conversion of such
money or property by the offender, or denial on his part of such receipt; (3) that such misappropriation or
conversion or denial is to the prejudice of another; and (4) there is demand by the offended party to the
offender.12

Likewise, Estafa can also be committed in what is called a "trust receipt transaction" under PD 115, which is
defined as:

Section 4. What constitutes a trust receipts transaction.—A trust receipt transaction, within the meaning of
this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and
another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute
title or security interests over certain specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latter’s execution and delivery to the entruster of a signed document
called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves
if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the
trust receipt, or for other purposes substantially equivalent to any of the following:

1. In the case of goods or documents: (a) to sell the goods or procure their sale; or (b) to manufacture or
process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under
trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall
retain its title over the goods whether in its original or processed form until the entrustee has complied full
with his obligation under the trust receipt; or (c) to load, unload, ship or transship or otherwise deal with
them in a manner preliminary or necessary to their sale; or

2. In the case of instruments: (a) to sell or procure their sale or exchange; or (b) to deliver them to a
principal; or (c) to effect the consummation of some transactions involving delivery to a depository or register;
or (d) to effect their presentation, collection or renewal.

The sale of good, documents or instruments by a person in the business of selling goods, documents or
instruments for profit who, at the outset of transaction, has, as against the buyer, general property rights in
such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other
interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and
is outside the purview and coverage of this Decree.

In other words, a trust receipt transaction is one where the entrustee has the obligation to deliver to the
entruster the price of the sale, or if the merchandise is not sold, to return the merchandise to the entruster.
There are, therefore, two obligations in a trust receipt transaction: the first refers to money received under
the obligation involving the duty to turn it over (entregarla) to the owner of the merchandise sold, while the
second refers to the merchandise received under the obligation to "return" it (devolvera) to the owner.13 A
violation of any of these undertakings constitutes Estafa defined under Art. 315, par. 1(b) of the RPC, as
provided in Sec. 13 of PD 115, viz:

Section 13. Penalty Clause.—The failure of an entrustee to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as
appears in the trust receipt or to return said goods, documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three hundred fifteen, paragraph one (b) of Act Numbered Three thousand
eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. x x x (Emphasis
supplied.)

A thorough examination of the facts obtaining in the instant case, however, reveals that the transaction
between petitioner and Asiatrust is not a trust receipt transaction but one of simple loan.

PD 115 Does Not Apply

It must be remembered that petitioner was transparent to Asiatrust from the very beginning that the subject
goods were not being held for sale but were to be used for the fabrication of steel communication towers in
accordance with his contracts with Islacom, Smart, and Infocom. In these contracts, he was commissioned to
build, out of the materials received, steel communication towers, not to sell them.

The true nature of a trust receipt transaction can be found in the "whereas" clause of PD 115 which states
that a trust receipt is to be utilized "as a convenient business device to assist importers and merchants solve
their financing problems." Obviously, the State, in enacting the law, sought to find a way to assist importers
and merchants in their financing in order to encourage commerce in the Philippines.
As stressed in Samo v. People,14 a trust receipt is considered a security transaction intended to aid in
financing importers and retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased. Similarly, American Jurisprudence
demonstrates that trust receipt transactions always refer to a method of "financing importations or financing
sales."15 The principle is of course not limited in its application to financing importations, since the principle
is equally applicable to domestic transactions.16 Regardless of whether the transaction is foreign or
domestic, it is important to note that the transactions discussed in relation to trust receipts mainly involved
sales.

Following the precept of the law, such transactions affect situations wherein the entruster, who owns or
holds absolute title or security interests over specified goods, documents or instruments, releases the subject
goods to the possession of the entrustee. The release of such goods to the entrustee is conditioned upon his
execution and delivery to the entruster of a trust receipt wherein the former binds himself to hold the specific
goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the entruster the proceeds to the extent of the
amount owing to the entruster or the goods, documents or instruments themselves if they are unsold.
Similarly, we held in State Investment House v. CA, et al. that the entruster is entitled "only to the proceeds
derived from the sale of goods released under a trust receipt to the entrustee."17

Considering that the goods in this case were never intended for sale but for use in the fabrication of steel
communication towers, the trial court erred in ruling that the agreement is a trust receipt transaction.

In applying the provisions of PD 115, the trial court relied on the Memorandum of Asiatrust’s appraiser,
Linga, who stated that the goods have been sold by petitioner and that only 3% of the goods remained in the
warehouse where it was previously stored. But for reasons known only to the trial court, the latter did not
give weight to the testimony of Linga when he testified that he merely presumed that the goods were sold, viz:

COURT (to the witness)

Q So, in other words, when the goods were not there anymore. You presumed that, that is already sold?

A Yes, your Honor.

Undoubtedly, in his testimony, Linga showed that he had no real personal knowledge or proof of the fact that
the goods were indeed sold. He did not notify petitioner about the inspection nor did he talk to or inquire
with petitioner regarding the whereabouts of the subject goods. Neither did he confirm with petitioner if the
subject goods were in fact sold. Therefore, the Memorandum of Linga, which was based only on his
presumption and not any actual personal knowledge, should not have been used by the trial court to prove
that the goods have in fact been sold. At the very least, it could only show that the goods were not in the
warehouse.

Having established the inapplicability of PD 115, this Court finds that petitioner’s liability is only limited to
the satisfaction of his obligation from the loan. The real intent of the parties was simply to enter into a
simple loan agreement.

To emphasize, the Trust Receipts Law was created to "to aid in financing importers and retail dealers who do
not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may
not be able to acquire credit except through utilization, as collateral, of the merchandise imported or
purchased." Since Asiatrust knew that petitioner was neither an importer nor retail dealer, it should have
known that the said agreement could not possibly apply to petitioner.

Moreover, this Court finds that petitioner is not liable for Estafa both under the RPC and PD 115.

Goods Were Not Received in Trust

The first element of Estafa under Art. 315, par. 1(b) of the RPC requires that the money, goods or other
personal property must be received by the offender in trust or on commission, or for administration, or
under any other obligation involving the duty to make delivery of, or to return it. But as we already
discussed, the goods received by petitioner were not held in trust. They were also not intended for sale and
neither did petitioner have the duty to return them. They were only intended for use in the fabrication of
steel communication towers.

No Misappropriation of Goods or Proceeds

The second element of Estafa requires that there be misappropriation or conversion of such money or
property by the offender, or denial on his part of such receipt.

This is the very essence of Estafa under Art. 315, par. 1(b). The words "convert" and "misappropriated"
connote an act of using or disposing of another’s property as if it were one’s own, or of devoting it to a
purpose or use different from that agreed upon. To misappropriate for one’s own use includes not only
conversion to one’s personal advantage, but also every attempt to dispose of the property of another without
a right.18
Petitioner argues that there was no misappropriation or conversion on his part, because his liability for the
amount of the goods subject of the trust receipts arises and becomes due only upon receipt of the proceeds
of the sale and not prior to the receipt of the full price of the goods.

Petitioner is correct. Thus, assuming arguendo that the provisions of PD 115 apply, petitioner is not liable for
Estafa because Sec. 13 of PD 115 provides that an entrustee is only liable for Estafa when he fails "to turn
over the proceeds of the sale of the goods x x x covered by a trust receipt to the extent of the amount owing
to the entruster or as appears in the trust receipt x x x in accordance with the terms of the trust receipt."

The trust receipt entered into between Asiatrust and petitioner states:

In case of sale I/we agree to hand the proceeds as soon as received to the BANK to apply against the relative
acceptance (as described above) and for the payment of any other indebtedness of mine/ours to ASIATRUST
DEVELOPMENT BANK.19 (Emphasis supplied.)

Clearly, petitioner was only obligated to turn over the proceeds as soon as he received payment. However, the
evidence reveals that petitioner experienced difficulties in collecting payments from his clients for the
communication towers. Despite this fact, petitioner endeavored to pay his indebtedness to Asiatrust, which
payments during the period from September 1997 to July 1998 total approximately PhP 1,500,000. Thus,
absent proof that the proceeds have been actually and fully received by petitioner, his obligation to turn over
the same to Asiatrust never arose.

What is more, under the Trust Receipt Agreement itself, no date of maturity was stipulated. The provision left
blank by Asiatrust is as follows:

x x x and in consideration thereof, I/we hereby agree to hold said goods in Trust for the said Bank and as its
property with liberty to sell the same for its account within ________ days from the date of execution of the
Trust Receipt x x x20

In fact, Asiatrust purposely left the space designated for the date blank, an action which in ordinary banking
transactions would be noted as highly irregular. Hence, the only way for the obligation to mature was for
Asiatrust to demand from petitioner to pay the obligation, which it never did.

Again, it also makes the Court wonder as to why Asiatrust decided to leave the provisions for the maturity
dates in the Trust Receipt agreements in blank, since those dates are elemental part of the loan. But then, as
can be gleaned from the records of this case, Asiatrust also knew that the capacity of petitioner to pay for his
loan also hinges upon the latter’s receivables from Islacom, Smart, and Infocom where he had ongoing and
future projects for fabrication and installation of steel communication towers and not from the sale of said
goods. Being a bank, Asiatrust acted inappropriately when it left such a sensitive bank instrument with a
void circumstance on an elementary but vital feature of each and every loan transaction, that is, the
maturity dates. Without stating the maturity dates, it was impossible for petitioner to determine when the
loan will be due.

Moreover, Asiatrust was aware that petitioner was not engaged in selling the subject goods and that
petitioner will use them for the fabrication and installation of communication towers. Before granting
petitioner the credit line, as aforementioned, Asiatrust conducted an investigation, which showed that
petitioner fabricated and installed communication towers for well-known communication companies to be
installed at designated project sites. In fine, there was no abuse of confidence to speak of nor was there any
intention to convert the subject goods for another purpose, since petitioner did not withhold the fact that
they were to be used to fabricate steel communication towers to Asiatrust. Hence, no malice or abuse of
confidence and misappropriation occurred in this instance due to Asiatrust’s knowledge of the facts.

Furthermore, Asiatrust was informed at the time of petitioner’s application for the loan that the payment for
the loan would be derived from the collectibles of his clients. Petitioner informed Asiatrust that he was
having extreme difficulties in collecting from Islacom the full contracted price of the towers. Thus, the duty of
petitioner to remit the proceeds of the goods has not yet arisen since he has yet to receive proceeds of the
goods. Again, petitioner could not be said to have misappropriated or converted the proceeds of the
transaction since he has not yet received the proceeds from his client, Islacom.

This Court also takes judicial notice of the fact that petitioner has fully paid his obligation to Asiatrust,
making the claim for damage and prejudice of Asiatrust baseless and unfounded. Given that the acceptance
of payment by Asiatrust necessarily extinguished petitioner’s obligation, then there is no longer any
obligation on petitioner’s part to speak of, thus precluding Asiatrust from claiming any damage. This is
evidenced by Asiatrust’s Affidavit of Desistance21 acknowledging full payment of the loan.

Reasonable Doubt Exists

In the final analysis, the prosecution failed to prove beyond reasonable doubt that petitioner was guilty of
Estafa under Art. 315, par. 1(b) of the RPC in relation to the pertinent provision of PD 115 or the Trust
Receipts Law; thus, his liability should only be civil in nature.

While petitioner admits to his civil liability to Asiatrust, he nevertheless does not have criminal liability. It is
a well-established principle that person is presumed innocent until proved guilty. To overcome the
presumption, his guilt must be shown by proof beyond reasonable doubt. Thus, we held in People v.
Mariano22 that while the principle does not connote absolute certainty, it means the degree of proof which
produces moral certainty in an unprejudiced mind of the culpability of the accused. Such proof should
convince and satisfy the reason and conscience of those who are to act upon it that the accused is in fact
guilty. The prosecution, in this instant case, failed to rebut the constitutional innocence of petitioner and
thus the latter should be acquitted.

At this point, the ruling of this Court in Colinares v. Court of Appeals is very apt, thus:

The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them
under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if
not reprehensible. Such agreements are contracts of adhesion which borrowers have no option but to sign
lest their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy of
banks, and is prone to misinterpretation x x x.23

Such is the situation in this case.

Asiatrust’s intention became more evident when, on March 30, 2009, it, along with petitioner, filed their
Joint Motion for Leave to File and Admit Attached Affidavit of Desistance to qualify the Affidavit of Desistance
executed by Felino H. Esquivas, Jr., attorney-in-fact of the Board of Asiatrust, which acknowledged the full
payment of the obligation of the petitioner and the successful mediation between the parties.

From the foregoing considerations, we deem it unnecessary to discuss and rule upon the other issues raised
in the appeal.

WHEREFORE, the CA Decision dated August 29, 2003 affirming the RTC Decision dated May 29, 2001 is
SET ASIDE. Petitioner ANTHONY L. NG is hereby ACQUITTED of the charge of violation of Art. 315, par. 1(b)
of the RPC in relation to the pertinent provision of PD 115.

SO ORDERED.

5. Land Bank of the Philippines vs. Perez, GR No. 166884, June 13, 2012

G.R. No. 166884 June 13, 2012

LAND BANK OF THE PHILIPPINES, Petitioner,

vs.
LAMBERTO C. PEREZ, NESTOR C. KUN, MA. ESTELITA P. ANGELES-PANLILIO, and NAPOLEON O.
GARCIA, Respondents.

DECISION

BRION, J.:

Before this Court is a petition for review on certiorari,1 under Rule 45 of the Rules of Court, assailing the
decision2 dated January 20, 2005 of the Court of Appeals in CA-G.R. SP No. 76588. In the assailed decision,
the Court of Appeals dismissed the criminal complaint for estafa against the respondents, Lamberto C. Perez,
Nestor C. Kun, Ma. Estelita P. Angeles-Panlilio and Napoleon Garcia, who allegedly violated Article 315,
paragraph 1(b) of the Revised Penal Code, in relation with Section 13 of Presidential Decree No. (P.D.) 115 –
the "Trust Receipts Law."

Petitioner Land Bank of the Philippines (LBP) is a government financial institution and the official depository
of the Philippines.3 Respondents are the officers and representatives of Asian Construction and Development
Corporation (ACDC), a corporation incorporated under Philippine law and engaged in the construction
business.4

On June 7, 1999, LBP filed a complaint for estafa or violation of Article 315, paragraph 1(b) of the Revised
Penal Code, in relation to P.D. 115, against the respondents before the City Prosecutor’s Office in Makati
City. In the affidavit-complaint5 of June 7, 1999, the LBP’s Account Officer for the Account Management
Development, Edna L. Juan, stated that LBP extended a credit accommodation to ACDC through the
execution of an Omnibus Credit Line Agreement (Agreement)6 between LBP and ACDC on October 29, 1996.
In various instances, ACDC used the Letters of Credit/Trust Receipts Facility of the Agreement to buy
construction materials. The respondents, as officers and representatives of ACDC, executed trust receipts7 in
connection with the construction materials, with a total principal amount of ₱52,344,096.32. The trust
receipts matured, but ACDC failed to return to LBP the proceeds of the construction projects or the
construction materials subject of the trust receipts. LBP sent ACDC a demand letter,8 dated May 4, 1999, for
the payment of its debts, including those under the Trust Receipts Facility in the amount of ₱66,425,924.39.
When ACDC failed to comply with the demand letter, LBP filed the affidavit-complaint.

The respondents filed a joint affidavit9 wherein they stated that they signed the trust receipt documents on
or about the same time LBP and ACDC executed the loan documents; their signatures were required by LBP
for the release of the loans. The trust receipts in this case do not contain (1) a description of the goods placed
in trust, (2) their invoice values, and (3) their maturity dates, in violation of Section 5(a) of P.D. 115.
Moreover, they alleged that ACDC acted as a subcontractor for government projects such as the Metro Rail
Transit, the Clark Centennial Exposition and the Quezon Power Plant in Mauban, Quezon. Its clients for the
construction projects, which were the general contractors of these projects, have not yet paid them; thus,
ACDC had yet to receive the proceeds of the materials that were the subject of the trust receipts and were
allegedly used for these constructions. As there were no proceeds received from these clients, no
misappropriation thereof could have taken place.

On September 30, 1999, Makati Assistant City Prosecutor Amador Y. Pineda issued a Resolution10
dismissing the complaint. He pointed out that the evidence presented by LBP failed to state the date when
the goods described in the letters of credit were actually released to the possession of the respondents.
Section 4 of P.D. 115 requires that the goods covered by trust receipts be released to the possession of the
entrustee after the latter’s execution and delivery to the entruster of a signed trust receipt. He adds that
LBP’s evidence also fails to show the date when the trust receipts were executed since all the trust receipts
are undated. Its dispositive portion reads:

WHEREFORE, premises considered, and for insufficiency of evidence, it is respectfully recommended that
the instant complaints be dismissed, as upon approval, the same are hereby dismissed.11

LBP filed a motion for reconsideration which the Makati Assistant City Prosecutor denied in his order of
January 7, 2000.12

On appeal, the Secretary of Justice reversed the Resolution of the Assistant City Prosecutor. In his resolution
of August 1, 2002,13 the Secretary of Justice pointed out that there was no question that the goods covered
by the trust receipts were received by ACDC. He likewise adopted LBP’s argument that while the subjects of
the trust receipts were not mentioned in the trust receipts, they were listed in the letters of credit referred to
in the trust receipts. He also noted that the trust receipts contained maturity dates and clearly set out their
stipulations. He further rejected the respondents’ defense that ACDC failed to remit the payments to LBP due
to the failure of the clients of ACDC to pay them. The dispositive portion of the resolution reads:

WHEREFORE, the assailed resolution is REVERSED and SET ASIDE. The City Prosecutor of Makati City is
hereby directed to file an information for estafa under Art. 315 (1) (b) of the Revised Penal Code in relation to
Section 13, Presidential Decree No. 115 against respondents Lamberto C. Perez, Nestor C. Kun, [Ma. Estelita
P. Angeles-Panlilio] and Napoleon O. Garcia and to report the action taken within ten (10) days from receipt
hereof.14

The respondents filed a motion for reconsideration of the resolution dated August 1, 2002, which the
Secretary of Justice denied.15 He rejected the respondents’ submission that Colinares v. Court of Appeals16
does not apply to the case. He explained that in Colinares, the building materials were delivered to the
accused before they applied to the bank for a loan to pay for the merchandise; thus, the ownership of the
merchandise had already been transferred to the entrustees before the trust receipts agreements were
entered into. In the present case, the parties have already entered into the Agreement before the construction
materials were delivered to ACDC.

Subsequently, the respondents filed a petition for review before the Court of Appeals.

After both parties submitted their respective Memoranda, the Court of Appeals promulgated the assailed
decision of January 20, 2005.17 Applying the doctrine in Colinares, it ruled that this case did not involve a
trust receipt transaction, but a mere loan. It emphasized that construction materials, the subject of the trust
receipt transaction, were delivered to ACDC even before the trust receipts were executed. It noted that LBP
did not offer proof that the goods were received by ACDC, and that the trust receipts did not contain a
description of the goods, their invoice value, the amount of the draft to be paid, and their maturity dates. It
also adopted ACDC’s argument that since no payment for the construction projects had been received by
ACDC, its officers could not have been guilty of misappropriating any payment. The dispositive portion reads:

WHEREFORE, in view of the foregoing, the Petition is GIVEN DUE COURSE. The assailed Resolutions of the
respondent Secretary of Justice dated August 1, 2002 and February 17, 2003, respectively in I.S. No. 99-F-
9218-28 are hereby REVERSED and SET ASIDE.18

LBP now files this petition for review on certiorari, dated March 15, 2005, raising the following error:

THE COURT OF APPEALS GRAVELY ERRED WHEN IT REVERSED AND SET ASIDE THE RESOLUTIONS OF
THE HONORABLE SECRETARY OF JUSTICE BY APPLYING THE RULING IN THE CASE OF COLINARES V.
COURT OF APPEALS, 339 SCRA 609, WHICH IS NOT APPLICABLE IN THE CASE AT BAR.19

On April 8, 2010, while the case was pending before this Court, the respondents filed a motion to dismiss.20
They informed the Court that LBP had already assigned to Philippine Opportunities for Growth and Income,
Inc. all of its rights, title and interests in the loans subject of this case in a Deed of Absolute Sale dated June
23, 2005 (attached as Annex "C" of the motion). The respondents also stated that Avent Holdings
Corporation, in behalf of ACDC, had already settled ACDC’s obligation to LBP on October 8, 2009. Included
as Annex "A" in this motion was a certification21 issued by the Philippine Opportunities for Growth and
Income, Inc., stating that it was LBP’s successor-in-interest insofar as the trust receipts in this case are
concerned and that Avent Holdings Corporation had already settled the claims of LBP or obligations of ACDC
arising from these trust receipts.
We deny this petition.

The disputed transactions are not trust receipts.

Section 4 of P.D. 115 defines a trust receipt transaction in this manner:

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of
this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and
another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute
title or security interests over certain specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document
called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves
if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the
trust receipt, or for other purposes substantially equivalent to any of the following:

1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or
process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under
trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall
retain its title over the goods whether in its original or processed form until the entrustee has complied fully
with his obligation under the trust receipt; or (c) to load, unload, ship or tranship or otherwise deal with
them in a manner preliminary or necessary to their sale[.]

There are two obligations in a trust receipt transaction. The first is covered by the provision that refers to
money under the obligation to deliver it (entregarla) to the owner of the merchandise sold. The second is
covered by the provision referring to merchandise received under the obligation to return it (devolvera) to the
owner. Thus, under the Trust Receipts Law,22 intent to defraud is presumed when (1) the entrustee fails to
turn over the proceeds of the sale of goods covered by the trust receipt to the entruster; or (2) when the
entrustee fails to return the goods under trust, if they are not disposed of in accordance with the terms of the
trust receipts.23

In all trust receipt transactions, both obligations on the part of the trustee exist in the alternative – the
return of the proceeds of the sale or the return or recovery of the goods, whether raw or processed.24 When
both parties enter into an agreement knowing that the return of the goods subject of the trust receipt is not
possible even without any fault on the part of the trustee, it is not a trust receipt transaction penalized under
Section 13 of P.D. 115; the only obligation actually agreed upon by the parties would be the return of the
proceeds of the sale transaction. This transaction becomes a mere loan,25 where the borrower is obligated to
pay the bank the amount spent for the purchase of the goods.

Article 1371 of the Civil Code provides that "[i]n order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered." Under this provision, we can
examine the contemporaneous actions of the parties rather than rely purely on the trust receipts that they
signed in order to understand the transaction through their intent.

We note in this regard that at the onset of these transactions, LBP knew that ACDC was in the construction
business and that the materials that it sought to buy under the letters of credit were to be used for the
following projects: the Metro Rail Transit Project and the Clark Centennial Exposition Project.26 LBP had in
fact authorized the delivery of the materials on the construction sites for these projects, as seen in the letters
of credit it attached to its complaint.27 Clearly, they were aware of the fact that there was no way they could
recover the buildings or constructions for which the materials subject of the alleged trust receipts had been
used. Notably, despite the allegations in the affidavit-complaint wherein LBP sought the return of the
construction materials,28 its demand letter dated May 4, 1999 sought the payment of the balance but failed
to ask, as an alternative, for the return of the construction materials or the buildings where these materials
had been used.29

The fact that LBP had knowingly authorized the delivery of construction materials to a construction site of
two government projects, as well as unspecified construction sites, repudiates the idea that LBP intended to
be the owner of those construction materials. As a government financial institution, LBP should have been
aware that the materials were to be used for the construction of an immovable property, as well as a property
of the public domain. As an immovable property, the ownership of whatever was constructed with those
materials would presumably belong to the owner of the land, under Article 445 of the Civil Code which
provides:

Article 445. Whatever is built, planted or sown on the land of another and the improvements or repairs made
thereon, belong to the owner of the land, subject to the provisions of the following articles.

Even if we consider the vague possibility that the materials, consisting of cement, bolts and reinforcing steel
bars, would be used for the construction of a movable property, the ownership of these properties would still
pertain to the government and not remain with the bank as they would be classified as property of the public
domain, which is defined by the Civil Code as:
Article 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by
the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for some public service or
for the development of the national wealth.

In contrast with the present situation, it is fundamental in a trust receipt transaction that the person who
advanced payment for the merchandise becomes the absolute owner of said merchandise and continues as
owner until he or she is paid in full, or if the goods had already been sold, the proceeds should be turned
over to him or to her.30

Thus, in concluding that the transaction was a loan and not a trust receipt, we noted in Colinares that the
industry or line of work that the borrowers were engaged in was construction. We pointed out that the
borrowers were not importers acquiring goods for resale.31 Indeed, goods sold in retail are often within the
custody or control of the trustee until they are purchased. In the case of materials used in the manufacture
of finished products, these finished products – if not the raw materials or their components – similarly
remain in the possession of the trustee until they are sold. But the goods and the materials that are used for
a construction project are often placed under the control and custody of the clients employing the contractor,
who can only be compelled to return the materials if they fail to pay the contractor and often only after the
requisite legal proceedings. The contractor’s difficulty and uncertainty in claiming these materials (or the
buildings and structures which they become part of), as soon as the bank demands them, disqualify them
from being covered by trust receipt agreements.

Based on these premises, we cannot consider the agreements between the parties in this case to be trust
receipt transactions because (1) from the start, the parties were aware that ACDC could not possibly be
obligated to reconvey to LBP the materials or the end product for which they were used; and (2) from the
moment the materials were used for the government projects, they became public, not LBP’s, property.

Since these transactions are not trust receipts, an action for estafa should not be brought against the
respondents, who are liable only for a loan. In passing, it is useful to note that this is the threat held against
borrowers that Retired Justice Claudio Teehankee emphatically opposed in his dissent in People v. Cuevo,32
restated in Ong v. CA, et al.:33

The very definition of trust receipt x x x sustains the lower court’s rationale in dismissing the information
that the contract covered by a trust receipt is merely a secured loan. The goods imported by the small
importer and retail dealer through the bank’s financing remain of their own property and risk and the old
capitalist orientation of putting them in jail for estafa for non-payment of the secured loan (granted after they
had been fully investigated by the bank as good credit risks) through the fiction of the trust receipt device
should no longer be permitted in this day and age.

As the law stands today, violations of Trust Receipts Law are criminally punishable, but no criminal
complaint for violation of Article 315, paragraph 1(b) of the Revised Penal Code, in relation with P.D. 115,
should prosper against a borrower who was not part of a genuine trust receipt transaction.

Misappropriation or abuse of confidence is absent in this case.

Even if we assume that the transactions were trust receipts, the complaint against the respondents still
should have been dismissed. The Trust Receipts Law 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 or not.
The law does not singularly seek to enforce payment of the loan, as "there can be no violation of [the] right
against imprisonment for non-payment of a debt."34

In order that the respondents "may be validly prosecuted for estafa under Article 315, paragraph 1(b) of the
Revised Penal Code,35 in relation with Section 13 of the Trust Receipts Law, the following elements must be
established: (a) they received the subject goods in trust or under the obligation to sell the same and to remit
the proceeds thereof to [the trustor], or to return the goods if not sold; (b) they misappropriated or converted
the goods and/or the proceeds of the sale; (c) they performed such acts with abuse of confidence to the
damage and prejudice of Metrobank; and (d) demand was made on them by [the trustor] for the remittance of
the proceeds or the return of the unsold goods."36

In this case, no dishonesty or abuse of confidence existed in the handling of the construction materials.

In this case, the misappropriation could be committed should the entrustee fail to turn over the proceeds of
the sale of the goods covered by the trust receipt transaction or fail to return the goods themselves. The
respondents could not have failed to return the proceeds since their allegations that the clients of ACDC had
not paid for the projects it had undertaken with them at the time the case was filed had never been
questioned or denied by LBP. What can only be attributed to the respondents would be the failure to return
the goods subject of the trust receipts.
We do not likewise see any allegation in the complaint that ACDC had used the construction materials in a
manner that LBP had not authorized. As earlier pointed out, LBP had authorized the delivery of these
materials to these project sites for which they were used. When it had done so, LBP should have been aware
that it could not possibly recover the processed materials as they would become part of government projects,
two of which (the Metro Rail Transit Project and the Quezon Power Plant Project) had even become part of the
operations of public utilities vital to public service. It clearly had no intention of getting these materials back;
if it had, as a primary government lending institution, it would be guilty of extreme negligence and
incompetence in not foreseeing the legal complications and public inconvenience that would arise should it
decide to claim the materials. ACDC’s failure to return these materials or their end product at the time these
"trust receipts" expired could not be attributed to its volition. No bad faith, malice, negligence or breach of
contract has been attributed to ACDC, its officers or representatives. Therefore, absent any abuse of
confidence or misappropriation on the part of the respondents, the criminal proceedings against them for
estafa should not prosper.

In Metropolitan Bank,37 we affirmed the city prosecutor’s dismissal of a complaint for violation of the Trust
Receipts Law. In dismissing the complaint, we took note of the Court of Appeals’ finding that the bank was
interested only in collecting its money and not in the return of the goods. Apart from the bare allegation that
demand was made for the return of the goods (raw materials that were manufactured into textiles), the bank
had not accompanied its complaint with a demand letter. In addition, there was no evidence offered that the
respondents therein had misappropriated or misused the goods in question.

The petition should be dismissed because the OSG did not file it and the civil liabilities have already been
settled.

The proceedings before us, regarding the criminal aspect of this case, should be dismissed as it does not
appear from the records that the complaint was filed with the participation or consent of the Office of the
Solicitor General (OSG). Section 35, Chapter 12, Title III, Book IV of the Administrative Code of 1987
provides that:

Section 35. Powers and Functions. — The Office of the Solicitor General shall represent the Government of
the Philippines, its agencies and instrumentalities and its officials and agents in any litigation, proceedings,
investigation or matter requiring the services of lawyers. x x x It shall have the following specific powers and
functions:

(1) Represent the Government in the Supreme Court and the Court of Appeals in all criminal proceedings;
represent the Government and its officers in the Supreme Court, the Court of Appeals and all other courts or
tribunals in all civil actions and special proceedings in which the Government or any officer thereof in his
official capacity is a party. (Emphasis provided.)

In Heirs of Federico C. Delgado v. Gonzalez,38 we ruled that the preliminary investigation is part of a
criminal proceeding. As all criminal proceedings before the Supreme Court and the Court of Appeals may be
brought and defended by only the Solicitor General in behalf of the Republic of the Philippines, a criminal
action brought to us by a private party alone suffers from a fatal defect. The present petition was brought in
behalf of LBP by the Government Corporate Counsel to protect its private interests. Since the representative
of the "People of the Philippines" had not taken any part of the case, it should be dismissed.1âwphi1

On the other hand, if we look at the mandate given to the Office of the Government Corporate Counsel, we
find that it is limited to the civil liabilities arising from the crime, and is subject to the control and
supervision of the public prosecutor. Section 2, Rule 8 of the Rules Governing the Exercise by the Office of
the Government Corporate Counsel of its Authority, Duties and Powers as Principal Law Office of All
Government Owned or Controlled Corporations, filed before the Office of the National Administration Register
on September 5, 2011, reads:

Section 2. Extent of legal assistance – The OGCC shall represent the complaining GOCC in all stages of the
criminal proceedings. The legal assistance extended is not limited to the preparation of appropriate sworn
statements but shall include all aspects of an effective private prosecution including recovery of civil liability
arising from the crime, subject to the control and supervision of the public prosecutor.

Based on jurisprudence, there are two exceptions when a private party complainant or offended party in a
criminal case may file a petition with this Court, without the intervention of the OSG: (1) when there is denial
of due process of law to the prosecution, and the State or its agents refuse to act on the case to the prejudice
of the State and the private offended party;39 and (2) when the private offended party questions the civil
aspect of a decision of the lower court.40

In this petition, LBP fails to allege any inaction or refusal to act on the part of the OSG, tantamount to a
denial of due process. No explanation appears as to why the OSG was not a party to the case. Neither can
LBP now question the civil aspect of this decision as it had already assigned ACDC’s debts to a third person,
Philippine Opportunities for Growth and Income, Inc., and the civil liabilities appear to have already been
settled by Avent Holdings Corporation, in behalf of ACDC. These facts have not been disputed by LBP.
Therefore, we can reasonably conclude that LBP no longer has any claims against ACDC, as regards the
subject matter of this case, that would entitle it to file a civil or criminal action.
WHEREFORE, we DENY the petition and AFFIRM the January 20, 2005 decision of the Court of Appeals in
CA-G.R. SP No. 76588. No costs.

SO ORDERED.
II. LETTERS OF CREDIT
1. HSBC vs. NSC, GR No. 183486, February 24, 2016

G.R. No. 183486

THE HONGKONG & SHANGHAI BANKING CORPORATION, LIMITED, Petitioner,

vs.
NATIONAL STEEL CORPORATION and CITYTRUST BANKING CORPORATION (NOW BANK OF THE
PHILIPPINE ISLANDS), Respondents.

DECISION

JARDELEZA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner The Hongkong &
Shanghai Banking Corporation, Limited (HSBC) filed this petition to assail the Decision of the Court of
Appeals (CA) dated November 19, 2007 (Assailed Decision) which reversed the ruling of the Regional Trial
Court, Branch 62 of Makati City (RTC Makati) and its Resolution denying HSBC's Motion for Reconsideration
dated June 23, 2008 (Assailed Resolution).

The Facts

Respondent National Steel Corporation (NSC) entered into an Export Sales Contract (the Contract) with
Klockner East Asia Limited (Klockner) on October 12, 1993. 1 NSC sold 1,200 metric tons of prime cold
rolled coils to Klockner under FOB ST Iligan terms. In accordance with the requirements in the Contract,
Klockner applied for an irrevocable letter of credit with HSBC in favor of NSC as the beneficiary in the
amount of US$468,000. On October 22, 1993, HSBC issued an irrevocable and onsight letter of credit no.
HKH 239409 (the Letter of Credit) in favor of NSC.2 The Letter of Credit stated that it is governed by the
International Chamber of Commerce Uniform Customs and Practice for Documentary Credits, Publication
No. 400 (UCP 400). Under UCP 400, HSBC as the issuing bank, has the obligation to immediately pay NSC
upon presentment of the documents listed in the Letter of Credit.3 These documents are: (1) one original
commercial invoice; (2) one packing list; (3) one non-negotiable copy of clean on board ocean bill of lading
made out to order, blank endorsed marked 'freight collect and notify applicant;' (4) copy of Mill Test
Certificate made out 'to whom it may concern;' (5) copy of beneficiary's telex to applicant (Telex No. 86660
Klock HX) advising shipment details including DIC No., shipping marks, name of vessel, port of shipment,
port of destination, bill of lading date, sailing and ETA dates, description of goods, size, weight, number of
packages and value of goods latest two days after shipment date; and (6) beneficiary's certificate certifying
that (a) one set of non-negotiable copies of documents (being those listed above) have been faxed to applicant
(FAX No. 5294987) latest two days after shipment date; and (b) one set of documents including one copy
each of invoice and packing list, 3/3 original bills of lading plus one non-negotiable copy and three original
Mill Test Certificates have been sent to applicant by air courier service latest two days after shipment date. 4

The Letter of Credit was amended twice to reflect changes in the terms of delivery. On November 2, 1993, the
Letter of Credit was first amended to change the delivery terms from FOB ST Iligan to FOB ST Manila and to
increase the amount to US$488,400.5 It was subsequently amended on November 18, 1993 to extend the
expiry and shipment date to December 8, 1993.6 On November 21, 1993, NSC, through Emerald Forwarding
Corporation, loaded and shipped the cargo of prime cold rolled coils on board MV Sea Dragon under China
Ocean Shipping Company Bill of Lading No. HKG 266001. The cargo arrived in Hongkong on November 25,
1993.7

NSC coursed the collection of its payment from Klockner through CityTrust Banking Corporation (CityTrust).
NSC had earlier obtained a loan from CityTrust secured by the proceeds of the Letter of Credit issued by
HSBC.8

On November 29, 1993, CityTrust sent a collection order (Collection Order) to HSBC respecting the collection
of payment from Klockner. The Collection Order instructed as follows: (1) deliver documents against
payment; (2) cable advice of non-payment with reason; (3) cable advice payment; and (4) remit proceeds via
TELEX. 9 The Collection Order also contained the following statement: "Subject to Uniform Rules for the
Collection of Commercial Paper Publication No. 322." 10 Further, the Collection Order stated that proceeds
should be remitted to Standard Chartered Bank of Australia, Ltd., Offshore Branch Manila (SCB-M) which
was, in turn, in charge of remitting the amount to CityTrust. 11 On the same date, CityTrust also presented
to HSBC the following documents: (1) Letter of Credit; (2) Bill of Lading; (3) Commercial Invoice; ( 4) Packing
List; (5) Mill Test Certificate; (6) NSC's TELEX to Klockner on shipping details; (7) Beneficiary's Certificate of
facsimile transmittal of documents; (8) Beneficiary's Certificate of air courier transmittal of documents; and
(9) DHL Receipt No. 669988911 and Certificate of Origin. 12

On December 2, 1993, HSBC sent a cablegram to CityTrust acknowledging receipt of the Collection Order. It
also stated that the documents will be presented to "the drawee against payment subject to UCP 322
[Uniform Rules for Collection (URC) 322] as instructed ... " 13 SCB-M then sent a cablegram to HSBC
requesting the latter to urgently remit the proceeds to its account. It further asked that HSBC inform it "if
unable to pay" 14 and of the "reasons thereof." 15 Neither CityTrust nor SCB-M objected to HSBC's
statement that the collection will be handled under the Uniform Rules for Collection (URC 322).

On December 7, 1993, HSBC responded to SCB-M and sent a cablegram where it repeated that "this bill is
being handled subject to [URC] 322 as instructed by [the] collecting bank." 16 It also informed SCB-M that it
has referred the matter to Klockner for payment and that it will revert upon the receipt of the amount. 17 On
December 8, 1993, the Letter of Credit expired.18

On December 10, 1993, HSBC sent another cablegram to SCB-M advising it that Klockner had refused
payment. It then informed SCB-M that it intends to return the documents to NSC with all the banking
charges for its account. 19 In a cablegram dated December 14, 1993, CityTrust requested HSBC to inform it
of Klockner's reason for refusing payment so that it may refer the matter to NSC.20 HSBC did not respond
and CityTrust thus sent a follow-up cablegram to HSBC on December 17, 1993. In this cablegram, CityTrust
insisted that a demand for payment must be made from Klockner since the documents "were found in
compliance with LC terms and conditions."21 HSBC replied on the same day stating that in accordance with
CityTrust's instruction in its Collection Order, HSBC treated the transaction as a matter under URC 322.
Thus, it demanded payment from Klockner which unfortunately refused payment for unspecified reasons. It
then noted that under URC 322, Klockner has no duty to provide a reason for the refusal. Hence, HSBC
requested for further instructions as to whether it should continue to press for payment or return the
documents.22 CityTrust responded that as advised by its client, HSBC should continue to press for
payment.23

Klockner continued to refuse payment and HSBC notified CityTrust in a cablegram dated January 7, 1994,
that should Klockner still refuse to accept the bill by January 12, 1994, it will return the full set of
documents to CityTrust with all the charges for the account of the drawer. 24

Meanwhile, on January 12, 1994, CityTrust sent a letter to NSC stating that it executed NSC's instructions
"to send, ON COLLECTION BASIS, the export documents ... "25 CityTrust also explained that its act of
sending the export documents on collection basis has been its usual practice in response to NSC's
instructions in its transactions.26

NSC responded to this in a letter dated January 18, 1994.27 NSC expressed its disagreement with
CityTrust's contention that it sent the export documents to HSBC on collection basis. It highlighted that it
"negotiated with CityTrust the export documents pertaining to LC No. HKH 239409 of HSBC and it was
CityTrust, which wrongfully treated the negotiation, as 'on collection basis."' 28 NSC further claimed that
CityTrust used its own mistake as an excuse against payment under the Letter of Credit. Thus, NSC argued
that CityTrust remains liable under the Letter of Credit. It also stated that it presumes that CityTrust has
preserved whatever right of reimbursement it may have against HSBC. 29

On January 13, 1994, CityTrust notified HSBC that it should continue to press for payment and to hold on
to the document until further notice. 30

However, Klockner persisted in its refusal to pay. Thus, on February 17, 1994, HSBC returned the
documents to CityTrust. 31 In a letter accompanying the returned documents, HSBC stated that it
considered itself discharged of its duty under the transaction. It also asked for payment of handling
charges.32 In response, CityTrust sent a cablegram to HSBC dated February 21, 1994 stating that it is "no
longer possible for beneficiary to wait for you to get paid by applicant."33 It explained that since the
documents required under the Letter of Credit have been properly sent to HSBC, Citytrust demanded
payment from it. CityTrust also stated, for the first time in all of its correspondence with HSBC, that "re your
previous telexes, ICC Publication No. 322 is not applicable."34 HSBC responded in cablegram dated
February 28, 1994.35 It insisted that CityTrust sent documents which clearly stated that the collection was
being made under URC 322. Thus, in accordance with its instructions, HSBC, in the next three months,
demanded payment from Klockner which the latter eventually refused. Hence, HSBC stated that it opted to
return the documents. It then informed CityTrust that it considered the transaction closed save for the
latter's obligation to pay the handling charges.36

Disagreeing with HSBC' s position, CityTrust sent a cablegram dated March 9, 1994.37 It insisted that HSBC
should pay it in accordance with the terms of the Letter of Credit which it issued on October 22, 1993. Under
the Letter of Credit, HSBC undertook to reimburse the presenting bank under "ICC 400 upon the
presentment of all necessary documents."38 CityTrust also stated that the reference to URC 322 in its
Collection Order was merely in fine print. The Collection Order itself was only pro-forma. CityTrust
emphasized that the reference to URC 322 has been "obviously superseded by our specific instructions to
'deliver documents against payment/cable advice non-payment with reason/cable advice payment/remit
proceeds via telex' which was typed in on said form."39 CityTrust also claimed that the controlling document
is the Letter of Credit and not the mere fine print on the Collection Order.40 HSBC replied on March 10,
1994.41 It argued that CityTrust clearly instructed it to collect payment under URC 322, thus, CityTrust can
no longer claim a contrary position three months after it made its request. HSBC repeated that the
transaction is closed except for CityTrust's obligation to pay for the expenses which HSBC incurred.42

Meanwhile, on March 3, 1994, NSC sent a letter to HSBC where it, for the first time, demanded payment
under the Letter of Credit. 43 On March 11, 1994, the NSC sent another letter to HSBC through the Office of
the Corporate Counsel which served as its final demand. These demands were made after approximately four
months from the expiration of the Letter of Credit.

Unable to collect from HSBC, NSC filed a complaint against it for collection of sum of money (Complaint)44
docketed as Civil Case No. 94-2122 (Collection Case) of the RTC Makati. In its Complaint, NSC alleged that it
coursed the collection of the Letter of Credit through CityTrust. However, notwithstanding CityTrust's
complete presentation of the documents in accordance with the requirements in the Letter of Credit, HSBC
unreasonably refused to pay its obligation in the amount of US$485,767.93.45

HSBC filed its Answer46 on January 6, 1995. HSBC denied any liability under the Letter of Credit. It argued
in its Answer that CityTrust modified the obligation when it stated in its Collection Order that the
transaction is subject to URC 322 and not under UCP 400.47 It also filed a Motion to Admit Attached Third-
Party Complaint48 against CityTrust on November 21, 1995.49 It claimed that CityTrust instructed it to
collect payment under URC 322 and never raised that it intended to collect under the Letter of Credit.50
HSBC prayed that in the event that the court finds it liable to NSC, CityTrust should be subrogated in its
place and be made directly liable to NSC.51 The RTC Makati granted the motion and admitted the third party
complaint. CityTrust filed its Answer52 on January 8, 1996. CityTrust denied that it modified the obligation.
It argued that as a mere agent, it cannot modify the terms of the Letter of Credit without the consent of all
the parties. 53 Further, it explained that the supposed instruction that the transaction is subject to URC 322
was merely in fine print in a pro forma document and was superimposed and pasted over by a large pink
sticker with different remittance instructions.54

After a full-blown trial,55 the RTC Makati rendered a decision (RTC Decision) dated February 23, 2000.56 It
found that HSBC is not liable to pay NSC the amount stated in the Letter of Credit. It ruled that the
applicable law is URC 322 as it was the law which CityTrust intended to apply to the transaction. Under
URC 322, HSBC has no liability to pay when Klockner refused payment. The dispositive portion states -

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Plaintiffs Complaint against HSBC is DISMISSED; and, HSBC's Counterclaims against NSC are DENIED.

2. Ordering Third-Party Defendant CityTrust to pay Third-Party Plaintiff HSBC the following:

2.1 US$771.21 as actual and consequential damages; and

2.2 Pl00,000 as attorney's fees.

3. No pronouncement as to costs.

SO ORDERED.57

NSC and CityTrust appealed the RTC Decision before the CA. In its Assailed Decision dated November 19,
2007,58 the CA reversed the RTC Makati. The CA found that it is UCP 400 and not URC 322 which governs
the transaction. According to the CA, the terms of the Letter of Credit clearly stated that UCP 400 shall
apply. Further, the CA explained that even if the Letter of Credit did not state that UCP 400 governs, it
nevertheless finds application as this Court has consistently recognized it under Philippine jurisdiction.
Thus, applying UCP 400 and principles concerning letters of credit, the CA explained that the obligation of
the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required documents
are properly presented. Under the independence principle, the issuing bank's obligation to pay under the
letter of credit is separate from the compliance of the parties in the main contract. The dispositive portion
held -

WHEREFORE, in view of the foregoing, the assailed decision is hereby REVERSED and SET ASIDE. HSBC is
ordered to pay its obligation under the irrevocable letter of credit in the amount of US$485,767.93 to NSC
with legal interest of six percent (6%) per annum from the filing of the complaint until the amount is fully
paid, plus attorney's fees equivalent to 10% of the principal. Costs against appellee HSBC.

SO ORDERED.59

HSBC filed a Motion for Reconsideration of the Assailed Decision which the CA denied in its Assailed
Resolution dated June 23, 2008.60

Hence, HSBC filed this Petition for Review on Certiorari61 before this Court, seeking a reversal of the CA' s
Assailed Decision and Resolution. In its petition, HSBC contends that CityTrust's order to collect under URC
322 did not modify nor contradict the Letter of Credit. In fact, it is customary practice in commercial
transactions for entities to collect under URC 322 even if there is an underlying letter of credit. Further,
CityTrust acted as an agent of NSC in collecting payment and as such, it had the authority to instruct HSBC
to proceed under URC 322 and not under UCP 400. Having clearly and expressly instructed HSBC to collect
under URC 322 and having fully intended the transaction to proceed under such rule as shown by the series
of correspondence between CityTrust and HSBC, CityTrust is estopped from now claiming that the collection
was made under UCP 400 in accordance with the Letter of Credit.
NSC, on the other hand, claims that HSBC's obligation to pay is clear from the terms of the Letter of Credit
and under UCP 400. It asserts that the applicable rule is UCP 400 and HSBC has no basis to argue that
CityTrust's presentment of the documents allowed HSBC to vary the terms of their agreement. 62

The Issues

The central question in this case is who among the parties bears the liability to pay the amount stated in the
Letter of Credit. This requires a determination of which between UCP 400 and URC 322 governs the
transaction. The obligations of the parties under the proper applicable rule will, in turn, determine their
liability.

The Ruling of the Court

We uphold the CA.

The nature of a letter of credit

A letter of credit is a commercial instrument developed to address the unique needs of certain commercial
transactions. It is recognized in our jurisdiction and is sanctioned under Article 56763 of the Code of
Commerce and in numerous jurisprudence defining a letter of credit, the principles relating to it, and the
obligations of parties arising from it.

In Bank of America, NT & SA v. Court of Appeals,64 this Court defined a letter of credit as " ... a financial
device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid,
and a buyer, who wants to have control of the goods before paying."65 Through a letter of credit, a buyer
obtains the credit of a third party, usually a bank, to provide assurance of payment.66

This, in turn, convinces a seller to part with his or her goods even before he or she is paid, as he or she is
insured by the third party that he or she will be paid as soon as he or she presents the documents agreed
upon. 67

A letter of credit generally arises out of a separate contract requiring the assurance of payment of a third
party. In a transaction involving a letter of credit, there are usually three transactions and three parties. The
first transaction, which constitutes the underlying transaction in a letter of credit, is a contract of sale
between the buyer and the seller. The contract may require that the buyer obtain a letter of credit from a
third party acceptable to the seller. The obligations of the parties under this contract are governed by our law
on sales.

The second transaction is the issuance of a letter of credit between the buyer and the issuing bank. The
buyer requests the issuing bank to issue a letter of credit naming the seller as the beneficiary. In this
transaction, the issuing bank undertakes to pay the seller upon presentation of the documents identified in
the letter of credit. The buyer, on the other hand, obliges himself or herself to reimburse the issuing bank for
the payment made. In addition, this transaction may also include a fee for the issuing bank's services. 68
This transaction constitutes an obligation on the part of the issuing bank to perform a service in
consideration of the buyer's payment. The obligations of the parties and their remedies in cases of breach are
governed by the letter of credit itself and by our general law on obligations, as our civil law finds suppletory
application in commercial documents. 69

The third transaction takes place between the seller and the issuing bank. The issuing bank issues the letter
of credit for the benefit of the seller. The seller may agree to ship the goods to the buyer even before actual
payment provided that the issuing bank informs him or her that a letter of credit has been issued for his or
her benefit. This means that the seller can draw drafts from the issuing bank upon presentation of certain
documents identified in the letter of credit. The relationship between the issuing bank and the seller is not
strictly contractual since there is no privity of contract nor meeting of the minds between them. 70 It also
does not constitute a stipulation pour autrui in favor of the seller since the issuing bank must honor the
drafts drawn against the letter of credit regardless of any defect in the underlying contract.71 Neither can it
be considered as an assignment by the buyer to the seller-beneficiary as the buyer himself cannot draw on
the letter. 72 From its inception, only the seller can demand payment under the letter of credit. It is also not
a contract of suretyship or guaranty since it involves primary liability in the event of default. 73 Nevertheless,
while the relationship between the seller-beneficiary and the issuing bank is not strictly contractual, strict
payment under the terms of a letter of credit is an enforceable right. 74 This enforceable right finds two legal
underpinnings. First, letters of credit, as will be further explained, are governed by recognized international
norms which dictate strict compliance with its terms. Second, the issuing bank has an existing agreement
with the buyer to pay the seller upon proper presentation of documents. Thus, as the law on obligations
applies even in commercial documents, 75 the issuing bank has a duty to the buyer to honor in good faith its
obligation under their agreement. As will be seen in the succeeding discussion, this transaction is also
governed by international customs which this Court has recognized in this jurisdiction. 76

In simpler terms, the various transactions that give rise to a letter of credit proceed as follows: Once the
seller ships the goods, he or she obtains the documents required under the letter of credit. He or she shall
then present these documents to the issuing bank which must then pay the amount identified under the
letter of credit after it ascertains that the documents are complete. The issuing bank then holds on to these
documents which the buyer needs in order to claim the goods shipped. The buyer reimburses the issuing
bank for its payment at which point the issuing bank releases the documents to the buyer. The buyer is then
able to present these documents in order to claim the goods. At this point, all the transactions are
completed. The seller received payment for his or her performance of his obligation to deliver the goods. The
issuing bank is reimbursed for the payment it made to the seller. The buyer received the goods purchased.

Owing to the complexity of these contracts, there may be a correspondent bank which facilitates the ease of
completing the transactions. A correspondent bank may be a notifying bank, a negotiating bank or a
confirming bank depending on the nature of the obligations assumed. 77 A notifying bank undertakes to
inform the seller-beneficiary that a letter of credit exists. It may also have the duty of transmitting the letter
of credit. As its obligation is limited to this duty, it assumes no liability to pay under the letter of credit. 78 A
negotiating bank, on the other hand, purchases drafts at a discount from the seller-beneficiary and presents
them to the issuing bank for payment. 79 Prior to negotiation, a negotiating bank has no obligation. A
contractual relationship between the negotiating bank and the seller-beneficiary arises only after the
negotiating bank purchases or discounts the drafts. 80 Meanwhile, a confirming bank may honor the letter
of credit issued by another bank or confirms that the letter of credit will be honored by the issuing bank. 81
A confirming bank essentially insures that the credit will be paid in accordance with the terms of the letter of
credit.82 It therefore assumes a direct obligation to the seller-beneficiary. 83

Parenthetically, when banks are involved in letters of credit transactions, the standard of care imposed on
banks engaged in business imbued with public interest applies to them. Banks have the duty to act with the
highest degree of diligence in dealing with clients. 84 Thus, in dealing with the parties in a letter of credit,
banks must also observe this degree of care.

The value of letters of credit in commerce hinges on an important aspect of such a commercial transaction.
Through a letter of credit, a seller-beneficiary is assured of payment regardless of the status of the
underlying transaction. International contracts of sales are perfected and consummated because of the
certainty that the seller will be paid thus making him or her willing to part with the goods even prior to
actual receipt of the amount agreed upon. The legally demandable obligation of an issuing bank to pay under
the letter of credit, and the enforceable right of the seller-beneficiary to demand payment, are indispensable
essentials for the system of letters of credit, if it is to serve its purpose of facilitating commerce. Thus, a
touchstone of any law or custom governing letters of credit is an emphasis on the imperative that issuing
banks respect their obligation to pay, and that seller-beneficiaries may reasonably expect payment, in
accordance with the terms of a letter of credit.

Rules applicable to letters of credit

Letters of credit are defined and their incidences regulated by Articles 567 to 57285 of the Code of
Commerce. These provisions must be read with Article 286 of the same code which states that acts of
commerce are governed by their provisions, by the usages and customs generally observed in the particular
place and, in the absence of both rules, by civil law. In addition, Article 5087 also states that commercial
contracts shall be governed by the Code of Commerce and special laws and in their absence, by general civil
law.

The International Chamber of Commerce (ICC)88 drafted a set of rules to govern transactions involving
letters of credit. This set of rules is known as the Uniform Customs and Practice for Documentary Credits
(UCP). Since its first issuance in 1933, the UCP has seen several revisions, the latest of which was in 2007,
known as the UCP 600. However, for the period relevant to this case, the prevailing version is the 1993
revision called the UCP 400. Throughout the years, the UCP has grown to become the worldwide standard in
transactions involving letters of credit.89 It has enjoyed near universal application with an estimated 95% of
worldwide letters of credit issued subject to the UCP.90

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,91 this Court applied a provision from
the UCP in resolving a case pertaining to a letter of credit transaction. This Court explained that the use of
international custom in our jurisdiction is justified by Article 2 of the Code of Commerce which provides that
acts of commerce are governed by, among others, usages and customs generally observed. Further, in Feati
Bank & Trust Company v. Court of Appeals,92 this Court ruled that the UCP should be applied in cases
where the letter of credit expressly states that it is the governing rule.93 This Court also held in Feati that
the UCP applies even if it is not incorporated into the letter of the credit.94 The application of the UCP in
Bank of Philippine Islands and in Feati was further affirmed in Metropolitan Waterworks and Sewerage
System v. Daway95 where this Court held that "[l]etters of credit have long been and are still governed by the
provisions of the Uniform Customs and Practice for Documentary Credit[s] of the International Chamber of
Commerce."96 These precedents highlight the binding nature of the UCP in our jurisdiction.

Thus, for the purpose of clarity, letters of credit are governed primarily by their own provisions, 97 by laws
specifically applicable to them, 98 and by usage and custom. 99 Consistent with our rulings in several cases,
100 usage and custom refers to UCP 400. When the particular issues are not covered by the provisions of the
letter of credit, by laws specifically applicable to them and by UCP 400, our general civil law finds suppletory
app1ication.101

Applying this set of laws and rules, this Court rules that HSBC is liable under the provisions of the Letter of
Credit, in accordance with usage and custom as embodied in UCP 400, and under the provisions of general
civil law.
HSBC 's Liability

The Letter of Credit categorically stated that it is subject to UCP 400, to wit:

Except so far as otherwise expressly stated, this documentary credit is subject to uniform Customs and
Practice for Documentary Credits (1983 Revision), International Chamber of Commerce Publication No.
400.102

From the moment that HSBC agreed to the terms of the Letter of Credit - which states that UCP 400 applies
- its actions in connection with the transaction automatically became bound by the rules set in UCP 400.
Even assuming that URC 322 is an international custom that has been recognized in commerce, this does
not change the fact that HSBC, as the issuing bank of a letter of credit, undertook certain obligations
dictated by the terms of the Letter of Credit itself and by UCP 400. In Feati, this Court applied UCP 400 even
when there is no express stipulation in the letter of credit that it governs the transaction. 103 On the
strength of our ruling in Feati, we have the legal duty to apply UCP 400 in this case independent of the
parties' agreement to be bound by it.

UCP 400 states that an irrevocable credit payable on sight, such as the Letter of Credit in this case,
constitutes a definite undertaking of the issuing bank to pay, provided that the stipulated documents are
presented and that the terms and conditions of the credit are complied with. 104 Further, UCP 400 provides
that an issuing bank has the obligation to examine the documents with reasonable care. 105 Thus, when
CityTrust forwarded the Letter of Credit with the attached documents to HSBC, it had the duty to make a
determination of whether its obligation to pay arose by properly examining the documents.

In its petition, HSBC argues that it is not UCP 400 but URC 322 that should govern the transaction. 106
URC 322 is a set of norms compiled by the ICC. 107 It was drafted by international experts and has been
adopted by the ICC members. Owing to the status of the ICC and the international representation of its
membership, these rules have been widely observed by businesses throughout the world. It prescribes the
collection procedures, technology, and standards for handling collection transactions for banks. 108 Under
the facts of this case, a bank acting in accordance with the terms of URC 322 merely facilitates collection. Its
duty is to forward the letter of credit and the required documents from the entity seeking payment to another
entity which has the duty to pay. The bank incurs no obligation other than as a collecting agent. This is
different in the case of an issuing bank acting in accordance with UCP 400. In this case, the issuing bank
has the duty to pay the amount stated in the letter of credit upon due presentment. HSBC claims that while
UCP 400 applies to letters of credit, it is also common for beneficiaries of such letters to seek collection
under URC 322. HSBC further claims that URC 322 is an accepted custom in commerce. 109 HSBC's
argument is without merit. We note that HSBC failed to present evidence to prove that URC 322 constitutes
custom and usage recognized in commerce. Neither was there sufficient evidence to prove that beneficiaries
under a letter of credit commonly resort to collection under URC 322 as a matter of industry practice. HSBC
claims that the testimony of its witness Mr. Lincoln MacMahon (Mr. MacMahon) suffices for this purpose.
110 However, Mr. MacMahon was not presented as an expert witness capable of establishing the existing
banking and commercial practice relating to URC 322 and letters of credit. Thus, this Court cannot hold that
URC 322 and resort to it by beneficiaries of letters of credit are customs that demand application in this
case.111

HSBC's position that URC 322 applies, thus allowing it, the issuing bank, to disregard the Letter of Credit,
and merely demand collection from Klockner cannot be countenanced. Such an argument effectively asks
this Court to give imprimatur to a practice that undermines the value and reliability of letters of credit in
trade and commerce. The entire system of letters of credit rely on the assurance that upon presentment of
the proper documents, the beneficiary has an enforceable right and the issuing bank a demandable
obligation, to pay the amount agreed upon. Were a party to the transaction allowed to simply set this aside
by the mere invocation of another set of norms related to commerce - one that is not established as a custom
that is entitled to recognition by this Court - the sanctity of letters of credit will be jeopardized. To repeat,
any law or custom governing letters of credit should have, at its core, an emphasis on the imperative that
issuing banks respect their obligation to pay and that seller-beneficiaries may reasonably expect payment in
accordance with the terms of a letter of credit. Thus, the CA correctly ruled, to wit:

At this juncture, it is significant to stress that an irrevocable letter of credit cannot, during its lifetime, be
cancelled or modified without the express permission of the beneficiary. Not even partial payment of the
obligation by the applicant-buyer would amend or modify the obligation of the issuing bank. The subsequent
correspondences of [CityTrust] to HSBC, thus, could not in any way affect or amend the letter of credit, as it
was not a party thereto. As a notifying bank, it has nothing to do with the contract between the issuing bank
and the buyer regarding the issuance of the letter of credit. 112 (Citations omitted)

The provisions in the Civil Code and our jurisprudence apply suppletorily in this case. 113 When a party
knowingly and freely binds himself or herself to perform an act, a juridical tie is created and he or she
becomes bound to fulfill his or her obligation. In this case, HSBC's obligation arose from two sources. First, it
has a contractual duty to Klockner whereby it agreed to pay NSC upon due presentment of the Letter of
Credit and the attached documents. Second, it has an obligation to NSC to honor the Letter of Credit. In
complying with its obligation, HSBC had the duty to perform all acts necessary. This includes a proper
examination of the documents presented to it and making a judicious inquiry of whether CityTrust, in behalf
of NSC, made a due presentment of the Letter of Credit.
Further, as a bank, HSBC has the duty to observe the highest degree of diligence. In all of its transactions, it
must exercise the highest standard of care and must fulfill its obligations with utmost fidelity to its clients.
Thus, upon receipt of CityTrust's Collection Order with the Letter of Credit, HSBC had the obligation to
carefully examine the documents it received. Had it observed the standard of care expected of it, HSBC
would have discovered that the Letter of Credit is the very same document which it issued upon the request
of Klockner, its client. Had HSBC taken the time to perform its duty with the highest degree of diligence, it
would have been alerted by the fact that the documents presented to it corresponded with the documents
stated in the Letter of Credit, to which HSBC freely and knowingly agreed. HSBC ought to have noticed the
discrepancy between CityTrust's request for collection under URC 322 and the terms of the Letter of Credit.
Notwithstanding any statements by CityTrust in the Collection Order as to the applicable rules, HSBC had
the independent duty of ascertaining whether the presentment of the Letter of Credit and the attached
documents gave rise to an obligation which it had to Klockner (its client) and NSC (the beneficiary).
Regardless of any error that CityTrust may have committed, the standard of care expected of HSBC dictates
that it should have made a separate detennination of the significance of the presentment of the Letter of
Credit and the attached documents. A bank exercising the appropriate degree of diligence would have, at the
very least, inquired if NSC was seeking payment under the Letter of Credit or merely seeking collection under
URC 322. In failing to do so, HSBC fell below the standard of care imposed upon it.

This Court therefore rules that CityTrust's presentment of the Letter of Credit with the attached documents
in behalf of NSC, constitutes due presentment.1avvphi1 Under the terms of the Letter of Credit, HSBC
undertook to pay the amount of US$485,767.93 upon presentment of the Letter of Credit and the required
documents.114 In accordance with this agreement, NSC, through CityTrust, presented the Letter of Credit
and the following documents: (1) Letter of Credit; (2) Bill of Lading; (3) Commercial Invoice; (4) Packing List;
(5) Mill Test Certificate; (6) NSC's TELEX to Klockner on shipping details; (7) Beneficiary's Certificate of
facsimile transmittal of documents; (8) Beneficiary's Certificate of air courier transmittal of documents; and
(9) DHL Receipt No. 669988911 and Certificate of Origin.115

In transactions where the letter of credit is payable on sight, as in this case, the issuer must pay upon due
presentment. This obligation is imbued with the character of definiteness in that not even the defect or
breach in the underlying transaction will affect the issuing bank's liability. 116 This is the Independence
Principle in the law on letters of credit. Article 17 of UCP 400 explains that under this principle, an issuing
bank assumes no liability or responsibility "for the form, sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or
superimposed thereon ... " Thus, as long as the proper documents are presented, the issuing bank has an
obligation to pay even if the buyer should later on refuse payment. Hence, Klockner's refusal to pay carries
no effect whatsoever on HSBC's obligation to pay under the Letter of Credit. To allow HSBC to refuse to
honor the Letter of Credit simply because it could not collect first from Klockner is to countenance a breach
of the Independence Principle.

HSBC's persistent refusal to comply with its obligation notwithstanding due presentment constitutes delay
contemplated in Article 1169 of the Civil Code. 117 This provision states that a party to an obligation incurs
in delay from the time the other party makes a judicial or extrajudicial demand for the fulfillment of the
obligation. We rule that the due presentment of the Letter of Credit and the attached documents is
tantamount to a demand. HSBC incurred in delay when it failed to fulfill its obligation despite such a
demand.

Under Article 1170 of the Civil Code, 118 a party in delay is liable for damages. The extent of these damages
pertains to the pecuniary loss duly proven. 119 In this case, such damage refers to the losses which NSC
incurred in the amount of US$485,767.93 as stated in the Letter of Credit. We also award interest as
indemnity for the damages incurred in the amount of six percent (6%) from the date of NSC's extrajudicial
demand. 120 An interest in the amount of six percent (6%) is also awarded from the time of the finality of
this decision until full payment. 121

Having been remiss in its obligations under the applicable law, rules and jurisprudence, HSBC only has itself
to blame for its consequent liability to NSC.

However, this Court finds that there is no basis for the CA's grant of attorney's fees in favor of NSC. Article
2208 of the Civil Code122 enumerates the grounds for the award of attorney's fees. This Court has explained
that the award of attorney's fees is an exception rather than the rule. 123 The winning party is not
automatically entitled to attorney's fees as there should be no premium on the right to litigate. 124 While
courts may exercise discretion in granting attorney's fees, this Court has stressed that the grounds used as
basis for its award must approximate as closely as possible the enumeration in Article 2208. 125 Its award
must have sufficient factual and legal justifications. 126 This Court rules that none of the grounds stated in
Article 2208 are present in this case. NSC has not cited any specific ground nor presented any particular fact
to warrant the award of attorney's fees.

CityTrust's Liability

When NSC obtained the services of CityTrust in collecting under the Letter of Credit, it constituted CityTrust
as its agent. Article 1868 of the Civil Code states that a contract of agency exists when a person binds
himself or herself "to render some service or to do something in representation or on behalf of another, with
the consent or authority of the latter." In this case, CityTrust bound itself to collect under the Letter of Credit
in behalf of NSC.

One of the obligations of an agent is to carry out the agency in accordance with the instructions of the
principal. 127 In ascertaining NSC's instructions to CityTrust, its letter dated January 18, 1994 is
determinative. In this letter, NSC clearly stated that it "negotiated with CityTrust the export documents
pertaining to LC No. HKH 239409 of HSBC and it was CityTrust which wrongfully treated the negotiation as
'on collection basis."' 128 HSBC persistently communicated with CityTrust and consistently repeated that it
will proceed with collection under URC 322. At no point did CityTrust correct HSBC or seek clarification from
NSC. In insisting upon its course of action, CityTrust failed to act in accordance with the instructions given
by NSC, its principal. Nevertheless while this Court recognizes that CityTrust committed a breach of its
obligation to NSC, this carries no implications on the clear liability of HSBC. As this Court already
mentioned, HSBC had a separate obligation that it failed to perform by reason of acts independent of
CityTrust's breach of its obligation under its contract of agency. If CityTrust has incurred any liability, it is to
its principal NSC. However, NSC has not raised any claim against CityTrust at any point in these
proceedings. Thus, this Court cannot make any finding of liability against CityTrust in favor of NSC.

WHEREFORE, in view of the foregoing, the Assailed Decision dated November 19, 2007 is AFFIRMED to the
extent that it orders HSBC to pay NSC the amount of US$485,767.93. HSBC is also liable to pay legal
interest of six percent (6%) per annum from the time of extrajudicial demand. An interest of six percent (6%)
is also awarded from the time of the finality of this decision until the amount is fully paid. We delete the
award of attorney's fees. No pronouncement as to cost.

SO ORDERED.

2. BPI vs. De Reny Fabric Industries, Inc., GR No. L-24821, October 16, 1970

G.R. No. L-24821 October 16, 1970

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA CARCERENY alias AURORA C.
GONZALES, defendants-appellants.

Aviado and Aranda for plaintiff-appellee.

S. Emiliano Calma for defendants-appellants.

CASTRO, J.:.

This is an appeal from the decision of the Court of First Instance of Manila ordering the defendants-
appellants to pay to the Bank of the Philippine Islands (hereinafter referred to as the Bank), jointly and
severally, the value of the credit it extended to them in several letters of credit which the Bank opened at the
behest of the defendants appellants to finance their importation of dyestuffs from the United States, which
however turned out to be mere colored chalk upon arrival and inspection thereof at the port of Manila.

The record shows that on four (4) different occasions in 1961, the De Reny Fabric Industries, Inc., a
Philippine corporation through its co-defendants-appellants, Aurora Carcereny alias Aurora C. Gonzales, and
Aurora T. Tuyo, president and secretary, respectively of the corporation, applied to the Bank for four (4)
irrevocable commercial letters of credit to cover the purchase by the corporation of goods described in the
covering L/C applications as "dyestuffs of various colors" from its American supplier, the J.B. Distributing
Company. All the applications of the corporation were approved, and the corresponding Commercial L/C
Agreements were executed pursuant to banking procedures. Under these agreements, the aforementioned
officers of the corporation bound themselves personally as joint and solidary debtors with the corporation.
Pursuant to banking regulations then in force, the corporation delivered to the Bank peso marginal deposits
as each letter of credit was opened.

The dates and amounts of the L/Cs applied for and approved as well as the peso marginal deposits made
were, respectively, as follows:.

Date Application Amount Marginal

& L/C No. Deposit

Oct. 10, 1961 61/1413 $57,658.38 P43,407.33

Oct. 23, 1961 61/1483 $25,867.34 19,473.64

Oct. 30, 1961 61/1495 $19,408.39 14,610.88

Nov. 10, 1961 61/1564 $26,687.64 20,090.90

TOTAL .... $129,621.75 P97,582.75

By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters of credit addressed to
its correspondent banks in the United States, with uniform instructions for them to notify the beneficiary
thereof, the J.B. Distributing Company, that they have been authorized to negotiate the latter's sight drafts
up to the amounts mentioned the respectively, if accompanied, upon presentation, by a full set of negotiable
clean "on board" ocean bills of lading covering the merchandise appearing in the LCs that is, dyestuffs of
various colors. Consequently, the J.B. Distributing Company drew upon, presented to and negotiated with
these banks, its sight drafts covering the amounts of the merchandise ostensibly being exported by it,
together with clean bills of lading, and collected the full value of the drafts up to the amounts appearing in
the L/Cs as above indicated. These correspondent banks then debited the account of the Bank of the
Philippine Islands with them up to the full value of the drafts presented by the J.B. Distributing Company,
plus commission thereon, and, thereafter, endorsed and forwarded all documents to the Bank of the
Philippine Islands.

In the meantime, as each shipment (covered by the above-mentioned letters of credit) arrived in the
Philippines, the De Reny Fabric Industries, Inc. made partial payments to the Bank amounting, in the
aggregate, to P90,000. Further payments were, however, subsequently discontinued by the corporation when
it became established, as a result of a chemical test conducted by the National Science Development Board,
that the goods that arrived in Manila were colored chalks instead of dyestuffs.

The corporation also refused to take possession of these goods, and for this reason, the Bank caused them to
be deposited with a bonded warehouse paying therefor the amount of P12,609.64 up to the filing of its
complaint with the court below on December 10, 1962.

On October 24, 1963 the lower court rendered its decision ordering the corporation and its co-defendants
(the herein appellants) to pay to the plaintiff-appellee the amount of P291,807.46, with interest thereon, as
provided for in the L/C Agreements, at the rate of 7% per annum from October 31, 1962 until fully paid, plus
costs.

It is the submission of the defendants-appellants that it was the duty of the foreign correspondent banks of
the Bank of the Philippine Islands to take the necessary precaution to insure that the goods shipped under
the covering L/Cs conformed with the item appearing therein, and, that the foregoing banks having failed to
perform this duty, no claim for recoupment against the defendants-appellants, arising from the losses
incurred for the non-delivery or defective delivery of the articles ordered, could accrue.

We can appreciate the sweep of the appellants' argument, but we also find that it is nestled hopelessly inside
a salient where the valid contract between the parties and the internationally accepted customs of the
banking trade must prevail.1

Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed that
the Bank shall not be responsible for the "existence, character, quality, quantity, conditions, packing, value,
or delivery of the property purporting to be represented by documents; for any difference in character,
quality, quantity, condition, or value of the property from that expressed in documents," or for "partial or
incomplete shipment, or failure or omission to ship any or all of the property referred to in the Credit," as
well as "for any deviation from instructions, delay, default or fraud by the shipper or anyone else in
connection with the property the shippers or vendors and ourselves [purchasers] or any of us." Having
agreed to these terms, the appellants have, therefore, no recourse but to comply with their covenant. 2

But even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on
account of the violation by their vendor of its prestation.

It was uncontrovertibly proven by the Bank during the trial below that banks, in providing financing in
international business transactions such as those entered into by the appellants, do not deal with the
property to be exported or shipped to the importer, but deal only with documents. The Bank introduced in
evidence a provision contained in the "Uniform Customs and Practices for Commercial Documentary Credits
Fixed for the Thirteenth Congress of International Chamber of Commerce," to which the Philippines is a
signatory nation. Article 10 thereof provides: .

In documentary credit operations, all parties concerned deal in documents and not in goods. — Payment,
negotiation or acceptance against documents in accordance with the terms and conditions of a credit by a
Bank authorized to do so binds the party giving the authorization to take up the documents and reimburse
the Bank making the payment, negotiation or acceptance.

The existence of a custom in international banking and financing circles negating any duty on the part of a
bank to verify whether what has been described in letters of credits or drafts or shipping documents actually
tallies with what was loaded aboard ship, having been positively proven as a fact, the appellants are bound
by this established usage. They were, after all, the ones who tapped the facilities afforded by the Bank in
order to engage in international business.

ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants' cost. This is without prejudice to
the Bank, in proper proceedings in the court below in this same case proving and being reimbursed
additional expenses, if any, it has incurred by virtue of the continued storage of the goods in question up to
the time this decision becomes final and executory.
 3. Feati Bank and Trust Co. vs. Court of Appeals, GR No. 94209, April 30, 1991

G.R. No. 94209 April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.

Pelaez, Adriano & Gregorio for petitioner.

Ezequiel S. Consulta for private respondent.

GUTIERREZ, JR., J.:

This is a petition for review seeking the reversal of the decision of the Court of Appeals dated June 29, 1990
which affirmed the decision of the Regional Trial Court of Rizal dated October 20, 1986 ordering the
defendants Christiansen and the petitioner, to pay various sums to respondent Villaluz, jointly and severally.

The facts of the case are as follows:

On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic
meters of lauan logs at $27.00 per cubic meter FOB.

After inspecting the logs, Christiansen issued purchase order No. 76171.

On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., de
Santa Ana, California, the Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter
of Credit No. IC-46268 available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase
price of the lauan logs.

