SECOND DIVISION

[ G.R. No. 216467, February 15, 2017 ]

PILIPINAS SHELL PETROLEUM CORPORATION v. CARLOS* DUQUE +

DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari seeking the reversal and setting aside of
the Decision and Resolution of the Court of Appeals (CA), dated August 18, 2014 and January
[1] [2]

14, 2015, respectively, in CA-G.R. SP No. 124925. The assailed Decision reversed and set aside
the March 23, 2012 Order of the Regional Trial Court (RTC) of Makati City, which revived its
March 16, 2011 Decision in Criminal Case No. 10-1757, while the questioned CA Resolution
denied petitioner's Motion for Reconsideration.

The pertinent factual and procedural antecedents of the case are as follows:

The instant petition arose from an Information for violation of Batas Pambansa Blg. 22 (BP 22)
filed with the Metropolitan Trial Court (MeTC) of Makati City against herein respondents. The
Information reads as follows:

That on or about the 16 day of November 2001, in the City of Makati, Metro Manila,
th

Philippines, a place within the jurisdiction of this Honorable Court, the above-named accused
being then the authorized signatories of FITNESS CONSULTANTS INC. did then and there
wilfully, unlawfully and feloniously make out, draw and issue to PILIPINAS SHELL PETROLEUM
CORP., to apply on account or for value the check described below:

Check No. : 6000012386

Drawn Against : International Exchange Bank
In the amount of : P105,518.55
Postdated/Dated : November 16, 2001
Payable to : Pilipinas Shell Corporation
said accused well knowing that at the time of issue thereof, said accused did not have
sufficient funds in or credit with the drawee bank for the payment in full of the face amount of
such check upon its presentment which check when presented for payment within reasonable
time from date thereof, was subsequently dishonored by the drawee bank for the reason
"ACCOUNT CLOSED" and despite receipt of notice of such dishonor, the said accused failed to
pay said payee the face amount of said check or to make arrangement for full payment thereof
within five (5) banking days after receiving notice.

CONTRARY TO LAW. [3]

It appears from the records at hand that herein petitioner Pilipinas Shell Petroleum Corporation
(PSPC) is a lessee of a building known as Shell House at 156 Valero Street, Salcedo Village,
Makati City. On August 23, 2000, PSPC subleased a 500-meter portion of the 2 Floor of the
nd

Shell Building to the The Fitness Center (TFC). Thereafter, TFC encountered problems in its
[4]

business operations. Thus, with the conformity of PSPC, TFC assigned to Fitness Consultants,
Inc, (FCI) all its rights and obligations under the contract of sublease executed by PSPC in its
favor. Respondent Carlos Duque is the proprietor, while respondent Teresa Duque is the
[5]

corporate secretary of FCI. Subsequently, FCI failed to pay its rentals to PSPC. FCI subsequently
issued a check, with respondents as signatories, which would supposedly cover FCI's
obligations to PSPC. However, the check was dishonored, thus, leading to the filing of a
criminal complaint against respondents for their alleged violation of BP 22.

The parties then went to trial, which subsequently resulted in a verdict finding herein
respondents guilty as charged. The dispositive portion of the Decision of the MeTC of Makati
City, Branch 66, dated May 17, 2010, reads thus:

WHEREFORE, in view of the foregoing, the prosecution having proven the guilt of the accused
beyond reasonable doubt, the Court renders judgment finding accused Carlo
Duque and Teresa Duque GUILTY of the offense of Violation of B.P. 22 and hereby
sentences them to pay a FINE of P105,516.55 with subsidiary imprisonment in case of
insolvency. Both accused are further ordered to civilly indemnify the private complainant
Pilipinas Shell Petroleum Corporation (PSPC) the amount of P105,516.55 with interest of
12% per annum from the time the complaint was filed on October 4, 2002 until the amount is
fully paid, attorney's fees of P50,000.00 and to pay the costs.

SO ORDERED. [6]

Respondents appealed the above MeTC Decision with the RTC of Makati.

On March 16, 2011, the RTC of Makati City, Branch 143, rendered judgment acquitting
respondents and disposing the case as follows:

WHEREFORE, premised considered, the [MeTC] Decision dated May 17, 2010 is modified as
follows:

The Court hereby renders judgment ACQUITTING the accused CARLO DUQUE and TERESA
DUQUE of violation of B.P. Blg. 22. However, the Court maintains the court a quo's finding in
ordering the accused to pay the complainant Pilipinas Shell Petroleum Corporation (PSC) the
amount of One Hundred Five Thousand Five Hundred Sixteen Pesos and Fifty Five Centavos
(Php105,516.55) as civil indemnity with interest of 12% per annum from the time the
complaint was filed on 04 October 2002 until the amount is fully paid, attorney's fees of Fifty
Thousand Pesos (Php50,000.00) and to pay the costs.

SO ORDERED. [7]
Respondents filed a Motion for Partial Reconsideration of the RTC Decision contending that
[8]

they could not be held civilly liable because their acquittal was due to the failure of the
prosecution to establish the elements of the offense charged. In addition, they assert that
they, being corporate officers, may not be held personally and civilly liable for the debts of the
corporation they represent, considering that they had been acquitted of criminal liability.

In an Order dated September 2, 2011, the RTC found merit in respondents' Motion for Partial
[9]

Reconsideration. The RTC ruled, in essence, that respondents may not be held civilly liable for
the value of the subject check because they have not been convicted of the offense with which
they had been charged. In addition, the RTC found that the check was drawn against the
current account of FCI and the obligations sought to be paid were corporate debts and, as
such, FCI, not respondents, should be held civilly liable. The RTC likewise held that the veil of
corporate fiction was not used as cloak for fraud as there was no evidence that respondents
agreed to be personally liable for the corporation's obligations.

PSPC filed a Motion for Reconsideration citing the rule that the extinction of the penal action
[10]

does not carry with it the extinction of the civil action and alleging that the RTC erred in ruling
that respondents may not be held liable for the obligations of FCI on the ground that there was
no basis to pierce the corporate veil.

On March 23, 2012, the RTC issued an Order granting PSPC's motion for reconsideration,
[11]

thus, reviving the RTC Decision of March 16, 2011. The RTC ruled that respondents' acquittal,
the same having been based on the prosecution's failure to prove all the elements of the
offense charged, did not include the extinguishment of their civil liability. Citing Section 1 of BP
22, the RTC held that the person who actually signed the corporate check shall be held liable,
without any condition, qualification or limitation. The RTC also found that the records show
that FCI, through respondents, was civilly liable to PSPC.

Aggrieved by the March 23, 2012 Order of the RTC, respondents filed a petition for review with
the CA contending that the RTC erred in holding them liable for the civil liability of FCI even if
they were acquitted of the crime of violating BP 22. [12]

In its assailed Decision, the CA ruled in favor of respondents and disposed of the case as
follows:

WHEREFORE, the petition is GRANTED and the assailed 23 March 2012 RTC decision
is REVERSED and SET ASIDE. The Order dated 2 September 2011 is REINSTATED.

IT IS SO ORDERED. [13]

The CA basically held that, upon acquittal, the civil liability of a corporate officer in a BP 22
case is extinguished with the criminal liability, without prejudice to an independent civil action
which may be pursued against the corporation.

Petitioner filed a motion for reconsideration, but the CA denied it in its Resolution dated
January 14, 2015.

Hence, the present petition for review on certiorari based on the following arguments:

A.

THE COURT OF APPEALS GRAVELY ERRED IN ABSOLVING RESPONDENTS FROM CIVIL LIABILITY
ARISING FROM THEIR VIOLATION OF BATAS PAMBANSA BLG. 22 DUE TO THEIR ACQUITTAL
FROM THE SAID CRIME, SINCE THE ORDER THAT DECREED THEIR ACQUITTAL DID NOT MAKE
AN EXPRESS MENTION THAT THE FACTS FROM WHICH THEIR CIVIL LIABILITY MAY ARISE DID
NOT EXIST.

B.
THE COURT OF APPEALS GRAVELY ERRED IN RELYING ON GOSIACO V. CHING IN RULING THAT
RESPONDENTS ARE ABSOLVED FROM CIVIL LIABILITY

C.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE CIVIL OBLIGATION COVERED BY
THE DISHONORED CHECKS WERE CORPORATE DEBTS FOR WHICH ONLY FCI SHOULD BE HELD
LIABLE.[14]

The petition lacks merit.

The only issue in the present case is whether or not respondents, as corporate officers, may
still be held civilly liable despite their acquittal from the criminal charge of violation of BP 22.

The Court rules in the negative, as this matter has already been settled by jurisprudence. In
the case of Gosiaco v. Ching, this Court enunciated the rule that a corporate officer who
[15]

issues a bouncing corporate check can only be held civilly liable when he is convicted. In the
said case, the Court ruled that:

When a corporate officer issues a worthless check in the corporate name he may be held
personally liable for violating a penal statute. The statute imposes ciiminal penalties on anyone
who with intent to defraud another of money or property, draws or issues a check on any bank
with knowledge that he has no sufficient funds in such bank to meet the check on
presentment. Moreover, the personal liability of the corporate officer is predicated on the
principle that he cannot shield himself from liability from his own acts on the ground that it
was a corporate act and not his personal act. [16]

The Court, citing the case of Bautista v. Auto Plus Traders, Incorporated, et. al., nonetheless
[17]

categorically held that the civil liability of a corporate officer in a BP 22 case is extinguished
with the criminal liability. [18]

The above rule is reiterated in the recent case of Navarra v. People, et al., where the
[19]

petitioner, the Chief Finance Officer of a corporation, who was the signatory of the dishonored
corporate checks, was convicted of the offense of violation of BP 22 and was ordered to pay
the private complainant civil indemnity in an amount equivalent to the value of the checks
which bounced. The Court held thus:

The general rule is that a corporate officer who issues a bouncing corporate check
can be held civilly liable when he is convicted. The criminal liability of the person who
issued the bouncing checks in behalf of a corporation stands independent of the civil liability of
the corporation itself, such civil liability arising from the Civil Code. But BP 22 itself fused this
criminal liability with the corresponding civil liability of the corporation itself by allowing the
complainant to recover such civil liability, not from the corporation, but from the person who
signed the check in its behalf. [20]

As held above, it is clear that the civil liability of the corporate officer for the issuance of a
bouncing corporate check attaches only if he is convicted. Conversely, therefore, it will follow
that once acquitted of the offense of violating BP 22, a corporate officer is discharged from any
civil liability arising from the issuance of the worthless check in the name of the corporation he
represents. This is without regard as to whether his acquittal was based on reasonable doubt
or that there was a pronouncement by the trial court that the act or omission from which the
civil liability might arise did not exist.

Moreover, in the present case, nothing in the records at hand would show that respondents
made themselves personally nor solidarity liable for the corporate obligations either as
accommodation parties or sureties. On the contrary, there is no dispute that respondents
signed the subject check in their capacity as corporate officers and that the check was drawn
in the name of FCI as payment for the obligation of the corporation and not for the personal
indebtedness of respondents. Neither is there allegation nor proof that the veil of corporate
fiction is being used by respondents for fraudulent purposes. The rule is that juridical entities
have personalities separate and distinct from its officers and the persons composing it.
Generally, the stockholders and officers are not personally liable for the obligations of the
[21]

corporation except only when the veil of corporate fiction is being used as a cloak or cover for
fraud or illegality, or to work injustice, which is not the case here. Hence, respondents cannot
[22]

be held liable for the value of the checks issued in payment for FCI's obligation.

The cases of Mitra v. People, et al. and Llamado v. Court of Appeals, et. al., which were
[23] [24]

cited by petitioner, may not be made as bases to rule against respondents because the
accused in the said cases were found guilty of violating BP 22. Thus, the general rule that a
corporate officer who issues a bouncing corporate check can be held civilly liable when
convicted, applies to them. In the present case, however, respondents were acquitted of the
offense charged. As such, consistent with the rule established in Bautista and Gosiaco,
respondents' civil liability was extinguished with their criminal liability. In the same manner,
the Court agrees with the CA that the case of Alferez v. People, et al. is neither applicable to
[25]

the present case on the ground that, while Alferez was acquitted from the charge of violation
of BP 22, the checks which bounced were issued by Alferez in his personal capacity and in
payment of his personal obligations.

WHEREFORE, the instant petition is DENIED. The Decision and Resolution of the Court of
Appeals, dated August 18, 2014 and January 14, 2015, respectively, in CA-G.R. SP No. 124925
are AFFIRMED.

SO ORDERED.
 DIVISION

[ GR No. 189081, Aug 10, 2016 ]

GLORIA S. DY v. PEOPLE +

RESOLUTION
JARDELEZA, J.:
Our law states that every person criminally liable for a felony is also civilly liable. This civil
liability ex delicto may be recovered through a civil action which, under our Rules of
Court, is deemed instituted with the criminal action. While they are actions mandatorily
fused,[1] they are, in truth, separate actions whose existences are not dependent on each
other. Thus, civil liability ex delicto survives an acquittal in a criminal case for failure to
prove guilt beyond reasonable doubt. However, the Rules of Court limits this mandatory
fusion to a civil action for the recovery of civil liability ex delicto. It, by no means, includes
a civil liability arising from a different source of obligation, as in the case of a contract.
Where the civil liability is ex contractu, the court hearing the criminal case has no
authority to award damages.

