G.R. No.

L-20567             July 30, 1965

PHILIPPINE NATIONAL BANK, petitioner, vs. MANILA SURETY and FIDELITY CO., INC. and
THE COURT OF APPEALS (Second Division), respondents.

The Philippine National Bank petitions for the review and reversal of the decision rendered by the
Court of Appeals (Second Division), in its case CA-G.R. No. 24232-R, dismissing the Bank's
complaint against respondent Manila Surety & Fidelity Co., Inc., and modifying the judgment of the
Court of First Instance of Manila in its Civil Case No. 11263.

The material facts of the case, as found by the appellate Court, are as follows:

The Philippine National Bank had opened a letter of credit and advanced thereon $120,000.00 to
Edgington Oil Refinery for 8,000 tons of hot asphalt. Of this amount, 2,000 tons worth P279,000.00
were released and delivered to Adams & Taguba Corporation (known as ATACO) under a trust
receipt guaranteed by Manila Surety & Fidelity Co. up to the amount of P75,000.00. To pay for the
asphalt, ATACO constituted the Bank its assignee and attorney-in-fact to receive and collect from
the Bureau of Public Works the amount aforesaid out of funds payable to the assignor under
Purchase Order No. 71947. This assignment (Exhibit "A") stipulated that:

The conditions of this assignment are as follows:

1. The same shall remain irrevocable until the said credit accomodation is fully liquidated.

2. The PHILIPPINE NATIONAL BANK is hereby appointed as our Attorney-in-Fact for us and
in our name, place and stead, to collect and to receive the payments to be made by virtue of
the aforesaid Purchase Order, with full power and authority to execute and deliver on our
behalf, receipt for all payments made to it; to endorse for deposit or encashment checks,
money order and treasury warrants which said Bank may receive, and to apply said
payments to the settlement of said credit accommodation.

This power of attorney shall also remain irrevocable until our total indebtedness to the said
Bank have been fully liquidated. (Exhibit E)

ATACO delivered to the Bureau of Public Works, and the latter accepted, asphalt to the total value of
P431,466.52. Of this amount the Bank regularly collected, from April 21, 1948 to November 18,
1948, P106,382.01. Thereafter, for unexplained reasons, the Bank ceased to collect, until in 1952 its
investigators found that more moneys were payable to ATACO from the Public Works office,
because the latter had allowed mother creditor to collect funds due to ATACO under the same
purchase order to a total of P311,230.41.

Its demands on the principal debtor and the Surety having been refused, the Bank sued both in the
Court of First Instance of Manila to recover the balance of P158,563.18 as of February 15, 1950,
plus interests and costs.

On October 4, 1958, the trial court rendered a decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered as follows:

1. Ordering defendants, Adams & Taguba Corporation and Manila Surety & Fidelity Co., Inc.,
to pay plaintiff, Philippines National Bank, the sum of P174,462.34 as of February 24, 1956,
 minus the amount of P8,000 which defendant, Manila Surety Co., Inc. paid from March, 1956
to October, 1956 with interest at the rate of 5% per annum from February 25, 1956, until fully
paid provided that the total amount that should be paid by defendant Manila Surety Co., Inc.,
on account of this case shall not exceed P75,000.00, and to pay the costs;

2. Orderinq cross-defendant, Adams & Taguba Corporation, and third-party defendant,

Pedro A. Taguba, jointly and severally, to pay cross and third-party plaintiff, Manila Surety &
Fidelity Co., Inc., whatever amount the latter has paid or shall pay under this judgment;

3. Dismissing the complaint insofar as the claim for 17% special tax is concerned; and

4. Dismissing the counterclaim of defendants Adams & Taguba Corporation and Manila
Surety & Fidelity Co., Inc.

From said decision, only the defendant Surety Company has duly perfected its appeal. The Central
Bank of the Philippines did not appeal, while defendant ATACO failed to perfect its appeal.

The Bank recoursed to the Court of Appeals, which rendered an adverse decision and modified the
judgment of the court of origin as to the surety's liability. Its motions for reconsideration having
proved unavailing, the Bank appealed to this Court.

The Court of Appeals found the Bank to have been negligent in having stopped collecting from the
Bureau of Public Works the moneys falling due in favor of the principal debtor, ATACO, from and
after November 18, 1948, before the debt was fully collected, thereby allowing such funds to be
taken and exhausted by other creditors to the prejudice of the surety, and held that the Bank's
negligence resulted in exoneration of respondent Manila Surety & Fidelity Company.