The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the instruction to
the latter that it "forward the enclosed letter of credit to the beneficiary." (Records, Vol. I, p. 11)

The letter of credit further provided that the draft to be drawn is on Security Pacific National Bank and that
it be accompanied by the following documents:

1. Signed Commercial Invoice in four copies showing the number of the purchase order and certifying
that —

a. All terms and conditions of the purchase order have been complied with and that all logs are fresh
cut and quality equal to or better than that described in H.A. Christiansen's telex #201 of May 1, 1970, and
that all logs have been marked "BEV-EX."

b. One complete set of documents, including 1/3 original bills of lading was airmailed to Consignee and
Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker.

c. One set of non-negotiable documents was airmailed to Han Mi Trade Development Company and one
set to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker.

2. Tally sheets in quadruplicate.

3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be advised by Hans
Axel Christiansen, showing Freight Prepaid and marked Notify:

Han Mi Trade Development Company, Ltd., Santa Ana, California.

Letter of Credit No. 46268 dated June 7, 1971

Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711 and Han Mi Trade
Development Company, Ltd., Seoul, Korea.

4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that logs have been
approved prior to shipment in accordance with terms and conditions of corresponding purchase Order.
(Record, Vol. 1 pp. 11-12)

Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary
Credits (1962 Revision).

The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its
loading, the logs were inspected by custom inspectors Nelo Laurente, Alejandro Cabiao, Estanislao Edera
from the Bureau of Customs (Records, Vol. I, p. 124) and representatives Rogelio Cantuba and Jesus Tadena
of the Bureau of Forestry (Records, Vol. I, pp. 16-17) all of whom certified to the good condition and
exportability of the logs.

After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate receipt of the
cargo which stated the same are in good condition (Records, Vol. I, p. 363). However, Christiansen refused to
issue the certification as required in paragraph 4 of the letter of credit, despite several requests made by the
private respondent.

Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company refused to
advance the payment on the letter of credit.

The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the private
respondent receiving any certification from Christiansen.

The persistent refusal of Christiansen to issue the certification prompted the private respondent to bring the
matter before the Central Bank. In a memorandum dated August 16, 1971, the Central Bank ruled that:

. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all log exports, the
certification of the lumber inspectors of the Bureau of Forestry . . . shall be considered final for purposes of
negotiating documents. Any provision in any letter of credit covering log exports requiring certification of
buyer's agent or representative that said logs have been approved for shipment as a condition precedent to
negotiation of shipping documents shall not be allowed. (Records, Vol. I, p. 367)

Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade Development
Company, to whom Christiansen sold the logs for the amount of $37.50 per cubic meter, for a net profit of
$10 per cubic meter. Hanmi Trade Development Company, on the other hand sold the logs to Taisung
Lumber Company at Inchon, Korea. (Rollo, p. 39)

Since the demands by the private respondent for Christiansen to execute the certification proved futile,
Villaluz, on September 1, 1971, instituted an action for mandamus and specific performance against
Christiansen and the Feati Bank and Trust Company (now Citytrust) before the then Court of First Instance
of Rizal. The petitioner was impleaded as defendant before the lower court only to afford complete relief
should the court a quo order Christiansen to execute the required certification.

The complaint prayed for the following:

1. Christiansen be ordered to issue the certification required of him under the Letter of Credit;

2. Upon issuance of such certification, or, if the court should find it unnecessary, FEATI BANK be
ordered to accept negotiation of the Letter of Credit and make payment thereon to Villaluz;

3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)

On or about 1979, while the case was still pending trial, Christiansen left the Philippines without informing
the Court and his counsel. Hence, Villaluz, filed an amended complaint to make the petitioner solidarily
liable with Christiansen.

The trial court, in its order dated August 29, 1979, admitted the amended complaint.

After trial, the lower court found:

The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs right to demand payment
is absolute. Defendant CHRISTIANSEN having accepted delivery of the logs by having them loaded in his
chartered vessel the "Zenlin Glory" and shipping them to the consignee, his buyer Han Mi Trade in Inchon,
South Korea (Art. 1585, Civil Code), his obligation to pay the purchase order had clearly arisen and the
plaintiff may sue and recover the price of the goods (Art. 1595, Id).

The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and with intent to
defraud the plaintiff, reflected in and aggravated by, not only his refusal to issue the certification that would
have enabled without question the plaintiff to negotiate the letter of credit, but his accusing the plaintiff in
his answer of fraud, intimidation, violence and deceit. These accusations said defendant did not attempt to
prove, as in fact he left the country without even notifying his own lawyer. It was to the Court's mind a pure
swindle.

The defendant Feati Bank and Trust Company, on the other hand, must be held liable together with his (sic)
co-defendant for having, by its wrongful act, i.e., its refusal to negotiate the letter of credit in the absence of
CHRISTIANSEN's certification (in spite of the Central Bank's ruling that the requirement was illegal),
prevented payment to the plaintiff. The said letter of credit, as may be seen on its face, is irrevocable and the
issuing bank, the Security Pacific National Bank in Los Angeles, California, undertook by its terms that the
same shall be honored upon its presentment. On the other hand, the notifying bank, the defendant Feati
Bank and Trust Company, by accepting the instructions from the issuing bank, itself assumed the very same
undertaking as the issuing bank under the terms of the letter of credit.
xxx xxx xxx

The Court likewise agrees with the plaintiff that the defendant BANK may also be held liable under the
principles and laws on both trust and estoppel. When the defendant BANK accepted its role as the notifying
and negotiating bank for and in behalf of the issuing bank, it in effect accepted a trust reposed on it, and
became a trustee in relation to plaintiff as the beneficiary of the letter of credit. As trustee, it was then duty
bound to protect the interests of the plaintiff under the terms of the letter of credit, and must be held liable
for damages and loss resulting to the plaintiff from its failure to perform that obligation.

Furthermore, when the defendant BANK assumed the role of a notifying and negotiating BANK it in effect
represented to the plaintiff that, if the plaintiff complied with the terms and conditions of the letter of credit
and presents the same to the BANK together with the documents mentioned therein the said BANK will pay
the plaintiff the amount of the letter of credit. The Court is convinced that it was upon the strength of this
letter of credit and this implied representation of the defendant BANK that the plaintiff delivered the logs to
defendant CHRISTIANSEN, considering that the issuing bank is a foreign bank with whom plaintiff had no
business connections and CHRISTIANSEN had not offered any other Security for the payment of the logs.
Defendant BANK cannot now be allowed to deny its commitment and liability under the letter of credit:

A holder of a promissory note given because of gambling who indorses the same to an innocent holder for
value and who assures said party that the note has no legal defect, is in estoppel from asserting that there
had been an illegal consideration for the note, and so, he has to pay its value. (Rodriguez v. Martinez, 5 Phil.
67).

The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a condition
precedent to negotiating the letter of credit, likewise in the Court's opinion acted in bad faith, not only
because of the clear declaration of the Central Bank that such a requirement was illegal, but because the
BANK, with all the legal counsel available to it must have known that the condition was void since it
depended on the sole will of the debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo, pp. 29-
31)

On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private respondent.
The dispositive portion of its decision reads:

WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants to pay the plaintiff,
jointly and severally, the following sums:

a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment is actually made,
representing the purchase price of the logs;

b) P17,340.00, representing government fees and charges paid by plaintiff in connection with the logs
shipment in question;

c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).

All three foregoing sums shall be with interest thereon at 12% per annum from September 1, 1971, when the
complaint was filed, until fully paid:

d) P70,000.00 as moral damages;

e) P30,000.00 as exemplary damages; and

f) P30,000.00 as attorney's fees and litigation expense.

(Rollo, p. 28)

The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on November 5,
1986, it filed a notice of appeal.

On November 10, 1986, the private respondent filed a motion for the immediate execution of the judgment
on the ground that the appeal of the petitioner was frivolous and dilatory.

The trial court ordered the immediate execution of its judgment upon the private respondent's filing of a
bond.

The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of the
writ of execution. Both motions were, however, denied. Thus, petitioner filed before the Court of Appeals a
petition for certiorari and prohibition with preliminary injunction to enjoin the immediate execution of the
judgment.

The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of
execution, the dispositive portion of the decision states:
WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution dated December
29, 1986, as well as his order dated January 14, 1987 denying the petitioner's urgent motion to suspend the
writ of execution against its properties are hereby annulled and set aside insofar as they are sought to be
enforced and implemented against the petitioner Feati Bank & Trust Company, now Citytrust Banking
Corporation, during the pendency of its appeal from the adverse decision in Civil Case No. 15121. However,
the execution of the same decision against defendant Axel Christiansen did not appeal said decision may
proceed unimpeded. The Sheriff s levy on the petitioner's properties, and the notice of sale dated January 13,
1987 (Annex M), are hereby annulled and set aside. Rollo p. 44)

A motion for reconsideration was thereafter filed by the private respondent. The Court of Appeals, in a
resolution dated June 29, 1987 denied the motion for reconsideration.

In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due course. In its
decision dated June 29, 1990, the Court of Appeals affirmed the decision of the lower court dated October
20, 1986 and ruled that:

1. Feati Bank admitted in the "special and negative defenses" section of its answer that it was the bank
to negotiate the letter of credit issued by the Security Pacific National Bank of Los Angeles, California.
(Record, pp. 156, 157). Feati Bank did notify Villaluz of such letter of credit. In fact, as such negotiating
bank, even before the letter of credit was presented for payment, Feati Bank had already made an advance
payment of P75,000.00 to Villaluz in anticipation of such presentment. As the negotiating bank, Feati Bank,
by notifying Villaluz of the letter of credit in behalf of the issuing bank (Security Pacific), confirmed such
letter of credit and made the same also its own obligation. This ruling finds support in the authority cited by
Villaluz:

A confirmed letter of credit is one in which the notifying bank gives its assurance also that the opening
bank's obligation will be performed. In such a case, the notifying bank will not simply transmit but will
confirm the opening bank's obligation by making it also its own undertaking, or commitment, or guaranty or
obligation. (Ward & Hatfield, 28-29, cited in Agbayani, Commercial Laws, 1978 edition, p. 77).

Feati Bank argues further that it would be considered as the negotiating bank only upon negotiation of the
letter of credit. This stance is untenable. Assurance, commitments or guaranties supposed to be made by
notifying banks to the beneficiary of a letter of credit, as defined above, can be relevant or meaningful only
with respect to a future transaction, that is, negotiation. Hence, even before actual negotiation, the notifying
bank, by the mere act of notifying the beneficiary of the letter of credit, assumes as of that moment the
obligation of the issuing bank.

2. Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the latter's principal or
client, i.e. Hans Axel-Christiansen. (sic) Such being the case, when Christiansen refused to issue the
certification, it was as though refusal was made by Feati Bank itself. Feati Bank should have taken steps to
secure the certification from Christiansen; and, if the latter should still refuse to comply, to hale him to
court. In short, Feati Bank should have honored Villaluz's demand for payment of his logs by virtue of the
irrevocable letter of credit issued in Villaluz's favor and guaranteed by Feati Bank.

3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained the statement
"Since Villaluz" draft was not drawn strictly in compliance with the terms of the letter of credit, Feati Bank's
refusal to negotiate it was justified," did not dispose of this question on the merits. In that case, the question
involved was jurisdiction or discretion, and not judgment. The quoted pronouncement should not be taken
as a preemptive judgment on the merits of the present case on appeal.

4. The original action was for "Mandamus and/or specific performance." Feati Bank may not be a party
to the transaction between Christiansen and Security Pacific National Bank on the one hand, and Villaluz on
the other hand; still, being guarantor or agent of Christiansen and/or Security Pacific National Bank which
had directly dealt with Villaluz, Feati Bank may be sued properly on specific performance as a procedural
means by which the relief sought by Villaluz may be entertained. (Rollo, pp. 32-33)

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal is hereby dismissed. Costs
against the petitioner. (Rollo, p. 33)

Hence, this petition for review.

The petitioner interposes the following reasons for the allowance of the petition.

First Reason

THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED FACTS AND INDEED,
WENT AGAINST THE EVIDENCE AND DECISION OF THIS HONORABLE COURT, THAT PETITIONER BANK
IS LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS NON-COMPLIANCE WITH THE
TERMS THEREOF,

Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT PETITIONER BANK, BY
NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF CREDIT, CONFIRMED SUCH CREDIT AND MADE
THE SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK.

Third Reason

THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT AFFIRMED THE TRIAL
COURT'S DECISION. (Rollo, p. 12)

The principal issue in this case is whether or not a correspondent bank is to be held liable under the letter of
credit despite non-compliance by the beneficiary with the terms thereof?

The petition is impressed with merit.

It is a settled rule in commercial transactions involving letters of credit that the documents tendered must
strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must
include all documents required by the letter. A correspondent bank which departs from what has been
stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not
thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to
the beneficiary Thus the rule of strict compliance.

In the United States, commercial transactions involving letters of credit are governed by the rule of strict
compliance. In the Philippines, the same holds true. The same rule must also be followed.

The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded clearly on the rule
of strict compliance.

We have heretofore held that these letters of credit are to be strictly complied with which documents, and
shipping documents must be followed as stated in the letter. There is no discretion in the bank or trust
company to waive any requirements. The terms of the letter constitutes an agreement between the purchaser
and the bank. (p. 743)

Although in some American decisions, banks are granted a little discretion to accept a faulty tender as when
the other documents may be considered immaterial or superfluous, this theory could lead to dangerous
precedents. Since a bank deals only with documents, it is not in a position to determine whether or not the
documents required by the letter of credit are material or superfluous. The mere fact that the document was
specified therein readily means that the document is of vital importance to the buyer.

Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for short)
in the letter of credit resulted in the applicability of the said rules in the governance of the relations between
the parties.

And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as
to the applicability of the U.C.P. in cases before us.

In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in this
jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce enunciates
that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be
governed by the usages and customs generally observed.

There being no specific provision which governs the legal complexities arising from transactions involving
letters of credit not only between the banks themselves but also between banks and seller and/or buyer, the
applicability of the U.C.P. is undeniable.

The pertinent provisions of the U.C.P. (1962 Revision) are:

Article 3.

An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes the
engagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or documents
presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will
be duly fulfilled, provided that all the terms and conditions of the credit are complied with.

An irrevocable credit may be advised to a beneficiary through another bank (the advising bank) without
engagement on the part of that bank, but when an issuing bank authorizes or requests another bank to
confirm its irrevocable credit and the latter does so, such confirmation constitutes a definite undertaking of
the confirming bank. . . .

Article 7.

Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in
accordance with the terms and conditions of the credit,"
Article 8.

Payment, acceptance or negotiation against documents which appear on their face to be in accordance with
the terms and conditions of a credit by a bank authorized to do so, binds the party giving the authorization
to take up documents and reimburse the bank which has effected the payment, acceptance or negotiation.
(Emphasis Supplied)

Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if the documents
tendered to it are on their face in accordance with the terms and conditions of the documentary credit. And
since a correspondent bank, like the petitioner, principally deals only with documents, the absence of any
document required in the documentary credit justifies the refusal by the correspondent bank to negotiate,
accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on
the completeness of the documents tendered by the beneficiary.

In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is not a
notifying bank but a confirming bank, we find the same erroneous.

The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In its
decision, the trial court ruled that the petitioner, in accepting the obligation to notify the respondent that the
irrevocable credit has been transmitted to the petitioner on behalf of the private respondent, has confirmed
the letter.

The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a
confirmed credit. These types of letters have different meanings and the legal relations arising from there
varies. A credit may be an irrevocable credit and at the same time a confirmed credit or vice-versa.

An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing
bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking
under the letter. The issuing bank does not reserve the right to revoke the credit. On the other hand, a
confirmed letter of credit pertains to the kind of obligation assumed by the correspondent bank. In this case,
the correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing
bank's obligation as its own according to the terms and conditions of the credit. (Agbayani, Commercial Laws
of the Philippines, Vol. 1, pp. 81-83)

Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent
bank in accepting the instructions of the issuing bank has also confirmed the letter of credit. Another error
which the lower court and the Court of Appeals made was to confuse the obligation assumed by the
petitioner.

In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are
classified according to the obligations taken up by it. The correspondent bank may be called a notifying
bank, a negotiating bank, or a confirming bank.

In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to
the beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public National Bank of New
York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws
of the Philippines, Vol. 1, p. 76). A negotiating bank, on the other hand, is a correspondent bank which buys
or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If
before negotiation, it has no liability with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the seller. (Scanlon v. First National Bank of
Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani, Commercial Laws
of the Philippines, Vol. 1, p. 76)

In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its
liability is a primary one as if the correspondent bank itself had issued the letter of credit. (Shaterian,
Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77)

In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the
beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing
bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not
a confirming bank as ruled by the courts below.

If the petitioner was a confirming bank, then a categorical declaration should have been stated in the letter of
credit that the petitioner is to honor all drafts drawn in conformity with the letter of credit. What was simply
stated therein was the instruction that the petitioner forward the original letter of credit to the beneficiary.

Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or transmit the
documentary of credit to the private respondent and its obligation ends there.

The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply
that the notifying bank promises to accept the draft drawn under the documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only
with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows
therefore that when the petitioner refused to negotiate with the private respondent, the latter has no cause of
action against the petitioner for the enforcement of his rights under the letter. (See Kronman and Co., Inc. v.
Public National Bank of New York, supra)

In order that the petitioner may be held liable under the letter, there should be proof that the petitioner
confirmed the letter of credit.

The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed the
letter of credit. The only evidence in this case, and upon which the private respondent premised his
argument, is the P75,000.00 loan extended by the petitioner to him.

The private respondent relies on this loan to advance his contention that the letter of credit was confirmed by
the petitioner. He claims that the loan was granted by the petitioner to him, "in anticipation of the
presentment of the letter of credit."

The proposition advanced by the private respondent has no basis in fact or law. That the loan agreement
between them be construed as an act of confirmation is rather far-fetched, for it depends principally on
speculative reasoning.

As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will
undertake the issuing bank's obligation as its own. Verily, the loan agreement it entered into cannot be
categorized as an emphatic assurance that it will carry out the issuing bank's obligation as its own.

The loan agreement is more reasonably classified as an isolated transaction independent of the documentary
credit.

Of course, it may be presumed that the petitioner loaned the money to the private respondent in anticipation
that it would later be paid by the latter upon the receipt of the letter. Yet, we would have no basis to rule
definitively that such "act" should be construed as an act of confirmation.

The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory" and the
only way to satisfy this need was to borrow money from the petitioner which the latter granted. From these
circumstances, a logical conclusion that can be gathered is that the letter of credit was merely to serve as a
collateral.

At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a
negotiating bank. Even then, the petitioner will still not be liable, for a negotiating bank before negotiation
has no contractual relationship with the seller.

The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between the
seller and the negotiating bank, viz:

It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual duty toward
the person for whose benefit the letter is written to discount or purchase any draft drawn against the credit.
No relationship of agent and principal, or of trustee and cestui, between the receiving bank and the
beneficiary of the letter is established. (P.568)

Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent
any definitive proof that it has confirmed the letter of credit or has actually negotiated with the private
respondent, the refusal by the petitioner to accept the tender of the private respondent is justified.

In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private respondent)
as the beneficiary of the letter of credit," the same has no legal basis.

A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the
legal title to which is vested to another." (89 C.J.S. 712)

The concept of a trust presupposes the existence of a specific property which has been conferred upon the
person for the benefit of another. In order therefore for the trust theory of the private respondent to be
sustained, the petitioner should have had in its possession a sum of money as specific fund advanced to it
by the issuing bank and to be held in trust by it in favor of the private respondent. This does not obtain in
this case.

The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of
money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the
letter of credit up to the designated amount specified in the letter. It does not convey the notion that a
particular sum of money has been specifically reserved or has been held in trust.

What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance
the sum of money from the buyer or the issuing bank. On the contrary, when the correspondent bank
accepts the tender and pays the amount stated in the letter, the money that it doles out comes not from any
particular fund that has been advanced by the issuing bank, rather it gets the money from its own funds and
then later seeks reimbursement from the issuing bank.

Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the petitioner
is only a notifying bank, its acceptance of the instructions of the issuing bank will not create estoppel on its
part resulting in the acceptance of the trust. Precisely, as a notifying bank, its only obligation is to notify the
private respondent of the existence of the letter of credit. How then can such create estoppel when that is its
only duty under the law?

We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor of the
issuing bank and in effect also of the latter's principal or client, i.e., Hans Axel Christiansen."

It is a fundamental rule that an irrevocable credit is independent not only of the contract between the buyer
and the seller but also of the credit agreement between the issuing bank and the buyer. (See Kingdom of
Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]). The relationship between the buyer (Christiansen)
and the issuing bank (Security Pacific National Bank) is entirely independent from the letter of credit issued
by the latter.

The contract between the two has no bearing as to the non-compliance by the buyer with the agreement
between the latter and the seller. Their contract is similar to that of a contract of services (to open the letter
of credit) and not that of agency as was intimated by the Court of Appeals. The unjustified refusal therefore
by Christiansen to issue the certification under the letter of credit should not likewise be charged to the
issuing bank.

As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer,
it has also nothing to do with the contract between the issuing bank and the buyer regarding the issuance of
the letter of credit.

The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of guarantee
vis-a-vis the concept of an irrevocable credit are inconsistent with each other.

In the first place, the guarantee theory destroys the independence of the bank's responsibility from the
contract upon which it was opened. In the second place, the nature of both contracts is mutually in conflict
with each other. In contracts of guarantee, the guarantor's obligation is merely collateral and it arises only
upon the default of the person primarily liable. On the other hand, in an irrevocable credit the bank
undertakes a primary obligation. (See National Bank of Eagle Pass, Tex v. American National Bank of San
Francisco, 282 F. 73 [1922])

The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of
an agency and not that of a guarantee. It may be observed that the notifying bank is merely to follow the
instructions of the issuing bank which is to notify or to transmit the letter of credit to the beneficiary. (See
Kronman v. Public National Bank of New York, supra). Its commitment is only to notify the beneficiary. It
does not undertake any assurance that the issuing bank will perform what has been mandated to or
expected of it. As an agent of the issuing bank, it has only to follow the instructions of the issuing bank and
to it alone is it obligated and not to buyer with whom it has no contractual relationship.

In fact the notifying bank, even if the seller tenders all the documents required under the letter of credit, may
refuse to negotiate or accept the drafts drawn thereunder and it will still not be held liable for its only
engagement is to notify and/or transmit to the seller the letter of credit.

Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay the
amount under the letter. As we have previously explained, there was a failure on the part of the private
respondent to comply with the terms of the letter of credit.

The failure by him to submit the certification was fatal to his case.1âwphi1 The U.C.P. which is incorporated
in the letter of credit ordains that the bank may only pay the amount specified under the letter if all the
documents tendered are on their face in compliance with the credit. It is not tasked with the duty of
ascertaining the reason or reasons why certain documents have not been submitted, as it is only concerned
with the documents. Thus, whether or not the buyer has performed his responsibility towards the seller is
not the bank's problem.

We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the
controversy on the basis of what the law is, for the law is not meant to favor only those who have been
oppressed, the law is to govern future relations among people as well. Its commitment is to all and not to a
single individual. The faith of the people in our justice system may be eroded if we are to decide not what the
law states but what we believe it should declare. Dura lex sed lex.

Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval required of
the private respondent to submit under the letter of credit, has become insignificant.

In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the petition
before it for certiorari and prohibition with preliminary injunction, to wit:
There is no merit in the respondent's contention that the certification required in condition No. 4 of the letter
of credit was "patently illegal." At the time the letter of credit was issued there was no Central Bank
regulation prohibiting such a condition in the letter of credit. The letter of credit (Exh. C) was issued on June
7, 1971, more than two months before the issuance of the Central Bank Memorandum on August 16, 1971
disallowing such a condition in a letter of credit. In fact the letter of credit had already expired on July 30,
1971 when the Central Bank memorandum was issued. In any event, it is difficult to see how such a
condition could be categorized as illegal or unreasonable since all that plaintiff Villaluz, as seller of the logs,
could and should have done was to refuse to load the logs on the vessel "Zenlin Glory", unless Christiansen
first issued the required certification that the logs had been approved by him to be in accordance with the
terms and conditions of his purchase order. Apparently, Villaluz was in too much haste to ship his logs
without taking all due precautions to assure that all the terms and conditions of the letter of credit had been
strictly complied with, so that there would be no hitch in its negotiation. (Rollo, p. 8)

WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS ASIDE the
decision of the Court of Appeals dated June 29, 1990. The amended complaint in Civil Case No. 15121 is
DISMISSED.

SO ORDERED.

4. Transfield Philipines, Inc. vs. Luzon Hydro Corporation, GR No. 146717, November 22, 2004

G.R. No. 146717 November 22, 2004

TRANSFIELD PHILIPPINES, INC., petitioner,

vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY
BANK CORPORATION, respondents.

DECISION

TINGA, J.:

Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device in
international trade. A creation of commerce and businessmen, the letter of credit is also unique in the
number of parties involved and its supranational character.

Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP No. 61901 entitled
"Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January 2001.2

On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a
Turnkey Contract3 whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a
seventy (70)-Megawatt hydro-electric power station at the Bakun River in the provinces of Benguet and Ilocos
Sur (hereinafter, the Project). Petitioner was given the sole responsibility for the design, construction,
commissioning, testing and completion of the Project.4

The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000, or
such later date as may be agreed upon between petitioner and respondent LHC or otherwise determined in
accordance with the Turnkey Contract; and (2) petitioner is entitled to claim extensions of time (EOT) for
reasons enumerated in the Turnkey Contract, among which are variations, force majeure, and delays caused
by LHC itself.5 Further, in case of dispute, the parties are bound to settle their differences through
mediation, conciliation and such other means enumerated under Clause 20.3 of the Turnkey Contract.6

To secure performance of petitioner's obligation on or before the target completion date, or such time for
completion as may be determined by the parties' agreement, petitioner opened in favor of LHC two (2)
standby letters of credit both dated 20 March 2000 (hereinafter referred to as "the Securities"), to wit:
Standby Letter of Credit No. E001126/8400 with the local branch of respondent Australia and New Zealand
Banking Group Limited (ANZ Bank)7 and Standby Letter of Credit No. IBDIDSB-00/4 with respondent
Security Bank Corporation (SBC)8 each in the amount of US$8,988,907.00.9

In the course of the construction of the project, petitioner sought various EOT to complete the Project. The
extensions were requested allegedly due to several factors which prevented the completion of the Project on
target date, such as force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied
the requests, however. This gave rise to a series of legal actions between the parties which culminated in the
instant petition.

The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry
Arbitration Commission (CIAC) on 1 June 1999.10 This was followed by another Request for Arbitration, this
time filed by petitioner before the International Chamber of Commerce (ICC)11 on 3 November 2000. In both
arbitration proceedings, the common issues presented were: [1) whether typhoon Zeb and any of its
associated events constituted force majeure to justify the extension of time sought by petitioner; and [2)
whether LHC had the right to terminate the Turnkey Contract for failure of petitioner to complete the Project
on target date.

Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the
Turnkey Contract,12 petitioner—in two separate letters13 both dated 10 August 2000—advised respondent
banks of the arbitration proceedings already pending before the CIAC and ICC in connection with its alleged
default in the performance of its obligations. Asserting that LHC had no right to call on the Securities until
the resolution of disputes before the arbitral tribunals, petitioner warned respondent banks that any
transfer, release, or disposition of the Securities in favor of LHC or any person claiming under LHC would
constrain it to hold respondent banks liable for liquidated damages.

As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause 8.214
of the Turnkey Contract, it failed to comply with its obligation to complete the Project. Despite the letters of
petitioner, however, both banks informed petitioner that they would pay on the Securities if and when LHC
calls on them.15

LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner in
default/delay in the performance of its obligations under the Turnkey Contract and demanded from
petitioner the payment of US$75,000.00 for each day of delay beginning 28 June 2000 until actual
completion of the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served
notice that it would call on the securities for the payment of liquidated damages for the delay.16

On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary
restraining order and writ of preliminary injunction, against herein respondents as defendants before the
Regional Trial Court (RTC) of Makati.17 Petitioner sought to restrain respondent LHC from calling on the
Securities and respondent banks from transferring, paying on, or in any manner disposing of the Securities
or any renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour temporary restraining order
on the same day. The case was docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of
Makati.

After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the temporary
restraining order for a period of seventeen (17) days or until 26 November 2000.18

The RTC, in its Order19 dated 24 November 2000, denied petitioner's application for a writ of preliminary
injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to justify the issuance
of the writ. Employing the principle of "independent contract" in letters of credit, the trial court ruled that
LHC should be allowed to draw on the Securities for liquidated damages. It debunked petitioner's contention
that the principle of "independent contract" could be invoked only by respondent banks since according to it
respondent LHC is the ultimate beneficiary of the Securities. The trial court further ruled that the banks
were mere custodians of the funds and as such they were obligated to transfer the same to the beneficiary for
as long as the latter could submit the required certification of its claims.

Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction, petitioner
elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the
issuance of a temporary restraining order and writ of preliminary injunction.20 Petitioner submitted to the
appellate court that LHC's call on the Securities was premature considering that the issue of its default had
not yet been resolved with finality by the CIAC and/or the ICC. It asserted that until the fact of delay could
be established, LHC had no right to draw on the Securities for liquidated damages.

Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call on and use of
the Securities as payment for liquidated damages. It averred that the Securities are independent of the main
contract between them as shown on the face of the two Standby Letters of Credit which both provide that the
banks have no responsibility to investigate the authenticity or accuracy of the certificates or the declarant's
capacity or entitlement to so certify.

In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order,
enjoining LHC from calling on the Securities or any renewals or substitutes thereof and ordering respondent
banks to cease and desist from transferring, paying or in any manner disposing of the Securities.

However, the appellate court failed to act on the application for preliminary injunction until the temporary
restraining order expired on 27 January 2001. Immediately thereafter, representatives of LHC trooped to ANZ
Bank and withdrew the total amount of US$4,950,000.00, thereby reducing the balance in ANZ Bank to
US$1,852,814.00.

On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court expressed
conformity with the trial court's decision that LHC could call on the Securities pursuant to the first principle
in credit law that the credit itself is independent of the underlying transaction and that as long as the
beneficiary complied with the credit, it was of no moment that he had not complied with the underlying
contract. Further, the appellate court held that even assuming that the trial court's denial of petitioner's
application for a writ of preliminary injunction was erroneous, it constituted only an error of judgment which
is not correctible by certiorari, unlike error of jurisdiction.

Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY BE INVOKED BY A
BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL THEREON IS WRONGFUL OR FRAUDULENT.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE RESOLUTION
OF PETITIONER'S AND LHC'S DISPUTES BY THE APPROPRIATE TRIBUNAL.

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER
THE SECURITIES DESPITE BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL.

WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN THE EVENT THAT:

A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE ALLOWED TO
RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE
DISPUTES BETWEEN PETITIONER AND LHC.

B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE SECURITIES.21

Petitioner contends that the courts below improperly relied on the "independence principle" on letters of
credit when this case falls squarely within the "fraud exception rule." Respondent LHC deliberately
misrepresented the supposed existence of delay despite its knowledge that the issue was still pending
arbitration, petitioner continues.

Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the
principle against unjust enrichment and that, under the premises, injunction was the appropriate remedy
obtainable from the competent local courts.

On 25 August 2003, petitioner filed a Supplement to the Petition22 and Supplemental Memorandum,23
alleging that in the course of the proceedings in the ICC Arbitration, a number of documentary and
testimonial evidence came out through the use of different modes of discovery available in the ICC
Arbitration. It contends that after the filing of the petition facts and admissions were discovered which
demonstrate that LHC knowingly misrepresented that petitioner had incurred delays— notwithstanding its
knowledge and admission that delays were excused under the Turnkey Contract—to be able to draw against
the Securities. Reiterating that fraud constitutes an exception to the independence principle, petitioner urges
that this warrants a ruling from this Court that the call on the Securities was wrongful, as well as contrary
to law and basic principles of equity. It avers that it would suffer grave irreparable damage if LHC would be
allowed to use the proceeds of the Securities and not ordered to return the amounts it had wrongfully drawn
thereon.

In its Manifestation dated 8 September 2003,24 LHC contends that the supplemental pleadings filed by
petitioner present erroneous and misleading information which would change petitioner's theory on appeal.

In yet another Manifestation dated 12 April 2004,25 petitioner alleges that on 18 February 2004, the ICC
handed down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that
petitioner was entitled to the return of the sums wrongfully taken by LHC for liquidated damages.

LHC filed a Counter-Manifestation dated 29 June 2004,26 stating that petitioner's Manifestation dated 12
April 2004 enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court of
Appeals. LHC notes that the Petition for Review essentially dealt only with the issue of whether injunction
could issue to restrain the beneficiary of an irrevocable letter of credit from drawing thereon. It adds that
petitioner has filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled "Transfield
Philippines Inc. v. Luzon Hydro Corporation," in which the parties made claims and counterclaims arising
from petitioner's performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case No.
04-332, entitled "Transfield Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56 of the RTC of
Makati, which is an action to enforce and obtain execution of the ICC's partial award mentioned in
petitioner's Manifestation of 12 April 2004.

In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum, LHC stresses
that the question of whether the funds it drew on the subject letters of credit should be returned is outside
the issue in this appeal. At any rate, LHC adds that the action to enforce the ICC's partial award is now fully
within the Makati RTC's jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is engaged in
forum-shopping by keeping this appeal and at the same time seeking the suit for enforcement of the arbitral
award before the Makati court.

Respondent SBC in its Memorandum, dated 10 March 200327 contends that the Court of Appeals correctly
dismissed the petition for certiorari. Invoking the independence principle, SBC argues that it was under no
obligation to look into the validity or accuracy of the certification submitted by respondent LHC or into the
latter's capacity or entitlement to so certify. It adds that the act sought to be enjoined by petitioner was
already fait accompli and the present petition would no longer serve any remedial purpose.

In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 200328 posits that its
actions could not be regarded as unjustified in view of the prevailing independence principle under which it
had no obligation to ascertain the truth of LHC's allegations that petitioner defaulted in its obligations.
Moreover, it points out that since the Standby Letter of Credit No. E001126/8400 had been fully drawn,
petitioner's prayer for preliminary injunction had been rendered moot and academic.

At the core of the present controversy is the applicability of the "independence principle" and "fraud
exception rule" in letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred
to simply as "credits," would provide a better perspective of the case.

The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to
recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of
credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict
compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the
issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the
underlying contract. Since the bank's customer cannot draw on the letter, it does not function as an
assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable
instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented
under it is often negotiable.29

In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient

and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a
seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the
goods before paying.30 The use of credits in commercial transactions serves to reduce the risk of
nonpayment of the purchase price under the contract for the sale of goods. However, credits are also used in
non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the non-sale
settings have come to be known as standby credits.31

There are three significant differences between commercial and standby credits. First, commercial credits
involve the payment of money under a contract of sale. Such credits become payable upon the presentation
by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales
agreement. In the standby type, the credit is payable upon certification of a party's nonperformance of the
agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not
performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed
his contract. The beneficiary of the standby credit must certify that his obligor has not performed the
contract.32

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the
addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt
therefor to the addressee.33 A letter of credit, however, changes its nature as different transactions occur
and if carried through to completion ends up as a binding contract between the issuing and honoring banks
without any regard or relation to the underlying contract or disputes between the parties thereto.34

Since letters of credit have gained general acceptability in international trade transactions, the ICC has
published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to
standardize practices in the letter of credit area. The vast majority of letters of credit incorporate the UCP.35
First published in 1933, the UCP for Documentary Credits has undergone several revisions, the latest of
which was in 1993.36

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,37 this Court ruled that the observance
of the UCP is justified by Article 2 of the Code of Commerce which provides that in the absence of any
particular provision in the Code of Commerce, commercial transactions shall be governed by usages and
customs generally observed. More recently, in Bank of America, NT & SA v. Court of Appeals,38 this Court
ruled that there being no specific provisions which govern the legal complexities arising from transactions
involving letters of credit, not only between or among banks themselves but also between banks and the
seller or the buyer, as the case may be, the applicability of the UCP is undeniable.

Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other
contract(s) on which they may be based and banks are in no way concerned with or bound by such
contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the
undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under
the credit is not subject to claims or defenses by the applicant resulting from his relationships with the
issuing bank or the beneficiary. A beneficiary can in no case avail himself of the contractual relationships
existing between the banks or between the applicant and the issuing bank.

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and
the required documents are presented to it. The so-called "independence principle" assures the seller or the
beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing
bank from determining whether the main contract is actually accomplished or not. Under this principle,
banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or
superimposed thereon, nor do they assume any liability or responsibility for the description, quantity,
weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents,
or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the
carriers, or the insurers of the goods, or any other person whomsoever.39
The independent nature of the letter of credit may be: (a) independence in toto where the credit is
independent from the justification aspect and is a separate obligation from the underlying agreement like for
instance a typical standby; or (b) independence may be only as to the justification aspect like in a
commercial letter of credit or repayment standby, which is identical with the same obligations under the
underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of the credit
the payment of the credit would constitute fraudulent abuse of the credit.40

Can the beneficiary invoke the independence principle?

Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it
is a defense available only to respondent banks. LHC, on the other hand, contends that it would be contrary
to common sense to deny the benefit of an independent contract to the very party for whom the benefit is
intended. As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle.

As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as
irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the
stipulated documents are presented and the conditions of the credit are complied with.41 Precisely, the
independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties in
the main contract. As the principle's nomenclature clearly suggests, the obligation under the letter of credit
is independent of the related and originating contract. In brief, the letter of credit is separate and distinct
from the underlying transaction.

Given the nature of letters of credit, petitioner's argument—that it is only the issuing bank that may invoke
the independence principle on letters of credit—does not impress this Court. To say that the independence
principle may only be invoked by the issuing banks would render nugatory the purpose for which the letters
of credit are used in commercial transactions. As it is, the independence doctrine works to the benefit of both
the issuing bank and the beneficiary.

Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the
benefit of the issuing bank but mainly for the benefit of the parties to the original transactions. With the
letter of credit from the issuing bank, the party who applied for and obtained it may confidently present the
letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business
transaction. On the other hand, the other party to the business transaction, i.e., the beneficiary of the letter
of credit, can be rest assured of being empowered to call on the letter of credit as a security in case the
commercial transaction does not push through, or the applicant fails to perform his part of the transaction.
It is for this reason that the party who is entitled to the proceeds of the letter of credit is appropriately called
"beneficiary."

Petitioner's argument that any dispute must first be resolved by the parties, whether through negotiations or
arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the letter
of credit into a mere guarantee. Jurisprudence has laid down a clear distinction between a letter of credit
and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite for the release
of funds under a letter of credit. In other words, the argument is incompatible with the very nature of the
letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract entered into
by the applicant and the beneficiary, there would be no practical and beneficial use for letters of credit in
commercial transactions.

Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:

The standby credit is an attractive commercial device for many of the same reasons that commercial credits
are attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety contracts,
which tend to generate higher costs than credits do and are usually triggered by a factual determination
rather than by the examination of documents.

Because parties and courts should not confuse the different functions of the surety contract on the one hand
and the standby credit on the other, the distinction between surety contracts and credits merits some
reflection. The two commercial devices share a common purpose. Both ensure against the obligor's
nonperformance. They function, however, in distinctly different ways.

Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's performance,
usually by hiring someone to complete that performance. Surety contracts, then, often involve costs of
determining whether the obligor defaulted (a matter over which the surety and the beneficiary often litigate)
plus the cost of performance. The benefit of the surety contract to the beneficiary is obvious. He knows that
the surety, often an insurance company, is a strong financial institution that will perform if the obligor does
not. The beneficiary also should understand that such performance must await the sometimes lengthy and
costly determination that the obligor has defaulted. In addition, the surety's performance takes time.

The standby credit has different expectations. He reasonably expects that he will receive cash in the event of
nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the
obligor (the applicant) over the nature of the applicant's performance takes place. The standby credit has this
opposite effect of the surety contract: it reverses the financial burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes
the fact of the obligor's performance. The beneficiary may have to establish that fact in litigation. During the
litigation, the surety holds the money and the beneficiary bears most of the cost of delay in performance.

In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money
promptly upon presentation of the required documents. It may be that the applicant has, in fact, performed
and that the beneficiary's presentation of those documents is not rightful. In that case, the applicant may
sue the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to determine
whether the applicant has in fact breached the obligation to perform, the beneficiary, not the applicant,
holds the money. Parties that use a standby credit and courts construing such a credit should understand
this allocation of burdens. There is a tendency in some quarters to overlook this distinction between surety
contracts and standby credits and to reallocate burdens by permitting the obligor or the issuer to litigate the
performance question before payment to the beneficiary.42

While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the
bank to honor the credit by allowing him to draw thereon. The situation itself emasculates petitioner's
posture that LHC cannot invoke the independence principle and highlights its puerility, more so in this case
where the banks concerned were impleaded as parties by petitioner itself.

Respondent banks had squarely raised the independence principle to justify their releases of the amounts
due under the Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules
that the respondent banks were left with little or no alternative but to honor the credit and both of them in
fact submitted that it was "ministerial" for them to honor the call for payment.43

Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of the
Contract read, thus:

4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost
shall on the Commencement Date provide security to the Employer in the form of two irrevocable and
confirmed standby letters of credit (the "Securities"), each in the amount of US$8,988,907, issued and
confirmed by banks or financial institutions acceptable to the Employer. Each of the Securities must be in
form and substance acceptable to the Employer and may be provided on an annually renewable basis.44

8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of
liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and every day or
part of a day that shall elapse between the Target Completion Date and the Completion Date, provided that
Liquidated Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of the
Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on the
following day without need of demand from the Employer.

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such
damages from any monies due, or to become due to the Contractor and/or by drawing on the Security."45

A contract once perfected, binds the parties not only to the fulfillment of what has been expressly stipulated
but also to all the consequences which according to their nature, may be in keeping with good faith, usage,
and law.46 A careful perusal of the Turnkey Contract reveals the intention of the parties to make the
Securities answerable for the liquidated damages occasioned by any delay on the part of petitioner. The call
upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an alternative recourse
available to it upon the happening of the contingency for which the Securities have been proffered. Thus,
even without the use of the "independence principle," the Turnkey Contract itself bestows upon LHC the
right to call on the Securities in the event of default.

Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities is wrongful
because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey
Contract knowing fully well that this is yet to be determined by the arbitral tribunals. It asserts that the
"fraud exception" exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents
to the confirming bank, documents that contain, expressly or by implication, material representations of fact
that to his knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy
available to it.

Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not without
limits and it is important to fashion those limits in light of the principle's purpose, which is to serve the
commercial function of the credit. If it does not serve those functions, application of the principle is not
warranted, and the commonlaw principles of contract should apply.

It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with the fact of
default which is the self-same issue pending resolution before the arbitral tribunals. To be able to declare the
call on the Securities wrongful or fraudulent, it is imperative to resolve, among others, whether petitioner
was in fact guilty of delay in the performance of its obligation. Unfortunately for petitioner, this Court is not
called upon to rule upon the issue of default—such issue having been submitted by the parties to the
jurisdiction of the arbitral tribunals pursuant to the terms embodied in their agreement.47

Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?
Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the
untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as
fraud sufficient to support an injunction against payment.48 The remedy for fraudulent abuse is an
injunction. However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud
constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the
main agreement; and (c) irreparable injury might follow if injunction is not granted or the recovery of
damages would be seriously damaged.49

In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension of
two hundred fifty-three (253) days which would move the target completion date. It argued that if its claims
for extension would be found meritorious by the ICC, then LHC would not be entitled to any liquidated
damages.50

Generally, injunction is a preservative remedy for the protection of one's substantive right or interest; it is
not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the
writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a
pending case is entirely within the discretion of the court taking cognizance of the case, the only limitation
being that this discretion should be exercised based upon the grounds and in the manner provided by law.51

Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that
there exists a right to be protected and that the acts against which the writ is to be directed are violative of
the said right.52 It must be shown that the invasion of the right sought to be protected is material and
substantial, that the right of complainant is clear and unmistakable and that there is an urgent and
paramount necessity for the writ to prevent serious damage.53 Moreover, an injunctive remedy may only be
resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied
under any standard compensation.54

In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call
on the Securities which would justify the issuance of preliminary injunction. By petitioner's own admission,
the right of LHC to call on the Securities was contractually rooted and subject to the express stipulations in
the Turnkey Contract.55 Indeed, the Turnkey Contract is plain and unequivocal in that it conferred upon
LHC the right to draw upon the Securities in case of default, as provided in Clause 4.2.5, in relation to
Clause 8.7.2, thus:

4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any of the Securities, stating
the nature of the default for which the claim on any of the Securities is to be made, provided that no notice
will be required if the Employer calls upon any of the Securities for the payment of Liquidated Damages for
Delay or for failure by the Contractor to renew or extend the Securities within 14 days of their expiration in
accordance with Clause 4.2.2.56

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such
damages from any monies due, or to become due, to the Contractor and/or by drawing on the Security.57

The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities wrongful
or fraudulent for there was nothing in the Contract which would indicate that the parties intended that all
disputes regarding delay should first be settled through arbitration before LHC would be allowed to call upon
the Securities. It is therefore premature and absurd to conclude that the draws on the Securities were
outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of
default.

Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did
petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction.58 What
petitioner did assert before the courts below was the fact that LHC's draws on the Securities would be
premature and without basis in view of the pending disputes between them. Petitioner should not be allowed
in this instance to bring into play the fraud exception rule to sustain its claim for the issuance of an
injunctive relief. Matters, theories or arguments not brought out in the proceedings below will ordinarily not
be considered by a reviewing court as they cannot be raised for the first time on appeal.59 The lower courts
could thus not be faulted for not applying the fraud exception rule not only because the existence of fraud
was fundamentally interwoven with the issue of default still pending before the arbitral tribunals, but more
so, because petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate,
petitioner utterly failed to show that it had a clear and unmistakable right to prevent LHC's call upon the
Securities.

Of course, prudence should have impelled LHC to await resolution of the pending issues before the arbitral
tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract did not
require LHC to do so and, therefore, it was merely enforcing its rights in accordance with the tenor thereof.
Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith.60 More importantly, pursuant to the principle of autonomy of contracts
embodied in Article 1306 of the Civil Code,61 petitioner could have incorporated in its Contract with LHC, a
proviso that only the final determination by the arbitral tribunals that default had occurred would justify the
enforcement of the Securities. However, the fact is petitioner did not do so; hence, it would have to live with
its inaction.
With respect to the issue of whether the respondent banks were justified in releasing the amounts due under
the Securities, this Court reiterates that pursuant to the independence principle the banks were under no
obligation to determine the veracity of LHC's certification that default has occurred. Neither were they bound
by petitioner's declaration that LHC's call thereon was wrongful. To repeat, respondent banks' undertaking
was simply to pay once the required documents are presented by the beneficiary.

At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's draws upon the
Securities were wrongful due to the non-existence of the fact of default, its right to seek indemnification for
damages it suffered would not normally be foreclosed pursuant to general principles of law.

Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this Court that the subject letters of
credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the instant petition.

Settled is the rule that injunction would not lie where the acts sought to be enjoined have already become
fait accompli or an accomplished or consummated act.63 In Ticzon v. Video Post Manila, Inc.64 this Court
ruled that where the period within which the former employees were prohibited from engaging in or working
for an enterprise that competed with their former employer—the very purpose of the preliminary injunction
—has expired, any declaration upholding the propriety of the writ would be entirely useless as there would
be no actual case or controversy between the parties insofar as the preliminary injunction is concerned.

In the instant case, the consummation of the act sought to be restrained had rendered the instant petition
moot—for any declaration by this Court as to propriety or impropriety of the non-issuance of injunctive relief
could have no practical effect on the existing controversy.65 The other issues raised by petitioner particularly
with respect to its right to recover the amounts wrongfully drawn on the Securities, according to it, could
properly be threshed out in a separate proceeding.

One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions. First,
in its Counter-Manifestation dated 29 June 200466 LHC alleges that petitioner presented before this Court
the same claim for money which it has filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW
and Civil Case No. 04-332 before the RTC of Makati. LHC argues that petitioner's acts constitutes forum-
shopping which should be punished by the dismissal of the claim in both forums. Second, in its Comment to
Petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum dated 8 October 2004, LHC
alleges that by maintaining the present appeal and at the same time pursuing Civil Case No. 04-332—
wherein petitioner pressed for judgment on the issue of whether the funds LHC drew on the Securities
should be returned—petitioner resorted to forum-shopping. In both instances, however, petitioner has
apparently opted not to respond to the charge.

Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial remedies
in different courts, simultaneously or successively, all substantially founded on the same transactions and
the same essential facts and circumstances, and all raising substantially the same issues either pending in,
or already resolved adversely, by some other court.67 It may also consist in the act of a party against whom
an adverse judgment has been rendered in one forum, of seeking another and possibly favorable opinion in
another forum other than by appeal or special civil action of certiorari, or the institution of two or more
actions or proceedings grounded on the same cause on the supposition that one or the other court might
look with favor upon the other party.68 To determine whether a party violated the rule against forum-
shopping, the test applied is whether the elements of litis pendentia are present or whether a final judgment
in one case will amount to res judicata in another.69 Forum-shopping constitutes improper conduct and
may be punished with summary dismissal of the multiple petitions and direct contempt of court.70

Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its
violation, the Court will refrain from making any definitive ruling on this issue until after petitioner has been
given ample opportunity to respond to the charge.

WHEREFORE, the instant petition is DENIED, with costs against petitioner.

Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice.

SO ORDERED.
5. MWSS vs. Daway, GR No. 160732, June 21, 2004

G.R. No. 160732 June 21, 2004

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,

vs.
HON. REYNALDO B. DAWAY, in his capacity as Presiding Judge of the Regional Trial Court of Quezon City,
Branch 90 and Maynilad Water Services, Inc., respondents

DECISION

AZCUNA, J.:
On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a determination
that the Petition for Rehabilitation with Prayer for Suspension of Actions and Proceedings filed by Maynilad
Water Services, Inc. (Maynilad) conformed substantially to the provisions of Sec. 2, Rule 4 of the Interim
Rules of Procedure on Corporate Rehabilitation (Interim Rules). It forthwith issued a Stay Order1 which
states, in part, that the court was thereby:

xxx xxx xxx

2. Staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by
court action or otherwise, against the petitioner, its guarantors and sureties not solidarily liable with the
petitioner;

3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in any manner any of its
properties except in the ordinary course of business;

4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as at the date of the filing
of the petition;

xxx xxx xxx

Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex Parte motions2 filed by
respondent Maynilad, issued the herein questioned Order3 which stated that it thereby:

"1. DECLARES that the act of MWSS in commencing on November 24, 2003 the process for the payment by
the banks of US$98 million out of the US$120 million standby letter of credit so the banks have to make
good such call/drawing of payment of US$98 million by MWSS not later than November 27, 2003 at 10:00 P.
M. or any similar act for that matter, is violative of the above-quoted sub-paragraph 2.) of the dispositive
portion of this Court’s Stay Order dated November 17, 2003.

2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt the written
certification/notice of draw to Citicorp International Limited dated November 24, 2003 and DECLARES void
any payment by the banks to MWSS in the event such written certification/notice of draw is not withdrawn
by MWSS and/or MWSS receives payment by virtue of the aforesaid standby letter of credit."

Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this petition for
review by way of certiorari under Rule 65 of the Rules of Court questioning the legality of said order as
having been issued without or in excess of the lower court’s jurisdiction or that the court a quo acted with
grave abuse of discretion amounting to lack or excess of jurisdiction.4

ANTECEDENTS OF THE CASE

On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year period to
manage, operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage
services in the West Zone Service Area, for which Maynilad undertook to pay the corresponding concession
fees on the dates agreed upon in said agreement5 which, among other things, consisted of payments of
petitioner’s mostly foreign loans.

To secure the concessionaire’s performance of its obligations under the Concession Agreement, Maynilad was
required under Section 6.9 of said contract to put up a bond, bank guarantee or other security acceptable to
MWSS.

In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year facility with a
number of foreign banks, led by Citicorp International Limited, for the issuance of an Irrevocable Standby
Letter of Credit6 in the amount of US$120,000,000 in favor of MWSS for the full and prompt performance of
Maynilad’s obligations to MWSS as aforestated.

Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by which it hoped to
recover the losses it had allegedly incurred and would be incurring as a result of the depreciation of the
Philippine Peso against the US Dollar. Failing to get what it desired, Maynilad issued a Force Majeure Notice
on March 8, 2001 and unilaterally suspended the payment of the concession fees. In an effort to salvage the
Concession Agreement, the parties entered into a Memorandum of Agreement (MOA)7 on June 8, 2001
wherein Maynilad was allowed to recover foreign exchange losses under a formula agreed upon between
them. Sometime in August 2001 Maynilad again filed another Force Majeure Notice and, since MWSS could
not agree with the terms of said Notice, the matter was referred on August 30, 2001 to the Appeals Panel for
arbitration. This resulted in the parties agreeing to resolve the issues through an amendment of the
Concession Agreement on October 5, 2001, known as Amendment No. 1,8 which was based on the terms set
down in MWSS Board of Trustees Resolution No. 457-2001, as amended by MWSS Board of Trustees
Resolution No. 487-2001,9 which provided inter alia for a formula that would allow Maynilad to recover
foreign exchange losses it had incurred or would incur under the terms of the Concession Agreement.

As part of this agreement, Maynilad committed, among other things, to:

a) infuse the amount of UD$80.0 million as additional funding support from its stockholders;
b) resume payment of the concession fees; and

c) mutually seek the dismissal of the cases pending before the Court of Appeals and with Minor Dispute
Appeals Panel.

However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination, claiming that
MWSS failed to comply with its obligations under the Concession Agreement and Amendment No. 1
regarding the adjustment mechanism that would cover Maynilad’s foreign exchange losses. On December 9,
2002, Maynilad filed a Notice of Early Termination of the concession, which was challenged by MWSS. This
matter was eventually brought before the Appeals Panel on January 7, 2003 by MWSS.10 On November 7,
2003, the Appeals Panel ruled that there was no Event of Termination as defined under Art. 10.2 (ii) or 10.3
(iii) of the Concession Agreement and that, therefore, Maynilad should pay the concession fees that had
fallen due.

The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter, submitted a written
notice11 on November 24, 2003, to Citicorp International Limited, as agent for the participating banks, that
by virtue of Maynilad’s failure to perform its obligations under the Concession Agreement, it was drawing on
the Irrevocable Standby Letter of Credit and thereby demanded payment in the amount of
US$98,923,640.15.

Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation before the court
a quo which resulted in the issuance of the Stay Order of November 17, 2003 and the disputed Order of
November 27, 2003.12

PETITIONER’S CASE

Petitioner hereby raises the following issues:

1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT PATENTLY WITHOUT
JURISDICTION OR IN EXCESS OF JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF JURISDICTION IN CONSIDERING THE PERFORMANCE BOND OR ASSETS OF
THE ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE OF THE PRIVATE RESPONDENT
MAYNILAD SUBJECT TO REHABILITATION.

2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF JURISDICTION OR
COMMIT A GRAVE ERROR OF LAW IN HOLDING THAT THE PERFORMANCE BOND OBLIGATIONS OF THE
BANKS WERE NOT SOLIDARY IN NATURE.

3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING MAYNILAD TO IN EFFECT
SEEK A REVIEW OR APPEAL OF THE FINAL AND BINDING DECISION OF THE APPEALS PANEL.

In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million Standby Letter
of Credit and Performance Bond are not property of the estate of the debtor Maynilad and, therefore, not
subject to the in rem rehabilitation jurisdiction of the trial court.

Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset of Maynilad but
only assets of the banks. Furthermore, a call on the Standby Letter of Credit cannot also be considered a
"claim" falling under the purview of the stay order as alleged by respondent as it is not directed against the
assets of respondent Maynilad.

Petitioner concludes that the public respondent erred in declaring and holding that the commencement of
the process for the payment of US$98 million is a violation of the order issued on November 17, 2003.

RESPONDENT MAYNILAD’S CASE

Respondent Maynilad seeks to refute this argument by alleging that:

a) the order objected to was strictly and precisely worded and issued after carefully considering/evaluating
the import of the arguments and documents referred to by Maynilad, MWSS and/or creditors Chinatrust
Commercial Bank and Suez in relation to admissions, pleadings and/or pertinent records13 and that public
respondent had the authority to issue the same;

b) public respondent never considered nor held that the Performance bond or assets of the issuing banks are
part or property of the estate of respondent Maynilad subject to rehabilitation and which respondent
Maynilad has not and has never claimed to be;14

c) what is relevant is not whether the performance bond or assets of the issuing banks are part of the estate
of respondent Maynilad but whether the act of petitioner in commencing the process for the payment by the
banks of US$98 million out of the US$120 million performance bond is covered and/or prohibited under
sub-paragraphs 2.) and 4.) of the stay order dated November 17, 2003;
d) the jurisdiction of public respondent extends not only to the assets of respondent Maynilad but also over
persons and assets of "all those affected by the proceedings x x x upon publication of the notice of
commencement;15" and

e) the obligations under the Standby Letter of Credit are not solidary and are not exempt from the coverage of
the stay order.

OUR RULING

We will discuss the first two issues raised by petitioner as these are interrelated and make up the main issue
of the petition before us which is, did the rehabilitation court sitting as such, act in excess of its authority or
jurisdiction when it enjoined herein petitioner from seeking the payment of the concession fees from the
banks that issued the Irrevocable Standby Letter of Credit in its favor and for the account of respondent
Maynilad?

The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate Rehabilitation to support its
jurisdiction over the Irrevocable Standby Letter of Credit and the banks that issued it. The section reads in
part "that jurisdiction over those affected by the proceedings is considered acquired upon the publication of
the notice of commencement of proceedings in a newspaper of general circulation" and goes further to define
rehabilitation as an in rem proceeding. This provision is a logical consequence of the in rem nature of the
proceedings, where jurisdiction is acquired by publication and where it is necessary that the assets of the
debtor come within the court’s jurisdiction to secure the same for the benefit of creditors. The reference to
"all those affected by the proceedings" covers creditors or such other persons or entities holding assets
belonging to the debtor under rehabilitation which should be reflected in its audited financial statements.
The banks do not hold any assets of respondent Maynilad that would be material to the rehabilitation
proceedings nor is Maynilad liable to the banks at this point.

Respondent Maynilad’s Financial Statement as of December 31, 2001 and 2002 do not show the Irrevocable
Standby Letter of Credit as part of its assets or liabilities, and by respondent Maynilad’s own admission it is
not. In issuing the clarificatory order of November 27, 2003, enjoining petitioner from claiming from an asset
that did not belong to the debtor and over which it did not acquire jurisdiction, the rehabilitation court acted
in excess of its jurisdiction.

Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that supports its
claim that the commencement of the process to draw on the Standby Letter of Credit is an enforcement of
claim prohibited by and under the Interim Rules and the order of public respondent.

Respondent Maynilad would persuade us that the above provision justifies a leap to the conclusion that such
an enforcement is prohibited by said section because it is a "claim against the debtor, its guarantors and
sureties not solidarily liable with the debtor" and that there is nothing in the Standby Letter of Credit nor in
law nor in the nature of the obligation that would show or require the obligation of the banks to be solidary
with the respondent Maynilad.

We disagree.

First, the claim is not one against the debtor but against an entity that respondent Maynilad has procured to
answer for its non-performance of certain terms and conditions of the Concession Agreement, particularly
the payment of concession fees.

Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against
guarantors and sureties, but only those claims against guarantors and sureties who are not solidarily liable
with the debtor. Respondent Maynilad’s claim that the banks are not solidarily liable with the debtor does
not find support in jurisprudence.

We held in Feati Bank & Trust Company v. Court of Appeals16 that the concept of guarantee vis-à-vis the
concept of an irrevocable letter of credit are inconsistent with each other. The guarantee theory destroys the
independence of the bank’s responsibility from the contract upon which it was opened and the nature of
both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor’s obligation is
merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an
irrevocable letter of credit, the bank undertakes a primary obligation. We have also defined a letter of credit
as an engagement by a bank or other person made at the request of a customer that the issuer shall honor
drafts or other demands of payment upon compliance with the conditions specified in the credit.17

Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the
presentation of documents18 and is thus a commitment by the issuer that the party in whose favor it is
issued and who can collect upon it will have his credit against the applicant of the letter, duly paid in the
amount specified in the letter.19 They are in effect absolute undertakings to pay the money advanced or the
amount for which credit is given on the faith of the instrument. They are primary obligations and not
accessory contracts and while they are security arrangements, they are not converted thereby into contracts
of guaranty.20 What distinguishes letters of credit from other accessory contracts, is the engagement of the
issuing bank to pay the seller once the draft and other required shipping documents are presented to it.21
They are definite undertakings to pay at sight once the documents stipulated therein are presented.
Letters of Credits have long been and are still governed by the provisions of the Uniform Customs and
Practice for Documentary Credits of the International Chamber of Commerce. In the 1993 Revision it
provides in Art. 2 that "the expressions Documentary Credit(s) and Standby Letter(s) of Credit mean any
arrangement, however made or described, whereby a bank acting at the request and on instructions of a
customer or on its own behalf is to make payment against stipulated document(s)" and Art. 9 thereof defines
the liability of the issuing banks on an irrevocable letter of credit as a "definite undertaking of the issuing
bank, provided that the stipulated documents are presented to the nominated bank or the issuing bank and
the terms and conditions of the Credit are complied with, to pay at sight if the Credit provides for sight
payment."22

We have accepted, in Feati Bank and Trust Company v. Court of Appeals23 and Bank of America NT & SA v.
Court of Appeals,24 to the extent that they are pertinent, the application in our jurisdiction of the
international credit regulatory set of rules known as the Uniform Customs and Practice for Documentary
Credits (U.C.P) issued by the International Chamber of Commerce, which we said in Bank of the Philippine
Islands v. Nery25 was justified under Art. 2 of the Code of Commerce, which states:

"Acts of commerce, whether those who execute them be merchants or not, and whether specified in this Code
or not should be governed by the provisions contained in it; in their absence, by the usages of commerce
generally observed in each place; and in the absence of both rules, by those of the civil law."

The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the
prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose obligations
are not solidary with the debtor. The participating banks’ obligation are solidary with respondent Maynilad in
that it is a primary, direct, definite and an absolute undertaking to pay and is not conditioned on the prior
exhaustion of the debtor’s assets. These are the same characteristics of a surety or solidary obligor.

Being solidary, the claims against them can be pursued separately from and independently of the
rehabilitation case, as held in Traders Royal Bank v. Court of Appeals26 and reiterated in Philippine
Blooming Mills, Inc. v. Court of Appeals,27 where we said that property of the surety cannot be taken into
custody by the rehabilitation receiver (SEC) and said surety can be sued separately to enforce his liability as
surety for the debts or obligations of the debtor. The debts or obligations for which a surety may be liable
include future debts, an amount which may not be known at the time the surety is given.

The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are not
solidary with those of respondent Maynilad. On the contrary, it is issued at the request of and for the
account of Maynilad Water Services, Inc., in favor of the Metropolitan Waterworks and Sewerage System, as
a bond for the full and prompt performance of the obligations by the concessionaire under the Concession
Agreement28 and herein petitioner is authorized by the banks to draw on it by the simple act of delivering to
the agent a written certification substantially in the form Annex "B" of the Letter of Credit. It provides further
in Sec. 6, that for as long as the Standby Letter of Credit is valid and subsisting, the Banks shall honor any
written Certification made by MWSS in accordance with Sec. 2, of the Standby Letter of Credit regardless of
the date on which the event giving rise to such Written Certification arose.29

Taking into consideration our own rulings on the nature of letters of credit and the customs and usage
developed over the years in the banking and commercial practice of letters of credit, we hold that except
when a letter of credit specifically stipulates otherwise, the obligation of the banks issuing letters of credit
are solidary with that of the person or entity requesting for its issuance, the same being a direct, primary,
absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents
required therein.

The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act on the
obligation of the banks under the Letter of Credit under the argument that this was not a solidary obligation
with that of the debtor. Being a solidary obligation, the letter of credit is excluded from the jurisdiction of the
rehabilitation court and therefore in enjoining petitioner from proceeding against the Standby Letters of
Credit to which it had a clear right under the law and the terms of said Standby Letter of Credit, public
respondent acted in excess of his jurisdiction.

ADDITIONAL ISSUES

We proceed to consider the other issues raised in the oral arguments and included in the parties’
memoranda:

1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy under the Interim
Rules itself which provides in Sec. 12, Rule 4 that the court may on motion or motu proprio, terminate,
modify or set conditions for the continuance of the stay order or relieve a claim from coverage thereof. We
find, however, that the public respondent had already accomplished this during the hearing set for the two
Urgent Ex Parte motions filed by respondent Maynilad on November 21 and 24, 2003,30 where the parties
including the creditors, Suez and Chinatrust Commercial "presented their respective arguments."31 The
public respondent then ruled, "after carefully considering/evaluating the import of the arguments and
documents referred to by Maynilad, MWSS and/or the creditors Chinatrust Commercial Bank and Suez in
relation to the admissions, the pleadings, and/or pertinent portions of the records, this court is of the
considered and humble view that the issue must perforce be resolved in favor of Maynilad."32 Hence to
pursue their opposition before the same court would result in the presentation of the same arguments and
issues passed upon by public respondent.

Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective remedy questioning the
orders of the rehabilitation court since they are immediately executory and a petition for review or an appeal
therefrom shall not stay the execution of the order unless restrained or enjoined by the appellate court." In
this situation, it had no other remedy but to seek recourse to us through this petition for certiorari.

In Silvestre v. Torres and Oben,33 we said that it is not enough that a remedy is available to prevent a party
from making use of the extraordinary remedy of certiorari but that such remedy be an adequate remedy
which is equally beneficial, speedy and sufficient, not only a remedy which at some time in the future may
offer relief but a remedy which will promptly relieve the petitioner from the injurious acts of the lower
tribunal. It is the inadequacy -- not the mere absence -- of all other legal remedies and the danger of failure
of justice without the writ, that must usually determine the propriety of certiorari.34

2. Respondent Maynilad argues that by commencing the process for payment under the Standby Letter of
Credit, petitioner violated an immediately executory order of the court and, therefore, comes to Court with
unclean hands and should therefore be denied any relief.

It is true that the stay order is immediately executory. It is also true, however, that the Standby Letter of
Credit and the banks that issued it were not within the jurisdiction of the rehabilitation court. The call on
the Standby Letter of Credit, therefore, could not be considered a violation of the Stay Order.

3. Respondent’s claim that the filing of the petition pre-empts the original jurisdiction of the lower court is
without merit. The purpose of the initial hearing is to determine whether the petition for rehabilitation has
merit or not. The propriety of the stay order as well as the clarificatory order had already been passed upon
in the hearing previously had for that purpose. The determination of whether the public respondent was
correct in enjoining the petitioner from drawing on the Standby Letter of Credit will have no bearing on the
determination to be made by public respondent whether the petition for rehabilitation has merit or not. Our
decision on the instant petition does not pre-empt the original jurisdiction of the rehabilitation court.

WHEREFORE, the petition for certiorari is granted. The Order of November 27, 2003 of the Regional Trial
Court of Quezon City, Branch 90, is hereby declared NULL AND VOID and SET ASIDE. The status quo Order
herein previously issued is hereby LIFTED. In view of the urgency attending this case, this decision is
immediately executory.

No costs.

SO ORDERED.

6. Bank of America, NT & SA vs. Court of Appeals, GR No. 105395, December 10, 1993

G.R. No. 105395 December 10, 1993

BANK OF AMERICA, NT & SA, petitioners,

vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND
JANE DOE, respondents.

Agcaoili & Associates for petitioner.

Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for private respondents.

VITUG, J.:

A "fiasco," involving an irrevocable letter of credit, has found the distressed parties coming to court as
adversaries in seeking a definition of their respective rights or liabilities thereunder.

On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by registered mail an Irrevocable
Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch, for the account of
General Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover the sale of plastic ropes and
"agricultural files," with the petitioner as advising bank and private respondent Inter-Resin Industrial
Corporation as beneficiary.

On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the foregoing and transmitting,
along with the bank's communication,
the latter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent Atty. Emiliano
Tanay to Bank of America to have the letter of credit confirmed. The bank did not. Reynaldo Dueñas, bank
employee in charge of letters of credit, however, explained to Atty. Tanay that there was no need for
confirmation because the letter of credit would not have been transmitted if it were not genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment under the letter of credit
by submitting to Bank of America invoices, covering the shipment of 24,000 bales of polyethylene rope to
General Chemicals valued at US$1,320,600.00, the corresponding packing list, export declaration and bill of
lading. Finally, after being satisfied that Inter-Resin's documents conformed with the conditions expressed in
the letter of credit, Bank of America issued in favor of Inter-Resin a Cashier's Check for P10,219,093.20, "the
Peso equivalent of the draft (for) US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for
documentary stamps, postage and mail issuance." 1 The check was picked up by Inter-Resin's Executive
Vice-President Barcelina Tio. On 10 April 1981, Bank of America wrote Bank of Ayudhya advising the latter
of the availment under the letter of credit and sought the corresponding reimbursement therefor.

Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for the second
availment under the same letter of credit consisting of a packing list, bill of lading, invoices, export
declaration and bills in set, evidencing the second shipment of goods. Immediately upon receipt of a telex
from the Bank of Ayudhya declaring the letter of credit fraudulent, 2 Bank of America stopped the processing
of Inter-Resin's documents and sent a telex to its branch office in Bangkok, Thailand, requesting assistance
in determining the authenticity of the letter of credit. 3 Bank of America kept Inter-Resin informed of the
developments. Sensing a fraud, Bank of America sought the assistance of the National Bureau of
Investigation (NBI). With the help of the staff of the Philippine Embassy at Bangkok, as well as the police and
customs personnel of Thailand, the NBI agents, who were sent to Thailand, discovered that the vans
exported by Inter-Resin did not contain ropes but plastic strips, wrappers, rags and waste materials. Here at
home, the NBI also investigated Inter-Resin's President Francisco Trajano and Executive Vice President
Barcelina Tio, who, thereafter, were criminally charged for estafa through falsification of commercial
documents. The case, however, was eventually dismissed by the Rizal Provincial Fiscal who found no prima
facie evidence to warrant prosecution.

Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso equivalent of the draft for
US$1,320,600.00 on the partial availment of the now disowned letter of credit. On the other hand, Inter-
Resin claimed that not only was it entitled to retain P10,219,093.20 on its first shipment but also to the
balance US$1,461,400.00 covering the second shipment.

On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send the merchandise to Thailand; (b) the
telex declaring the letter of credit fraudulent was unverified and self-serving, hence, hearsay, but even
assuming that the letter of credit was fake, "the fault should be borne by the BA which was careless and
negligent" 5 for failing to utilize its modern means of communication to verify with Bank of Ayudhya in
Thailand the authenticity of the letter of credit before sending the same to Inter-Resin; (c) the loading of
plastic products into the vans were under strict supervision, inspection and verification of government
officers who have in their favor the presumption of regularity in the performance of official functions; and (d)
Bank of America failed to prove the participation of Inter-Resin or its employees in the alleged fraud as, in
fact, the complaint for estafa through falsification of documents was dismissed by the Provincial Fiscal of
Rizal.6

On appeal, the Court of Appeals 7 sustained the trial court; hence, this present recourse by petitioner Bank
of America.

The following issues are raised by Bank of America: (a) whether it has warranted the genuineness and
authenticity of the letter of credit and, corollarily, whether it has acted merely as an advising bank or as a
confirming bank; (b) whether Inter-Resin has actually shipped the ropes specified by the letter of credit; and
(c) following the dishonor of the letter of credit by Bank of Ayudhya, whether Bank of America may recover
against Inter-Resin under the draft executed in its partial availment of the letter of credit.8

In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly raise the issue of being
only an advising bank; (b) the findings of the trial court that the ropes have actually been shipped is binding
on the Court; and, (c) Bank of America cannot recover from Inter-Resin because the drawer of the letter of
credit is the Bank of Ayudhya and not Inter-Resin.

If only to understand how the parties, in the first place, got themselves into the mess, it may be well to start
by recalling how, in its modern use, a letter of credit is employed in trade transactions.

A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of
dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part
with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. 9 To
break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of the
seller so that, by virtue of the latter of credit, the issuing bank can authorize the seller to draw drafts and
engage to pay them upon their presentment simultaneously with the tender of documents required by the
letter of credit. 10 The buyer and the seller agree on what documents are to be presented for payment, but
ordinarily they are documents of title evidencing or attesting to the shipment of the goods to the buyer.

Once the credit is established, the seller ships the goods to the buyer and in the process secures the required
shipping documents or documents of title. To get paid, the seller executes a draft and presents it together
with the required documents to the issuing bank. The issuing bank redeems the draft and pays cash to the
seller if it finds that the documents submitted by the seller conform with what the letter of credit requires.
The bank then obtains possession of the documents upon paying the seller. The transaction is completed
when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under
this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the
buyer acquires said documents and control over the goods only after reimbursing the bank.

What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of
the issuing bank to pay the seller of the draft and the required shipping documents are presented to it. In
turn, this arrangement assures the seller of prompt payment, independent of any breach of the main sales
contract. By this so-called "independence principle," the bank determines compliance with the letter of credit
only by examining the shipping documents presented; it is precluded from determining whether the main
contract is actually accomplished or not. 11

There would at least be three (3) parties: (a) the buyer, 12 who procures the letter of credit and obliges
himself to reimburse the issuing bank upon receipts of the documents of title; (b) the bank issuing the letter
of credit, 13 which undertakes to pay the seller upon receipt of the draft and proper document of titles and to
surrender the documents to the buyer upon reimbursement; and, (c) the seller, 14 who in compliance with
the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing
bank to recover payment.

The number of the parties, not infrequently and almost invariably in international trade practice, may be
increased. Thus, the services of an advising (notifying) bank 15 may be utilized to convey to the seller the
existence of the credit; or, of a confirming bank 16 which will lend credence to the letter of credit issued by a
lesser known issuing bank; or, of a paying bank, 17 which undertakes to encash the drafts drawn by the
exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may
approach another bank, termed the negotiating bank, 18 to have the draft discounted.

Being a product of international commerce, the impact of this commercial instrument transcends national
boundaries, and it is thus not uncommon to find a dearth of national law that can adequately provide for its
governance. This country is no exception. Our own Code of Commerce basically introduces only its concept
under Articles 567-572, inclusive, thereof. It is no wonder then why great reliance has been placed on
commercial usage and practice, which, in any case, can be justified by the universal acceptance of the
autonomy of contract rules. The rules were later developed into what is now known as the Uniform Customs
and Practice for Documentary Credits ("U.C.P.") issued by the International Chamber of Commerce. It is by
no means a complete text by itself, for, to be sure, there are other principles, which, although part of lex
mercatoria, are not dealt with the U.C.P.

In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the extent of their
pertinency, the application in our jurisdiction of this international commercial credit regulatory set of rules.
20 In Bank of Phil. Islands v. De Nery, 21 we have said that the observances of the U.C.P. is justified by
Article 2 of the Code of Commerce which expresses that, in the absence of any particular provision in the
Code of Commerce, commercial transactions shall be governed by usages and customs generally observed.
We have further observed that there being no specific provisions which govern the legal complexities arising
from transactions involving letters of credit not only between or among banks themselves but also between
banks and the seller or the buyer, as the case may be, the applicability of the U.C.P. is undeniable.