The Case

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court.
Petitioner Gloria S. Dy (petitioner) seeks the reversal of the decision of the Court
of Appeals (CA) dated February 25, 2009 (Assailed Decision) [2] ordering her to pay
Mandy Commodities Company, Inc. (MCCI) in the amount of P21,706,281.00. [3]

The Facts

Petitioner was the former General Manager of MCCL. In the course of her employment,
petitioner assisted MCCI in its business involving several properties. One such business
pertained to the construction of warehouses over a property (Numancia Property) that
MCCI leased from the Philippine National Bank (PNB). Sometime in May 1996, in pursuit
of MCCI's business, petitioner proposed to William Mandy (Mandy), President of MCCI,
the purchase of a property owned by Pantranco. As the transaction involved a large
amount of money, Mandy agreed to obtain a loan from the International China Bank of
Commerce (ICBC). Petitioner represented that she could facilitate the approval of the
loan. True enough, ICBC granted a loan to MCCI in the amount of P20,000,000.00,
evidenced by a promissory note. As security, MCCI also executed a chattel mortgage over
the warehouses in the Numancia Property. Mandy entrusted petitioner with the obligation
to manage the payment of the loan.[4]

In February 1999, MCCI received a notice of foreclosure over the mortgaged property due
to its default in paying the loan obligation.[5] In order to prevent the foreclosure, Mandy
instructed petitioner to facilitate the payment of the loan. MCCI, through Mandy, issued
13 Allied Bank checks and 12 Asia Trust Bank checks in varying amounts and in different
dates covering the period from May 18, 1999 to April 4, 2000.[6] The total amount of the
checks, which were all payable to cash, was P21,706,281.00. Mandy delivered the checks
to petitioner. Mandy claims that he delivered the checks with the instruction that
petitioner use the checks to pay the loan.[7] Petitioner, on the other hand, testified that she
encashed the checks and returned the money to Mandy.[8] ICBC eventually foreclosed the
mortgaged property as MCCI continued to default in its obligation to pay. Mandy claims
that it was only at this point in time that he discovered that not a check was paid to ICBC.
[9]

Thus, on October 7, 2002, MCCI, represented by Mandy, filed a Compiamt-Affidavit

for Estafa[10] before the Office of the City Prosecutor of Manila. On March 3, 2004, an
Information[11] was filed against petitioner before the Regional Trial Court (RTC) Manila.

After a full-blown trial, the RTC Manila rendered a decision[12] dated November 11, 2005
(RTC Decision) acquitting petitioner. The RTC Manila found that while petitioner admitted
that she received the checks, the prosecution failed to establish that she was under any
obligation to deliver them to ICBC in payment of MCCFs loan. The trial court made this
finding on the strength of Mandy's admission that he gave the checks to petitioner with
the agreement that she would encash them. Petitioner would then pay ICBC using her own
checks. The trial court further made a finding that Mandy and petitioner entered into a
contract of loan.[13] Thus, it held that the prosecution failed to establish an important
element of the crime of estafa—misappropriation or conversion. However, while the RTC
Manila acquitted petitioner, it ordered her to pay the amount of the checks. The
dispositive portion of the RTC Decision states —

WHEREFORE, the prosecution having failed to establish the guilt of the accused beyond
reasonable doubt, judgment is hereby rendered ACQUITTING the accused of the offense
charged. With costs de officio.

The accused is however civilly liable to the complainant for the amount of P21,706,281.00.

SO ORDERED.[14]
Petitioner filed an appeal[15] of the civil aspect of the RTC Decision with the CA. In the
Assailed Decision,[16] the CA found the appeal without merit. It held that the acquittal of
petitioner does not necessarily absolve her of civil liability. The CA said that it is settled
that when an accused is acquitted on the basis of reasonable doubt, courts may still find
him or her civilly liable if the evidence so warrant. The CA explained that the evidence on
record adequately prove that petitioner received the checks as a loan from MCCI. Thus,
preventing the latter from recovering the amount of the checks would constitute unjust
enrichment. Hence, the Assailed Decision ruled
WHEREFORE, in view of the foregoing, the appeal is DENIED. The Decision dated
November 11, 2005 of the Regional Trial Court, Manila, Branch 33 in Criminal Case No.
04-224294 which found Gloria Dy civilly liable to William Mandy is AFFIRMED.

SO ORDERED.[17]
The CA also denied petitioner's motion for reconsideration in a resolution[18] dated August
3, 2009.

Hence, this Petition for Review on Certiorari (Petition). Petitioner argues that since she
was acquitted for failure of the prosecution to prove all the elements of the crime charged,
there was therefore no crime committed.[19] As there was no crime, any civil liability ex
delicto cannot be awarded.

The Issues

The central issue is the propriety of making a finding of civil liability in a criminal case
for estafa when the accused is acquitted for failure of the prosecution to prove all the
elements of the crime charged.

The Ruling of the Court

We grant the petition.

Civil Liability Arising From Crime

Our laws recognize a bright line distinction between criminal and civil liabilities. A crime
is a liability against the state. It is prosecuted by and for the state. Acts considered
criminal are penalized by law as a means to protect the society from dangerous
transgressions. As criminal liability involves a penalty affecting a person's liberty, acts are
only treated criminal when the law clearly says so. On the other hand, civil liabilities take
a less public and more private nature. Civil liabilities are claimed through civil actions as a
means to enforce or protect a right or prevent or redress a wrong.[20] They do not carry
with them the imposition of imprisonment as a penalty. Instead, civil liabilities are
compensated in the form of damages.

Nevertheless, our jurisdiction recognizes that a crime has a private civil component. Thus,
while an act considered criminal is a breach of law against the State, our legal system
allows for the recovery of civil damages where there is a private person injured by a
criminal act. It is in recognition of this dual nature of a criminal act that our Revised Penal
Code provides that every person criminally liable is also civilly liable. [21] This is the
concept of civil liability ex delicto.

This is echoed by the New Civil Code when it recognizes acts or omissions punished by
law as a separate source of obligation.[22] This is reinforced by Article 30 of the same code
which refers to the filing of a separate civil action to demand civil liability arising from a
criminal offense.[23]

The Revised Penal Code fleshes out this civil liability in Article 104 [24] which states that it
includes restitution, reparation of damage caused and indemnification for consequential
damages.

Rules of procedure for criminal and civil actions involving the same act or omission

The law and the rules of procedure provide for a precise mechanism in instituting a civil
action pertaining to an act or omission which is also subject of a criminal case. Our Rules
of Court prescribes a kind of fusion such that, subject to certain defined qualifications,
when a criminal action is instituted, the civil action for the recovery of the civil liability
arising from the offense is deemed instituted as well.[25]

However, there is an important difference between civil and criminal proceedings that
require a fine distinction as to how these twin actions shall proceed. These two
proceedings involve two different standards of proof. A criminal action requires proof of
guilt beyond reasonable doubt while a civil action requires a lesser quantum of proof, that
of preponderance of evidence. This distinction also agrees with the essential principle in
our legal system that while a criminal liability carries with it a corresponding civil liability,
they are nevertheless separate and distinct. In other words, these two liabilities may co-
exist but their existence is not dependent on each other.[26]

The Civil Code states that when an accused in a criminal prosecution is acquitted on the
ground that his guilt has not been proven beyond reasonable doubt, a civil action for
damages for the same act or omission may be filed. In the latter case, only preponderance
of evidence is required.[27] This is supported by the Rules of Court which provides that the
extinction of the criminal action does not result in the extinction of the corresponding civil
action.[28] The latter may only be extinguished when there is a "finding in a final judgment
in the criminal action that the act or omission from which the civil liability may arise did
not exist."[29] Consistent with this, the Rules of Court requires that in judgments of
acquittal the court must state whether "the evidence of the prosecution absolutely failed
to prove the guilt of the accused or merely failed to prove his guilt beyond reasonable
doubt. In either case, the judgment shall determine if the act or omission from which the
civil liability might arise did not exist."[30]

Thus, whether an exoneration from the criminal action should affect the corresponding
civil action depends on the varying kinds of acquittal. In Manantan v. Court of Appeals,
[31]
we explained —

Our law recognizes two kinds of acquittal, with different effects on the civil liability of the
accused. First is an acquittal on the ground that the accused is not the author of the act or
omission complained of. This instance closes the door to civil liability, for a person who
has been found to be not the perpetrator of any act or omission cannot and can never be
held liable for such act or omission. There being no delict civil liability ex delicto is out of
the question, and the civil action, if any, which may be instituted must be based on
grounds other than the delict complained of. This is the situation contemplated in Rule
111 of the Rules of Court. The second instance is an acquittal based on reasonable doubt
on the guilt of the accused. In this case, even if the guilt of the accused has not been
satisfactorily established, he is not exempt from civil liability which may be proved by
preponderance of evidence only. This is the situation contemplated in Article 29 of the
Civil Code, where the civil action for damages is "for the same act or omission." Although
the two actions have different purposes, the matters discussed in the civil case are similar
to those discussed in the criminal case. However, the judgment In the criminal proceeding
cannot be read in evidence In the civil action to establish any fact there determined, even
though both actions involve the same act or omission. The reason for this rule is that the
parties are not the same and secondarily, different rules of evidence are applicable.
Hence, notwithstanding herein petitioner's acquittal, the Court of Appeals in determining
whether Article 29 applied, was not precluded from looking into the question of
petitioner's negligence or reckless imprudence.[32]
In Dayap v. Sendiong,[33] we further said —

The acquittal of the accused does not automatically preclude a judgment against him on
the civil aspect of the case. The extinction of the penal action does not carry with it the
extinction of the civil liability where: (a) the acquittal is based on reasonable doubt as only
preponderance of evidence is required; (b) the court declares that the liability of the
accused is only civil; and (c) the civil liability of the accused does not arise from or is not
based upon the crime of which the accused is acquitted. However, the civil action based
on delict may be deemed extinguished if mere is a finding on the final judgment in the
criminal action that the act or omission from which the civil liability may arise did not
exist or where the accused did not commit the acts or omission imputed to him.[34]
Hence, a civil action filed for the purpose of enforcing civil liability ex delicto, even if
mandatorily instituted with the corresponding criminal action, survives an acquittal when
it is based on the presence of reasonable doubt. In these instances, while the evidence
presented does not establish the fact of the crime with moral certainty, the civil action still
prevails for as long as the greater weight of evidence tilts in favor of a finding of liability.
This means that while the mind of the court cannot rest easy in penalizing the accused for
the commission of a crime, it nevertheless finds that he or she committed or omitted to
perform acts which serve as a separate source of obligation. There is no sufficient proof
that the act or omission is criminal beyond reasonable doubt, but there is a preponderance
of evidence to show that the act or omission caused injury which demands compensation.

Civil Liability Ex Delicto in Estafa Cases

Our laws penalize criminal fraud which causes damage capable of pecuniary estimation
through estafa under Article 315 of the Revised Penal Code. In general, the elements
of estafa are:

That the accused defrauded another (a) by abuse of confidence, or (b) by means of
(1)
deceit; and
That damage or prejudice capable of pecuniary estimation is caused to the offended
(2)
party or third person.
The essence of the crime is the unlawful abuse of confidence or deceit in order to cause
damage. As this Court previously held, "the element of fraud or bad faith is
indispensable."[35] Our law abhors the act of defrauding another person by abusing his
trust or deceiving him, such that, it criminalizes this kind of fraud.

Article 315 of the Revised Penal Code identifies the circumstances which constitute estafa.
Article 315, paragraph 1 (b) states that estafa is committed by abuse of confidence —

Art. 315. Swindling (estafa) - 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.
In this kind of estafa, the fraud which the law considers as criminal is the act of
misappropriation or conversion. When the element of misappropriation or conversion is
missing, there can be no estafa. In such case, applying the foregoing discussions on civil
liability ex delicto, there can be no civil liability as there is no act or omission from which
any civil liability may be sourced. However, when an accused is acquitted because a
reasonable doubt exists as to the existence of misappropriation or conversion, then civil
liability may still be awarded. This means that, while there is evidence to prove fraud,
such evidence does not suffice to convince the court to the point of moral certainty that
the act of fraud amounts to estafa. As the act was nevertheless proven, albeit without
sufficient proof justifying the imposition of any criminal penalty, civil liability exists.

In this case, the RTC Manila acquitted petitioner because the prosecution failed to
establish by sufficient evidence the element of misappropriation or conversion. There was
no adequate evidence to prove that Mandy gave the checks to petitioner with the
instruction that she will use them to pay the ICBC loan. Citing Mandy's own testimony in
open court, the RTC Manila held that when Mandy delivered the checks to petitioner,
their agreement was that it was a "sort of loan."[36] In the dispositive portion of the RTC
Decision, the RTC Manila ruled that the prosecution "failed to establish the guilt of the
accused beyond reasonable doubt."[37] It then proceeded to order petitioner to pay the
amount of the loan.

The ruling of the RTC Manila was affirmed by the CA. It said that "[t]he acquittal of Gloria
Dy is anchored on the ground that her guilt was not proved beyond reasonable doubt - not
because she is not the author of the act or omission complained of. x x x The trial court
found no trickery nor deceit in obtaining money from the private complainant; instead, it
concluded that the money obtained was undoubtedly a loan."[38]

Our jurisprudence on this matter diverges.

Earlier cases ordered the dismissal of the civil action for recovery of civil liability ex
delicto whenever there is a finding that there was no estafa but rather an obligation to pay
under a contract. In People v. Pantig,[39] this Court affirmed the ruling of the lower court
acquitting Pantig, but revoked the portion sentencing him to pay the offended party the
amount of money alleged to have been obtained through false and fraudulent
representations, thus —

The trial court found as a fact that the sum of P1,200, ordered to be paid in the judgment
of acquittal, was received by the defendant-appellant as loan. This finding is inconsistent
with the existence of the criminal act charged in the information. The liability of the
defendant for the return of the amount so received arises from a civil contract,
not from a criminal act, and may not be enforced in the criminal case.
The portion of the judgment appealed from, which orders the defendant-appellant to pay
the sum of Pi ,200 to the offended party, is hereby revoked, without prejudice to the filing
of a civil action for the recovery of the said amount.[40]
This was also the import of the ruling in People v. Singson.[41] In that case, this Court
found that "the evidence [was] not sufficient to establish the existence of fraud or deceit
on the part of the accused. x x x And when there is no proven deceit or fraud, there is no
crime of estafa."[42] While we also said that the established facts may prove Singson's civil
liability (obligation to pay under a contract of sale), we nevertheless made no finding of
civil liability because "our mind cannot rest easy on the certainty of guilt" [43] considering
the above finding. The dispositive portion stated that Singson is acquitted "without
prejudice to any civil liability which may be established in a civil case against her." [44]

However, our jurisprudence on the matter appears to have changed in later years.

In Eusebio-Calderon v. People,[45] this Court affirmed the finding of the CA that Calderon
"did not employ trickery or deceit in obtaining money from the private complainants,
instead, it concluded that the money obtained was undoubtedly loans for which [Calderon]
paid interest."[46] Thus, this Court upheld Calderon's acquittal of estafa, but found her
civilly liable for the principal amount borrowed from the private complainants. [47]

The ruling was similar in People v. Cuyugan.[48] In that case, we acquitted Cuyugan
of estafa for failure of the prosecution to prove fraud. We held that the transaction
between Cuyugan and private complainants was a loan to be used by Cuyugan in her
business. Thus, this Court ruled that Cuyugan has the obligation, which is civil in
character, to pay the amount borrowed.[49]

We hold that the better rule in ascertaining civil liability in estafa cases is that
pronounced in Pantig and Singson. The rulings in these cases are more in accord with the
relevant provisions of the Civil Code, and the Rules of Court. They are also logically
consistent with this Court's pronouncement in Manantan.

Under Pantig and Singson, whenever the elements of estafa are not established, and that
the delivery of any personal property was made pursuant to a contract, any civil liability
arising from the estafa cannot be awarded in the criminal case. This is because the civil
liability arising from the contract is not civil liability ex delicto, which arises from the
same act or omission constituting the crime. Civil liability ex delicto is the liability sought
to be recovered in a civil action deemed instituted with the criminal case.

The situation envisioned in the foregoing cases, as in this case, is civil liability ex
contractu where the civil liability arises from an entirely different source of obligation.
Therefore, it is not the type of civil action deemed instituted in the criminal case, and
consequently must be filed separately. This is necessarily so because whenever the court
makes a finding that the elements of estafa do not exist, it effectively says that there is no
crime. There is no act or omission that constitutes criminal fraud. Civil liability ex
delicto cannot be awarded as it cannot be sourced from something that does not exist.

When the court finds that the source of obligation is in fact, a contract, as in a contract of
loan, it takes a position completely inconsistent with the presence of estafa. In estafa, a
person parts with his money because of abuse of confidence or deceit. In a contract, a
person willingly binds himself or herself to give something or to render some service.
[50]
In estafa, the accused's failure to account for the property received amounts to criminal
fraud. In a contract, a party's failure to comply with his obligation is only a contractual
breach. Thus, any finding that the source of obligation is a contract negates estafa. The
finding, in turn, means that there is no civil liability ex delicto. Thus, the rulings in the
foregoing cases are consistent with the concept of fused civil and criminal actions, and the
different sources of obligations under our laws.
We apply this doctrine to the facts of this case. Petitioner was acquitted by the RTC
Manila because of the absence of the element of misappropriation or conversion. The RTC
Manila, as affirmed by the CA, found that Mandy delivered the checks to petitioner
pursuant to a loan agreement. Clearly, there is no crime of estafa. There is no proof of the
presence of any act or omission constituting criminal fraud. Thus, civil liability ex
delicto cannot be awarded because there is no act or omission punished by law which can
serve as the source of obligation. Any civil liability arising from the loan takes the nature
of a civil liability ex contractu. It does not pertain to the civil action deemed instituted
with the criminal case.

In Manantan, this Court explained the effects of this result on the civil liability deemed
instituted with the criminal case. At the risk of repetition, Manantan held that when there
is no delict, "civil liability ex delicto is out of the question, and the civil action, if any,
which may be instituted must be based on grounds other than the delict complained
of."[51] In Dy's case, the civil liability arises out of contract—a different source of obligation
apart from an act or omission punished by law—and must be claimed in a separate civil
action.

Violation of Due Process

We further note that the evidence on record never fully established the terms of this loan
contract. As the trial before the RTC Manila was focused on proving estafa, the loan
contract was, as a consequence, only tangentially considered. This provides another
compelling reason why the civil liability arising from the loan should be instituted in a
separate civil case. A civil action for collection of sum of money filed before the proper
court will provide for a better venue where the terms of the loan and other relevant details
may be received. While this may postpone a warranted recovery of the civil liability, this
Court deems it more important to uphold the principles underlying the inherent
differences in the various sources of obligations under our law, and the rule that fused
actions only refer to criminal and civil actions involving the same act or omission. These
legal tenets play a central role in this legal system. A confusion of these principles will
ultimately jeopardize the interests of the parties involved. Actions focused on
proving estafa is not the proper vehicle to thresh out civil liability arising from a contract.
[52]
The Due Process Clause of the Constitution dictates that a civil liability arising from a
contract must be litigated in a separate civil action.

Section 1 of the Bill of Rights states that no person shall be deprived of property without
due process of law. This provision protects a person's right to both substantive and
procedural due process. Substantive due process looks into the validity of a law and
protects against arbitrariness.[53] Procedural due process, on the other hand, guarantees
procedural fairness.[54] It requires an ascertainment of "what process is due, when it is
due, and the degree of what is due."[55] This aspect of due process is at the heart of this
case.

In general terms, procedural due process means the right to notice and hearing.[56] More
specifically, our Rules of Court provides for a set of procedures through which a person
may be notified of the claims against him or her as well as methods through which he or
she may be given the adequate opportunity to be heard.

The Rules of Court requires that any person invoking the power of the judiciary to protect
or enforce a right or prevent or redress a wrong[57] must file an initiatory pleading which
embodies a cause of action,[58] which is defined as the act or omission by which a party
violates a right of another.[59] The contents of an initiatory pleading alleging a cause of
action will vary depending on the source of the obligation involved. In the case of an
obligation arising from a contract, as in this case, the cause of action in an initiatory
pleading will involve the duties of the parties to the contract, and what particular
obligation was breached. On the other hand, when the obligation arises from an act or
omission constituting a crime, the cause of action must necessarily be different. In such a
case, the initiatory pleading will assert as a cause of action the act or omission of
respondent, and the specific criminal statute he or she violated. Where the initiatory
pleading fails to state a cause of action, the respondent may file a motion to dismiss even
before trial.[60] These rules embody the fundamental right to notice under the Due Process
Clause of the Constitution.

In a situation where a court (in a fused action for the enforcement of criminal and civil
liability) may validly order an accused-respondent to pay an obligation arising from a
contract, a person's right to be notified of the complaint, and the right to have the
complaint dismissed if there is no cause of action, are completely defeated. In this event,
the accused-respondent is completely unaware of the nature of the liability claimed
against him or her at the onset of the case. The accused-respondent will not have read any
complaint stating the cause of action of an obligation arising from a contract. All
throughout the trial, the accused-respondent is made to believe that should there be any
civil liability awarded against him or her, this liability is rooted from the act or omission
constituting the crime. The accused-respondent is also deprived of the remedy of having
the complaint dismissed through a motion to dismiss before trial. In a fused action, the
accused-respondent could not have availed of this remedy because he or she was not even
given an opportunity to ascertain what cause of action to look for in the initiatory
pleading. In such a case, the accused-respondent is blindsided. He or she could not even
have prepared the appropriate defenses and evidence to protect his or her interest. This is
not the concept of fair play embodied in the Due Process Clause. It is a clear violation of a
person's right to due process.

The Rules of Court also allows a party to a civil action certain remedies that enable him or
her to effectively present his or her case. A party may file a cross-claim, a counterclaim or
a third-party complaint.[61] The Rules of Court prohibits these remedies in a fused civil and
criminal case.[62] The Rules of Court requires that any cross-claim, counterclaim or third-
party complaint must be instituted in a separate civil action.[63] In a legal regime where a
court may order an accused in a fused action to pay civil liability arising from a contract,
the accused-respondent is completely deprived of the remedy to file a cross-claim, a
counterclaim or a third-party complaint. This—coupled with an accused-respondent's
inability to adequately prepare his or her defense because of lack of adequate notice of
the claims against him or her—prevents the accused-respondent from having any right to
a meaningful hearing. The right to be heard under the Due Process Clause requires not
just any kind of an opportunity to be heard. It mandates that a party to a case must have
the chance to be heard in a real and meaningful sense. It does not require a perfunctory
hearing, but a court proceeding where the party may adequately avail of the procedural
remedies granted to him or her. A court decision resulting from this falls short of the
mandate of the Due Process Clause.

Indeed, the language of the Constitution is clear. No person shall be deprived of property
without due process of law. Due Process, in its procedural sense, requires, in essence, the
right to notice and hearing. These rights are further fleshed out in the Rules of Court. The
Rules of Court enforces procedural due process because, to repeat the words of this Court
in Secretary of Justice v. Lantion, it provides for "what process is due, when it is due, and
the degree of what is due."[64] A court ordering an accused in a fused action to pay his or
her contractual liability deprives him or her of his or her property without the right to
notice and hearing as expressed in the procedures and remedies under the Rules of Court.
Thus, any court ruling directing an accused in a fused action to pay civil liability arising
from a contract is one that completely disregards the Due Process Clause. This ruling
must be reversed and the Constitution upheld.
Conclusion

The lower courts erred when they ordered petitioner to pay her civil obligation arising
from a contract of loan in the same criminal case where she was acquitted on the ground
that there was no crime. Any contractual obligation she may have must be litigated in a
separate civil action involving the contract of loan. We clarify that in cases where the
accused is acquitted on the ground that there is no crime, the civil action deemed
instituted with the criminal case cannot prosper precisely because there is no delict from
which any civil obligation may be sourced. The peculiarity of this case is the finding that
petitioner, in fact, has an obligation arising from a contract. This civil action arising from
the contract is not necessarily extinguished. It can be instituted in the proper court
through the proper civil action.

We note that while there is no written contract of loan in this case, there is an oral
contract of loan which must be brought within six years.[65] Under the facts of the case, it
appears that any breach in the obligation to pay the loan may have happened between
1996 and 1999, or more than six years since this case has been instituted. This
notwithstanding, we find that the civil action arising from the contract of loan has not yet
prescribed. Article 1150 of the Civil Code states —

Art. 1150. The time for prescription for all kinds of actions, when there is no special
provision which ordains otherwise, shall be counted from the day they may be brought.
We held in numerous cases that it is the legal possibility of bringing the action that
determines the starting point for the computation of the period of prescription.[67] We
highlight the unique circumstances surrounding this case. As discussed in this decision,
there has been diverse jurisprudence as to the propriety of ordering an accused to pay an
obligation arising from a contract in the criminal case where the accused was acquitted on
the ground that there is no crime. Litigants, such as MCCI, cannot be blamed for relying
on prior rulings where the recovery on a contract of loan in a criminal case for estafa was
allowed. We have found the opportunity to clarify this matter through this decision. As it is
only now that we delineate the rules governing the fusion of criminal and civil actions
pertaining to estafa, it is only upon the promulgation of this judgment that litigants have a
clear understanding of the proper recourse in similar cases. We therefore rule that insofar
as MCCI is concerned, the filing of an action, if any (that may be sourced from the
contract of loan), becomes a legal possibility only upon the finality of this decision which
definitively ruled upon the principles on fused actions.

We add, however, that upon finality of this decision, prospective litigants should become
more circumspect in ascertaining their course of action in similar cases. Whenever a
litigant erroneously pursues an estafa case, and the accused is subsequently acquitted
because the obligation arose out of a contract, the prescriptive period will still be counted
from the time the cause of action arose. In this eventuality, it is probable that the action
has already prescribed by the time the criminal case shall have been completed. This
possibility demands that prospective litigants do not haphazardly pursue the filing of
an estafa case in order to force an obligor to pay his or her obligation with the threat of
criminal conviction. It compels litigants to be honest and fair in their judgment as to the
proper action to be filed. This ruling should deter litigants from turning to criminal courts
as their collection agents, and should provide a disincentive to the practice of filing of
criminal cases based on unfounded grounds in order to provide a litigant a bargaining
chip in enforcing contracts.

WHEREFORE, in view of the foregoing, the Petition is GRANTED. The Decision of the
CA dated February 25, 2009 is REVERSED. This is however, without prejudice to any civil
action which may be filed to claim civil liability arising from the contract.

SO ORDERED.
Velasco, Jr., (Chairperson), Peralta, Perez, and Reyes, JJ., concur.

September 6, 2016

NOTICE OF JUDGMENT

Sirs / Mesdames:

Please take notice that on August 10, 2016 a Decision, copy attached hereto, was
rendered by the Supreme Court in the above-entitled case, the original of which was
received by this Office on September 6, 2016 at 1:35 p.m.