The first issue raised with the petitioner, i.e., that it has in this instance merely been advising bank, is
outrightly rejected by Inter-Resin and is thus sought to be discarded for having been raised only on appeal.
We cannot agree. The crucial point of dispute in this case is whether under the "letter of credit," Bank of
America has incurred any liability to the "beneficiary" thereof, an issue that largely is dependent on the
bank's participation in that transaction; as a mere advising or notifying bank, it would not be liable, but as a
confirming bank, had this been the case, it could be considered as having incurred that liability. 22

In Insular Life Assurance Co. Ltd. Employees Association — Natu vs. Insular Life Assurance Co., Ltd., 23 the
Court said: Where the issues already raised also rest on other issues not specifically presented, as long as
the latter issues bear relevance and close relation to the former and as long as they arise from the matters on
record, the court has the authority to include them in its discussion of the controversy and to pass upon
them just as well. In brief, in those cases where questions not particularly raised by the parties surface as
necessary for the complete adjudication of the rights and obligations of the parties, the interests of justice
dictate that the court should consider and resolve them. The rule that only issues or theories raised in the
initial proceedings may be taken up by a party thereto on appeal should only refer to independent, not
concomitant matters, to support or oppose the cause of action or defense. The evil that is sought to be
avoided, i.e., surprise to the adverse party, is in reality not existent on matters that are properly litigated in
the lower court and appear on record.

It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an
advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions of the
letter of credit itself, the petitioner bank's letter of advice, its request for payment of advising fee, and the
admission of Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin to submit
documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously
make it a confirming bank. The fact, too, that the draft required by the letter of credit is to be drawn under
the account of General Chemicals (buyer) only means the same had to be presented to Bank of Ayudhya
(issuing bank) for payment. It may be significant to recall that the letter of credit is an engagement of the
issuing bank, not the advising bank, to pay the draft.
No less important is that Bank of America's letter of 11 March 1981 has expressly stated that "[t]he
enclosure is solely an advise of credit opened by the abovementioned correspondent and conveys no
engagement by us." 24 This written reservation by Bank of America in limiting its obligation only to being an
advising bank is in consonance with the provisions of U.C.P.

As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying
Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit. 25 The bare
statement of the bank employees, aforementioned, in responding to the inquiry made by Atty. Tanay, Inter-
Resin's representative, on the authenticity of the letter of credit certainly did not have the effect of novating
the letter of credit and Bank of America's letter of advise, 26 nor can it justify the conclusion that the bank
must now assume total liability on the letter of credit. Indeed, Inter-Resin itself cannot claim to have been all
that free from fault. As the seller, the issuance of the letter of credit should have obviously been a great
concern to it. 27 It would have, in fact, been strange if it did not, prior to the letter of credit, enter into a
contract, or negotiated at the every least, with General Chemicals. 28 In the ordinary course of business, the
perfection of contract precedes the issuance of a letter of credit.

Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising bank. The
view that Bank of America should have first checked the authenticity of the letter of credit with bank of
Ayudhya, by using advanced mode of business communications, before dispatching the same to Inter-Resin
finds no real support in U.C.P. Article 18 of the U.C.P. states that: "Banks assume no liability or
responsibility for the consequences arising out of the delay and/or loss in transit of any messages, letters or
documents, or for delay, mutilation or other errors arising in the transmission of any telecommunication . . ."
As advising bank, Bank of America is bound only to check the "apparent authenticity" of the letter of credit,
which it did. 29 Clarifying its meaning, Webster's Ninth New Collegiate Dictionary 30 explains that the word
"APPARENT suggests appearance to unaided senses that is not or may not be borne out by more rigorous
examination or greater knowledge."

May Bank of America then recover what it has paid under the letter of credit when the corresponding draft
for partial availment thereunder and the required documents were later negotiated with it by Inter-Resin?
The answer is yes. This kind of transaction is what is commonly referred to as a discounting arrangement.
This time, Bank of America has acted independently as a negotiating bank, thus saving Inter-Resin from the
hardship of presenting the documents directly to Bank of Ayudhya to recover payment. (Inter-Resin, of
course, could have chosen other banks with which to negotiate the draft and the documents.) As a
negotiating bank, Bank of America has a right to recourse against the issuer bank and until reimbursement
is obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability thereon. 31

While bank of America has indeed failed to allege material facts in its complaint that might have likewise
warranted the application of the Negotiable Instruments Law and possible then allowed it to even go after the
indorsers of the draft, this failure, 32/ nonetheless, does not preclude petitioner bank's right (as negotiating
bank) of recovery from Inter-Resin itself. Inter-Resin admits having received P10,219,093.20 from bank of
America on the letter of credit and in having executed the corresponding draft. The payment to Inter-Resin
has given, as aforesaid, Bank of America the right of reimbursement from the issuing bank, Bank of Ayudhya
which, in turn, would then seek indemnification from the buyer (the General Chemicals of Thailand). Since
Bank of Ayudhya disowned the letter of credit, however, Bank of America may now turn to Inter-Resin for
restitution.

Between the seller and the negotiating bank there is the usual relationship existing between a drawer and
purchaser of drafts. Unless drafts drawn in pursuance of the credit are indicated to be without recourse
therefore, the negotiating bank has the ordinary right of recourse against the seller in the event of dishonor
by the issuing bank . . . The fact that the correspondent and the negotiating bank may be one and the same
does not affect its rights and obligations in either capacity, although a special agreement is always a
possibility . . . 33

The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste instead of its products, is
really of no consequence. In the operation of a letter of credit, the involved banks deal only with documents
and not on goods described in those documents. 34

The other issues raised in then instant petition, for instance, whether or not Bank of Ayudhya did issue the
letter of credit and whether or not the main contract of sale that has given rise to the letter of credit has been
breached, are not relevant to this controversy. They are matters, instead, that can only be of concern to the
herein parties in an appropriate recourse against those, who, unfortunately, are not impleaded in these
proceedings.

In fine, we hold that —

First, given the factual findings of the courts below, we conclude that petitioner Bank of America has acted
merely as a notifying bank and did not assume the responsibility of a confirming bank; and

Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's partial availment as
beneficiary of the letter of credit which has been disowned by the alleged issuer bank.

No judgment of civil liability against the other defendants, Francisco Trajano and other unidentified parties,
can be made, in this instance, there being no sufficient evidence to warrant any such finding.
WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin Industrial Corporation is
ordered to refund to petitioner Bank of America NT & SA the amount of P10,219,093.20 with legal interest
from the filing of the complaint until fully paid.

No costs.

SO ORDERED.

7. PNB vs. San Miguel Corporation, GR No. 186063, January 15, 2014

G.R. No. 186063 January 15, 2014

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
SAN MIGUEL CORPORATION, Respondent.

DECISION

PERALTA, J.:

This treats of the petition for review on certiorari of the Decision1 and Resolution2 of the Court of Appeals
(CA), dated June 7 2008 and December 15, 2008, respectively, in CA-G.R. SP No. 01249-MIN.

The facts, as summarized by the CA, are as follows:

On July 1, 1996, respondent San Miguel Corporation (SMC, for brevity) entered into an Exclusive Dealership
Agreement with a certain Rodolfo R. Goroza (Goroza, hereafter), wherein the latter was given by SMC the
right to trade, deal, market or otherwise sell its various beer products.

Goroza applied for a credit line with SMC, but one of the requirements for the credit line was a letter of
credit. Thus, Goroza applied for and was granted a letter of credit by the PNB in the amount of two million
pesos (₱2,000,000.00). Under the credit agreement, the PNB has the obligation to release the proceeds of
Goroza's credit line to SMC upon presentation of the invoices and official receipts of Goroza's purchases of
SMC beer products to the PNB, Butuan Branch.

On August 1, 1996, Goroza availed of his credit line with PNB and started selling SMC's beer products x x x.

On February 11, 1997, Goroza applied for an additional credit line with the PNB. The latter granted Goroza a
one (1) year revolving credit line in the amount not exceeding two million four hundred thousand pesos
(₱2,400,000.00). Thus, Goroza's total credit line reached four million four hundred thousand pesos
(₱4,400,000.00) x x x. Initially, Goroza was able to pay his credit purchases with SMC x x x. Sometime in
January 1998, however, Goroza started to become delinquent with his accounts.

Demands to pay the amount of three million seven hundred twenty-two thousand four hundred forty pesos
and 88/100 (₱3,722,440.88) were made by SMC against Goroza and PNB, but neither of them paid. Thus, on
April 23, 2003, SMC filed a Complaint for collection of sum of money against PNB and Goroza with the
respondent Regional Trial Court Branch 3, Butuan City.3

After summons, herein petitioner filed its Answer,4 while Goroza did not. Upon respondent's Motion to
Declare Defendant in Default,5 Goroza was declared in default.

Trial ensued insofar as Goroza was concerned and respondent presented its evidence ex parte against the
former. Respondent made a formal offer of its exhibits on April 6, 2004 and the trial court admitted them on
June 16, 2004.

Thereafter, on January 21, 2005, pre-trial between PNB and SMC was held.6

On May 10, 2005, the RTC rendered a Decision,7 disposing as follows:

WHEREFORE, the Court hereby renders judgment in favor of plaintiff [SMC] ordering defendant Rodolfo
Goroza to pay plaintiff the following:

1. The principal amount of ₱3,722,440.00;

2. The interest of 12% per annum on the principal amount reckoned from January 27, 1998 up to the time
of execution of the Judgment of this case;

3. Attorney's fees of ₱30,000.00;

4. Litigation expenses of ₱20,000.00.

SO ORDERED.8
Goroza filed a Notice of Appeal,9 while SMC filed a Motion for Reconsideration.10

On July 14, 2005, the RTC granted SMC's motion for reconsideration. The trial court amended its Decision
by increasing the award of litigation expenses to ₱90,652.50.11

Thereafter, on July 25, 2005, the RTC issued an Order,12 pertinent portions of which read as follows:

xxxx

Finding the Notice of Appeal filed within the reglementary period and the corresponding appeal fee paid, x x
x. The same is hereby given due course.

Considering that the case as against defendant PNB is still on-going, let the Record in this case insofar as
defendant Rodolfo R. Goroza is concerned, be reproduced at the expense of defendant-appellant so that the
same can be forwarded to the Court of Appeals, together with the exhibits and transcript of stenographic
notes in the required number of copies.

SO ORDERED.13

In the meantime, trial continued with respect to PNB.

On September 27, 2005, PNB filed an Urgent Motion to Terminate Proceedings14 on the ground that a
decision was already rendered on May 10, 2005 finding Goroza solely liable.

The RTC denied PNB's motion in its Resolution15 dated October 11, 2005.

On October 14, 2005, the RTC issued a Supplemental Judgment,16 thus:

The Court omitted by inadvertence to insert in its decision dated May 10, 2005 the phrase "without prejudice
to the decision that will be made against the other co-defendant, PNB, which was not declared in default."

WHEREFORE, the phrase "without prejudice to the decision made against the other defendant PNB which
was not declared in default" shall be inserted in the dispositive portion of said decision.

SO ORDERED.17

On even date, the RTC also issued an Amended Order,18 to wit:

The Court's Order dated July 25, 2005 is hereby amended to include the phrase "this appeal applies only to
defendant Rolando Goroza and without prejudice to the continuance of the hearing on the other defendant
Philippine National Bank".

SO ORDERED.19

PNB then filed a Motion for Reconsideration20 of the above-quoted Supplemental Judgment and Amended
Order, but the RTC denied the said motion via its Resolution21 dated July 6, 2006.

Aggrieved, PNB filed a special civil action for certiorari with the CA imputing grave abuse of discretion on the
part of the RTC for having issued its July 6, 2006 Resolution.22

On June 17, 2008, the CA rendered its questioned Decision denying the petition and affirming the assailed
Resolution of the RTC.

PNB filed a Motion for Reconsideration,23 but the CA denied it in its assailed Resolution. Hence, the instant
petition with the following Assignment of Errors:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE TRIAL COURT WAS CORRECT IN RENDERING A
SUPPLEMENTAL JUDGMENT AND AMENDED ORDER AGAINST THE BANK DESPITE THE PERFECTION OF
APPEAL OF ONE OF THE DEFENDANTS.

THE COURT OF APPEALS ERRED IN HOLDING THAT PROCEEDINGS MAY CONTINUE AGAINST PNB
DESPITE THE COMPLETE ADJUDICATION OF RELIEF IN FAVOR OF SMC.24

PNB contends that the CA erred in holding that the RTC was correct in rendering its Supplemental
Judgment and Amended Order despite the perfection of Goroza's appeal. PNB claims that when Goroza's
appeal was perfected, the RTC lost jurisdiction over the entire case making the assailed Supplemental
Judgment and Amended Order void for having been issued without or in excess of jurisdiction.

PNB also argues that the CA erred in ruling that proceedings against it may continue in the RTC, despite the
trial court's complete adjudication of relief in favor of SMC. PNB avers that the May 10, 2005 Decision of the
RTC, finding Goroza solely liable to pay the entire amount sought to be recovered by SMC, has settled the
obligation of both Goroza and PNB, and that there is no longer any ground to hold PNB for trial and make a
separate judgment against it; otherwise, SMC will recover twice for the same cause of action.

The petition lacks merit.

It is clear from the proceedings held before and the orders issued by the RTC that the intention of the trial
court is to conduct separate proceedings to determine the respective liabilities of Goroza and PNB, and
thereafter, to render several and separate judgments for or against them. While ideally, it would have been
more prudent for the trial court to render a single decision with respect to Goroza and PNB, the procedure
adopted the RTC is, nonetheless, allowed under Section 4, Rule 36 of the Rules of Court, which provides that
"in an action against several defendants, the court may, when a several judgment is proper, render judgment
against one or more of them, leaving the action to proceed against the others." In addition, Section 5 of the
same Rule states that "when more than one claim for relief is presented in an action, the court at any stage,
upon a determination of the issues material to a particular claim and all counterclaims arising out of the
transaction or occurrence which is the subject matter of the claim may render a separate judgment disposing
of such claim." Further, the same provision provides that "the judgment shall terminate the action with
respect to the claim so disposed of and the action shall proceed as to the remaining claims." Thus, the appeal
of Goroza, assailing the judgment of the RTC finding him liable, will not prevent the continuation of the
ongoing trial between SMC and PNB. The RTC retains jurisdiction insofar as PNB is concerned, because the
appeal made by Goroza was only with respect to his own liability. In fact, PNB itself, in its Reply to
respondent's Comment, admitted that the May 10, 2005 judgment of the RTC was "decided solely against
defendant Rodolfo Goroza."25

The propriety of a several judgment is borne by the fact that SMC's cause of action against PNB stems from
the latter's alleged liability under the letters of credit which it issued. On the other hand, SMC's cause of
action against Goroza is the latter's failure to pay his obligation to the former.1âwphi1 As to the separate
judgment, PNB has a counterclaim against SMC which is yet to be resolved by the RTC.

Indeed, the issues between SMC and PNB which are to be resolved by the RTC, as contained in the trial
court's Pre-Trial Order dated January 21, 2005, were not addressed by the RTC in its Decision rendered
against Goroza. In particular, the RTC judgment against Goroza did not make any determination as to
whether or not PNB is liable under the letter of credit it issued and, if so, up to what extent is its liability. In
fact, contrary to PNB's claim, there is nothing in the RTC judgment which ruled that Goroza is "solely liable"
to pay the amount which SMC seeks to recover.

In this regard, this Court's disquisition on the import of a letter of credit, in the case ofTransfield Philippines,
Inc. v. Luzon Hydro Corporation,26 as correctly cited by the CA, is instructive, to wit:

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the
addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt
therefor to the addressee. A letter of credit, however, changes its nature as different transactions occur and if
carried through to completion ends up as a binding contract between the issuing and honoring banks
without any regard or relation to the underlying contract or disputes between the parties thereto.

xxxx

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and
the required documents are presented to it. The so-called "independence principle" assures the seller or the
beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing
bank from determining whether the main contract is actually accomplished or not. Under this principle,
banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or
superimposed thereon, nor do they assume any liability or responsibility for the description, quantity,
weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents,
or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the
carriers, or the insurers of the goods, or any other person whomsoever.

xxxx

As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as
irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the
stipulated documents are presented and the conditions of the credit are complied with. Precisely, the
independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties in
the main contract. As the principle's nomenclature clearly suggests, the obligation under the letter of credit
is independent of the related and originating contract. In brief, the letter of credit is separate and distinct
from the underlying transaction.27

In other words, PNB cannot evade responsibility on the sole ground that the RTC judgment found Goroza
liable and ordered him to pay the amount sought to be recovered by SMC. PNB's liability, if any, under the
letter of credit is yet to be determined.

WHEREFORE, the instant petition is DENIED. The Decision of the Court of Appeals, dated June 17, 2008,
and its Resolution dated December 15, 2008, both in CA-G.R. SP No. 01249-MIN, are AFFIRMED.
SO ORDERED.

III. WAREHOUSE RECEIPTS

1. PNB vs. Sayo, Jr., GR No. 129918, July 9, 1988

G.R. No. 129918 July 9, 1998

PHILIPPINE NATIONAL BANK, petitioner,

vs.

HON. MARCELINO L. SAYO, JR., in his capacity as Presiding Judge of the Regional Trial Court of Manila
(Branch 45), NOAH'S ARK SUGAR REFINERY, ALBERTO T. LOOYUKO, JIMMY T. GO and WILSON T. GO,
respondents.

DAVIDE, JR., J.:

In this special civil action for certiorari, actually the third dispute between the same private parties to have
reached this Court, 1 petitioner asks us to annul the orders 2 of 15 April 1997 and 14 July 1997 issued in
Civil Case No. 90-53023 by the Regional Trial Court, Manila, Branch 45. The first order 3 granted private
respondents' motion for execution to satisfy their warehouseman's lien against petitioner, while the second
order 4 denied, with finality, petitioner's motion for reconsideration of the first order and urgent motion to lift
garnishment, and private respondents' motion for partial reconsideration.

The factual antecedents until the commencement of G.R. No. 119231 were summarized in our decision
therein, as follows:

In accordance with Act No. 2137, the Warehouse Receipts Law, Noah's Ark Sugar Refinery issued on several
dates, the following Warehouse Receipts (Quedans): (a) March 1, 1989, Receipt No. 18062, covering sugar
deposited by Rosa Sy; (b) March 7, 1989, Receipt No. 18080, covering sugar deposited by RNS Merchandising
(Rosa Ng Sy); (c) March 21, 1989, Receipt No. 18081, covering sugar deposited by St. Therese Merchandising;
(d) March 31, 1989, Receipt No. 18086, covering sugar deposited by St. Therese Merchandising; and (e) April
1, 1989, Receipt No. 18087, covering sugar deposited by RNS Merchandising. The receipts are substantially
in the form, and contains the terms, prescribed for negotiable warehouse receipts by Section 2 of the law.

Subsequently, Warehouse Receipts Nos. 18080 and 18081 were negotiated and endorsed to Luis T. Ramos,
and Receipts Nos. 18086, 18087 and 18062 were negotiated and endorsed to Cresencia K. Zoleta. Ramos
and Zoleta then used the quedans as security for two loan agreements — one for P15.6 million and the other
for P23.5 million — obtained by them from the Philippine National Bank. The aforementioned quedans were
endorsed by them to the Philippine National Bank.

Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans upon maturity on January 9, 1990.
Consequently, on March 16, 1990, the Philippine National Bank wrote to Noah's Ark Sugar Refinery
demanding delivery of the sugar stocks covered by the quedans endorsed to it by Zoleta and Ramos. Noah's
Ark Sugar Refinery refused to comply with the demand alleging ownership thereof, for which reason the
Philippine National Bank filed with the Regional Trial Court of Manila a verified complaint for "Specific
Performance with Damages and Application for Writ of Attachment" against Noah's Ark Sugar Refinery,
Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go, the last three being identified as the sole proprietor,
managing partner, and Executive Vice President of Noah's Ark, respectively.

Respondent Judge Benito C. Se, Jr., [to] whose sala the case was raffled, denied the Application for
Preliminary Attachment. Reconsideration therefor was likewise denied.

Noah's Ark and its co-defendants filed an Answer with Counterclaim and Third-Party Complaint in which
they claimed that they [were] the owners of the subject quedans and the sugar represented therein, averring
as they did that:

9. * * * In an agreement dated April 1, 1989, defendants agreed to sell to Rosa Ng Sy of RNS

Merchandising and Teresita Ng of St. Therese Merchandising the total volume of sugar indicated in the
quedans stored at Noah's Ark Sugar Refinery for a total consideration of P63,000,000.00, * * * The
corresponding payments in the form of checks issued by the vendees in favor of defendants were
subsequently dishonored by the drawee banks by reason of "payment stopped" and "drawn against
insufficient funds," * * * Upon proper notification to said vendees and plaintiff in due course, defendants
refused to deliver to vendees therein the quantity of sugar covered by the subject quedans.

10. * * * Considering that the vendees and first endorsers of subject quedans did not acquire ownership
thereof, the subsequent endorsers and plaintiff itself did not acquire a better right of ownership than the
original vendees/first endorsers.

The Answer incorporated a Third-Party Complaint by Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go,
doing business under the trade name and style Noah's Ark Sugar Refinery against Rosa Ng Sy and Teresita
Ng, praying that the latter be ordered to deliver or return to them the quedans (previously endorsed to PNB
and the subject of the suit) and pay damages and litigation expenses.

The Answer of Rosa Ng Sy and Teresita Ng, dated September 6, 1990, one of avoidance, is essentially to the
effect that the transaction between them, on the one hand, and Jimmy T. Go, on the other, concerning the
quedans and the sugar stocks covered by them was merely a simulated one being part of the latter's complex
banking schemes and financial maneuvers, and thus, they are not answerable in damages to him.

On January 31, 1991, the Philippine National Bank filed a Motion for Summary Judgment in favor of the
plaintiff as against the defendants for the reliefs prayed for in the complaint.

On May 2, 1991, the Regional Trial Court issued an order denying the Motion for Summary Judgment.
Thereupon, the Philippine National Bank filed a Petition for Certiorari with the Court of Appeals, docketed as
CA-G.R. SP No. 25938 on December 13, 1997.

Pertinent portions of the decision of the Court of Appeals read:

In issuing the questioned Orders, the respondent Court ruled that "questions of law should be resolved after
and not before, the questions of fact are properly litigated." A scrutiny of defendant's affirmative defenses
does not show material questions of fact as to the alleged nonpayment of purchase price by the vendees/first
endorsers, and which nonpayment is not disputed by PNB as it does not materially affect PNB's title to the
sugar stocks as holder of the negotiable quedans.

What is determinative of the propriety of summary judgment is not the existence of conflicting claims from
prior parties but whether from an examination of the pleadings, depositions, admissions and documents on
file, the defenses as to the main issue do not tender material questions of fact (see Garcia vs. Court of
Appeals, 167 SCRA 815) or the issues thus tendered are in fact sham, fictitious, contrived, set up in bad
faith or so unsubstantial as not to constitute genuine issues for trial. (See Vergara vs. Suelto, et al., 156
SCRA 753; Mercado, et al. vs. Court of Appeals, 162 SCRA 75). [sic] The questioned Orders themselves do
not specify what material facts are in issue. (See Sec. 4, Rule 34, Rules of Court).

To require a trial notwithstanding pertinent allegations of the pleadings and other facts appearing on the
record, would constitute a waste of time and an injustice to the PNB whose rights to relief to which it is
plainly entitled would be further delayed to its prejudice.

In issuing the questioned Orders, We find the respondent Court to have acted in grave abuse of discretion
which justify holding null and void and setting aside the Orders dated May 2 and July 4, 1990 of respondent
Court, and that a summary judgment be rendered forthwith in favor of the PNB against Noah's Ark Sugar
Refinery, et al., as prayed for in petitioner's Motion for Summary Judgment.

On December 13, 1991, the Court of Appeals nullified and set aside the orders of May 2 and July 4, 1990 of
the Regional Trial Court and ordered the trial court to render summary judgment in favor of the PNB. On
June 18, 1992, the trial court rendered judgment dismissing plaintiffs complaint against private respondents
for lack of cause of action and likewise dismissed private respondent's counterclaim against PNB and of the
Third-Party Complaint and the Third-Party Defendant's Counterclaim. On September 4, 1992, the trial court
denied PNB's Motion for Reconsideration.

On June 9, 1992, the PNB filed an appeal from the RTC decision with the Supreme Court, G.R. No. 107243,
by way of a Petition for Review on Certiorari under Rule 45 of the Rules of Court. This Court rendered
judgment on September 1, 1993, the dispositive portion of which reads:

WHEREFORE, the trial judge's decision in Civil Case No. 90-53023, dated June 18, 7992, is reversed and set
aside and a new one rendered conformably with the final and executory decision of the Court of Appeals in
CA-G.R. SP No. 25938, ordering the private respondents Noah's Ark Sugar Refinery, Alberto T. Looyuko,
Jimmy T. Go and Wilson T. Go, jointly and severally:

(a) to deliver to the petitioner Philippine National Bank, "the sugar stocks covered by the Warehouse
Receipts/Quedans which are now in the latter's possession as holder for value and in due course; or
alternatively, to pay (said) plaintiff actual damages in the amount of P39.1 million," with legal interest
thereon from the filing of the complaint until full payment; and

(b) to pay plaintiff Philippine National Bank attorney's fees, litigation expenses and judicial costs hereby
fixed at the amount of One Hundred Fifty Thousand Pesos (P150,000.00) as well as the costs.

SO ORDERED.

On September 29, 1993, private respondents moved for reconsideration of this decision. A
Supplemental/Second Motion for Reconsideration with leave of court was filed by private respondents on
November 8, 1993. We denied private respondent's motion on January 10, 1994.

Private respondents filed a Motion Seeking Clarification of the Decision, dated September 1, 1993. We denied
this motion in this manner:
It bears stressing that the relief granted in this Court's decision of September 1, 1993 is precisely that set
out in the final and executory decision of the Court of Appeals in CA-G.R. SP No. 25938, dated December 13,
1991, which was affirmed in toto by this Court and which became unalterable upon becoming final and
executory.

Private respondents thereupon filed before the trial court an Omnibus Motion seeking among others the
deferment of the proceedings until private respondents [were] heard on their claim for warehouseman's lien.
On the other hand, on August 22, 1994, the Philippine National Bank filed a Motion for the Issuance of a
Writ of Execution and an Opposition to the Omnibus Motion filed by private respondents.

The trial court granted private respondents' Omnibus Motion on December 20, 1994 and set reception of
evidence on their claim for warehouseman's lien. The resolution of the PNB's Motion for Execution was
ordered deferred until the determination of private respondents' claim.

On February 21, 1995, private respondents' claim for lien was heard and evidence was received in support
thereof. The trial court thereafter gave both parties five (5) days to file respective memoranda.

On February 28, 1995, the Philippines National bank filed a Manifestation with Urgent Motion to Nullify
Court Proceedings. In adjudication thereof, the trial court issued the following order on March 1, 1995:

WHEREFORE, this court hereby finds that there exists in favor of the defendants a valid warehouseman's
lien under Section 27 of Republic Act 2137 and accordingly, execution of the judgment is hereby ordered
stayed and/or precluded until the full amount of defendants' lien on the sugar stocks covered by the five (5)
quedans subject of this action shall have been satisfied conformably with the provisions of Section 31 of
Republic Act 2137. 5

Unsatisfied with the trial court's order of 1 March 1995, herein petitioner filed with us G.R. No. 119231,
contending:

PNB'S RIGHT TO A WRIT OF EXECUTION IS SUPPORTED BY TWO FINAL AND EXECUTORY DECISIONS:
THE DECEMBER 13, 1991 COURT OF APPEALS [sic] DECISION IN CA-G.R. SP NO. 25938; AND, THE
NOVEMBER 9, 1992 SUPREME COURT DECISION IN G.R. NO. 107243. RESPONDENT RTC'S MINISTERIAL
AND MANDATORY DUTY IS TO ISSUE THE WRIT OF EXECUTION TO IMPLEMENT THE DECRETAL
PORTION OF SAID SUPREME COURT DECISION.

II

RESPONDENT RTC IS WITHOUT JURISDICTION TO HEAR PRIVATE RESPONDENTS' OMNIBUS MOTION.

THE CLAIMS SET FORTH IN SAID MOTION: (1) WERE ALREADY REJECTED BY THE SUPREME COURT IN
ITS MARCH 9, 1994 RESOLUTION DENYING PRIVATE RESPONDENTS' "MOTION FOR CLARIFICATION OF
DECISION" IN G.R. NO. 107243; AND (2) ARE BARRED FOREVER BY PRIVATE RESPONDENTS' FAILURE
TO INTERPOSE THEM IN THEIR ANSWER, AND FAILURE TO APPEAL FROM THE JUNE 18, 1992
DECISION IN CIVIL CASE NO. 90-52023.

III

RESPONDENT RTC'S ONLY JURISDICTION IS TO ISSUE THE WRIT TO EXECUTE THE SUPREME COURT
DECISION. THUS, PNB IS ENTITLED TO: (1) A WRIT OF CERTIORARI TO ANNUL THE RTC RESOLUTION
DATED DECEMBER 20, 1994 AND THE ORDER DATED FEBRUARY 7, 1995 AND ALL PROCEEDINGS
TAKEN BY THE RTC THEREAFTER; (2) A WRIT OF PROHIBITION TO PREVENT RESPONDENT RTC FROM
FURTHER PROCEEDING WITH CIVIL CASE NO. 90-53023 AND COMMITTING OTHER ACTS VIOLATIVE OF
THE SUPREME COURT DECISION IN G.R. NO. 107243; AND (3) A WRIT OF MANDAMUS TO COMPEL
RESPONDENT RTC TO ISSUE THE WRIT TO EXECUTE THE SUPREME COURT JUDGMENT IN FAVOR OF
PNB.

In our decision of 18 April 1996 in G.R. No. 119231, we held against herein petitioner as to these issues and
concluded:

In view of the foregoing, the rule may be simplified thus: While the PNB is entitled to the stocks of sugar as
the endorsee of the quedans, delivery to it shall be effected only upon payment of the storage fees.

Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in
accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods by
surrendering possession thereof. In other words, the lien may be lost where the warehouseman surrenders
the possession of the goods without requiring payment of his lien, because a warehouseman's lien is
possessory in nature.

We, therefore, uphold and sustain the validity of the assailed orders of public respondent, dated December
20, 1994 and March 1, 1995.
In fine, we fail to see any taint of abuse of discretion on the part of the public respondent in issuing the
questioned orders which recognized the legitimate right of Noah's Ark, after being declared as
warehouseman, to recover storage fees before it would release to the PNB sugar stocks covered by the five (5)
Warehouse Receipts. Our resolution, dated March 9, 1994, did not preclude private respondents' unqualified
right to establish its claim to recover storage fees which is recognized under Republic Act No. 2137. Neither
did the Court of Appeals' decision, dated December 13, 1991, restrict such right.

Our Resolution's reference to the decision by the Court of Appeals, dated December 13, 1991, in CA-G.R. SP
No. 25938, was intended to guide the parties in the subsequent disposition of the case to its final end. We
certainly did not foreclose private respondents' inherent right as warehouseman to collect storage fees and
preservation expenses as stipulated on the face of each of the Warehouse Receipts and as provided for in the
Warehouse Receipts Law (R.A. 2137). 6

Petitioner's motion to reconsider the decision in G.R. No. 119231 was denied.

After the decision in G.R. No. 119231 became final and executory, various incidents took place before the
trial court in Civil Case No. 90-53023. The petition in this case summarizes these as follows:

3.24 Pursuant to the abovementioned Supreme Court Decision, private respondents filed a Motion for
Execution of Defendants' Lien as Warehouseman dated 27 November 1996. A photocopy of said Motion for
Execution is attached hereto as Annex "I".

3.25 PNB opposed said Motion on the following grounds:

(a) The lien claimed by Noah's Ark in the unbelievable amount of P734,341,595.06 is illusory; and

(b) There is no legal basis for execution of defendants' lien as warehouseman unless and until PNB
compels the delivery of the sugar stocks.

3.26 In their Reply to Opposition dated 18 January 1997, private respondents pointed out that a lien
existed in their favor, as held by the Supreme Court. In its Rejoinder dated 7 February 1997, PNB countered
private respondents' argument, pointing out that the dispositive portion of the court a quo's Order dated 1
March 1995 failed to state the amount for which execution may be granted and, thus, the same could not be
the subject of execution; and (b) private respondents should instead file a separate action to prove the
amount of its claim as warehouseman.

3.27 The court a quo, this time presided by herein public respondent, Hon. Marcelino L. Sayo Jr., granted
private respondents' Motion for Execution. In its questioned Order dated 15 April 1997 (Annex "A"), the court
a quo ruled in this wise:

Accordingly, the computation of accrued storage fees and preservation charges presented in evidence by the
defendants, in the amount of P734,341,595.06 as of January 31, 1995 for the 86,356.41, 50 kg. bags of
sugar, being in order and with sufficient basis, the same should be granted. This Court consequently rejects
PNB's claim of no sugar no lien, since it is undisputed that the amount of the accrued storage fees is
substantially in excess of the alternative award of P39.1 Million in favor of PNB, including legal interest and
P150,000.00 in attorney's fees, which PNB is however entitled to be credited . . . .

xxx xxx xxx

WHEREFORE, premises considered and finding merit in the defendants' motion for execution of their claim
for lien as warehouseman, the same is hereby GRANTED. Accordingly, let a writ of execution issue for the
amount of P662,548,611.50, in accordance with the above disposition.

SO ORDERED. (Emphasis supplied.)

3.28 On 23 April 1997, PNB was immediately served with a Writ of Execution for the amount of
P662,548,611.50 in spite of the fact that it had not yet been served with the Order of the court a quo dated
15 April 1997. PNB thus filed an Urgent Motion dated 23 April 1997 seeking the deferment of the
enforcement of the Writ of Execution. A photocopy of the Writ of Execution is attached hereto as Annex "J".

3.29 Nevertheless, the Sheriff levied on execution several properties of PNB. Firstly, a Notice of Levy dated
24 April 1997 on a parcel of land with an area of Ninety-Nine Thousand Nine Hundred Ninety-Nine (99,999)
square meters, covered by Transfer Certificate of Title No. 23205 in the name of PNB, was served upon the
Register of Deeds of Pasay City. Secondly, a Notice of Garnishment dated 23 April 1997 on fund deposits of
PNB was served upon the Bangko Sentral ng Pilipinas. Photocopies of the Notice of Levy and the Notice of
Garnishment are attached hereto as Annexes "K" and "L" respectively.

3.30 On 28 April 1997, petitioner filed a Motion for Reconsideration with Urgent Prayer for Quashal of Writ
of Execution dated 15 April 1997. Petitioner's Motion was based on the following grounds:

(1) Noah's Ark is not entitled to a warehouseman's lien in the humongous amount of P734,341,595.06
because the same has been waived for not having been raised earlier as either counterclaim or defense
against PNB;
(2) Assuming said lien has not been waived, the same, not being registered, is already barred by
prescription and/or laches,

(3) Assuming further that said lien has not been waived nor barred, still there was no complaint ever
filed in court to effectively commence this entirely new cause of action;

(4) There is no evidence on record which would support and sustain the claim of P734,341,595.06 which
is excessive, oppressive and unconscionable;

(5) Said claim if executed would constitute unjust enrichment to the serious prejudice of PNB and
indirectly the Philippine Government, who innocently acquired the sugar quedans through assignment of
credit;

(6) In all respects, the decisions of both the Supreme Court and of the former Presiding Judge of the trial
court do not contain a specific determination and/or computation of warehouseman's lien, thus requiring
first and foremost a fair hearing of PNB's evidence, to include the true and standard industry rates on sugar
storage fees, which if computed at such standard rate of thirty centavos per kilogram per month, shall result
in the sum of about Three Hundred Thousand Pesos only.

3.31 In its Motion for Reconsideration, petitioner prayed for the following reliefs:

1. PNB be allowed in the meantime to exercise its basic right to present evidence in order to prove the
above allegations especially the true and reasonable storage fees which may be deducted from PNB's
judgment award of P39.1 Million, which storage fees if computed correctly in accordance with standard
sugar industry rates, would amount to only P300 Thousand Pesos, without however waiving or abandoning
its (PNB's) legal positions/contentions herein abovementioned.

2. The Order dated April 15, 1997 granting the Motion for Execution by defendant Noah's Ark be set
aside.

3. The execution proceedings already commenced by said sheriffs be nullified at whatever stage of
accomplishment.

A photocopy of petitioner's Motion for Reconsideration with Urgent Prayer for Quashal of Writ of Execution is
attached hereto and made integral part hereof as Annex "M".

3.32 Private respondents filed an Opposition with Motion for Partial Reconsideration dated 8 May 1997.
Still discontented with the excessive and staggering amount awarded to them by the court a quo, private
respondents' Motion for Partial Reconsideration sought additional and continuing storage fees over and
above what the court a quo had already unjustly awarded. A photocopy of private respondents' Opposition
with Motion for Partial Reconsideration dated 8 May 1997 is attached hereto as Annex "N".

3.32.1 Private respondents prayed for the further amount of P227,375,472.00 in storage fees from 1
February 1995 until 15 April 1997, the date of the questioned Order granting their Motion for Execution.

3.32.2 In the same manner, private respondents prayed for a continuing amount of P345,424.00 as daily
storage fees after 15 April 1997 until the total amount of the storage fees is satisfied.

3.33 On 19 May 1997, PNB filed its Reply with Opposition (To Defendants' Opposition with Partial Motion
for Reconsideration), containing therein the following motions: (i) Supplemental Motion for Reconsideration;
(ii) Motion to Strike out the Testimony of Noah's Ark's Accountant Last February 21, 1995; and (iii) Motion
for the Issuance of a Writ of Execution in favor of PNB. In support of its pleading, petitioner raised the
following:

(1) Private respondents failed to pay the appropriate docket fees either for its principal claim or for its
additional claim, as said claims for warehouseman's lien were not at all mentioned in their answer to
petitioner's Complaint;

(2) The amount awarded by the court a quo was grossly and manifestly unreasonable, excessive, and
oppressive;

(3) It is the dispositive portion of the decision which shall be controlling in any execution proceeding. If
no specific award is stated in the dispositive portion, a writ of execution supplying an amount not included
in the dispositive portion of the decision being executed is null and void;

(4) Private respondents failed to prove the existence of the sugar stocks in Noah's Ark's warehouses.
Thus, private respondents' claims are mere paper liens which cannot be the subject of execution;

(5) The attendant circumstances, particularly Judge Se's Order of 1 March 1995 onwards, were tainted
with fraud and absence of due process, as PNB was not given a fair opportunity to present its evidence on
the matter of the warehouseman's lien. Thus, all orders prescinding thereform, including the questioned
Order dated 15 April 1997 must perforce be set aside and the execution proceedings against PNB be
permanently stayed.

3.34 On 6 May 1997, petitioner also filed an Urgent Motion to Lift Garnishment of PNB Funds with Bangko
Sentral ng Pilipinas.

3.35 On 14 July 1997, respondent Judge issued the second Order (Annex "B"), the questioned part of the
dispositive portion of which states:

WHEREFORE, premises considered, the plaintiff Philippine National Bank's subject "Motion for
Reconsideration With Urgent Prayer for Quashal of Writ of Execution" dated April 28, 1997 and undated
"Urgent Motion to Lift Garnishment of PNB Funds With Bangko Sentral ng Pilipinas" filed on May 6, 1997,
together with all its related Motions are all DENIED with finality for lack of merit.

xxx xxx xxx

The Order of this Court dated April 15, 1997, the final Writ of Execution likewise dated April 15, 1997 and
the corresponding Garnishment all stand firm.

SO ORDERED.7

Aggrieved thereby, petitioners filed this petition, alleging as grounds therefor, the following:

A. THE COURT A QUO ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE
ABUSE OF DISCRETION WHEN IT ISSUED A WRIT OF EXECUTION IN FAVOR OF DEFENDANTS FOR THE
AMOUNT OF P734,341,595.06.

4.1 The court a quo had no authority to issue a writ of execution in favor of private respondents as there
was no final and executory judgment ripe for execution.

4.2 Public respondent judge patently exceeded the scope of his authority in making a determination of
the amount of storage fees due private respondents in a mere interlocutory order resolving private
respondents' Motion for Execution.

4.3 The manner in which the court a quo awarded storage fees in favor of private respondents and
ordered the execution of said award was arbitrary and capricious, depriving petitioner of its inherent
substantive and procedural rights.

B. EVEN ASSUMING ARGUENDO THAT THE COURT A QUO HAD AUTHORITY TO GRANT PRIVATE
RESPONDENTS' MOTION FOR EXECUTION, THE COURT A QUO ACTED WITH GRAVE ABUSE OF
DISCRETION IN AWARDING THE HIGHLY UNREASONABLE, UNCONSCIONABLE, AND EXCESSIVE
AMOUNT OF P734,341,595.06 IN FAVOR OF PRIVATE RESPONDENTS.

4.4 There is no basis for the court a quo's award of P734,341,595.06 representing private respondents'
alleged warehouseman's lien.

4.5 PNB has sufficient evidence to show that the astronomical amount claimed by private respondents is
very much in excess of the industry rate for storage fees and preservation expenses.

C. PUBLIC RESPONDENT JUDGE'S GRAVE ABUSE OF DISCRETION BECOMES MORE PATENT AFTER
A CLOSE PERUSAL OF THE QUESTIONED ORDER DATED 14 JULY 1997.

4.6. The court a quo resolved a significant and consequential matter entirely relying on documents
submitted by private respondents totally disregarding clearly contrary evidence submitted by PNB.

4.7 The court a quo misquoted and misinterpreted the Supreme Court Decision dated 18 April 1997.

D. THE COURT A QUO ACTED WITH GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT
PRIVATE RESPONDENTS HAVE LONG WAIVED THEIR RIGHT TO CLAIM ANY WAREHOUSEMAN'S LIEN.

4.8 Private respondents raised the matter of their entitlement to a warehouseman's lien for storage fees
and preservation expenses for the first time only during the execution proceedings of the Decision in favor of
PNB.

4.9 Private respondents' claim for warehouseman's lien is in the nature of a compulsory counterclaim
which should have been included in private respondents' answer to the Complaint. Private respondents failed
to include said claim in their answer either as a counterclaim or as an alternative defense to PNB's
Complaint.

4.10 Private respondents' clam is likewise lost by virtue of a specific provision of the Warehouse Receipts
Law and barred by prescription and laches.
E. PUBLIC RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF DISCRETION IN REFUSING TO
LIFT THE ORDER OF GARNISHMENT OF THE FUNDS OF PNB WITH THE BANGKO SENTRAL NG
PILIPINAS.

4.11 Public respondent judge failed to consider PNB's arguments in support of its Urgent motion to Lift
Garnishment. 8

In arguing its cause, petitioner explained that this Court's decision in G.R. No. 119231 merely affirmed the
trial court's resolutions of 20 December 1994 and 1 March 1995. The earlier resolution set private
respondents' reception of evidence for hearing to prove their warehouseman's lien and, pending
determination thereof, deferred petitioner's motion for execution of the summary judgment rendered in
petitioner's favor in G.R. No. 107243. The subsequent resolution recognized the existence of a valid
warehouseman's lien without, however, specifying the amount, and required its full satisfaction by petitioner
prior to the execution of the judgment in G.R. No. 107243.

Under said circumstances, petitioner reiterated that neither this Court's decision nor the trial court's
resolutions specified any amount for the warehouseman's lien, either in the bodies or dispositive portions
thereof. Petitioner therefore questioned the propriety of the computation of the warehouseman's lien in the
assailed order of 15 April 1997.

Petitioner further characterized as highly irregular the trial court's final determination of such lien in a mere
interlocutory order without explanation, as such should or could have been done only by way of a judgment
on the merits. Petitioner likewise reasoned that a writ of execution was proper only to implement a final and
executory decision, which was not present in the instant case. Petitioner then cited the cases of Edward v.
Arce, where we ruled that the only portion of the decision which could be the subject of execution was that
decreed in the dispositive part, 9 and Ex-Bataan Veterans Security Agency, Inc. v. National Labor Relations
Commission, 10 where we held that a writ of execution should conform to the dispositive portion to be
executed, otherwise, execution becomes void if in excess of and beyond the original judgment.

Petitioner likewise emphasized that the hearing of 21 February 1995 was marred by procedural infirmities,
narrating that the trial court proceeded with the hearing notwithstanding the urgent motion for
postponement of petitioner's counsel of record, who attended a previously scheduled hearing in Pampanga.
However, petitioner's lawyer-representative was sent to confirm the allegations in said motion. To petitioner's
dismay, instead of granting a postponement, the trial court allowed the continuance of the hearing on the
basis that there was "nothing sensitive about [the presentation of private respondents' evidence]." 11 At the
same hearing, the trial court admitted all the documentary evidence offered by private respondents and
ordered the filing of the parties' respective memoranda. Hence, petitioner was virtually deprived of its right to
cross-examine the witness, comment on or object to the offer of evidence and present countervailing
evidence. In fact, to date, petitioner's urgent motion to nullify the court proceedings remains unresolved.

To stress its point, petitioner underscores the conflicting views of Judge Benito C. Se, Jr., who heard and
tried almost the entire proceedings, and his successor, Judge Marcelino L. Sayo, Jr., who issued the assailed
orders. In the resolution 12 of 1 March 1995, Judge Se found private respondents' claim for warehouse lien
in the amount of P734,341,595.06 unacceptable, thus:

In connection with [private respondents'] claim for payment of warehousing fees and expenses, this Court
cannot accept [private respondents'] pretense that they are entitled to storage fees and preservation expenses
in the amount of P734,341,595.06 as shown in their Exhibits "1" to "11". There would, however, appear to be
legal basis for their claim for fees and expenses covered during the period from the time of the issuance of
the five (5) quedans until demand for their delivery was made by [petitioner] prior to the institution of the
present action. [Petitioner] should not be made to shoulder the warehousing fees and expenses after the
demand was made. . . . 13

Since it was deprived of a fair opportunity to present its evidence on the warehouseman's lien due Noah's
Ark, petitioner submitted the following documents: (1) an affidavit of petitioner's credit investigator 14 and
his report 15 indicating that Noah's Ark only had 1,490, 50kg. bags, and not 86,356.41, 50kg. bags, of sugar
in its warehouse; (2) Noah's Ark's reports 16 for 1990-94 showing that it did not have sufficient sugar stock
to cover the quantity specified in the subject quedans, (3) Circular Letter No. 18 (s. 1987-88) 17 of the Sugar
Regulatory Administration requiring sugar mill companies to submit reports at week's end to prevent the
issuance of warehouse receipts not covered by actual inventory; and (4) an affidavit of petitioner's assistant
vice president 18 alleging that Noah's Ark's daily storage fee of P4/bag exceeded the prevailing industry rate.

Petitioner, moreover, laid stress on the fact that in the questioned order of 14 July 1997, the trial court relied
solely on the Annual Synopsis of Production & Performance Date/Annual Compendium of Performance by
Philippine Sugar Refineries from 1989 to 1994, in disregard of Noah's Ark's certified reports that it did not
have sufficient sugar stock to cover the quantity specified in the subject quedans. Between the two,
petitioner urged, the latter should have been accorded greater evidentiary weight.

Petitioner then argued that the trial court's second assailed order of 14 July 1997 misinterpreted our
decision in G.R. No. 119231 by ruling that the Refining Contract under which the subject sugar stock was
produced bound the parties. According to petitioner, the Refining Contract never existed, it having been
denied by Rosa Ng Sy; thus, the trial court could not have properly based its computation of the
warehouseman's lien on the Refining Contract. Petitioner maintained that a separate trial was necessary to
settle the issue of the warehouseman's lien due Noah's Ark, if at all proper.

Petitioner further asserted that Noah's Ark could no longer recover its lien, having raised the issue for the
first time only during the execution proceedings of this Court's decision in G.R. No. 107243. As said claim
was a separate cause of action which should have been raised in private respondents' answer with
counterclaim to petitioner's complaint, private respondents' failure to raise said claim should have been
deemed a waiver thereof.

Petitioner likewise insisted that under Section 29 19 of the Warehouse Receipts Law, private respondents
were barred from claiming the warehouseman's lien due to their refusal to deliver the goods upon petitioner's
demand. Petitioner further raised that private respondents failed to timely assert their claim within the five-
year prescriptive period, citing Article 1149 20 of the New Civil Code.

Finally, petitioner questioned the trial court's refusal to lift the garnishment order considering that the levy
on its real property, with an estimated market value of P6,000,000,000, was sufficient to satisfy the
judgment award; and contended that the garnishment was contrary to Section 103 21 of the Bangko Sentral
ng Pilipinas Law (Republic Act No. 7653).

On 8 August 1997, we required respondents to comment on the petition and issued a temporary restraining
order enjoining the trial court form implementing its orders of 15 April and 14 July 1997.

In their comment, private respondents first sought the lifting of the temporary restraining order, claiming
that petitioner could no longer seek a stay of the execution of this Court's decision in G.R. No. 119231 which
had become final and executory; and the petition raised factual issues which had long been resolved in the
decision in G.R. No. 119231, thereby rendering the instant petition moot and academic. They underscored
that CA-G.R. No. SP No. 25938, G.R. No. 107243 and G.R. No. 119231 all sustained their claim for a
warehouseman's lien, while the storage fees stipulated in the Refining Contract had the approval of the
Sugar Regulatory Authority. Likewise, under the Warehouse Receipts Law, full payment of their lien was a
pre-requisite to their obligation to release and deliver the sugar stock to petitioner.

Anent the trial court's jurisdiction to determine the warehouseman's lien, private respondents maintained
that such had already been established. Accordingly, the resolution of 1 March 1995 declared that they were
entitled to a warehouseman's lien, for which reason, the execution of the judgment in favor of petitioner was
stayed until the latter's full payment of the lien. This resolution was then affirmed by this Court in our
decision in G.R. No. 119231. Even assuming the trial court erred, the error could only have been in the
wisdom of its findings and not of jurisdiction, in which case, the proper remedy of petitioner should have
been an appeal and certiorari did not lie.

Private respondents also raised the issue of res judicata as a bar to the instant petition, i.e., the March
resolution was already final and unappealable, having been resolved in G.R. No. 119231, and the orders
assailed here were issued merely to implement said resolution.

Private respondents then debunked the claim that petitioner was denied due process. In that February
hearing, petitioner was represented by counsel who failed to object to the presentation and offer of their
evidence consisting of the five quedans, Refining Contracts with petitioner and other quedan holders, and the
computation resulting in the amount of P734,341,595.06, among other documents. Private respondents even
attached a copy of the transcript of stenographic notes 22 to their comment. In refuting petitioner's
argument that no writ of execution could issue in absence of a specific amount in the dispositive portion of
this Court's decision in G.R. No. 119231, private respondents argued that any ambiguity in the decision
could be resolved by referring to the entire record of the case, 23 even after the decision had become final.

Private respondents next alleged that the award of P734,341,595.06 to satisfy their warehouseman's lien was
in accordance with the stipulations provided in the quedans and the corresponding Refining Contracts, and
that the validity of said documents had been recognized by this Court in our decision in G.R. No. 119231.
Private respondents then questioned petitioner's failure to oppose or rebut the evidence they presented and
bewailed its belated attempts to present contrary evidence through its pleadings. Nonetheless, said evidence
was even considered by the trial court when petitioner sought a reconsideration of the first assailed order of
15 April 1997, thus further precluding any claim of denial of due process.

Private respondents next pointed to the fact that they consistently claimed that they had not been paid for
storing the sugar stock, which prompted them to file criminal charges of estafa and violation of Batas
Pambansa (BP) Blg. 22 against Rosa Ng Sy and Teresita Ng. In fact, Sy was eventually convicted of two
counts of violation of BP Blg. 22. Private respondents, moreover, incurred, and continue to incur, expenses
for the storage and preservation of the sugar stock; and denied having waived their warehouseman's lien, an
issue already raised and rejected by this Court in G.R. No. 119231.

Private respondents further claimed that the garnishment order was proper, only that it was rendered
ineffective. In a letter 24 received by the sheriff from the Bangko Sentral ng Pilipinas, it was stated that the
garnishment could not be enforced since petitioner's deposits with the Bangko Sentral ng Pilipinas consisted
solely of legal reserves which were exempt from garnishment. Petitioner therefore suffered no damage from
said garnishment. Private respondents likewise deemed immaterial petitioner's argument that the writ of
execution issued against its real property in Pasay City was sufficient, considering its prevailing market
value of P6,000,000,000 was in excess of the warehouseman's lien; and invoked Rule 39 of the 1997 Rules of
Civil Procedure, which provided that the sheriff must levy on all the property of the judgment debtor,
excluding those exempt from execution, in the execution of a money judgment.

Finally, private respondents accused petitioner of coming to court with unclean hands, specifically citing its
misrepresentation that the award of the warehouseman's lien would result in the collapse of its business.
This claim, private respondents asserted, was contradicted by petitioner's 1996 Audited Financial Statement
indicating that petitioner's assets amounted to billions of pesos, and its 1996 Annual Report to its
stockholders where petitioner declared that the pending legal actions arising from their normal course of
business "will not materially affect the Group's financial position." 25

In reply, petitioner advocated that resort to the remedy of certiorari was proper since the assailed orders were
interlocutory, and not a final judgment or decision. Further, that it was virtually deprived of its
constitutional right to due process was a valid issue to raise in the instant petition; and not even the doctrine
of res judicata could bar this petition as the element of a final and executory judgment was lacking.
Petitioner likewise disputed the claim that the resolution of 1 March 1995 was final and executory, otherwise
private respondents would not have filed an opposition and motion for partial reconsideration 26 two years
later. Petitioner also contended that the issues raised in this petition were not resolved in G.R. No. 119231,
as what was resolved there was private respondents' mere entitlement to a warehouseman's lien, without
specifying a corresponding amount. In the instant petition, the issues pertained to the amount and
enforceability of said lien based on the arbitrary manner the amount was determined by the trial court.

Petitioner further argued that the refining contracts private respondents invoked could not bind the former
since it was not a party thereto. In fact, said contracts were not even attached to the quedans when
negotiated; and that their validity was repudiated by a supposed party thereto, Rosa Ng Sy, who claimed that
the contract was simulated, thus void pursuant to Article 1345 of the New Civil Code. Should the refining
contracts in turn be declared void, petitioner advocated that any determination by the court of the existence
and amount of the warehouseman's lien due should be arrived at using the test of reasonableness. Petitioner
likewise noted that the other refining contracts 27 presented by private respondents to show similar storage
fees were executed between the years 1996 and 1997, several years after 1989. Thus, petitioner concluded,
private respondents could not claim that the more recent and increased rates where those which prevailed in
1989.

Finally, petitioner asserted that in the event that this Court should uphold the trial court's determination of
the amount of the warehouseman's lien, petitioner should be allowed to exercise its option as a judgment
obligor to specify which of its properties may be levied upon, citing Section 9(b), Rule 39 of the 1997 Rules of
Civil Procedure. Petitioner claimed to have been deprived of this option when the trial court issued the
garnishment and levy orders.

The petition was set for oral argument on 24 November 1997 where the parties addressed the following
issues we formulated for them to discuss:

(1) Is this special civil action the appropriate remedy?

(2) Has the trial court the authority to issue a writ of execution on Noah's Ark's claims for storage fees
considering that this Court in G.R. No. 119231 merely sustained the trial court's order of 20 December 1994
granting the Noah's Ark Omnibus Motion and setting the reception of evidence on its claims for storage fees,
and of 1 March 1995 finding that there existed in favor of Noah's Ark a warehouseman's lien under Section
27 of R.A. No. 2137 and directing that the execution of the judgment in favor of PNB be stayed and/or
precluded until the full amount of Noah's Ark's lien is satisfied conformably with Section 31 of R.A. No.
2137?

(3) Is [petitioner] liable for storage fees (a) from the issuance of the quedans in 1989 to Rosa Sy, St.
Therese Merchandising and RNS Merchandising, up to their assignment by endorsees Ramos and Zoleta to
[petitioner] for their loan; or (b) after [petitioner] has filed an action for specific performance and damages
(Civil Case No. 90-53023) against Noah's Ark for the latter's failure to comply with [petitioner's] demand for
the delivery of the sugar?

(4) Did respondent Judge commit grave abuse of discretion as charged? 28

In our resolution of 24 November 1997, we summarized the positions of the parties on these issues, thus:

Expectedly, counsel for petitioner submitted that certiorari under Rule 65 of the Rules of Court is the proper
remedy and not an ordinary appeal, contending, among others, that the order of execution was not final. On
the other hand, counsel for respondents maintained that petitioner PNB disregarded the hierarchy of courts
as it bypassed the Court of Appeals when it filed the instant petition before this Court.

On the second issue, counsel for petitioner submitted that the trial court had no authority to issue the writ
of execution or if it had, it denied PNB due process when it held PNB liable for the astronomical amount or
P734,341,595.06 as warehouseman's lien or storage fees. Counsel for respondent, on the other hand,
contended that the trial court's authority to issue the questioned writ of execution is derived from the
decision in G.R. No. 119231 which decision allegedly provided for ample or sufficient parameters for the
computation of the storage fees.
On the third issue, counsel for petitioner while presupposing that PNB may be held to answer for storage
fees, contended that the same should start from the time the endorsees of the sugar quedans defaulted in
their payments, i.e., 1990 because before that, respondent Noah's Ark's claim was that it was the owner of
the sugar covered by the quedans. On the other hand, respondents' counsel pointed out that PNB's liability
should start from the issuance of the quedans in 1989.

The arguments on the fourth issue, hinge on the parties' arguments for or against the first three issues.
Counsel for petitioner stressed that the trial court indeed committed a grave abuse of discretion, while
respondents' counsel insisted that no grave abuse of discretion was committed by the trial court. 29

Private respondents likewise admitted that during the pendency of the case, they failed to avail of their
options as a warehouseman. Concretely, they could have enforced their lien through the foreclosure of the
goods or the filing of an ordinary civil action. Instead, they sought to execute this Court's judgment in G.R.
No. 119231. They eventually agreed that petitioner's liability for the warehouseman's lien should be reckoned
from the time it stepped into the shoes of the original depositors. 30

In our resolution of 24 November 1997, we required the parties to simultaneously submit their respective
memoranda within 30 days or, in the alternative, a compromise agreement should a settlement be achieved.
Notwithstanding efforts exerted by the parties, no mutually acceptable solution was reached.

In their respective memoranda, the parties reiterated or otherwise buttressed the arguments raised in their
previous pleadings and during the oral arguments on 24 November 1997, especially on the formulated
issues.

The petition is meritorious.

We shall take up the formulated issues in seriatim.

A. This Special Civil Action is an Appropriate Remedy.

A careful perusal of the first assailed order shows that the trial court not only granted the motion for
execution, but also appreciated the evidence in the determination of the warehouseman's lien; formulated its
computation of the lien; and adopted an offsetting of the parties' claims. Ineluctably, the order as in the
nature of a final order for it left nothing else to be resolved thereafter. Hence, petitioner's remedy was to
appeal therefrom. 31 Nevertheless, petitioner was not precluded from availing of the extraordinary remedy of
certiorari under Rule 65 of the Rules of Court. It is well-settled that the availability of an appeal does not
foreclose recourse to the extraordinary remedies of certiorari or prohibition where appeal is not adequate, or
equally beneficial, speedy and sufficient. 32

Petitioner assailed the challenged orders as having been issued without or in excess of jurisdiction or with
grave abuse of discretion and alleged that it had no other plain, speedy and adequate remedy in the ordinary
course of law. As hereafter shown, these claims were not unfounded, thus the propriety of this special civil
action is beyond question.

This Court had original jurisdiction, concurrent with that of Regional Trial Courts and the Court of Appeals,
over petitions for certiorari, prohibition, mandamus, quo warranto and habeas curpus, 33 and we entertain
direct resort to us in cases where special and important reasons or exceptional and compelling
circumstances justify the same. 34 These reasons and circumstances are present here.

B. Under the Special Circumstances in This Case, Private

Respondents May Enforce Their Warehouseman 's Lien
in Civil Case No. 90-53023.

The remedies available to a warehouseman, such as private respondents, to enforce his warehouseman's lien
are:

(1) To refuse to deliver the goods until his lien is satisfied, pursuant to Section 31 of the Warehouse
Receipt Law;

(2) To sell the goods and apply the proceeds thereof to the value of the lien pursuant to Sections 33 and
34 of the Warehouse Receipts Law; and

(3) By other means allowed by law to a creditor against his debtor, for the collection from the depositor of
all charges and advances which the depositor expressly or impliedly contracted with the warehouseman to
pay under Section 32 of the Warehouse Receipt Law; or such other remedies allowed by law for the
enforcement of a lien against personal property under Section 35 of said law. The third remedy is sought
judicially by suing for the unpaid charges. 35

Initially, private respondents availed of the first remedy. However, when petitioner moved to execute the
judgment in G.R. No. 107243 before the trial court, private respondents, in turn, moved to have the
warehouse charges and fees due them determined and thereafter sought to collect these from petitioners.
While the most appropriate remedy for private respondents was an action for collection, in G.R. No. 119231,
we already recognized their right to have such charges and fees determined in Civil Case No. 90-53023. The
import of our holding in G.R. No. 119231 was that private respondents were likewise entitled to a judgment
on their warehouse charges and fees, and the eventual satisfaction thereof, thereby avoiding having to file
another action to recover these charges and fees, which would only have further delayed the resolution of the
respective claims of the parties, and as a corollary thereto, the indefinite deferment of the execution of the
judgment in G.R. No. 107243. Thus we note that petitioner, in fact, already acquiesced to the scheduled
dates previously set for the hearing on private respondents' warehouseman's charges.

However, as will be shown below, it would be premature to execute the order fixing the warehouseman's
charges and fees.

C. Petitioner is Liable for Storage Fees.

We confirmed petitioner's liability for storage fees in G.R. No. 119231. However, petitioner's status as to the
quedans must first be clearly defined and delineated to be able to determine the extent of its liability.

Petitioner insisted, both in its petition and during the oral arguments on 24 November 1997, that it was a
mere pledgee as the quedans were used to secure two loans it granted. 36 In our decision in G.R. No.
107243, we upheld this contention of petitioner, thus;

Zoleta and Ramos then used the quedans as security for loans obtained by them from the Philippine National
Bank (PNB) as security for loans obtained by them in the amounts of P23.5 million and P15.6 million,
respectively. These quedans they indoors to the bank. 37

As such, Martinez v. Philippine National Bank 38 becomes relevant:

In conclusion, we hold that where a warehouse receipt or quedan is transferred or endorsed to a creditor
only to secure the payment of a loan or debt, the transferee or endorsee does not automatically become the
owner of the goods covered by the warehouse receipt or quedan but he merely retains the right to keep and
with the consent of the owner to sell them so as to satisfy the obligation from the proceeds of the sale, this
for the simple reason that the transaction involved is not a sale but only a mortgage or pledge, and that if the
property covered by the quedans or warehouse receipts is lost without the fault or negligence of the
mortgagee or pledgee or the transferee or endorsee of the warehouse receipt or quedan, then said goods are
to be regarded as lost on account of the real owner, mortgagor or pledgor.

The indorsement and delivery of the warehouse receipts (quedans) by Ramos and Zoleta to petitioner was not
to convey "title" to or ownership of the goods but to secure (by way of pledge) the loans granted to Ramos and
Zoleta by petitioner. The indorsement of the warehouse receipts (quedans), to perfect the pledge, 39 merely
constituted a symbolical or constructive delivery of the possession of the thing thus encumbered. 40

The creditor, in a contract of real security, like pledge, cannot appropriate without foreclosure the things
given by way of pledge. 41 Any stipulation to the contrary, termed pactum commissorio, is null and void. 42
The law requires foreclosure in order to allow a transfer of title of the good given by way of security from its
pledgor, 43 and before any such foreclosure, the pledgor, not the pledgee, is the owner of the goods. In
Philippine National Bank v. Atendido, 44 we said:

The delivery of the palay being merely by way of security, it follows that by the nature of the transaction its
ownership remains with the pledgor subject only to foreclosure in case of non-fulfillment of the obligation. By
this we mean that if the obligation is not paid upon maturity the most that the pledgee can do is to sell the
property and apply the proceeds to the payment of the obligation and to return the balance, if any, to the
pledgor (Art. 1872, Old Civil Code [Art. 2112, New Civil Code]). This is the essence of this contract, for,
according to law, a pledgee cannot become the owner of, nor appropriate to himself, the thing given in pledge
(Article 1859, Old Civil Code [Art. 2088, New Civil Code]). . . The fact that the warehouse receipt covering
palay was delivered, endorsed in blank, to the bank does not alter the situation, the purpose of such
endorsement being merely to transfer the juridical possession of the property to the pledgees and to forestall
any possible disposition thereof on the part of the pledgor. This is true notwithstanding the provisions of the
Warehouse Receipt Law.

The warehouseman, nevertheless, is entitled to the warehouseman's lien that attaches to the goods invokable
against anyone who claims a right of possession thereon.

The next issue to resolve is the duration of time the right of petitioner over the goods may be held subject to
the warehouseman's lien.

Sec. 8, 29 and 31 of the Warehouse Receipts Law now come to fore. They provide, as follows:

Sec. 8. Obligation of warehousemen to deliver. — A warehouseman, in the absence of some lawful excuse
provided by this Act, is bound to deliver the goods upon a demand made either by the holder of a receipt for
the goods or by the depositor, if such demand is accompanied with:

(a) An offer to satisfy warehouseman's lien;

(b) An offer to surrender the receipt, if negotiable, with such indorsements as would be necessary for the
negotiation of the receipt; and

(c) A readiness and willingness to sign, when the goods are delivered, an acknowledgment that they have
been delivered, if such signature is requested by the warehouseman.

In case the warehouseman refuses or fails to deliver the goods in compliance with a demand by the holder or
depositor so accompanied, the burden shall be upon the warehouseman to establish the existence of a lawful
excuse for such refusal.

Sec. 29. How the lien may be lost. — A warehouseman loses his lien upon goods;

(a) By surrendering possession thereof, or.

(b) By refusing to deliver the goods when a demand is made with which he is bound to comply under the
provisions of this Act.

Sec. 31. Warehouseman need not deliver until lien is satisfied. — A warehouseman having a lien valid
against the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied.

Simply put, where a valid demand by the lawful holder of the quedans for the delivery of the goods is refused
by the warehouseman, despite the absence of a lawful excuse provided by the statute itself, the
warehouseman's lien is thereafter concomitantly lost. As to what the law deems a valid demand, Section 8
enumerates what must accompany a demand; while as regards the reasons which a warehouseman may
invoke to legally refuse to effect delivery of the goods covered by the quedans, these are:

(1) That the holder of the receipt does not satisfy the conditions prescribed in Section 8 of the Act. (See
Sec. 8, Act No. 2137)

(2) That the warehouseman has legal title in himself on the goods, such title or right being derived
directly or indirectly from a transfer made by the depositor at the time of or subsequent to the deposit for
storage, or from the warehouseman's lien. (Sec. 16, Act No. 2137)

(3) That the warehouseman has legally set up the title or right of third persons as lawful defense for non-
delivery of the goods as follows:

(a) Where the warehouseman has been requested, by or on behalf of the person lawfully entitled to a
right of property of or possession in the goods, not to make such delivery (Sec. 10, Act No. 2137), in which
case, the warehouseman may, either as a defense to an action brought against him for nondelivery of the
goods, or as an original suit, whichever is appropriate, require all known claimants to interplead (Sec. 17,
Act No. 2137);

(b) Where the warehouseman had information that the delivery about to be made was to one not lawfully
entitled to the possession of the goods (Sec. 14 Act No. 2137), in which case, the warehouseman shall be
excused from liability for refusing to deliver the goods, either to the depositor or person claiming under him
or to the adverse claimant, until the warehouseman has had a reasonable time to ascertain the validity of the
adverse claims or to bring legal proceedings to compel all claimants to interplead (Sec. 18, Act No. 2137); and

(c) Where the goods have already been lawfully sold to third persons to satisfy a warehouseman's lien, or
have been lawfully sold or disposed of because of their perishable or hazardous nature. (Sec. 36, Act No.
2137).

(4) That the warehouseman having a lien valid against the person demanding the goods refuses to deliver
the goods to him until the lien is satisfied. (Sec. 31 Act No. 2137)

(5) That the failure was not due to any fault on the part of the warehouseman, as by showing that, prior
to demand for delivery and refusal, the goods were stolen or destroyed by fire, flood, etc., without any
negligence on his part, unless he has contracted so as to be liable in such case, or that the goods have been
taken by the mistake of a third person without the knowledge or implied assent of the warehouseman, or
some other justifiable ground for non-delivery. (67 C.J. 532) 45

Regrettably, the factual settings do not sufficiently indicate whether the demand to obtain possession of the
goods complied with Section 8 of the law. The presumption, nevertheless, would be that the law was
complied with, rather than breached, by petitioner. Upon the other hand, it would appear that the refusal of
private respondents to deliver the goods was not anchored on a valid excuse, i.e., non-satisfaction of the
warehouseman's lien over the goods, but on an adverse claim of ownership. Private respondents justified
their refusal to deliver the goods, as stated in their Answer with Counterclaim and Third-Party Complaint in
Civil Case No. 90-53023, by claiming that they "are still the legal owners of the subject quedans and the
quantity of sugar represented therein." Under the circumstances, this hardly qualified as a valid, legal
excuse. The loss of the warehouseman's lien, however, does not necessarily mean the extinguishment of the
obligation to pay the warehousing fees and charges which continues to be a personal liability of the owners,
i.e., the pledgors, not the pledgee, in this case. But even as to the owners-pledgors, the warehouseman fees
and charges have ceased to accrue from the date of the rejection by Noah's Ark to heed the lawful demand by
petitioner for the release of the goods.

The finality of our denial in G.R. No. 119231 of petitioner's petition to nullify the trial court's order of 01
March 1995 confirms the warehouseman's lien; however, such lien, nevertheless, should be confined to the
fees and charges as of the date in March 1990 when Noah's Ark refused to heed PNB's demand for delivery of
the sugar stocks and in no event beyond the value of the credit in favor of the pledgee (since it is basic that,
in foreclosures, the buyer does not assume the obligations of the pledgor to his other creditors even while
such buyer acquires title over the goods less any existing preferred lien thereover). 46 The foreclosure of the
thing pledged, it might incidentally be mentioned, results in the full satisfaction of the loan liabilities to the
pledgee of the pledgors. 47

D. Respondent Judge Committed Grave Abuse of Discretion.

We hold that the trial court deprived petitioner of due process in rendering the challenged order of 15 April
1996 without giving petitioner an opportunity to present its evidence. During the final hearing of the case,
private respondents commenced and concluded their presentation of evidence as to the matter of the
existence of and amount owing due to their warehouseman's lien. Their exhibits were duly marked and
offered and the trial court thereafter ruled, to wit:

Court: Order.

With the admission of Exhibits "1" to "11", inclusive of submarkings, as part of the testimony of Benigno
Bautista, the defendant [private respondents] is given five (5) days from today to file its memorandum.
Likewise, plaintiff [petitioner] is given five (5) days, from receipt of defendants' [private respondents']
memorandum, to file its comment thereto. Thereafter the same shall be deemed submitted for decision.

SO ORDERED. 48

Nowhere in the transcript of stenographic notes, however, does it show that petitioner was afforded an
opportunity to comment on, much less, object to, private respondents' offer of exhibits, or even present its
evidence on the matter in dispute. In fact, petitioner immediately moved to nullify the proceedings conducted
during that hearing, but its motion was ignored and never resolved by the trial court. Moreover, it cannot be
said that petitioner's filing of subsequent pleadings, where it attached its affidavits and documents to contest
the warehouseman's lien, was sufficient to fully satisfy the requirements of due process. The subsequent
pleadings were filed only to show that petitioner had evidence to refute the claims of private respondents or
that the latter were not entitled thereto, but could not have adequately substituted for a full-blown
opportunity to present its evidence, given the exorbitant amounts involved. This, when coupled with the fact
that the motion to postpone the hearing filed by petitioner's counsel was not unreasonable, leads us to
conclude that petitioner's right to fully present its case was rendered nugatory. It is thus evident to us that
there was undue and unwarranted haste on the part of respondent court to rule in favor of private
respondents. We do not hesitate to say that any tilt of the scales of justice, no matter how slight, evokes
suspicion and erodes a litigant's faith and hope in seeking recourse before courts of law.

Likewise do we refuse to give credence to private respondents' allegation that the parties agreed that
petitioner's presentation of evidence would be submitted on the basis of affidavits, 49 without, however,
specifying any order or written agreement to that effect.

It is interesting to note that among the evidence petitioner wanted to present were reports obtained from
Noah's Ark, disclosing that the latter failed to maintain a sufficient inventory to satisfy the sugar stock
covered by the subject quedans. This was a serious allegation, and on that score alone, the trial court should
have allowed a hearing on the matter, especially in light of the magnitude of the claims sought. If it turns out
to be true that the stock of sugar Noah's Ark had in possession was below the quantities specified in the
quedans, then petitioner should not be made to pay for storage and preservation expenses for non-existent
goods.

It was likewise grave abuse of discretion on the part of respondent court to order immediate execution of the
15 April 1997 order. We ruled earlier that said order was in the nature of a final order fixing the amount of
the warehouseman's charges and fees, and petitioner's net liability, after the set-off of the money judgment
in its favor in G.R. No. 107243. Section 1 of Rule 39 of the Rules of Court explicitly provides that execution
shall issue as a matter of right, on motion, upon a judgment or order that disposes of the action or
proceeding upon the expiration of the period to appeal therefrom if no appeal has been duly perfected.
Execution pending appeal is, however, allowed in Section 2 thereof, but only on motion with due notice to
the adverse party, more importantly, only "upon good reasons shown in a special order." Here, there is no
showing that a motion for execution pending appeal was filed and that a special order was issued by
respondent court. Verily, the immediate execution only served to further strengthen our perception of undue
and unwarranted haste on the part of respondent court in resolving the issue of the warehouseman's lien in
favor of private respondents.

In light of the above, we need not rule anymore on the fourth formulated issue.

WHEREFORE, the petition is GRANTED. The challenged orders of 15 April and 14 July 1997, including the
notices of levy and garnishment, of the Regional Trial Court of Manila, Branch 45, in Civil Case No. 90-
53023 are REVERSED and SET ASIDE, and said court is DIRECTED to conduct further proceedings in said
case:

(1) to allow petitioner to present its evidence on the matter of the warehouseman's lien;

(2) to compute the petitioner's warehouseman's lien in light of the foregoing observations; and

(3) to determine whether, for the relevant period, Noah's Ark maintained a sufficient inventory to cover
the volume of sugar specified in the quedans.

Costs against private respondents.

SO ORDERED.

IV. CHATTEL MORTGAGE

1. Tsai vs. CA, GR No. 120098, October 2, 2001

G.R. No. 120098 October 2, 2001

RUBY L. TSAI, petitioner,

vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS, INC. and MAMERTO R VILLALUZ, respondents.

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

[G.R. No. 120109. October 2, 2001.]

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,

vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS and MAMERTO R VILLALUZ, respondents.

QUISUMBING, J.:

These consolidated cases assail the decision1 of the Court of Appeals in CA-G.R. CV No. 32986, affirming the
decision2 of the Regional Trial Court of Manila, Branch 7, in Civil Case No. 89-48265. Also assailed is
respondent court's resolution denying petitioners' motion for reconsideration.

On November 26, 1975, respondent Ever Textile Mills, Inc. (EVERTEX) obtained a three million peso
(P3,000,000.00) loan from petitioner Philippine Bank of Communications (PBCom). As security for the loan,
EVERTEX executed in favor of PBCom, a deed of Real and Chattel Mortgage over the lot under TCT No.
372097, where its factory stands, and the chattels located therein as enumerated in a schedule attached to
the mortgage contract. The pertinent portions of the Real and Chattel Mortgage are quoted below:

MORTGAGE

(REAL AND CHATTEL)

xxx xxx xxx

The MORTGAGOR(S) hereby transfer(s) and convey(s), by way of First Mortgage, to the MORTGAGEE, . . .
certain parcel(s) of land, together with all the buildings and improvements now existing or which may
hereafter exist thereon, situated in . . .

"Annex A"

(Real and Chattel Mortgage executed by Ever Textile Mills in favor of PBCommunications — continued)

LIST OF MACHINERIES & EQUIPMENT

A. Forty Eight (48) units of Vayrow Knitting Machines-Tompkins made in Hongkong:

Serial Numbers Size of Machines

xxx xxx xxx

B. Sixteen (16) sets of Vayrow Knitting Machines made in Taiwan.

xxx xxx xxx

C. Two (2) Circular Knitting Machines made in West Germany.

xxx xxx xxx

D. Four (4) Winding Machines.

xxx xxx xxx

SCHEDULE "A"

I. TCT # 372097 - RIZAL

xxx xxx xxx

II. Any and all buildings and improvements now existing or hereafter to exist on the above-mentioned
lot.

III. MACHINERIES & EQUIPMENT situated, located and/or installed on the above-mentioned lot located
at . . .

(a) Forty eight sets (48) Vayrow Knitting Machines . . .

(b) Sixteen sets (16) Vayrow Knitting Machines . . .

(c) Two (2) Circular Knitting Machines . . .

(d) Two (2) Winding Machines . . .

(e) Two (2) Winding Machines . . .

IV. Any and all replacements, substitutions, additions, increases and accretions to above properties.

xxx xxx xxx3

On April 23, 1979, PBCom granted a second loan of P3,356,000.00 to EVERTEX. The loan was secured by a
Chattel Mortgage over personal properties enumerated in a list attached thereto. These listed properties were
similar to those listed in Annex A of the first mortgage deed.

After April 23, 1979, the date of the execution of the second mortgage mentioned above, EVERTEX
purchased various machines and equipments.

On November 19, 1982, due to business reverses, EVERTEX filed insolvency proceedings docketed as SP
Proc. No. LP-3091-P before the defunct Court of First Instance of Pasay City, Branch XXVIII. The CFI issued
an order on November 24, 1982 declaring the corporation insolvent. All its assets were taken into the
custody of the Insolvency Court, including the collateral, real and personal, securing the two mortgages as
abovementioned.

In the meantime, upon EVERTEX's failure to meet its obligation to PBCom, the latter commenced
extrajudicial foreclosure proceedings against EVERTEX under Act 3135, otherwise known as "An Act to
Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgages" and Act
1506 or "The Chattel Mortgage Law". A Notice of Sheriff's Sale was issued on December 1, 1982.

On December 15, 1982, the first public auction was held where petitioner PBCom emerged as the highest
bidder and a Certificate of Sale was issued in its favor on the same date. On December 23, 1982, another
public auction was held and again, PBCom was the highest bidder. The sheriff issued a Certificate of Sale on
the same day.

On March 7, 1984, PBCom consolidated its ownership over the lot and all the properties in it. In November
1986, it leased the entire factory premises to petitioner Ruby L. Tsai for P50,000.00 a month. On May 3,
1988, PBCom sold the factory, lock, stock and barrel to Tsai for P9,000,000.00, including the contested
machineries.

On March 16, 1989, EVERTEX filed a complaint for annulment of sale, reconveyance, and damages with the
Regional Trial Court against PBCom, alleging inter alia that the extrajudicial foreclosure of subject mortgage
was in violation of the Insolvency Law. EVERTEX claimed that no rights having been transmitted to PBCom
over the assets of insolvent EVERTEX, therefore Tsai acquired no rights over such assets sold to her, and
should reconvey the assets.

Further, EVERTEX averred that PBCom, without any legal or factual basis, appropriated the contested
properties, which were not included in the Real and Chattel Mortgage of November 26, 1975 nor in the
Chattel Mortgage of April 23, 1979, and neither were those properties included in the Notice of Sheriff's Sale
dated December 1, 1982 and Certificate of Sale . . . dated December 15, 1982.

The disputed properties, which were valued at P4,000,000.00, are: 14 Interlock Circular Knitting Machines,
1 Jet Drying Equipment, 1 Dryer Equipment, 1 Raisin Equipment and 1 Heatset Equipment.
The RTC found that the lease and sale of said personal properties were irregular and illegal because they
were not duly foreclosed nor sold at the December 15, 1982 auction sale since these were not included in the
schedules attached to the mortgage contracts. The trial court decreed:

WHEREFORE, judgment is hereby rendered in favor of plaintiff corporation and against the defendants:

1. Ordering the annulment of the sale executed by defendant Philippine Bank of Communications in
favor of defendant Ruby L. Tsai on May 3, 1988 insofar as it affects the personal properties listed in par. 9 of
the complaint, and their return to the plaintiff corporation through its assignee, plaintiff Mamerto R. Villaluz,
for disposition by the Insolvency Court, to be done within ten (10) days from finality of this decision;

2. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of
P5,200,000.00 as compensation for the use and possession of the properties in question from November
1986 to February 1991 and P100,000.00 every month thereafter, with interest thereon at the legal rate per
annum until full payment;

3. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of P50,000.00
as and for attorney's fees and expenses of litigation;

4. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of P200,000.00
by way of exemplary damages;

5. Ordering the dismissal of the counterclaim of the defendants; and

6. Ordering the defendants to proportionately pay the costs of suit.

SO ORDERED.4

Dissatisfied, both PBCom and Tsai appealed to the Court of Appeals, which issued its decision dated August
31, 1994, the dispositive portion of which reads:

WHEREFORE, except for the deletion therefrom of the award; for exemplary damages, and reduction of the
actual damages, from P100,000.00 to P20,000.00 per month, from November 1986 until subject personal
properties are restored to appellees, the judgment appealed from is hereby AFFIRMED, in all other respects.
No pronouncement as to costs.5

Motion for reconsideration of the above decision having been denied in the resolution of April 28, 1995,
PBCom and Tsai filed their separate petitions for review with this Court.

In G.R No. 120098, petitioner Tsai ascribed the following errors to the respondent court:

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN EFFECT MAKING A CONTRACT
FOR THE PARTIES BY TREATING THE 1981 ACQUIRED MACHINERIES AS CHATTELS INSTEAD OF REAL
PROPERTIES WITHIN THEIR EARLIER 1975 DEED OF REAL AND CHATTEL MORTGAGE OR 1979 DEED
OF CHATTEL MORTGAGE.

II

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN HOLDING THAT THE DISPUTED
1981 MACHINERIES ARE NOT REAL PROPERTIES DEEMED PART OF THE MORTGAGE — DESPITE THE
CLEAR IMPORT OF THE EVIDENCE AND APPLICABLE RULINGS OF THE SUPREME COURT.

III

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN DEEMING PETITIONER A

PURCHASER IN BAD FAITH.

IV

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN ASSESSING PETITIONER ACTUAL
DAMAGES, ATTORNEY'S FEES AND EXPENSES OF LITIGATION — FOR WANT OF VALID FACTUAL AND
LEGAL BASIS.

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN HOLDING AGAINST PETITIONER'S
ARGUMENTS ON PRESCRIPTION AND LACHES.6

In G.R. No. 120098, PBCom raised the following issues:

I.
DID THE COURT OF APPEALS VALIDLY DECREE THE MACHINERIES LISTED UNDER PARAGRAPH 9 OF
THE COMPLAINT BELOW AS PERSONAL PROPERTY OUTSIDE OF THE 1975 DEED OF REAL ESTATE
MORTGAGE AND EXCLUDED THEM FROM THE REAL PROPERTY EXTRAJUDICIALLY FORECLOSED BY
PBCOM DESPITE THE PROVISION IN THE 1975 DEED THAT ALL AFTER-ACQUIRED PROPERTIES DURING
THE LIFETIME OF THE MORTGAGE SHALL FORM PART THEREOF, AND DESPITE THE UNDISPUTED
FACT THAT SAID MACHINERIES ARE BIG AND HEAVY, BOLTED OR CEMENTED ON THE REAL PROPERTY
MORTGAGED BY EVER TEXTILE MILLS TO PBCOM, AND WERE ASSESSED FOR REAL ESTATE TAX
PURPOSES?

II

CAN PBCOM, WHO TOOK POSSESSION OF THE MACHINERIES IN QUESTION IN GOOD FAITH,
EXTENDED CREDIT FACILITIES TO EVER TEXTILE MILLS WHICH AS OF 1982 TOTALLED P9,547,095.28,
WHO HAD SPENT FOR MAINTENANCE AND SECURITY ON THE DISPUTED MACHINERIES AND HAD TO
PAY ALL THE BACK TAXES OF EVER TEXTILE MILLS BE LEGALLY COMPELLED TO RETURN TO EVER
THE SAID MACHINERIES OR IN LIEU THEREOF BE ASSESSED DAMAGES. IS THAT SITUATION
TANTAMOUNT TO A CASE OF UNJUST ENRICHMENT?7

The principal issue, in our view, is whether or not the inclusion of the questioned properties in the foreclosed
properties is proper. The secondary issue is whether or not the sale of these properties to petitioner Ruby
Tsai is valid.

For her part, Tsai avers that the Court of Appeals in effect made a contract for the parties by treating the
1981 acquired units of machinery as chattels instead of real properties within their earlier 1975 deed of Real
and Chattel Mortgage or 1979 deed of Chattel Mortgage.8 Additionally, Tsai argues that respondent court
erred in holding that the disputed 1981 machineries are not real properties.9 Finally, she contends that the
Court of Appeals erred in holding against petitioner's arguments on prescription and laches10 and in
assessing petitioner actual damages, attorney's fees and expenses of litigation, for want of valid factual and
legal basis.11

Essentially, PBCom contends that respondent court erred in affirming the lower court's judgment decreeing
that the pieces of machinery in dispute were not duly foreclosed and could not be legally leased nor sold to
Ruby Tsai. It further argued that the Court of Appeals' pronouncement that the pieces of machinery in
question were personal properties have no factual and legal basis. Finally, it asserts that the Court of
Appeals erred in assessing damages and attorney's fees against PBCom.

In opposition, private respondents argue that the controverted units of machinery are not "real properties"
but chattels, and, therefore, they were not part of the foreclosed real properties, rendering the lease and the
subsequent sale thereof to Tsai a nullity.12

Considering the assigned errors and the arguments of the parties, we find the petitions devoid of merit and
ought to be denied.

Well settled is the rule that the jurisdiction of the Supreme Court in a petition for review on certiorari under
Rule 45 of the Revised Rules of Court is limited to reviewing only errors of law, not of fact, unless the factual
findings complained of are devoid of support by the evidence on record or the assailed judgment is based on
misapprehension of facts.13 This rule is applied more stringently when the findings of fact of the RTC is
affirmed by the Court of Appeals.14

The following are the facts as found by the RTC and affirmed by the Court of Appeals that are decisive of the
issues: (1) the "controverted machineries" are not covered by, or included in, either of the two mortgages, the
Real Estate and Chattel Mortgage, and the pure Chattel Mortgage; (2) the said machineries were not included
in the list of properties appended to the Notice of Sale, and neither were they included in the Sheriff's Notice
of Sale of the foreclosed properties.15

Petitioners contend that the nature of the disputed machineries, i.e., that they were heavy, bolted or
cemented on the real property mortgaged by EVERTEX to PBCom, make them ipso facto immovable under
Article 415 (3) and (5) of the New Civil Code. This assertion, however, does not settle the issue. Mere nuts
and bolts do not foreclose the controversy. We have to look at the parties' intent.

While it is true that the controverted properties appear to be immobile, a perusal of the contract of Real and
Chattel Mortgage executed by the parties herein gives us a contrary indication. In the case at bar, both the
trial and the appellate courts reached the same finding that the true intention of PBCOM and the owner,
EVERTEX, is to treat machinery and equipment as chattels. The pertinent portion of respondent appellate
court's ruling is quoted below:

As stressed upon by appellees, appellant bank treated the machineries as chattels; never as real properties.
Indeed, the 1975 mortgage contract, which was actually real and chattel mortgage, militates against
appellants' posture. It should be noted that the printed form used by appellant bank was mainly for real
estate mortgages. But reflective of the true intention of appellant PBCOM and appellee EVERTEX was the
typing in capital letters, immediately following the printed caption of mortgage, of the phrase "real and
chattel." So also, the "machineries and equipment" in the printed form of the bank had to be inserted in the
blank space of the printed contract and connected with the word "building" by typewritten slash marks. Now,
then, if the machineries in question were contemplated to be included in the real estate mortgage, there
would have been no necessity to ink a chattel mortgage specifically mentioning as part III of Schedule A a
listing of the machineries covered thereby. It would have sufficed to list them as immovables in the Deed of
Real Estate Mortgage of the land and building involved.

As regards the 1979 contract, the intention of the parties is clear and beyond question. It refers solely to
chattels. The inventory list of the mortgaged properties is an itemization of sixty-three (63) individually
described machineries while the schedule listed only machines and 2,996,880.50 worth of finished cotton
fabrics and natural cotton fabrics.16

In the absence of any showing that this conclusion is baseless, erroneous or uncorroborated by the evidence
on record, we find no compelling reason to depart therefrom.

Too, assuming arguendo that the properties in question are immovable by nature, nothing detracts the
parties from treating it as chattels to secure an obligation under the principle of estoppel. As far back as
Navarro v. Pineda, 9 SCRA 631 (1963), an immovable may be considered a personal property if there is a
stipulation as when it is used as security in the payment of an obligation where a chattel mortgage is
executed over it, as in the case at bar.

In the instant case, the parties herein: (1) executed a contract styled as "Real Estate Mortgage and Chattel
Mortgage," instead of just "Real Estate Mortgage" if indeed their intention is to treat all properties included
therein as immovable, and (2) attached to the said contract a separate "LIST OF MACHINERIES &
EQUIPMENT". These facts, taken together, evince the conclusion that the parties' intention is to treat these
units of machinery as chattels. A fortiori, the contested after-acquired properties, which are of the same
description as the units enumerated under the title "LIST OF MACHINERIES & EQUIPMENT," must also be
treated as chattels.

Accordingly, we find no reversible error in the respondent appellate court's ruling that inasmuch as the
subject mortgages were intended by the parties to involve chattels, insofar as equipment and machinery were
concerned, the Chattel Mortgage Law applies, which provides in Section 7 thereof that: "a chattel mortgage
shall be deemed to cover only the property described therein and not like or substituted property thereafter
acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything
in the mortgage to the contrary notwithstanding."

And, since the disputed machineries were acquired in 1981 and could not have been involved in the 1975 or
1979 chattel mortgages, it was consequently an error on the part of the Sheriff to include subject
machineries with the properties enumerated in said chattel mortgages.

As the auction sale of the subject properties to PBCom is void, no valid title passed in its favor.
Consequently, the sale thereof to Tsai is also a nullity under the elementary principle of nemo dat quod non
habet, one cannot give what one does not have.17

Petitioner Tsai also argued that assuming that PBCom's title over the contested properties is a nullity, she is
nevertheless a purchaser in good faith and for value who now has a better right than EVERTEX.

To the contrary, however, are the factual findings and conclusions of the trial court that she is not a
purchaser in good faith. Well-settled is the rule that the person who asserts the status of a purchaser in
good faith and for value has the burden of proving such assertion.18 Petitioner Tsai failed to discharge this
burden persuasively.

Moreover, a purchaser in good faith and for value is one who buys the property of another without notice
that some other person has a right to or interest in such property and pays a full and fair price for the same,
at the time of purchase, or before he has notice of the claims or interest of some other person in the
property.19 Records reveal, however, that when Tsai purchased the controverted properties, she knew of
respondent's claim thereon. As borne out by the records, she received the letter of respondent's counsel,
apprising her of respondent's claim, dated February 27, 1987.20 She replied thereto on March 9, 1987.21
Despite her knowledge of respondent's claim, she proceeded to buy the contested units of machinery on May
3, 1988. Thus, the RTC did not err in finding that she was not a purchaser in good faith.

Petitioner Tsai's defense of indefeasibility of Torrens Title of the lot where the disputed properties are located
is equally unavailing. This defense refers to sale of lands and not to sale of properties situated therein.
Likewise, the mere fact that the lot where the factory and the disputed properties stand is in PBCom's name
does not automatically make PBCom the owner of everything found therein, especially in view of EVERTEX's
letter to Tsai enunciating its claim.

Finally, petitioners' defense of prescription and laches is less than convincing. We find no cogent reason to
disturb the consistent findings of both courts below that the case for the reconveyance of the disputed
properties was filed within the reglementary period. Here, in our view, the doctrine of laches does not apply.
Note that upon petitioners' adamant refusal to heed EVERTEX's claim, respondent company immediately
filed an action to recover possession and ownership of the disputed properties. There is no evidence showing
any failure or neglect on its part, for an unreasonable and unexplained length of time, to do that which, by
exercising due diligence, could or should have been done earlier. The doctrine of stale demands would apply
only where by reason of the lapse of time, it would be inequitable to allow a party to enforce his legal rights.
Moreover, except for very strong reasons, this Court is not disposed to apply the doctrine of laches to
prejudice or defeat the rights of an owner.22

As to the award of damages, the contested damages are the actual compensation, representing rentals for the
contested units of machinery, the exemplary damages, and attorney's fees.

As regards said actual compensation, the RTC awarded P100,000.00 corresponding to the unpaid rentals of
the contested properties based on the testimony of John Chua, who testified that the P100,000.00 was based
on the accepted practice in banking and finance, business and investments that the rental price must take
into account the cost of money used to buy them. The Court of Appeals did not give full credence to Chua's
projection and reduced the award to P20,000.00.

Basic is the rule that to recover actual damages, the amount of loss must not only be capable of proof but
must actually be proven with reasonable degree of certainty, premised upon competent proof or best
evidence obtainable of the actual amount thereof.23 However, the allegations of respondent company as to
the amount of unrealized rentals due them as actual damages remain mere assertions unsupported by
documents and other competent evidence. In determining actual damages, the court cannot rely on mere
assertions, speculations, conjectures or guesswork but must depend on competent proof and on the best
evidence obtainable regarding the actual amount of loss.24 However, we are not prepared to disregard the
following dispositions of the respondent appellate court:

. . . In the award of actual damages under scrutiny, there is nothing on record warranting the said award of
P5,200,000.00, representing monthly rental income of P100,000.00 from November 1986 to February 1991,
and the additional award of P100,000.00 per month thereafter.

As pointed out by appellants, the testimonial evidence, consisting of the testimonies of Jonh (sic) Chua and
Mamerto Villaluz, is shy of what is necessary to substantiate the actual damages allegedly sustained by
appellees, by way of unrealized rental income of subject machineries and equipments.

The testimony of John Cua (sic) is nothing but an opinion or projection based on what is claimed to be a
practice in business and industry. But such a testimony cannot serve as the sole basis for assessing the
actual damages complained of. What is more, there is no showing that had appellant Tsai not taken
possession of the machineries and equipments in question, somebody was willing and ready to rent the same
for P100,000.00 a month.

xxx xxx xxx

Then, too, even assuming arguendo that the said machineries and equipments could have generated a rental
income of P30,000.00 a month, as projected by witness Mamerto Villaluz, the same would have been a gross
income. Therefrom should be deducted or removed, expenses for maintenance and repairs . . . Therefore, in
the determination of the actual damages or unrealized rental income sued upon, there is a good basis to
calculate that at least four months in a year, the machineries in dispute would have been idle due to absence
of a lessee or while being repaired. In the light of the foregoing rationalization and computation, We believe
that a net unrealized rental income of P20,000.00 a month, since November 1986, is more realistic and
fair.25

As to exemplary damages, the RTC awarded P200,000.00 to EVERTEX which the Court of Appeals deleted.
But according to the CA, there was no clear showing that petitioners acted malevolently, wantonly and
oppressively. The evidence, however, shows otherwise.It is a requisite to award exemplary damages that the
wrongful act must be accompanied by bad faith,26 and the guilty acted in a wanton, fraudulent, oppressive,
reckless or malevolent manner.27 As previously stressed, petitioner Tsai's act of purchasing the controverted
properties despite her knowledge of EVERTEX's claim was oppressive and subjected the already insolvent
respondent to gross disadvantage. Petitioner PBCom also received the same letters of Atty. Villaluz,
responding thereto on March 24, 1987.28 Thus, PBCom's act of taking all the properties found in the factory
of the financially handicapped respondent, including those properties not covered by or included in the
mortgages, is equally oppressive and tainted with bad faith. Thus, we are in agreement with the RTC that an
award of exemplary damages is proper.

The amount of P200,000.00 for exemplary damages is, however, excessive. Article 2216 of the Civil Code
provides that no proof of pecuniary loss is necessary for the adjudication of exemplary damages, their
assessment being left to the discretion of the court in accordance with the circumstances of each case.29
While the imposition of exemplary damages is justified in this case, equity calls for its reduction. In Inhelder
Corporation v. Court of Appeals, G.R. No. L-52358, 122 SCRA 576, 585, (May 30, 1983), we laid down the
rule that judicial discretion granted to the courts in the assessment of damages must always be exercised
with balanced restraint and measured objectivity. Thus, here the award of exemplary damages by way of
example for the public good should be reduced to P100,000.00.

By the same token, attorney's fees and other expenses of litigation may be recovered when exemplary
damages are awarded.30 In our view, RTC's award of P50,000.00 as attorney's fees and expenses of litigation
is reasonable, given the circumstances in these cases.
WHEREFORE, the petitions are DENIED. The assailed decision and resolution of the Court of Appeals in CA-
G.R. CV No. 32986 are AFFIRMED WITH MODIFICATIONS. Petitioners Philippine Bank of Communications
and Ruby L. Tsai are hereby ordered to pay jointly and severally Ever Textile Mills, Inc. the following: (1)
P20,000.00 per month, as compensation for the use and possession of the properties in question from
November 198631 until subject personal properties are restored to respondent corporation; (2) P100,000.00
by way of exemplary damages, and (3) P50,000.00 as attorney's fees and litigation expenses. Costs against
petitioners.

SO ORDERED.

2. Saldana vs. Philippine Guaranty Co., GR No. L-13194, January 29, 1960

G.R. No. L-13194 January 29, 1960

BUENAVENTURA T. SALDANA, plaintiff-appellant,

vs.
PHILIPPINE GUARANTY COMPANY, INC., et al., defendants-appellees.

Gatchalian & Padilla for appellant.

Emiliano Tabasondra for appellee Company.Teodoro Padilla for the other appellees.

REYES, J.B.L., J.:

This case arose from a complaint for damages filed by Buenaventura Saldana (docketed as Civil Case No.
32703 of the Court of First Instance of Manila) that was dismissed by order of the Court dated August 20,
1957, for lack of sufficient cause of action. In another order of September 30, 1957 of the same court,
plaintiff's motion for reconsideration was denied, and the case was appealed to this Court.

The facts are that on May 8, 1953, in order to secure an indebtedness of P15,000.00, Josefina Vda. de
Aleazar executed in favor of the plaintiff-appellant Buenaventura Saldana a chattel mortgage covering
properties described as follows:

A building of strong materials, used for restaurant business, located in front of the San Juan de Dios
Hospital at Dewey Boulevard, Pasay City, and the following personal properties therein contained:

1 Radio, Zenith, cabinet type.

1 Cooler.

1 Electric range, stateside, 4 burners.

1 Frigidaire, 8 cubic feet.

1 G.E. Deepfreezer.

8 Tables, stateside.

32 Chromium chairs, stateside.

1 Sala set upholstered, 6 pieces.

1 Bedroom set, 6 pieces.

And all other furniture's, fixtures or equipment found in the said premises.

Subsequent to the execution of said mortgage and while the same was still in force, the defendant Hospital
de San Juan de Dios, Inc. obtained, in Civil Case No. 1930 of the Municipal Court of Pasay City, a judgment
was duly Josewfina Vda. de Eleazar. A writ of execution was duly issued and, on January 28, 1957, the same
was served on the judgment debtor by the sheriff of Pasay City; whereupon the following properties of
Josefina Eleazar were levied upon:

8 Tables with 4 (upholstered) chairs each.

1 Table with 4 (wooden) chairs.

1 Table (large) with 5 chairs.

1 Radio-phono (Zenith, 8 tubes).

2 Showcases (big, with mirrors).

1 Rattan sala set with 4 chairs, 1 table and 3 sidetables .

1 Wooden drawer.

1 Tocador (brown with mirror).

1 Aparador .

2 Beds (single type).

1 Freezer (deep freeze).

1 Gas range (magic chef, with 4 burners).

1 Freezer (G.E.).

On January 31, 1957, the plaintiff-appellant Saldana filed a third-party claim asserting that the above-
described properties levied are subject to his chattel mortgage of May 8, 1953. In virtue thereof, the sheriff
released only some of the property originally included in the levy of January 28, 1957, to wit:

1 Radio, Zenith, cabinet type.

8 Tables, stateside.

32 Chromiun chairs, stateside.

1 G.E. Deep freezer.

To proceed with the execution sale of the rest of the properties still under levy, the defendants-appellees
Hospital de San Juan de Dios, Inc. and the Philippine Guaranty Co., Inc., executed an indemnity bond to
answer for any damages that plaintiff might suffer. Accordingly, on February 13, 1957, the said properties
were sold to the defendant hospital as the highest bidder, for P1,500.00.

Appellants claims that the phrase in the chattel mortgage contract — "and all other furnitures, fixtures and
equipment found in the said premises", validly and sufficiently covered within its terms the personal
properties disposed of in the auction sale, as to warrant an action for damages by the plaintiff mortgagee.

There is merit in appellant's contention. Section 7 of Act No. 1508, commonly and better known as the
Chattel Mortgage Law, does not demand a minute and specific description of every chattel mortgaged in the
deal of mortgage but only requires that the description of the properties be such "as to enable the parties in
the mortgage, or any other person, after reasonable inquiry and investigation to identify the same". Gauged
by this standard, general description have been held by this Court. (See Stockholder vs. Ramirez, 44 Phil.,
993; Pedro de Jesus vs. Guam Bee Co., Inc., 72 Phil., 464).

A similar rule obtains in the United States courts and decisions there have repeatedly upheld clauses of
general import in mortgages of chattels other than goods for trade, and containing expressions similar to that
of the contract now before us. Thus, "and all other stones belonging to me and all other goods and chattels"
(Russel vs. Winne, 97 Am. Dec. 755); "all of the property of the said W.W. Allen used or situated upon the
leased premises" (Dorman vs. Crooks State Bank, 64 A.L.R. 614); "all goods in the store where they are doing
business in E. City, N.C." (Davis vs. Turner, 120 Fed. 605); "all and singular the goods, wares, stock, iron
tools manufactured articles and property of every description, being situated in or about the shop or building
now occupied by me in Howley Stree" (Winslow vs. Merchants Ins. Co., 38 Am. Dec. 368,) were held sufficient
description, on the theory that parol evidence could supplement it to render identification rule is expressed
in Walker vs. Johnson (Mont.) 1254 A.L.R. 937:

The courts and textbook writers have developed several rules for determination of the sufficiency of the
description in a chattel mortgage. The rules are general in nature and are different where the controversy is
between the parties to the mortgage from the situation where third parties with out actual notice come in. In
11 C.J. 457, it is said: "Ad against third persons the description in the mortgage must point out its subject
matter so that such person may identify the chattels observed, but it is not essential that the description be
so specific that the property may be identified by it alone, if such description or means of identification
which, if pursued will disclose the property conveyed." In 5 R.C.L. 423 the rule is stated that a description
which will enable a third person, aided by inquires which the instrument itself suggest to identify the
property is sufficiently definite." In 1 Jones on Chattel Mortgages and Conditional Sales, Bowers Edition, at
page 95 the writer says: "As to them (third persons), the description is sufficient if it points to evidence
whereby the precise thing mortgaged may be ascertained with certainty." Here there is nothing in the
description "873 head of sheep" from which anyone, the mortgagee or third persons, could ascertain with any
certainty what chattels were covered by the mortgage.

In many instances the courts have held the description good where, though otherwise faulty, the mortgage
explicity states that the property is in the possession of the mortgagor, and especially where it is the only
property of that kind owned by him.

The specifications in the chattel mortgage contract in the instant case, we believe, in substantial compliance
with the "reasonable description rule" fixed by the chattel Mortgage Act. We may notice in the agreement,
moreover, that the phrase in question is found after an enumeration of other specific articles. It can thus be
reasonably inferred therefrom that the "furnitures, fixture and equipment" referred to are properties of like
nature, similarly situated or similarly used in the restaurant of the mortgagor located in front of the San
Juan de Dos Hospital at Dewey Boulevard, Pasay City, which articles can be definitely pointed out or
ascertain by simple inquiry at or about the premises. Note that the limitation found in the last paragraph of
section 7 of the Chattel Mortgage Law1 on "like or subsituated properties" make reference to those "thereafter
acquired by the mortgagor and placed in the same depository as the property originally mortgaged", not to
those already existing and originally included at the date of the constitution of the chattel mortgage. A
contrary view would unduly impose a more rigid condition than what the law prescribes, which is that the
description be only such as to enable identification after a reasonable inquiry and investigation.

The case of Giberson vs. A.N. Jureidini Bros., 44 Phil., 216, 219, cited by the appellees and the lower court,
cannot be likened to the case at bar, for there, what were sought to be mortgaged included two stores wit all
its merchandise, effects, wares, and other bazar goods which were being constantly disposed of and replaced
with new supplies in connection with the business, thereby making any particular or definite identification
either impractical or impossible under the circumstances. Here, the properties deemed overed were more or
less fixed, or at least permanently situated or used in the premises of the mortgagor's restaurant.

The rule in the Jureidini case is further weakened by the court's observation that (44 Phil., p. 220) —

Moreover, if there should exist any doubts on the questions we have just discussed, they should be treshed
out in the insolvency proceedings,

which appears inconsistent with the definitive character of the rulings invoked.

We find that the ground for the appealed order (lack of cause of action) does not appear so indubitable as to
warrant a dismissal of the action without inquiry into the merits and without the description in the deed of
mortgage (Nico vs. Blanco, 81 Phil., 213; Zobel vs. Abreau, 52 Off. Gaz., 3592).

Wherefore, the orders appealed from are set aside and the case remanded to the lower court for further
proceedings. Costs against appellee.

3. Acme Shoe, Rubber & Plastic Corp. vs. CA, GR No. 103576, August 22, 1996

G.R. No. 103576 August 22, 1996

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners,
vs.
HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY,
respondents.

VITUG, J.:p

Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its
coverage to obligations yet to be contracted or incurred? This question is the core issue in the instant
petition for review on certiorari.

Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic
Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of
private respondent Producers Bank of the Philippines. The mortgage stood by way of security for petitioner's
corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage agreement was to
this effect —

(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full
obligation or obligations above-stated according to the terms thereof, then this mortgage shall be null and
void. . . .

In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former
note, as an extension thereof, or as a new loan, or is given any other kind of accommodations such as
overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments on Trust
Receipts, etc., this mortgage shall also stand as security for the payment of the said promissory note or notes
and/or accommodations without the necessity of executing a new contract and this mortgage shall have the
same force and effect as if the said promissory note or notes and/or accommodations were existing on the
date thereof. This mortgage shall also stand as security for said obligations and any and all other obligations
of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been
contracted before, during or after the constitution of this mortgage. 1

In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained
from respondent bank additional financial accommodations totalling P2,700,000.00. 2 These borrowings
were on due date also fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million
pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial constraints,
the loan was not settled at maturity. 3 Respondent bank thereupon applied for an extra judicial foreclosure
of the chattel mortgage, herein before cited, with the Sheriff of Caloocan City, prompting petitioner
corporation to forthwith file an action for injunction, with damages and a prayer for a writ of preliminary
injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C-12081). Ultimately, the court
dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held petitioner corporation
bound by the stipulations, aforequoted, of the chattel mortgage.

Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991, affirmed, "in all
respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January 1992.

The instant petition interposed by petitioner corporation was initially dinied on 04 March 1992 by this Court
for having been insufficient in form and substance. Private respondent filed a motion to dismiss the petition
while petitioner corporation filed a compliance and an opposition to private respondent's motion to dismiss.
The Court denied petitioner's first motion for reconsideration but granted a second motion for
reconsideration, thereby reinstating the petition and requiring private respondent to comment thereon. 5

Except in criminal cases where the penalty of reclusion perpetua or death is imposed 6 which the Court so
reviews as a matter of course, an appeal from judgments of lower courts is not a matter of right but of sound
judicial discretion. The circulars of the Court prescribing technical and other procedural requirements are
meant to weed out unmeritorious petitions that can unnecessarily clog the docket and needlessly consume
the time of the Court. These technical and procedural rules, however, are intended to help secure, not
suppress, substantial justice. A deviation from the rigid enforcement of the rules may thus be allowed to
attain the prime objective for, after all, the dispensation of justice is the core reason for the existence of
courts. In this instance, once again, the Court is constrained to relax the rules in order to give way to and
uphold the paramount and overriding interest of justice.

Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a
suretyship, the faithful performance of the obligation by the principal debt or is secured by the personal
commitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a mortgage
or an antichresis, that fulfillment is secured by an encumbrance of property — in pledge, the placing of
movable property in the possession of the creditor; in chattel mortgage, by the execution of the
corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a
public instrument encumbering the real property covered thereby; and in antichresis, by a written
instrument granting to the creditor the right to receive the fruits of an immovable property with the
obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit
— upon the essential condition that if the obligation becomes due and the debtor defaults, then the property
encumbered can be alienated for the payment of the obligation, 7 but that should the obligation be duly
paid, then the contract is automatically extinguished proceeding from the accessory character 8 of the
agreement. As the law so puts it, once the obligation is complied with, then the contract of security becomes,
ipso facto, null and void. 9

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so
long as these future debts are accurately described, 10 a chattel mortgage, however, can only cover
obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel
mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled
upon, the security itself, however, does not come into existence or arise until after a chattel mortgage
agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by
amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. 11 Refusal on
the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute
an act of default on the part of the borrower of the financing agreement whereon the promise is written but,
of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during
the life of the chattel mortgage sought to be foreclosed.

A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the
Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While
it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still
be valid between the parties (not against third persons acting in good faith 12), the fact, however, that the
statute has provided that the parties to the contract must execute an oath that —

. . . (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and
for no other purpose, and that the same is a just and valid obligation, and one not entered into for the
purpose of fraud. 13

makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely
contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage
contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of
the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or
terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al., 14 the Court
said —
. . . A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from
the date the same are made and not from the date of the mortgage. 15

The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had
ceased to exist coincidentally with the full payment of the P3,000,000.00 loan, 16 there no longer was any
chattel mortgage that could cover the new loans that were concluded thereafter.

We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial court
for a specific finding on the amount of damages it has sustained "as a result of the unlawful action taken by
respondent bank against it." 17 This prayer is not reflected in its complaint which has merely asked for the
amount of P3,000,000.00 by way of moral damages. 18 In LBC Express, Inc. vs. Court of Appeals, 19 we
have said:

Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation,
being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no
senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be
experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life — all of
which cannot be suffered by respondent bank as an artificial person. 20

While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so
named as a party in representation of petitioner corporation.

Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It instead
turned out to be, however, a source of disappointment for this Court to read in petitioner's reply to private
respondent's comment on the petition his so-called "One Final Word;" viz:

In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals
should be required to justify its decision which completely disregarded the basic laws on obligations and
contracts, as well as the clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this
Honorable Court; that in the event that its explanation is wholly unacceptable, this Honorable Court should
impose appropriate sanctions on the erring justices. This is one positive step in ridding our courts of law of
incompetent and dishonest magistrates especially members of a superior court of appellate jurisdiction. 21
(Emphasis supplied.)

The statement is not called for. The Court invites counsel's attention to the admonition in Guerrero vs.
Villamor; 22 thus:

(L)awyers . . . should bear in mind their basic duty "to observe and maintain the respect due to the courts of
justice and judicial officers and . . . (to) insist on similar conduct by others." This respectful attitude towards
the court is to be observed, "not for the sake of the temporary incumbent of the judicial office, but for the
maintenance of its supreme importance." And it is through a scrupulous preference for respectful language
that a lawyer best demonstrates his observance of the respect due to the courts and judicial officers . . . 23

The virtues of humility and of respect and concern for others must still live on even in an age of materialism.

WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without
prejudice to the appropriate legal recourse by private respondent as may still be warranted as an unsecured
creditor. No costs.

Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the courts.

SO ORDERED.

4. Union Bank of the Philippines vs. Junait, G.R. No. 171569, August 1, 2011

G.R. No. 171569 August 1, 2011

UNION BANK OF THE PHILIPPINES,

vs.
ALAIN* JUNIAT, WINWOOD APPAREL, INC., WINGYAN APPAREL, INC., NONWOVEN FABRIC PHILIPPINES,
Respondents.

DECISION

DEL CASTILLO, J.:

To have a binding effect on third parties, a contract of pledge must appear in a public instrument.1

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the June 23, 2005
Decision3 and the February 9, 2006 Resolution4 of the Court of Appeals (CA) in CA-G.R. CV No. 66392.

Factual Antecedents

Petitioner Union Bank of the Philippines (Union Bank) is a universal

banking corporation organized and existing under Philippine laws.5

Respondents Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc. (Wingyan) are domestic
corporations engaged in the business of apparel manufacturing.6 Both respondent corporations are owned
and operated by respondent Alain Juniat (Juniat), a French national based in Hongkong.7 Respondent
Nonwoven Fabric Philippines, Inc. (Nonwoven) is a Philippine corporation engaged in the manufacture and
sale of various types of nonwoven fabrics.8

On September 3, 1992, petitioner filed with the Regional Trial Court (RTC) of Makati, Branch 57, a
Complaint9 with prayer for the issuance of ex-parte writs of preliminary attachment and replevin against
Juniat, Winwood, Wingyan, and the person in possession of the mortgaged motorized sewing machines and
equipment.10 Petitioner alleged that Juniat, acting for and in behalf of Winwood and Wingyan, executed a
promissory note11 dated April 11, 1992 and a Chattel Mortgage12 dated March 27, 1992 over several
motorized sewing machines and other allied equipment to secure their obligation arising from export bills
transactions to petitioner in the amount of ₱1,131,134.35;13 that as additional security for the obligation,
Juniat executed a Continuing Surety Agreement14 dated April 11, 1992 in favor of petitioner;15 that the
loan remains unpaid;16 and that the mortgaged motorized sewing machines are insufficient to answer for
the obligation.17

On September 10, 1992, the RTC issued writs of preliminary attachment and replevin in favor of
petitioner.18 The writs were served by the Sheriff upon Nonwoven as it was in possession of the motorized
sewing machines and equipment.19 Although Nonwoven was not impleaded in the complaint filed by
petitioner, the RTC likewise served summons upon Nonwoven since it was in possession of the motorized
sewing machines and equipment.20

On September 28, 1992, Nonwoven filed an Answer,21 contending that the unnotarized Chattel Mortgage
executed in favor of petitioner has no binding effect on Nonwoven and that it has a better title over the
motorized sewing machines and equipment because these were assigned to it by Juniat pursuant to their
Agreement22 dated May 9, 1992.23 Juniat, Winwood, and Wingyan, on the other hand, were declared in
default for failure to file an answer within the reglementary period.24

On November 23, 1992, petitioner filed a Motion to Sell Chattels Seized by Replevin,25 praying that the
motorized sewing machines and equipment be sold to avoid depreciation and deterioration.26 However, on
May 18, 1993, before the RTC could act on the motion, petitioner sold the attached properties for the amount
of ₱1,350,000.00.27

Nonwowen moved to cite the officers of petitioner in contempt for selling the attached properties, but the RTC
denied the same on the ground that Union Bank acted in good faith.28

Ruling of the Regional Trial Court

On May 20, 1999, the RTC of Makati, Branch 145,29 rendered a Decision30 in favor of petitioner. The RTC
ruled that both the Chattel Mortgage dated March 27, 1992 in favor of petitioner and the Agreement dated
May 9, 1992 in favor of Nonwoven have no obligatory effect on third persons because these documents were
not notarized.31 However, since the Chattel Mortgage in favor of petitioner was executed earlier, petitioner
has a better right over the motorized sewing machines and equipment under the doctrine of "first in time,
stronger in right" (prius tempore, potior jure).32 Thus, the RTC disposed of the case in this wise:

WHEREFORE, above premises considered, judgment is hereby rendered as follows:

1.] Declaring the [petitioner] UNION BANK OF THE PHILIPPINES, as having the better right to the goods
and/or machineries subject of the Writs of Preliminary Attachment and Replevin issued by this Court on
September 10, 1992.

2.] Declaring the [petitioner] as entitled to the proceeds of the sale of the subject machineries in the amount
of ₱1,350,000.00;

3.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan Apparel, Inc. to be jointly and
severally liable to the [petitioner], for the deficiency between the proceeds of the sale of the machineries
subject of this suit [₱1,350,000.00] and original claim of the plaintiff [₱1,919,907.03], in the amount of
₱569,907.03, with legal interest at the rate of 12% per annum from date of this judgment until fully paid;
and

4.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan Apparel, Inc. to be jointly and
severally liable to the [petitioner] for the amount of ₱50,000.00 as reasonable attorneys fees; and

5.] Cost of this suit against the [respondents].

SO ORDERED.33

Nonwoven moved for reconsideration34 but the RTC denied the same in its

Order35 dated July 14, 1999.

Ruling of the Court of Appeals

On appeal, the CA reversed the ruling of the RTC. The CA ruled that the contract of pledge entered into
between Juniat and Nonwoven is valid and binding, and that the motorized sewing machines and equipment
were ceded to Nonwoven by Juniat by virtue of a dacion en pago.36 Thus, the CA declared Nonwoven entitled
to the proceeds of the sale of the attached properties.37 The fallo reads:

WHEREFORE, premises considered, the assailed decision is hereby REVERSED and SET ASIDE. [Petitioner]
Union Bank of the Philippines is hereby DIRECTED to pay Nonwoven Fabric Philippines, Inc. ₱1,350,000.00,
the amount it holds in escrow, realized from the May 18, 1993 sale of the machineries to avoid deterioration
during pendency of suit. No pronouncement as to costs.

SO ORDERED.38

Petitioner sought reconsideration39 which was denied by the CA in a Resolution40 dated February 9, 2006.

Issues

Hence, the present recourse where petitioner interposes the following issues:
1. Whether x x x the Court of Appeals committed serious reversible error in setting aside the Decision of the
trial court holding that Union Bank of the Philippines had a better right over the machineries seized/levied
upon in the proceedings before the trial court and/or the proceeds of the sale thereof;

2. Whether x x x the Court of Appeals seriously erred in holding that [Nonwoven] has a valid claim over the
subject sewing machines.41

Petitioner’s Arguments

Echoing the reasoning of the RTC, petitioner insists that it has a better title to the proceeds of the sale.42
Although the Chattel Mortgage executed in its favor was not notarized, petitioner insists that it is
nevertheless valid, and thus, has preference over a subsequent unnotarized agreement.43 Petitioner further
claims that except for the said agreement, no other evidence was presented by Nonwoven to show that the
motorized sewing machines and equipment were indeed transferred to them by
Juniat/Winwood/Wingyan.44

Respondent Nonwoven’s Arguments

Nonwoven, on the other hand, claims ownership over the proceeds of the sale under Article 154445 of the
Civil Code on double sale, which it claims can be applied by analogy in the instant case.46 Nonwoven
contends that since its prior possession over the motorized sewing machines and equipment was in good
faith, it has a better title over the proceeds of the sale.47 Nonwoven likewise maintains that petitioner has no
right over the proceeds of the sale because the Chattel Mortgage executed in its favor was unnotarized,
unregistered, and without an affidavit of good faith.48

Our Ruling

The petition has merit.

Nonwoven lays claim to the attached motorized sewing machines and equipment pursuant to the Agreement
it entered into with Juniat, to wit:

Hong Kong, 9th May, 1992

With reference to talks held this morning at the Holiday Inn Golden Mile Coffee Shop, among the following
parties:

a. Redflower Garments Inc. – Mrs. Maglipon

b. Nonwoven Fabrics Phils. Inc. – Mr. J. Tan

c. Winwood Apparel Inc./Wing Yan Apparel, Inc. – Mr. A. Juniat, Mrs. S. Juniat

IT WAS AGREED THAT:

a. Settlement of the accounts between Nonwoven Fabrics Phils. Inc. and Winwood Apparel Inc./Wing Yan
Apparel, Inc. should be effected as agreed through partial payment by L/C with the balance to be settled at a
later date for which Winwood Apparel, Inc. agrees to consign 94 sewing machines, 3 snap machines and 2
boilers, presently in the care of Redflower Garments Inc., to the care of Nonwoven Fabrics Phils., Inc. as
guarantee. Meanwhile, Nonwoven will resume delivery to Winwood/Win Yang as usual.
x x x x49 (Emphasis supplied.)

It insists that since the attached properties were assigned or ceded to it by Juniat, it has a better right over
the proceeds of the sale of the attached properties than petitioner, whose claim is based on an unnotarized
Chattel Mortgage.

We do not agree.

Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of Wingyan and Winwood, in
favor of petitioner does not bind Nonwoven.50 However, it must be pointed out that petitioner’s primary
cause of action is for a sum of money with prayer for the issuance of ex-parte writs of attachment and
replevin against Juniat, Winwood, Wingyan, and the person in possession of the motorized sewing machines
and equipment.51 Thus, the fact that the Chattel Mortgage executed in favor of petitioner was not notarized
does not affect petitioner’s cause of action. Petitioner only needed to show that the loan of Juniat, Wingyan
and Winwood remains unpaid and that it is entitled to the issuance of the writs prayed for. Considering that
writs of attachment and replevin were issued by the RTC,52 Nonwoven had to prove that it has a better right
of possession or ownership over the attached properties.1avvphil This it failed to do.

A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing machines, snap machines and
boilers were pledged to Nonwoven by Juniat to guarantee his obligation. However, under Article 2096 of the
Civil Code, "[a] pledge shall not take effect against third persons if a description of the thing pledged and the
date of the pledge do not appear in a public instrument." Hence, just like the chattel mortgage executed in
favor of petitioner, the pledge executed by Juniat in favor of Nonwoven cannot bind petitioner.

Neither can we sustain the finding of the CA that: "The machineries were ceded to THIRD PARTY
NONWOVEN by way of dacion en pago, a contract later entered into by WINWOOD/WINGYAN and THIRD
PARTY NONWOVEN."53 As aptly pointed out by petitioner, no evidence was presented by Nonwoven to show
that the attached properties were subsequently sold to it by way of a dacion en pago. Also, there is nothing in
the Agreement dated May 9, 1992 to indicate that the motorized sewing machines, snap machines and
boilers were ceded to Nonwoven as payment for the Wingyan’s and Winwood’s obligation. It bears stressing
that there can be no transfer of ownership if the delivery of the property to the creditor is by way of
security.54 In fact, in case of doubt as to whether a transaction is one of pledge or dacion en pago, the
presumption is that it is a pledge as this involves a lesser transmission of rights and interests.55

In view of the foregoing, we are constrained to reverse the ruling of the CA. Nonwoven is not entitled to the
proceeds of the sale of the attached properties because it failed to show that it has a better title over the
same.

WHEREFORE, the petition is hereby GRANTED. The assailed June 23, 2005 Decision and the February 9,
2006 Resolution of the Court of Appeals in CA-G.R. CV No. 66392 are hereby REVERSED and SET ASIDE.
The May 20, 1999 Decision of the Regional Trial Court of Makati, Branch 145, is hereby REINSTATED and
AFFIRMED.

SO ORDERED.

V. SECURITIES REGULATION CODE

1. Abacus Securities Corporation vs. Ampil, GR No. 160016, February 27, 2006
G.R. No. 160016 February 27, 2006

ABACUS SECURITIES CORPORATION, Petitioner,

vs.
RUBEN U. AMPIL, Respondent.

DECISION
PANGANIBAN, CJ:

Stock market transactions affect the general public and the national economy. The rise and fall of stock
market indices reflect to a considerable degree the state of the economy. Trends in stock prices tend to
herald changes in business conditions. Consequently, securities transactions are impressed with public
interest, and are thus subject to public regulation. In particular, the laws and regulations requiring payment
of traded shares within specified periods are meant to protect the economy from excessive stock market
speculations, and are thus mandatory.

In the present case, respondent cannot escape payment of stocks validly traded by petitioner on his behalf.
These transactions took place before both parties violated the trading law and rules. Hence, they fall outside
the purview of the pari delicto rule.

The Case

Before the Court is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the March 21,
2003 Decision2 and the September 19, 2003 Resolution3 of the Court of Appeals (CA) in CA-GR CV No.
68273. The assailed Decision disposed as follows:

"UPON THE VIEW WE TAKE OF THIS CASE THUS, this appeal is hereby DISMISSED. With costs."4

The CA denied reconsideration in its September 19, 2003 Resolution.

The Facts

The factual antecedents were summarized by the trial court (and reproduced by the CA in its assailed
Decision) in this wise:

"Evidence adduced by the [petitioner] has established the fact that [petitioner] is engaged in business as a
broker and dealer of securities of listed companies at the Philippine Stock Exchange Center.

"Sometime in April 1997, [respondent] opened a cash or regular account with [petitioner] for the purpose of
buying and selling securities as evidenced by the Account Application Form. The parties’ business
relationship was governed by the terms and conditions [stated therein] x x x.

"Since April 10, 1997, [respondent] actively traded his account, and as a result of such trading activities, he
accumulated an outstanding obligation in favor of [petitioner] in the principal sum of ₱6,617,036.22 as of
April 30, 1997.

"Despite the lapse of the period within which to pay his account as well as sufficient time given by [petitioner]
for [respondent] to comply with his proposal to settle his account, the latter failed to do so. Such that
[petitioner] thereafter sold [respondent’s] securities to set off against his unsettled obligations.

"After the sale of [respondent’s] securities and application of the proceeds thereof against his account,
[respondent’s] remaining unsettled obligation to [petitioner] was ₱3,364,313.56. [Petitioner] then referred the
matter to its legal counsel for collection purposes.

"In a letter dated August 15, 1997, [petitioner] through counsel demanded that [respondent] settle his
obligation plus the agreed penalty charges accruing thereon equivalent to the average 90-day Treasury Bill
rate plus 2% per annum (200 basis points).
"In a letter dated August [26], 1997, [respondent] acknowledged receipt of [petitioner’s] demand [letter] and
admitted his unpaid obligation and at the same time request[ed] for 60 days to raise funds to pay the same,
which was granted by [petitioner].

"Despite said demand and the lapse of said requested extension, [respondent] failed and/or refused to pay
his accountabilities to [petitioner].

"For his defense, [respondent] claims that he was induced to trade in a stock security with [petitioner]
because the latter allowed offset settlements wherein he is not obliged to pay the purchase price. Rather, it
waits for the customer to sell. And if there is a loss, [petitioner] only requires the payment of the deficiency
(i.e., the difference between the higher buying price and the lower selling price). In addition, it charges a
commission for brokering the sale.

"However, if the customer sells and there is a profit, [petitioner] deducts the purchase price and delivers only
the surplus – after charging its commission.

"[respondent] further claims that all his trades with [petitioner] were not paid in full in cash at anytime after
purchase or within the T+4 [4 days subsequent to trading] and none of these trades was cancelled by
[petitioner] as required in Exhibit ‘A-1’. Neither did [petitioner] apply with either the Philippine Stock
Exchange or the SEC for an extension of time for the payment or settlement of his cash purchases. This was
not brought to his attention by his broker and so with the requirement of collaterals in margin account.
Thus, his trade under an offset transaction with [petitioner] is unlimited subject only to the discretion of the
broker. x x x [Had petitioner] followed the provision under par. 8 of Exh. ‘A-1’ which stipulated the
liquidation within the T+3 [3 days subsequent to trading], his net deficit would only be ₱1,601,369.59.
[respondent] however affirmed that this is not in accordance with RSA [Rule 25-1 par. C, which mandates
that if you do not pay for the first] order, you cannot subsequently make any further order without
depositing the cash price in full. So, if RSA Rule 25-1, par. C, was applied, he was limited only to the first
transaction. That [petitioner] did not comply with the T+4 mandated in cash transaction. When [respondent]
failed to comply with the T+3, [petitioner] did not require him to put up a deposit before it executed its
subsequent orders. [Petitioner] did not likewise apply for extension of the T+4 rule. Because of the offset
transaction, [respondent] was induced to [take a] risk which resulted [in] the filing of the instant suit against
him [because of which] he suffered sleepless nights, lost appetite which if quantified in money, would
amount to ₱500,000.00 moral damages and ₱100,000.00 exemplary damages."5

In its Decision6 dated June 26, 2000, the Regional Trial Court (RTC) of Makati City (Branch 57) held that
petitioner violated Sections 23 and 25 of the Revised Securities Act (RSA) and Rule 25-1 of the Rules
Implementing the Act (RSA Rules) when it failed to: 1) require the respondent to pay for his stock purchases
within three (T+3) or four days (T+4) from trading; and 2) request from the appropriate authority an
extension of time for the payment of respondent’s cash purchases. The trial court noted that despite
respondent’s non-payment within the required period, petitioner did not cancel the purchases of respondent.
Neither did it require him to deposit cash payments before it executed the buy and/or sell orders subsequent
to the first unsettled transaction. According to the RTC, by allowing respondent to trade his account actively
without cash, petitioner effectively induced him to purchase securities thereby incurring excessive credits.

The trial court also found respondent to be equally at fault, by incurring excessive credits and waiting to see
how his investments turned out before deciding to invoke the RSA. Thus, the RTC concluded that petitioner
and respondent were in pari delicto and therefore without recourse against each other.

Ruling of the Court of Appeals

The CA upheld the lower court’s finding that the parties were in pari delicto. It castigated petitioner for
allowing respondent to keep on trading despite the latter’s failure to pay his outstanding obligations. It
explained that "the reason [behind petitioner’s act] is elemental in its simplicity. And it is not exactly
altruistic. Because whether [respondent’s] trading transaction would result in a surplus or deficit, he would
still be liable to pay [petitioner] its commission. [Petitioner’s] cash register will keep on ringing to the sound
of incoming money, no matter what happened to [respondent]."7

The CA debunked petitioner’s contention that the trial court lacked jurisdiction to determine violations of the
RSA. The court a quo held that petitioner was estopped from raising the question, because it had actively
and voluntarily participated in the assailed proceedings.
Hence, this Petition.8

Issues

Petitioner submits the following issues for our consideration:

"I.

Whether or not the Court of Appeal’s ruling that petitioner and respondent are in pari delicto which allegedly
bars any recovery, is in accord with law and applicable jurisprudence considering that respondent was the
first one who violated the terms of the Account Opening Form, [which was the] agreement between the
parties.

"II.

Whether or not the Court of Appeal’s ruling that the petitioner and respondent are in pari delicto is in accord
with law and applicable jurisprudence considering the Account Opening Form is a valid agreement.

"III.

Whether or not the Court of Appeal’s ruling that petitioner cannot recover from respondent is in accord with
law and applicable jurisprudence since the evidence and admission of respondent proves that he is liable to
petitioner for his outstanding obligations arising from the stock trading through petitioner.

"IV.

Whether or not the Court of Appeal’s ruling on petitioner’s alleged violation of the Revised Securities Act [is]
in accord with law and jurisprudence since the lower court has no jurisdiction over violations of the Revised
Securities Act."9

Briefly, the issues are (1) whether the pari delicto rule is applicable in the present case, and (2) whether the
trial court had jurisdiction over the case.

The Court’s Ruling

The Petition is partly meritorious.

Main Issue:

Applicability of the

Pari Delicto Principle

In the present controversy, the following pertinent facts are undisputed: (1) on April 8, 1997, respondent
opened a cash account with petitioner for his transactions in securities;10 (2) respondent’s purchases were
consistently unpaid from April 10 to 30, 1997;11 (3) respondent failed to pay in full, or even just his
deficiency,12 for the transactions on April 10 and 11, 1997;13 (4) despite respondent’s failure to cover his
initial deficiency, petitioner subsequently purchased and sold securities for respondent’s account on April 25
and 29;14 (5) petitioner did not cancel or liquidate a substantial amount of respondent’s stock transactions
until May 6, 1997.15

The provisions governing the above transactions are Sections 23 and 25 of the RSA16 and Rule 25-1 of the
RSA Rules, which state as follows:

"SEC. 23. Margin Requirements. –

xxxxxxxxx

(b) It shall be unlawful for any member of an exchange or any broker or dealer, directly or indirectly, to
extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer –

(1) On any security other than an exempted security, in contravention of the rules and regulations which the
Commission shall prescribe under subsection (a) of this Section;

(2) Without collateral or on any collateral other than securities, except (i) to maintain a credit initially
extended in conformity with the rules and regulations of the Commission and (ii) in cases where the
extension or maintenance of credit is not for the purpose of purchasing or carrying securities or of evading or
circumventing the provisions of subparagraph (1) of this subsection.

x x x x x x x x x"

"SEC. 25. Enforcement of margin requirements and restrictions on borrowings. – To prevent indirect
violations of the margin requirements under Section 23 hereof, the broker or dealer shall require the
customer in nonmargin transactions to pay the price of the security purchased for his account within such
period as the Commission may prescribe, which shall in no case exceed three trading days; otherwise, the
broker shall sell the security purchased starting on the next trading day but not beyond ten trading days
following the last day for the customer to pay such purchase price, unless such sale cannot be effected
within said period for justifiable reasons. The sale shall be without prejudice to the right of the broker or
dealer to recover any deficiency from the customer. x x x."

"RSA RULE 25-1

"Purchases and Sales in Cash Account

"(a) Purchases by a customer in a cash account shall be paid in full within three (3) business days after the
trade date.

"(b) If full payment is not received within the required time period, the broker or dealer shall cancel or
otherwise liquidate the transaction, or the unsettled portion thereof, starting on the next business day but
not beyond ten (10) business days following the last day for the customer to pay, unless such sale cannot be
effected within said period for justifiable reasons.

"(c) If a transaction is cancelled or otherwise liquidated as a result of non-payment by the customer, prior to
any subsequent purchase during the next ninety (90) days, the customer shall be required to deposit
sufficient funds in the account to cover each purchase transaction prior to execution.

xxxxxxxxx

"(f) Written application for an extension of the period of time required for payment under paragraph (a) be
made by the broker or dealer to the Philippine Stock Exchange, in the case of a member of the Exchange, or
to the Commission, in the case of a non-member of the Exchange. Applications for the extension must be
based upon exceptional circumstances and must be filed and acted upon before the expiration of the original
payment period or the expiration of any subsequent extension."

Section 23(b) above -- the alleged violation of petitioner which provides the basis for respondent’s defense --
makes it unlawful for a broker to extend or maintain credit on any securities other than in conformity with
the rules and regulations issued by Securities and Exchange Commission (SEC). Section 25 lays down the
rules to prevent indirect violations of Section 23 by brokers or dealers. RSA Rule 25-1 prescribes in detail the
regulations governing cash accounts.

The United States, from which our country’s security policies are patterned,17 abound with authorities
explaining the main purpose of the above statute on margin18 requirements. This purpose is to regulate the
volume of credit flow, by way of speculative transactions, into the securities market and redirect resources
into more productive uses. Specifically, the main objective of the law on margins is explained in this wise:

"The main purpose of these margin provisions xxx is not to increase the safety of security loans for lenders.
Banks and brokers normally require sufficient collateral to make themselves safe without the help of law.
Nor is the main purpose even protection of the small speculator by making it impossible for him to spread
himself too thinly – although such a result will be achieved as a byproduct of the main purpose.

xxxxxxxxx

"The main purpose is to give a [g]overnment credit agency an effective method of reducing the aggregate
amount of the nation’s credit resources which can be directed by speculation into the stock market and out
of other more desirable uses of commerce and industry x x x."19

A related purpose of the governmental regulation of margins is the stabilization of the economy.20
Restrictions on margin percentages are imposed "in order to achieve the objectives of the government with
due regard for the promotion of the economy and prevention of the use of excessive credit."21

Otherwise stated, the margin requirements set out in the RSA are primarily intended to achieve a
macroeconomic purpose -- the protection of the overall economy from excessive speculation in securities.
Their recognized secondary purpose is to protect small investors.

The law places the burden of compliance with margin requirements primarily upon the brokers and
dealers.22 Sections 23 and 25 and Rule 25-1, otherwise known as the "mandatory close-out rule,"23 clearly
vest upon petitioner the obligation, not just the right, to cancel or otherwise liquidate a customer’s order, if
payment is not received within three days from the date of purchase. The word "shall" as opposed to the
word "may," is imperative and operates to impose a duty, which may be legally enforced. For transactions
subsequent to an unpaid order, the broker should require its customer to deposit funds into the account
sufficient to cover each purchase transaction prior to its execution. These duties are imposed upon the
broker to ensure faithful compliance with the margin requirements of the law, which forbids a broker from
extending undue credit to a customer.

It will be noted that trading on credit (or "margin trading") allows investors to buy more securities than their
cash position would normally allow.24 Investors pay only a portion of the purchase price of the securities;
their broker advances for them the balance of the purchase price and keeps the securities as collateral for
the advance or loan.25 Brokers take these securities/stocks to their bank and borrow the "balance" on it,
since they have to pay in full for the traded stock. Hence, increasing margins26 i.e., decreasing the amounts
which brokers may lend for the speculative purchase and carrying of stocks is the most direct and effective
method of discouraging an abnormal attraction of funds into the stock market and achieving a more
balanced use of such resources.

"x x x [T]he x x x primary concern is the efficacy of security credit controls in preventing speculative excesses
that produce dangerously large and rapid securities price rises and accelerated declines in the prices of given
securities issues and in the general price level of securities. Losses to a given investor resulting from price
declines in thinly margined securities are not of serious significance from a regulatory point of view. When
forced sales occur and put pressures on securities prices, however, they may cause other forced sales and
the resultant snowballing effect may in turn have a general adverse effect upon the entire market."27
The nature of the stock brokerage business enables brokers, not the clients, to verify, at any time, the status
of the client’s account.28 Brokers, therefore, are in the superior position to prevent the unlawful extension of
credit.29 Because of this awareness, the law imposes upon them the primary obligation to enforce the
margin requirements.

Right is one thing; obligation is quite another. A right may not be exercised; it may even be waived. An
obligation, however, must be performed; those who do not discharge it prudently must necessarily face the
consequence of their dereliction or omission.30

Respondent Liable for the First,

But Not for the Subsequent Trades

Nonetheless, these margin requirements are applicable only to transactions entered into by the present
parties subsequent to the initial trades of April 10 and 11, 1997. Thus, we hold that petitioner can still
collect from respondent to the extent of the difference between the latter’s outstanding obligation as of April
11, 1997 less the proceeds from the mandatory sell out of the shares pursuant to the RSA Rules. Petitioner’s
right to collect is justified under the general law on obligations and contracts.31

Article 1236 (second paragraph) of the Civil Code, provides:

"Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to
the debtor." (Emphasis supplied)

Since a brokerage relationship is essentially a contract for the employment of an agent, principles of contract
law also govern the broker-principal relationship.32

The right to collect cannot be denied to petitioner as the initial transactions were entered pursuant to the
instructions of respondent. The obligation of respondent for stock transactions made and entered into on
April 10 and 11, 1997 remains outstanding. These transactions were valid and the obligations incurred by
respondent concerning his stock purchases on these dates subsist. At that time, there was no violation of the
RSA yet. Petitioner’s fault arose only when it failed to: 1) liquidate the transactions on the fourth day
following the stock purchases, or on April 14 and 15, 1997; and 2) complete its liquidation no later than ten
days thereafter, applying the proceeds thereof as payment for respondent’s outstanding obligation.33

Elucidating further, since the buyer was not able to pay for the transactions that took place on April 10 and
11, that is at T+4, the broker was duty-bound to advance the payment to the settlement banks without
prejudice to the right of the broker to collect later from the client.34

In securities trading, the brokers are essentially the counterparties to the stock transactions at the
Exchange.35 Since the principals of the broker are generally undisclosed, the broker is personally liable for
the contracts thus made.36 Hence, petitioner had to advance the payments for respondent’s trades. Brokers
have a right to be reimbursed for sums advanced by them with the express or implied authorization of the
principal,37 in this case, respondent.

It should be clear that Congress imposed the margin requirements to protect the general economy, not to
give the customer a free ride at the expense of the broker.38 Not to require respondent to pay for his April 10
and 11 trades would put a premium on his circumvention of the laws and would enable him to enrich
himself unjustly at the expense of petitioner.

In the present case, petitioner obviously failed to enforce the terms and conditions of its Agreement with
respondent, specifically paragraph 8 thereof, purportedly acting on the plea39 of respondent to give him time
to raise funds therefor. These stipulations, in relation to paragraph 4,40 constituted faithful compliance with
the RSA. By failing to ensure respondent’s payment of his first purchase transaction within the period
prescribed by law, thereby allowing him to make subsequent purchases, petitioner effectively converted
respondent’s cash account into a credit account. However, extension or maintenance of credits on
nonmargin transactions, are specifically prohibited under Section 23(b). Thus, petitioner was remiss in its
duty and cannot be said to have come to court with "clean hands" insofar as it intended to collect on
transactions subsequent to the initial trades of April 10 and 11, 1997.

Respondent Equally Guilty

for Subsequent Trades

On the other hand, we find respondent equally guilty in entering into the transactions in violation of the RSA
and RSA Rules. We are not prepared to accept his self-serving assertions of being an "innocent victim" in all
the transactions. Clearly, he is not an unsophisticated, small investor merely prodded by petitioner to
speculate on the market with the possibility of large profits with low -- or no -- capital outlay, as he pictures
himself to be. Rather, he is an experienced and knowledgeable trader who is well versed in the securities
market and who made his own investment decisions. In fact, in the Account Opening Form (AOF), he
indicated that he had excellent knowledge of stock investments; had experience in stocks trading,
considering that he had similar accounts with other firms.41 Obviously, he knowingly speculated on the
market, by taking advantage of the "no-cash-out" arrangement extended to him by petitioner.

We note that it was respondent who repeatedly asked for some time to pay his obligations for his stock
transactions. Petitioner acceded to his requests. It is only when sued upon his indebtedness that respondent
raised as a defense the invalidity of the transactions due to alleged violations of the RSA. It was respondent’s
privilege to gamble or speculate, as he apparently did so by asking for extensions of time and refraining from
giving orders to his broker to sell, in the hope that the prices would rise. Sustaining his argument now would
amount to relieving him of the risk and consequences of his own speculation and saddling them on the
petitioner after the result was known to be unfavorable.42 Such contention finds no legal or even moral
justification and must necessarily be overruled. Respondent’s conduct is precisely the behavior of an investor
deplored by the law.

In the final analysis, both parties acted in violation of the law and did not come to court with clean hands
with regard to transactions subsequent to the initial trades made on April 10 and 11, 1997. Thus, the
peculiar facts of the present case bar the application of the pari delicto rule -- expressed in the maxims "Ex
dolo malo non oritur action" and "In pari delicto potior est conditio defendentis" -- to all the transactions
entered into by the parties. The pari delecto rule refuses legal remedy to either party to an illegal agreement
and leaves them where they were.43 In this case, the pari delicto rule applies only to transactions entered
into after the initial trades made on April 10 and 11, 1997.

Since the initial trades are valid and subsisting obligations, respondent is liable for them. Justice and good
conscience require all persons to satisfy their debts. Ours are courts of both law and equity; they compel fair
dealing; they do not abet clever attempts to escape just obligations. Ineludibly, this Court would not hesitate
to grant relief in accordance with good faith and conscience.

Pursuant to RSA Rule 25-1, petitioner should have liquidated the transaction (sold the stocks) on the fourth
day following the transaction (T+4) and completed its liquidation not later than ten days following the last
day for the customer to pay (effectively T+14). Respondent’s outstanding obligation is therefore to be
determined by using the closing prices of the stocks purchased at T+14 as basis.

We consider the foregoing formula to be just and fair under the circumstances. When petitioner tolerated the
subsequent purchases of respondent without performing its obligation to liquidate the first failed
transaction, and without requiring respondent to deposit cash before embarking on trading stocks any
further, petitioner, as the broker, violated the law at its own peril. Hence, it cannot now complain for failing
to obtain the full amount of its claim for these latter transactions.

On the other hand, with respect to respondent’s counterclaim for damages for having been allegedly induced
by petitioner to generate additional purchases despite his outstanding obligations, we hold that he deserves
no legal or equitable relief consistent with our foregoing finding that he was not an innocent investor as he
presented himself to be.

Second Issue:
Jurisdiction

It is axiomatic that the allegations in the complaint, not the defenses set up in the answer or in the motion to
dismiss determine which court has jurisdiction over an action.44 Were we to be governed by the latter rule,
the question of jurisdiction would depend almost entirely upon the defendant.45

The instant controversy is an ordinary civil case seeking to enforce rights arising from the Agreement (AOF)
between petitioner and respondent. It relates to acts committed by the parties in the course of their business
relationship. The purpose of the suit is to collect respondent’s alleged outstanding debt to petitioner for stock
purchases.

To be sure, the RSA and its Rules are to be read into the Agreement entered into between petitioner and
respondent. Compliance with the terms of the AOF necessarily means compliance with the laws. Thus, to
determine whether the parties fulfilled their obligations in the AOF, this Court had to pass upon their
compliance with the RSA and its Rules. This, in no way, deprived the Securities and Exchange Commission
(SEC) of its authority to determine willful violations of the RSA and impose appropriate sanctions therefor, as
provided under Sections 45 and 46 of the Act.

Moreover, we uphold the SEC in its Opinion, thus:

"As to the issue of jurisdiction, it is settled that a party cannot invoke the jurisdiction of a court to secure
affirmative relief against his opponent and after obtaining or failing to obtain such relief, repudiate or
question that same jurisdiction.

"Indeed, after voluntarily submitting a cause and encountering an adverse decision on the merits, it is too
late for petitioner to question the jurisdictional power of the court. It is not right for a party who has affirmed
and invoked the jurisdiction of a court in a particular matter to secure an affirmative relief, to afterwards
deny that same jurisdiction to escape a penalty."46

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are hereby MODIFIED.
Respondent is ordered to pay petitioner the difference between the former’s outstanding obligation as of April
11, 1997 less the proceeds from the mandatory sell out of shares pursuant to the RSA Rules, with interest
thereon at the legal rate until fully paid.

The RTC of Makati, Branch 57 is hereby directed to make a computation of respondent’s outstanding
obligation using the closing prices of the stocks at T+14 as basis -- counted from April 11, 1997 and to issue
the proper order for payment if warranted. It may hold trial and hear the parties to be able to make this
determination.

No finding as to costs in this instance.

SO ORDERED.

2. Gabionza vs. Court of Appeals, GR No. 161057, September 12, 2008

BETTY GABIONZA and G.R. No. 161057

ISABELITA TAN,

Petitioners,

Present:
QUISUMBING, J.

Chairperson,

- versus - CARPIO MORALES,

TINGA,

VELASCO, JR., and

COURT OF APPEALS, LUKE BRION, JJ.

ROXAS and EVELYN NOLASCO,

Respondents. Promulgated:

September 12, 2008

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

DECISION

Tinga, J.:

On 21 August 2000, petitioners Betty Go Gabionza (Gabionza) and Isabelita Tan (Tan) filed their respective
Complaints-affidavit1 charging private respondents Luke Roxas (Roxas) and Evelyn Nolasco (Nolasco) with
several criminal acts. Roxas was the president of ASB Holdings, Inc. (ASBHI) while Nolasco was the senior
vice president and treasurer of the same corporation.

According to petitioners, ASBHI was incorporated in 1996 with its declared primary purpose to invest in any
and all real and personal properties of every kind or otherwise acquire the stocks, bonds, and other
securities or evidence of indebtedness of any other corporation, and to hold or own, use, sell, deal in, dispose
of, and turn to account any such stocks.2 ASBHI was organized with an authorized capital stock of
P500,000.00, a fact reflected in the corporation’s articles of incorporation, copies of which were appended as
annexes to the complaint.3

Both petitioners had previously placed monetary investment with the Bank of Southeast Asia (BSA). They
alleged that between 1996 and 1997, they were convinced by the officers of ASBHI to lend or deposit money
with the corporation. They and other investors were urged to lend, invest or deposit money with ASBHI, and
in return they would receive checks from ASBHI for the amount so lent, invested or deposited. At first, they
were issued receipts reflecting the name "ASB Realty Development" which they were told was the same entity
as BSA or was connected therewith, but beginning in March 1998, the receipts were issued in the name of
ASBHI. They claimed that they were told that ASBHI was exactly the same institution that they had
previously dealt with.4

ASBHI would issue two (2) postdated checks to its lenders, one representing the principal amount and the
other covering the interest thereon. The checks were drawn against DBS Bank and would mature in 30 to 45
days. On the maturity of the checks, the individual lenders would renew the loans, either collecting only the
interest earnings or rolling over the same with the principal amounts.5
In the first quarter of 2000, DBS Bank started to refuse to pay for the checks purportedly by virtue of "stop
payment" orders from ASBHI. In May of 2000, ASBHI filed a petition for rehabilitation and receivership with
the Securities and Exchange Commission (SEC), and it was able to obtain an order enjoining it from paying
its outstanding liabilities.6 This series of events led to the filing of the complaints by petitioners, together
with Christine Chua, Elizabeth Chan, Ando Sy and Antonio Villareal, against ASBHI.7 The complaints were
for estafa under Article 315(2)(a) and (2)(d) of the Revised Penal Code, estafa under Presidential Decree No.
1689, violation of the Revised Securities Act and violation of the General Banking Act.