Very truly yours,

(SGD)
WILFREDO V.
LAPITAN
Division Clerk of
Court
[1]
Bautista, The Confusing Fusion of A Civil Claim In a Criminal Proceeding, 79 Phil. L.J
640 (2004), pp. 361-401.
[2]
Penned by Arcangelita M. Romilla-Lontok and concurred in by Associate Justices
Josefina Guevara-Salonga and Romeo F. Barza, rollo, pp. 39-48.
[3]
Id. at 41, 48.
[4]
Records, pp. 407-409.
[5]
Id. at 409.
[6]
Id. at 452-476.
[7]
TSN, July 12, 2004, p. 44.
[8]
TSN, May 4, 2005, p. 32.
[9]
Records, pp. 409-410.
[10]
Id. at 13-23.
[11]
Id. at 1-3.
[12]
Id. at 406-417.
[13]
Id. at 415-416.
[14]
Id. at 417.
[15]
Rollo, pp. 68-259.
[16]
Supra note 2.
[17]
Rollo, p. 48, emphasis in the original.
[18]
Id. at 67.
[19]
Id. at 21-27.
[20]
RULES OF COURT, Rule 1, Sec. 3, par. (a).
[21]
REVISED PENAL CODE, Art. 100.
[22]
CIVIL CODE, Art. 1157. Obligations arise from:

1. Law;

2. Contracts;

3. Quasi-contracts;
4. Acts or omissions/punished by law; and

5. Quasi-delicts.
[23]
CIVIL CODE, Art. 30. When a separate civil action is brought to demand civil liability
arising from a criminal offense, and no criminal proceedings are instituted during the
pendency of the civil case, a preponderance of evidence shall likewise be sufficient to
prove the act complained of.
[24]
REVISED PENAL CODE, Art. 104. What is included in civil liability. — The civil liability
established in articles 100, 101, 102 and 103 of this Code includes:

1. Restitution;

2. Reparation of the damage caused;

3. Indemnification for consequential damages.

[25]
RULES OF COURT, Rule 111, Sec. 1, par. (a). See also footnote 1.
[26]
Supra note 1.
[27]
CIVIL CODE, Art. 29. When the accused in a criminal prosecution is acquitted on the
ground that his guilt has not been proved beyond reasonable doubt, a civil action for
damages for the same act or omission may be instituted. Such action requires only a
preponderance of evidence. Upon motion of the defendant, the court may require the
plaintiff to file a bond to answer for damages in case the complaint should be found to be
malicious.

If in a criminal case the judgment of acquittal is based upon reasonable doubt, the court
shall so declare. In the absence of any declaration to that effect, it may be inferred from
the text of the decision whether or not the acquittal is due to that ground.
[28]
RULES OF COURT, Rule 113, Sec. 2. When separate civil action is suspended. — After
the criminal action has been commenced, the separate civil action arising therefrom
cannot be instituted until final judgment has been entered in the criminal action.

If the criminal action is filed after the said civil action has already been instituted, the
latter shall be suspended in whatever stage it may be found before judgment on the
merits. The suspension shall last until final judgment is rendered in the criminal action.
Nevertheless, before judgment on the merits is rendered in the civil action, the same may,
upon motion of the offended party, be consolidated with the criminal action in the court
trying the criminal action. In case of consolidation, the evidence already adduced in the
civil action shall be deemed automatically reproduced in the criminal action without
prejudice to the right of the prosecution to cross-examine the witnesses presented by the
offended party in the criminal case and of the parties to present additional evidence. The
consolidated criminal and civil actions shall be tried and decided jointly.

During the pendency of the criminal action, the running of the period of prescription of
the civil action which cannot be instituted separately or whose proceeding has been
suspended shall be tolled.

The extinction of the penal action does not carry with it extinction of the civil action.
However, the civil action based on delict may be deemed extinguished if there is a finding
in a final judgment in the criminal action that the act or omission from which the civil
liability may arise did not exist.
[29]
Id.
[30]
RULES OF COURT, Rule 120, Sec. 2.
[31]
G.R. No. 107125, January 29, 2001, 350 SCRA 387.
[32]
Id. at 397-398.
[33]
G.R. No. 177960, January 29, 2009, 577 SCRA 134.
[34]
Id. at 148.
[35]
People v. Singson, G.R. No. 75920, November 12, 1992, 215 SCRA 534, 538.
[36]
Records, pp. 415-416.
[37]
Id. at 417.
[38]
Rollo, p. 45.
[39]
97 Phil. 748 (1955).
[40]
Id. at 750, emphasis supplied.
[41]
G.R. No. 75920, November 12, 1992, 215 SCRA 534.
[42]
Id. at 538-539.
[43]
Id. at 539.
[44]
Id. See also United States v. Ador Dionisio, 35 Phil. 141, 143-144 (1916). In this case,
while this Court convicted the accused for estafa, it refused to order him to pay the civil
liabilities claimed by private complainant, explaining that —

But the amount of the hire cannot be recovered by way of civil damages in these
proceedings. The amount due under the rental contract may properly be recovered in a
separate civil action; but it cannot be held to be included in the civil damages (perjuicios)
arising out of the crime of estafa of which the accused is convicted in this criminal action.
(Art. 119, Penal Code.)

xxx

x x x The indebtedness under the rental contract was and is a thing wholly apart
from and independent of the crime of estafa committed by the accused. No direct
causal relation can be traced between them, and in the absence of such a relation, a
judgment for the amount of the indebtedness, with subsidiary imprisonment in case of
insolvency and failure to pay the amount of the judgment, cannot properly be included in a
judgment in the criminal action for the civil damages (perjuicios) arising from or
consequent upon the commission of the crime of which the accused is convicted.
(Emphasis supplied.)
 DIVISION

[ GR No. 190286, Jan 11, 2018 ]

RAMON E. REYES v. BANCOM DEVELOPMENT CORP. +

DECISION

SERENO, C.J.:
Before this Court is a Petition for Review on Certiorari[1] filed by Ramon E. Reyes and
Clara R. Pastor seeking to reverse the Decision[2] and the Resolution[3] of the Court of
Appeals (CA) in CA-G.R. CV No. 45959. The CA affirmed the ruling of the Regional Trial
Court (RTC) holding petitioners jointly and severally liable to respondent Bancom
Development Corporation (Bancom) as guarantors of certain loans obtained by Marbella
Realty, Inc. (Marbella).

FACTS
The dispute in this case originated from a Continuing Guaranty[4] executed in favor of
respondent Bancom by Angel E. Reyes, Sr., Florencio Reyes, Jr., Rosario R. Du, Olivia
Arevalo, and the two petitioners herein, Ramon E. Reyes and Clara R. Pastor (the Reyes
Group). In the instrument, the Reyes Group agreed to guarantee the full and due payment
of obligations incurred by Marbella under an Underwriting Agreement with
Bancom. These obligations included certain Promissory Notes[5] issued by Marbella in
favor of Bancom on 24 May 1979 for the aggregate amount of P2,828,140.32.

It appears from the records that Marbella was unable to pay back the notes at the time of
their maturity. Consequently, it issued a set of replacement Promissory Notes[6] on 22
August 1979, this time for the increased amount of P2,901,466.48. It again defaulted on
the payment of this second set of notes, leading to the execution of a third set[7] for the
total amount of P3,002,333.84, and finally a fourth set[8] for the same amount.

Because of Marbella's continued failure to pay back the loan despite repeated demands,
Bancom filed a Complaint for Sum of Money with a prayer for damages before the RTC of
Makati on 7 July 1981.[9] The case, which sought payment of the total sum of
P4,300,247.35, was instituted against (a) Marbella as principal debtor; and (b) the
individuals comprising the Reyes Group as guarantors of the loan.

In their defense, Marbella and the Reyes Group argued that they had been forced to
execute the Promissory Notes and the Continuing Guaranty against their will. [10] They also
alleged that the foregoing instruments should be interpreted in relation to earlier
contracts pertaining to the development of a condominium project known as Marbella II.
[11]

The Marbella II contracts were entered into by Bancom; the Reyes Group, as owners of
the parcel of land to be utilized for the condominium project along Roxas Boulevard; and
Fereit Realty Development Corporation (Fereit), a sister company of Bancom, as the
construction developer and project manager.[12] This venture, however, soon encountered
financial difficulties. As a result, the Reyes Group was allegedly forced to enter into a
Memorandum of Agreement to take on part of the loans obtained by Fereit from Bancom
for the development of the project. Marbella, for its part, was supposedly compelled to
assume Fereit's obligation to cause the release of P2.8 million in receivables then
assigned to State Financing;[13] and subsequently to obtain additional financing from
Bancom in the same amount for that purpose.[14]

The above developments were cited by Marbella and the Reyes group in support of the
allegation that Bancom took advantage of their resultant financial distress. Bancom
allegedly demanded the execution of Promissory Notes and the Continuing Guaranty from
the Reyes Group,[15] despite the fact that additional financing became necessary only
because of the failure of Fereit (Bancom's sister company) to comply with its obligation. [16]

To bolster its claim that the promissory notes were issued in connection with Fereit's
obligations, Marbella, together with the Reyes Group, also presented a document entitled
Amendment of Memorandum of Agreement.[17] In this instrument, Fereit undertook to
reimburse Marbella for the P2.8 million the latter had paid, and for all penalties, fees, and
charges incurred to obtain additional financing.

THE RTC RULING

In a Decision dated 8 April 1991, the RTC held Marbella and the Reyes Group solidarily
liable to Bancom. The trial court ordered them to pay the amounts indicated on the
Promissory Notes dated 28 February 1980 in the total amount of P4,300,247.35 plus
interest computed from 19 May 1981, the date of demand; and to pay penalties and
attorney's fees as well.[18]

PROCEEDINGS BEFORE THE CA

Marbella and the Reyes Group appealed the RTC ruling to the CA.[19] They asserted that
the trial court erred in disregarding the terms of the earlier agreements they had entered
into with Bancom and Fereit.[20] The former also reiterated that the amounts covered by
the Promissory Notes represented additional financing secured from Bancom to fulfill
Fereit's obligations. Hence, they said they cannot be held liable for the payment of those
amounts.[21]

In the course of the proceedings before the CA, Abella Concepcion Regala & Cruz moved
to withdraw its appearance in the case as counsel for Bancom.[22] The law firm asserted
that it had "totally lost contact" with its client despite serious efforts on the part of the
former to get in touch with its officers.[23] The law firm also alleged that it had "received
reports that the client has undergone a merger with another entity," thereby making its
authority to represent the corporation subject to doubt.[24]

In a Resolution dated 1 June 2004,[25] the CA granted the motion after noting that the copy
of a resolution sent to Bancom had been returned to the appellate court unclaimed. The
CA held that this failure of service supported the claim of Abella Concepcion Regala &
Cruz that the latter had lost all contact with its client.

THE CA RULING

In a Decision dated 25 June 2009,[26] the CA denied the appeal citing the undisputed fact
that Marbella and the Reyes Group had failed to comply with their obligations under the
Promissory Notes and the guaranty. The appellate court rejected the assertion that
noncompliance was justified by the earlier agreements entered into by the parties. The CA
explained:

In this case, it is worth to note that it is an undisputed fact that defendants-appellants

failed to make good their alleged obligations under the Promissory Notes and Continuing
Guaranty which they issued in favor of BAN[C]OM. [The instruments'] genuineness and
due execution are likewise undisputed.

Defendants-appellants' only defense rests on the allegation that their non-payment of such
obligations is justified taking into consideration the terms of the Memorandum of
Agreement entered into by and among the plaintiff-appellee and defendants-appellants
herein particularly paragraph 13 thereof. Said the appellants in support hereof, since
Bancom [which was in full control of the financial affairs of Fereit] failed to cause the
release of the aforesaid receivables (P2,800,000) to State Financing by Fereit, Bancom
should necessarily suffer the consequences thereof - not the defendants-appellants.

Apparently, the thrust of defendants-appellants' defense points to Fereit's non-compliance

with paragraph 13 of the "Memorandum of Agreement." However, records show that
defendants-appellants did nothing to formally [assert] their rights against Fereit. Truly,
this Court agrees with the trial court's pronouncement that defendants-appellants' failure
to avail of the remedies provided by law, such as the filing of a third-party complaint
against Fereit, necessarily indicates that they themselves did not seriously consider
Fereit's non-compliance as affecting their own liability to BANCOM. This can be done for
after all, Fereit is still a different entity with distinct and separate corporate existence
from that of BANCOM even granting that BANCOM is in full control of the financial affairs
of Fereit.
xxxx

Besides, the terms of the promissory notes and "Continuing Guaranty" x x x are clear and
unequivocal, leaving no room [for] interpretation. For not being contrary to law, morals,
good customs, public order and public policy, defendants' obligation has the force of law
and should be complied with in good faith.[27]
Of the individuals comprising the Reyes Group, only petitioners filed a Motion for
Reconsideration of the CA Decision.[28] They reiterated their argument that the Promissory
Notes were not meant to be binding, given that the funds released to Marbella by Bancom
were not loans, but merely additional financing. Petitioners also contended that the action
must be considered abated pursuant to Section 122 of the Corporation Code. They pointed
out that the Certificate of Registration issued to Bancom had been revoked by the
Securities and Exchange Commission (SEC) on 31 May 2004, and that no trustee or
receiver had been appointed to continue the suit; in fact, even Bancom's former counsel
was compelled to withdraw its appearance from the case, as it could no longer contact the
corporation.