A special task force, the Task Force on Financial Fraud (Task Force), was created by the Department of
Justice (DOJ) to investigate the several complaints that were lodged in relation to ASBHI.8 The Task Force,
dismissed the complaint on 19 October 2000, and the dismissal was concurred in by the assistant chief state
prosecutor and approved by the chief state prosecutor.9 Petitioners filed a motion for reconsideration but
this was denied in February 2001.10 With respect to the charges of estafa under Article 315(2) of the Revised
Penal Code and of violation of the Revised Securities Act (which form the crux of the issues before this
Court), the Task Force concluded that the subject transactions were loans which gave rise only to civil
liability; that petitioners were satisfied with the arrangement from 1996 to 2000; that petitioners never
directly dealt with Nolasco and Roxas; and that a check was not a security as contemplated by the Revised
Securities Act.

Petitioners then filed a joint petition for review with the Secretary of Justice. On 15 October 2001, then
Secretary Hernando Perez issued a resolution which partially reversed the Task Force and instead directed
the filing of five (5) Informations for estafa under Article 315(2)(a) of the Revised Penal Code on the
complaints of Chan and petitioners Gabionza and Tan, and an Information for violation of Section 4 in
relation to Section 56 of the Revised Securities Act.11 Motions for reconsideration to this Resolution were
denied by the Department of Justice in a Resolution dated 3 July 2002.12

Even as the Informations were filed before the Regional Trial Court of Makati City, private respondents
assailed the DOJ Resolution by way of a certiorari petition with the Court of Appeals. In its assailed
Decision13 dated 18 July 2003, the Court of Appeals reversed the DOJ and ordered the dismissal of the
criminal cases. The dismissal was sustained by the appellate court when it denied petitioners’ motion for
reconsideration in a Resolution dated 28 November 2003.14 Hence this petition filed by Gabionza and Tan.

The Court of Appeals deviated from the general rule that accords respect to the discretion of the DOJ in the
determination of probable cause. This Court consistently adheres to its policy of non-interference in the
conduct of preliminary investigations, and to leave to the investigating prosecutor sufficient latitude of
discretion in the determination of what constitutes sufficient evidence to establish probable cause for the
filing of an information against a supposed offender.15

At the outset, it is critical to set forth the key factual findings of the DOJ which led to the conclusion that
probable cause existed against the respondents. The DOJ Resolution states, to wit:

The transactions in question appear to be mere renewals of the loans the complainant-petitioners earlier
granted to BSA. However, just after they agreed to renew the loans, the ASB agents who dealt with them
issued to them receipts indicating that the borrower was ASB Realty, with the representation that it was "the
same entity as BSA or connected therewith." On the strength of this representation, along with other claims
relating to the status of ASB and its supposed financial capacity to meet obligations, the complainant-
petitioners acceded to lend the funds to ASB Realty instead. As it turned out, however, ASB had in fact no
financial capacity to repay the loans as it had an authorized capital stock of only P500,000.00 and paid up
capital of only P125,000.00. Clearly, the representations regarding its supposed financial capacity to meet its
obligations to the complainant-petitioners were simply false. Had they known that ASB had in fact no such
financial capacity, they would not have invested millions of pesos. Indeed, no person in his proper frame of
mind would venture to lend millions of pesos to a business entity having such a meager capitalization. The
fact that the complainant-petitioners might have benefited from its earlier dealings with ASB, through
interest earnings on their previous loans, is of no moment, it appearing that they were not aware of the fraud
at those times they renewed the loans.

The false representations made by the ASB agents who dealt with the complainant-petitioners and who
inveigled them into investing their funds in ASB are properly imputable to respondents Roxas and Nolasco,
because they, as ASB’s president and senior vice president/treasurer, respectively, in charge of its
operations, directed its agents to make the false representations to the public, including the complainant-
petitioners, in order to convince them to invest their moneys in ASB. It is difficult to make a different
conclusion, judging from the fact that respondents Roxas and Nolasco authorized and accepted for ASB the
fraud-induced loans. This makes them liable for estafa under Article 315 (paragraph 2 [a]) of the Revised
Penal Code. They cannot escape criminal liability on the ground that they did not personally deal with the
complainant-petitioners in regard to the transactions in question. Suffice it to state that to commit a crime,
inducement is as sufficient and effective as direct participation.16

Notably, neither the Court of Appeals’ decision nor the dissent raises any serious disputation as to the
occurrence of the facts as narrated in the above passage. They take issue instead with the proposition that
such facts should result in a prima facie case against either Roxas or Nolasco, especially given that neither of
them engaged in any face-to-face dealings with petitioners. Leaving aside for the moment whether this
assumed remoteness of private respondents sufficiently insulates them from criminal liability, let us first
discern whether the above-stated findings do establish a prima facie case that petitioners were indeed the
victims of the crimes of estafa under Article 315(2)(a) of the Revised Penal Code and of violation of the
Revised Securities Act.

Article 315(2)(a) of the Revised Penal Code states:

ART. 315. Swindling (estafa). — Any person who shall defraud another by any of the means mentioned
herein below shall be punished by:

xxx xxx xxx

(2) By means of any of the following false pretenses or fraudulent acts executed prior to or simultaneous with
the commission of the fraud:

(a) By using a fictitious name, or falsely pretending to possess power, influence, qualifications, property,
credit, agency, business or imaginary transactions, or by means of other similar deceits;

xxx xxx xxx

The elements of estafa by means of deceit as defined under Article 315(2)(a) of the Revised Penal Code are as
follows: (1) that there must be a false pretense, fraudulent act or fraudulent means; (2) that such false
pretense, fraudulent act or fraudulent means must be made or executed prior to or simultaneously with the
commission of the fraud; (3) that the offended party must have relied on the false pretense, fraudulent act or
fraudulent means, that is, he was induced to part with his money or property because of the false pretense,
fraudulent act or fraudulent means; and (4) that as a result thereof, the offended party suffered damage.17

Do the findings embodied in the DOJ Resolution align with the foregoing elements of estafa by means of
deceit?

First. The DOJ Resolution explicitly identified the false pretense, fraudulent act or fraudulent means
perpetrated upon the petitioners. It narrated that petitioners were made to believe that ASBHI had the
financial capacity to repay the loans it enticed petitioners to extend, despite the fact that "it had an
authorized capital stock of only P500,000.00 and paid up capital of only P125,000.00."18 The deficient
capitalization of ASBHI is evinced by its articles of incorporation, the treasurer’s affidavit executed by
Nolasco, the audited financial statements of the corporation for 1998 and the general information sheets for
1998 and 1999, all of which petitioners attached to their respective affidavits.19

The Court of Appeals conceded the fact of insufficient capitalization, yet discounted its impact by noting that
ASBHI was able to make good its loans or borrowings from 1998 until the first quarter of 2000.20 The short-
lived ability of ASBHI, to repay its loans does not negate the fraudulent misrepresentation or inducement it
has undertaken to obtain the loans in the first place. The material question is not whether ASBHI inspired
exculpatory confidence in its investors by making good on its loans for a while, but whether such investors
would have extended the loans in the first place had they known its true financial setup. The DOJ
reasonably noted that "no person in his proper frame of mind would venture to lend millions of pesos to a
business entity having such a meager capitalization." In estafa under Article 315(2)(a), it is essential that
such false statement or false representation constitute the very cause or the only motive which induces the
complainant to part with the thing.21
Private respondents argue before this Court that the true capitalization of ASBHI has always been a matter of
public record, reflected as it is in several documents which could be obtained by the petitioners from the
SEC.22 We are not convinced. The material misrepresentations have been made by the agents or employees
of ASBHI to petitioners, to the effect that the corporation was structurally sound and financially able to
undertake the series of loan transactions that it induced petitioners to enter into. Even if ASBHI’s lack of
financial and structural integrity is verifiable from the articles of incorporation or other publicly available
SEC records, it does not follow that the crime of estafa through deceit would be beyond commission when
precisely there are bending representations that the company would be able to meet its obligations.
Moreover, respondents’ argument assumes that there is legal obligation on the part of petitioners to
undertake an investigation of ASBHI before agreeing to provide the loans. There is no such obligation. It is
unfair to expect a person to procure every available public record concerning an applicant for credit to satisfy
himself of the latter’s financial standing. At least, that is not the way an average person takes care of his
concerns.

Second. The DOJ Resolution also made it clear that the false representations have been made to petitioners
prior to or simultaneously with the commission of the fraud. The assurance given to them by ASBHI that it is
a worthy credit partner occurred before they parted with their money. Relevantly, ASBHI is not the entity
with whom petitioners initially transacted with, and they averred that they had to be convinced with such
representations that Roxas and the same group behind BSA were also involved with ASBHI.

Third. As earlier stated, there was an explicit and reasonable conclusion drawn by the DOJ that it was the
representation of ASBHI to petitioners that it was creditworthy and financially capable to pay that induced
petitioners to extend the loans. Petitioners, in their respective complaint-affidavits, alleged that they were
enticed to extend the loans upon the following representations: that ASBHI was into the very same activities
of ASB Realty Corp., ASB Development Corp. and ASB Land, Inc., or otherwise held controlling interest
therein; that ASB could legitimately solicit funds from the public for investment/borrowing purposes; that
ASB, by itself, or through the corporations aforestated, owned real and personal properties which would
support and justify its borrowing program; that ASB was connected with and firmly backed by DBS Bank in
which Roxas held a substantial stake; and ASB would, upon maturity of the checks it issued to its lenders,
pay the same and that it had the necessary resources to do so.23

Fourth. The DOJ Resolution established that petitioners sustained damage as a result of the acts
perpetrated against them. The damage is considerable as to petitioners. Gabionza lost P12,160,583.32
whereas Tan lost 16,411,238.57.24 In addition, the DOJ Resolution noted that neither Roxas nor Nolasco
disputed that ASBHI had borrowed funds from about 700 individual investors amounting to close to P4B.25

To the benefit of private respondents, the Court of Appeals ruled, citing Sesbreno v. Court of Appeals,26 that
the subject transactions "are akin to money market placements which partake the nature of a loan, the non-
payment of which does not give rise to criminal liability for estafa." The citation is woefully misplaced.
Sesbreno affirmed that "a money market transaction partakes the nature of a loan and therefore
‘nonpayment thereof would not give rise to criminal liability for estafa through misappropriation or
conversion.’"27 Estafa through misappropriation or conversion is punishable under Article 315(1)(b), while
the case at bar involves Article 315 (2)(a), a mode of estafa by means of deceit. Indeed, Sesbreno explains: "In
money market placement, the investor is a lender who loans his money to a borrower through a middleman
or dealer. Petitioner here loaned his money to a borrower through Philfinance. When the latter failed to
deliver back petitioner's placement with the corresponding interest earned at the maturity date, the liability
incurred by Philfinance was a civil one."28 That rationale is wholly irrelevant to the complaint at bar, which
centers not on the inability of ASBHI to repay petitioners but on the fraud and misrepresentation committed
by ASBHI to induce petitioners to part with their money.

To be clear, it is possible to hold the borrower in a money market placement liable for estafa if the creditor
was induced to extend a loan upon the false or fraudulent misrepresentations of the borrower. Such estafa is
one by means of deceit. The borrower would not be generally liable for estafa through misappropriation if he
or she fails to repay the loan, since the liability in such instance is ordinarily civil in nature.

We can thus conclude that the DOJ Resolution clearly supports a prima facie finding that the crime of estafa
under Article 315 (2)(a) has been committed against petitioners. Does it also establish a prima facie finding
that there has been a violation of the then-Revised Securities Act, specifically Section 4 in relation to Section
56 thereof?

Section 4 of Batas Pambansa Blg. 176, or the Revised Securities Act, generally requires the registration of
securities and prohibits the sale or distribution of unregistered securities.29 The DOJ extensively concluded
that private respondents are liable for violating such prohibition against the sale of unregistered securities:
Respondents Roxas and Nolasco do not dispute that in 1998, ASB borrowed funds about 700 individual
investors amounting to close to P4 billion, on recurring, short-term basis, usually 30 or 45 days, promising
high interest yields, issuing therefore mere postdate checks. Under the circumstances, the checks assumed
the character of "evidences of indebtedness," which are among the "securities" mentioned under the Revised
Securities Act. The term "securities" embodies a flexible rather than static principle, one that is capable of
adaptation to meet the countless and variable schemes devised by those who seek to use the money of others
on the promise of profits (69 Am Jur 2d, p. 604). Thus, it has been held that checks of a debtor received and
held by the lender also are evidences of indebtedness and therefore "securities" under the Act, where the
debtor agreed to pay interest on a monthly basis so long as the principal checks remained uncashed, it being
said that such principal extent as would have promissory notes payable on demand (Id., p. 606, citing Untied
States v. Attaway (DC La) 211 F Supp 682). In the instant case, the checks were issued by ASB in lieu of the
securities enumerated under the Revised Securities Act in a clever attempt, or so they thought, to take the
case out of the purview of the law, which requires prior license to sell or deal in securities and registration
thereof. The scheme was to designed to circumvent the law. Checks constitute mere substitutes for cash if so
issued in payment of obligations in the ordinary course of business transactions. But when they are issued
in exchange for a big number of individual non-personalized loans solicited from the public, numbering
about 700 in this case, the checks cease to be such. In such a circumstance, the checks assume the
character of evidences of indebtedness. This is especially so where the individual loans were not evidenced by
appropriate debt instruments, such as promissory notes, loan agreements, etc., as in this case. Purportedly,
the postdated checks themselves serve as the evidences of the indebtedness. A different rule would open the
floodgates for a similar scheme, whereby companies without prior license or authority from the SEC. This
cannot be countenanced. The subsequent repeal of the Revised Securities Act does not spare respondents
Roxas and Nolasco from prosecution thereunder, since the repealing law, Republic Act No. 8799 known as
the "Securities Regulation Code," continues to punish the same offense (see Section 8 in relation to Section
73, R.A. No. 8799).30

The Court of Appeals however ruled that the postdated checks issued by ASBHI did not constitute a security
under the Revised Securities Act. To support this conclusion, it cited the general definition of a check as "a
bill of exchange drawn on a bank and payable on demand," and took cognizance of the fact that "the
issuance of checks for the purpose of securing a loan to finance the activities of the corporation is well within
the ambit of a valid corporate act" to note that a corporation does not need prior registration with the SEC in
order to be able to issue a check, which is a corporate prerogative.

This analysis is highly myopic and ignorant of the bigger picture. It is one thing for a corporation to issue
checks to satisfy isolated individual obligations, and another for a corporation to execute an elaborate
scheme where it would comport itself to the public as a pseudo-investment house and issue postdated
checks instead of stocks or traditional securities to evidence the investments of its patrons. The Revised
Securities Act was geared towards maintaining the stability of the national investment market against
activities such as those apparently engaged in by ASBHI. As the DOJ Resolution noted, ASBHI adopted this
scheme in an attempt to circumvent the Revised Securities Act, which requires a prior license to sell or deal
in securities. After all, if ASBHI’s activities were actually regulated by the SEC, it is hardly likely that the
design it chose to employ would have been permitted at all.

But was ASBHI able to successfully evade the requirements under the Revised Securities Act? As found by
the DOJ, there is ultimately a prima facie case that can at the very least sustain prosecution of private
respondents under that law. The DOJ Resolution is persuasive in citing American authorities which
countenance a flexible definition of securities. Moreover, it bears pointing out that the definition of
"securities" set forth in Section 2 of the Revised Securities Act includes "commercial papers evidencing
indebtedness of any person, financial or non-financial entity, irrespective of maturity, issued, endorsed, sold,
transferred or in any manner conveyed to another."31 A check is a commercial paper evidencing
indebtedness of any person, financial or non-financial entity. Since the checks in this case were generally
rolled over to augment the creditor’s existing investment with ASBHI, they most definitely take on the
attributes of traditional stocks.

We should be clear that the question of whether the subject checks fall within the classification of securities
under the Revised Securities Act may still be the subject of debate, but at the very least, the DOJ Resolution
has established a prima facie case for prosecuting private respondents for such offense. The thorough
determination of such issue is best left to a full-blown trial of the merits, where private respondents are free
to dispute the theories set forth in the DOJ Resolution. It is clear error on the part of the Court of Appeals to
dismiss such finding so perfunctorily and on such flimsy grounds that do not consider the grave
consequences. After all, as the DOJ Resolution correctly pointed out: "[T]he postdated checks themselves
serve as the evidences of the indebtedness. A different rule would open the floodgates for a similar scheme,
whereby companies without prior license or authority from the SEC. This cannot be countenanced."32
This conclusion quells the stance of the Court of Appeals that the unfortunate events befalling petitioners
were ultimately benign, not malevolent, a consequence of the economic crisis that beset the Philippines
during that era.33 That conclusion would be agreeable only if it were undisputed that the activities of ASBHI
are legal in the first place, but the DOJ puts forth a legitimate theory that the entire modus operandi of
ASBHI is illegal under the Revised Securities Act and if that were so, the impact of the Asian economic crisis
would not obviate the criminal liability of private respondents.

Private respondents cannot make capital of the fact that when the DOJ Resolution was issued, the Revised
Securities Act had already been repealed by the Securities Regulation Code of 2000.34 As noted by the DOJ,
the new Code does punish the same offense alleged of petitioners, particularly Section 8 in relation to Section
73 thereof. The complained acts occurred during the effectivity of the Revised Securities Act. Certainly, the
enactment of the new Code in lieu of the Revised Securities Act could not have extinguished all criminal acts
committed under the old law.

In 1909-1910, the Philippine and United States Supreme Courts affirmed the principle that when the
repealing act reenacts substantially the former law, and does not increase the punishment of the accused,
"the right still exists to punish the accused for an offense of which they were

convicted and sentenced before the passage of the later act."35 This doctrine was reaffirmed as recently as
2001, where the Court, through Justice Quisumbing, held in Benedicto v. Court of Appeals36 that an
exception to the rule that the absolute repeal of a penal law deprives the court of authority to punish a
person charged with violating the old law prior to its repeal is "where the repealing act reenacts the former
statute and punishes the act previously penalized under the old law."37 It is worth noting that both the
Revised Securities Act and the Securities Regulation Code of 2000 provide for exactly the same penalty: "a
fine of not less than five thousand (P5,000.00) pesos nor more than five hundred thousand (P500,000.00)
pesos or imprisonment of not less than seven (7) years nor more than twenty one (21) years, or both, in the
discretion of the court."38

It is ineluctable that the DOJ Resolution established a prima facie case for violation of Article 315 (2)(a) of the
Revised Penal Code and Sections 4 in relation to 56 of the Revised Securities Act. We now turn to the critical
question of whether the same charges can be pinned against Roxas and Nolasco likewise.

The DOJ Resolution did not consider it exculpatory that Roxas and Nolasco had not themselves dealt directly
with petitioners, observing that "to commit a crime, inducement is as sufficient and effective as direct
participation."39 This conclusion finds textual support in Article 1740 of the Revised Penal Code. The Court
of Appeals was unable to point to any definitive evidence that Roxas or Nolasco did not instruct or induce the
agents of ASBHI to make the false or misleading representations to the investors, including petitioners.
Instead, it sought to acquit Roxas and Nolasco of any liability on the ground that the traders or employees of
ASBHI who directly made the dubious representations to petitioners were never identified or impleaded as
respondents.

It appears that the Court of Appeals was, without saying so, applying the rule in civil cases that all
indispensable parties must be impleaded in a civil action.41 There is no equivalent rule in criminal
procedure, and certainly the Court of Appeals’ decision failed to cite any statute, procedural rule or
jurisprudence to support its position that the failure to implead the traders who directly dealt with
petitioners is indeed fatal to the complaint.42

Assuming that the traders could be tagged as principals by direct participation in tandem with Roxas and
Nolasco – the principals by inducement – does it make sense to compel that they be jointly charged in the
same complaint to the extent that the exclusion of one leads to the dismissal of the complaint? It does not.
Unlike in civil cases, where indispensable parties are required to be impleaded in order to allow for complete
relief once the case is adjudicated, the determination of criminal liability is individual to each of the
defendants. Even if the criminal court fails to acquire jurisdiction over one or some participants to a crime, it
still is able to try those accused over whom it acquired jurisdiction. The criminal court will still be able to
ascertain the individual liability of those accused whom it could try, and hand down penalties based on the
degree of their participation in the crime. The absence of one or some of the accused may bear impact on the
available evidence for the prosecution or defense, but it does not deprive the trial court to accordingly try the
case based on the evidence that is actually available.

At bar, if it is established after trial that Roxas and Nolasco instructed all the employees, agents and traders
of ASBHI to represent the corporation as financially able to engage in the challenged transactions and repay
its investors, despite their knowledge that ASBHI was not established to be in a position to do so, and that
representatives of ASBHI accordingly made such representations to petitioners, then private respondents
could be held liable for estafa. The failure to implead or try the employees, agents or traders will not negate
such potential criminal liability of Roxas and Nolasco. It is possible that the non-participation of such
traders or agents in the trial will affect the ability of both petitioners and private respondents to adduce
evidence during the trial, but it cannot quell the existence of the crime even before trial is had. At the very
least, the non-identification or non-impleading of such traders or agents cannot negatively impact the finding
of probable cause.

The assailed ruling unfortunately creates a wide loophole, especially in this age of call centers, that would
create a nearly fool-proof scheme whereby well-organized criminally-minded enterprises can evade
prosecution for criminal fraud. Behind the veil of the anonymous call center agent, such enterprises could
induce the investing public to invest in fictional or incapacitated corporations with fraudulent impossible
promises of definite returns on investment. The rule, as set forth by the Court of Appeals’ ruling, will allow
the masterminds and profiteers from the scheme to take the money and run without fear of the law simply
because the defrauded investor would be hard-pressed to identify the anonymous call center agents who,
reading aloud the script prepared for them in mellifluous tones, directly enticed the investor to part with his
or her money.

Is there sufficient basis then to establish probable cause against Roxas and Nolasco? Taking into account
the relative remoteness of private respondents to petitioners, the DOJ still concluded that there was. To
repeat:

The false representations made by the ASB agents who dealt with the complainant-petitioners and who
inveigled them into investing their funds in ASB are properly imputable to respondents Roxas and Nolasco,
because they, as ASB’s president and senior vice president/treasurer, respectively, respectively, in charge of
its operations, directed its agents to make the false representations to the public, including the complainant-
petitioners, in order to convince them to invest their moneys in ASB. It is difficult to make a different
conclusion, judging from the fact that respondents Roxas and Nolasco authorized and accepted for ASB the
fraud-induced loans.43

Indeed, the facts as thus established cannot lead to a definite, exculpatory conclusion that Roxas and
Nolasco did not instruct, much less forbid, their agents from making the misrepresentations to petitioners.
They could of course pose that defense, but such claim can only be established following a trial on the merits
considering that nothing in the record proves without doubt such law-abiding prudence on their part. There
is also the fact that ABSHI, their corporation, actually received the alleged amounts of money from
petitioners. It is especially curious that according to the ASBHI balance sheets dated 31 December 1999,
which petitioners attached to their affidavit-complaints,44 over five billion pesos were booked as "advances to
stockholder" when, according to the general information sheet for 1999, Roxas owned 124,996 of the
125,000 subscribed shares of ASBHI.45 Considering that ASBHI had an authorized capital stock of only
P500,000 and a subscribed capital of P125,000, it can be reasonably deduced that such large amounts
booked as "advances to stockholder" could have only come from the loans extended by over 700 investors to
ASBHI.

It is true that there are exceptions that may warrant departure from the general rule of non-interference with
the determination of probable cause by the DOJ, yet such exceptions do not lie in this case, and the
justifications actually cited in the Court of Appeals’ decision are exceptionally weak and ultimately
erroneous. Worse, it too hastily condoned the apparent evasion of liability by persons who seemingly profited
at the expense of investors who lost millions of pesos. The Court’s conclusion is that the DOJ’S decision to
prosecute private respondents is founded on sufficient probable cause, and the ultimate determination of
guilt or acquittal is best made through a full trial on the merits. Indeed, many of the points raised by private
respondents before this Court, related as they are to the factual context surrounding the subject
transactions, deserve the full assessment and verification only a trial on the merits can accord.

WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution of the Court of Appeals dated
18 July 2003 and 28 November 2003 are REVERSED and SET ASIDE. The Resolutions of the Department of
Justice in I.S. Nos. 2000-1418 to 1422 dated 15 October 2001 and 3 July 2002 are REINSTATED. Costs
against private respondents.

3. SEC vs. Prosperity.com, Inc., GR No. 164197, January 25, 2012

G.R. No. 164197 January 25, 2012

SECURITIES AND EXCHANGE COMMISSION, Petitioner,
vs.
PROSPERITY.COM, INC., Respondent.

DECISION

ABAD, J.:

This case involves the application of the Howey test in order to determine if a particular transaction is an
investment contract.

The Facts and the Case

Prosperity.Com, Inc. (PCI) sold computer software and hosted websites without providing internet service. To
make a profit, PCI devised a scheme in which, for the price of US$234.00 (subsequently increased to
US$294), a buyer could acquire from it an internet website of a 15-Mega Byte (MB) capacity. At the same
time, by referring to PCI his own down-line buyers, a first-time buyer could earn commissions, interest in
real estate in the Philippines and in the United States, and insurance coverage worth ₱50,000.00.

To benefit from this scheme, a PCI buyer must enlist and sponsor at least two other buyers as his own down-
lines. These second tier of buyers could in turn build up their own down-lines. For each pair of down-lines,
the buyer-sponsor received a US$92.00 commission. But referrals in a day by the buyer-sponsor should not
exceed 16 since the commissions due from excess referrals inure to PCI, not to the buyer-sponsor.

Apparently, PCI patterned its scheme from that of Golconda Ventures, Inc. (GVI), which company stopped
operations after the Securities and Exchange Commission (SEC) issued a cease and desist order (CDO)
against it. As it later on turned out, the same persons who ran the affairs of GVI directed PCI’s actual
operations.

In 2001, disgruntled elements of GVI filed a complaint with the SEC against PCI, alleging that the latter had
taken over GVI’s operations. After hearing,1 the SEC, through its Compliance and Enforcement unit, issued
a CDO against PCI. The SEC ruled that PCI’s scheme constitutes an Investment contract and, following the
Securities Regulations Code,2 it should have first registered such contract or securities with the SEC.

Instead of asking the SEC to lift its CDO in accordance with Section 64.3 of Republic Act (R.A.) 8799, PCI
filed with the Court of Appeals (CA) a petition for certiorari against the SEC with an application for a
temporary restraining order (TRO) and preliminary injunction in CA-G.R. SP 62890. Because the CA did not
act promptly on this application for TRO, on January 31, 2001 PCI returned to the SEC and filed with it
before the lapse of the five-day period a request to lift the CDO. On the following day, February 1, 2001, PCI
moved to withdraw its petition before the CA to avoid possible forum shopping violation.

During the pendency of PCI’s action before the SEC, however, the CA issued a TRO, enjoining the
enforcement of the CDO.3 In response, the SEC filed with the CA a motion to dismiss the petition on ground
of forum shopping. In a Resolution,4 the CA initially dismissed the petition, finding PCI guilty of forum
shopping. But on PCI’s motion, the CA reversed itself and reinstated the petition.5

In a joint resolution,6 CA-G.R. SP 62890 was consolidated with CA-G.R. SP 64487 that raised the same
issues. On July 31, 2003 the CA rendered a decision, granting PCI’s petition and setting aside the SEC-
issued CDO.7 The CA ruled that, following the Howey test, PCI’s scheme did not constitute an investment
contract that needs registration pursuant to R.A. 8799, hence, this petition.

The Issue Presented

The sole issue presented before the Court is whether or not PCI’s scheme constitutes an investment contract
that requires registration under R.A. 8799.

The Ruling of the Court

The Securities Regulation Code treats investment contracts as "securities" that have to be registered with the
SEC before they can be distributed and sold. An investment contract is a contract, transaction, or scheme
where a person invests his money in a common enterprise and is led to expect profits primarily from the
efforts of others.8

Apart from the definition, which the Implementing Rules and Regulations provide, Philippine jurisprudence
has so far not done more to add to the same. Of course, the United States Supreme Court, grappling with the
problem, has on several occasions discussed the nature of investment contracts. That court’s rulings, while
not binding in the Philippines, enjoy some degree of persuasiveness insofar as they are logical and consistent
with the country’s best interests.9

The United States Supreme Court held in Securities and Exchange Commission v. W.J. Howey Co.10 that,
for an investment contract to exist, the following elements, referred to as the Howey test must concur: (1) a
contract, transaction, or scheme; (2) an investment of money; (3) investment is made in a common
enterprise; (4) expectation of profits; and (5) profits arising primarily from the efforts of others. 11 Thus, to
sustain the SEC position in this case, PCI’s scheme or contract with its buyers must have all these elements.

An example that comes to mind would be the long-term commercial papers that large companies, like San
Miguel Corporation (SMC), offer to the public for raising funds that it needs for expansion. When an investor
buys these papers or securities, he invests his money, together with others, in SMC with an expectation of
profits arising from the efforts of those who manage and operate that company. SMC has to register these
commercial papers with the SEC before offering them to investors.1âwphi1

Here, PCI’s clients do not make such investments. They buy a product of some value to them: an Internet
website of a 15-MB capacity. The client can use this website to enable people to have internet access to what
he has to offer to them, say, some skin cream. The buyers of the website do not invest money in PCI that it
could use for running some business that would generate profits for the investors. The price of US$234.00 is
what the buyer pays for the use of the website, a tangible asset that PCI creates, using its computer facilities
and technical skills.

Actually, PCI appears to be engaged in network marketing, a scheme adopted by companies for getting
people to buy their products outside the usual retail system where products are bought from the store’s
shelf. Under this scheme, adopted by most health product distributors, the buyer can become a down-line
seller. The latter earns commissions from purchases made by new buyers whom he refers to the person who
sold the product to him. The network goes down the line where the orders to buy come.

The commissions, interest in real estate, and insurance coverage worth ₱50,000.00 are incentives to down-
line sellers to bring in other customers. These can hardly be regarded as profits from investment of money
under the Howey test.

The CA is right in ruling that the last requisite in the Howey test is lacking in the marketing scheme that PCI
has adopted. Evidently, it is PCI that expects profit from the network marketing of its products. PCI is correct
in saying that the US$234 it gets from its clients is merely a consideration for the sale of the websites that it
provides.

WHEREFORE, the Court DENIES the petition and AFFIRMS the decision dated July 31, 2003 and the
resolution dated June 18, 2004 of the Court of Appeals in CA-G.R. SP 62890.

SO ORDERED.

4. SEC vs. Santos, GR No. 195542, March 19, 2014

G.R. No. 195542

SECURITIES AND EXCHANGE COMMISSION, Petitioner,

vs.
OUDINE SANTOS, Respondent.

DECISION

PEREZ, J.:

Before us is another cautionary tale of an investment arrangement which, at the outset, appeared good,
unraveling unhappily as a deal too-good-to-be-true.

This petition for review on certiorari under Rule 45 of the Rules of Court assails the Decision1 of the Court of
Appeals in CA-G.R. SP No. 112781 affirming the Resolutions2 of the Secretary of Justice in I.S. No. 2007-
1054 which, among others, dismissed the criminal complaint for violation of Section 28 of Republic Act No.
8799, the Securities Regulation Code, filed by petitioner Securities and Exchange Commission (SEC) against
respondent Oudine Santos (Santos).

Sometime in 2007, yet another investment scam was exposed with the disappearance of its primary
perpetrator, Michael H.K. Liew (Liew), a self- styled financial guru and Chairman of the Board of Directors of
Performance Investment Products Corporation (PIPC-BVI), a foreign corporation registered in the British
Virgin Islands.

To do business in the Philippines, PIPC-BVI incorporated herein as Philippine International Planning Center
Corporation (PIPC Corporation).

Because the head of PIPC Corporation had gone missing and with it the monies and investment of a
significant number of investors, the SEC was flooded with complaints from thirty-one (31) individuals against
PIPC Corporation, its directors, officers, employees, agents and brokers for alleged violation of certain
provisions of the Securities Regulation Code, including Section 28 thereof. Santos was charged in the
complaints in her capacity as investment consultant of PIPC Corporation, who supposedly induced private
complainants Luisa Mercedes P. Lorenzo (Lorenzo) and Ricky Albino P. Sy (Sy), to invest their monies in PIPC
Corporation.

The common recital in the 31 complaints is that:

x x x [D]ue to the inducements and solicitations of the PIPC corporation’s directors, officers and
employees/agents/brokers, the former were enticed to invest their hard-earned money, the minimum
amount of which must be US$40,000.00, with PIPC-BVI, with a promise of higher income potential of an
interest of 12 to 18 percentum (%) per annum at relatively low-risk investment program. The private
complainants also claimed that they were made to believe that PIPC Corporation refers to Performance
Investment Product Corporation, the Philippine office or branch of PIPC-BVI, which is an entity engaged in
foreign currency trading, and not Philippine International Planning Center Corporation.3

Soon thereafter, the SEC, through its Compliance and Endorsement Division, filed a complaint-affidavit for
violation of Sections 8,4 265 and 286 of the Securities Regulation Code before the Department of Justice
which was docketed as I.S. No. 2007-1054. Among the respondents in the complaint-affidavit were the
principal officers of PIPC: Liew, Chairman and President; Cristina Gonzalez-Tuason, Director and General
Manager; Ma. Cristina Bautista-Jurado, Director; and herein respondent Santos.

Private complainants, Lorenzo and Sy, in their affidavits annexed to SEC’s complaint-affidavit, respectively
narrated Santos’ participation in how they came to invest their monies in PIPC Corporation:
1. Lorenzo’s affidavit

xxxx

2. I heard about PIPC Corporation from my friend Derrick Santos during an informal gathering sometime in
March 2006. He said that the investments in PIPC Corporation generated a return of 18-20% p.a. every two
(2) months. He then gave me the number of his sister, Oudine Santos who worked for PIPC Philippines to
discuss the investment further.

3. I then met with Oudine Santos sometime during the first week of April 2006 at PIPC Philippines’ lounge x
x x. Oudine Santos conducted for my personal benefit a presentation of the characteristics of their
investment product called "Performance Managed Portfolio" (PMP). The main points of her presentation are
indicated in a summary she gave me, x x x:

xxxx

4. I asked Oudine Santos who were the traders, she said their names were "confidential."

5. Oudine Santos also emphasized in that same meeting that I should keep this transaction to myself
because they were not allowed to conduct foreign currency trading. However, she assured me that I should
not worry because they have a lot of "big people" backing them up. She also mentioned that they were
applying for a seat in the "stock exchange."

6. I ultimately agreed to put in FORTY THOUSAND US DOLLARS (US$40,000.00) in their investment

product.

7. Oudine Santos then gave me instructions on how to place my money in PMP and made me sign a
Partnership Agreement. x x x.

xxxx

8. Soon thereafter, pursuant to the instructions Oudine Santos gave me, I remitted US$40,000.00 to ABN-
AMRO Hong Kong.

9. Afterwards, I received a letter dated 17 April 2006, signed by Michael H.K. Liew, welcoming my
investment.

xxxx

10. Sometime on May 2006, I added another US$ 60,000.00 to my then subsisting account #181372, thus
totaling US$100,000.00. This amount, pursuant to the instructions of Oudine Santos, was remitted to
Standard Chartered Bank.

xxxx

14. Then sometime on May 2007, I planned to pull out my remaining US$100,000.00 investment in PIPC
Philippines. On 22 May 2007, I met with Oudine Santos at the 15th Floor of Citibank Tower in Makati City. I
told her I wanted to terminate all my investments.

15. Oudine Santos instead said that PIPC Philippines has a new product I might be interested in. x x x She
explained that this product had the following characteristics:
xxxx

16. Oudine Santos reiterated these claims in an email she sent me on 22 May 2007. x x x.

17. Enticed by these assurances and promises of large earnings, I put in FOUR HUNDRED THOUSAND US
DOLLARS (US$400,000.00) in PMP (RZB), which became account # R149432.

18. Pursuant to the instructions Oudine Santos gave me, I remitted the amount of US$ 400,000.00 to RZB
Austria, Singapore Branch.

xxxx

22. I tried calling Oudine Santos and was finally able to reach her at around 7 in the morning. She confirmed
what Leah Caringal told me. I told her then that I want full recovery of my investment in accordance with
their 100% principal guarantee. To this day[,] I have not received my principal investment.7

5. Sy’s affidavit

2. I have been a depositor of the Bank of the Philippine Islands (BPI) Pasong Tamo branch for the past 15
years. Sometime in the last quarter of 2006, I was at BPI Pasong Tamo to accomplish certain routine
transactions. Being a client of long standing, the bank manager[,] as a matter of courtesy, allowed me to wait
in her cubicle. It was there that the bank manager introduced me to another bank client, Ms. Oudine Santos.
After exchanging pleasantries, and in the course of a brief conversation, Ms. Santos told me that she is a
resident of Damariñas Village and was working as an investment consultant for a certain company,
Performance Investment Products Corporation [PIPC]. She told me that she wanted to invite me to her office
at the Citibank Tower in Makati so that she could explain the investment products that they are offering. I
gave her my contact number and finished my transaction with the bank for that day;

3. Ms. Santos texted me to confirm our meeting. A few days later, I met her at the business lounge of [PIPC]
located at the 15th Floor of Citibank Tower, Makati. During the meeting, Ms. Santos enticed me to invest in
their Performance Managed Portfolio which she explained was a risk controlled investment program designed
for individuals like me who are looking for higher investment returns than bank deposits while still having
the advantage of security and liquidity. She told me that they were engaged in foreign currency trading
abroad and that they only employ professional and experienced foreign exchange traders who specialize in
trading the Japanese Yen, Euro, British Pound, Swiss Francs and Australian Dollar. I then told her that I did
not have any experience in foreign currency trading and was quite conservative in handling my money;

4. Ms. Santos quickly allayed my fears by emphasizing that the capital for any investment with [PIPC] is
secure. She then trumpeted [PIPC’s] track record in the Philippines, having successfully solicited investments
from many wealthy and well-known individuals since 2001;

5. Ms. Santos convinced me to invest in Performance Management Portfolio I x x x [which] features full
protection for the principal investment and a 60%-40% sharing of the profit between the client and [PIPC]
respectively;

6. In November of 2006, I decided to invest USD 40,000 specifically in Performance Management Portfolio I x
x x. After signing the Partnership Agreement, x x x, I was instructed by Ms. Santos to deposit the amount by
telegraphic transfer to [PIPC’s] account in ABN AMRO Bank Hong Kong. I did as instructed;

xxxx

8. Sometime January to March of 2007, [Santos] was convincing me to make an additional investment under
a second product, Performance Management Portfolio II [PMP II] which provides a more limited guarantee for
the principal investment of USD 100,000 and a 80%-20% sharing of the profit between the client and [PIPC]
respectively. In both schemes, the client’s participation will be limited to choosing two currencies which will
in turn be traded by professional traders abroad. Profit earned from the transaction will then be remitted to
the client’s account every 8 weeks;

xxxx

10. After I made my USD 40,000 PMP I investment, Ms. Santos invited me to meet Mr. Michael Liew in the
business lounge some time during the first quarter of this year. My impression was that he was quite
unassuming considering that he was the head of an international investment firm. x x x.8

On the whole, Lorenzo and Sy charge Santos in her capacity as investment consultant of PIPC Corporation
who actively engaged in the solicitation and recruitment of investors. Private complainants maintain that
Santos, apart from being PIPC Corporation’s employee, acted as PIPC Corporation’s agent and made
representations regarding its investment products and that of the supposed global corporation PIPC-BVI.
Facilitating Lorenzo’s and Sy’s investment with PIPC Corporation, Santos represented to the two that
investing with PIPC Corporation, an affiliate of PIPC-BVI, would be safe and full-proof.

In SEC’s complaint-affidavit, it charged the following:

xxxx

12. This case stems from the act of fraud and chicanery masterfully orchestrated and executed by the
officers and agents of PIPC Corp. against their unsuspecting investors. The deception is founded on the basic
fact that neither PIPC Corp. nor its officers, employees and agents are registered brokers/dealers, making
their numerous transactions of buying and selling securities to the public a blatant violation of the
provisions of the SRC, specifically Sections 8 and 28 thereof. Their illegal offer/sale of securities in the form
of the "Performance Management Partnership Agreement" to the public was perpetrated for about nine (9)
years and would have continued were it not for the alleged, and most probably, contrived and deliberate
withdrawal of the entire funds of the corporation by Michael H.K. Liew. The [scam] was masked by a
supposed offshore foreign currency trading scheme promising that the principal or capital infused will be
guaranteed or fully protected. Coupled with this [full] guarantee for the principal is the prospect of profits at
an annual rate of 12 to 18%. [One of] the other enticements provided by the subject company were free use
of its business either for personal or business purposes, free subscription of imported magazines, [trips]
abroad, and insurance coverage, just to name a few. Fully convinced and enamored [by the] thought of
earning higher rates of interest along with the promise of a guaranteed [capital] the investors placed and
entrusted their money to PIPC Corp., only to find out later [that they] had been deceived and taken for a ride.

xxxx

17. Sometime in 2006, an investigation was undertaken by the [Compliance and Enforcement Division of the
SEC] on the [account] of PIPC Corp. Per its Articles of Incorporation, PIPC Corp. was authorized to engage [in
the] dissemination of information on the current flow of foreign exchange (forex) as x x x precious metals
such as gold, silver, and oil, and items traded in stock and securities/commodities exchanges around the
world. To be more specific, PIPC Corp. [was] authorized to act only as a research arm of their foreign clients.

xxxx

22. x x x.

Name of Investors Broker/Agent Banl/Location to which funds were transferred Date Account
Number Amount of Investment Bank/ Location
xxx
xxxx
23. Luisa Mercedes P. Lorenzo Oudine Santos RZB Austria, Singapore Branch June 2007
R149432 US$500,000 Not provided
xxxx
32. Ricky Albino P. SyOudine Santos ABN-AMRO Bank Hongkong 9 October 2006 0800287 769
US$40,000 BPI Pasong Tamo B9
23. A careful perusal of the complaint-affidavits revealed that for every completed investment transaction, a
company brochure, depending on the type of investment portfolio chosen, was provided to each investor
containing the following information on Performance BVI and its investment product called Performance
Managed Portfolio or PMP, the points of which are as follows:

a.8 calendar week maturity period[,]

b.principal investment (minimum of USD 40,000) is protected[,]

c.investments maintained in strict confidentiality[,]

d.features: security, liquidity, short term commitment,

e.tax-exemption status for offshore investments.

24.The investment flow is described as follows:

a.Investors’ funds will be placed into a fixed deposit account with a PIPC designated bank and shall not be
exposed for trading purposes. The PIPC designated bank shall then extend a margin line request for trading
based on the deposit;

b.PIPC shall open a separate account which will contain an amount of not more than 30% of its own funds to
serve as a profit and loss account;

c.Trading will commence with PIPC designated bank closely monitoring the performance to ensure that if
losses are incurred trading will cease immediately should the 20% stop limit be hit;

d.Profits will be credited into the Profit and Loss account with PIPC designated bank account. Losses will be
debited from the same account up to the controlled 20% limit;

e.Notice of withdrawals must be submitted two weeks prior to schedule of maturity otherwise investment is
automatically rolled over to the next batch;

f.At maturity, profits accumulated in the settlement account shall be distributed and deposited into each
investor’s dollar bank account within fourteen (14) banking days;

g.The funds of various investors are pooled, batched and deposited with PIPC designated bank account
acting as custodian bank, to form a massive asset base. This account is separate and distinct from the Profit
and Loss Account. The line from this pooled fund is then entrusted to full time professional and experienced
foreign traders who each specialize in the following currencies: Japanes Yen, Euro, British Pound, Swiss
Francs and Australian Dollar. Profits generated from trading these major currencies is credited into the Profit
and Loss Account, which at the end of the eight calendar week lock-in period, will be distributed among the
investors. Investors are informed of their account status thru trading statements issued by PIPC every time
there is a trade made in their respective accounts.

xxxx
25. Furthermore, it was relayed by the officers and agents to complainants-investors that PIPC Corp. is the
Philippine office of the Performance Group of Companies affiliates situated in different parts of the world,
particularly China, Indonesia, Hong Kong, Japan, Korea,

Singapore, and the British Virgin Islands (BVI), even reaching Switzerland. With such basic depiction of the
legitimacy and stability of PIPC Corp., complainants-investors deduced that it was clothed with the authority
to solicit, offer [and] sell securities. As regards the officers and agents of [PIPC Corp.], they secured proper
individual licenses with the SEC as brokers/dealers of securities to enable to solicit, offer and/or sell the
same.

26. Official SEC documents would show that while PIPC Corp. is indeed registered with the SEC, it having
engaged in the solicitation and sale of securities was contrary to the purpose for which it was established
which is only to act as a financial research. Corollarily, PIPC Corp.’s officers, agents, and brokers were not
licensed to solicit, offer and sell securities to the public, a glaring violation of Sections 8 and 28 of the
SRC.10

In refutation, Santos denied intentionally defrauding complainants Lorenzo and Sy:

12.I cannot understand how I can be charged of forming, or even of being a part of, a syndicate "formed with
the intention of carrying an unlawful or illegal act, transaction, enterprise or scheme." If this charge has
reference to PIPC Corp. then I certainly cannot be held liable therefore. As I mentioned above, I joined PIPC
Corp. only in April 2005 and, by that time, the company was already in existence for over four years. I had
no participation whatsoever in its creation or formation, as I was not even connected with PIPC Corp. at the
time of its incorporation. In fact, I have never been a stockholder, director, general manager or officer of PIPC
Corp. Further, PIPC Corp. was duly registered with the Securities and Exchange Commission and was
organized for a legitimate purpose, and certainly not for the purpose of perpetrating a fraud against the
public.

13.That I was an employee and, later on, an independent information provider of PIPC Corp. is of little
consequence. My duties as such were limited to providing information about the corporate clients of PIPC
Corp. that had been expressly requested by interested individuals. I performed my assigned job without any
criminal intent or malice. In this regard, I have been advised that offenses penalized under the RPC are
intentional felonies for which criminal liability attaches only when it is shown that the malefactors acted with
criminal intent or malice. There can be no crime when the criminal mind is wanting. In this case, I performed
my task of providing requested information about the clients of PIPC Corp. without any intent to violate the
law. Thus, there can be no criminal liability.

[14]. I have also been advised that under the law, the directors and officers of a corporation who act for and
in behalf of the corporation, who keep within the lawful scope of their authority, and act in good faith, do not
become liable, whether civilly or otherwise, for the consequences of their acts, as these acts are properly
attributed to the corporation alone. The same principle should apply to individual, like myself, who was only
acting within the bounds of her assigned tasks and had absolutely no decision-making power in the
management and supervision of the company.

[15]. Neither can I be liable of forming a syndicate with respect to PIPC- BVI. To reiterate, at no time was I
ever a stockholder, director, employee, officer or agent of PIPC-BVI. Said company is simply one of many
companies serviced by PIPC Corp. I had no participation whatsoever in its creation and/or in the direction of
its day-to-day affairs.

xxxx

19. Further, I have been advised by counsel that conspiracy must be established by positive and conclusive
evidence. It cannot be based on mere conjecture but must be established as a fact. In this case, no proof of
conspiracy was presented against me. In fact, it appears that I have been dragged in to this allegation based
on the hearsay statement of Felicia Tirona that I was one of the in-house "account executives" or "work force"
of PIPC-BVI and PIPC Corp. There was no allegation whatsoever of any illegal act done by me to warrant the
institution of criminal charges against me. If at all, only Michael Liew should be held criminally liable, as he
was clearly the one who absconded with the money of the investors of PIPC-BVI. Mr. Liew has since
disappeared and efforts to locate him have apparently proved to be futile to date.
xxxx

23.In the first place, I did not receive any money or property from any of the complainants. As clearly shown
by the documents submitted to this Honorable Office, particularly, the Portfolio Management Partnership
Agreement, Security Agreement, Declaration of Trust, bank statements and acknowledgement receipts,
complainants delivered their money to PIPC-BVI, not to PIPC Corp. Complainants deposited their investment
in PIPC-BVI’s bank account, and PIPC-BVI would subsequently issue an acknowledgement receipt. No part of
the said money was ever delivered to PIPC Corp. or to me.

24.Indeed, complainant’s own evidence show that the Portfolio Management Partnership Agreement, Security
Agreement and Declaration of Trust were executed between PIPC-BVI and the individual complainants.
Further, paragraph 2 of the Declaration of Trust explicitly stated that PIPC-BVI "hold the said amount of
money UPON TRUST for the Beneficiary Owner." The complainants cannot, therefore, hold PIPC Corp., or
any of its officers or employees, with misappropriating their money or property when they were fully aware
that they delivered their money to, and transacted solely with, PIPC-BVI, and not PIPC Corp.

25.It also bears stressing that of the twenty-one (21) complainants in this case, only complainant Ricky
Albino Sy alleged that he had actually dealt with me. Complainant Sy himself never alleged that he delivered
or entrusted any money or property to me. On the contrary, complainant Sy admitted that he deposited his
investment of U.S.$40,000.00 by bank transfer to PIPC-BVI’s account in the ABN Amro Bank. That the
money was delivered to PIPC-BVI, and not to me, is shown by the fact that the receipt was issued by PIPC-
BVI. I never signed or issued any acknowledgement receipt, as I never received any such money. Neither did I
ever gain physical or juridical possession of the said money.11 (Emphasis and underscoring supplied).

Santos’ defense consisted in: (1) denying participation in the conspiracy and fraud perpetrated against the
investor-complainants of PIPC Corporation, specifically Sy and Lorenzo; (2) claiming that she was initially
and merely an employee of, and subsequently an independent information provider for, PIPC Corporation; (3)
PIPC Corporation being a separate entity from PIPC-BVI of which Santos has never been a part of in any
capacity; (4) her not having received any money from Sy and Lorenzo, the two having, in actuality, directly
invested their money in PIPC-BVI; (5) Santos having dealt only with Sy and the latter, in fact, deposited
money directly into PIPC-BVI’s account; and (6) on the whole, PIPC-BVI as the other party in the investment
contracts signed by Sy and Lorenzo, thus the only corporation liable to Sy and Lorenzo and the other
complainants.

On 18 April 2008, the DOJ, in I.S. No. 2007-1054, issued a Resolution signed by a panel of three (3)
prosecutors, with recommendation for approval of the Assistant Chief State Prosecutor, and ultimately
approved by Chief State Prosecutor Jovencito R. Zuño, indicting: (a) Liew and Gonzalez-Tuason for violation
of Sections 8 and 26 of the Securities Regulation Code; and (b) herein respondent Santos, along with Cristina
Gonzalez-Tuason and 12 others for violation of Section 28 of the Securities Regulation Code. The same
Resolution likewise dismissed the complaint against 8 of the respondents therein for insufficiency of
evidence. In the 18 April 2008 Resolution, the DOJ discussed at length the liability of PIPC Corporation and
its officers, employees, agents and all those acting on PIPC Corporation’s behalf, to wit:

Firstly, complainant SEC filed the instant case for alleged violation by respondents [therein, including herein
respondent, Santos,] of Section 8 of the SRC.

Sec. 8. Requirement of Registration of Securities. – 8.1. Securities shall not be sold or offered for sale or
distribution within the Philippines, without a registration statement duly filed with and approved by the
Commission. Prior to such sale, information on the securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each prospective purchaser.

Based on the above provision of the law, complainant SEC is now accusing all respondents [therein,
including Santos,] for violating the same when they allegedly sold and/or offered for sale unregistered
securities.

However, Section 8.5 thereof provides that "The Commission may audit the financial statements, assets and
other information of a firm applying for registration of its securities whenever it deems the same necessary to
insure full disclosure or to protect the interest of the investors and the public in general."
The above-quoted provision is loud and clear and needs no further interpretation. It is the firm through its
authorized officers that is required to register its securities with the SEC and not the individual persons
allegedly selling and/or offering for sale said unregistered securities. To do otherwise would open the
floodgates to numerous complaints against innocent individuals who have no hand in the control, decision-
making and operations of said investment company.

Clearly, it is only the PIPC Corp. and respondents Michael H. Liew and Cristina Gonzalez-Tuason being the
President and the General Manager respectively, of PIPC Corp. who violated Section 8 of the SRC.

xxxx

Respondents Liew and Tuason are directors and officers of PIPC Corp. who exercise power of control and
supervision in the management of said corporation. Surely they cannot claim having no knowledge of the
operations of PIPC Corp. vis-à-vis its scope of authority since they are the ones who actually created and
manage the same. They are well aware that PIPC Corp. is a mere financial research facility and has nothing
to do with selling or offering for sale securities to the general public. But despite knowledge, they continue to
recruit and deceive the general public by making it appear that PIPC Corp. is a legitimate investment
company.

Moreover, they cannot evade liability by hiding behind the veil of a corporate fiction. x x x.

xxxx

In the case at bar, the investors were made to believe that PIPC Corp. and PIPC-BVI is one and the same
corporation. There is nothing on record that would show that private complainants were informed that PIPC
Corp. and PIPC-BVI are two entities distinct and separate from one another. In fact, when they invested their
money, they dealt with PIPC Corp. and the people acting on its behalf but when they signed documents they
were provided with ones bearing the name of PIPC-BVI. Clearly, this obvious and intentional confusion of
names of the two entities is designed to defraud and later to avoid liabilities from their victims. Therefore, the
defense of a corporate fiction is unavailing in the instant case.

xxxx

Buying and selling of securities is an indispensable element that makes one a broker or dealer. So if one is
not engaged in the business of buying and selling of securities, naturally he or she cannot be considered as a
broker or dealer. However, a person may be considered as an agent of another, juridical or natural person, if
it can be inferred that he or she acts as an agent of his or her principal as above-defined. One can also be an
investor and agent at the same time.

An examination of the records and the evidence submitted by the parties, we have observed that all
respondents are investors of PIPC-BVI, same with the private complainants, they also lost thousands of
dollars. We also noted the fact that most of the private complainants and alleged brokers or agents are long
time friends if not blood related individuals. Notably also is the fact that most of them are highly educated
businessmen/businesswomen who are financially well-off. Hence, they are regarded to be wiser and more
prudent and expected to exercise due diligence of a good father of a family in managing their finances as
compared to those who are less fortunate in life.

However, we still need to delve deeper into the facts and the [evidence] on record to determine the degree of
respondents’ participations and if on the basis of their actions, it can be inferred that they acted as
employees-agents or investor-agents of PIPC Corp. or PIPC- BVI then are liable under Section 28 of the SRC
otherwise, they cannot be [blamed] for being mere employees or investors thereof.

xxxx

Oudine Santos. Investment Consultant of PIPC Corp. who allegedly invited, convinced and assured private
complainants Luisa Mercedes P. Lorenzo and Ricky Albino P. Sy to invest in PIPC Corp. To prove their
allegations, respondents attached email exchanges with respondent Santos regarding the details in investing
with PIPC-BVI. Respondent Santos failed to submit counter-affidavit despite subpoena.

xxxx

After painstakingly going over the record and the supporting documents attached thereto and after carefully
evaluating the respective claims and defenses raised by all the parties, the undersigned panel of prosecutors
has a reason to believe that Section 28 of the SRC has been violated and that the following respondents are
probably guilty thereof and should, therefore, be held for trial:

1.Cristina Gonzalez-Tuason

2.x x x.

xxxx

13.Oudine Santos

The above-named respondents, aside from being officers, employees or investors, clearly acted as agents of
PIPC Corp. who made representations regarding PIPC Corp. and PIPC-BVI investment products. They
assured their clients that investing with PIPC-BVI will be 100% guaranteed. In addition, they also facilitated
their clients’ investments with PIPC-BVI and some, if not all, even received money investors as evidenced by
the acknowledgement receipts they signed and on behalf of PIPC-BVI. The documentary evidence submitted
by witnesses and their categorical and positive assertion of facts which, taken together corroborate one
another, prevails over the defense of denial raised by the above-named respondents which are mostly self-
serving in nature.

A formal or written contract of agency between two or more persons is not necessary for one to become an
agent of the other for as long as it can be inferred from their actions that there exists a principal- agent
relationship between them on the one hand and the PIPC Corp. or PIPC-BVI on the other hand, then, it is
implied that a contract of agency is created.

As to their contention that they are not officers or employees of PIPC Corp., the Supreme Court ruled that
one may be an agent of a domestic corporation although he or she is not an officer thereto. x x x. The basis of
agency is representation; the question of whether an agency has been created is ordinarily a question which
may be established in the same way as any other fact, either by direct or substantial evidence; though that
fact or extent of authority of the agents may not, as a general rule, be established from the declarations of
the agents alone, if one professes to act as agent for another, he or she is estopped to deny her agency both
as against the asserted principal and third persons interested in the transaction in which he or she is
engaged.

Further, they cannot raise the defense of good faith for the simple reason that the SRC is a special law where
criminal intent is not an essential element. Mere violation of which is punishable except in some provisions
thereof where fraud is a condition sine qua non such as Section 26 of the said law.

xxxx

WHEREFORE, the foregoing considered, it is respectfully recommended that this resolution be APPROVED
and that:

1.An information for violation of Section 8 of the SRC be filed against respondent PIPC Corp., MICHAEL H.
LIEW and CRISTINA GONZALEZ-TUASON;
2.An information for violation of Section 26 thereof be also filed against respondents MICHAEL H. LIEW and
CRISTINA GONZALEZ- TUASON; and

3.An information for violation of Section 28 thereof be filed against respondents CRISTINA GONZALEZ-
TUASON, MA. CRISTINA BAUTISTA-JURADO, BARBARA GARCIA, ANTHONY KIERULF, EUGENE GO,
MICHAEL MELCHOR NUBLA, MA. PAMELA MORRIS, LUIS ‘JIMBO’ ARAGON, RENATO SARMIENTO, JR.,
VICTOR JOSE VERGEL DE DIOS, NICOLINE AMORANTO MENDOZA, JOSE ‘JAY’ TENGCO III, [respondent]
OUDINE SANTOS AND HERLEY JESUITAS; and

4.The complaint against MAYENNE CARMONA, YEYE SAN PEDRO-CHOA, MIA LEGARDA, NICOLE ORTEGA,
DAVID CHUA-UNSU, STANLEY CHUA-UNSU, DEBORAH V. YABUT, CHRISTINE YU and JONATHAN
OCAMPO be dismissed for insufficiency of evidence.12 (Emphasis supplied).

In sum, the DOJ panel based its finding of probable cause on the collective acts of the majority of the
respondents therein, including herein respondent Santos, which consisted in their acting as employees-agent
and/or investor-agents of PIPC Corporation and/or PIPC-BVI. Specifically alluding to Santos as Investment
Consultant of PIPC Corporation, the DOJ found probable cause to indict her for violation of Section 28 of the
Securities Regulation Code for engaging in the business of selling or offering for sale securities, on behalf of
PIPC Corporation and/or PIPC-BVI (which were found to be an issuer13 of securities without the necessary
registration from the SEC) without Santos being registered as a broker, dealer, salesman or an associated
person.

On separate motions for reconsideration of the respondents therein, including herein respondent Santos, the
DOJ panel issued a Resolution dated 2 September 2008 modifying its previous ruling and excluding
respondent Victor Jose Vergel de Dios from prosecution for violation of Section 28 of the Securities
Regulation Code, thus:

After an assiduous re-evaluation of the facts and the evidence submitted by the parties in support of their
respective positions, the undersigned panel finds x x x [that the] rest of the respondents mainly rehashed
their earlier arguments except for a few respondents who, in one way or another, failed to participate in the
preliminary investigation; hence raising their respective defenses for the first time in their motions for
reconsideration.

xxxx

With respect to respondents Luis "Jimbo" Aragon and Oudine Santos who also claimed to have not received
subpoenas, this panel, after thoroughly evaluating their respective defenses, finds them to be similarly
situated with the other respondents who acted as agents for and in behalf of PIPC Corp. and/or PIPC-BVI;
hence, their inclusion in the information is affirmed.

xxxx

x x x As to the issue on whether or not PMPA is a security contract, we rule in the affirmative, as supported
by the herein below provisions of the SRC, particularly:

Sec. 8. Requirement of Registration of Securities. – 8.1. Securities shall not be sold or offered for sale or
distribution within the Philippines, without registration statement duly filed with and approved by the
Commission. Prior to such sale, information on the securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each prospective purchaser.

Securities have been defined as shares, participation or interest in a corporation or in a commercial

enterprise or profit making venture and evidenced by a certificate, contract, instrument, whether written or
electronic in character. It includes among others, investment contracts, certificates of interest or
participation in a profit sharing agreement, certificates of deposit for a future subscription.

Under the SRC’s Amended Implementing Rules and Regulations, specifically Rule 3, par. 1 subpar. G, an
investment contract has been defined as a contract, transaction or scheme (collectively "contract"), whereby a
person invests his money in a common enterprise and is led to expect profits primarily from the efforts of
others. It is likewise provided in the said provision that an investment contract is presumed to exist
whenever a person seeks to use the money or property of others on the promise of profits and a common
enterprise is deemed created when two

(2) or more investors "pool" their resources creating a common enterprise, even if the promoter receives
nothing more than a broker’s commission. Undoubtedly, the PMPA is an investment contract falling within
the purview of the term securities as defined by law.

xxxx

It bears to emphasize that the purpose of a preliminary investigation and/or confrontation between the
party-litigants is for them to lay down all their cards on the table to properly inform and apprise the other of
the charges against him/her, to avoid suprises and to afford the adverse party all the opportunity to defend
himself/herself based on the evidence submitted against him/her. Thus, failure on the part of the defaulting
party to submit evidence that was then available to him is deemed a waiver on his part to submit it in the
same proceedings against the same party for the same issue.

WHEREFORE, the foregoing premises considered, the undersigned panel of prosecutors respectfully
recommends that the assailed resolution be modified by dismissing the complaint against Victor Jose Vergel
De Dios and that the Information filed with the appropriate court for violation of Section 28 of the SRC be
amended accordingly.14

Respondent Santos filed a petition for review before the Office of the Secretary of the DOJ assailing the
Resolutions dated 18 April 2008 and 2 September 2008 and claiming that she was a mere clerical
employee/information provider who never solicited nor recruited investors, in particular complainants Sy
and Lorenzo, for PIPC Corporation or PIPC- BVI. Santos also claimed dearth of evidence indicating she was a
salesman/agent or an associated person of a broker or dealer, as defined under the Securities Regulation
Code.

The SEC filed its Comment opposing Santos’ petition for review. Thereafter, the Office of the Secretary of the
DOJ, through its then Undersecretary Ricardo R. Blancaflor, issued a Resolution dated 1 October 2009
which, as previously adverted to, excluded respondent Santos from prosecution for violation of Section 28 of
the Securities Regulation Code. For a complete picture, we quote in full the disquisition of the Secretary of
the DOJ:

[Santos] argues that while Luisa Mercedes P. Lorenzo and Ricky Albino P. Sy mentioned two (2) instances
wherein she allegedly enticed them to invest, their own pieces of evidence, particularly the Annex "E" series
(several "Details of Profit distribution & Renewal of Partnership Agreement" bearing different dates addressed
to Ricky Albino P. Sy with stamped signature for PIPC-BVI), indicate that they invested and reinvested their
money with PIPC-BVI repeatedly and even earned profits from these transactions through direct dealing with
PIPC-BVI and without her participation. In addition, she maintains that Luisa Mercedes P. Lorenzo and
Ricky Albino P. Sy had several opportunities to divest or withdraw their respective investments but opted not
to do so at their own volitions.

xxxx

The sole issue in this case is whether or not respondent Santos acted as agent of PIPC Corp. or had enticed
Luisa Mercedes P. Lorenzo or Ricky Albino P. Sy to buy PIPC Corp. or PIPC-BVI’s investment products.

We resolve in the negative.

Section 28 of the Securities Regulation Code (SRC) reads:

SEC. [28]. Registration of Brokers, Dealers, Salesmen and Associated Persons. – 28.1. No person shall
engage in the business of buying or selling securities in the Philippines as a broker or dealer unless
registered as such with the Commission.
28.2. No registered broker or dealer shall employ any salesman or any associated person, and no issuer shall
employ any salesman, who is not registered as such with the Commission.

Jurisprudence defines an "agent" as a "business representative, whose function is to bring about, modify,
affect, accept performance of, or terminate contractual obligations between principal and third persons." x x
x On the other hand, the Implementing Rules of the SRC simply provides that an agent or a "salesman" is a
person employed as such or as an agent, by the dealer, issuer or broker to buy and sell securities x x x.

A judicious examination of the records indicates the lack of evidence that respondent Santos violated Section
28 of the SRC, or that she had acted as an agent for PIPC Corp. or enticed Luisa Mercedes P. Lorenzo or
Ricky Albino P. Sy to buy PIPC Corp. or PIPC-BVI’s investment products.

The annex "D" ("Welcome to PMP" Letter dated [17 April 2006] addressed to Luisa Mercedes P. Lorenzo
signed by Michael Liew as president of PIPC-BVI), Annex "E" (Fixed Deposit Advice Letter dated [26 June
2006] addressed to Luisa Mercedes P. Lorenzo and stamped signature for PIPC-BVI), and Annex "H"
("Welcome to PMP" Letter dated [30 May 2007] addressed to Luisa Mercedes P. Lorenzo signed by Michael
Liew as President of PIPC-BVI) of the complaint-affidavit dated [11 September 2007] of Luisa Mercedes P.
Lorenzo show that she directly dealt with PIPC-BVI in placing her investment. The same is true with regard
to Annex "A" series (Portfolio Management Partnership Agreement between Ricky Albino P. Sy and PIPC-BVI,
Security Agreement between Ricky Albino P. Sy and PIPC-BVI, and Declaration of Trust between Ricky Albino
P. Sy and PIPC-BVI), Annex "B" (Official Receipt dated 09 November 2006 issued by PIPC-BVI), Annex "C’
("Welcome to PMP" Letter dated [10 November 2006] addressed to Ricky Albino P. Sy and signed by Michael
[Liew] as President of PIPC-BVI), and Annex "D" (Fixed Deposit Advice Letter dated [29 January 2007]
addressed to Ricky Albino P. Sy with stamped signature for PIPC-BVI) of the complaint-affidavit dated [26
September 2007] of Ricky Albino P. Sy. These documents categorically show that the parties therein, i.e.,
Luisa Mercedes P. Lorenzo or Ricky Albino P. Sy and PIPC-BVI, transacted with each other directly without
any participation from respondent Santos.

These documents speak for themselves. Moreover, it bears stressing that Luisa Mercedes P. Lorenzo and
Ricky Albino P. Sy admit in their respective affidavits that they directly deposited their investments by bank
transfer to PIPC-BVI’s offshore bank account.

Annex "B" (Printed background of the PMP of [PIPC]-BVI enumerating the features of said product) and
Annex "C" (Printed "Procedures in PMP Account Opening" instructing the client what to do in placing his/her
investment) of the complaint-affidavit of Luisa Mercedes P. Lorenzo actually supports the allegations of
respondent Santos that there were printed forms/brochures for distribution to persons requesting the same.
These printed/prepared handouts contain the assurances or guarantees of PIPC-BVI and the instructions on
where and how to deposit the investors’ money.

Likewise, Luisa Mercedes P. Lorenzo’s Annex "A" (2006 GIS of PIPC Corp. listing the stockholders, board of
directors an[d] officers thereof), Annex "F" (Deposit Confirmation dated [14 June 2006] from Standard
Chartered Bank) and Annexes "I" to "L" (SEC Certifications stating that PIPC Corp., PIPC, PIPC-BVI and
Performance Investment Products Ltd., respectively, are not registered issuer of securities nor licensed to
offer or sell securities to the public) are not evidence against respondent Santos. Her name is not even
mentioned in any of these documents. If at all, these documents are evidence against PIPC Corp. and its
officers named therein.

Further, it is important to note that in the "Request Form," one of the documents being distributed by
respondent Santos x x x, it is categorically stated therein that said request "shall not be taken as an
investment solicitation x x x, but is mainly for the purpose of providing me with information." Clearly, this
document proves that respondent Santos did not or was not involved in the solicitation of investments but
merely shows that she is an employee of PIPC Corp. In addition, the "Information Dissemination Agreement"
between her employer PIPC Corp. and PIPC- BVI readably and understandably provides that she is
prohibited from soliciting investments in behalf of PIPC-BVI and her authority is limited only to providing
interested persons with the "necessary information regarding how to communicate directly with PIPC."
Parenthetically, the decision to sign the partnership Agreement with PIPC-BVI to invest and repeatedly
reinvest their monies with PIPC-BVI were made by Luisa Mercedes P. Lorenzo and Ricky Albino P. Sy
themselves without any inducement or undue influence from respondent Santos.

xxxx
WHEREFORE, the assailed resolution is hereby MODIFIED, the Chief State Prosecutor is directed to
EXCLUDE respondent Oudine Santos from the Information for violation of Section 28 of the Securities and
Regulation Code, if any has been filed, and report the action taken thereon within ten (10) days from receipt
hereof.15

Expectedly, after the denial of the SEC’s motion for reconsideration before the Secretary of the DOJ, the SEC
filed a petition for certiorari before the Court of Appeals seeking to annul the 1 October 2009 Resolution of
the DOJ.

The Court of Appeals dismissed the SEC’s petition for certiorari and affirmed the 1 October 2009 Resolution
of the Secretary of the DOJ:

Prescinding from the foregoing, a person must first and foremost be engaged in the business of buying and
selling securities in the Philippines before he can be considered as a broker, a dealer or salesman within the
coverage of the Securities Regulation Code. The record in this case however is bereft of any showing that
[Santos] was engaged in the business of buying and selling securities in the Philippines, whether for herself
or in behalf of another person or entity. Apart from [SEC’s] sweeping allegation that [Santos] enticed Sy and
Lorenzo and solicited from them investments for PIPC-BVI without first being registered as broker, dealer or
salesman with SEC, no evidence had been adduced that shows [Santos’] actual participation in the alleged
offer and sale of securities to the public, particularly to Sy and Lorenzo, within the Philippines. There was
likewise no exchange of funds between Sy and Lorenzo, on one hand, and [Santos], on the other hand, as the
price of certain securities offered by PIPC-BVI. There was even no specific proof that [Santos] misrepresented
to Sy and Lorenzo that she was a licensed broker, dealer or salesperson of securities, thereby inducing them
to invest and deliver their hard-earned money with PIPC-BVI. In fact, the Information Dissemination
Agreement between PIPC Corporation, [Santos’ employer], and PIPC-BVI clearly provides that [Santos] was
prohibited from soliciting investments in behalf of PIPC-BVI and that her authority is limited only to
providing prospective client with the "necessary information on how to communicate directly with PIPC."
Thus, it is obvious that the final decision of investing and reinvesting their money with PIPC-BVI was made
solely by Sy and Lorenzo themselves.

xxxx

WHEREFORE, in view of the foregoing premises, the petition filed in this case is hereby DENIED and,
consequently, DISMISSED. The assailed Resolutions dated [1 October 2009] and [23 November 2009] of the
Secretary of Justice in I.S. No. 2007-1054 are hereby

AFFIRMED.16

Hence, this appeal by certiorari raising the sole error of Santos’ exclusion from the Information for violation
of Section 28 of the Securities Regulation Code.

Generally, at the preliminary investigation proper, the investigating prosecutor, and ultimately, the Secretary
of the DOJ, is afforded wide latitude of discretion in the exercise of its power to determine probable cause to
warrant criminal prosecution. The determination of probable cause is an executive function where the
prosecutor determines merely that a crime has been committed and that the accused has committed the
same.17 The rules do not require that a prosecutor has moral certainty of the guilt of a person simply for
preliminary investigation purposes.

However, the authority of the prosecutor and the DOJ is not absolute; it cannot be exercised arbitrarily or
capriciously. Where the findings of the investigating prosecutor or the Secretary of the DOJ as to the
existence of probable cause are equivalent to a gross misapprehension of facts, certiorari will lie to correct
these errors.18

While it is our policy not to interfere in the conduct of preliminary investigations, we have, on more than one
occasion, adhered to some exceptions to the general rule:
1.when necessary to afford adequate protection to the constitutional rights of the accused;

2.when necessary for the orderly administration of justice or to avoid oppression or multiplicity of actions;

3.when there is a prejudicial question which is sub judice;

4.when the acts of the officer are without or in excess of authority;

5.where the prosecution is under an invalid law, ordinance or regulation;

6.when double jeopardy is clearly apparent;

7.where the court has no jurisdiction over the offense;

8.where it is a case of persecution rather than prosecution;

9.where the charges are manifestly false and motivated by the lust for vengeance;

10.when there is clearly no prima facie case against the accused and a motion to quash on that ground has
been denied.19(Italics supplied).

In excluding Santos from the prosecution of the supposed violation of Section 28 of the Securities Regulation
Code, the Secretary of the DOJ, as affirmed by the appellate court, debunked the DOJ panel’s finding that
Santos was prima facie liable for either: (1) selling securities in the Philippines as a broker or dealer, or (2)
acting as a salesman, or an associated person of any broker or dealer on behalf of PIPC Corporation and/or
PIPC-BVI without being registered as such with the SEC.

To get to that conclusion, the Secretary of the DOJ and the appellate court ruled that no evidence was
adduced showing Santos’ actual participation in the final sale by PIPC Corporation and/or PIPC-BVI of
unregistered securities since the very affidavits of complainants Lorenzo and Sy proved that Santos had
never signed, neither was she mentioned in, any of the investment documents between Lorenzo and Sy, on
one hand, and PIPC Corporation and/or PIPC-BVI, on the other hand.

The conclusions made by the Secretary of the DOJ and the appellate court are a myopic view of the
investment solicitations made by Santos on behalf of PIPC Corporation and/or PIPC-BVI while she was not
licensed as a broker or dealer, or registered as a salesman, or an associated person of a broker or dealer.

We sustain the DOJ panel’s findings which were not overruled by the Secretary of the DOJ and the appellate
court, that PIPC Corporation and/or PIPC-BVI was: (1) an issuer of securities without the necessary
registration or license from the SEC, and (2) engaged in the business of buying and selling securities. In
connection therewith, we look to Section 3 of the Securities Regulation Code for pertinent definitions of
terms:

Sec. 3. Definition of Terms. – x x x.

xxxx

3.3."Broker" is a person engaged in the business of buying and selling securities for the account of others.
3.4."Dealer" means [any] person who buys [and] sells securities for his/her own account in the ordinary
course of business.

3.5."Associated person of a broker or dealer" is an employee thereof whom, directly exercises control of
supervisory authority, but does not include a salesman, or an agent or a person whose functions are solely
clerical or ministerial.

xxxx

3.13."Salesman" is a natural person, employed as such [or] as an agent, by a dealer, issuer or broker to buy
and sell securities.

To determine whether the DOJ Secretary’s Resolution was tainted with grave abuse of discretion, we pass
upon the elements for violation of Section 28 of the Securities Regulation Code: (a) engaging in the business
of buying or selling securities in the Philippines as a broker or dealer; or (b) acting as a salesman; or (c)
acting as an associated person of any broker or dealer, unless registered as such with the SEC.

Tying it all in, there is no quarrel that Santos was in the employ of PIPC Corporation and/or PIPC-BVI, a
corporation which sold or offered for sale unregistered securities in the Philippines. To escape probable
culpability, Santos claims that she was a mere clerical employee of PIPC Corporation and/or PIPC-BVI and
was never an agent or salesman who actually solicited the sale of or sold unregistered securities issued by
PIPC Corporation and/or PIPC-BVI.

Solicitation is the act of seeking or asking for business or information; it is not a commitment to an
agreement.20

Santos, by the very nature of her function as what she now unaffectedly calls an information provider,
brought about the sale of securities made by PIPC Corporation and/or PIPC-BVI to certain individuals,
specifically private complainants Sy and Lorenzo by providing information on the investment products of
PIPC Corporation and/or PIPC- BVI with the end in view of PIPC Corporation closing a sale.

While Santos was not a signatory to the contracts on Sy’s or Lorenzo’s investments, Santos procured the sale
of these unregistered securities to the two (2) complainants by providing information on the investment
products being offered for sale by PIPC Corporation and/or PIPC-BVI and convincing them to invest therein.

No matter Santos’ strenuous objections, it is apparent that she connected the probable investors, Sy and
Lorenzo, to PIPC Corporation and/or PIPC-BVI, acting as an ostensible agent of the latter on the viability of
PIPC Corporation as an investment company. At each point of Sy’s and Lorenzo’s investment, Santos’
participation thereon, even if not shown strictly on paper, was prima facie established.

In all of the documents presented by Santos, she never alleged or pointed out that she did not receive extra
consideration for her simply providing information to Sy and Lorenzo about PIPC Corporation and/or PIPC-
BVI. Santos only claims that the monies invested by Sy and Lorenzo did not pass through her hands. In
short, Santos did not present in evidence her salaries as a supposed "mere clerical employee or information
provider" of PIPC-BVI. Such presentation would have foreclosed all questions on her status within PIPC
Corporation and/or PIPC-BVI at the lowest rung of the ladder who only provided information and who did
not use her discretion in any capacity.

We cannot overemphasize that the very information provided by Santos locked the deal on unregistered
securities with Sy and Lorenzo.

In fact, Sy alleged in his affidavit, which allegation was not refuted by Santos, that he was introduced to
Santos while he performed routine transactions at his bank:
2.I have been a depositor of the Bank of the Philippine Islands (BPI) Pasong Tamo branch for the past 15
years. Sometime in the last quarter of 2006, I was at BPI Pasong Tamo to accomplish certain routine
transactions. Being a client of long standing, the bank manager[,] as a matter of courtesy, allowed me to wait
in her cubicle. It was there that the bank manager introduced me to another bank client, Ms. Oudine Santos.
After exchanging pleasantries, and in the course of a brief conversation, Ms. Santos told me that she is a
resident of Damariñas Village and was working as an investment consultant for a certain company,
Performance Investment Products Corporation [PIPC]. She told me that she wanted to invite me to her office
at the Citibank Tower in Makati so that she could explain the investment products that they are offering. I
gave her my contact number and finished my transaction with the bank for that day;

3.Ms. Santos texted me to confirm our meeting. A few days later, I met her at the business lounge of [PIPC]
located at the 15th Floor of Citibank Tower, Makati.1âwphi1 During the meeting, Ms. Santos enticed me to
invest in their Performance Managed Portfolio which she explained was a risk controlled investment program
designed for individuals like me who are looking for higher investment returns than bank deposits while still
having the advantage of security and liquidity. She told me that they were engaged in foreign currency
trading abroad and that they only employ professional and experienced foreign exchange traders who
specialize in trading the Japanese Yen, Euro, British Pound, Swiss Francs and Australian Dollar. I then told
her that I did not have any experience in foreign currency trading and was quite conservative in handling my
money;21

Santos countered that:

28. I also categorically deny complainant Sy’s allegation that I "enticed" him to enter into a Partnership
Agreement with PIPC-BVI. In the first place, I came to know complainant Sy only when he was referred to me
by a mutual acquaintance, Ms. Ana Liliosa Santos, who was then the Manager of the Bank of the Philippine
Islands, Pasong Tamo Branch. Ms. Ana Santos set up a meeting between complainant Sy and me because
complainant Sy wanted to know more about PIPC-BVI. As with the other individuals who expressed interest
in PIPC Corp.’s client companies, I then provided complainant Sy with additional information about PIPC-
BVI. The decision to enter into the aforementioned Partnership Agreement with PIPC-BVI was made by
complainant Sy alone without any inducement or undue influence from me, as in fact I only met him twice –
the first one was on the meeting set up by Ms. Ana Santos and the second one was to introduce him to
Michael Liew. Indeed, complainant Sy appears to be a well-educated person with years of experience as a
businessman. It is reasonable to assume that before entering into the said Partnership Agreement with PIPC-
BVI, complainant Sy had fully understood the nature of the agreement and that in entering thereto, he had
been motivated by a desire to earn a profit and had believed, as I myself have been led to believe, that PIPC-
BVI was a legitimate business concern which offered a reasonable return on investment, Moreover,
complainant Sy could have withdrawn his initial investment of US$40,000.00 on its date of maturity, i.e., 26
January 2007, as indicated in the PIPC-BVI’s letter dated 10 November 2006, a copy of which is attached to
complainant Sy’s Sworn Statement. Complainant Sy, however, obviously decided on his own volition to keep
his investment with PIPC-BVI presumably because he wanted to gain more profit therefrom. Complainant Sy
in fact admitted that he received monetary returns from PIPC-BVI in the total amount of US$2,439.12.22

What is palpable from the foregoing is that Sy and Lorenzo did not go directly to Liew or any of PIPC
Corporation’s and/or PIPC-BVI’s principal officers before making their investment or renewing their prior
investment. However, undeniably, Santos actively recruited and referred possible investors to PIPC
Corporation and/or PIPC-BVI and acted as the go-between on behalf of PIPC Corporation and/or PIPC-BVI.

The DOJ’s and Court of Appeals’ reasoning that Santos did not sign the investment contracts of Sy and
Lorenzo is specious. The contracts merely document the act performed by Santos.

Individual complainants and the SEC have categorically alleged that Liew and PIPC Corporation and/or
PIPC-BVI is not a legitimate investment company but a company which perpetrated a scam on 31 individuals
where the president, a foreign national, Liew, ran away with their money. Liew’s absconding with the monies
of 31 individuals and that PIPC Corporation and/or PIPC-BVI were not licensed by the SEC to sell securities
are uncontroverted facts.

The transaction initiated by Santos with Sy and Lorenzo, respectively, is an investment contract or
participation in a profit sharing agreement that falls within the definition of the law. When the investor is
relatively uninformed and turns over his money to others, essentially depending upon their representations
and their honesty and skill in managing it, the transaction generally is considered to be an investment
contract.23 The touchstone is the presence of an investment in a common venture premised on a reasonable
expectation of profits to be derived from the entrepreneurial or managerial efforts of others.24
At bottom, the exculpation of Santos cannot be preliminarily established simply by asserting that she did not
sign the investment contracts, as the facts alleged in this case constitute fraud perpetrated on the public.
Specially so because the absence of Santos’ signature in the contract is, likewise, indicative of a scheme to
circumvent and evade liability should the pyramid fall apart.

Lastly, we clarify that we are only dealing herein with the preliminary investigation aspect of this case. We do
not adjudge respondents’ guilt or the lack thereof. Santos' defense of being a mere employee or simply an
information provider is best raised and threshed out during trial of the case.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. No. SP No. 112781
and the Resolutions of the Department of Justice dated 1 October 2009 and 23 November 2009 are
ANNULLED and SET ASIDE. The Resolution of the Department of Justice dated 18 April 2008 and 2
September 2008 are REINSTATED. The Department of Justice is directed to include respondent Oudine
Santos in the Information for violation of Section 28 of the Securities and Regulation Code.

SO ORDERED.

5. SEC vs. Interport Resources Corporation, GR No. 135808, October 6, 2008

G.R. No. 135808 October 6, 2008

SECURITIES AND EXCHANGE COMMISSION, petitioner,

vs.
INTERPORT RESOURCES CORPORATION, MANUEL S. RECTO, RENE S. VILLARICA, PELAGIO RICALDE,
ANTONIO REINA, FRANCISCO ANONUEVO, JOSEPH SY and SANTIAGO TANCHAN, JR., respondents.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the Decision,1 dated
20 August 1998, rendered by the Court of Appeals in C.A.-G.R. SP No. 37036, enjoining petitioner Securities
and Exchange Commission (SEC) from taking cognizance of or initiating any action against the respondent
corporation Interport Resources Corporation (IRC) and members of its board of directors, respondents
Manuel S. Recto, Rene S. Villarica, Pelagio Ricalde, Antonio Reina, Francisco Anonuevo, Joseph Sy and
Santiago Tanchan, Jr., with respect to Sections 8, 30 and 36 of the Revised Securities Act. In the same
Decision of the appellate court, all the proceedings taken against the respondents, including the assailed
SEC Omnibus Orders of 25 January 1995 and 30 March 1995, were declared void.

The antecedent facts of the present case are as follows.

On 6 August 1994, the Board of Directors of IRC approved a Memorandum of Agreement with Ganda
Holdings Berhad (GHB). Under the Memorandum of Agreement, IRC acquired 100% or the entire capital
stock of Ganda Energy Holdings, Inc. (GEHI),2 which would own and operate a 102 megawatt (MW) gas
turbine power-generating barge. The agreement also stipulates that GEHI would assume a five-year power
purchase contract with National Power Corporation. At that time, GEHI's power-generating barge was 97%
complete and would go on-line by mid-September of 1994. In exchange, IRC will issue to GHB 55% of the
expanded capital stock of IRC amounting to 40.88 billion shares which had a total par value of P488.44
million.3

On the side, IRC would acquire 67% of the entire capital stock of Philippine Racing Club, Inc. (PRCI). PRCI
owns 25.724 hectares of real estate property in Makati. Under the Agreement, GHB, a member of the
Westmont Group of Companies in Malaysia, shall extend or arrange a loan required to pay for the proposed
acquisition by IRC of PRCI.4
IRC alleged that on 8 August 1994, a press release announcing the approval of the agreement was sent
through facsimile transmission to the Philippine Stock Exchange and the SEC, but that the facsimile
machine of the SEC could not receive it. Upon the advice of the SEC, the IRC sent the press release on the
morning of 9 August 1994.5

The SEC averred that it received reports that IRC failed to make timely public disclosures of its negotiations
with GHB and that some of its directors, respondents herein, heavily traded IRC shares utilizing this
material insider information. On 16 August 1994, the SEC Chairman issued a directive requiring IRC to
submit to the SEC a copy of its aforesaid Memorandum of Agreement with GHB. The SEC Chairman further
directed all principal officers of IRC to appear at a hearing before the Brokers and Exchanges Department
(BED) of the SEC to explain IRC's failure to immediately disclose the information as required by the Rules on
Disclosure of Material Facts.6

In compliance with the SEC Chairman's directive, the IRC sent a letter dated 16 August 1994 to the SEC,
attaching thereto copies of the Memorandum of Agreement. Its directors, Manuel Recto, Rene Villarica and
Pelagio Ricalde, also appeared before the SEC on 22 August 1994 to explain IRC's alleged failure to
immediately disclose material information as required under the Rules on Disclosure of Material Facts.7

On 19 September 1994, the SEC Chairman issued an Order finding that IRC violated the Rules on
Disclosure of Material Facts, in connection with the Old Securities Act of 1936, when it failed to make timely
disclosure of its negotiations with GHB. In addition, the SEC pronounced that some of the officers and
directors of IRC entered into transactions involving IRC shares in violation of Section 30, in relation to
Section 36, of the Revised Securities Act.8

Respondents filed an Omnibus Motion, dated 21 September 1994, which was superseded by an Amended
Omnibus Motion, filed on 18 October 1994, alleging that the SEC had no authority to investigate the subject
matter, since under Section 8 of Presidential Decree No. 902-A,9 as amended by Presidential Decree No.
1758, jurisdiction was conferred upon the Prosecution and Enforcement Department (PED) of the SEC.
Respondents also claimed that the SEC violated their right to due process when it ordered that the
respondents appear before the SEC and "show cause why no administrative, civil or criminal sanctions
should be imposed on them," and, thus, shifted the burden of proof to the respondents. Lastly, they sought
to have their cases tried jointly given the identical factual situations surrounding the alleged violation
committed by the respondents.10

Respondents also filed a Motion for Continuance of Proceedings on 24 October 1994, wherein they moved for
discontinuance of the investigations and the proceedings before the SEC until the undue publicity had
abated and the investigating officials had become reasonably free from prejudice and public pressure.11

No formal hearings were conducted in connection with the aforementioned motions, but on 25 January
1995, the SEC issued an Omnibus Order which thus disposed of the same in this wise:12

WHEREFORE, premised on the foregoing considerations, the Commission resolves and hereby rules:

1. To create a special investigating panel to hear and decide the instant case in accordance with the Rules of
Practice and Procedure Before the Prosecution and Enforcement Department (PED), Securities and Exchange
Commission, to be composed of Attys. James K. Abugan, Medardo Devera (Prosecution and Enforcement
Department), and Jose Aquino (Brokers and Exchanges Department), which is hereby directed to
expeditiously resolve the case by conducting continuous hearings, if possible.

2. To recall the show cause orders dated September 19, 1994 requiring the respondents to appear and show
cause why no administrative, civil or criminal sanctions should be imposed on them.

3. To deny the Motion for Continuance for lack of merit.

Respondents filed an Omnibus Motion for Partial Reconsideration,13 questioning the creation of the special
investigating panel to hear the case and the denial of the Motion for Continuance. The SEC denied
reconsideration in its Omnibus Order dated 30 March 1995.14
The respondents filed a petition before the Court of Appeals docketed as C.A.-G.R. SP No. 37036, questioning
the Omnibus Orders dated 25 January 1995 and 30 March 1995.15 During the proceedings before the Court
of Appeals, respondents filed a Supplemental Motion16 dated 16 May 1995, wherein they prayed for the
issuance of a writ of preliminary injunction enjoining the SEC and its agents from investigating and
proceeding with the hearing of the case against respondents herein. On 5 May 1995, the Court of Appeals
granted their motion and issued a writ of preliminary injunction, which effectively enjoined the SEC from
filing any criminal, civil or administrative case against the respondents herein.17

On 23 October 1995, the SEC filed a Motion for Leave to Quash SEC Omnibus Orders so that the case may
be investigated by the PED in accordance with the SEC Rules and Presidential Decree No. 902-A, and not by
the special body whose creation the SEC had earlier ordered.18

The Court of Appeals promulgated a Decision19 on 20 August 1998. It determined that there were no
implementing rules and regulations regarding disclosure, insider trading, or any of the provisions of the
Revised Securities Acts which the respondents allegedly violated. The Court of Appeals likewise noted that it
found no statutory authority for the SEC to initiate and file any suit for civil liability under Sections 8, 30
and 36 of the Revised Securities Act. Thus, it ruled that no civil, criminal or administrative proceedings may
possibly be held against the respondents without violating their rights to due process and equal protection. It
further resolved that absent any implementing rules, the SEC cannot be allowed to quash the assailed
Omnibus Orders for the sole purpose of re-filing the same case against the respondents.20

The Court of Appeals further decided that the Rules of Practice and Procedure Before the PED, which took
effect on 14 April 1990, did not comply with the statutory requirements contained in the Administrative Code
of 1997. Section 8, Rule V of the Rules of Practice and Procedure Before the PED affords a party the right to
be present but without the right to cross-examine witnesses presented against him, in violation of Section
12(3), Chapter 3, Book VII of the Administrative Code. 21

In the dispositive portion of its Decision, dated 20 August 1998, the Court of Appeals ruled that22:

WHEREFORE, [herein petitioner SEC's] Motion for Leave to Quash SEC Omnibus Orders is hereby DENIED.
The petition for certiorari, prohibition and mandamus is GRANTED. Consequently, all proceedings taken
against [herein respondents] in this case, including the Omnibus Orders of January 25, 1995 and March 30,
1995 are declared null and void. The writ of preliminary injunction is hereby made permanent and,
accordingly, [SEC] is hereby prohibited from taking cognizance or initiating any action, be they civil,
criminal, or administrative against [respondents] with respect to Sections 8 (Procedure for Registration), 30
(Insider's duty to disclose when trading) and 36 (Directors, Officers and Principal Stockholders) in relation to
Sections 46 (Administrative sanctions) 56 (Penalties) 44 (Liabilities of Controlling persons) and 45
(Investigations, injunctions and prosecution of offenses) of the Revised Securities Act and Section 144
(Violations of the Code) of the Corporation Code. (Emphasis provided.)

The SEC filed a Motion for Reconsideration, which the Court of Appeals denied in a Resolution23 issued on
30 September 1998.

Hence, the present petition, which relies on the following grounds24:

THE COURT OF APPEALS ERRED WHEN IT DENIED PETITIONER'S MOTION FOR LEAVE TO QUASH THE
ASSAILED SEC OMNIBUS ORDERS DATED JANUARY 25 AND MARCH 30, 1995.

II

THE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS NO STATUTORY AUTHORITY
WHATSOEVER FOR PETITIONER SEC TO INITIATE AND FILE ANY SUIT BE THEY CIVIL, CRIMINAL OR
ADMINISTRATIVE AGAINST RESPONDENT CORPORATION AND ITS DIRECTORS WITH RESPECT TO
SECTION 30 (INSIDER'S DUTY TO DISCOLSED [sic] WHEN TRADING) AND 36 (DIRECTORS OFFICERS AND
PRINCIPAL STOCKHOLDERS) OF THE REVISED SECURITIES ACT; AND

III

THE COURT OF APPEALS ERRED WHEN IT RULED THAT RULES OF PRACTICE AND PROSECUTION
BEFORE THE PED AND THE SICD RULES OF PROCEDURE ON ADMINISTRATIVE
ACTIONS/PROCEEDINGS25 ARE INVALID AS THEY FAIL TO COMPLY WITH THE STATUTORY
REQUIREMENTS CONTAINED IN THE ADMINISTRATIVE CODE OF 1987.

The petition is impressed with merit.

Before discussing the merits of this case, it should be noted that while this case was pending in this Court,
Republic Act No. 8799, otherwise known as the Securities Regulation Code, took effect on 8 August 2000.
Section 8 of Presidential Decree No. 902-A, as amended, which created the PED, was already repealed as
provided for in Section 76 of the Securities Regulation Code:

SEC. 76. Repealing Clause. - The Revised Securities Act (Batas Pambansa Blg. 178), as amended, in its
entirety, and Sections 2, 4 and 8 of Presidential Decree 902-A, as amended, are hereby repealed. All other
laws, orders, rules and regulations, or parts thereof, inconsistent with any provision of this Code are hereby
repealed or modified accordingly.

Thus, under the new law, the PED has been abolished, and the Securities Regulation Code has taken the
place of the Revised Securities Act.

The Court now proceeds with a discussion of the present case.

I. Sctions 8, 30 and 36 of the Revised Securities Act do not require the enactment of implementing rules to
make them binding and effective.

The Court of Appeals ruled that absent any implementing rules for Sections 8, 30 and 36 of the Revised
Securities Act, no civil, criminal or administrative actions can possibly be had against the respondents
without violating their right to due process and equal protection, citing as its basis the case Yick Wo v.
Hopkins.26 This is untenable.

In the absence of any constitutional or statutory infirmity, which may concern Sections 30 and 36 of the
Revised Securities Act, this Court upholds these provisions as legal and binding. It is well settled that every
law has in its favor the presumption of validity. Unless and until a specific provision of the law is declared
invalid and unconstitutional, the same is valid and binding for all intents and purposes.27 The mere absence
of implementing rules cannot effectively invalidate provisions of law, where a reasonable construction that
will support the law may be given. In People v. Rosenthal,28 this Court ruled that:

In this connection we cannot pretermit reference to the rule that "legislation should not be held invalid on
the ground of uncertainty if susceptible of any reasonable construction that will support and give it effect. An
Act will not be declared inoperative and ineffectual on the ground that it furnishes no adequate means to
secure the purpose for which it is passed, if men of common sense and reason can devise and provide the
means, and all the instrumentalities necessary for its execution are within the reach of those intrusted
therewith." (25 R.C.L., pp. 810, 811)

In Garcia v. Executive Secretary,29 the Court underlined the importance of the presumption of validity of
laws and the careful consideration with which the judiciary strikes down as invalid acts of the legislature:

The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of the
political departments are valid in the absence of a clear and unmistakable showing to the contrary. To doubt
is to sustain. This presumption is based on the doctrine of separation of powers which enjoins upon each
department a becoming respect for the acts of the other departments. The theory is that as the joint act of
Congress and the President of the Philippines, a law has been carefully studied and determined to be in
accordance with the fundamental law before it was finally enacted.

The necessity for vesting administrative authorities with power to make rules and regulations is based on the
impracticability of lawmakers' providing general regulations for various and varying details of
management.30 To rule that the absence of implementing rules can render ineffective an act of Congress,
such as the Revised Securities Act, would empower the administrative bodies to defeat the legislative will by
delaying the implementing rules. To assert that a law is less than a law, because it is made to depend on a
future event or act, is to rob the Legislature of the power to act wisely for the public welfare whenever a law
is passed relating to a state of affairs not yet developed, or to things future and impossible to fully know.31 It
is well established that administrative authorities have the power to promulgate rules and regulations to
implement a given statute and to effectuate its policies, provided such rules and regulations conform to the
terms and standards prescribed by the statute as well as purport to carry into effect its general policies.
Nevertheless, it is undisputable that the rules and regulations cannot assert for themselves a more extensive
prerogative or deviate from the mandate of the statute.32 Moreover, where the statute contains sufficient
standards and an unmistakable intent, as in the case of Sections 30 and 36 of the Revised Securities Act,
there should be no impediment to its implementation.

The reliance placed by the Court of Appeals in Yick Wo v. Hopkins33 shows a glaring error. In the cited case,
this Court found unconstitutional an ordinance which gave the board of supervisors authority to refuse
permission to carry on laundries located in buildings that were not made of brick and stone, because it
violated the equal protection clause and was highly discriminatory and hostile to Chinese residents and not
because the standards provided therein were vague or ambiguous.

This Court does not discern any vagueness or ambiguity in Sections 30 and 36 of the Revised Securities Act,
such that the acts proscribed and/or required would not be understood by a person of ordinary intelligence.

Section 30 of the Revised Securities Act

Section 30 of the Revised Securities Act reads:

Sec. 30. Insider's duty to disclose when trading. - (a) It shall be unlawful for an insider to sell or buy a
security of the issuer, if he knows a fact of special significance with respect to the issuer or the security that
is not generally available, unless (1) the insider proves that the fact is generally available or (2) if the other
party to the transaction (or his agent) is identified, (a) the insider proves that the other party knows it, or (b)
that other party in fact knows it from the insider or otherwise.

(b) "Insider" means (1) the issuer, (2) a director or officer of, or a person controlling, controlled by, or under
common control with, the issuer, (3) a person whose relationship or former relationship to the issuer gives or
gave him access to a fact of special significance about the issuer or the security that is not generally
available, or (4) a person who learns such a fact from any of the foregoing insiders as defined in this
subsection, with knowledge that the person from whom he learns the fact is such an insider.

(c) A fact is "of special significance" if (a) in addition to being material it would be likely, on being made
generally available, to affect the market price of a security to a significant extent, or (b) a reasonable person
would consider it especially important under the circumstances in determining his course of action in the
light of such factors as the degree of its specificity, the extent of its difference from information generally
available previously, and its nature and reliability.

(d) This section shall apply to an insider as defined in subsection (b) (3) hereof only to the extent that he
knows of a fact of special significance by virtue of his being an insider.

The provision explains in simple terms that the insider's misuse of nonpublic and undisclosed information is
the gravamen of illegal conduct. The intent of the law is the protection of investors against fraud, committed
when an insider, using secret information, takes advantage of an uninformed investor. Insiders are obligated
to disclose material information to the other party or abstain from trading the shares of his corporation. This
duty to disclose or abstain is based on two factors: first, the existence of a relationship giving access, directly
or indirectly, to information intended to be available only for a corporate purpose and not for the personal
benefit of anyone; and second, the inherent unfairness involved when a party takes advantage of such
information knowing it is unavailable to those with whom he is dealing.34

In the United States (U.S.), the obligation to disclose or abstain has been traditionally imposed on corporate
"insiders," particularly officers, directors, or controlling stockholders, but that definition has since been
expanded.35 The term "insiders" now includes persons whose relationship or former relationship to the
issuer gives or gave them access to a fact of special significance about the issuer or the security that is not
generally available, and one who learns such a fact from an insider knowing that the person from whom he
learns the fact is such an insider. Insiders have the duty to disclose material facts which are known to them
by virtue of their position but which are not known to persons with whom they deal and which, if known,
would affect their investment judgment. In some cases, however, there may be valid corporate reasons for the
nondisclosure of material information. Where such reasons exist, an issuer's decision not to make any public
disclosures is not ordinarily considered as a violation of insider trading. At the same time, the undisclosed
information should not be improperly used for non-corporate purposes, particularly to disadvantage other
persons with whom an insider might transact, and therefore the insider must abstain from entering into
transactions involving such securities.36

Respondents further aver that under Section 30 of the Revised Securities Act, the SEC still needed to define
the following terms: "material fact," "reasonable person," "nature and reliability" and "generally available." 37
In determining whether or not these terms are vague, these terms must be evaluated in the context of
Section 30 of the Revised Securties Act. To fully understand how the terms were used in the aforementioned
provision, a discussion of what the law recognizes as a fact of special significance is required, since the duty
to disclose such fact or to abstain from any transaction is imposed on the insider only in connection with a
fact of special significance.

Under the law, what is required to be disclosed is a fact of "special significance" which may be (a) a material
fact which would be likely, on being made generally available, to affect the market price of a security to a
significant extent, or (b) one which a reasonable person would consider especially important in determining
his course of action with regard to the shares of stock.

(a) Material Fact - The concept of a "material fact" is not a new one. As early as 1973, the Rules Requiring
Disclosure of Material Facts by Corporations Whose Securities Are Listed In Any Stock Exchange or
Registered/Licensed Under the Securities Act, issued by the SEC on 29 January 1973, explained that "[a]
fact is material if it induces or tends to induce or otherwise affect the sale or purchase of its securities."
Thus, Section 30 of the Revised Securities Act provides that if a fact affects the sale or purchase of securities,
as well as its price, then the insider would be required to disclose such information to the other party to the
transaction involving the securities. This is the first definition given to a "fact of special significance."

(b.1) Reasonable Person - The second definition given to a fact of special significance involves the judgment of
a "reasonable person." Contrary to the allegations of the respondents, a "reasonable person" is not a
problematic legal concept that needs to be clarified for the purpose of giving effect to a statute; rather, it is
the standard on which most of our legal doctrines stand. The doctrine on negligence uses the discretion of
the "reasonable man" as the standard.38 A purchaser in good faith must also take into account facts which
put a "reasonable man" on his guard.39 In addition, it is the belief of the reasonable and prudent man that
an offense was committed that sets the criteria for probable cause for a warrant of arrest.40 This Court, in
such cases, differentiated the reasonable and prudent man from "a person with training in the law such as a
prosecutor or a judge," and identified him as "the average man on the street," who weighs facts and
circumstances without resorting to the calibrations of our technical rules of evidence of which his knowledge
is nil. Rather, he relies on the calculus of common sense of which all reasonable men have in abundance.41
In the same vein, the U.S. Supreme Court similarly determined its standards by the actual significance in
the deliberations of a "reasonable investor," when it ruled in TSC Industries, Inc. v. Northway, Inc.,42 that
the determination of materiality "requires delicate assessments of the inferences a ‘reasonable shareholder'
would draw from a given set of facts and the significance of those inferences to him."

(b.2) Nature and Reliability - The factors affecting the second definition of a "fact of special significance,"
which is of such importance that it is expected to affect the judgment of a reasonable man, were
substantially lifted from a test of materiality pronounced in the case In the Matter of Investors Management
Co., Inc.43:

Among the factors to be considered in determining whether information is material under this test are the
degree of its specificity, the extent to which it differs from information previously publicly disseminated, and
its reliability in light of its nature and source and the circumstances under which it was received.
It can be deduced from the foregoing that the "nature and reliability" of a significant fact in determining the
course of action a reasonable person takes regarding securities must be clearly viewed in connection with the
particular circumstances of a case. To enumerate all circumstances that would render the "nature and
reliability" of a fact to be of special significance is close to impossible. Nevertheless, the proper adjudicative
body would undoubtedly be able to determine if facts of a certain "nature and reliability" can influence a
reasonable person's decision to retain, sell or buy securities, and thereafter explain and justify its factual
findings in its decision.

(c) Materiality Concept - A discussion of the "materiality concept" would be relevant to both a material fact
which would affect the market price of a security to a significant extent and/or a fact which a reasonable
person would consider in determining his or her cause of action with regard to the shares of stock.
Significantly, what is referred to in our laws as a fact of special significance is referred to in the U.S. as the
"materiality concept" and the latter is similarly not provided with a precise definition. In Basic v. Levinson,44
the U.S. Supreme Court cautioned against confining materiality to a rigid formula, stating thus:

A bright-line rule indeed is easier to follow than a standard that requires the exercise of judgment in the light
of all the circumstances. But ease of application alone is not an excuse for ignoring the purposes of the
Securities Act and Congress' policy decisions. Any approach that designates a single fact or occurrence as
always determinative of an inherently fact-specific finding such as materiality, must necessarily be
overinclusive or underinclusive.

Moreover, materiality "will depend at any given time upon a balancing of both the indicated probability that
the event will occur and the anticipated magnitude of the event in light of the totality of the company
activity."45 In drafting the Securities Act of 1934, the U.S. Congress put emphasis on the limitations to the
definition of materiality:

Although the Committee believes that ideally it would be desirable to have absolute certainty in the
application of the materiality concept, it is its view that such a goal is illusory and unrealistic. The
materiality concept is judgmental in nature and it is not possible to translate this into a numerical formula.
The Committee's advice to the [SEC] is to avoid this quest for certainty and to continue consideration of
materiality on a case-by-case basis as disclosure problems are identified." House Committee on Interstate
and Foreign Commerce, Report of the Advisory Committee on Corporate Disclosure to the Securities and
Exchange Commission, 95th Cong., 1st Sess., 327 (Comm.Print 1977). (Emphasis provided.)46

(d) Generally Available - Section 30 of the Revised Securities Act allows the insider the defense that in a
transaction of securities, where the insider is in possession of facts of special significance, such information
is "generally available" to the public. Whether information found in a newspaper, a specialized magazine, or
any cyberspace media be sufficient for the term "generally available" is a matter which may be adjudged
given the particular circumstances of the case. The standards cannot remain at a standstill. A medium,
which is widely used today was, at some previous point in time, inaccessible to most. Furthermore, it would
be difficult to approximate how the rules may be applied to the instant case, where investigation has not
even been started. Respondents failed to allege that the negotiations of their agreement with GHB were made
known to the public through any form of media for there to be a proper appreciation of the issue presented.

Section 36(a) of the Revised Securities Act

As regards Section 36(a) of the Revised Securities Act, respondents claim that the term "beneficial ownership"
is vague and that it requires implementing rules to give effect to the law. Section 36(a) of the Revised
Securities Act is a straightforward provision that imposes upon (1) a beneficial owner of more than ten
percent of any class of any equity security or (2) a director or any officer of the issuer of such security, the
obligation to submit a statement indicating his or her ownership of the issuer's securities and such changes
in his or her ownership thereof. The said provision reads:

Sec. 36. Directors, officers and principal stockholders. - (a) Every person who is directly or indirectly the
beneficial owner of more than ten per centum of any [class] of any equity security which is registered
pursuant to this Act, or who is [a] director or an officer of the issuer of such security, shall file, at the time of
the registration of such security on a securities exchange or by the effective date of a registration statement
or within ten days after he becomes such a beneficial owner, director or officer, a statement with the
Commission and, if such security is registered on a securities exchange, also with the exchange, of the
amount of all equity securities of such issuer of which he is the beneficial owner, and within ten days after
the close of each calendar month thereafter, if there has been a change in such ownership during such
month, shall file with the Commission, and if such security is registered on a securities exchange, shall also
file with the exchange, a statement indicating his ownership at the close of the calendar month and such
changes in his ownership as have occurred during such calendar month. (Emphasis provided.)

Section 36(a) refers to the "beneficial owner." Beneficial owner has been defined in the following manner:

[F]irst, to indicate the interest of a beneficiary in trust property (also called "equitable ownership"); and
second, to refer to the power of a corporate shareholder to buy or sell the shares, though the shareholder is
not registered in the corporation's books as the owner. Usually, beneficial ownership is distinguished from
naked ownership, which is the enjoyment of all the benefits and privileges of ownership, as against
possession of the bare title to property.47

Even assuming that the term "beneficial ownership" was vague, it would not affect respondents' case, where
the respondents are directors and/or officers of the corporation, who are specifically required to comply with
the reportorial requirements under Section 36(a) of the Revised Securities Act. The validity of a statute may
be contested only by one who will sustain a direct injury as a result of its enforcement.48

Sections 30 and 36 of the Revised Securities Act were enacted to promote full disclosure in the securities
market and prevent unscrupulous individuals, who by their positions obtain non-public information, from
taking advantage of an uninformed public. No individual would invest in a market which can be manipulated
by a limited number of corporate insiders. Such reaction would stifle, if not stunt, the growth of the
securities market. To avert the occurrence of such an event, Section 30 of the Revised Securities Act
prevented the unfair use of non-public information in securities transactions, while Section 36 allowed the
SEC to monitor the transactions entered into by corporate officers and directors as regards the securities of
their companies.

In the case In the Matter of Investor's Management Co.,49 it was cautioned that "the broad language of the
anti-fraud provisions," which include the provisions on insider trading, should not be "circumscribed by fine
distinctions and rigid classifications." The ambit of anti-fraud provisions is necessarily broad so as to
embrace the infinite variety of deceptive conduct.50

In Tatad v. Secretary of Department of Energy,51 this Court brushed aside a contention, similar to that
made by the respondents in this case, that certain words or phrases used in a statute do not set determinate
standards, declaring that:

Petitioners contend that the words "as far as practicable," "declining" and "stable" should have been defined
in R.A. No. 8180 as they do not set determinate and determinable standards. This stubborn submission
deserves scant consideration. The dictionary meanings of these words are well settled and cannot confuse
men of reasonable intelligence. x x x. The fear of petitioners that these words will result in the exercise of
executive discretion that will run riot is thus groundless. To be sure, the Court has sustained the validity of
similar, if not more general standards in other cases.

Among the words or phrases that this Court upheld as valid standards were "simplicity and dignity,"52
"public interest,"53 and "interests of law and order."54

The Revised Securities Act was approved on 23 February 1982. The fact that the Full Disclosure Rules were
promulgated by the SEC only on 24 July 1996 does not render ineffective in the meantime Section 36 of the
Revised Securities Act. It is already unequivocal that the Revised Securities Act requires full disclosure and
the Full Disclosure Rules were issued to make the enforcement of the law more consistent, efficient and
effective. It is equally reasonable to state that the disclosure forms later provided by the SEC, do not, in any
way imply that no compliance was required before the forms were provided. The effectivity of a statute which
imposes reportorial requirements cannot be suspended by the issuance of specified forms, especially where
compliance therewith may be made even without such forms. The forms merely made more efficient the
processing of requirements already identified by the statute.

For the same reason, the Court of Appeals made an evident mistake when it ruled that no civil, criminal or
administrative actions can possibly be had against the respondents in connection with Sections 8, 30 and 36
of the Revised Securities Act due to the absence of implementing rules. These provisions are sufficiently clear
and complete by themselves. Their requirements are specifically set out, and the acts which are enjoined are
determinable. In particular, Section 855 of the Revised Securities Act is a straightforward enumeration of the
procedure for the registration of securities and the particular matters which need to be reported in the
registration statement thereof. The Decision, dated 20 August 1998, provides no valid reason to exempt the
respondent IRC from such requirements. The lack of implementing rules cannot suspend the effectivity of
these provisions. Thus, this Court cannot find any cogent reason to prevent the SEC from exercising its
authority to investigate respondents for violation of Section 8 of the Revised Securities Act.

II. The right to cross-examination is not absolute and cannot be demanded during investigative proceedings
before the PED.

In its assailed Decision dated 20 August 1998, the Court of Appeals pronounced that the PED Rules of
Practice and Procedure was invalid since Section 8, Rule V56 thereof failed to provide for the parties' right to
cross-examination, in violation of the Administrative Code of 1987 particularly Section 12(3), Chapter 3,
Book VII thereof. This ruling is incorrect.

Firstly, Section 4, Rule I of the PED Rules of Practice and Procedure, categorically stated that the
proceedings before the PED are summary in nature:

Section 4. Nature of Proceedings - Subject to the requirements of due process, proceedings before the "PED"
shall be summary in nature not necessarily adhering to or following the technical rules of evidence obtaining
in the courts of law. The Rules of Court may apply in said proceedings in suppletory character whenever
practicable.

Rule V of the PED Rules of Practice and Procedure further specified that:

Section 5. Submission of Documents - During the preliminary conference/hearing, or immediately thereafter,

the Hearing Officer may require the parties to simultaneously submit their respective verified position papers
accompanied by all supporting documents and the affidavits of their witnesses, if any which shall take the
place of their direct testimony. The parties shall furnish each other with copies of the position papers
together with the supporting affidavits and documents submitted by them.

Section 6. Determination of necessity of hearing. - Immediately after the submission by the parties of their
position papers and supporting documents, the Hearing Officer shall determine whether there is a need for a
formal hearing. At this stage, he may, in his discretion, and for the purpose of making such determination,
elicit pertinent facts or information, including documentary evidence, if any, from any party or witness to
complete, as far as possible, the facts of the case. Facts or information so elicited may serve as basis for his
clarification or simplifications of the issues in the case. Admissions and stipulation of facts to abbreviate the
proceedings shall be encouraged.

Section 7. Disposition of Case. If the Hearing Officer finds no necessity of further hearing after the parties
have submitted their position papers and supporting documents, he shall so inform the parties stating the
reasons therefor and shall ask them to acknowledge the fact that they were so informed by signing the
minutes of the hearing and the case shall be deemed submitted for resolution.

As such, the PED Rules provided that the Hearing Officer may require the parties to submit their respective
verified position papers, together with all supporting documents and affidavits of witnesses. A formal hearing
was not mandatory; it was within the discretion of the Hearing Officer to determine whether there was a need
for a formal hearing. Since, according to the foregoing rules, the holding of a hearing before the PED is
discretionary, then the right to cross-examination could not have been demanded by either party.

Secondly, it must be pointed out that Chapter 3, Book VII of the Administrative Code, entitled "Adjudication,"
does not affect the investigatory functions of the agencies. The law creating the PED, Section 8 of Presidential
Decree No. 902-A, as amended, defines the authority granted to the PED, thus:

SEC. 8. The Prosecution and Enforcement Department shall have, subject to the Commission's control and
supervision, the exclusive authority to investigate, on complaint or motu proprio, any act or omission of the
Board of Directors/Trustees of corporations, or of partnerships, or of other associations, or of their
stockholders, officers or partners, including any fraudulent devices, schemes or representations, in violation
of any law or rules and regulations administered and enforced by the Commission; to file and prosecute in
accordance with law and rules and regulations issued by the Commission and in appropriate cases, the
corresponding criminal or civil case before the Commission or the proper court or body upon prima facie
finding of violation of any laws or rules and regulations administered and enforced by the Commission; and
to perform such other powers and functions as may be provided by law or duly delegated to it by the
Commission. (Emphasis provided.)

The law creating PED empowers it to investigate violations of the rules and regulations promulgated by the
SEC and to file and prosecute such cases. It fails to mention any adjudicatory functions insofar as the PED
is concerned. Thus, the PED Rules of Practice and Procedure need not comply with the provisions of the
Administrative Code on adjudication, particularly Section 12(3), Chapter 3, Book VII.

In Cariño v. Commission on Human Rights,57 this Court sets out the distinction between investigative and
adjudicative functions, thus:

"Investigate," commonly understood, means to examine, explore, inquire or delve or probe into, research on,
study. The dictionary definition of "investigate" is "to observe or study closely; inquire into systematically: "to
search or inquire into" xx to subject to an official probe xx: to conduct an official inquiry." The purpose of an
investigation, of course is to discover, to find out, to learn, obtain information. Nowhere included or
intimated is the notion of settling, deciding or resolving a controversy involved in the facts inquired into by
application of the law to the facts established by the inquiry.

The legal meaning of "investigate" is essentially the same: "(t)o follow up step by step by patient inquiry or
observation. To trace or track; to search into; to examine and inquire into with care and accuracy; to find out
by careful inquisition; examination; the taking of evidence; a legal inquiry;" "to inquire; to make an
investigation," "investigation" being in turn described as "(a)n administrative function, the exercise of which
ordinarily does not require a hearing. 2 Am J2d Adm L Sec. 257; xx an inquiry, judicial or otherwise, for the
discovery and collection of facts concerning a certain matter or matters."

"Adjudicate," commonly or popularly understood, means to adjudge, arbitrate, judge, decide, determine,
resolve, rule on, settle. The dictionary defines the term as "to settle finally (the rights and duties of parties to
a court case) on the merits of issues raised: xx to pass judgment on: settle judicially: xx act as judge." And
"adjudge" means "to decide or rule upon as a judge or with judicial or quasi-judicial powers: xx to award or
grant judicially in a case of controversy x x x."

In a legal sense, "adjudicate" means: "To settle in the exercise of judicial authority. To determine finally.
Synonymous with adjudge in its strictest sense;" and "adjudge" means: "To pass on judicially, to decide,
settle, or decree, or to sentence or condemn. x x x Implies a judicial determination of a fact, and the entry of
a judgment."

There is no merit to the respondent's averment that the sections under Chapter 3, Book VII of the
Administrative Code, do not distinguish between investigative and adjudicatory functions. Chapter 3, Book
VII of the Administrative Code, is unequivocally entitled "Adjudication."

Respondents insist that the PED performs adjudicative functions, as enumerated under Section 1(h) and (j),
Rule II; and Section 2(4), Rule VII of the PED Rules of Practice and Procedure:

Section 1. Authority of the Prosecution and Enforcement Department - Pursuant to Presidential Decree No.
902-A, as amended by Presidential Decree No. 1758, the Prosecution and Enforcement Department is
primarily charged with the following:

xxxx

(h) Suspends or revokes, after proper notice and hearing in accordance with these Rules, the franchise or
certificate of registration of corporations, partnerships or associations, upon any of the following grounds:

1. Fraud in procuring its certificate of registration;

2. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or
damage to the general public;

3. Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which
would amount to a grave violation of its franchise;

xxxx

(j) Imposes charges, fines and fees, which by law, it is authorized to collect;

xxxx

Section 2. Powers of the Hearing Officer. The Hearing Officer shall have the following powers:

xxxx

4. To cite and/or declare any person in direct or indirect contempt in accordance with pertinent provisions of
the Rules of Court.

Even assuming that these are adjudicative functions, the PED, in the instant case, exercised its investigative
powers; thus, respondents do not have the requisite standing to assail the validity of the rules on
adjudication. A valid source of a statute or a rule can only be contested by one who will sustain a direct
injury as a result of its enforcement.58 In the instant case, respondents are only being investigated by the
PED for their alleged failure to disclose their negotiations with GHB and the transactions entered into by its
directors involving IRC shares. The respondents have not shown themselves to be under any imminent
danger of sustaining any personal injury attributable to the exercise of adjudicative functions by the SEC.
They are not being or about to be subjected by the PED to charges, fees or fines; to citations for contempt; or
to the cancellation of their certificate of registration under Section 1(h), Rule II of the PED Rules of Practice
and Procedure.

To repeat, the only powers which the PED was likely to exercise over the respondents were investigative in
nature, to wit:

Section 1. Authority of the Prosecution and Enforcement Department - Pursuant to Presidential Decree No.
902-A, as amended by Presidential Decree No. 1758, the Prosecution and Enforcement Department is
primarily charged with the following:

xxxx

b. Initiates proper investigation of corporations and partnerships or persons, their books, records and other
properties and assets, involving their business transactions, in coordination with the operating department
involved;

xxxx

e. Files and prosecutes civil or criminal cases before the Commission and other courts of justice involving
violations of laws and decrees enforced by the Commission and the rules and regulations promulgated
thereunder;

f. Prosecutes erring directors, officers and stockholders of corporations and partnerships, commercial paper
issuers or persons in accordance with the pertinent rules on procedures;
The authority granted to the PED under Section 1(b), (e), and (f), Rule II of the PED Rules of Practice and
Procedure, need not comply with Section 12, Chapter 3, Rule VII of the Administrative Code, which affects
only the adjudicatory functions of administrative bodies. Thus, the PED would still be able to investigate the
respondents under its rules for their alleged failure to disclose their negotiations with GHB and the
transactions entered into by its directors involving IRC shares.

This is not to say that administrative bodies performing adjudicative functions are required to strictly comply
with the requirements of Chapter 3, Rule VII of the Administrative Code, particularly, the right to cross-
examination. It should be noted that under Section 2.2 of Executive Order No. 26, issued on 7 October 1992,
abbreviated proceedings are prescribed in the disposition of administrative cases:

2. Abbreviation of Proceedings. All administrative agencies are hereby directed to adopt and include in their
respective Rules of Procedure the following provisions:

xxxx

2.2 Rules adopting, unless otherwise provided by special laws and without prejudice to Section 12, Chapter
3, Book VII of the Administrative Code of 1987, the mandatory use of affidavits in lieu of direct testimonies
and the preferred use of depositions whenever practicable and convenient.

As a consequence, in proceedings before administrative or quasi-judicial bodies, such as the National Labor
Relations Commission and the Philippine Overseas Employment Agency, created under laws which authorize
summary proceedings, decisions may be reached on the basis of position papers or other documentary
evidence only. They are not bound by technical rules of procedure and evidence. 59 In fact, the hearings
before such agencies do not connote full adversarial proceedings.60 Thus, it is not necessary for the rules to
require affiants to appear and testify and to be cross-examined by the counsel of the adverse party. To
require otherwise would negate the summary nature of the administrative or quasi-judicial proceedings.61 In
Atlas Consolidated Mining and Development Corporation v. Factoran, Jr.,62 this Court stated that:

[I]t is sufficient that administrative findings of fact are supported by evidence, or negatively stated, it is
sufficient that findings of fact are not shown to be unsupported by evidence. Substantial evidence is all that
is needed to support an administrative finding of fact, and substantial evidence is "such relevant evidence as
a reasonable mind might accept as adequate to support a conclusion."

In order to comply with the requirements of due process, what is required, among other things, is that every
litigant be given reasonable opportunity to appear and defend his right and to introduce relevant evidence in
his favor.63

III. The Securities Regulations Code did not repeal Sections 8, 30 and 36 of the Revised Securities Act since
said provisions were reenacted in the new law.

The Securities Regulations Code absolutely repealed the Revised Securities Act. While the absolute repeal of
a law generally deprives a court of its authority to penalize the person charged with the violation of the old
law prior to its appeal, an exception to this rule comes about when the repealing law punishes the act
previously penalized under the old law. The Court, in Benedicto v. Court of Appeals, sets down the rules in
such instances:64

As a rule, an absolute repeal of a penal law has the effect of depriving the court of its authority to punish a
person charged with violation of the old law prior to its repeal. This is because an unqualified repeal of a
penal law constitutes a legislative act of rendering legal what had been previously declared as illegal, such
that the offense no longer exists and it is as if the person who committed it never did so. There are, however,
exceptions to the rule. One is the inclusion of a saving clause in the repealing statute that provides that the
repeal shall have no effect on pending actions. Another exception is where the repealing act reenacts the
former statute and punishes the act previously penalized under the old law. In such instance, the act
committed before the reenactment continues to be an offense in the statute books and pending cases are not
affected, regardless of whether the new penalty to be imposed is more favorable to the accused. (Emphasis
provided.)
In the present case, a criminal case may still be filed against the respondents despite the repeal, since
Sections 8, 65 12,66 26,67 2768 and 2369 of the Securities Regulations Code impose duties that are
substantially similar to Sections 8, 30 and 36 of the repealed Revised Securities Act.

Section 8 of the Revised Securities Act, which previously provided for the registration of securities and the
information that needs to be included in the registration statements, was expanded under Section 12, in
connection with Section 8 of the Securities Regulations Code. Further details of the information required to
be disclosed by the registrant are explained in the Amended Implementing Rules and Regulations of the
Securities Regulations Code, issued on 30 December 2003, particularly Sections 8 and 12 thereof.

Section 30 of the Revised Securities Act has been reenacted as Section 27 of the Securities Regulations Code,
still penalizing an insider's misuse of material and non-public information about the issuer, for the purpose
of protecting public investors. Section 26 of the Securities Regulations Code even widens the coverage of
punishable acts, which intend to defraud public investors through various devices, misinformation and
omissions.

Section 23 of the Securities Regulations Code was practically lifted from Section 36(a) of the Revised
Securities Act. Both provisions impose upon (1) a beneficial owner of more than ten percent of any class of
any equity security or (2) a director or any officer of the issuer of such security, the obligation to submit a
statement indicating his or her ownership of the issuer's securities and such changes in his or her
ownership thereof.

Clearly, the legislature had not intended to deprive the courts of their authority to punish a person charged
with violation of the old law that was repealed; in this case, the Revised Securities Act.

IV. The SEC retained the jurisdiction to investigate violations of the Revised Securities Act, reenacted in the
Securities Regulations Code, despite the abolition of the PED.

Section 53 of the Securities Regulations Code clearly provides that criminal complaints for violations of rules
and regulations enforced or administered by the SEC shall be referred to the Department of Justice (DOJ) for
preliminary investigation, while the SEC nevertheless retains limited investigatory powers.70 Additionally,
the SEC may still impose the appropriate administrative sanctions under Section 54 of the aforementioned
law.71

In Morato v. Court of Appeals,72 the cases therein were still pending before the PED for investigation and the
SEC for resolution when the Securities Regulations Code was enacted. The case before the SEC involved an
intra-corporate dispute, while the subject matter of the other case investigated by the PED involved the
schemes, devices, and violations of pertinent rules and laws of the company's board of directors. The
enactment of the Securities Regulations Code did not result in the dismissal of the cases; rather, this Court
ordered the transfer of one case to the proper regional trial court and the SEC to continue with the
investigation of the other case.

The case at bar is comparable to the aforecited case. In this case, the SEC already commenced the
investigative proceedings against respondents as early as 1994. Respondents were called to appear before the
SEC and explain their failure to disclose pertinent information on 14 August 1994. Thereafter, the SEC
Chairman, having already made initial findings that respondents failed to make timely disclosures of their
negotiations with GHB, ordered a special investigating panel to hear the case. The investigative proceedings
were interrupted only by the writ of preliminary injunction issued by the Court of Appeals, which became
permanent by virtue of the Decision, dated 20 August 1998, in C.A.-G.R. SP No. 37036. During the pendency
of this case, the Securities Regulations Code repealed the Revised Securities Act. As in Morato v. Court of
Appeals, the repeal cannot deprive SEC of its jurisdiction to continue investigating the case; or the regional
trial court, to hear any case which may later be filed against the respondents.

V. The instant case has not yet prescribed.

Respondents have taken the position that this case is moot and academic, since any criminal complaint that
may be filed against them resulting from the SEC's investigation of this case has already prescribed.73 They
point out that the prescription period applicable to offenses punished under special laws, such as violations
of the Revised Securities Act, is twelve years under Section 1 of Act No. 3326, as amended by Act No. 3585
and Act No. 3763, entitled "An Act to Establish Periods of Prescription for Violations Penalized by Special
Acts and Municipal Ordinances and to Provide When Prescription Shall Begin to Act."74 Since the offense
was committed in 1994, they reasoned that prescription set in as early as 2006 and rendered this case moot.
Such position, however, is incongruent with the factual circumstances of this case, as well as the applicable
laws and jurisprudence.

It is an established doctrine that a preliminary investigation interrupts the prescription period.75 A

preliminary investigation is essentially a determination whether an offense has been committed, and whether
there is probable cause for the accused to have committed an offense:

A preliminary investigation is merely inquisitorial, and it is often the only means of discovering the persons
who may be reasonably charged with a crime, to enable the fiscal to prepare the complaint or information. It
is not a trial of the case on the merits and has no purpose except that of determining whether a crime has
been committed or whether there is probable cause to believe that the accused is guilty thereof.76

Under Section 45 of the Revised Securities Act, which is entitled Investigations, Injunctions and Prosecution
of Offenses, the Securities Exchange Commission (SEC) has the authority to "make such investigations as it
deems necessary to determine whether any person has violated or is about to violate any provision of this Act
XXX." After a finding that a person has violated the Revised Securities Act, the SEC may refer the case to the
DOJ for preliminary investigation and prosecution.

While the SEC investigation serves the same purpose and entails substantially similar duties as the
preliminary investigation conducted by the DOJ, this process cannot simply be disregarded. In Baviera v.
Paglinawan,77 this Court enunciated that a criminal complaint is first filed with the SEC, which determines
the existence of probable cause, before a preliminary investigation can be commenced by the DOJ. In the
aforecited case, the complaint filed directly with the DOJ was dismissed on the ground that it should have
been filed first with the SEC. Similarly, the offense was a violation of the Securities Regulations Code,
wherein the procedure for criminal prosecution was reproduced from Section 45 of the Revised Securities
Act. 78 This Court affirmed the dismissal, which it explained thus:

The Court of Appeals held that under the above provision, a criminal complaint for violation of any law or
rule administered by the SEC must first be filed with the latter. If the Commission finds that there is
probable cause, then it should refer the case to the DOJ. Since petitioner failed to comply with the foregoing
procedural requirement, the DOJ did not gravely abuse its discretion in dismissing his complaint in I.S. No.
2004-229.

A criminal charge for violation of the Securities Regulation Code is a specialized dispute. Hence, it must first
be referred to an administrative agency of special competence, i.e., the SEC. Under the doctrine of primary
jurisdiction, courts will not determine a controversy involving a question within the jurisdiction of the
administrative tribunal, where the question demands the exercise of sound administrative discretion
requiring the specialized knowledge and expertise of said administrative tribunal to determine technical and
intricate matters of fact. The Securities Regulation Code is a special law. Its enforcement is particularly
vested in the SEC. Hence, all complaints for any violation of the Code and its implementing rules and
regulations should be filed with the SEC. Where the complaint is criminal in nature, the SEC shall indorse
the complaint to the DOJ for preliminary investigation and prosecution as provided in Section 53.1 earlier
quoted.

We thus agree with the Court of Appeals that petitioner committed a fatal procedural lapse when he filed his
criminal complaint directly with the DOJ. Verily, no grave abuse of discretion can be ascribed to the DOJ in
dismissing petitioner's complaint.

The said case puts in perspective the nature of the investigation undertaken by the SEC, which is a requisite
before a criminal case may be referred to the DOJ. The Court declared that it is imperative that the criminal
prosecution be initiated before the SEC, the administrative agency with the special competence.

It should be noted that the SEC started investigative proceedings against the respondents as early as 1994.
This investigation effectively interrupted the prescription period. However, said proceedings were disrupted
by a preliminary injunction issued by the Court of Appeals on 5 May 1995, which effectively enjoined the
SEC from filing any criminal, civil, or administrative case against the respondents herein.79 Thereafter, on
20 August 1998, the appellate court issued the assailed Decision in C.A. G.R. SP. No. 37036 ordering that
the writ of injunction be made permanent and prohibiting the SEC from taking cognizance of and initiating
any action against herein respondents. The SEC was bound to comply with the aforementioned writ of
preliminary injunction and writ of injunction issued by the Court of Appeals enjoining it from continuing
with the investigation of respondents for 12 years. Any deviation by the SEC from the injunctive writs would
be sufficient ground for contempt. Moreover, any step the SEC takes in defiance of such orders will be
considered void for having been taken against an order issued by a court of competent jurisdiction.

An investigation of the case by any other administrative or judicial body would likewise be impossible
pending the injunctive writs issued by the Court of Appeals. Given the ruling of this Court in Baviera v.
Paglinawan,80 the DOJ itself could not have taken cognizance of the case and conducted its preliminary
investigation without a prior determination of probable cause by the SEC. Thus, even presuming that the
DOJ was not enjoined by the Court of Appeals from conducting a preliminary investigation, any preliminary
investigation conducted by the DOJ would have been a futile effort since the SEC had only started with its
investigation when respondents themselves applied for and were granted an injunction by the Court of
Appeals.

Moreover, the DOJ could not have conducted a preliminary investigation or filed a criminal case against the
respondents during the time that issues on the effectivity of Sections 8, 30 and 36 of the Revised Securities
Act and the PED Rules of Practice and Procedure were still pending before the Court of Appeals. After the
Court of Appeals declared the aforementioned statutory and regulatory provisions invalid and, thus, no civil,
criminal or administrative case may be filed against the respondents for violations thereof, the DOJ would
have been at a loss, as there was no statutory provision which respondents could be accused of violating.

Accordingly, it is only after this Court corrects the erroneous ruling of the Court of Appeals in its Decision
dated 20 August 1998 that either the SEC or DOJ may properly conduct any kind of investigation against
the respondents for violations of Sections 8, 30 and 36 of the Revised Securities Act. Until then, the
prescription period is deemed interrupted.

To reiterate, the SEC must first conduct its investigations and make a finding of probable cause in
accordance with the doctrine pronounced in Baviera v. Paglinawan.81 In this case, the DOJ was precluded
from initiating a preliminary investigation since the SEC was halted by the Court of Appeals from continuing
with its investigation. Such a situation leaves the prosecution of the case at a standstill, and neither the SEC
nor the DOJ can conduct any investigation against the respondents, who, in the first place, sought the
injunction to prevent their prosecution. All that the SEC could do in order to break the impasse was to have
the Decision of the Court of Appeals overturned, as it had done at the earliest opportunity in this case.
Therefore, the period during which the SEC was prevented from continuing with its investigation should not
be counted against it. The law on the prescription period was never intended to put the prosecuting bodies in
an impossible bind in which the prosecution of a case would be placed way beyond their control; for even if
they avail themselves of the proper remedy, they would still be barred from investigating and prosecuting the
case.

Indubitably, the prescription period is interrupted by commencing the proceedings for the prosecution of the
accused. In criminal cases, this is accomplished by initiating the preliminary investigation. The prosecution
of offenses punishable under the Revised Securities Act and the Securities Regulations Code is initiated by
the filing of a complaint with the SEC or by an investigation conducted by the SEC motu proprio. Only after
a finding of probable cause is made by the SEC can the DOJ instigate a preliminary investigation. Thus, the
investigation that was commenced by the SEC in 1995, soon after it discovered the questionable acts of the
respondents, effectively interrupted the prescription period. Given the nature and purpose of the
investigation conducted by the SEC, which is equivalent to the preliminary investigation conducted by the
DOJ in criminal cases, such investigation would surely interrupt the prescription period.

VI. The Court of Appeals was justified in denying SEC's Motion for Leave to Quash SEC Omnibus Orders
dated 23 October 1995.

The SEC avers that the Court of Appeals erred when it denied its Motion for Leave to Quash SEC Omnibus
Orders, dated 23 October 1995, in the light of its admission that the PED had the sole authority to
investigate the present case. On this matter, this Court cannot agree with the SEC.

In the assailed decision, the Court of Appeals denied the SEC's Motion for Leave to Quash SEC Omnibus
Orders, since it found other issues that were more important than whether or not the PED was the proper
body to investigate the matter. Its refusal was premised on its earlier finding that no criminal, civil, or
administrative case may be filed against the respondents under Sections 8, 30 and 36 of the Revised
Securities Act, due to the absence of any implementing rules and regulations. Moreover, the validity of the
PED Rules on Practice and Procedure was also raised as an issue. The Court of Appeals, thus, reasoned that
if the quashal of the orders was granted, then it would be deprived of the opportunity to determine the
validity of the aforementioned rules and statutory provisions. In addition, the SEC would merely pursue the
same case without the Court of Appeals having determined whether or not it may do so in accordance with
due process requirements. Absent a determination of whether the SEC may file a case against the
respondents based on the assailed provisions of the Revised Securities Act, it would have been improper for
the Court of Appeals to grant the SEC's Motion for Leave to Quash SEC Omnibus Orders.

In all, this Court rules that no implementing rules were needed to render effective Sections 8, 30 and 36 of
the Revised Securities Act; nor was the PED Rules of Practice and Procedure invalid, prior to the enactment
of the Securities Regulations Code, for failure to provide parties with the right to cross-examine the witnesses
presented against them. Thus, the respondents may be investigated by the appropriate authority under the
proper rules of procedure of the Securities Regulations Code for violations of Sections 8, 30, and 36 of the
Revised Securities Act.82

IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. This Court hereby REVERSES the assailed
Decision of the Court of Appeals promulgated on 20 August 1998 in CA-G.R. SP No. 37036 and LIFTS the
permanent injunction issued pursuant thereto. This Court further DECLARES that the investigation of the
respondents for violations of Sections 8, 30 and 36 of the Revised Securities Act may be undertaken by the
proper authorities in accordance with the Securities Regulations Code. No costs.

SO ORDERED.

6. Philippine Veterans Bank vs. Callangan, GR No. 191995, August 3, 2011

G.R. No. 191995 August 3, 2011

PHILIPPINE VETERANS BANK, Petitioner,

vs.
JUSTINA CALLANGAN, in her capacity as Director of the Corporation Finance Department of the Securities
and Exchange Commission and/or the SECURITIES AND EXCHANGE COMMISSION, Respondent.

RESOLUTION

BRION, J.:

We resolve the motion for reconsideration1 filed by petitioner Philippine Veterans Bank (the Bank) dated
August 5, 2010, addressing our June 16, 2010 Resolution that denied the Bank’s petition for review on
certiorari.

Factual Antecedents

On March 17, 2004, respondent Justina F. Callangan, the Director of the Corporation Finance Department
of the Securities and Exchange Commission (SEC), sent the Bank a letter, informing it that it qualifies as a
"public company" under Section 17.2 of the Securities Regulation Code (SRC) in relation with Rule 3(1)(m) of
the Amended Implementing Rules and Regulations of the SRC. The Bank is thus required to comply with the
reportorial requirements set forth in Section 17.1 of the SRC.2

The Bank responded by explaining that it should not be considered a "public company" because it is a
private company whose shares of stock are available only to a limited class or sector, i.e., to World War II
veterans, and not to the general public.3

In a letter dated April 20, 2004, Director Callangan rejected the Bank’s explanation and assessed it a total
penalty of One Million Nine Hundred Thirty-Seven Thousand Two Hundred Sixty-Two and 80/100 Pesos
(₱1,937,262.80) for failing to comply with the SRC reportorial requirements from 2001 to 2003. The Bank
moved for the reconsideration of the assessment, but Director Callangan denied the motion in SEC-CFD
Order No. 085, Series of 2005 dated July 26, 2005.4 When the SEC En Banc also dismissed the Bank’s
appeal for lack of merit in its Order dated August 31, 2006, prompting the Bank to file a petition for review
with the Court of Appeals (CA).5

On March 6, 2008, the CA dismissed the petition and affirmed the assailed SEC ruling, with the modification
that the assessment of the penalty be recomputed from May 31, 2004.6

The CA also denied the Bank’s motion for reconsideration,7 opening the way for the Bank’s petition for
review on certiorari filed with this Court.8

On June 16, 2010, the Court denied the Bank’s petition for failure to show any reversible error in the
assailed CA decision and resolution.9

The Motion for Reconsideration

The Bank reiterates that it is not a "public company" subject to the reportorial requirements under Section
17.1 of the SRC because its shares can be owned only by a specific group of people, namely, World War II
veterans and their widows, orphans and compulsory heirs, and is not open to the investing public in general.
The Bank also asks the Court to take into consideration the financial impact to the cause of "veteranism";
compliance with the reportorial requirements under the SRC, if the Bank would be considered a "public
company," would compel the Bank to spend approximately ₱40 million just to reproduce and mail the
"Information Statement" to its 400,000 shareholders nationwide.

The Court’s Ruling

We DENY the motion for reconsideration for lack of merit.

To determine whether the Bank is a "public company" burdened with the reportorial requirements ordered by
the SEC, we look to Subsections 17.1 and 17.2 of the SRC, which provide:

Section 17. Periodic and Other Reports of Issuers. –

17.1. Every issuer satisfying the requirements in Subsection 17.2 hereof shall file with the Commission:

a) Within one hundred thirty-five (135) days, after the end of the issuer’s fiscal year, or such other time as
the Commission may prescribe, an annual report which shall include, among others, a balance sheet, profit
and loss statement and statement of cash flows, for such last fiscal year, certified by an independent certified
public accountant, and a management discussion and analysis of results of operations; and

b) Such other periodical reports for interim fiscal periods and current reports on significant developments of
the issuer as the Commission may prescribe as necessary to keep current information on the operation of
the business and financial condition of the issuer.

17.2. The reportorial requirements of Subsection 17.1 shall apply to the following:

xxxx

c) An issuer with assets of at least Fifty million pesos (₱50,000,000.00) or such other amount as the
Commission shall prescribe, and having two hundred (200) or more holders each holding at least one
hundred (100) shares of a class of its equity securities: Provided, however, That the obligation of such issuer
to file reports shall be terminated ninety (90) days after notification to the Commission by the issuer that the
number of its holders holding at least one hundred (100) shares is reduced to less than one hundred (100).
(emphases supplied)

We also cite Rule 3(1)(m) of the Amended Implementing Rules and Regulations of the SRC, which defines a
"public company" as "any corporation with a class of equity securities listed on an Exchange or with assets
in excess of Fifty Million Pesos (₱50,000,000.00) and having two hundred (200) or more holders, at least two
hundred (200) of which are holding at least one hundred (100) shares of a class of its equity securities."

From these provisions, it is clear that a "public company," as contemplated by the SRC, is not limited to a
company whose shares of stock are publicly listed; even companies like the Bank, whose shares are offered
only to a specific group of people, are considered a public company, provided they meet the requirements
enumerated above.

The records establish, and the Bank does not dispute, that the Bank has assets exceeding ₱50,000,000.00
and has 395,998 shareholders.10 It is thus considered a public company that must comply with the
reportorial requirements set forth in Section 17.1 of the SRC.

The Bank also argues that even assuming it is considered a "public company" pursuant to Section 17 of the
SRC, the Court should interpret the pertinent SRC provisions in such a way that no financial prejudice is
done to the thousands of veterans who are stockholders of the Bank. Given that the legislature intended the
SRC to apply only to publicly traded companies, the Court should exempt the Bank from complying with the
reportorial requirements.

On this point, the Bank is apparently referring to the obligation set forth in Subsections 17.5 and 17.6 of the
SRC, which provide:

Section 17.5. Every issuer which has a class of equity securities satisfying any of the requirements in
Subsection 17.2 shall furnish to each holder of such equity security an annual report in such form and
containing such information as the Commission shall prescribe.

Section 17.6. Within such period as the Commission may prescribe preceding the annual meeting of the
holders of any equity security of a class entitled to vote at such meeting, the issuer shall transmit to such
holders an annual report in conformity with Subsection 17.5. (emphases supplied)

In making this argument, the Bank ignores the fact that the first and fundamental duty of the Court is to
apply the law.11 Construction and interpretation come only after a demonstration that the application of the
law is impossible or inadequate unless interpretation is resorted to.12 In this case, we see the law to be very
clear and free from any doubt or ambiguity; thus, no room exists for construction or interpretation.

Additionally, and contrary to the Bank’s claim, the Bank’s obligation to provide its stockholders with copies
of its annual report is actually for the benefit of the veterans-stockholders, as it gives these stockholders
access to information on the Bank’s financial status and operations, resulting in greater transparency on the
part of the Bank. While compliance with this requirement will undoubtedly cost the Bank money, the benefit
provided to the shareholders clearly outweighs the expense. For many stockholders, these annual reports are
the only means of keeping in touch with the state of health of their investments; to them, these are
invaluable and continuing links with the Bank that immeasurably contribute to the transparency in public
companies that the law envisions.

WHEREFORE, premises considered, petitioner Philippine Veterans Bank’s motion for reconsideration is
hereby DENIED with finality.

SO ORDERED.

7. Cemco Holdings, Inc. vs. National Life Insurance Company of the Philippines, GR No. 171815,
August 7, 2007
G.R. No. 171815 August 7, 2007

CEMCO HOLDINGS, INC., Petitioner,

vs.
NATIONAL LIFE INSURANCE COMPANY OF THE PHILIPPINES, INC., Respondent.

DECISION

CHICO-NAZARIO, J.:

This Petition for Review under Rule 45 of the Rules of Court seeks to reverse and set aside the 24 October
2005 Decision1 and the 6 March 2006 Resolution2 of the Court of Appeals in CA-G.R. SP No. 88758 which
affirmed the judgment3 dated 14 February 2005 of the Securities and Exchange Commission (SEC) finding
that the acquisition of petitioner Cemco Holdings, Inc. (Cemco) of the shares of stock of Bacnotan
Consolidated Industries, Inc. (BCI) and Atlas Cement Corporation (ACC) in Union Cement Holdings
Corporation (UCHC) was covered by the Mandatory Offer Rule under Section 19 of Republic Act No. 8799,
otherwise known as the Securities Regulation Code.

The Facts

Union Cement Corporation (UCC), a publicly-listed company, has two principal stockholders – UCHC, a non-
listed company, with shares amounting to 60.51%, and petitioner Cemco with 17.03%. Majority of UCHC’s
stocks were owned by BCI with 21.31% and ACC with 29.69%. Cemco, on the other hand, owned 9% of
UCHC stocks.

In a disclosure letter dated 5 July 2004, BCI informed the Philippine Stock Exchange (PSE) that it and its
subsidiary ACC had passed resolutions to sell to Cemco BCI’s stocks in UCHC equivalent to 21.31% and
ACC’s stocks in UCHC equivalent to 29.69%.

In the PSE Circular for Brokers No. 3146-2004 dated 8 July 2004, it was stated that as a result of petitioner
Cemco’s acquisition of BCI and ACC’s shares in UCHC, petitioner’s total beneficial ownership, direct and
indirect, in UCC has increased by 36% and amounted to at least 53% of the shares of UCC, to wit4 :

Particulars Percentage
Existing shares of Cemco in UCHC 9%
Acquisition by Cemco of BCI’s and ACC’s shares in UCHC 51%
Total stocks of Cemco in UCHC 60%
Percentage of UCHC ownership in UCC 60%
Indirect ownership of Cemco in UCC 36%
Direct ownership of Cemco in UCC 17%
Total ownership of Cemco in UCC 53%
As a consequence of this disclosure, the PSE, in a letter to the SEC dated 15 July 2004, inquired as to
whether the Tender Offer Rule under Rule 19 of the Implementing Rules of the Securities Regulation Code is
not applicable to the purchase by petitioner of the majority of shares of UCC.

In a letter dated 16 July 2004, Director Justina Callangan of the SEC’s Corporate Finance Department
responded to the query of the PSE that while it was the stance of the department that the tender offer rule
was not applicable, the matter must still have to be confirmed by the SEC en banc.

Thereafter, in a subsequent letter dated 27 July 2004, Director Callangan confirmed that the SEC en banc
had resolved that the Cemco transaction was not covered by the tender offer rule.
On 28 July 2004, feeling aggrieved by the transaction, respondent National Life Insurance Company of the
Philippines, Inc., a minority stockholder of UCC, sent a letter to Cemco demanding the latter to comply with
the rule on mandatory tender offer. Cemco, however, refused.

On 5 August 2004, a Share Purchase Agreement was executed by ACC and BCI, as sellers, and Cemco, as
buyer.

On 12 August 2004, the transaction was consummated and closed.

On 19 August 2004, respondent National Life Insurance Company of the Philippines, Inc. filed a complaint
with the SEC asking it to reverse its 27 July 2004 Resolution and to declare the purchase agreement of
Cemco void and praying that the mandatory tender offer rule be applied to its UCC shares. Impleaded in the
complaint were Cemco, UCC, UCHC, BCI and ACC, which were then required by the SEC to file their
respective comment on the complaint. In their comments, they were uniform in arguing that the tender offer
rule applied only to a direct acquisition of the shares of the listed company and did not extend to an indirect
acquisition arising from the purchase of the shares of a holding company of the listed firm.

In a Decision dated 14 February 2005, the SEC ruled in favor of the respondent by reversing and setting
aside its 27 July 2004 Resolution and directed petitioner Cemco to make a tender offer for UCC shares to
respondent and other holders of UCC shares similar to the class held by UCHC in accordance with Section
9(E), Rule 19 of the Securities Regulation Code.

Petitioner filed a petition with the Court of Appeals challenging the SEC’s jurisdiction to take cognizance of
respondent’s complaint and its authority to require Cemco to make a tender offer for UCC shares, and
arguing that the tender offer rule does not apply, or that the SEC’s re-interpretation of the rule could not be
made to retroactively apply to Cemco’s purchase of UCHC shares.

The Court of Appeals rendered a decision affirming the ruling of the SEC. It ruled that the SEC has
jurisdiction to render the questioned decision and, in any event, Cemco was barred by estoppel from
questioning the SEC’s jurisdiction. It, likewise, held that the tender offer requirement under the Securities
Regulation Code and its Implementing Rules applies to Cemco’s purchase of UCHC stocks. The decretal
portion of the said Decision reads:

IN VIEW OF THE FOREGOING, the assailed decision of the SEC is AFFIRMED, and the preliminary
injunction issued by the Court LIFTED.5

Cemco filed a motion for reconsideration which was denied by the Court of Appeals.

Hence, the instant petition.

In its memorandum, petitioner Cemco raises the following issues:

I.

ASSUMING ARGUENDO THAT THE SEC HAS JURISDICTION OVER NATIONAL LIFE’S COMPLAINT AND
THAT THE SEC’S RE-INTERPRETATION OF THE TENDER OFFER RULE IS CORRECT, WHETHER OR NOT
THAT REINTERPRETATION CAN BE APPLIED RETROACTIVELY TO CEMCO’S PREJUDICE.

II.
WHETHER OR NOT THE SEC HAS JURISDICTION TO ADJUDICATE THE DISPUTE BETWEEN THE
PARTIES A QUO OR TO RENDER JUDGMENT REQUIRING CEMCO TO MAKE A TENDER OFFER FOR UCC
SHARES.

III.

WHETHER OR NOT CEMCO’S PURCHASE OF UCHC SHARES IS SUBJECT TO THE TENDER OFFER
REQUIREMENT.

IV.

WHETHER OR NOT THE SEC DECISION, AS AFFIRMED BY THE CA DECISION, IS AN INCOMPLETE

JUDGMENT WHICH PRODUCED NO EFFECT.6

Simply stated, the following are the issues:

1. Whether or not the SEC has jurisdiction over respondent’s complaint and to require Cemco to make a
tender offer for respondent’s UCC shares.

2. Whether or not the rule on mandatory tender offer applies to the indirect acquisition of shares in a listed
company, in this case, the indirect acquisition by Cemco of 36% of UCC, a publicly-listed company, through
its purchase of the shares in UCHC, a non-listed company.