On 23 July 2009, petitioners filed a Supplement to their Motion for Reconsideration. [29] In
support of their argument on the abatement of the suit, they attached a Certificate of
Corporate Filing/Information issued by the SEC. The latter confirmed that Bancom's
Certificate of Registration[30] had been revoked on 26 May 2003 for noncompliance with
the SEC's reportorial requirements.

In a Resolution[31] dated 9 November 2009, the CA denied the Motion for Reconsideration,
since the points raised therein had already been passed upon in its earlier ruling.
 PROCEEDINGS BEFORE THIS COURT

On 27 November 2009, petitioners filed the instant Petition for Review. They assert that
the CA committed a grievous error in refusing to declare the suit abated despite the
obvious fact that Bancom no longer exists. They likewise contend that the appellate court
had incorrectly relied upon the Promissory Notes and the Continuing Guaranty. It
allegedly failed to take into account the parties' earlier related agreements that showed
that petitioners could not be held liable for the debt.

In a Resolution[32] dated 17 February 2010, we ordered Bancom to comment on the

Petition for Review. The copy of the Resolution served at Bancom's address on record was,
however, returned unserved with the postal notation "RTS - non-existent address." [33] For
this reason, we deemed the filing of a comment waived.[34]

ISSUES

The following issues are presented to the Court for resolution:

1. Whether the present suit should be deemed abated by the revocation by the SEC of the
Certificate of Registration issued to Bancom

2. Whether the CA correctly ruled that petitioners are liable to Bancom for (a) the
payment of the loan amounts indicated on the Promissory Notes issued by Marbella; and
(b) attorney's fees

OUR RULING
We DENY the Petition.

The revocation of Bancom's Certificate of Registration does not justify the

abatement of these proceedings.

Section 122[35] of the Corporation Code provides that a corporation whose charter is
annulled, or whose corporate existence is otherwise terminated, may continue as a body
corporate for a limited period of three years, but only for certain specific purposes
enumerated by law. These include the prosecution and defense of suits by or against the
corporation, and other objectives relating to the settlement and closure of corporate
affairs.

Based on the provision, a defunct corporation loses the right to sue and be sued in its
name upon the expiration of the three-year period provided by law.[36] Jurisprudence,
however, has carved out an exception to this rule. In several cases, this Court has ruled
that an appointed receiver,[37] an assignee,[38] or a trustee[39] may institute suits or continue
pending actions on behalf of the corporation, even after the winding-up period. The rule
was first enunciated in the 1939 case Sumera v. Valencia,[40] in which we declared:

[I]f the corporation carries out the liquidation of its assets through its own officers and
continues and defends the actions brought by or against it, its existence shall terminate at
the end of three years from the time of dissolution; but if a receiver or assignee is
appointed, as has been done in the present case, with or without a transfer of its
properties within three years, the legal interest passes to the assignee, the beneficial
interest remaining in the members, stockholders, creditors and other interested persons;
and said assignee may bring an action, prosecute that which has already been commenced
for the benefit of the corporation, or defend the latter against any other action already
instituted or which may be instituted even outside of the period of three years fixed for the
officers of the corporation.

For the foregoing considerations, we are of the opinion and so hold that when a
corporation is dissolved and the liquidation of its assets is placed in the hands of a
receiver or assignee, the period of three years prescribed by section 77 of Act No. 1459
known as the Corporation Law is not applicable, and the assignee may institute all actions
leading to the liquidation of the assets of the corporation even after the expiration of three
years.
In subsequent cases, the Court further clarified that a receiver or an assignee need not
even be appointed for the purpose of bringing suits or continuing those that are pending.
[41]
In Gelano v. Court of Appeals,[42] we declared that in the absence of a receiver or an
assignee, suits may be instituted or continued by a trustee specifically designated for a
particular matter, such as a lawyer representing the corporation in a certain case. We also
ruled in Clemente v. Court of Appeals[43] that the board of directors of the corporation may
be considered trustees by legal implication for the purpose of winding up its affairs.

Here, it appears that the SEC revoked the Certificate of Registration issued to Bancom on
26 May 2003.[44] Despite this revocation, however, Bancom does not seem to have
conveyed its assets to trustees or to its stockholders and creditors. The corporation has
also failed to appoint a new counsel after the law firm formerly representing it was
allowed to withdraw its appearance on 1 June 2004. Citing these circumstances,
petitioners assert that these proceedings should be considered abated.

We disagree.

It is evident from the foregoing discussion of law and jurisprudence that the mere
revocation of the charter of a corporation does not result in the abatement of proceedings.
Since its directors are considered trustees by legal implication,[45] the fact that Bancom did
not convey its assets to a receiver or assignee was of no consequence. It must also be
emphasized that the dissolution of a creditor-corporation does not extinguish any right or
remedy in its favor. Section 145 of the Corporation Code is explicit on this point:

Sec. 145. Amendment or repeal.- No right or remedy in favor of or against any

corporation, its stockholders, members, directors, trustees, or officers, nor any
liability incurred by any such corporation, stockholders, members, directors, trustees, or
officers, shall be removed or impaired either by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal of this Code or of any part
thereof. (Emphasis supplied)
As a necessary consequence of the above rule, the corresponding liability of the debtors of
a dissolved corporation must also be deemed subsisting. To rule otherwise would be to
sanction the unjust enrichment of the debtor at the expense of the corporation.[46]

As guarantors of the loans of Marbella, petitioners are liable to Bancom.

On the merits of the claim, we affirm the finding of the CA on the liability of petitioners.
Having executed a Continuing Guaranty in favor of Bancom, petitioners are solidarily
liable with Marbella for the payment of the amounts indicated on the Promissory Notes.

As the appellate court observed,[47] petitioners did not challenge the genuineness and due
execution of the promissory notes. Neither did they deny their nonpayment of Marbella's
loans or the fact that these obligations were covered by the guaranty. Their sole defense
was that the promissory notes in question were not binding, because the funds released to
Marbella by Bancom were not loans but merely additional financing. This financial
accommodation was supposedly meant to a1low Marbella to rectify the failure of Fereit to
cause the release of receivables assigned to another entity. In support of their allegations,
petitioners cite certain provisions of the Memorandum of Agreement dated 16 August
1977[48] and its Amendment.[49]

We reject these contentions.

The obligations of Marbella and the Reyes Group under the Promissory Notes and the
Continuing Guaranty, respectively, are plain and unqualified. Under the notes, Marbella
promised to pay Bancom the amounts stated on the maturity dates indicated. [50] The Reyes
Group, on the other hand, agreed to become liable if any of Marbella's guaranteed
obligations were not duly paid on the due date.[51] There is absolutely no support for the
assertion that these agreements were not meant to be binding.

We also note that even if the other agreements referred to by petitioners are taken into
account, the result would be the same. They would still be deemed liable, since the two
contracts they cited only establish the following premises: (a) Fereit took on the
responsibility of causing the release of certain receivables from State Financing; (b)
Marbella assumed the performance of the obligation of Fereit after the latter failed to
fulfill its duty; (c) Bancom would grant Marbella additional financing for that purpose,
with the obligation to be paid within three years; and (d) Fereit would reimburse Marbella
for the expenses the latter would incur as a result of this assumption of the obligation.
Specifically on the duty of Marbella to pay back the additional financing, the Amendment
states:

1. Bancom hereby agrees to grant the additional financing requested by Marbella II in

the principal amount of TWO MILLION EIGHT HUNDRED TWENTY EIGHT
THOUSAND ONE HUNDRED FORTY & 32/100 (P2,828,140.32), Philippine Currency,
payable by Marbella II within three (3) years, under such terms and conditions as
may be mutually agreed upon by Bancom and Marbella II. The additional financing
 herein requested by Marbella II shall be payable by Marbella II irrespective of
whether Marbella II realizes a net profit after tax on its Marbella II Condominium
Project.

2. In lieu of the obligations of Fereit under Paragraph 9 and 13 of the Memorandum of

Agreement, Fereit hereby agrees to reimburse Marbella II the principal sum of
P2,828,140.32 plus interest, fees and other charges which Marbella II shall pay to
Bancom in the settlement and/or liquidation of the additional financing. However,
penalties, fees and other charges resulting from the default of Marbella II with
respect to the additional financing shall be borne by Marbella II.

It is evident from the foregoing provisions that Bancom extended additional financing to
Marbella on the condition that the loan would be paid upon maturity. It is equally clear
that the latter obligated itself to pay the stated amount to Bancom without any condition.
The unconditional tenor of the obligation of Marbella to pay Bancom for the loan amount,
plus interest and penalties, is likewise reflected in the Promissory Notes issued in favor of
the latter.[52] Marbella, in turn, was granted the right to collect reimbursement from
Fereit, an entirely distinct entity. While it was averred that Bancom had complete control
of Fereit's assets and activities, we note that no sufficient evidence was presented in
support of this assertion.

As to petitioners, the Continuing Guaranty evidently binds them to pay Bancom the
amounts indicated on the original set of Promissory Notes, as well as any and all
instruments issued upon the renewal, extension, amendment or novation thereof.[53] The
Court notes that the final set of Promissory Notes issued by Marbella in this case reflect
the total amount of P3,002,333.84.[54] The CA and the RTC thus ordered the payment of
P4,300,247.35, which represents the principal amount and all interest and penalty
charges as of 19 May 1981, or the date of demand.
We affirm this ruling with the modification that petitioners are liable to pay Bancom the
following amounts: (a) P4,300,247.35; (b) interest accruing on the principal sum of
P3,002,333.84 (and not the entire amount of P4,300,247.35), from 19 May 1981, the date
of demand, at the rates identified below;[55] and (c) penalties accrued in relation thereto,
with legal interest from maturity date until fully paid.

Needless to state, the clear terms of these agreements cannot be negated and deemed
non-binding simply on the basis of the self-serving testimony of Angel Reyes, one of the
guarantors of the loan. The CA therefore correctly rejected the attempt of petitioners to
renege on their obligations. We also find the award of P500,000 for attorney's fees in
order, pursuant to the stipulation in the Promissory Notes allowing the recovery thereof.
Nevertheless, in the interest of equity and considering that petitioners are already liable
for penalties, we deem it proper to modify the stipulated rate of interest to conform to the
legal interest rates under prevailing jurisprudence.

WHEREFORE, the Petition for Review is hereby DENIED, and the Decision. dated 25
June 2009 and the Resolution dated 9 November 2009 issued by the Court of Appeals in
CA-G.R. CV No. 45959 are AFFIRMED with MODIFICATION.

Petitioners Ramon E. Reyes and Clara R. Pastor are jointly and severally liable with
Marbella Manila Realty, Inc., Angel E. Reyes, Sr., Florencio Reyes, Jr., Rosario R. Du and
Olivia Arevalo for the following amounts:

P4,300,247.35, representing the principal sum and all interest and penalty charges as
(a)
of 19 May 1981;
legal interest on the principal sum of P3,002,333.84 at the rate of 12% per annum
(b) from 19 May 1981, the date of demand, until 30 June 2013, and at the rate of 6% per
annum from 1 July 2013, until this Decision becomes final and executory;
(c) penalties equivalent to 20% of the obligation;
legal interest on the penalty amount at the rate of 12% per annum from 19 May 1981,
(d) the date of demand, until30 June 2013, and at the rate of 6% per annum from 1 July
2013, until this Decision becomes final and executory;
(e) attorney's fees in the amount of P500,000; and
legal interest of 6% per annum on all the foregoing monetary awards from date of
(f)
finality of this Decision until full payment thereof.

SO ORDERED.

Leonardo-De Castro, Del Castillo, Jardeleza, and Gesmundo,* JJ., concur.

 DIVISION

[ GR No. 138814, Apr 16, 2009 ]

MAKATI STOCK EXCHANGE v. MIGUEL V. CAMPOS +

DECISION

603 Phil. 121

CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 seeking the reversal of the
Decision[2] dated 11 February 1997 and Resolution dated 18 May 1999 of the Court of
Appeals in CA-G.R. SP No. 38455.

The facts of the case are as follows:

SEC Case No. 02-94-4678 was instituted on 10 February 1994 by respondent Miguel V.
Campos, who filed with the Securities, Investigation and Clearing Department (SICD) of
the Securities and Exchange Commission (SEC), a Petition against herein petitioners
Makati Stock Exchange, Inc. (MKSE) and MKSE directors, Ma. Vivian Yuchengco, Adolfo
M. Duarte, Myron C. Papa, Norberto C. Nazareno, George Uy-Tioco, Antonio A, Lopa,
Ramon B. Arnaiz, Luis J.L. Virata, and Antonio Garcia, Jr. Respondent, in said Petition,
sought: (1) the nullification of the Resolution dated 3 June 1993 of the MKSE Board of
Directors, which allegedly deprived him of his right to participate equally in the allocation
of Initial Public Offerings (IPO) of corporations registered with MKSE; (2) the delivery of
the IPO shares he was allegedly deprived of, for which he would pay IPO prices; and (3)
the payment of P2 million as moral damages, P1 million as exemplary damages, and
P500,000.00 as attorney's fees and litigation expenses.

On 14 February 1994, the SICD issued an Order granting respondent's prayer for the
issuance of a Temporary Restraining Order to enjoin petitioners from implementing or
enforcing the 3 June 1993 Resolution of the MKSE Board of Directors.

The SICD subsequently issued another Order on 10 March 1994 granting respondent's
application for a Writ of Preliminary Injunction, to continuously enjoin, during the
pendency of SEC Case No. 02-94-4678, the implementation or enforcement of the MKSE
Board Resolution in question. Petitioners assailed this SICD Order dated 10 March 1994
in a Petition for Certiorari filed with the SEC en banc, docketed as SEC-EB No. 393.

On 11 March 1994, petitioners filed a Motion to Dismiss respondent's Petition in SEC

Case No. 02-94-4678, based on the following grounds: (1) the Petition became moot due to
the cancellation of the license of MKSE; (2) the SICD had no jurisdiction over the Petition;
and (3) the Petition failed to state a cause of action.
The SICD denied petitioner's Motion to Dismiss in an Order dated 4 May 1994. Petitioners
again challenged the 4 May 1994 Order of SICD before the SEC en banc through another
Petition for Certiorari, docketed as SEC-EB No. 403.

In an Order dated 31 May 1995 in SEC-EB No. 393, the SEC en banc nullified the 10
March 1994 Order of SICD in SEC Case No. 02-94-4678 granting a Writ of Preliminary
Injunction in favor of respondent. Likewise, in an Order dated 14 August 1995 in SEC-EB
No. 403, the SEC en banc annulled the 4 May 1994 Order of SICD in SEC Case No. 02-94-
4678 denying petitioners' Motion to Dismiss, and accordingly ordered the dismissal of
respondent's Petition before the SICD.

Respondent filed a Petition for Certiorari with the Court of Appeals assailing the Orders of
the SEC en banc dated 31 May 1995 and 14 August 1995 in SEC-EB No. 393 and SEC-EB
No. 403, respectively. Respondent's Petition before the appellate court was docketed as
CA-G.R. SP No. 38455.

On 11 February 1997, the Court of Appeals promulgated its Decision in CA-G.R. SP No.
38455, granting respondent's Petition for Certiorari, thus:

WHEREFORE, the petition in so far as it prays for annulment of the Orders dated May 31,
1995 and August 14, 1995 in SEC-EB Case Nos. 393 and 403 is GRANTED. The said
orders are hereby rendered null and void and set aside.
Petitioners filed a Motion for Reconsideration of the foregoing Decision but it was denied
by the Court of Appeals in a Resolution dated 18 May 1999.

Hence, the present Petition for Review raising the following arguments:

I.
THE SEC EN BANC DID NOT COMMIT GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF JURISDICTION WHEN IT DISMISSED THE PETITION FILED
BY RESPONDENT BECAUSE ON ITS FACE, IT FAILED TO STATE A CAUSE OF ACTION.

II.

THE GRANT OF THE IPO ALLOCATIONS IN FAVOR OF RESPONDENT WAS A MERE

ACCOMMODATION GIVEN TO HIM BY THE BOARD OF [DIRECTORS] OF THE MAKATI
STOCK EXCHANGE, INC.

III.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE SEC EN BANC COMMITTED
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION
WHEN IT MADE AN EXTENDED INQUIRY AND PROCEEDED TO MAKE A
DETERMINATION AS TO THE TRUTH OF RESPONDENT'S ALLEGATIONS IN HIS
PETITION AND USED AS BASIS THE EVIDENCE ADDUCED DURING THE HEARING ON
THE APPLICATION FOR THE WRIT OF PRELIMINARY INJUNCTION TO DETERMINE
THE EXISTENCE OR VALIDITY OF A STATED CAUSE OF ACTION.

IV.

IPO ALLOCATIONS GRANTED TO BROKERS ARE NOT TO BE BOUGHT BY THE

BROKERS FOR THEMSELVES BUT ARE TO BE DISTRIBUTED TO THE INVESTING
PUBLIC. HENCE, RESPONDENT'S CLAIM FOR DAMAGES IS ILLUSORY AND HIS
PETITION A NUISANCE SUIT.[3]
On 18 September 2001, counsel for respondent manifested to this Court that his client
died on 7 May 2001. In a Resolution dated 24 October 2001, the Court directed the
substitution of respondent by his surviving spouse, Julia Ortigas vda. de Campos.

Petitioners want this Court to affirm the dismissal by the SEC en banc of respondent's
Petition in SEC Case No. 02-94-4678 for failure to state a cause of action. On the other
hand, respondent insists on the sufficiency of his Petition and seeks the continuation of
the proceedings before the SICD.

A cause of action is the act or omission by which a party violates a right of another. [4] A
complaint states a cause of action where it contains three essential elements of a cause of
action, namely: (1) the legal right of the plaintiff, (2) the correlative obligation of the
defendant, and (3) the act or omission of the defendant in violation of said legal right. If
these elements are absent, the complaint becomes vulnerable to dismissal on the ground
of failure to state a cause of action.

If a defendant moves to dismiss the complaint on the ground of lack of cause of action, he
is regarded as having hypothetically admitted all the averments thereof. The test of
sufficiency of the facts found in a complaint as constituting a cause of action is whether or
not admitting the facts alleged, the court can render a valid judgment upon the same in
accordance with the prayer thereof. The hypothetical admission extends to the relevant
and material facts well pleaded in the complaint and inferences fairly deducible
therefrom. Hence, if the allegations in the complaint furnish sufficient basis by which the
complaint can be maintained, the same should not be dismissed regardless of the defense
that may be assessed by the defendant.[5]
Given the foregoing, the issue of whether respondent's Petition in SEC Case No. 02-94-
4678 sufficiently states a cause of action may be alternatively stated as whether,
hypothetically admitting to be true the allegations in respondent's Petition in SEC Case
No. 02-94-4678, the SICD may render a valid judgment in accordance with the prayer of
said Petition.

A reading of the exact text of respondent's Petition in SEC Case No. 02-94-4678 is,
therefore, unavoidable. Pertinent portions of the said Petition reads:

7. In recognition of petitioner's invaluable services, the general membership of respondent

corporation [MKSE] passed a resolution sometime in 1989 amending its Articles of
Incorporation, to include the following provision therein:

"ELEVENTH - WHEREAS, Mr. Miguel Campos is the only surviving incorporator of the
Makati Stock Exchange, Inc. who has maintained his membership;

"WHEREAS, he has unselfishly served the Exchange in various capacities, as governor

from 1977 to the present and as President from 1972 to 1976 and again as President from
1988 to the present;

"WHEREAS, such dedicated service and leadership which has contributed to the
advancement and well being not only of the Exchange and its members but also to the
Securities industry, needs to be recognized and appreciated;

"WHEREAS, as such, the Board of Governors in its meeting held on February 09, 1989 has
correspondingly adopted a resolution recognizing his valuable service to the Exchange,
reward the same, and preserve for posterity such recognition by proposing a resolution to
the membership body which would make him as Chairman Emeritus for life and install in
the Exchange premises a commemorative bronze plaque in his honor;
"NOW, THEREFORE, for and in consideration of the above premises, the position of the
"Chairman Emeritus" to be occupied by Mr. Miguel Campos during his lifetime and
irregardless of his continued membership in the Exchange with the Privilege to attend all
membership meetings as well as the meetings of the Board of Governors of the Exchange,
is hereby created."
8. Hence, to this day, petitioner is not only an active member of the respondent
corporation, but its Chairman Emeritus as well.

9. Correspondingly, at all times material to this petition, as an active member and

Chairman Emeritus of respondent corporation, petitioner has always enjoyed the right
given to all the other members to participate equally in the Initial Public Offerings (IPOs
for brevity) of corporations.

10. IPOs are shares of corporations offered for sale to the public, prior to the listing in the
trading floor of the country's two stock exchanges. Normally, Twenty Five Percent (25%)
of these shares are divided equally between the two stock exchanges which in turn divide
these equally among their members, who pay therefor at the offering price.

11. However, on June 3, 1993, during a meeting of the Board of Directors of respondent-
corporation, individual respondents passed a resolution to stop giving petitioner the IPOs
he is entitled to, based on the ground that these shares were allegedly benefiting Gerardo
O. Lanuza, Jr., who these individual respondents wanted to get even with, for having filed
cases before the Securities and Exchange (SEC) for their disqualification as member of
the Board of Directors of respondent corporation.

12. Hence, from June 3, 1993 up to the present time, petitioner has been deprived of his
right to subscribe to the IPOs of corporations listing in the stock market at their offering
prices.

13. The collective act of the individual respondents in depriving petitioner of his right to a
share in the IPOs for the aforementioned reason, is unjust, dishonest and done in bad
faith, causing petitioner substantial financial damage.[6]
There is no question that the Petition in SEC Case No. 02-94-4678 asserts a right in favor
of respondent, particularly, respondent's alleged right to subscribe to the IPOs of
corporations listed in the stock market at their offering prices; and stipulates the
correlative obligation of petitioners to respect respondent's right, specifically, by
continuing to allow respondent to subscribe to the IPOs of corporations listed in the stock
market at their offering prices.

However, the terms right and obligation in respondent's Petition are not magic words that
would automatically lead to the conclusion that such Petition sufficiently states a cause of
action. Right and obligation are legal terms with specific legal meaning. A right is a claim
or title to an interest in anything whatsoever that is enforceable by law. [7] An obligation is
defined in the Civil Code as a juridical necessity to give, to do or not to do. [8] For every
right enjoyed by any person, there is a corresponding obligation on the part of another
person to respect such right. Thus, Justice J.B.L. Reyes offers[9] the definition given by
Arias Ramos as a more complete definition:

An obligation is a juridical relation whereby a person (called the creditor) may demand
from another (called the debtor) the observance of a determinative conduct (the giving,
doing or not doing), and in case of breach, may demand satisfaction from the assets of the
latter.
The Civil Code enumerates the sources of obligations:
Art. 1157. Obligations arise from:

(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.
Therefore, an obligation imposed on a person, and the corresponding right granted to
another, must be rooted in at least one of these five sources. The mere assertion of a right
and claim of an obligation in an initiatory pleading, whether a Complaint or Petition,
without identifying the basis or source thereof, is merely a conclusion of fact and law. A
pleading should state the ultimate facts essential to the rights of action or defense
asserted, as distinguished from mere conclusions of fact or conclusions of law.[10] Thus, a
Complaint or Petition filed by a person claiming a right to the Office of the President of
this Republic, but without stating the source of his purported right, cannot be said to have
sufficiently stated a cause of action. Also, a person claiming to be the owner of a parcel of
land cannot merely state that he has a right to the ownership thereof, but must likewise
assert in the Complaint either a mode of acquisition of ownership or at least a certificate
of title in his name.

In the case at bar, although the Petition in SEC Case No. 02-94-4678 does allege
respondent's right to subscribe to the IPOs of corporations listed in the stock market at
their offering prices, and petitioners' obligation to continue respecting and observing such
right, the Petition utterly failed to lay down the source or basis of respondent's right
and/or petitioners' obligation.

Respondent merely quoted in his Petition the MKSE Board Resolution, passed sometime in
1989, granting him the position of Chairman Emeritus of MKSE for life. However, there is
nothing in the said Petition from which the Court can deduce that respondent, by virtue of
his position as Chairman Emeritus of MKSE, was granted by law, contract, or any other
legal source, the right to subscribe to the IPOs of corporations listed in the stock market
at their offering prices.

A meticulous review of the Petition reveals that the allocation of IPO shares was merely
alleged to have been done in accord with a practice normally observed by the members of
the stock exchange, to wit:

IPOs are shares of corporations offered for sale to the public, prior to their listing in the
trading floor of the country's two stock exchanges. Normally, Twenty-Five Percent
(25%) of these shares are divided equally between the two stock exchanges which
in turn divide these equally among their members, who pay therefor at the
offering price.[11] (Emphasis supplied)
A practice or custom is, as a general rule, not a source of a legally demandable or
enforceable right.[12] Indeed, in labor cases, benefits which were voluntarily given by the
employer, and which have ripened into company practice, are considered as rights that
cannot be diminished by the employer.[13] Nevertheless, even in such cases, the source of
the employees' right is not custom, but ultimately, the law, since Article 100 of the Labor
Code explicitly prohibits elimination or diminution of benefits.

There is no such law in this case that converts the practice of allocating IPO shares to
MKSE members, for subscription at their offering prices, into an enforceable or
demandable right. Thus, even if it is hypothetically admitted that normally, twenty five
percent (25%) of the IPOs are divided equally between the two stock exchanges -- which,
in turn, divide their respective allocation equally among their members, including the
Chairman Emeritus, who pay for IPO shares at the offering price -- the Court cannot grant
respondent's prayer for damages which allegedly resulted from the MKSE Board
Resolution dated 3 June 1993 deviating from said practice by no longer allocating any
shares to respondent.

Accordingly, the instant Petition should be granted. The Petition in SEC Case No. 02-94-
4678 should be dismissed for failure to state a cause of action. It does not matter that the
SEC en banc, in its Order dated 14 August 1995 in SEC-EB No. 403, overstepped its
bounds by not limiting itself to the issue of whether respondent's Petition before the SICD
sufficiently stated a cause of action. The SEC en banc may have been mistaken in
considering extraneous evidence in granting petitioners' Motion to Dismiss, but its
discussion thereof are merely superfluous and obiter dictum. In the main, the SEC en
banc did correctly dismiss the Petition in SEC Case No. 02-94-4678 for its failure to state
the basis for respondent's alleged right, to wit:

Private respondent Campos has failed to establish the basis or authority for his alleged
right to participate equally in the IPO allocations of the Exchange. He cited paragraph 11
of the amended articles of incorporation of the Exchange in support of his position but a
careful reading of the said provision shows nothing therein that would bear out his claim.
The provision merely created the position of chairman emeritus of the Exchange but it
mentioned nothing about conferring upon the occupant thereof the right to receive IPO
allocations.[14]
With the dismissal of respondent's Petition in SEC Case No. 02-94-4678, there is no more
need for this Court to resolve the propriety of the issuance by SCID of a writ of
preliminary injunction in said case.