3. Whether or not the questioned ruling of the SEC can be applied retroactively to Cemco’s transaction which
was consummated under the authority of the SEC’s prior resolution.

On the first issue, petitioner Cemco contends that while the SEC can take cognizance of respondent’s
complaint on the alleged violation by petitioner Cemco of the mandatory tender offer requirement under
Section 19 of Republic Act No. 8799, the same statute does not vest the SEC with jurisdiction to adjudicate
and determine the rights and obligations of the parties since, under the same statute, the SEC’s authority is
purely administrative. Having been vested with purely administrative authority, the SEC can only impose
administrative sanctions such as the imposition of administrative fines, the suspension or revocation of
registrations with the SEC, and the like. Petitioner stresses that there is nothing in the statute which
authorizes the SEC to issue orders granting affirmative reliefs. Since the SEC’s order commanding it to make
a tender offer is an affirmative relief fixing the respective rights and obligations of parties, such order is void.

Petitioner further contends that in the absence of any specific grant of jurisdiction by Congress, the SEC
cannot, by mere administrative regulation, confer on itself that jurisdiction.

Petitioner’s stance fails to persuade.

In taking cognizance of respondent’s complaint against petitioner and eventually rendering a judgment which
ordered the latter to make a tender offer, the SEC was acting pursuant to Rule 19(13) of the Amended
Implementing Rules and Regulations of the Securities Regulation Code, to wit:

13. Violation

If there shall be violation of this Rule by pursuing a purchase of equity shares of a public company at
threshold amounts without the required tender offer, the Commission, upon complaint, may nullify the said
acquisition and direct the holding of a tender offer. This shall be without prejudice to the imposition of other
sanctions under the Code.
The foregoing rule emanates from the SEC’s power and authority to regulate, investigate or supervise the
activities of persons to ensure compliance with the Securities Regulation Code, more specifically the
provision on mandatory tender offer under Section 19 thereof.7

Another provision of the statute, which provides the basis of Rule 19(13) of the Amended Implementing Rules
and Regulations of the Securities Regulation Code, is Section 5.1(n), viz:

[T]he Commission shall have, among others, the following powers and functions:

xxxx

(n) Exercise such other powers as may be provided by law as well as those which may be implied from, or
which are necessary or incidental to the carrying out of, the express powers granted the Commission to
achieve the objectives and purposes of these laws.

The foregoing provision bestows upon the SEC the general adjudicative power which is implied from the
express powers of the Commission or which is incidental to, or reasonably necessary to carry out, the
performance of the administrative duties entrusted to it. As a regulatory agency, it has the incidental power
to conduct hearings and render decisions fixing the rights and obligations of the parties. In fact, to deprive
the SEC of this power would render the agency inutile, because it would become powerless to regulate and
implement the law. As correctly held by the Court of Appeals:

We are nonetheless convinced that the SEC has the competence to render the particular decision it made in
this case. A definite inference may be drawn from the provisions of the SRC that the SEC has the authority
not only to investigate complaints of violations of the tender offer rule, but to adjudicate certain rights and
obligations of the contending parties and grant appropriate reliefs in the exercise of its regulatory functions
under the SRC. Section 5.1 of the SRC allows a general grant of adjudicative powers to the SEC which may
be implied from or are necessary or incidental to the carrying out of its express powers to achieve the
objectives and purposes of the SRC. We must bear in mind in interpreting the powers and functions of the
SEC that the law has made the SEC primarily a regulatory body with the incidental power to conduct
administrative hearings and make decisions. A regulatory body like the SEC may conduct hearings in the
exercise of its regulatory powers, and if the case involves violations or conflicts in connection with the
performance of its regulatory functions, it will have the duty and authority to resolve the dispute for the best
interests of the public.8

For sure, the SEC has the authority to promulgate rules and regulations, subject to the limitation that the
same are consistent with the declared policy of the Code. Among them is the protection of the investors and
the minimization, if not total elimination, of fraudulent and manipulative devises. Thus, Subsection 5.1(g) of
the law provides:

Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on
and supervise compliance with such rules, regulations and orders.

Also, Section 72 of the Securities Regulation Code reads:

72.1. x x x To effect the provisions and purposes of this Code, the Commission may issue, amend, and
rescind such rules and regulations and orders necessary or appropriate, x x x.

72.2. The Commission shall promulgate rules and regulations providing for reporting, disclosure and the
prevention of fraudulent, deceptive or manipulative practices in connection with the purchase by an issuer,
by tender offer or otherwise, of and equity security of a class issued by it that satisfies the requirements of
Subsection 17.2. Such rules and regulations may require such issuer to provide holders of equity securities
of such dates with such information relating to the reasons for such purchase, the source of funds, the
number of shares to be purchased, the price to be paid for such securities, the method of purchase and such
additional information as the Commission deems necessary or appropriate in the public interest or for the
protection of investors, or which the Commission deems to be material to a determination by holders
whether such security should be sold.
The power conferred upon the SEC to promulgate rules and regulations is a legislative recognition of the
complexity and the constantly-fluctuating nature of the market and the impossibility of foreseeing all the
possible contingencies that cannot be addressed in advance. As enunciated in Victorias Milling Co., Inc. v.
Social Security Commission9 :

Rules and regulations when promulgated in pursuance of the procedure or authority conferred upon the
administrative agency by law, partake of the nature of a statute, and compliance therewith may be enforced
by a penal sanction provided in the law. This is so because statutes are usually couched in general terms,
after expressing the policy, purposes, objectives, remedies and sanctions intended by the legislature. The
details and the manner of carrying out the law are often times left to the administrative agency entrusted
with its enforcement. In this sense, it has been said that rules and regulations are the product of a delegated
power to create new or additional legal provisions that have the effect of law.

Moreover, petitioner is barred from questioning the jurisdiction of the SEC. It must be pointed out that
petitioner had participated in all the proceedings before the SEC and had prayed for affirmative relief. In fact,
petitioner defended the jurisdiction of the SEC in its Comment dated 15 September 2004, filed with the SEC
wherein it asserted:

This Honorable Commission is a highly specialized body created for the purpose of administering, overseeing,
and managing the corporate industry, share investment and securities market in the Philippines. By the very
nature of its functions, it dedicated to the study and administration of the corporate and securities laws and
has necessarily developed an expertise on the subject. Based on said functions, the Honorable Commission
is necessarily tasked to issue rulings with respect to matters involving corporate matters and share
acquisitions. Verily when this Honorable Commission rendered the Ruling that " … the acquisition of Cemco
Holdings of the majority shares of Union Cement Holdings, Inc., a substantial stockholder of a listed
company, Union Cement Corporation, is not covered by the mandatory tender offer requirement of the SRC
Rule 19," it was well within its powers and expertise to do so. Such ruling shall be respected, unless there
has been an abuse or improvident exercise of authority.10

Petitioner did not question the jurisdiction of the SEC when it rendered an opinion favorable to it, such as
the 27 July 2004 Resolution, where the SEC opined that the Cemco transaction was not covered by the
mandatory tender offer rule. It was only when the case was before the Court of Appeals and after the SEC
rendered an unfavorable judgment against it that petitioner challenged the SEC’s competence. As articulated
in Ceroferr Realty Corporation v. Court of Appeals11 :

While the lack of jurisdiction of a court may be raised at any stage of an action, nevertheless, the party
raising such question may be estopped if he has actively taken part in the very proceedings which he
questions and he only objects to the court’s jurisdiction because the judgment or the order subsequently
rendered is adverse to him.

On the second issue, petitioner asserts that the mandatory tender offer rule applies only to direct acquisition
of shares in the public company.

This contention is not meritorious.

Tender offer is a publicly announced intention by a person acting alone or in concert with other persons to
acquire equity securities of a public company.12 A public company is defined as a corporation which is listed
on an exchange, or a corporation with assets exceeding ₱50,000,000.00 and with 200 or more stockholders,
at least 200 of them holding not less than 100 shares of such company.13 Stated differently, a tender offer is
an offer by the acquiring person to stockholders of a public company for them to tender their shares therein
on the terms specified in the offer.14 Tender offer is in place to protect minority shareholders against any
scheme that dilutes the share value of their investments. It gives the minority shareholders the chance to
exit the company under reasonable terms, giving them the opportunity to sell their shares at the same price
as those of the majority shareholders.15

Under Section 19 of Republic Act No. 8799, it is stated:

Tender Offers. 19.1. (a) Any person or group of persons acting in concert who intends to acquire at least
fifteen percent (15%) of any class of any equity security of a listed corporation or of any class of any equity
security of a corporation with assets of at least Fifty million pesos (₱50,000,000.00) and having two hundred
(200) or more stockholders with at least one hundred (100) shares each or who intends to acquire at least
thirty percent (30%) of such equity over a period of twelve (12) months shall make a tender offer to
stockholders by filing with the Commission a declaration to that effect; and furnish the issuer, a statement
containing such of the information required in Section 17 of this Code as the Commission may prescribe.
Such person or group of persons shall publish all requests or invitations for tender, or materials making a
tender offer or requesting or inviting letters of such a security. Copies of any additional material soliciting or
requesting such tender offers subsequent to the initial solicitation or request shall contain such information
as the Commission may prescribe, and shall be filed with the Commission and sent to the issuer not later
than the time copies of such materials are first published or sent or given to security holders.

Under existing SEC Rules,16 the 15% and 30% threshold acquisition of shares under the foregoing provision
was increased to thirty-five percent (35%). It is further provided therein that mandatory tender offer is still
applicable even if the acquisition is less than 35% when the purchase would result in ownership of over 51%
of the total outstanding equity securities of the public company.17

The SEC and the Court of Appeals ruled that the indirect acquisition by petitioner of 36% of UCC shares
through the acquisition of the non-listed UCHC shares is covered by the mandatory tender offer rule.

This interpretation given by the SEC and the Court of Appeals must be sustained.

The rule in this jurisdiction is that the construction given to a statute by an administrative agency charged
with the interpretation and application of that statute is entitled to great weight by the courts, unless such
construction is clearly shown to be in sharp contrast with the governing law or statute.18 The rationale for
this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society and
the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates
to accumulation of experience and growth of specialized capabilities by the administrative agency charged
with implementing a particular statute.19

The SEC and the Court of Appeals accurately pointed out that the coverage of the mandatory tender offer
rule covers not only direct acquisition but also indirect acquisition or "any type of acquisition." This is clear
from the discussions of the Bicameral Conference Committee on the Securities Act of 2000, on 17 July 2000.

SEN. S. OSMEÑA. Eto ang mangyayari diyan, eh. Somebody controls 67% of the Company. Of course, he will
pay a premium for the first 67%. Control yan, eh. Eh, kawawa yung mga maiiwan, ang 33% because the
value of the stock market could go down, could go down after that, because there will (p. 41) be no more
market. Wala nang gustong bumenta. Wala nang… I mean maraming gustong bumenta, walang gustong
bumili kung hindi yung majority owner. And they will not buy. They already have 67%. They already have
control. And this protects the minority. And we have had a case in Cebu wherein Ayala A who already owned
40% of Ayala B made an offer for another 40% of Ayala B without offering the 20%. Kawawa naman yung
nakahawak ngayon ng 20%. Ang baba ng share sa market. But we did not have a law protecting them at that
time.

CHAIRMAN ROCO. So what is it that you want to achieve?

SEN. S. OSMEÑA. That if a certain group achieves a certain amount of ownership in a corporation, yeah, he
is obligated to buy anybody who wants to sell.

CHAIRMAN ROCO. Pro-rata lang. (p. 42).

xxxx

REP. TEODORO. As long as it reaches 30, ayan na. Any type of acquisition just as long as it will result in
30… (p.50)… reaches 30, ayan na. Any type of acquisition just as long as it will result in 30, general tender,
pro-rata.20 (Emphasis supplied.)
Petitioner counters that the legislator’s reference to "any type of acquisition" during the deliberations on the
Securities Regulation Code does not indicate that congress meant to include the "indirect" acquisition of
shares of a public corporation to be covered by the tender offer rule. Petitioner also avers that it did not
directly acquire the shares in UCC and the incidental benefit of having acquired the control of the said public
company must not be taken against it.

These arguments are not convincing. The legislative intent of Section 19 of the Code is to regulate activities
relating to acquisition of control of the listed company and for the purpose of protecting the minority
stockholders of a listed corporation. Whatever may be the method by which control of a public company is
obtained, either through the direct purchase of its stocks or through an indirect means, mandatory tender
offer applies. As appropriately held by the Court of Appeals:

The petitioner posits that what it acquired were stocks of UCHC and not UCC. By happenstance, as a result
of the transaction, it became an indirect owner of UCC. We are constrained, however, to construe ownership
acquisition to mean both direct and indirect. What is decisive is the determination of the power of control.
The legislative intent behind the tender offer rule makes clear that the type of activity intended to be
regulated is the acquisition of control of the listed company through the purchase of shares. Control may [be]
effected through a direct and indirect acquisition of stock, and when this takes place, irrespective of the
means, a tender offer must occur. The bottomline of the law is to give the shareholder of the listed company
the opportunity to decide whether or not to sell in connection with a transfer of control. x x x.21

As to the third issue, petitioner stresses that the ruling on mandatory tender offer rule by the SEC and the
Court of Appeals should not have retroactive effect or be made to apply to its purchase of the UCHC shares
as it relied in good faith on the letter dated 27 July 2004 of the SEC which opined that the proposed
acquisition of the UCHC shares was not covered by the mandatory offer rule.

The argument is not persuasive.

The action of the SEC on the PSE request for opinion on the Cemco transaction cannot be construed as
passing merits or giving approval to the questioned transaction. As aptly pointed out by the respondent, the
letter dated 27 July 2004 of the SEC was nothing but an approval of the draft letter prepared by Director
Callanga. There was no public hearing where interested parties could have been heard. Hence, it was not
issued upon a definite and concrete controversy affecting the legal relations of parties thereby making it a
judgment conclusive on all the parties. Said letter was merely advisory. Jurisprudence has it that an
advisory opinion of an agency may be stricken down if it deviates from the provision of the statute.22 Since
the letter dated 27 July 2004 runs counter to the Securities Regulation Code, the same may be disregarded
as what the SEC has done in its decision dated 14 February 2005.

Assuming arguendo that the letter dated 27 July 2004 constitutes a ruling, the same cannot be utilized to
determine the rights of the parties. What is to be applied in the present case is the subsequent ruling of the
SEC dated 14 February 2005 abandoning the opinion embodied in the letter dated 27 July 2004. In Serrano
v. National Labor Relations Commission,23 an argument was raised similar to the case under consideration.
Private respondent therein argued that the new doctrine pronounced by the Court should only be applied
prospectively. Said postulation was ignored by the Court when it ruled:

While a judicial interpretation becomes a part of the law as of the date that law was originally passed, this is
subject to the qualification that when a doctrine of this Court is overruled and a different view is adopted,
and more so when there is a reversal thereof, the new doctrine should be applied prospectively and should
not apply to parties who relied on the old doctrine and acted in good faith. To hold otherwise would be to
deprive the law of its quality of fairness and justice then, if there is no recognition of what had transpired
prior to such adjudication.

It is apparent that private respondent misconceived the import of the ruling. The decision in Columbia
Pictures does not mean that if a new rule is laid down in a case, it should not be applied in that case but
that said rule should apply prospectively to cases arising afterwards. Private respondent’s view of the
principle of prospective application of new judicial doctrines would turn the judicial function into a mere
academic exercise with the result that the doctrine laid down would be no more than a dictum and would
deprive the holding in the case of any force.
Indeed, when the Court formulated the Wenphil doctrine, which we reversed in this case, the Court did not
defer application of the rule laid down imposing a fine on the employer for failure to give notice in a case of
dismissal for cause. To the contrary, the new rule was applied right then and there. x x x.

Lastly, petitioner alleges that the decision of the SEC dated 14 February 2005 is "incomplete and produces
no effect."

This contention is baseless.

The decretal portion of the SEC decision states:

In view of the foregoing, the letter of the Commission, signed by Director Justina F. Callangan, dated July
27, 2004, addressed to the Philippine Stock Exchange is hereby REVERSED and SET ASIDE. Respondent
Cemco is hereby directed to make a tender offer for UCC shares to complainant and other holders of UCC
shares similar to the class held by respondent UCHC, at the highest price it paid for the beneficial ownership
in respondent UCC, strictly in accordance with SRC Rule 19, Section 9(E).24

A reading of the above ruling of the SEC reveals that the same is complete. It orders the conduct of a
mandatory tender offer pursuant to the procedure provided for under Rule 19(E) of the Amended
Implementing Rules and Regulations of the Securities Regulation Code for the highest price paid for the
beneficial ownership of UCC shares. The price, on the basis of the SEC decision, is determinable. Moreover,
the implementing rules and regulations of the Code are sufficient to inform and guide the parties on how to
proceed with the mandatory tender offer.

WHEREFORE, the Decision and Resolution of the Court of Appeals dated 24 October 2005 and 6 March
2006, respectively, affirming the Decision dated 14 February 2005 of the Securities and Exchange
Commission En Banc, are hereby AFFIRMED. Costs against petitioner.

SO ORDERED.

8. Citibank NA vs. Tanco-Gabaldon, GR No. 198444, September 4, 2013

G.R. No. 198444 September 4, 2013

CITIBANK N.A. AND THE CITIGROUP PRIVATE BANK, Petitioners,

vs.
ESTER H. TANCO-GABALDON, ARSENIO TANCO & THE HEIRS OF KU TIONG LAM, Respondents.

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

G.R. No, 198469-70

CAROL LIM, Petitioner,

vs.
ESTER H. TANCO-GABALDON, ARSENIO TANCO & THE HEIRS OF KU TIONG LAM, Respondents.

DECISION

REYES, J.:
These consolidated cases arose from the same antecedent facts.

On September 21, 2007, Ester H. Tanco-Gabaldon (Gabaldon), Arsenio Tanco (Tanco) and the Heirs of Ku
Tiong Lam (Lam) (respondents) filed with the Securities and Exchange Commission’s Enforcement and
Prosecution Department1 (SEC-EPD) a complaint for violation of the Revised Securities Act (RSA) and the
Securities Regulation Code (SRC)against petitioners Citibank N.A. (Citibank) and its officials,2 Citigroup
Private Bank (Citigroup) and its officials,3 and petitioner Carol Lim (Lim),who is Citigroup’s Vice-President
and Director. In their Complaint,4 the respondents alleged that Gabaldon, Tanco and Lam were joint
accountholders of petitioner Citigroup. Sometime in March 2000, the respondents met with petitioner Lim,
who "induced" them into signing a subscription agreement for the purchase of USD 2,000,000.00 worth of
Ceres II Finance Ltd. Income Notes. In September of the same year, they met again with Lim for another
investment proposal, this time for the purchase of USD500,000.00 worth of Aeries Finance II Ltd. Senior
Subordinated Income Notes. In a January 2003 statement issued by the Citigroup, the respondents learned
that their investments declined, until their account was totally wiped out. Upon verification with the SEC,
they learned that the Ceres II Finance Ltd. Notes and the Aeries Finance II Ltd. Notes were not duly
registered securities. They also learned that Ceres II Finance Ltd., Aeries Finance II Ltd. and the petitioners,
among others, are not duly-registered security issuers, brokers, dealers or agents.

Hence, the respondents prayed in their complaint that: (1) the petitioners be held administratively liable;5 (2)
the petitioners be liable to pay an administrative fine pursuant to Section 54(ii), SRC; (3) the petitioners’
existing registration/s or secondary license/s to act as a broker/dealer in securities, government securities
eligible dealer, investment adviser of an investment house/underwriter of securities and transfer agent be
revoked; and (4) criminal complaints against the petitioners be filed and endorsed to the Department of
Justice (DOJ) for investigation.6

Petitioners Citibank and Citigroup claimed that they did not receive a copy of the complaint and it was only
after the Bangko Sentral ng Pilipinas (BSP) wrote them on October 26, 2007 that they were furnished a copy.
They replied to the BSP disclaiming any participation by the Citibank or its officers on the transactions and
products complained of. Citibank and Citigroup furnished a copy of its letter to the SEC-EPD and the
respondents’ counsel.

On August 1, 2008, the SEC-EPD asked from the petitioners certain documents to be submitted during a
scheduled conference, to which they complied. The petitioners, however, reiterated its position that they are
not submitting to the jurisdiction of the SEC. The petitioners were also required to submit other
documents.6a

Thereafter, in an order dated December 8, 2008, the SEC-EPD terminated its investigation on the ground
that the respondents’ action has already prescribed.7 According to the SEC-EPD, "[t]he aforesaid complaint
was filed before the [SEC-EPD] on 21 September 2007 while a similar complaint was lodged before the [DOJ]
on October 2005. Seven (7) years had lapsed before the filing of the action before the SEC while the
complaint instituted before the DOJ was filed one month after the expiration of the allowable period."8 It
appears that on October 24, 2005,9 the respondents had already filed with the Mandaluyong City
Prosecutor’s Office a complaint for violation of the RSA and SRC but it was referred to the SEC pursuant to
Baviera v. Prosecutor Paglinawan.10

In 2009, petitioners Citibank and Citigroup received a copy of the respondents’ Notice of Appeal and
Memorandum of Appeals but the officials did not, as according to them, the latter were not connected with
them. Citibank also alleged that they did not receive any order to file a Reply Memorandum, in contravention
of Section 11-5, Rule XI of the 2006SEC Rules of Procedure. It turned out, however, that an order was issued
by the SEC, dated February 26, 2009, requiring the petitioners to file their reply.11

On November 6, 2009, petitioners Citibank and Citigroup received the SEC en banc Decision12 dated
October 15, 2009 reinstating the complaint and ordering the immediate investigation of the case. Petitioner
Lim, who was then based in Hong Kong, learned of the rendition of the SEC decision on November 20, 2009
through a teleconference with petitioner Citibank’s counsel.13 Thus, petitioners Citibank and Citigroup filed
a petition for review with the Court of Appeals (CA), docketed as CA-G.R. SP No.111501. Petitioner Lim filed
her own petition for review with the CA, docketed as CA-G.R. SP No. 112309. These two petitions were then
consolidated Finally, the CA rendered the Decision14 dated October 5, 2010, which provides for the following
dispositive portion:

WHEREFORE, the foregoing premises considered, the petition is partly GRANTED. The writ of injunction is
hereby DISSOLVED. The Securities and Exchange Commission-Enforcement and Prosecution Department is
ordered to proceed with its investigation with dispatch and with due regard to the parties’ right to notice and
hearing.

SO ORDERED.15

The petitioners filed a motion for reconsideration, which was denied by the CA in its Resolution16 dated
August 31, 2011. The petitioners then filed the present consolidated petitions for review under Rule 45 of the
Rules of Court.

The issues raised in these petitions are: (1) whether the criminal action for offenses punished under the SRC
filed by the respondents against the petitioners has already prescribed; and (2) whether the filing of the
action for the petitioners’ administrative liability is barred by laches.

It was the CA’s view that since the SRC has no specific provision on prescription of criminal offenses, the
applicable law is Act No. 3326.17 Under the SRC, imprisonment of more than six (6) years is the imposable
penalty for the offenses with which the petitioners were charged, and applying Act No. 3326, the prescriptive
period for the filing of an action is twelve (12) years, reckoned from the time of commission or discovery of
the offense.18 The respondents’ filing of the complaint with the SEC, therefore, was within the prescriptive
period.

In G.R. Nos. 198469-70, petitioner Lim share the view of petitioners Citibank and Citigroup that Act No.
3326 is not applicable and the SRC provides for its own prescriptive period.19 Meanwhile, in G.R. No.
198444, petitioners Citibank and Citigroup maintain that the CA committed an error in applying Act No.
3326. According to the petitioners, Section 62.2 of the SRC applies to both civil and criminal liability. The
petitioners also insist that laches bar the investigation of the respondents’ complaint against the petitioners.
On the other hand, the respondents assert, among others, the applicability of Act No. 3326.20

Ruling of the Court

Resolution of the issue raised by the petitioners call for an examination of the pertinent provisions of the
SRC, particularly Section 62,which states:

SEC. 62. Limitation of Actions. –

62.1. No action shall be maintained to enforce any liability created under Section 56 or 57 of this Code
unless brought within two (2) years after the discovery of the untrue statement or the omission, or, if the
action is to enforce a liability created under Subsection 57.1(a), unless brought within two (2) years after the
violation upon which it is based. In no event shall any such action be brought to enforce a liability created
under Section 56 or Subsection 57.1(a) more than five (5) years after the security was bona fide offered to the
public, or under Subsection 57.1(b) more than five (5) years after the sale.

62.2. No action shall be maintained to enforce any liability created under any other provision of this Code
unless brought within two (2) years after the discovery of the facts constituting the cause of action and
within five (5) years after such cause of action accrued.1âwphi1

Section 62 provides for two different prescriptive periods.

Section 62.1 specifically sets out the prescriptive period for the liabilities created under Sections 56, 57,
57.1(a) and 57.1(b). Section 56refers to Civil Liabilities on Account of False Registration Statement while
Section 57 pertains to Civil Liabilities on Arising in Connection with Prospectus, Communications and
Reports. Under these provisions, enforcement of the civil liability must be brought within two (2) years or five
(5) years, as the case may be.
On the other hand, Section 62.2 provides for the prescriptive period to enforce any liability created under the
SRC. It is the interpretation of the phrase "any liability" that creates the uncertainty. Does it include both
civil and criminal liability? Or does it pertain solely to civil liability?

In order to put said phrase in its proper perspective, reference must be made to the rule of statutory
construction that every part of the statute must be interpreted with reference to the context, i.e., that every
part of the statute must be considered together with the other parts, and kept subservient to the general
intent of the whole enactment.21

Section 62.2 should not be read in isolation of the other provision included in Section 62, particularly
Section62.1, which provides for the prescriptive period for the enforcement of civil liability in cases of
violations of Sections 56, 57, 57.1(a) and 57.1(b).

Moreover, it should be noted that the civil liabilities provided in the SRC are not limited to Sections 56 and
57. Section 58 provides for Civil Liability For Fraud in Connection With Securities Transactions; Section 59 –
Civil Liability For Manipulation of Security Prices; Section 60 – Civil Liability With Respect to Commodity
Future Contracts and Pre-need Plans; and Section 61 – Civil Liability on Account of Insider Trading. Thus,
bearing in mind that Section 62.1 merely addressed the prescriptive period for the civil liability provided in
Sections 56, 57, 57.1(a) and 57.1(b), then it reasonably follows that the other sub-provision, Section 62.2,
deals with the other civil liabilities that were not covered by Section 62.1, namely Sections59, 60 and 61.
This conclusion is further supported by the fact that the subsequent provision, Section 63, explicitly pertains
to the amount of damages recoverable under Sections 56, 57, 58, 59, 60 and 61,22 the trial court having
jurisdiction over such actions,23 the persons liable24 and the extent of their liability25

Clearly, the intent is to encompass in Section 62the prescriptive periods only of the civil liability in cases of
violations of the SRC.

The CA, therefore, did not commit any error when it ruled that "the phrase ‘any liability’ in subsection 62.2
can only refer to other liabilities that are also civil in nature. The phrase could not have suddenly intended to
mean criminal liability for this would go beyond the context of the other provisions among which it is
found."26

Given the absence of a prescriptive period for the enforcement of the criminal liability in violations of the
SRC, Act No. 3326 now comes into play. Panaguiton, Jr. v. Department of Justice27 expressly ruled that Act
No. 3326 is the law applicable to offenses under special laws which do not provide their own prescriptive
periods.28

Section 1 of Act No. 3326 provides:

Violations penalized by special acts shall, unless otherwise provided in such acts, prescribe in accordance
with the following rules: (a) after a year for offenses punished only by a fine or by imprisonment for not more
than one month, or both; (b) after four years for those punished by imprisonment for more than one month,
but less than two years; (c)after eight years for those punished by imprisonment for two years or more, but
less than six years; and (d) after twelve years for any other offense punished by imprisonment for six years or
more, except the crime of treason, which shall prescribe after twenty years. Violations penalized by
municipal ordinances shall prescribe after two months.(Emphasis ours)

Under Section 73 of the SRC, violation of its provisions or the rules and regulations is punishable with
imprisonment of not less than seven (7)years nor more than twenty-one (21) years. Applying Section 1 of Act
No.3326, a criminal prosecution for violations of the SRC shall, therefore, prescribe in twelve (12) years.

Hand in hand with Section 1, Section 2 of Act No. 3326 states that" prescription shall begin to run from the
day of the commission of the violation of the law, and if the same be not known at the time, from the
discovery thereof and the institution of judicial proceedings for its investigation and punishment." In
Republic v. Cojuangco, Jr.29 the Court ruled that Section 2 provides two rules for determining when the
prescriptive period shall begin to run: first, from the day of the commission of the violation of the law, if such
commission is known; and second, from its discovery, if not then known, and the institution of judicial
proceedings for its investigation and punishment.30
The respondents alleged in their complaint that the transactions occurred between September 2000, when
they purchased the Subscription Agreement for the purchase of USD 2,000,000.00 worth of Ceres II Finance
Ltd. Income Notes, and July 31, 2003, when their Ceres II Finance Ltd. account was totally wiped out.
Nevertheless, it was only sometime in November 2004 that the respondents discovered that the securities
they purchased were actually worthless. Thereafter, the respondents filed on October 23, 2005 with the
Mandaluyong City Prosecutor’s Office a complaint for violation of the RSA and SRC. In Resolution dated July
18,2007, however, the prosecutor’s office referred the complaint to the SEC.31 Finally, the respondents filed
the complaint with the SEC on September 21,2007. Based on the foregoing antecedents, only seven (7) years
lapsed since the respondents invested their funds with the petitioners, and three (3) years since the
respondents’ discovery of the alleged offenses, that the complaint was correctly filed with the SEC for
investigation. Hence, the respondents’ complaint was filed well within the twelve (12)-year prescriptive period
provided by Section 1 of Act No. 3326.

On the issue of laches.

Petitioner Lim contends that the CA committed an error when it did not apply the principle of laches vis-à-vis
the petitioners’ administrative liability.32

Laches has been defined as the failure or neglect for an unreasonable and unexplained length of time to do
that which, by exercising due diligence, could or should have been done earlier, thus, giving rise to a
presumption that the party entitled to assert it either has abandoned or declined to assert it.33

Section 54 of the SRC provides for the administrative sanctions to be imposed against persons or entities
violating the Code, its rules or SEC orders.34 Just as the SRC did not provide a prescriptive period for the
filing of criminal actions, it likewise omitted to provide for the period until when complaints for
administrative liability under the law should be initiated. On this score, it is a well-settled principle of law
that laches is a recourse inequity, which is, applied only in the absence of statutory law.35 And though
aches applies even to imprescriptible actions, its elements must be proved positively.36 Ultimately, the
question of laches is addressed to the sound discretion of the court and, being an equitable doctrine, its
application is controlled by equitable considerations.37

In this case, records bear that immediately after the respondents discovered in 2004 that the securities they
invested in were actually worthless, they filed on October 23, 2005 a complaint for violation of the RSA and
SRC with the Mandaluyong City Prosecutor's Office. It took the prosecutor three (3) years to resolve the
complaint and refer the case to the SEC,38 in conformity with the Court's pronouncement in Baviera39 that
all complaints for any violation of the SRC and its implementing rules and regulations should be filed with
the SEC. Clearly, the filing of the complaint with the SEC on September 21, 2007 is not barred by laches as
the respondents' judicious actions reveal otherwise.

WHEREFORE, the petitions are DENIED for lack of merit.

SO ORDERED.

9. Pua vs. Citibank NA, GR No. 180064, September 16, 2013

G.R. No. 180064 September 16, 2013

JOSE U. PUA and BENJAMIN HANBEN U. PUA, Petitioners,

vs.
CITIBANK, N. A., Respondent.

DECISION

PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated May 21, 2007 and Resolution3
dated October 16, 2007 of the Court of Appeals (CA) in CA-G.R. SP No. 79297, which reversed and set aside
the Orders dated May 14, 20034 and July 16, 20035 of the Regional Trial Court of Cauayan City, Isabela,
Branch 19 (RTC), dismissing petitioners Jose(Jose) and Benjamin Hanben U. Pua's (petitioners) complaint
against respondent Citibank, N. A. (respondent).

The Facts

On December 2, 2002, petitioners filed before the RTC a Complaint6 for declaration of nullity of contract and
sums of money with damages against respondent,7 docketed as Civil Case No. 19-1159.8 In their complaint,
petitioners alleged that they had been depositors of Citibank Binondo Branch (Citibank Binondo) since 1996.
Sometime in 1999, Guada Ang, Citibank Binondo’s Branch Manager, invited Jose to a dinner party at the
Manila Hotel where he was introduced to several officers and employees of Citibank Hongkong Branch
(Citibank Hongkong).9 A few months after, Chingyee Yau (Yau), Vice-President of Citibank Hongkong, came
to the Philippines to sell securities to Jose. They averred that Yau required Jose to open an account with
Citibank Hongkong as it is one of the conditions for the sale of the aforementioned securities.10 After
opening such account, Yau offered and sold to petitioners numerous securities11 issued by various public
limited companies established in Jersey, Channel I sands. The offer, sale, and signing of the subscription
agreements of said securities were all made and perfected at Citibank Binondo in the presence of its officers
and employees.12 Later on, petitioners discovered that the securities sold to them were not registered with
the Securities and Exchange Commission (SEC)and that the terms and conditions covering the subscription
were not likewise submitted to the SEC for evaluation, approval, and registration.13 Asserting that
respondent’s actions are in violation of Republic Act No.8799, entitled the "Securities Regulation Code"
(SRC), they assailed the validity of the subscription agreements and the terms and conditions thereof for
being contrary to law and/or public policy.14

For its part, respondent filed a motion to dismiss15 alleging, inter alia, that petitioners’ complaint should be
dismissed outright for violation of the doctrine of primary jurisdiction. It pointed out that the merits of the
case would largely depend on the issue of whether or not there was a violation of the SRC, in particular,
whether or not there was a sale of unregistered securities. In this regard, respondent contended that the SRC
conferred upon the SEC jurisdiction to investigate compliance with its provisions and thus, petitioners’
complaint should be first filed with the SEC and not directly before the RTC.16

Petitioners opposed17 respondent’s motion to dismiss, maintaining that the RTC has jurisdiction over their
complaint. They asserted that Section 63of the SRC expressly provides that the RTC has exclusive
jurisdiction to hear and decide all suits to recover damages pursuant to Sections 56 to 61 of the same law.18

The RTC Ruling

In an Order19 dated May 14, 2003, the RTC denied respondent’s motion to dismiss. It noted that petitioners’
complaint is for declaration of nullity of contract and sums of money with damages and, as such, it has
jurisdiction to hear and decide upon the case even if it involves the alleged sale of securities. It ratiocinated
that the legal questions or issues arising from petitioners’ causes of action against respondent are more
appropriate for the judiciary than for an administrative agency to resolve.20

Respondent filed an omnibus motion21 praying, among others, for there consideration of the aforesaid
ruling, which petitioners, in turn, opposed.22 In an Order23 dated July 16, 2003, the RTC denied
respondent’s omnibus motion with respect to its prayer for reconsideration. Dissatisfied, respondent filed a
petition for certiorari before the CA.24

The CA Ruling

In a Decision25 dated May 21, 2007, the CA reversed and set aside the RTC’s Orders and dismissed
petitioners’ complaint for violation of the doctrine of primary jurisdiction. The CA agreed with respondent’s
contention that since the case would largely depend on the issue of whether or not the latter violated the
provisions of the SRC, the matter is within the special competence or knowledge of the SEC. Citing the case
of Baviera v. Paglinawan26 (Baviera), the CA opined that all complaints involving violations of the SRC
should be first filed before the SEC.27
Aggrieved, petitioners moved for reconsideration,28 which was, however, denied by the CA in a Resolution29
dated October 16, 2007.Hence, this petition.

The Issue Before the Court

The essential issue in this case is whether or not petitioners’ action falls within the primary jurisdiction of
the SEC.

Petitioners reiterate their original position that the SRC itself provides that civil cases for damages arising
from violations of the same law fall within the exclusive jurisdiction of the regional trial courts.30

On the contrary, respondent maintains that since petitioners’ complaint would necessarily touch on the
issue of whether or not the former violated certain provisions of the SRC, then the said complaint should
have been first filed with the SEC which has the technical competence to resolve such dispute.31

The Court’s Ruling

The petition is meritorious.

At the outset, the Court observes that respondent erroneously relied on the Baviera ruling to support its
position that all complaints involving purported violations of the SRC should be first referred to the SEC. A
careful reading of the Baviera case would reveal that the same involves a criminal prosecution of a purported
violator of the SRC, and not a civil suit such as the case at bar. The pertinent portions of the Baviera ruling
thus read:

A criminal charge for violation of the Securities Regulation Code is a specialized dispute. Hence, it must first
be referred to an administrative agency of special competence, i.e., the SEC. Under the doctrine of primary
jurisdiction, courts will not determine a controversy involving a question within the jurisdiction of the
administrative tribunal, where the question demands the exercise of sound administrative discretion
requiring the specialized knowledge and expertise of said administrative tribunal to determine technical and
intricate matters of fact. The Securities Regulation Code is a special law. Its enforcement is particularly
vested in the SEC.

Hence, all complaints for any violation of the Code and its implementing rules and regulations should be
filed with the SEC. Where the complaint is criminal in nature, the SEC shall indorse the complaint to the
DOJ for preliminary investigation and prosecution as provided in Section 53.1 earlier quoted.

We thus agree with the Court of Appeals that petitioner committed a fatal procedural lapse when he filed his
criminal complaint directly with the DOJ. Verily, no grave abuse of discretion can be ascribed to the DOJ in
dismissing petitioner’s complaint.32 (Emphases and underscoring supplied)

Records show that petitioners’ complaint constitutes a civil suit for declaration of nullity of contract and
sums of money with damages, which stemmed from respondent’s alleged sale of unregistered securities, in
violation of the various provisions of the SRC and not a criminal case such as that involved in Baviera.

In this light, when the Court ruled in Baviera that "all complaints for any violation of the [SRC] x x x should
be filed with the SEC,"33 it should be construed as to apply only to criminal and not to civil suits such as
petitioners’ complaint.

Moreover, it is a fundamental rule in procedural law that jurisdiction is conferred by law;34 it cannot be
inferred but must be explicitly stated therein. Thus, when Congress confers exclusive jurisdiction to a
judicial or quasi-judicial entity over certain matters by law, this, absent any other indication to the contrary,
evinces its intent to exclude other bodies from exercising the same.
It is apparent that the SRC provisions governing criminal suits are separate and distinct from those which
pertain to civil suits. On the one hand, Section 53 of the SRC governs criminal suits involving violations of
the said law, viz.:

SEC. 53. Investigations, Injunctions and Prosecution of Offenses. –

53.1. The Commission may, in its discretion, make such investigations as it deems necessary to determine
whether any person has violated or is about to violate any provision of this Code, any rule, regulation or
order thereunder, or any rule of an Exchange, registered securities association, clearing agency, other self-
regulatory organization, and may require or permit any person to file with it a statement in writing, under
oath or otherwise, as the Commission shall determine, as to all facts and circumstances concerning the
matter to be investigated. The Commission may publish information concerning any such violations, and to
investigate any fact, condition, practice or matter which it may deem necessary or proper to aid in the
enforcement of the provisions of this Code, in the prescribing of rules and regulations thereunder, or in
securing information to serve as a basis for recommending further legislation concerning the matters to
which this Code relates: Provided, however, That any person requested or subpoenaed to produce documents
or testify in any investigation shall simultaneously be notified in writing of the purpose of such investigation:
Provided, further, That all criminal complaints for violations of this Code, and the implementing rules and
regulations enforced or administered by the Commission shall be referred to the Department of Justice for
preliminary investigation and prosecution before the proper court:

Provided, furthermore, That in instances where the law allows independent civil or criminal proceedings of
violations arising from the same act, the Commission shall take appropriate action to implement the same:
Provided, finally, That the investigation, prosecution, and trial of such cases shall be given priority.

On the other hand, Sections 56, 57, 58, 59, 60, 61, 62, and 63 of the SRC pertain to civil suits involving
violations of the same law. Among these, the applicable provisions to this case are Sections 57.1 and 63.1 of
the SRC which provide:

SEC. 57. Civil Liabilities Arising in Connection With Prospectus, Communications and Reports.

– 57.1. Any person who:

(a) Offers to sell or sells a security in violation of Chapter III;

or

(b) Offers to sell or sells a security, whether or not exempted by the provisions of this Code, by the use of any
means or instruments of transportation or communication, by means of a prospectus or other written or oral
communication, which includes an untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements, in the light of the circumstances under which they were made,
not misleading (the purchaser not knowing of such untruth or omission), and who shall fail in the burden of
proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or
omission, shall be liable to the person purchasing such security from him, who may sue to recover the
consideration paid for such security with interest thereon, less the amount of any income received thereon,
upon the tender of such security, or for damages if he no longer owns the security.

xxxx

SEC. 63. Amount of Damages to be Awarded. – 63.1. All suits to recover damages pursuant to Sections 56,
57, 58, 59, 60 and 61 shall be brought before the Regional Trial Court which shall have exclusive jurisdiction
to hear and decide such suits. The Court is hereby authorized to award damages in an amount not exceeding
triple the amount of the transaction plus actual damages.

x x x x (Emphases and underscoring supplied)

Based on the foregoing, it is clear that cases falling under Section 57of the SRC, which pertain to civil
liabilities arising from violations of the requirements for offers to sell or the sale of securities, as well as other
civil suits under Sections 56, 58, 59, 60, and 61 of the SRC shall be exclusively brought before the regional
trial courts. It is a well-settled rule in statutory construction that the term "shall" is a word of command, and
one which has always or which must be given a compulsory meaning, and it is generally imperative or
mandatory.35 Likewise, it is equally revelatory that no SRC provision of similar import is found in its
sections governing criminal suits; quite the contrary, the SRC states that criminal cases arising from
violations of its provisions should be first referred to the SEC.1âwphi1

Therefore, based on these considerations, it stands to reason that civil suits falling under the SRC are under
the exclusive original jurisdiction of the regional trial courts and hence, need not be first filed before the
SEC, unlike criminal cases wherein the latter body exercises primary jurisdiction.

All told, petitioners' filing of a civil suit against respondent for purported violations of the SRC was properly
filed directly before the RTC.

WHEREFORE, the petition is GRANTED. Accordingly, the Court of Appeals' Decision dated May 21, 2007
and Resolution dated October 16,2007 in CA-G.R. SP No. 79297 are hereby REVERSED and SET ASIDE. Let
Civil Case No. 19-1159 be REINSTATED and REMANDED to the Regional Trial Court of Cauayan City,
Isabela, Branch 19 for further proceedings.

SO ORDERED.

10. Timeshare Realty vs. Lao, GR No. 158941, February 11, 2008

G.R. No. 158941 February 11, 2008

TIMESHARE REALTY CORPORATION, petitioner,

vs.
CESAR LAO and CYNTHIA V. CORTEZ, respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the
October 30, 2002 Resolution1 of the Court of Appeals (CA), which denied due course to the appeal of
Timeshare Realty Corporation (petitioner) from the March 25, 2002 Decision2 of the Securities and Exchange
Commission (SEC) in SEC Case No. 01-99-6199; and the July 4, 2003 CA Resolution,3 which denied
petitioner’s Motion for Reconsideration.

As found by the SEC,4 the antecedent facts are as follows:

On October 6, 1996, herein petitioner sold to Ceasar M. Lao and Cynthia V. Cortez (respondents), one
timeshare of Laguna de Boracay for US$7,500.00 under Contract No. 135000998 payable in eight months
and fully paid by the respondents.

Sometime in February 1998, the SEC issued a resolution to the effect that petitioner was without authority
to sell securities, like timeshares, prior to February 11, 1998. It further stated in the resolution/order that
the Registration Statement of petitioner became effective only on February 11, 1998. It also held that the 30
days within which a purchaser may exercise the option to unilaterally rescind the purchase agreement and
receive the refund of money paid applies to all purchase agreements entered into by petitioner prior to the
effectivity of the Registration Statement.
Petitioner sought a reconsideration of the aforesaid order but the SEC denied the same in a letter dated
March 9, 1998.

On March 30, 1998, respondents wrote petitioner demanding their right and option to cancel their Contract,
as it appears that Laguna de Boracay is selling said shares without license or authority from the SEC. For
failure to get an answer to the said letter, respondents this time, through counsel, reiterated their demand
through another letter dated June 29, 1998. But despite repeated demands, petitioner failed and refused to
refund or pay respondents.5

Respondents directly filed with SEC En Banc6 a Complaint7 against petitioner and the Members of its Board
of Directors - Julius S. Strachan, Angel G. Vivar, Jr. and Cecilia R. Palma - for violation of Section 4 of Batas
Pambansa Bilang (B.P. Blg.) 178.8 Petitioner filed an Answer9 to the Complaint but the SEC En Banc, in an
Order10 dated April 25, 2000, expunged the Answer from the records due to tardiness.

On March 25, 2002, the SEC En Banc rendered a Decision in favor of respondents, ordering petitioner,
together with Julius S. Strachan, Angel G. Vivar, Jr., and Cecilia R. Palma, to pay respondents the amount of
US$7,500.00.11

Petitioner filed a Motion for Reconsideration12 which the SEC En Banc denied in an Order13 dated June 24,
2002.

Petitioner received a copy of the June 24, 2002 SEC En Banc Order on July 4, 200214 and had 15 days or
until July 19, 2002 within which to appeal. However, on July 10, 2002, petitioner sought from the CA an
extension of 30 days, counted from July 19, 2002, or until August 19, 2002, within which to appeal.15 The
CA partly granted the motion in an Order dated July 24, 2002, to wit:

As prayed for, but conditioned on the timeliness of its filing, the Motion for Extension to File Petition for
Review dated 09 July 2002 and filed before this Court on 10 July 2002 is GRANTED and petitioners are
given a non-extendible period of fifteen (15) days from 10 July 2002 or until 25 July 2002 within which to file
the desired petition, otherwise, the above-entitled case will be dismissed. (Emphasis supplied.) 16

Petitioner purportedly received the July 24, 2002 CA Order on July 29, 2002,17 but filed a Petition for
Review with the CA on August 19, 2002.18

In the assailed October 30, 2002 Resolution, the CA dismissed the Petition for Review, thus:

Under Section 4, Rule 43 of the 1997 Revised Rules of Civil Procedure, petitioners shall not be given an
extension longer than fifteen (15) days from the expiration of the reglementary period, except for the most
compelling reason.

Thus, on 24 July 2002, in the absence of a compelling reason that justifies the granting of a longer period of
extension, this Court issued a resolution wherein petitioners were given an extension of ONLY fifteen days
from 10 July 2002 or until 25 July 2002 within which to file the petition for review, otherwise, the above
entitled case will be dismissed.

However, records show that petitioners filed their petition for review only on 19 August 2002, which is
twenty-five (25) days beyond the allowed 15-day extended period granted by this Court.

WHEREFORE, the appeal from the decision of the Securities and Exchange Commission (SEC) Case No. 01-
99-6199 is hereby DISMISSED for failure of the petitioners to file their Petition for Review under the 15-day
period granted by this Court as provided by Rule 43, Section 4 of the 1997 Revised Rules of Civil Procedure.

SO ORDERED.19
and denied petitioner's Motion for Reconsideration in the assailed Resolution dated July 4, 2003.20

Petitioner filed the present petition, urging us to look beyond the procedural lapse in its appeal, and resolve
the following substantive issues:

Whether or not the eventual approval or issuance of license has retroactive effect and therefore ratifies all
earlier transactions;

Whether or not a party in a contract could withdraw or rescind unilaterally without valid reason.21

We deny the petition.

A judgment must become final at the time appointed by law22 -- this is a fundamental principle upon which
rests the efficacy of our courts whose processes and decrees command obedience only when these are
perceived to have some degree of permanence and predictability. Thus, an appeal from such judgment, not
being a natural right but a mere statutory privilege, must be perfected according to the mode and within the
period prescribed by the law and the rules; otherwise, the appeal is forever barred, and the judgment
becomes binding.23

Section 70 of Republic Act No. 879924 which was enacted on July 19, 2000, is the law which governs
petitioner’s appeal from the orders of the SEC En Banc. It prescribes that such appeal be taken to the CA "by
petition for review in accordance with the pertinent provisions of the Rules of Court," specifically Rule 43.25

Section 4 of Rule 43 is restrictive in its treatment of the period within which a petition may be filed:

Section 4. Period of appeal. - The appeal shall be taken within fifteen (15) days from notice of the award,
judgment, final order or resolution, or from the date of its last publication, if publication is required by law
for its effectivity, or of the denial of petitioner’s motion for new trial or reconsideration duly filed in
accordance with the governing law of the court or agency a quo. Only one (1) motion for reconsideration shall
be allowed. Upon proper motion and the payment of the full amount of the docket fee before the expiration of
the reglementary period, the Court of Appeals may grant an additional period of fifteen (15) days only within
which to file the petition for review. No further extension shall be granted except for the most compelling
reason and in no case to exceed fifteen (15) days. (Emphasis supplied.)

Petitioner’s Motion for Extension of Time to File Petition for Review flouted the foregoing restriction: it sought,
not a 15-day, but a 30-day extension of the appeal period;26 and it did not even bother to cite a compelling
reason for such extension, other than its counsel’s caseload which, as we have repeatedly ruled, hardly
qualifies as an imperative cause for moderation of the rules.27

Its motion for extension being inherently flawed, petitioner should not have presumed that the CA would
fully grant the same.28 Instead, it should have exercised due diligence by filing the proper petition within the
allowable period,29 or at the very least, ascertaining from the CA whether its motion for extension had been
acted upon.30 As it were, petitioner’s counsel left the country, unmindful of the possibility that his client’s
period to appeal was about to lapse - as it indeed lapsed on July 25, 1999, after the CA allowed them a 15-
day extension only, in view of the restriction under Section 4, Rule 43. Thus, petitioner has only itself to
blame that the Petition for Review it filed on August 19, 1999 was late by 25 days. The CA cannot be faulted
for dismissing it.

The Court notes that the CA reckoned the 15-day extension it granted to petitioner from July 10, 1999, the
date petitioner filed its Motion for Extension, rather than from July 19, 1999, the date of expiration of
petitioner’s original period to appeal. While such computation of the CA appears to be erroneous, petitioner
did not question it in the present petition. But even if we do reckon the 15-day extension period from July
19, 1999, the same would have ended on August 3, 1999, making petitioner’s appeal still inexcusably tardy
by 16 days. Either way we reckon it, therefore, petitioner’s appeal was not perfected within the period
prescribed under Rule 43.
Nevertheless, the Court opts to resolve the substantive issues raised by petitioner in its appeal so as to
determine the lawful rights of the parties and put an end to the litigation.

Petitioner claims that at the time it entered into a timeshare purchase agreement with respondents on
October 6, 1996, it already possessed the requisite license and marketing agreement to engage in such
transactions,31 as evidenced by its registration with the SEC as a corporation.32 Petitioner argues that
when it was registered and authorized by the SEC as broker of securities33 - such as the Laguna de Boracay
timeshares - this had the effect of ratifying its October 6, 1996 purchase agreement with respondents, and
removing any cause for the latter to rescind it.

The Court is not persuaded.

As cited by the SEC En Banc in its March 25, 2002 Decision, as early as February 13, 1998, the SEC,
through Director Linda A. Daoang, already rendered a ruling on the effectivity of the registration statement of
petitioner, viz:

This has reference to your registration statement which was rendered effective 11 February 1998. The 30
days within which a purchaser may exercise the option to unilaterally rescind the purchase agreement and
receive the refund of money paid, applies to all purchase agreements entered into by the registrant prior to
the effectivity of the registration statement. The 30-day rescission period for contracts signed before the
Registration Statement was rendered effective shall commence on 11 February 1998. The rescission period
for contracts after 11 February 1998 shall commence on the date of purchase agreement. (Emphasis
supplied.)34

Petitioner sought a reconsideration of said ruling but the same was denied by Director Daoang in an Order
dated March 9, 1998.35 However, petitioner did not resort to any other administrative remedy against said
ruling, such as by questioning the same before the SEC En Banc. Having failed to exhaust the administrative
remedies available to it, petitioner is already bound by said ruling and can no longer question the same
through a direct and belated recourse to us.36

Finally, the provisions of B.P. Blg. 178 do not support the contention of petitioner that its mere registration
as a corporation already authorizes it to deal with unregistered timeshares. Corporate registration is just one
of several requirements before it may deal with timeshares:

Section 8. Procedure for registration. - (a) All securities required to be registered under subsection (a) of
Section four of this Act shall be registered through the filing by the issuer or by any dealer or underwriter
interested in the sale thereof, in the office of the Commission, of a sworn registration statement with respect
to such securities, containing or having attached thereto, the following:

xxxx

(36) Unless previously filed and registered with the Commission and brought up to date:

(a) A copy of its articles of incorporation with all amendments thereof and its existing by-laws or instruments
corresponding thereto, whatever the name, if the issuer be a corporation.

Prior to fulfillment of all the other requirements of Section 8, petitioner is absolutely proscribed under
Section 4 from dealing with unregistered timeshares, thus:

Section 4. Requirement of registration of securities. - (a) No securities, except of a class exempt under any of
the provisions of Section five hereof or unless sold in any transaction exempt under any of the provisions of
Section six hereof, shall be sold or offered for sale or distribution to the public within the Philippines unless
such securities shall have been registered and permitted to be sold as hereinafter provided. (Emphasis
supplied.)
WHEREFORE, the petition is DENIED for lack of merit.

Costs against petitioner.

SO ORDERED.

11. SEC vs. Hon. Laigo, GR No. 188639, September 2, 2015

G.R. No. 188639

SECURITIES AND EXCHANGE COMMISSION, Petitioner,

vs.
HON. REYNALDO M. LAIGO, in his capacity as Presiding Judge of the Regional Trial Court, National Capital
Judicial Region, Makati City, Branch 56, GLICERIA AYAD, SAHLEE DELOS REYES and ANTONIO P.
HUETE, JR., Respondents.

DECISION

MENDOZA, J.:

In this petition for certiorari1under Rule 65 of the Rules of Court, petitioner Securities and Exchange
Commission (SEC), through the Office of the Solicitor General (OSG), assails the June 26, 2009 Order2 (June
26, 2009 Order) issued by respondent Judge Reynaldo M. Laigo (Judge Laigo) of the Regional Trial Court,
Branch 56, Makati City (RTC), in Sp. Proc. No. M-6758,3 a petition for involuntary insolvency of Legacy
Consolidated Plans, Incorporated (Legacy), ordering the inclusion of the trust fund in its corporate assets to
the prejudice of the plan holders.

Factual Antecedents

Republic Act (R.A.) No. 8799, otherwise known as the Securities Regulation Code (SRC), specifically Section
16 thereof, mandated the Securities and Exchange Commission (SEC) to prescribe rules and regulations
governing the pre-need industry. Pursuant thereto, the SEC issued the corresponding New Rules on the
Registration and Sale of Pre-Need Plans (New Rules)4 to govern the pre-need industry prior to the enactment
of R.A. No. 9829, otherwise known as the Pre-need Code of the Philippines (Pre-Need Code). It required from
the pre-need providers the creation of trust funds as a requirement for registration.

As defined in Rule 1.9 of the New Rules, " ‘Trust Fund’ means a fund set up from plan holders’ payments,
separate and distinct from the paid-up capital of a registered pre-need company, established with a trustee
under a trust agreement approved by the SEC, to pay for the benefits as provided in the pre-need plan."

Legacy, being a pre-need provider, complied with the trust fund requirement and entered into a trust
agreement with the Land Bank of the Philippines (LBP).

In mid-2000, the industry collapsed for a range of reasons. Legacy, like the others, was unable to pay its
obligations to the plan holders.

This resulted in Legacy being the subject of a petition for involuntary insolvency filed on February 18, 2009
by private respondents in their capacity as plan holders. Through its manifestation filed in the RTC, Legacy
did not object to the proceedings. Accordingly, it was declared insolvent by the RTC in its Order,5 dated April
27, 2009. The trial court also ordered Legacy to submit an inventory of its assets and liabilities pursuant to
Sections 15 and 16 of Act No. 1956,6 otherwise known as the Insolvency Law, the applicable bankruptcy law
at that time.
On May 15, 2009, the RTC ordered the SEC, being the pre-need industry’s regulator, to submit the
documents pertaining to Legacy’s assets and liabilities.

In its Manifestation with Evaluation, dated June 10, 2009, the SEC opposed the inclusion of the trust fund
in the inventory of corporate assets on the ground that to do so would contravene the New Rules which
treated trust funds as principally established for the exclusive purpose of guaranteeing the delivery of
benefits due to the planholders. It was of the position that the inclusion of the trust fund in the insolvent’s
estate and its being opened to claims by non-planholders would contravene the purpose for its
establishment.

On June 26, 2009, despite the opposition of the SEC, Judge Laigo ordered the insolvency Assignee, Gener T.
Mendoza (Assignee) to take possession of the trust fund. Judge Laigo viewed the trust fund as Legacy’s
corporate assets and, for said reason, included it in the insolvent’s estate. Thus:

WHEREFORE, the Court rules as follows:

1. Directing the afore-named banks to report to Assignee, Gener T. Mendoza, whose address is at c/o GNCA
Holdings, Inc., Unit 322, 3/F, LRI design Center, 210 Nicanor Garcia St., Makati City, the total funds as of
today deposited to the insolvent debtor’s respective Trust Funds, within five (5) days from receipt of this
Order.

2. Subject funds can be withdrawn by the Assignee only upon Order of the Court for distribution among the
creditors who have officially filed their valid claims with this Court, and for all the expenses to be incurred by
the Assignee in the course of the discharge of his duties and responsibilities as such Assignee.

3. Stopping the Securities and Exchange Commission (SEC) from further validating the claims of planholders
(now creditors) pertaining to their pre-need plans.

xxx xxx xxx

SO ORDERED.7

The RTC stated that the trust fund could be withdrawn by the Assignee to be used for the expenses he would
incur in the discharge of his functions and to be distributed among the creditors who had officially filed their
valid claims with the court.

The Present Petition

Intent on protecting the interest of the investing public and securing the trust fund exclusively for the
planholders, the SEC filed "this present recourse directly to this Honorable Court in accordance with Section
5 (1),

Article VIII of the 1987 Constitution for the reason that the matters involve an issue of transcendental
importance to numerous hard-working Filipinos who had invested their lifetime savings and hard-earned
money in Legacy, hoping that through this pre-need company they will be able to fulfill their dreams of
providing a bright future for their children."8

The SEC’s Position

In essence, the SEC contends that Judge Laigo gravely abused his discretion in treating the trust fund as
part of the insolvency estate of Legacy. It argues that the trust fund should redound exclusively to the benefit
of the plan holders, who are the ultimate beneficial owners; that the trust fund is held, managed and
administered by the trustee bank to address and answer the claims against the pre-need company by all its
plan holders and/or beneficiaries; that to consider the said fund as corporate assets is to open the floodgates
to creditors of Legacy other than the plan holders; and that, in issuing the order, Judge Laigo effectively
allowed non-plan holders to reach the trust fund in patent violation of the New Rules established to protect
the pre-need investors.

In its Memorandum,9 the SEC stressed that the setting-up of the trust funds effectively created a
demarcation line between the claims of Plan holders vis-à-vis those of the other creditors of Legacy; that
Legacy’s interest over the trust properties was only by virtue of it being a trustor and not the owner; and that
the SEC was authorized to validate claims of plan holders in the exercise of its power as regulator of pre-
need corporations.

Further, the SEC is of the position that Section 52 of the Pre-Need Code10 should be given retroactive effect
for being procedural in character.

Thus, the SEC raises the following

ISSUES

I.

Whether or not the Trust Funds of Legacy form part of its Corporate Assets.

II.

Whether or not respondent Trial Court Judge committed grave abuse of discretion amounting to lack or
excess of jurisdiction in issuing the herein assailed Order dated June 26, 2009.

III.

Whether or not the claims of planholders are to be treated differently from the claims of other creditors of
Legacy.

IV.

Whether or not Legacy retains ownership over the trust funds assets despite the execution of trust
agreements.

V.

Whether or not the insolvency court, presided by respondent Trial Court Judge, has the authority to enjoin
petitioner SEC from further validating the claims of Legacy’s planholders and treating them as if they are
ordinary creditors of Legacy.

VI.

Whether or not the provision of the Pre-need Code regarding liquidation is in the nature of a procedural law
that can be retroactively applied to the case at bar.11

Private Respondents’ position

In their Comment/Opposition,12 the private respondents, Glicera Ayad, Sahlee Delos Reyes and Antonio P.
Huerte, Jr. (private respondents), submit that nothing in the New Rules expressly provided that the trust
fund is excluded from the inventory of corporate assets which is required to be submitted to the insolvency
court; that the SEC’s interference in the insolvency proceedings is incongruous to the legal system; and that
under the provisions of the Insolvency Law, all claims, including those against the trust funds should be filed
in the liquidation proceedings.13 Hence, private respondents assert that no grave abuse of discretion was
committed by Judge Laigo in issuing the June 26, 2009 Order.

The Assignee’s Position

In his separate Comments on Petition14 and Memorandum,15 the Assignee contends that the trust fund
forms part of Legacy’s corporate assets for the following reasons: first, the insolvency court has jurisdiction
over all the claims against the insolvent and the trust fund forms part of the company’s corporate assets. It
cited Abrera v. College Assurance Plan,16 where the Court held that claims arising from pre-need contracts
should not be treated separately from other claims against a pre-need company. As such, the claims over the
trust fund, being claims against Legacy, are necessarily lodged with the insolvency court. Second, the setting
up of the trust fund is a mere scheme to attain an administrative end, that is, the assurance that the
benefits will be delivered under the pre-need contracts.

Considering that Legacy is the debtor as regards such benefits, it is only through it, or through the
insolvency court, that the assets including the trust fund can be distributed to satisfy valid claims. Third,
though the trustee banks hold legal title over the funds, the real parties-in-interest are the preneed
companies as the terms of the trust agreement between Legacy and LBP (as trustee) show this intent.

The Assignee also submits that no law authorized the SEC to interfere in the insolvency proceedings because
its authority under the SRC is only to regulate the sale of pre-need plans and not to regulate the
management of trust funds.

In sum, the Assignee interprets the June 26, 2009 Order in this wise: that the creditors, plan holders or not,
should first line up and file valid claims with the insolvency court and not get entangled in the validation
process of the SEC; and that once the plan holders have qualified, they will be given preference in the
distribution of the trust assets. Moreover, he proposes that if the trust fund assets will not be enough to
satisfy all claims, the plan holders can still join other claimants and participate in the distribution of the
other assets of the pre-need company.17

From the foregoing, the Court is called to determine whether Judge Laigo gravely abused his discretion in:

1. Including the trust properties in the insolvent’s estate; and

2. Prohibiting the SEC from validating the claims filed by the plan holders against the trust fund.

The Court’s Ruling

The overarching consideration in the legislative mandate to establish trust funds is the protection of the
interest of the planholders in the investment plans. The SRC provides in no uncertain terms the intent to
make such interests paramount above all else. Thus, it directed the SEC to come up with rules and
regulations to govern not only trust funds but the industry as a whole. Pursuant to its mandate and
delegated authority, the SEC came out with the New Rules, which the Congress later on toughened through
the enactment of the Pre-Need Code, carrying similar protection but far more detailed in scope.

It is in this context that this Court rules to grant the petition filed by the SEC. The Court finds that Judge
Laigo gravely abused his discretion in treating the trust fund as assets that form part of Legacy’s insolvency
estate and in enjoining the SEC’s validation of the planholders’ claims against the trust properties.

The Trust Fund is for the sole benefit

of the planholders and cannot be used

to satisfy the claims of other creditors

of Legacy

Section 30 of the Pre-Need Code clearly provides that the proceeds of trust funds shall redound solely to the
planholders. Section 30 reads:

Trust Fund

SECTION 30. Trust Fund. — To ensure the delivery of the guaranteed benefits and services provided under a
pre-need plan contract, a trust fund per pre-need plan category shall be established. A portion of the
installment payment collected shall be deposited by the pre-need company in the trust fund, the amount of
which will be as determined by the actuary based on the viability study of the pre-need plan approved by the
Commission. Assets in the trust fund shall at all times remain for the sole benefit of the plan holders. At no
time shall any part of the trust fund be used for or diverted to any purpose other than for the exclusive
benefit of the plan holders. In no case shall the trust fund assets be used to satisfy claims of other creditors
of the pre-need company. The provision of any law to the contrary notwithstanding, in case of insolvency of
the pre-need company, the general creditors shall not be entitled to the trust fund.

Except for the payment of the cost of benefits or services, the termination values payable to the plan holders,
the insurance premium payments for insurance-funded benefits of memorial life plans and other costs
necessary to ensure the delivery of benefits or services to plan holders, no withdrawal shall be made from the
trust fund unless approved by the Commission. The benefits received by the plan holders shall be exempt
from all taxes and the trust fund shall not be held liable for attachment, garnishment, levy or seizure by or
under any legal or equitable processes except to pay for the debt of the plan holder to the benefit plan or that
arising from criminal liability imposed in a criminal action.

[Emphases Supplied]

The Assignee argues that Legacy has retained a beneficial interest in the trust fund despite the execution of
the trust agreement and that the properties can be the subject of insolvency proceedings. In this regard, the
Assignee calls the Court’s attention to the trust agreement provisions which supposedly refer to the interest
of Legacy in the trust properties, to wit:

The TRUSTEE hereby undertakes to perform the functions and duties of a TRUSTEE provided for in this
Agreement with the utmost good faith, care and prudence required by a fiduciary relation, being understood,
however, that the COMPANY shall be solely and exclusive (sic) responsible for (1) fulfilling the servi ferred to
in the recital clauses, (ii) the settlement/payment of claims of any person or firm availing of such services,
(iii)compliance with all laws and governmental regulations on pre-needplans, and (iv) submission of other
data or information as may beprescribed by the Commission.

xxx

xxx the Trustee shall from time to time on the written directions of the Company make payments out of the
Trust Fund to the Company. To the extent permitted by law, the Trustee shall be under no liability for any
payment made pursuant to the direction of the Company. Any written direction of the Company shall
constitute a certification that the distribution of payment so directed is one which the Company is authorized
to direct. From time to time and when directed in writing by the Company, the Trustee shall pay monies from
the Trust Fund in amounts equal to the outstanding amount of the Trust Fund at any given time to defray
the Company’s obligations to the Plan holders under its preneed plan contract and provided further that the
company shall be reimbursed by the Trustee from the Trust Fund for whatever amounts it has advanced to
its beneficiaries.18 [Italics supplied]
To the Assignee, these "control" mechanisms are indicative of the interest of Legacy in the enforcement of the
trust fund because the agreement gives it the power to dictate on LBP the fulfilment of the trust, such as the
delivery of monies to it to facilitate the payment to the plan holders.

The Court, however, sees it differently.

In the course of delving into the complex relationships created by the agreement and the existing regulatory
framework, this Court finds that Legacy’s claimed interest in the enforcement of the trust and in the trust
properties is mere apparent than real. Legacy is not a beneficiary.

First, it must be stressed that a person is considered as a beneficiary of a trust if there is a manifest
intention to give such a person the beneficial interest over the trust properties.19 This is the considered
opinion expressed in the Restatement of the Law of Trust (Restatement)20 which Justice Vicente Abad
Santos has described in his contribution to the Philippine Law Journal as containing the more salient
principles, doctrines and rules on the subject.21 Here, the terms of the trust agreement plainly confer the
status of beneficiary to the plan holders, not to Legacy. In the recital clauses of the said agreement, Legacy
bound itself to provide for the sound, prudent and efficient management and administration of such portion
of the collection "for the benefit and account of the planholders,"22 through LBP (as the trustee).

This categorical declaration doubtless indicates that the intention of the trustor is to make the planholders
the beneficiaries of the trust properties, and not Legacy. It is clear that because the beneficial ownership is
vested in the planholders and the legal ownership in the trustee, LBP, Legacy, as trustor, is left without any
iota of interest in the trust fund. This is consistent with the nature of a trust arrangement, whereby there is
a separation of interests in the subject matter of the trust, the beneficiary having an equitable interest, and
the trustee having an interest which is normally legal interest.23

Second, considering the fact that a mandated pre-need trust is one imbued with public interest, the issue on
who the beneficiary is must be determined on the basis of the entire regulatory framework. Under the New
Rules, it is unmistakable that the beneficial interest over the trust properties is with the planholders. Rule
16.3 of the New Rules provides that : [n]o withdrawal shall be made from the trust fund except for paying the
benefits such as monetary consideration, the cost of services rendered or property delivered, trust fees, bank
charges and investment expenses in the operation of the trust fund, termination values payable to the plan
holders, annuities, contributions of cancelled plans to the fund and taxes on trust funds.

Rule 17.1 also states that to ensure the liquidity of the trust fund to guarantee the delivery of the benefits
provided for under the plan contract and to obtain sufficient capital growth to meet the growing actuarial
reserve liabilities, all investments of the trust fund shall be limited to Fixed Income Instruments, Mutual
Funds, Equities, and Real Estate, subject to certain limitations.

Further, Rule 20.1 directs the trustee to exercise due diligence for the protection of the plan holders guided
by sound investment principles in the exclusive management and control over the funds and its right, at any
time, to sell, convert, invest, change, transfer, or otherwise change or dispose of the assets comprising the
funds. All these certainly underscore the importance of the plan holders being recognized as the ultimate
beneficiaries of the SEC-mandated trust.

This consistently runs in accord with the legislative intent laid down in Chapter IV of R.A. No. 8799, or the
SRC, which provides for the establishment of trust funds for the payment of benefits under such plans.
Section 16 of the SRC provides:

SEC. 16. Pre-Need Plans. - No person shall sell or offer for sale to the public any pre-need plan except in
accordance with rules and regulations which the Commission shall prescribe. Such rules shall regulate the
sale of pre-need plans by, among other things, requiring the registration of pre-need plans, licensing persons
involved in the sale of pre-need plans, requiring disclosures to prospective plan holders, prescribing
advertising guidelines, providing for uniform accounting system, reports and record keeping with respect to
such plans, imposing capital, bonding and other financial responsibility, and establishing trust funds for the
payment of benefits under such plans. [Emphasis supplied]
It is clear from Section 16 that the underlying congressional intent is to make the plan holders the exclusive
beneficiaries. It has been said that what is within the spirit is within the law even if it is not within the letter
of the law because the spirit prevails over the letter.24

This will by the legislature was fortified with the enactment of R.A. No. 9829 or the Pre-Need Code in 2009.25
The Congress, because of the chaos confounding the industry at the time, considered it necessary to provide
a stronger legal framework so that no entity could claim that the mandate and delegated authority of the
SEC under the SRC was nebulous. The Pre-Need Code cemented the regulatory framework governing the
preneed industry with precise specifics to ensure that the rights of the pre-need plan holders would be
categorically defined and protected. Similar provisions in the Pre-Need Code are the following:

SECTION 32. Terms and Conditions of a Trust Fund. — A trust fund must be established separately for each
type of pre-need plan with the trust department of a trust company, bank or investment house doing
business in the Philippines. No trust fund shall be established by a pre-need company with an affiliate trust
entity subject to Section 38 hereof.

The trust agreement shall be submitted to the Commission for approval before execution and shall contain
the following salient provisions, among others:

(a) The manner in which the trust fund is to be operated;

(b) Investment powers of the trustee with respect to trust deposits, including the character and kind of
investment;

(c) Auditing and settlement of accounts of the trustee with respect to the trust fund;

(d) Basis upon which the trust fund may be terminated;

(e) Provisions for withdrawals from the trust fund;

(f) That the trustee shall submit to the power of the Commission to examine and verify the trust fund;

(g) An undertaking by the trustee that it shall abide by the rules and regulations of the Commission with
respect to the trust fund; and

(h) An undertaking by the trustee that it shall submit such other data or information as may be prescribed
by the Commission.

SECTION 33. Responsibilities of the Trustee. — The trustee shall:

(a) Administer and manage the trust fund with utmost good faith, care and prudence required by a fiduciary
relationship;

(b) The trustee shall have the exclusive management and control over the funds and the right at any time to
sell, convert, invest, change, transfer or otherwise change or dispose of the assets comprising the funds
within the parameters prescribed by the pre-need company and provided these parameters are compliant
with the Commission's regulations; and

(c) Not use the trust fund to invest in or extend any loan or credit accommodation to the pre-need company,
its directors, officers, stockholders, and related interests as well as to persons or enterprises controlling,
owned or controlled by, or under common control with said company, its directors, officers, stockholders and
related interests except for entities which are direct providers of pre-need companies.
SECTION 34. Investment of the Trust Fund. — To ensure the liquidity of the trust fund to guarantee the
delivery of the benefits provided for under the plan contract and likewise obtain sufficient capital growth to
meet the growing actuarial reserve liabilities, all investments of the trust fund/s of a pre-need company shall
be limited to the following and subject to limitations, to wit:

(a) Fixed income instruments. — These may be classified into short-term and long-term instruments. The
instrument is shortterm if the maturity period is three hundred sixty-five (365) days or less. This category
includes:

(1) Government securities which shall not be less than ten percent (10%) of the trust fund amount;

(2) Savings/time deposits and unit investment trust funds maintained with and managed by a duly
authorized bank with satisfactory examination rating as of the last examination by the BSP;

(3) Commercial papers duly registered with the SEC with a credit rating of "1" for short-term and "AAA" for
longterm based on the rating scale of an accredited Philippine Rating Agency or its equivalent at the time of
investment.

The maximum exposure to long-term commercial papers shall not exceed fifteen percent (15%) of the total
trust fund amount while the exposure to each commercial paper issuer shall not exceed ten percent (10%) of
the allocated amount; and

(4) Direct loans to corporations which are financially stable, profitable for the last three (3) years and have a
good track record of paying their previous loans. These loans shall be fully secured by a real estate mortgage
up to the extent of sixty percent (60%) of the zonal valuation of the property at the time the loan was granted.

The property shall be covered by a transfer certificate of title registered in the name of the mortgagor and free
from liens and encumbrances. The maximum amount to be allocated for direct loans shall not exceed five
percent (5%) of the total trust fund amount while the amount to be granted to each corporate borrower shall
not exceed ten percent (10%) of the amount allocated.

The maximum term of the loan should be no longer than four (4) years.

Direct loans to planholders are exempt from the limitations set forth under this section: Provided, That such
loans to planholders shall not exceed ten percent (10%) of the total trust fund amount.

(b) Equities. — Investments in equities shall be limited to stocks listed on the main board of a local stock
exchange.

Investments in duly registered collective investment instruments such as mutual funds are allowed
hereunder: Provided, That such funds are invested only in fixed income instruments and blue chips
securities, subject to the limitations prescribed by laws, rules and regulations.