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 11
February 1997 and its Resolution dated 18 May 1999 in CA-G.R. SP No. 38455
are REVERSED and SET ASIDE. The Orders dated 31 May 1995 and 14 August 1995 of
the Securities and Exchange Commission en banc in SEC-EB Case No. 393 and No. 403,
respectively, are hereby reinstated. No pronouncement as to costs.

SO ORDERED.
 FIRST DIVISION

[ G.R. No. 204639, February 15, 2017 ]

SAN FRANCISCO INN v. SAN PABLO CITY WATER DISTRICT +

DECISION
CAGUIOA, J:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court
assailing the Decision dated September 14, 2011 of the Court of Appeals (CA) in CA-G.R. CV
[1] [2]

No. 95617, modifying the Decision dated May 25, 2010 of the Regional Trial Court of San
[3]

Pablo City, Branch 32 (RTC), declaring valid the imposition of production charges/fees by
respondent San Pablo City Water District (SPCWD) on commercial and industrial
users/operators of deep wells in San Pablo City and upholding the right of SPCWD to demand
payment of production charges/fees in accordance with existing rates from petitioner San
Francisco Inn (SFI) and for the latter to pay interest thereon from their imposition starting in
1998. The review of the Resolution dated November 13, 2012 of the CA, denying SFI's motion
[4]

for reconsideration of the CA Decision, is also sought in the petition.

While there were several issues raised by SFI before the RTC and the CA, the singular issue it
raised in the petition is whether the CA erred in upholding SPCWD's right to impose production
assessment in the absence of any findings or proof that SFI's use of ground water was injuring
or reducing SPCWD's financial condition and impairing its ground water source, pursuant to
Section 39 of Presidential Decree No. 198 (PD 198) and Section 11 of the "Rules Governing
Ground Water Pumping and Spring Development Within the Territorial Jurisdiction of San Pablo
City Water District" (the Rules).
[5]

SFI argues that both the law and the Rules provide the following specific conditions before any
water district may adopt and levy ground water production assessment:

Prior due notice to entities within the district extracting ground water for commercial and industrial uses, and hearing on the
(1)
water district's plan to adopt and levy a ground water production assessment or impose special charges at fixed rate; and
A finding by the Board of Directors of the water district that production of ground water by such entities is: (i) adversely
(2)
affecting the water district's financial condition and (ii) impairing its ground water sources.[6]
The Facts and Antecedent Proceedings

The RTC, in its Decision dated May 25, 2010, made the following findings which are relevant to
the issue posed above:

The facts are not in dispute while the proceedings are of record.

The petitioner [SFI] is a hotel business establishment situated at Brgy. San Francisco Calihan,
San Pablo City. In 1996, petitioner caused the construction of two (2) deep-well pumps for the
use of its business. The pumps, which have a production capacity of four (4) liters per second
each, bear the following specification[s]: size of casing [-] 2.0"; size of column pipe - 1.5";
pump setting - 60 feet; and motor HP rating - 1.5 HP.

The respondent [SPCWD] is a local water utility organized under Resolution No. 309, approved
by the Municipal Board of the City of San Pablo, on December 17, 1973, absorbing the former
San Pablo Waterworks System and its facilities. Its operation is under the National Water
Resources Board, formerly Council (NWRB), which is the national agency vested with authority
to control and regulate the utilization, exploitation, development, conservation and operation
of water resources pursuant to Presidential Decree No. 1067, otherwise known as the "Water
Code of the Philippines" (Water Code) and Presidential Decree No. 198, the "Local Water
Utilities Administration Law". The respondent [SPCWD] is managed by a Board of Directors.

In 1977, the respondent [SPCWD] promulgated the Rules Governing Groundwater Pumping and
Spring Development Within the Territorial Jurisdiction of the San Pablo City Water District.
These rules were approved by the NWRB in its 88 meeting held on January 23, 1978. The
th

provisions of the Rules relevant to this case are [Sections 10 , 11 and 12 ].

[7] [8] [9]

xxxx

Pursuant to Section 80 of PD 1067, the NWRB in its Memorandum dated February 4, 1997,
deputized the respondent to perform the following functions:

"xxx

"1. To accept, process, investigate and make recommendation on water permit applications on
sources located within the territorial jurisdiction of the Water District.

2. To monitor drilling wells and other water resources development activities in your area for
conformance with the provision of the Water Code and the rules and regulations of the Water
District as approved by the Board.

3. To coordinate with the Offices of the DPWH-DE and NIA-PIO and other concerned agencies
for the orderly and timely completion of necessary field activities related.

"xxx."
xxx In a letter dated 26 January 1998, the respondent's General Manager Roger F. Borja,
invited petitioner and other deep-well users in San Pablo City, to a meeting to discuss the
imposition of production assessment fees. The meeting proceeded as scheduled on February
19, 1998, with several deep-well owners present, among which is the petitioner. The topic
discussed during the meeting involved the legality of the imposition of production fees and the
rate of production fees to be imposed. No concrete agreement was reached except that the
deep-well users just agreed to submit within fifteen (15) days a position paper either
individually or collectively. xxx On March 26, 1998, deep-well users, including petitioner
submitted their position paper opposing the imposition of the production assessment fee on
the ground that the same "is inequitable and constitutes an unjust discrimination against such
users."

On September 11, 1998, petitioner [SFI] filed an application for water permit with the NWRB. In
a letter dated November 14, 1998, the DPWH District Engineer requested petitioner to submit
clearances from the barangay chairman, the city mayor and the respondent water district. It
appears that petitioner failed to comply except the submission of a barangay clearance
certificate, and a certification dated 17 November 1998, issued by the respondent's Engr.
Virgilio L. Amante, respondent's Engineering and Production Division Manager, stating among
others that "the extraction of water has no adverse effect on the existing water supply and
system of the San Pablo City Water District," but "without prejudice to the water district
implementation of production assessment charges in the future."

On June 1, 1999, the respondent sent the petitioner a copy of a draft Memorandum of
Agreement, regarding the proposed imposition of production assessment fee at P0.50 per
cubic meter of water drawn from the well. The petitioner [SFI], however, did not sign the MOA.
The respondent [SPCWD] in a letter dated November 9, 1999, again wrote the petitioner
asking the latter to approve and/or sign the MOA.

On 30 July 2001, the Board of Directors of the respondent's (sic) passed a Board Resolution No.
050, Series of 2001, creating an investigating panel to investigate, hear and decide violations
of the Water Code. The panel was composed of the Legal Counsel as Chairman, and then
Senior Industrial Relations Management Officer and the Commercial Division Manager, as
members, of the respondent. In an Order dated August 30, 200 I, the Investigating Board
directed the petitioner to appear and submit evidence "WHY NO CEASE AND DESIST ORDER
AND CLOSURE OF OPERATION of the water well" should be issued against the petitioner.
Petitioner through counsel submitted a Manifestation and Motion on September 12, 2001,
asking that the Order of August 30, 2001, be set aside and that it be furnished copy of the
specific complaint against it. In an Order dated September 25, 2001, the Investigating Board
resolved xxx:

"xxxx

In the interest of justice and for the reasons advanced in his motion, [petitioner SFI] is hereby
ordered to appear before the Investigating Board on Tuesday, October 2, 2001 at 9:30 a.m. for
continuation of the investigation and to submit [its] evidence why NO CEASE AND DESIST
ORDER AND CLOSURE OF OPERATION of the water well against you and your corporation shall
be issued pursuant to Board Resolution No. 045, Series of 1995 and Section 15 of the approved
San Pablo City Water District Rules in Resolution No. 883, dated January 23, 1978 by the
NWRB."

xxxx
On November 19, 2001, prior to the issuance of the [Order dated November 20, 2001,
submitting the matter for resolution due to the failure of petitioner [SFI] or counsel to appear
on October 2, 2001, despite receipt of notice], the [p]etitioner instituted the instant petition
seeking to enjoin the respondent water district and its General Manager, from further
investigating and hearing IB No. 006, entitled "San Pablo City Water District vs. San Francisco
Inn," as its continuance will work injustice and/or irreparable damage or injury to the petitioner
and will mean closure of its hotel business operation. On November 28, 2001, the respondents
through counsel filed a Motion to Dismiss anchored on the arguments that the Court has no
jurisdiction over the subject matter, and for lack of cause of action against the respondents.
The petitioner filed its opposition to the motion to dismiss, contending that the Court has
jurisdiction over the subject matter of the case and that it has a valid cause of action against
the petitioner (sic). The Court, in an Order dated February 1, 2002, denied the motion to
dismiss, directing the respondents to file their answer xxx. On February 27, 2002, the
respondents submitted their answer, maintaining its (sic) position that the NWRB, not the
Court[,] has jurisdiction to hear the subject matter of the case, and that injunction is not the
proper remedy there being an administrative remedy available to the petitioner.

xxxx

In the interim, the Investigating Board came out with its Report and Resolution in IB-Case No.
006, dated April 9, 2002, recommending to the respondent's Board of Directors, the following:

"1. To issue a CEASE AND DESIST ORDER AND CLOSURE OF OPERATION of their deepwell (sic)
constructed by the [petitioner] without the required water permit;

"2. To demand the required payment of the appropriations of water without permit from
October 1999 up to the present, the equivalent value of the consumption to be paid to the
district;

"3. That a CEASE AND DESIST ORDER AND CLOSURE OF OPERATION of the water supply be
issued by the Board of Directors of the appropriate agency after the lapse of 15 days from the
issuance of approval order by the Board. The order that may be issued by the Board based on
the recommendation be enforced by the designated enforcing officer with the assistance of the
Philippine National Police as provided in PD 1067.

"xxx."
From the above Report and Resolution, the petitioner filed a Motion for Reconsideration on
May 14, 2002, on the following grounds: a) the authority of the respondent has already been
questioned in the action for injunction; b) that the respondent has not shown proof that the
extraction/drawing of water by the petitioner had caused injury upon the respondent's financial
condition; and c) the petitioner had already filed a water permit application which is pending
before the NWRB. In a 1 Indorsement dated May 15, 2002, the Investigating Board referred
st

the above-mentioned Motion for Reconsideration to the respondent's Board of Directors for
appropriate action. At this juncture, it may well be pointed out that the Board of Directors of
the respondent has not yet taken action on the above Report and Resolution of the
Investigating Board.

In addition to the above action taken by the petitioner, it also filed before this Court a Motion
for Issuance of a Writ of Preliminary Mandatory Injunction, to enjoin the respondent and its
Board of Directors "not to proceed in IB case No. 006 and/or from doing any further acts that
could possibly disturb the status quo and will render the instant case moot and academic
pending the final adjudication of the instant case in the higher interest of equity, fair play and
substantial justice." The respondents through counsel filed an Opposition to the motion on May
18, 2002, contending that the matters discussed in the subject motion, "are questions to be
determined on the merits of the case," such that to rule on it "would be to rule on the main
case of the petition which is injunction xxx." In a Supplemental Manifestation filed on May 28,
2002, the petitioner argued that it had already filed a water permit application which remained
unacted upon and that the operation of a deep-well did not affect the water supply system of
the respondent.

At the hearing on June 28, 2002, petitioner and counsel appeared but respondents and counsel
did not. On motion by the petitioner, the Court gave it a period of ten (10) days to file its
formal offer of exhibits, and for respondents to file their comment therein. On July 17, 2002,
the petitioner formally offered Exhibits "A" to "I". On July 19, 2002, the respondents opposed
the admission of the petitioner's exhibits on the ground that no formal hearing was conducted
as to warrant the offer of the said exhibits. In an Order dated November 19, 2002, the Court
admitted Exhibits "A" to "I" of the petitioner, in support of its prayer for the issuance of
prohibitory mandatory injunction.

After a series of [O]rders setting the case for pre-trial, the initial pre-trial was held on
November 13, 2002. The case was transferred from one Presiding Judge to another through
various reasons such as inhibition, transfer to another station and illness of one. Eventually,
full-blown pre trial was held on February 4, 2008.
At the trial, the following testified for the petitioner: Leodino M. Carandang (on May 12, 2008);
Virgilio Amante, whose testimony did not proceed in view of his unfortunate death (on June 23,
2008) but that the respondents admitted the due execution and existing (sic) of a Certification
dated November 19, 1998, issued by Engr. Virgilio Amante, which was marked Exhibit "G";
Josefina Agoncillo (on July 28, 2008); and Renato Amurao as an adverse witness (on August 4,
2008)[.] On October 3, 2008, the petitioner formally offered its evidence consisting of Exhibits
"A" to "N". On October 15, 2008, the respondents submitted their comment on the petitioner's
exhibits, objecting primarily to the purpose[s] for which they are being offered. In an Order
dated October 27, 2008, this Court admitted petitioner's Exhibits "A" to "N".