These investments shall include stocks issued by companies that are financially stable, actively traded,
possess good track record of growth and have declared dividends for the past three (3) years.
Notwithstanding the prohibition against transactions with directors, officers, stockholders and related
interests, the trustee may invest in equities of companies related to the trustee provided these companies
comply with the foregoing criteria provided in this paragraph for equity investments.

The amount to be allocated for this purpose shall not exceed thirty percent (30%) of the total trust fund while
the investment in any particular issue shall not exceed ten percent (10%) of the allocated amount. The
investment shall be recorded at the aggregate of the lower of cost or market.
Existing investments which are not in accordance herewith shall be disposed of within three (3) years from
the effectivity of this Act.

(c) Real Estate. — These shall include real estate properties located in strategic areas of cities and first class
municipalities.1âwphi1 The transfer certificate of title (TCT) shall be in the name of the seller, free from liens
and encumbrances and shall be transferred in the name of the trustee in trust for the planholders unless t
r/transferor is the pre-need company wherein an annotation to the TCT relative to the sale/transfer may be
allowed. It shall be recorded at acquisition cost.

However, the real estate shall be appraised every three (3) years by a licensed real estate appraiser,
accredited by the Philippine Association of Real Estate Appraisers, to reflect the increase or decrease in the
value of the property. In case the appraisal would result in an increase in the value, only sixty percent (60%)
of the appraisal increase is allowed to be recorded in the books of the trust fund but in case of decline in
value, the entire decline shall be recorded. Appraisal increment should not be used to cover up the required
monthly contribution to the trust fund.

The total recorded value of the real estate investment shall not exceed ten percent (10%) of the total trust
fund amount of the pre-need company. In the event that the existing real estate investment exceeds the
aforesaid limit, the same shall be leveled off to the prescribed limit within three (3) years from the effectivity
of this Code.

Investment of the trust fund, which is not in accordance with the preceding paragraphs, shall not be allowed
unless the prior written approval of the Commission had been secured: Provided, further, That no deposit or
investment in any single entity shall exceed fifteen percent (15%) of the total value of the trust fund:
Provided, finally, That the Commission is authorized to adjust the percentage allocation per category set
forth herein not in excess of two percentage (2%) points upward or downward and no oftener than once every
five (5) years. The first adjustment hereunder may be made no earlier than five (5) years from the effectivity of
this Act. The pre-need company shall not use the trust fund to extend any loan to or to invest in its
directors, stockholders, officers or its affiliates.

xxx

SECTION 36. Trust Fund Deficiencies. — Upon approval by the Commission of the pre-need reserve
computation submitted in the preceding section, any deficiency in the trust fund, when compared to the
reserve liabilities as reported in the pre-need reserve valuation report, shall be funded by the pre-need
company within sixty (60) days from such approval. Failure to cover the deficiency in an appropriate manner
within the time required shall subject the pre-need company to the payment of a penalty, in addition to other
remedies exercisable by the Commission, as provided for in this Code. Any excess of the trust fund over the
actuarial reserve liabilities may be credited to future deposit requirements.

SECTION 37. Liquidity Reserve. — The trustee shall at all times maintain a liquidity reserve which shall be
sufficient to cover at least fifteen percent (15%) of the trust fund but in no case less than one hundred
twenty-five percent (125%) of the amount of the availing plans for the succeeding year. For this purpose, the
pr pany shall timely submit to the trustee a summary of benefits payable for the succeeding year.

The following shall qualify as investments for the liquidity reserve:

(a) Loans secured by a hold-out on assignment or pledge deposits maintained either with the trustee or other
banks, or of deposit substitute of the trustee itself or mortgage and chattel mortgage bonds issued by the
trustee;

(b) Treasury notes or bills, other government securities or bonds, and such other evidences or indebtedness
or obligations the servicing and repayment of which are fully guaranteed by the Republic of the Philippines;

(c) Repurchase agreements with any of those mentioned in Item "b" above, as underlying instruments
thereof; and
(d) Savings or time deposits with government-owned banks or commercial banks.

SECTION 38. Trustees. — Upon approval of the Commission or when the Commission requires for the
protection of plan holders, the pre-need company shall entrust the management and administration of the
trust fund to any reputable bank's trust department, trust company or any entity authorized to perform
trust functions in the Philippines: Provided, That no director and/or officer of the pre-need company shall at
the same time serve as director and/or officer of the affiliate or related trust entity: Provided, further, That no
trust fund shall be established by a preneed company with a subsidiary, affiliate or related trust entity.
However, such may be allowed: Provided, That the following conditions are complied with:

(a) A written approval of the Commission has been previously obtained; and

(b) Public disclosure of the affiliation with the trust entity be included in all materials in whatever form.

The Commission shall have the authority to prescribe appropriate rules that shall ensure that the yield of the
trust fund is maximized, consistent with the requirements of safety and liquidity.

[Italics Supplied]

"Under the principle of legislative approval of administrative interpretation by re-enactment, the re-
enactment of a statute, substantiallyunchanged (as in this case), is persuasive indication of the adoption by
Congress of a prior executive construction."26 Accordingly, where a statute is susceptible of the meaning
placed upon it by a ruling of the government agency charged with its enforcement and the legislature
thereafter reenacts the provisions without substantial change, such action is to some extent confirmatory
that the ruling carries out the legislative purpose.27

The Court cannot go against that legislative intent for it is the duty of this institution to read what the law
intends. It is a cardinal rule that, in seeking the meaning of the law, the first concern of the judge should be
to discover in its provisions the intent of the lawmaker. Unquestionably, the law should never be interpreted
in such a way as to cause injustice as this is never within the legislative intent. An indispensable part of that
intent, in fact, for we presume the good motives of the legislature, is to render justice.28

To rule that Legacy has retained a beneficial interest in the trust fund is to perpetuate the injustices being
committed against the plan holders and violate not only the spirit of the trust agreement but, more
importantly, the lawmaker’s intent. If indeed Legacy had an interest that could be reached by its creditors
even during insolvency, the plan holders would be prejudiced as they would be forced to share in the assets
that would be distributed pro rata to all creditors, whether plan holders or not. It would contradict the very
purpose for which the trust was mandated by the Congress in the first place.

Third, the perceived interest of Legacy, as touted by the Assignee, has simply no basis. It may appear that
Legacy under the agreement has control over the enforcement of the trust because of its provisions stating
that Legacy shall "solely and exclusive[ly] [be] responsible for fulfilling the services referred to in the recital
clauses and the settlement/payment of claims of any person or firm availing of such services" and that "[a]ny
written direction of the Company [to the trustee] shall constitute a certification that the distribution of
payment so directed is one which the Company is authorized to direct"29 Such provisions, however, cannot
be construed as Legacy having retained a beneficial interest in the trust fund.

To begin with, the aforestated provisions refer solely to the delivery of the proceeds of the trust from LBP to
Legacy and then finally to the beneficiaries. In effect, Legacy merely agreed to facilitate the payment of the
benefits from the trust fund to the intended beneficiaries, acting as a conduit or an agent of the trustee in
the enforcement of the trust agreement. Under the general principles of trust, a trustee, by the terms of the
agreement may be permitted to delegate to agents or to co-trustees or to other persons the administration of
the trust or the performance of act which could not otherwise be properly delegated.30 Thus, by the terms of
the trust, as in this case, a trustee may be authorized or permit an agent to do acts such as the delivery of
the benefits out of the trust fund.
The Court cannot subscribe either to the Assignee’s position that Legacy is a debtor of the planholders
relative to the trust fund. In trust, it is the trustee, and not the trustor, who owes fiduciary duty to the
beneficiary.

The Restatement is clear on this point. Section 170 thereof provides that the "trustee is under a duty to the
beneficiary to administer the trust solely in the interest of the beneficiary."31 Section 182 also states that the
duty of a trustee is to pay income to the beneficiary.32 Thus, LBP is tasked with the fiduciary duty to act for
the benefit of the planholders as to matters within the scope of the relation.33 Like a debtor, LBP owes the
planholders the amounts due from the trust fund. As to the planholders, as creditors, they can rightfully use
equitable remedies against the trustee for the protection of their interest in the trust fund and, in particular,
their right to demand the payment of what is due them from the fund. Verily, Legacy is out of the picture and
exists only as a representative of the trustee, LBP, with the limited role of facilitating the delivery of the
benefits of the trust fund to the beneficiaries – the planholders. The trust fund should not revert to Legacy,
which has no beneficial interest over it. Not being an asset of Legacy, the trust fund is immune from its
reach and cannot be included by the RTC in the insolvency estate.

In the end, the failure of Judge Laigo to consider the provisions of the SRC, the New Rules and the law on
trusts, that should have warranted the exclusion of the trust fund from the insolvency estate of Legacy,
constituted grave abuse of discretion. In treating the trust fund as forming part of Legacy’s insolvency estate,
Judge Laigo acted against what was contemplated by law. He turned a blind eye to the will of the Congress
as expressed through the SRC and the Pre-Need Code. In the process, he endangered the claims of the
planholders by allowing the probability that they would be drastically reduced or dissipated. He should have
acted prudently bearing in mind that the establishment of the trust was precisely for the exclusive benefit of
the plan holders.

Enjoining the SEC from validating the

claims against the trust fund is grave
abuse of discretion for the insolvency
court has no authority to order the
reversion of properties that do not
form part of Legacy’s insolvent estate.

The Assignee cited Abrera v. College Assurance Plan34 (Abrera), where the Court held that claims covered by
rehabilitation proceedingsbefore the RTC should include all claims or demands of whatever nature or
character against a debtor or its property. At the heart of the Assignee’s argument is that because the
authority is with the RTC, the SEC has no right to interfere in the insolvency proceedings.

It is an error for the Assignee to assume that the authority of the RTC extends to the claims against the trust
fund. Claims against the trust fund must be distinguished from claims against Legacy. The claims against
the trust fund are directed not against Legacy, but against LBP, the trustee, being the debtor relative to the
trust properties.

The Pre-Need Code is clear on this. It recognizes the distinction between claims against the pre-need
company and those against the trust fund.1âwphi1 Section 52 (b) states that liquidation "proceedings in
court shall proceed independently of proceedings in the Commission for the liquidation of claims, and
creditors of the pre-need company shall have no personality whatsoever in the Commission proceedings to
litigate their claims against the trust funds." The reason why claims against the trust funds can proceed
independently of the proceedings in the courts is the fact that the latter is directed against a different person
or entity.

Moreover, the Assignee must be reminded that the issue in Abrera is not similar to the question raised here
by the SEC. In the case at bench, the SEC questions the propriety of including the trust fund in the
inventory of Legacy’s corporate assets.

Jurisdiction over claims filed against

the trust fund
From the effectivity of the Pre-Need Code, it is the Insurance Commission (IC) that "shall have the primary
and exclusive power to adjudicate any and all claims involving pre-need plans."35

The transitory provisions of the Pre-Need Code, however, provide that "[n]otwithstanding any provision to the
contrary, all pending claims, complaints and cases (referring to pre-need contract and trust claims) filed with
the SEC shall be continued in its full and final conclusion."36

The Pre-Need Code recognizes that the jurisdiction over pending claims against the trust funds prior to its
effectivity is vested with the SEC. Such authority can be easily discerned even from the provisions of the
SRC.

Section 4 thereof provides that despite the transfer of jurisdiction37 to the RTC of those matters enumerated
under Section 5 of P.D. No. 902-A,38 the SEC remains authorized to "exercise such other powers as may be
provided by law as well as those which may be implied from, or which are necessary or incidental to the
carrying out of, the express powers granted the Commission39 to achieve the objectives and purposes of
these laws."40 Relevant thereto is Section 36.5 (b) of the SRC which states that:

The Commission may, having due regard to the public interest or the protection of investors, regulate,
supervise, examine, suspend or otherwise discontinue such and other similar funds under such rules and
regulations which the Commission may promulgate, and which may include taking custody and
management of the fund itself as well as investments in, and disbursements from, the funds under such
forms of control and supervision by the Commission as it may from time to time require. The authority
granted to the Commission under this subsection shall also apply to all funds established for the protection
of investors (which necessarily includes the trust funds), whether established by the Commission or
otherwise.41

Concomitantly, under the New Rules, the SEC "may, at its discretion, demand for the conversion to cash or
other near cash assets of the investments made by the Trustee to protect the interest of the Planholders."42

Therefore, even prior to the transfer to the IC of matters pertaining to pre-need plans and trust funds, the
SEC had authority to regulate, manage, and hear all claims involving trust fund assets, if in its discretion,
public interest so required. Accordingly, all claims against the trust funds, which have been pending before
it, are clearly within the SEC’s authority to rule upon.

Pre-Need Code is curative and

remedial in character and,
therefore, can be applied
retroactively

Finally, it must be stressed that the primary protection accorded by the Pre-Need Code to the plan holders is
curative and remedial and, therefore, can be applied retroactively. The rule is that where the provisions of a
statute clarify an existing law and do not contemplate a change in that law, the statute may be given
curative, remedial and retroactive effect.43 To review, curative statutes are those enacted to cure defects,
abridge superfluities, and curb certain evils.44 As stressed by the Court in Fabian v. Desierto,45

If the rule takes away a vested right, it is not procedural. If the rule creates a right such as the right to
appeal, it may be clarified as a substantive matter; but if it operates as a means of implementing an existing
right then the rule deals merely with procedure.

[Emphasis Supplied]

A reading of the Pre-Need Code immediately shows that its provisions operate merely in furtherance of the
remedy or confirmation of the right of the planholders to exclusively claim against the trust funds as
intended by the legislature. No new substantive right was created or bestowed upon the plan holders. Section
52 of the Pre-Need Code only echoes and clarifies the SRC’s intent to exclude from the insolvency proceeding
trust fund assets that have been established "exclusively for the benefit of plan holders." It was precisely
enacted to foil the tactic of taking undue advantage of any ambiguities in the New Rules.

Any doubt or reservation in this regard has been dispelled by the Pre- Need Code. Section 57 thereof provides
that "[a]ny pre-need company who, at the time of the effectivity of this Code has been registered and licensed
to sell pre-need plans and similar contracts, shall be considered registered and licensed under the provision
of this Code and its implementing rules and regulations and shall be subject to and governed by the
provisions hereof xxx." Thus, Legacy and all other existing pre-need companies cannot claim that the
provisions of the Pre- Need Code are not applicable to them and to the claims which accrued prior to the
enactment of the said law.

"[I]t has been said that a remedial statute must be so construed as to make it effect the evident purpose for
which it was enacted, so that if the reason of the statute extends to past transactions, as well as to those in
the future, then it will be so applied although the statute does not in terms so direct..46 With the Pre-Need
Code having the attribute of a remedial statute, Legacy and all pre-need providers or their creditors cannot
argue that it cannot be retroactively applied.

Conclusion

In sum, improvidently ordering the inclusion of the trust fund in Legacy's insolvency estate without regard to
the avowed state policy of protecting the consumer of pre-need plans, as laid down in the SRC, the New
Rules, and the Pre-Need Code, constitutes grave abuse of discretion. The R TC should have known, and
ought to know, the overarching consideration the Congress intended in requiring the establishment of trust
funds - to uphold first and foremost the interest of the plan holders.

The Court upholds its duty to protect the ordinary Filipino workers who are seeking a future for their
children through pre-need contracts. Their incredibly long wait is over as this is the moment when their
rightful and exclusive right to the trust funds, created primarily for them, is judicially respected and
affirmed.

WHEREFORE, the petition is GRANTED. The June 26, 2009 Order of the Regional Trial Court, Branch 56,
Makati City, is declared NULL and VOID.

The Securities and Exchange Commission is directed to process the claims of legitimate plan holders with
dispatch.

SO ORDERED.

12. People vs. Tibayan, GR Nos. 209655-60, January 14, 2015

G.R. Nos. 209655-60 January 14, 2015

PEOPLE OF THE PHILIPPINES, Plaintiff-Appellee,

vs.
PALMY TIBAYAN and RICO Z. PUERTO, Accused-Appellants.

DECISION

PERLAS-BERNABE, J.:

Assailed in this ordinary appeal1 filed by accused-appellants Palmy Tibayan (Tibayan) and Rico Z. Puerto
(Puerto) (accused-appellants) is the Decision2 dated June 28, 2013 of the Court of Appeals (CA) in CA-G.R.
CR Nos. 33063, 33562, 33660, 33669, 33939, and 34398 which modified the Decisions dated December 4,
2009,3 June 24, 2010,4 August 2, 2010,5 August 5, 2010,6 January 21, 2011,7 and August 18, 20118 of
the Regional Trial Court of Las Piñas City, Branch 198 (RTC) and convicted accused appellants of the crime
of Syndicated Estafa, defined and penalized under Item 2 (a), Paragraph 4, Article 315 of the Revised Penal
Code (RPC) in relation to Presidential Decree No. (PD) 1689.9

The Facts

Tibayan Group Investment Company,Inc. (TGICI) is an open-end investment company registered with the
Securities and Exchange Commission (SEC) on September 21, 2001.10 Sometime in 2002, the SEC
conducted an investigation on TGICI and its subsidiaries. In the course thereof, it discovered that TGICI was
selling securities to the public without a registration statement in violation of Republic Act No. 8799,
otherwise known as "The Securities Regulation Code," and that TGICI submitted a fraudulent Treasurer’s
Affidavit before the SEC. Resultantly, on October 21, 2003, the SEC revoked TGICI’s corporate registration
for being fraudulently procured.11 The foregoing led to the filing of multiple criminal cases12 for Syndicated
Estafa against the incorporators and directors of TGICI,13 namely, Jesus Tibayan, Ezekiel D. Martinez,
Liborio E. Elacio, Jimmy C. Catigan, Nelda B. Baran, and herein accused-appellants.14 Consequently,
warrants of arrest were issued against all of them; however, only accusedappellants were arrested, while the
others remained at large.15

According to the prosecution, private complainants Hector H. Alvarez, Milagros Alvarez, Clarita P. Gacayan,
Irma T. Ador, Emelyn Gomez, Yolanda Zimmer, Nonito Garlan, Judy C. Rillon, Leonida D. Jarina, Reynaldo
A. Dacon, Cristina DelaPeña, and Rodney E. Villareal16 (private complainants) were enticed to invest in
TGICI due to the offer of high interest rates, as well as the assurance that they will recover their investments.
After giving their money to TGICI, private complainants received a Certificate of Share and post-dated
checks, representing the amount of the principal investment and the monthly interest earnings,
respectively.17 Upon encashment, the checks were dishonored, as the account was already closed,
prompting private complainants to bring the bounced checks to the TGICI office to demand payment. At the
office, the TGICI employees took the said checks, gave private complainants acknowledgement receipts, and
reassured that their investments, as well as the interests, would be paid. However, the TGICI office closed
down without private complainants having been paid and, thus, they were constrained to file criminal
complaints against the incorporators and directors of TGICI.18

In their defense, accused-appellants denied having conspired with the other TGICI incorporators to defraud
private complainants. Particularly, Puerto claimed that his signature in the Articles of Incorporation of TGICI
was forged and that since January 2002, he was no longer a director of TGICI. For her part, Tibayan also
claimed that her signature in the TGICI’s Articles of Incorporation was a forgery,as she was neither an
incorporator nor a director of TGICI.19

The RTC Rulings

On various dates, the RTC issued six (6) separate decisions convicting Tibayan of 13 counts and Puerto of 11
counts of Estafa under Item 2 (a), Paragraph 4, Article 315 of the RPC in relation to PD 1689, to wit: (a) in a
Joint Decision20 dated December 4, 2009, the RTC found accused-appellants guilty beyond reasonable
doubt of three (3) counts of Estafa, sentencing them to suffer the penalty of imprisonment for a period of 20
years of reclusion temporalfor each count and ordering them to pay the amounts of ₱1,500,000.00 to Hector
H. Alvarez, and 119,405.23 and ₱800,000.00 to Milagros Alvarez;21 (b) in a Joint Decision22 dated June 24,
2010, the RTC acquitted Puerto of all the charges, but found Tibayan guilty beyond reasonable doubt of two
(2) counts of Estafa, sentencing her to suffer the penalty of imprisonment for a period of 20 years of reclusion
temporal for each count, and ordering her to pay the amounts of ₱1,300,000.00 and US$12,000.00 to Clarita
P. Gacayan and ₱500,000.00 to Irma T. Ador;23 (c) in a Joint Decision24 dated August 2, 2010, the accused-
appellants were found guilty beyond reasonable doubt of two (2) counts of Estafa, and were sentenced to
suffer the penalty of imprisonment for a period of 20 years of reclusion temporal for each count, and ordered
to pay the amounts of ₱1,000,000.00 to Yolanda Zimmer and ₱556,376.00 to Nonito Garlan;25 (d) in a Joint
Decision26 dated August 5, 2010, the RTC found the accused appellants guilty beyond reasonable doubt of
one (1) count of Estafa, sentencing them to suffer the penalty of imprisonment for a period of 20 years of
reclusion temporaland ordering them to pay Emelyn Gomez the amount of ₱250,000.00;27 (e) in a
Decision28 dated January 21, 2011, accused-appellants were found guilty beyond reasonable doubt of one
(1) count of Estafa each, and were sentenced to suffer the penalty of imprisonment for a period of 20 years of
reclusion temporal and ordered to pay Judy C. Rillon the amount of ₱118,000.00;29 and (f) in a Joint
Decision30 dated August 18, 2011, accused-appellants were each convicted of four (4) counts of Estafa, and
meted different penalties per count, as follows: (i) for the first count, they were sentenced to suffer the
penalty of imprisonment for a period of four (4) years and two (2) months of prision correcional medium, as
minimum, to fifteen (15) years of reclusion temporal medium, as maximum, and to pay Reynaldo A. Dacon
the amount of ₱100,000.00; (ii) for the second count, they were sentenced to suffer the penalty of
imprisonment for a period of ten (10) years of prision mayor medium, as minimum, to twenty (20) years of
reclusion temporal medium, as maximum, and to pay Leonida D. Jarina the amount of ₱200,000.00; (iii) for
the third count, they were sentenced to suffer the penalty of imprisonment for a period of ten (10) years of
prision mayormedium, as minimum, to twenty (20) years of reclusion temporal medium, as maximum, and
to pay Cristina Dela Peña the amount of ₱250,000.00; and (iv) for the last count, they were sentenced to
suffer the penalty of imprisonment for a period of four (4) years and two (2) months of prision correcional
medium, as minimum, to fifteen (15) years of reclusion temporalmedium, as maximum, and to pay Rodney
E. Villareal the amount of ₱100,000.00.31

In the aforesaid decisions, the RTC did not lend credence to accused appellants’ denials in light of the
positive testimonies of the private complainants that they invested their money in TGICI because of the
assurances from accused-appellants and the other directors/incorporators of TGICI that their investments
would yield very profitable returns. In this relation, the RTC found that accused-appellants conspired with
the other directors/incorporators of TGICI in misrepresenting the company as a legitimate corporation duly
registered to operate as a mutual fund to the detriment of the private complainants.32 However, the RTC
convicted accused-appellants of simple Estafa only, as the prosecution failed to allege in the informations
that accused-appellants and the other directors/ incorporators formed a syndicate with the intention of
defrauding the public, or it failed to adduce documentary evidence substantiating its claims that the
accused-appellants committed Syndicated Estafa.33

Aggrieved, accused-appellants separately appealed the foregoing RTC Decisions to the CA, docketed as CA-
G.R. CR Nos. 33063, 33562, 33660, 33669, 33939, and 34398. Thereafter, the CA issued a Resolution34
dated February 19, 2013 ordering the consolidation of accused-appellants’ appeals.

The CA Ruling

In a Decision35 dated June 28, 2013, the CA modified accused appellants’ conviction to that of Syndicated
Estafa, and accordingly, increased their respective penalties to life imprisonment for each count.36 The CA
also increased the amount of actual damages awarded to private complainant Clarita P. Gacayan from
₱1,300,000.00 to ₱1,530,625.90, apart from the award of US$12,000.00.37

It held that TGICI and its subsidiaries were engaged in a Ponzi scheme which relied on subsequent investors
to pay its earlier investors – and is what PD 1689 precisely aims to punish. Inevitably, TGICI could no longer
hoodwink new investors that led to its collapse.38 Thus, the CA concluded that as incorporators/directors of
TGICI, accused-appellants and their cohorts conspired in making TGICI a vehicle for the perpetuation of
fraud against the unsuspecting public. As such, they cannot hide behind the corporate veil and must be
personally and criminally liable for their acts.39 The CA then concluded that since the TGICI
incorporators/directors comprised more than five (5) persons, accused-appellants’ criminal liability should
be upgraded to that of Syndicated Estafa, and their respective penalties increased accordingly.40
Undaunted, accused-appellants filed the instant appeal.

The Issue Before the Court

The primordial issue for the Court’s resolution is whether or not accused-appellants are guilty beyond
reasonable doubt of the crime of Syndicated Estafa defined and penalized under Item 2 (a), Paragraph 4,

Article 315 of the RPC in relation to PD 1689.

The Court’s Ruling

The Court sustains the convictions of accused-appellants.

Item 2 (a), Paragraph 4, Article 315 of the RPC provides:

Art. 315. Swindling (estafa).– Any person who shall defraud another by any means mentioned hereinbelow
shall be punished by:
xxxx

2. By means of any of the following false pretenses or fraudulent acts executed prior to or

simultaneously with the commission of the fraud:

(a) By using fictitious name, or falsely pretending to possess power, influence, qualifications, property, credit,
agency, business, or imaginary transactions; or by means of other similar deceits.

xxxx

The elements of Estafa by means of deceit under this provision are the following: (a) that there must be a
false pretense or fraudulent representation as to his power, influence, qualifications, property, credit, agency,
business or imaginary transactions; (b) that such false pretense or fraudulent representation was made or
executed prior to or simultaneously with the commission of the fraud; (c) that the offended party relied on
the false pretense, fraudulent act, or fraudulent means and was induced to part with his money or property;
and (d) that, as a result thereof, the offended party suffered damage.41

In relation thereto, Section 1 of PD 1689 defines Syndicated Estafa as follows:

Section 1. Any person or persons who shall commit estafa or other forms of swindling as defined in Articles
315 and 316 of the Revised Penal Code, as amended, shall be punished by life imprisonment to death if the
swindling (estafa) is committed by a syndicate consisting of five or more persons formed with the intention of
carrying out the unlawful or illegal act, transaction, enterprise or scheme, and the defraudation results in
the misappropriation of moneys contributed by stockholders, or members of rural banks, cooperatives,
"samahang nayon(s)," or farmers’ associations, or funds solicited by corporations/associations from the
general public.

Thus, the elements of Syndicated Estafa are: (a) Estafa or other forms of swindling, as defined in Articles 315
and 316 of the RPC, is committed; (b) the Estafa or swindling is committed by a syndicate of five (5) or more
persons; and (c) defraudation results in the misappropriation of moneys contributed by stockholders, or
members of rural banks, cooperative, "samahang nayon(s)," or farmers’ associations, or of funds solicited by
corporations/associations from the general public.42

In this case, a judicious review of the records reveals TGICI’s modus operandiof inducing the public to invest
in it on the undertaking that their investment would be returned with a very high monthly interest rate
ranging from three to five and a half percent (3%-5.5%).43 Under such lucrative promise, the investing
public are enticed to infuse funds into TGICI. However, as the directors/incorporators of TGICI knew from
the start that TGICI is operating withoutany paid-up capital and has no clear trade by which it can pay the
assured profits to its investors,44 they cannot comply with their guarantee and had to simply abscond with
their investors’ money. Thus, the CA correctly held that accused-appellants, along with the other accused
who are still at large, used TGICI to engage ina Ponzi scheme, resulting in the defraudation of the TGICI
investors.

To be sure, a Ponzi scheme is a typeof investment fraud that involves the payment of purported returns to
existing investors from funds contributed by new investors. Its organizers often solicit new investors by
promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many
Ponzi schemes, the perpetrators focus on attracting new money to make promised payments to earlier-stage
investors to create the false appearance that investors are profiting from a legitimate business.45 It is not an
investment strategy but a gullibility scheme, which works only as long as there is an ever increasing number
of new investors joining the scheme.46 It is difficult to sustain the scheme over a long period of time because
the operator needs an ever larger pool of later investors to continue paying the promised profits toearly
investors. The idea behind this type of swindle is that the "con-man" collects his money from his second or
third round of investors and then absconds before anyone else shows up to collect. Necessarily, Ponzi
schemes only last weeks, or months at the most.47

In this light, it is clear that all the elements of Syndicated Esta/a, committed through a Ponzi scheme, are
present in this case, considering that: (a) the incorporators/directors of TGICI comprising more than five (5)
people, including herein accused-appellants, made false pretenses and representations to the investing
public - in this case, the private complainants - regarding a supposed lucrative investment opportunity with
TGICI in order to solicit money from them; (b) the said false pretenses and representations were made prior
to or simultaneous with the commission of fraud; (c) relying on the same, private complainants invested their
hard earned money into TGICI; and (d) the incorporators/directors of TGICI ended up running away with the
private complainants' investments, obviously to the latter's prejudice.

Corollary thereto, the CA correctly upgraded accused-appellants' conviction from simple Estafa to Syndicated
Estafa.1âwphi1 In a criminal case, an appeal throws the whole case wide open for review. Issues whether
raised or not by the parties may be resolved by the appellate court.48 Hence, accused appellants' appeal
conferred upon the appellate court full jurisdiction and rendered it competent to examine the records, revise
the judgment appealed from, increase the penalty, and cite the proper provision of the penal law.49

WHEREFORE, the appeal is DENIED. The Decision dated June 28, 2013 of the Court of Appeals in CA-G.R.
CR Nos. 33063, 33562, 33660, 33669, 33939, and 34398 is hereby AFFIRMED. Accordingly, accused
appellants Palmy Tibayan and Rico Z. Puerto are found GUILTY beyond reasonable doubt of 13 and 11
counts, respectively, of Syndicated Esta/a and are sentenced to suffer the penalty of life imprisonment for
each count. Accused-appellants are further ordered to pay actual damages to each of the private
complainants in the following amounts: (a) ₱1,500,000.00 to Hector H. Alvarez; (b) ₱119,405.23 and
₱800,000.00 to Milagros Alvarez; (c) ₱1,530,625.90 and US$12,000.00 to Clarita P. Gacayan; (d) ₱500,000.00
to Irma T. Ador; (e) ₱1,000,000.00 to Yolanda Zimmer; (f) ₱556,376.00 to Nonito Garlan; (g) ₱250,000.00 to
Emelyn Gomez; (h) ₱118,000.00 to Judy C. Rillon; (i) ₱100,000.00 to Reynaldo A. Dacon; (j) ₱200,000.00 to
Leonida D. Jarina; (k) ₱250,000.00 to Cristina Dela Pefia; and (l) ₱100,000.00 to Rodney E. Villareal.

SO ORDERED.

13. Primanila Plans vs. SEC, GR No. 193791, August 6, 2014

G.R. No. 193791 August 6, 2014

PRIMANILA PLANS, INC., herein REPRESENTED by EDUARDO S. MADRID, Petitioner,

vs.
SECURITIES AND EXCHANGE COMMISSION, Respondent.

DECISION

REYES, J.:

This resolves the Petition for Review on Certiorari1 under Rule 45 of the Rules of Court filed by Primanila
Plans, Inc. (Primanila) to assail the Decision2 dated March 9, 2010 and Resolution3 dated September 15,
2010 of the Court of Appeals (CA) in CA-G.R. SP No. 104083. The CA affirmed in CA-G.R. SP No. 104083 the
Securities and Exchange Commission's (SEC) issuance of an Order4 dated April 9, 2008, which was a cease
and desist order upon Primanila with the following dispositive portion:

WHEREFORE, pursuant to the authority vested in the Commission, PRIMANILA PLANS, INC., its respective
officers, directors, agents, representatives, and any and all persons, conduit entities and subsidiaries
claiming and acting under their authority, are hereby ordered to immediately CEASE AND DESIST from
further engaging in activities of selling, offering for sale Primasa plans and to refrain from further collecting
payments and amortizations for Primasa plans to protect the interest of investors and the public in general.

In accordance with the provisions of Section 64.3 of Republic Act No. 8799, otherwise known as the
Securities Regulation Code, the parties subject of this Cease and Desist Order may file a formal request or
motion for the lifting of this Order within a non-extendible period of five (5) days from receipt hereof.

SO ORDERED.5
The Facts

Primanila was registered with the SEC on October 17, 1988 and was issued Certificate of Registration No.
156350. Based on its amended articles of incorporation, the company’s primary purpose was "to organize,
establish, develop, conduct,provide, maintain, operate, offer, issue, market and sell pension plans under
which the savings of professionals, officers, directors and other personnel of corporations, firms, or entities,
and self employed individuals can be pooled together, accumulated and invested in profitable placements
and productive enterprises so as to build an Accumulated Fund for each individual participant or planholder
for his retirement, monthly pension or for other [foreseeable] needs in the future." Primanila then operated as
a pre-needcompany and maintained a business office in Makati City.6

On April 9, 2008, the SEC was prompted to issue the subject cease and desist order after an investigation
conducted by the SEC’s Compliance and Enforcement Department (CED) on Primanila yielded the following
factual findings duly explained inthe cease and desist order:

1. The office of [Primanila] located at 20th Floor, Philippine AXA Life Centre, Sen. Gil Puyat Ave., Makati City
was closed. No notices were posted outside said office to inform the public of the reason for such closure. x x
x

2. [Primanila]’s website (www.primanila.com) was offering a pension plan product called Primasa Plan. The
website contains detailed instructions as to how interested persons can apply for the said plan and where
initial contributions and succeeding installment payments can be made by applicants and planholders.
According to the website, applicants and planholders can pay directly at the head office, any of its field
offices or may deposit the payments in PRIMANILA’s METROBANK Account No. 066-3-06631031-1. This was
discovered by [CED] when a member of CED visited [Primanila’s] website on February 12, 2008.

3. [PRIMANILA] failed to renew its Dealer’s License for 2008. In view of the expiration of the said license, the
[SEC’s NonTraditional Securities and Instruments Department (NTD)], through its Acting Director Jose P.
Aquino, issued a letter dated January 3, 2008 addressed to [Primanila’s] Chairmanand CEO Mr. Eduardo S.
Madrid, enjoining [Primanila] from selling and/or offering for sale pre-need plans to the public.

4. [Primanila] has not been issued a secondary license to act as dealer or general agent for pre-need pension
plans for 2008. Also, no registration statement has been filed by [Primanila] for the approval of a pension
plan product called Primasa Plan. This is shown in the certification dated February 15, 2008 issued by NTD
upon the request of Atty. Hubert B. Guevara of CED.

5. [Primanila’s] Bank Account is still active. This was discovered by CED when it deposited on March 6,2008
the sum of Php 50.00 which was duly received by METROBANK Robinson’s Branch as shown by the deposit
slip.

6. Among the many planholders of [PRIMANILA] are enlisted personnel of the Philippine National Police
(PNP). Premium collections for Primaplans via salary deductions were religiously remitted to [Primanila] on a
monthly basis. x x x

7. PNP remitted the total amount of Php 2,072,149.38 to respondent PRIMANILA representing the
aforementioned premium collections via salary deductions of the 410 enlisted personnel of PNP who are
planholders. This is shown in the table prepared by the remittance clerk of the PNP, Ms. Mercedita A.
Almeda.

8. [PRIMANILA] failed to deposit the required monthly contributions to the trust fund in violation of Pre-need
Rule 19.1. This is shown in the Trust Fund Reports for the monthsof November and December 2007
prepared by ASIATRUST BANK, the trustee of [Primanila].

9. [PRIMANILA] under-declared the total amount of its collections as shown in its SEC Monthly Collection
Reports which it submitted to NTD. Its reports show thatit only collected the total amount of Php 302,081.00
from January to September 2007. However, the remittance report of the PNP shows that [Primanila] received
the amount of Php 1,688,965.22 from the PNP planholders alone for the said period. Therefore, it under-
declared its report by Php 1,386,884.22.7

From these findings, the SEC declared that Primanila committed a flagrant violation of Republic Act No.
8799, otherwise known as The Securities Regulation Code (SRC), particularly Section 16 thereof which reads:

Section 16. Pre-Need Plans. –No person shall sell or offer for sale to the public any pre-need planexcept in
accordance with rules and regulations which the Commission shall prescribe. Such rules shall regulate the
sale of pre-need plans by, among other things, requiring the registration of pre-need plans, licensing persons
involved in the sale of pre-need plans, requiring disclosures to prospective plan holders, prescribing
advertising guidelines, providing for uniform accounting system, reports and record keeping with respect to
such plans, imposing capital, bonding and other financial responsibility and establishing trust funds for the
payment of benefits under such plans.

It also breached the New Rules on the Registration and Sale of Pre-Need Plans, specifically Rule Nos. 3 and
15 thereof, to wit:

Rule 3. Registration of Pre-Need Plans. – No corporation shall issue, offer for sale, or sell Pre-NeedPlans
unless such plans shall have been registered under Rule 4.

Rule 15. Registration of Dealers, General Agents and Salesmen of Pre-Need Plans.

15.1. Any issuer selling its own Pre-Need Plans shall be deemed a dealer in securities and shall be required
to be registered as such and comply with all the provisions hereof; provided that the issuer selling different
types of Pre-Need Plans shall be required to be registered as dealer only once for the different types of plans.

The SEC then issued the subject cease and desist order "in order to prevent further violations and in order to
protect the interest of its plan holders and the public."8

Feeling aggrieved, Primanila filed a Motion for Reconsideration/Lift Cease and Desist Order,9 arguing that it
was denied due process as the order was released without any prior issuance by the SEC of a notice or
formal charge that could have allowed the company to defend itself.10 Primanila further argued that it was
neither selling nor collecting premium payments for the product Primasa plans. The product was previously
developed but was never launched and soldto the public following the resignation from the company in 2006
by Benjamin Munda,the one who crafted it. The Primanila company website that included details on the
Primasa product was not updated; the advertisement of the product on the website was the result of mere
inadvertence.11 Thus, the cease and desist order against Primanila would allegedly not accomplish anything,
but only prejudice the interest and claims of its other planholders.12

On June 5, 2008, the SEC issued its Order13 denying Primanila’s motion for reconsideration for lack of
merit. The cease and desist order issued on April 9, 2008 was then made permanent. Unyielding, Primanila
appealed to the CA viaa petition for review. On March 9, 2010, the CA rendered its decision dismissing the
petition and affirming in toto the issuances of the SEC.

The Present Petition

Following the CA’s denial of its motion to reconsider, Primanila filed the present petition which cites the
following grounds:

THE [CA] GROSSLY ERRED WHEN IT SUSTAINED THE ASSAILED ORDERS OF RESPONDENT SEC
CONSIDERING THAT THE FACTS AND EVIDENCE ON RECORD [STATE] OTHERWISE; THE [CA] GROSSLY
ERRED WHEN IT RULED THAT [PRIMANILA] WAS GIVEN DUE PROCESS BY RESPONDENT SEC AS
[PRIMANILA] WAS ABLE TO FILE A MOTION FOR RECONSIDERATION; AND
THE [CA] GROSSLY ERRED WHEN IT RULED THAT THE PUBLIC WILL NOT SUFFER GREATLY AND
IRREPARABLY BY THE IMPLEMENTATION OF THE ASSAILED ORDERS OF RESPONDENT SEC.14

The Ruling of the Court

The petition lacks merit.

Due Process of Law

Contrary to its stance, Primanila was accorded due process notwithstanding the SEC’s immediate issuance
of the cease and desist order on April 9, 2008. The authority of the SEC and the manner by which it can
issue cease and desist orders are providedin Section 64 of the SRC, and we quote:

Section 64. Cease and Desist Order. –

64.1. The Commission, after proper investigation or verification, motu proprio,or upon verified complaint by
any aggrieved party, may issue a cease and desist order without the necessity of a prior hearingif in its
judgment the act orpractice, unless restrained, will operate as a fraud on investors or isotherwise likely to
cause grave or irreparable injury or prejudice to the investing public.

64.2. Until the Commission issues a cease and desist order, the fact that an investigation has been initiated
or that a complaint has been filed, including the contents of the complaint, shall be confidential. Upon
issuance of a cease and desist order,the Commission shall make public such order and a copy thereof shall
be immediately furnished to each person subject to the order. 64.3. Any person against whom a cease and
desist order was issued may, within five (5) days from receipt of the order, file a formal request for lifting
thereof. Said request shall be set for hearing by the Commission not later than fifteen (15) days from its filing
and the resolution thereof shall be made not later than ten (10) days from the termination of the hearing. If
the Commission fails to resolve the request within the time herein prescribed, the cease and desist order
shall automatically be lifted.

The law is clear on the point that a cease and desist order may be issued by the SEC motu proprio, it being
unnecessary thatit results from a verified complaint from an aggrieved party. A prior hearing is also not
required whenever the Commission finds it appropriate to issue a cease and desist order that aims to curtail
fraudor grave or irreparable injury to investors. There is good reason for this provision, as any delay in the
restraint of acts that yield such resultscan only generate further injury to the public that the SEC is obliged
to protect.

To equally protect individuals and corporations from baseless and improvident issuances, the authority of
the SEC under this rule is nonetheless with defined limits. A cease and desist order may only be issued by
the Commission after proper investigation or verification, and upon showing that the acts sought to be
restrained could result in injury or fraud to the investing public. Without doubt, these requisites were duly
satisfied by the SEC prior to its issuance of the subject cease and desist order.

Records indicate the prior conduct of a proper investigation on Primanila’s activities by the Commission’s
CED. Investigators of the CED personally conducted an ocular inspection of Primanila’s declared office, only
to confirm reports that it had closed even without the prior approval of the SEC. Members of CED also visited
the company website of Primanila, and discovered the company’s offer for sale thereon of the pension plan
product called Primasa Plan, with instructions on how interested applicants and planholders could pay their
premium payments for the plan. One of the payment options was through bank deposit to Primanila’s given
Metrobank account which, following an actual deposit made by the CED was confirmed to be active.

As part of their investigation, the SEC also looked into records relevant to Primanila’s business. Records with
the SEC’s Non-Traditional Securities and Instruments Department (NTD) disclosed Primanila’s failure to
renew its dealer’s license for 2008, orto apply for a secondary license as dealer or general agent for pre-need
pension plans for the same year. SEC records also confirmed Primanila’s failureto file a registration
statement for Primasa Plan, to fully remit premium collections from planholders, and to declare truthfully its
premium collections from January to September 2007. (Emphasis ours)
The SEC was not mandated to allow Primanila to participate in the investigation conducted by the
Commission prior to the cease and desist order’s issuance. Given the circumstances, it was sufficient for the
satisfaction of the demands of due process that the company was amply apprised of the results of the SEC
investigation, and then given the reasonable opportunity to present its defense. Primanila was able to do this
via its motion to reconsider and lift the cease and desist order. After the CED filed its comment on the
motion,Primanila was further given the chance to explain its side to the SEC through the filing of its reply.
"Trite to state, a formal trial or hearing isnot necessary to comply with the requirements of due process.Its
essence is simply the opportunity to explain one’s position."15 As the Court held in Ledesma v. Court of
Appeals:16

Due process, as a constitutional precept, does not always and in all situations require a trial-type
proceeding. Due process is satisfied when a person is notified of the charge against him and given an
opportunity to explain or defend himself. In administrative proceedings, the filing of charges and giving
reasonable opportunity for the person so charged to answer the accusations against him constitute the
minimum requirements of due process. The essence of due process is simply to be heard, or as applied to
administrative proceedings, an opportunity to explain one’s side, or an opportunity to seek a reconsideration
of the action or ruling complained of.17

Validity of the Cease and Desist Order

The validity of the SEC’s cease and desist order is further sustained for having sufficient factual and legal
bases.

The acts specifically restrained by the subject cease and desist order were Primanila’s sale, offer for sale and
collection of payments specifically for its Primasa plans. Notwithstandingthe findings of both the SEC and
the CA on Primanila’s activities, the company still argued in its petition that it neither sold nor collected
premiums for the Primasa product. Primanila argued that the offer for sale of Primasa through the Primanila
website was the result of mere inadvertence, after the website developer whom it hired got hold of a copy of
an old Primasa brochure and then included its contents in the company website even without the knowledge
and prior approval of Primanila.

It bears emphasis that the arguments of Primanila on the matter present factual issues, which as a rule, are
beyond the scope of a petition for review on certiorari. We underscore the basic rule that only questions of
law may be raised in a petition for review under Rule 45 of the Rules of Court. The Supreme Court is not a
trier of facts. It is not our function to review, examine and evaluate or weigh the probative value of the
evidence presented, for a question of fact would arise in such event.18 Thus, it is equally settled that the
factual findingsof administrative agencies, such as the SEC, are generally held to be binding and final so
long as they are supported by substantial evidence in the record of the case. Our jurisdiction is limited to
reviewing and revising errorsof law imputed to the lower court, the latter’s findings of fact being conclusive
and not reviewable by this Court.19

In ruling on the petition’s denial, werely on the substantial evidence that supports the SEC’s and CA’s
findings.1âwphi1 Section 5, Rule 133 of the Rules of Court defines "substantial evidence" as such relevant
evidence which a reasonable mind might accept as adequate to support a conclusion.20 In the instant case,
this substantial evidence is derived from the results of the SEC investigation on Primanila’s activities.
Specifically on the product Primasa plans, the SEC ascertained that there were detailed instructions on
Primanila’s website as to how interested persons could apply for a plan, together with the manner by which
premium payments therefor could be effected. A money deposit by CED to Primanila’s Metrobank account
indicated in the advertisement confirmed that the bank account was active.

There could be no better conclusion from the foregoing circumstances that Primanila was engaged inthe sale
or, at the very least, an offer for sale to the public of the Primasa plans. The offer for Primasa was direct and
its reach was even expansive, especially as it utilized its website as a medium and visits to it were, as could
be expected, from prospective clients.

The Court finds weak and implausible the argument of Primanila that the inclusion of the Primasa
advertisement on its website was due to mere inadvertence. It was very unlikely that Primanila’s website
developer would include in the Primanila website sections or items that were not sanctioned by the company.
As a hiree of the company, the websitedeveloper could have only acted upon the orders and specific
instructions of the company. As prudence requires, there also normally are employees of a company who are
specifically tasked to monitor contents and activities in its company website. It was therefore inconceivable
that Primanila only knew of the Primasa post on its website after it received the subject cease and desist
order. In any case, Primanila should beheld responsible for the truthfulness of all data or information that
appeared on its website, especially as these were supplied by persons who wereworking under its authority.

It is beyond dispute that Primasa plans were not registered with the SEC. Primanila was then barred from
selling and offering for sale the said plan product. A continued sale by the company would operate as fraud
to its investors, and would cause grave or irreparable injury or prejudice to the investing public, grounds
which could justify the issuance of a cease and desist order under Section 64 of the SRC.Furthermore, even
prior to the issuance of the subject cease and desist order, Primanila was already enjoined by the SEC from
selling and/or offering for sale pre-need products to the public. The SEC Order dated April 9, 2008 declared
that Primanila failed to renew its dealer’s license for 2008, prompting the SEC’s NTD to issue a letter dated
January3, 2008 addressed to Primanila’s Chairman and Chief Executive Officer Eduardo S. Madrid,
enjoining the company from selling and/or offering for sale pre-need plans to the public. It also had not
obtained a secondary license to act as dealer or general agent for pre-need pension plans for 2008.21

In view of the foregoing, Primanila clearly violated Section 16 of the SRC and pertinent rules which barred
the sale or offer for sale to the public of a pre-need product except in accordance with SEC rules and
regulations. Under Section 16 of the SRC:

Sec. 16. Pre-Need Plans. - No person shall sell or offer for sale to the public any pre-need plan except in
accordance with rules and regulations which the Commission shall prescribe. Such rules shall regulate the
sale of pre-need plans by, among other things, requiring the registration of pre-need plans, licensing persons
involved in the sale of pre-need plans, requiring disclosures to prospective plan holders, prescribing
advertising guidelines, providing for uniform plans, imposing capital, bonding and other financial
responsibility, and establishing trust funds for the payment of benefits under such plans.

As the foregoing provisions are necessary for the protection of investors and the public in general, even the
Pre-Need Code,22 which now governs pre-need companies and their activities, contains similar conditions for
the regulation of pre-need plans.

WHEREFORE, the petition is DENIED. The Decision dated March 9, 2010 and Resolution dated September
15, 2010 of the Court of Appeals in CA-G.R. SP. No. 104083 are AFFIRMED. SO ORDERED.

14. SEC vs. Universal Rightfield Property Holdings, Inc., GR No. 181381, July 20, 2015

G.R. No. 181381 July 20, 2015

SECURITIES and EXCHANGE COMMISSION, Petitioner,

vs.
UNIVERSAL RIGHTFIELD PROPERTY HOLDINGS, INC., Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review under Rule 45 of the Rules of Court, which seeks to reverse and set
aside the Decision1 dated January 21, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 93337, the
dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the petition is GRANTED. The assailed Resolution, dated December
15, 2005, of the Securities and Exchange Commission, as well as its Order of Revocation dated December 8,
2004, are hereby SET ASIDE.

SO ORDERED.2
The facts are as follows:

Respondent Universal Rightfield Property Holdings, Inc. (URPHI) is a corporation duly registered and existing
under the Philippine Laws, and is engaged in the business of providing residential and leisure-related needs
and wants of the middle and upper middle-income market.

On May 29, 2003, petitioner Securities and Exchange Commission (SEC), through its Corporate Finance
Department, issued an Order revoking URPHI's Registration of Securities and Permit to Sell Securities to the
Public for its failure to timely file its Year 2001 Annual Report and Year 2002 1st, 2nd and 3rd Quarterly
Reports pursuant to Section 173 of the Securities Regulation Code (SRC), Republic Act No. 8799.

On October 16, 2003, URPHI filed with the SEC a Manifestation/Urgent Motion to Set Aside Revocation
Order and Reinstate Registration after complying with its reportorial requirements.

On October 24, 2003, the SEC granted URPHI's motion to lift the revocation order, considering the current
economic situation, URPHI's belated filing of the required annual and quarterly reports, and its payment of
the reduced fine of ₱82,000.00.

Thereafter, URPHI failed again to comply with the same reportorial requirements.

In a Notice of Hearing dated June 25, 2004, the SEC directed URPHI to show cause why its Registration of
Securities and Certificate of Permit to Sell Securities to the Public should not be suspended for failure to
submit the said requirements. Pertinent portion of the notice reads: Records show that the corporation has
failed to submit the following reports in violation of SRC Rule 17.1:

(1) 2003 Annual Report (SEC Form 17-A); and

(2) 2004 1st Quarter Report (SEC Form 17-Q)

The company has been allowed a non-extendible period until May 31, 2004 within which to file its 2003
Annual Report but to date the said report has not been submitted.

In view of the foregoing and considering the inadequate information available to the public, the corporation is
hereby directed to show cause why the Registration of its Securities and Certificate of Permit to Sell
Securities should not be suspended, in a hearing scheduled before Atty. Francia A. Tiuseco-Manlapaz on
July 6, 2004, at the Securities Registration Division, Corporation Finance Department of the Commission,
6th Floor, SEC Building, EDA, Greenhills, Mandaluyong, Metro Manila at 10:00 o'clock in the morning.
Failure of the company to appear, through its representative, at the said hearing shall be deemed a waiver on
its part to be heard with regard to the suspension of its Certificate of Permit to Sell Securities to the Public.

SO ORDERED.4

During the scheduled hearing on July 6, 2004, URPHI, through its Chief Accountant, Rhodora Lahaylahay,
informed the SEC why it failed to submit the reportorial requirements, viz.: (1) it was constrained to reduce
its accounting staff due to cost-cutting measures; thus, some of the audit requirements were not completed
within the original timetable; and (2) its audited financial statements for the period ending December 31,
2003 could not be finalized by reason of the delay in the completion of some of its audit requirements.

In an Order dated July 27, 2004, the SEC suspended URPHI's Registration of Securities and Permit to Sell
Securities to the Public for failure to submit its reportorial requirements despite the lapse of the extension
period, and due to lack of sufficient justification for its inability to comply with the said requirements.
On August 23, 2004, the SEC, through its Corporation Finance Department, informed URPHI that it failed to
submit its 2004 2nd Quarter Report (SEC Form 17-Q) in violation of the Amended Implementing Rules and
Regulations of the SRC Rule 17 .1(1)(A)(ii).5 It also directed URPHI to file the said report, and to show cause
why it should not be held liable for violation of the said rule.

In a letter dated September 28, 2004, URPHI requested for a final extension, or until November 15, 2004,
within which to submit its reportorial requirements. Pertinent portions of the letter read:

We refer to your Order dated 27 July 2004, wherein the Commission resolved to SUSPEND the Corporation's
Registration of Securities and Permit to Sell Securities to the Public due to non-filing of the Corporation's
reportorial requirements under SRC Rule 17 effective for sixty (60) days or until the reporting requirements
are complied [with]; otherwise, the Commission shall proceed with the revocation of the Corporation's
registration [of] securities. To date, the Corporation has not filed with the Commission its 2003 Annual
Report in SEC Form 17-A and 2004 1st and 2°d Quarterly reports in SEC Form 17-Q. The non-submission of
these reportorial requirements, as we have already disclosed to you per our letter dated 13 September 2004,
was due to the non-finalization of the Corporation's audited financial statement for the fiscal year ended
December 31, 2003.

During our meeting with our external auditor, SGV & Co. last 8 September 2004, SGV agreed to facilitate the
finalization of our financial statements within two (2) weeks. Notwithstanding the same, the Corporation
foresees the impossibility of complying with its submission until the end of the month, as the partners of
SGV are still reviewing the final draft of the financial statements. The Corporation intends to comply with its
reportorial requirements. However, due to the foregoing circumstances, the finalization of our financial
statement has again been delayed. In this regard, may we request for the last time until November 15, 2004
within which to submit said reportorial requirements.6

On December 1, 2004, URPHI filed with the SEC its 2003 Annual Report.

In an Order of Revocation7 dated December 8, 2004, the SEC revoked URPHI's Registration of Securities and
Permit to Sell Securities to the Public for its failure to submit its reportorial requirements within the final
extension period.

On December 9, 10, and 14, 2004, URPHI finally submitted to the SEC its 1st Quarterly Report for 2004,
2nd Quarterly Report for 2004, and 3rd Quarterly Report for 2004, respectively. Meantime, URPHI appealed
the SEC Order of Revocation dated December 8, 2004 by filing a Notice of Appeal and a Memorandum both
dated January 3, 2005.

In a Resolution dated December 15, 2005, the SEC denied URPHI's appeal, thus: WHEREFORE, premises
considered, the Memorandum dated 03 January 2005 of Universal Rightfield Property Holdings, Inc. praying
for the reversal of the Order of Revocation dated 08 December 2004 is DENIED for lack of merit.

SO ORDERED.8

Aggrieved, URPHI filed a petition for review with the CA.

In a Decision dated January 21, 2008, the CA granted the petition and set aside the SEC Order of Revocation
after finding that URPHI was not afforded due process because no due notice was given and no hearing was
conducted before its registration of securities and permit to sell them to the public was revoked. The CA
noted that the hearing conducted on July 6, 2004 was only for the purpose of determining whether URPHI's
registration and permit to sell should be suspended and not whether said registration should be revoked.

The CA ruled that based on how Sections 5.1 (m)9 and 13.110 of the SRC are worded, suspension and
revocation of URPHI's registration of securities each requires separate notices and hearings. It also held that
the Ruling11 in Globe Telecom, Inc. v. The National Telecommunications Commission12 (Globe Telecom,
Inc.) applies squarely to this case since the Section 13.1 of the SRC itself provides that due notice and
hearing are required before revocation may be ordered by the SEC. In view of such specific mandate of the
SRC in cases of revocation, the CA rejected the SEC's argument that the hearing conducted for the
suspension of URPHI's registration can already be considered as the hearing for revocation.
The CA also held that the SEC cannot brush aside the specific mandate of Section 13 .1 of the SRC by
merely invoking the doctrine that administrative due process is satisfied when the party is given the
opportunity to explain one's side or the opportunity to seek a reconsideration of the action or ruling taken.
Citing Globe Telecom, Inc.13 the CA explained that while such doctrine remains valid and has been applied
in numerous instances, it must give way in instances when the statute itself, such as Section 13 .1,
demands prior notice and hearing. It added that the imperativeness for a hearing in cases of revocation of
registration of securities assumes greater significance, considering that revocation is a measure punitive in
character undertaken by an administrative agency in the exercise of its quasi-judicial functions. Dissatisfied
with the CA Decision, the SEC filed the instant petition for review on certiorari, raising the sole issue that:

THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE WHICH IS NOT IN ACCORD WITH THE
LAW AND PREVAILING JURISPRUDENCE.14

On the one hand, the SEC contends that URPHI was accorded all the opportunity to be heard and comply
with all the reportorial requirements before the Order of Revocation was issued. Specifically, in the Order
dated July 27, 2004 suspending URPHI's registration of securities for 60 days, the SEC expressly warned
that such registration would be revoked should it persistently fail to comply with the said requirements. Still,
URPHI continuously failed to submit the required reports. On August 23, 2004, the SEC directed again
URPHI to submit the required report and to show cause why it should not be held liable for violation of the
law. Instead of submitting the required reports, URPHI requested for a final extension, or until November 15,
2004, within which to comply with its reportorial requirements. For URPHI's failure to submit the said
reports, the SEC issued the Order of Revocation dated December 8, 2004. URPHI immediately filed a motion
for reconsideration thereof through a Notice of Appeal and a Memorandum both dated January 3, 2005,
which the SEC later denied in the Resolution dated December 15, 2005. Hence, URPHI was amply accorded
its guaranteed right to due process.

The SEC also submits that the factual milieu of Globe Telecom, Inc.15 cited by the CA in its Decision is
starkly different from this case. Unlike in the former case where the Court ruled that the fine imposed by the
National Telecommunications Commission without notice and hearing, was null and void due to the denial of
petitioner's right to due process, the SEC points out that URPHI was duly notified of its violations and the
corresponding penalty that may be imposed should it fail to submit the required reports, and was given more
than enough time to comply before the Order of Revocation was issued. The SEC adds that a hearing was
conducted on July 6, 2004 as to URPHI's repeated failure to submit the reportorial requirements as
mandated by the SRC and its implementing rules and regulations, which was the basis in issuing the said
Order.

On the other hand, URPHI insists that the CA was correct in ruling that the SRC requires separate notices
and hearings for revocation and suspension of registration of securities and permit to sell them to the public.
It then asserts that the warning contained in the SEC's suspension Order dated July 27, 2004 does not meet
the requirement of notice under the SRC. It stresses that while the SEC issued a separate notice of hearing
for such suspension, no similar notice was issued as regards such revocation. It also notes that the July 6,
2004 hearing was with regard to the suspension of its registration of securities, and that no hearing was ever
conducted for purposes of revocation of such registration.

On the SEC's claim that URPHI was afforded due process because it was already given the opportunity to
seek a reconsideration of the Order of Revocation by filing its Notice of Appeal and Memorandum, URPHI
argues that the filing of such appeal did not cure the violation of its right to due process. In support of its
argument, URPHI cites the Globe Telecom, Inc.16 ruling that notice and hearing are indispensable when an
administrative agency exercises quasi-judicial functions and that such requirements become even more
imperative if the statute itself demands it.

URPHI further cites the ruling17 in BLTB, Co. v. Cadiao, et al.,18 to support its view that a motion for
reconsideration is curative of a defect in procedural due process only if a party is given sufficient opportunity
to explain his side of the controversy. It claims that the controversy referred to is the underlying substantive
controversy of which the procedural due process controversy is but an offshoot. Noting that the only issue
raised in its appeal was procedural, i.e., whether it was denied prior notice and hearing under the SRC,
URPHI contends that it cannot be said that by appealing to the SEC, it had the opportunity to explain its
side on substantive controversy which pertains to its alleged violation of the SRC and failure to comply with
the reportorial requirements that prompted the SEC to issue the Order of Revocation. Hence, such appeal
cannot be considered curative of the defect in procedural due process which attended the issuance of the
said Order.
URPHI further submits that the prior revocation of its registration on May 29, 2003 did not cure the lack of
due process which attended the revocation of its registration on December 8, 2004. Since the SEC deemed it
proper to lift the prior revocation, such can no longer be used to sustain another revocation order, much less
one issued without prior notice and hearing. Granted that it was accorded due process, URPHI asserts that
the revocation of its registration of securities and permit to sell them to the public is inequitable under the
circumstances. It calls attention to the severe and certain consequences of such revocation, i.e., termination
of the public offering of its securities, return of payments received from purchasers thereof, and its delisting
from the PSE, which will cause financial ruin and jeopardize its efforts to recover from its current financial
distress. Claiming that it exerted best effort and exercised good faith in complying with the reportorial
requirements, URPHI avers that the interest of the investing public will be better served if, instead of
revoking its registration of securities, the SEC will merely impose penalties and allow it to continue as a
going concern in the hope that it may later return to profitability.

The petition is meritorious.

There is no dispute that violation of the reportorial requirements under Section 17.119 of the Amended
Implementing Rules and Regulation20 of the SRC is a ground for suspension or revocation of registration of
securities pursuant to Sections 13.1 and 54.1 of the SRC. However, contrary to the CA ruling that separate
notices and hearings for suspension and revocation of registration of securities and permit to sell them to the
public are required, Sections 13 .1 and 54.1 of the SRC expressly provide that the SEC may suspend or
revoke such registration only after due notice and hearing, to wit:

13.1. The Commission may reject a registration statement and refuse registration of the security thereunder,
or revoke the effectivity of a registration statement and the registration of the security thereunder after due
notice and hearing by issuing an order to such effect, setting forth its findings in respect thereto, if it finds
that:

a) The issuer:

xxxx

(ii) Has violated any of the provisions of this Code, the rules promulgated pursuant thereto, or any order of
the Commission of which the issuer has notice in connection with the offering for which a registration
statement has been filed;21

xxxx

54.1. If, after due notice and hearing, the Commission finds that: (a) There is a violation of this Code, its
rules, or its orders; (b) Any registered broker or dealer, associated person thereof has failed reasonably to
supervise, with a view to preventing violations, another person subject to supervision who commits any such
violation; ( c) Any registrant or other person has, in a registration statement or in other reports, applications,
accounts, records or documents required by law or rules to be filed with the Commission, made any untrue
statement of a material fact, or omitted to state any material fact required to be stated therein or necessary
to make the statements therein not misleading; or, in the case of an underwriter, has failed to conduct an
inquiry with reasonable diligence to insure that a registration statement is accurate and complete in all
material respects; or ( d) Any person has refused to permit any lawful examinations into its affairs, it shall, in
its discretion, and subject only to the limitations hereinafter prescribed, impose any or all of the following
sanctions as may be appropriate in light of the facts and circumstances:

(i) Suspension, or revocation of any registration for the offering of securities;22

The Court has consistently held that the essence of due process is simply an opportunity to be heard, or as
applied to administrative proceedings, an opportunity to explain one's side or an opportunity to seek a
reconsideration of the action or ruling complained of.23 Any seeming defect in its observance is cured by the
filing of a motion for reconsideration, and denial of due process cannot be successfully invoked by a party
who has had the opportunity to be heard on such motion.24 What the law prohibits is not the absence of
previous notice, but the absolute absence thereof and the lack of opportunity to be heard.25
In the present case, due notice of revocation was given to URPHI through the SEC Order dated July 27, 2004
which reads:

Considering that the company is under rehabilitation, the request was granted and it was given a non-
extendible period until May 31, 2004 within which to comply.

Despite the extension[,] however, it failed to submit said reports. Hence, a hearing was held on July 6, 2004
wherein the company's representative, its Chief Accountant and a Researcher appeared. No sufficient reason
or justification for the company's inability to comply with its reporting obligation was presented.

In view thereof, the Commission[,] in its meeting held on July 22, 2004, resolved to SUSPEND the
Registration of Securities and Permit to Sell Securities to the Public issued to UNIVERSAL RIGHTFIELD
PROPERTY HOLDINGS, INC., in accordance with Section 54 of the Securities Regulation Code.

This said Suspension shall be effective for sixty (60) days or until the reporting requirements are complied
[with,] otherwise the Commission shall proceed with the revocation of the company's registration of
securities.

Let this Order be published in a newspaper of general circulation in the Philippines or on the Commission's
web page.

SO ORDERED.26

Contrary to the view that a separate notice of hearing to revoke is necessary to initiate the revocation
proceeding, the Court holds that such notice would be a superfluity since the Order dated July 27, 2004
already states that such proceeding shall ensue if URPHI would still fail to submit the reportorial
requirements after the lapse of the 60-day suspension period. After all, "due notice" simply means the
information that must be given or made to a particular person or to the public within a legally mandated
period of time so that its recipient will have the opportunity to respond to a situation or to allegations that
affect the individual's or public's legal rights or duties.27

Granted that no formal hearing was held before the issuance of the Order of Revocation, the Court finds that
there was substantial compliance with the requirements of due process when URPHI was given opportunity
to be heard. Upon receipt of the SEC Order dated July 27, 2004, URPHI filed the letters dated September 13
and 28, 2004, seeking a final extension to submit the reportorial requirements, and admitting that its failure
to submit its 2nd Quarterly Report for 2004 was due to the same reasons that it was unable to submit its
2003 Annual Report and 1st Quarterly Report for 2004. Notably, in its Order of Revocation, the SEC
considered URPHI's letters and stated that it still failed to submit the required reports, despite the lapse of
the final extension requested.

In A.Z. Arnaiz, Realty, Inc. v. Office of the President,28 the Court held that due process, as a constitutional
precept, does not always, and in all situations, require a trial-type proceeding. Litigants may be heard
through pleadings, written explanations, position papers, memoranda or oral arguments. The standard of
due process that must be met in administrative tribunals allows a certain degree of latitude as long as
fairness is not ignored. It is, therefore, not legally objectionable for being violative of due process for an
administrative agency to resolve a case based solely on position papers, affidavits or documentary evidence
submitted by the parties. Guided by the foregoing principle, the Court rules that URPHI was afforded
opportunity to be heard when the SEC took into account in its Order of Revocation URPHI's September 13
and 28, 2004 letters, explaining its failure to submit the reportorial requirements, as well as its request for
final extension within which to comply. Pertinent portions of the said Order read:

The Commission in its meeting held on July 22, 2004 resolved to suspend its Registration of Securities and
Permit to Sell Securities to the Public. The Order of Suspension stated that it was to be effective for sixty (60)
days or until the reporting requirements were complied with by the company; otherwise, the Commission
shall proceed with the revocation of the company's registration of securities.

The sixty (60)-day period had elapsed on September 25, 2004 but the Commission received a letter on
September 29, 2004 from the President of the company, Mr. Jose L. Merin. In the said letter, it was admitted
that the corporation had failed to submit its 2003 Annual Report (SEC Form 17-A) and its 2004 1st and 2nd
Quarterly Reports (SEC Form 17-Q) but explained that the reason for its inability to submit said reports was
due to the non-finalization of the company's audited financial statements for the fiscal year ended December
31, 2003. It further stated that during its meeting with its external auditor, SGV & Co., last September 8,
2004, SGV agreed to facilitate the finalization of its financial statements within two (2) weeks. The
corporation foresaw the impossibility of complying with its submission until the end of the month as the
partners of SGV were still reviewing the final draft of the financial statements, thus, the request for extension
FOR THE LAST TIME until November 15, 2004 within which to comply.

SEC Form 17-A (for 2003) was finally submitted on December 1, 2004.

IN VIEW THEREOF, the Commission, in its meeting held on December 2, 2004, resolved to REVOKE the
Registration of Securities and Permit to Sell Securities to the Public issued to UNIVERSAL RIGHTFIELD
PROPERTY HOLDINGS, INC.29

Aside from having been given the opportunity to be heard before the SEC issued the Order of Revocation,
URPHI was likewise able to seek reconsideration of such action complained of. After the issuance of the said
Order, URPHI filed a Notice of Appeal and a Memorandum, asserting that it was issued without due notice
and hearing, and that the revocation is inequitable under the circumstances. In the Resolution dated
December 15, 2004, the SEC denied URPHI's appeal in this wise:

In the instant case, URPHI was accorded due process when its Chief Financial Officer gave its side on the
imputed violation and informed the Commission that it will not be able to submit its Annual Report (SEC
Form 17-A) for the fiscal year ending on 31 December 2003 and requested for additional time to comply with
the said requirements. The Commission granted URPHI a non-extendible period of forty-seven (47) calendar
days or until 15 November 2004 within which to comply.

In spite of the extension of time given, URPHI still failed to submit the said reports. During the 06 July 2004
hearing where the Chief Accountant and researcher of URPHI were present, both failed to present sufficient
justifications for URPHI's inability to comply with its reporting obligations.

It is also noteworthy to mention that URPHI's Registration of Securities and Permit to Sell Securities to the
Public had been revoked on several occasions on account of the same deficiency. URPHI is aware of the SRC
Rules and must suffer the consequences of its reported violations.30

Verily, URPHI was given the opportunity to be heard before the Order of Revocation was issued, as well as
the opportunity to seek the reconsideration of such order.

Meanwhile, the Court disagrees with URPHI's claim that the Globe Telecom, Inc.31 ruling - that notice and
hearing are indispensable when an administrative agency exercises quasi-judicial functions and that such
requirements become even more imperative if the statute itself demands it -is applicable to the present case.

In Gamboa v. Finance Secretary,32 the Court has held that the SEC has both regulatory and adjudicative
functions, thus:

Under its regulatory responsibilities, the SEC may pass upon applications for, or may suspend or revoke
(after due notice and hearing), certificates of registration of corporations, partnerships and associations
(excluding cooperatives, homeowners associations, and labor unions); compel legal and regulatory
compliances; conduct inspections; and impose fines or other penalties for violations of the Revised Securities
Act, as well as implementing rules and directives of the SEC, such as may be warranted.

Relative to its adjudicative authority, the SEC has original and exclusive jurisdiction to hear and decide
controversies and cases involving

–
a. Intra-corporate and partnership relations between or among the corporation, officers and stockholders
and partners, including their elections or appointments;

b. State and corporate affairs in relation to the legal existence of corporations, partnerships and associations
or to their franchises; and

c. Investors and corporate affairs particularly in respect of devices and schemes, such as fraudulent
practices, employed by directors, officers, business associates, and/or other stockholders, partners, or
members of registered firms; x x x

As can be gleaned from the aforequoted ruling, the revocation of registration of securities and permit to sell
them to the public is not an exercise of the SEC's quasi-judicial power, but of its regulatory power. A "quasi-
judicial function" is a term which applies to the action, discretion, etc., of public administrative officers or
bodies, who are required to investigate facts, or ascertain the existence of facts, hold hearings, and draw
conclusions from them, as a basis for their official action and to exercise discretion of a judicial nature.33
Although Section 13.1 of the SRC requires due notice and hearing before issuing an order of revocation, the
SEC does not perform such quasi-judicial functions and exercise discretion of a judicial nature in the
exercise of such regulatory power. It neither settles actual controversies involving rights which are legally
demandable and enforceable, nor adjudicates private rights and obligations in cases of adversarial nature.
Rather, when the SEC exercises its incidental power to conduct administrative hearings and make decisions,
it does so in the course of the performance of its regulatory and law enforcement function.

Significantly, unlike in Globe Telecom, Inc.34 where the Court ruled that the fine imposed by the NTC
without notice and hearing, was null and void due to the denial of petitioner's right to due process, the
revocation of URPHI's registration of securities and permit to sell them to the public cannot be considered a
penalty but a withdrawal of a privilege, which regulatory power the SEC validly exercised after giving it due
notice and opportunity to be heard.

While URPHI correctly relied in BLTB Co., Inc. v. Cadiao35 to support its view that a motion for
reconsideration is curative of a defect in procedural due process only if a party is given sufficient opportunity
to explain his side of the controversy, the Court rejects URPHI's claim that it did not have the opportunity to
explain the substantive controversy of its violation of the SRC reportorial requirements.36 Contrary to the
claim that only the issue of procedural due process was raised in its appeal with the SEC, URPHI also raised
in its Memorandum dated January 3, 2005 the reasons why it failed to comply with the said requirements,
and why revocation is inequitable under the circumstances.37

For the late filing of annual report and quarterly report, SEC Memorandum Circular No. 6, Series of 2005,
the Consolidated Scale of Fines in effect at the time the offenses were committed, provides for the following
administrative penalties:

SRC/IRR
Provisions Description First Offense Second Offense Third Offense
Section 17.1;
SRC Rule
17.1 Late Filing of Quarterly Report (SEC Form 17-Q) Reprimand/Warning ₱50,000.00 plus
₱300.00 per day of delay ₱60,000.00 plus ₱600.00 per day of delay
Late Filing of Annual Report (SEC Form 17-A) Reprimand/Warning ₱100,000.00 plus ₱500.00 per day
of delay ₱200,000.00 plus ₱1000.00 per day of delay
It bears emphasis that URPHI had committed several offenses for failure to comply with the reportorial
requirements for which it was fined and its registration of securities revoked. On May 29, 2003, the SEC
issued an Order revoking URPHI's Registration of Securities and Permit to Sell Securities to the Public for its
failure to timely file its Year 2001 Annual Report and Year 2002 1st, 2nd and 3rd Quarterly Reports. Then,
on October 24, 2003, the SEC granted URPHI's petition to lift the revocation, considering the current
economic situation, its belated filing of the required annual and quarterly reports, and its payment of the
reduced fine of ₱82,000.00. Despite the foregoing, URPHI failed again to submit its 2003 Annual Report, and
Year 2004 1st, 2nd and 3rd Quarterly Reports within the requested extension periods.
Therefore, notwithstanding the belated filing of the said reports, as well as the claim that public interest
would be better served if the SEC will merely impose penalties and allow it to continue in order to become
profitable again, the SEC cannot be faulted for revoking once again URPHI's registration of securities and
permit to sell them to the public due to its repeated failure to timely submit such reports. Needless to state,
such continuing reportorial requirements are pursuant to the state policies declared in Section 238 of the
SRC of protecting investors and ensuring full and fair disclosure of information about securities and their
issuer.

All told, the CA erred in ruling that the SEC revoked URPHI's registration of securities and permit to sell
them to the public without due process of law.1âwphi1 Quite the contrary, the requirements of due notice
and hearing under Sections 13 .1 and 54.1 of the SRC were substantially complied with. Due notice was
made through the Order dated July 27, 2004 stating that revocation proceeding shall ensue if URPHI would
still fail to submit the reportorial requirements after the lapse of the 60-day suspension period. Though no
formal hearing was held, URPHI was still given an opportunity to be heard through the letters dated
September 13 and 18, 2004 before the Order of Revocation was issued, as well as through its Notice of
Appeal and Memorandum when it moved to reconsider the said order.

WHEREFORE, the petition is GRANTED and the Decision dated January 21, 2008 of the Court of Appeals in
CA-G.R. SP No. 93337, is REVERSED and SET ASIDE. In lieu thereof, the Resolution dated December 15,
2005 of the Securities and Exchange Commission and its Order of Revocation dated December 8, 2004 are
REINSTATED.

SO ORDERED.