For the respondents, the following testified: Engr. Roger F. Borja (on November 17, 2008, and
January 26, 2009); Florante Alvero (on March 2, 2009); Renato Amurao (on July 27, 2009);
Antonio Estemadura, one of the deep-well owners who is paying the production assessment
fees (on November 9, 2009); and Teresita B. Rivera (on January 11, 2010). On January 28,
2010, the respondent[s] formally offered their exhibits consisting of Exhibits "1" to "34", with
their respective sub-markings. On February 11, 2010, the petitioner through counsel filed its
comments on the respondents' offer of evidence. In an Order dated February 15, 2010, this
Court admitted all the respondents' Exhibits "1" to "34"; and directed the parties to submit
their respective memoranda. Both the respondents and petitioner submitted their respective
memoranda on March 29, 2010. [10]

On the power of the respondent local water utility [SPCWD] to impose production assessment
fees on deep well owners, the RTC, citing Section 39 of PD 198 and Section 11 of the Rules,
ruled that:

Clearly, then, there can be no dispute that the respondent water utility has the power to
impose production assessment fees. The authority, however, shall be subject to notice and
hearing, and conditioned upon a finding that the appropriation of underground water by a
person or utility, as in the case of the petitioner "is injuring or reducing the district's financial
condition."

This Court painstakingly reviewed the records of this case and the proceedings before the
Investigating Board created by the respondent water utility. Nothing in the records will show
that the respondent [SPCWD] has come up with a written finding that petitioner [SFI]'s
appropriation of underground water is injuring or reducing the respondent's financial condition.
What is extant from the records are the following:

a. that there was an invitation to all deep-well users in San Pablo City to a meeting
regarding the legality of the imposition of production assessment fees;

b. the meeting was held on February 19, 1998, where deep-well users attended, including
the petitioners (sic);

c. no concrete agreement was reached during the meeting except for the deep-well users
to submit their position paper;

d. that on March 26, 1998, the deep-well users submitted their position paper opposing
the imposition of the production assessment fees;

e. that while other deep-well users eventually paid production assessment fees and
signed the MOA on the same, petitioner did not agree and refused to sign the MOA;

f. that the respondent created an Investigating Board to investigate petitioner for failure
to secure water permit;

g. that the Investigating Board directed petitioner to show cause why no cease and desist
order be issued for operating a deep well without a permit;
 h. that petitioner submitted a Manifestation and Motion asking for any specific complaint
against it in regard of its operation;

i. that the Investigating [Board] set the incident for hearing on October 2, 2001, but the
petitioner did not appear, prompting the Investigating Board to consider the matter
submitted for resolution;

j. that on April 9, 2002, the Investigating Board came out with its Report and Resolution
recommending to the respondent['s] Board of Directors to issue a cease and desist
order against the petitioner for operating a deep well without a permit, and to demand
payment of the equivalent value of the consumption or underground water "from
October 1999 up to the present"; and

k. that the above Report and Resolution has not yet been acted upon by the respondent's
Board of Directors up to this time.

In fine, the respondent [SPCWD]'s Board of Director[s] has no final resolution or decision yet on
the matter of the recommendation of the Investigating Board. The obvious reason for this, as
borne by the records is the fact that petitioner [SFI] sought intervention of this Court through
the instant proceedings.

In short, the respondent [SPCWD]'s Board of Directors has no official action yet in the form of a
board resolution fixing the rate of production assessment fees, neither does it have any
conclusive finding that the appropriation by the petitioner [SFI] of their (sic) two (2) deep-well
pumps is "injuring or reducing the district's financial condition." Even the Report and
Resolution of the Investigating Board made no mention about the injurious effect of the
petitioner [SFI]'s operation upon the financial condition of the respondent [SPCWD]. There is
also no showing that the respondent [SPCWD] had required the petitioner [SFI] to conduct
reports on its operation of the two (2) deep-well pumps as so provided in Section 39 of PD 198
and Section 11 of the Rules Governing Groundwater Pumping and Spring Development quoted
earlier. While the respondent [SPCWD] has drafted a MOA on the imposition of production
assessment fees upon deep well owners/users and provided copies thereof to the latter
including the petitioner [SFI], the same is not supported by any resolution promulgated and
approved by the respondent [SPCWD]'s Board of Directors. In the absence of such board
resolution, the respondent [SPCWD] cannot as yet legally impose any production assessment
fees upon deep-well owners/users. Let it be clarified, however, that deep-well owners/users
who have signed the MOA are presumed to have voluntarily acceded to the payment of
production assessment fees, and must continue to pay the same. [11]

The RTC dismissed the petition of petitioner SFI in its Decision dated May 25, 2010, the
dispositive portion of which reads as follows:

WHEREFORE, the instant petition is DISMISSED. Without pronouncement as to damages.

SO ORDERED. [12]

Respondent SPWCD appealed the RTC Decision before the CA. The CA, in its Decision dated
September 14, 2011, declared "valid the imposition of production charges/fees by
[13]

respondent xxx SPCWD on commercial and industrial users/operators of deep wells in San
Pablo City, and upholds the right of [respondent] SPCWD to demand payment of production
charges/fees in accordance with existing rates from [SFI] and for the latter to pay interest
thereon from its imposition starting in 1998."[14]

The CA made the following findings:

At the outset, this Court finds that [respondent] SPCWD complied with the due process
requirement for the effectivity and enforcement of the law and the rules sought to be
implemented. It called a meeting for that purpose where even [SFI] itself stated that officials of
SPCWD explained the concept and the legal basis of the production assessment fee and the
purpose for which the district is imposing the said charges. [SFI] also narrated in its Appellee's
Brief that the attendees at the public hearing expressed their concern with respect to the
charges that will be imposed. It has been held that the importance of the first notice, that is,
the notice of coverage and the letter of invitation to a conference, and its actual conduct
cannot be understated. They are steps designed to comply with the requirements of
administrative due process preliminary to the imposition of the production assessment rate
which is an exercise of police power for the regulation of private property in accordance with
the Constitution.

With respect to the rate of the assessment, the trial court was of the firm view that without the
express board resolution from the Board of Directors, the SPCWD is precluded from imposing
and collecting the same. The trial court undermined SPCWD's compliance with the due process
of prior consultation with the deep well users who were required to submit their position paper.
Accordingly, from the intended production assessment fee of P6.50 was reduced to P0.80 per
cubic meter for commercial users and P1.60 per cubic meters (sic) for industrial users. But
upon further consultation, the Board of Directors of the SPCWD finally pegged the production
assessment rate from P0.80 to P0.50 per cubic meter for commercial operator/users, and from
P1.60 to P1.00 per cubic meters (sic) for industrial users.
[15]

From these findings, the CA ruled that there was no need to await the Board Resolution
expressly fixing the rate since the assessment as well as the agreed reduced rate to be
imposed was based on a prior consultation on the rates with deep well users, which is a "form
of contemporaneous or practical construction by the administrative officers charged with the
implementation of the Water Code" and the signing of the MOA where the parties agreed to
pay the reduced rate is a "form of implied administrative interpretation of the law or the so
called interpretation by usage or practice." The CA further ruled that SFI, by seeking the
[16]

injunction on the assessment to be charged by SPCWD, questioned the exercise of police

power by the State; and in this case, it was exercised by an administrative board by virtue of a
valid delegation.[17]

On the matter of SFI's argument that for SPCWD to be able to charge production fee it should
prove the impairment of ground water supply, the CA ruled that:

To Our mind, it is not necessary to prove the impairment of ground water supply because the
Water Code on which the rules is (sic) premised simply states that there may be assessment
charges if the financial condition of the district is affected. It does not require establishment of
the impairment of ground water supply. Thus, the imposition of an additional requirement
exceeded the requirement in the main law. However, even assuming that proof must be made
that there is injury to the ground water supply, this Court takes judicial notice that in 1997-
1998 the entire world was affected by the El Niño Phenomenon. Its effect on the Philippines
was explained by the Department of Science and Technology xxx. [18]

SFI filed a motion for reconsideration, which the CA denied in its Resolution dated November
13, 2012. Hence, this petition for review filed by SFI.
[19]

SPCWD filed its Comment dated May 31, 2013. [20]

SFI filed its Reply on March 10, 2014. [21]

The Issue Before the Court

As formulated by SFI, the sole issue to be resolved in the petition is:

Whether the CA erred in upholding the right of SPCWD to impose production assessment in the
clear absence of any findings/proof to support compliance that SFI's use of ground water is
injuring or reducing SPCWD's financial condition and impairing its ground water source,
pursuant to Section 39 of PD 198 and Section 11 of the Rules. [22]

The Court's Ruling

The petition has merit.

The jurisdiction of the courts over a dispute involving the right or authority of a local water
utility or water district entity, like SPCWD, to impose production assessment against
commercial or industrial deep well users, like SFI, pursuant to Section 39 of PD 198 is settled.
The issue in such a dispute is a judicial question properly addressed to the courts. Thus, the
[23]

RTC correctly exercised its jurisdiction over the dispute between SFI and SPCWD.

Section 39 of PD 198, except for a minor typographical error, is unambiguous, viz:

Section 39. Production Assessment. - In the event the board of a district finds, after notice and
hearing, that production of ground water by other entities within the district for commercial or
industrial uses in (sic) injuring or reducing the district's financial condition, the board may
adopt and levy a ground water production assessment to compensate for such loss. In
connection therewith, the district may require necessary reports by the operator of any
commercial or industrial well. Failure to pay said assessment shall constitute an invasion of the
waters of the district and shall entitle this district to an injunction and damages pursuant to
Section 32 of this Title.
Section 11 of the Rules is likewise without ambiguity, viz:

Section 11 - Production Assessment - In the event the Board of Directors of the District, finds,
after notice and hearing, that production of ground water by other entities within the District
for commercial or industrial uses is adversely affecting the District['s] financial condition and is
impairing its ground water source, the Board may adopt and levy a ground water production
assessment or impose special charges at fixed rates to compensate for such loss. In
connection therewith the District may require commercial or industrial appropriators to install
metering devices acceptable to the District to measure the actual abstraction or appropriation
of water and which devices shall be regularly inspected by the District. [24]

There being no ambiguity, the plain meaning of Section 39, PD 189 and Section 11 of the Rules
is to be applied. A cardinal rule in statutory construction is that when the law is clear and free
from any doubt or ambiguity, there is no room for interpretation. There is only room for
application.[25]
Under the law and the Rules, the requirements that must be complied with before a water
district entity may impose production assessment on the production of ground water by
commercial or industrial operators/users are:

1. A prior notice and hearing; and

2. A resolution by the Board of Directors of the water district entity: (i) finding that the
production of ground water by such operators/users within the district is injuring or
reducing the water district entity's financial condition and is impairing its ground water
source; and (ii) adopting and levying a ground water production assessment at fixed
rates to compensate for such loss.

The Court, not being a trier of facts, must rely on the findings of the RTC set forth above.

The RTC correctly applied the clear text of the law and the Rules. The RTC also correctly ruled
that the preconditions for the levying of production assessment by SPCWD on SFI had not been
complied with. While there had been prior notice and hearing, SPCWD's Board of Directors had
not adopted the required resolution with a definitive finding that the appropriation by SFI of its
two deep well pumps was injuring or reducing the SPCWD's financial condition and fixing the
rate of production assessment fees to be levied against SFI that would be adequate to
compensate the financial loss it stood to suffer.

It is well to note that, as astutely observed by the RTC, even the Report and Resolution of the
Investigating Board created by SPCWD made no mention about the injurious effects, if any, of
SFI's deep well operation upon the financial condition of SPCWD. While SPCWD had drafted a
MOA on the imposition of production assessment fees upon deep well owners/users and
provided copies thereof to them, including SFI, the MOA was not supported by any resolution
duly promulgated and approved by SPCWD's Board of Directors or by any finding that there
were injurious effects of SFI's deep well operation upon the financial condition of SPCWD. For
its part, SFI did not execute the MOA.

A MOA or contract between the water district entity and the deep well operator/user is not
required under the law and the Rules. However, when a MOA is voluntarily agreed upon and
executed, the obligation to pay production assessment fees on the part of the deep well
operator/user and the right of the water district entity to collect the fees arise from contract.
The parties are, therefore, legally bound to comply with their respective prestations.
[26]

Unlike a MOA, which creates contractual obligations, faithful compliance with the requirements
of Section 39 of PD 198 and Section 11 of the Rules creates binding obligations arising from
law. Thus, in the absence of the requisite board resolution, SPCWD cannot legally impose any
[27]

production assessment fees upon SFI.

The CA erred when it ruled that "there is no need to await the Board Resolution expressly
fixing the rate" because a board resolution, as described above, is a mandatory prerequisite
[28]

under the law and the Rules. The CA's invocation of "contemporaneous or practical
construction" and "interpretation by usage or practice" is unwarranted, Section 39 of PD
[29] [30]

198 and Section 11 of the Rules being crystal clear and wholly unambiguous.

Furthermore, the CA's reliance on the El Niño phenomenon in 1997-1998, which it took judicial
notice of, to justify the imposition of production assessment fees by SPCWD on SFI does not
meet the clear parameters stated in the law and the Rules. What is sought to be compensated
by the production assessment fees is the financial loss that the water district entity stands to
suffer due to the production of the ground water by the deep well operator/user. The law
requires proof of a direct correlation between the financial loss of the water district entity and
the ground water production of the deep well operator/user. In this case, with or without the El
Niño phenomenon, such direct correlation has not been preponderantly established as found
by the RTC.
WHEREFORE, the Decision dated September 14, 2011 and the Resolution dated November
13, 2012 of the of the Court of Appeals in CA G.R. CV No. 95617 are REVERSED and SET
ASIDE. The Decision dated May 25, 2010 of the Regional Trial Court of San Pablo City, Branch
32 in Civil Case No. SP-5869, dismissing the petition, is AFFIRMED.

SO ORDERED.

Sereno, C. J., (Chairperson), Leonardo-De Castro, Del Castillo, and Perlas-Bernabe, JJ., concur.