This holding is now assailed by the Bank. It contends the power of attorney obtained from ATACO
was merely in additional security in its favor, and that it was the duty of the surety, and not that of the
creditor, owed see to it that the obligor fulfills his obligation, and that the creditor owed the surety no
duty of active diligence to collect any, sum from the principal debtor, citing Judge Advocate General
vs. Court of Appeals, G.R. No. L-10671, October 23, 1958.

This argument of appellant Bank misses the point. The Court of Appeals did not hold the Bank
answerable for negligence in failing to collect from the principal debtor but for its neglect in collecting
the sums due to the debtor from the Bureau of Public Works, contrary to its duty as holder of an
exclusive and irrevocable power of attorney to make such collections, since an agent is required to
act with the care of a good father of a family (Civ. Code, Art. 1887) and becomes liable for the
damages which the principal may suffer through his non-performance (Civ. Code, Art. 1884).
Certainly, the Bank could not expect that the Bank would diligently perform its duty under its power
of attorney, but because they could not have collected from the Bureau even if they had attempted to
do so. It must not be forgotten that the Bank's power to collect was expressly made irrevocable, so
that the Bureau of Public Works could very well refuse to make payments to the principal debtor
itself, and a fortiori reject any demands by the surety.

Even if the assignment with power of attorney from the principal debtor were considered as mere
additional security still, by allowing the assigned funds to be exhausted without notifying the surety,
the Bank deprived the former of any possibility of recoursing against that security. The Bank thereby
exonerated the surety, pursuant to Article 2080 of the Civil Code:
 ART. 2080. — The guarantors, even though they be solidary, are released from their
obligation whenever by come act of the creditor they cannot be subrogated to the rights,
mortgages and preferences of the latter. (Emphasis supplied.)

The appellant points out to its letter of demand, Exhibit "K", addressed to the Bureau of Public
Works, on May 5, 1949, and its letter to ATACO, Exhibit "G", informing the debtor that as of its date,
October 31, 1949, its outstanding balance was P156,374.83. Said Exhibit "G" has no bearing on the
issue whether the Bank has exercised due diligence in collecting from the Bureau of Public Works,
since the letter was addressed to ATACO, and the funds were to come from elsewhere. As to the
letter of demand on the Public Works office, it does not appear that any reply thereto was made; nor
that the demand was pressed, nor that the debtor or the surety were ever apprised that payment
was not being made. The fact remains that because of the Bank's inactivity the other creditors were
enabled to collect P173,870.31, when the balance due to appellant Bank was only P158,563.18. The
finding of negligence made by the Court of Appeals is thus not only conclusive on us but fully
supported by the evidence.

Even if the Court of Appeals erred on the second reason it advanced in support of the decision now
under appeal, because the rules on application of payments, giving preference to secured
obligations are only operative in cases where there are several distinct debts, and not where there is
only one that is partially secured, the error is of no importance, since the principal reason based on
the Bank's negligence furnishes adequate support to the decision of the Court of Appeals that the
surety was thereby released.

WHEREFORE, the appealed decision is affirmed, with costs against appellant Philippine National
Bank.
G.R. No. L-3572             September 30, 1952

PAULINO DUMAGUIN, plaintiff-appellant, vs. A.I. REYNOLDS, E.J. HARRISON and BIG WEDGE
MINING COMPANY, defendants-appellees.

For purposes of this decision, the following facts may be said to be agreed upon by the parties or to
be without dispute. Because the plaintiff Paulino M. Dumaguin would appear to be the central figure
in this case, we shall begin by making reference to his background and his status at the time he
entered into the transactions and executed the deeds of conveyance whose legality is now the
subject of the present petition.

Paulino M. Dumaguin was a teacher in the public elementary schools for a year and a half, and from
1916 to 1918 was the Manager of the Head Waters Mining Company in Baguio. As Manager of said
mining company Paulino acquired some knowledge of mining. On or before May 21, 1929, he was a
supervising line-man of the Bureau of Posts. On that date, (May 21, 1929) he was admitted to the
Insular Psychopathic Hospital at San Felipe Neri (now National Psychopathic Hospital),
Mandaluyong, Rizal, said to be suffering from "paranoia". On October 15, 1929, Dr. Toribio Joson,
assistant alienist of said Hospital, submitted the following memorandum:

"MEMORANDUM

To: the Alienist in Charge Insular Psychopathic Hospital, San Felipe Neri, Rizal.

Subject: Paulino M. Dumaguin. — Male, married, 33 years old, Ex-Supervising

Lineman of the Bureau of Posts, admitted to the hospital at 11:25 a.m. on May 21,
1929.

1. The patient is well-behaved, oriented in all spheres, coherent in his speech and
has no more illusion or hallucinations; but is having a delusion that one of the
patients in the Hospital is trying to chloroform him. He consequently keeps away from
the said patient.

2. He is not also sure that his former officemates whom he erroneously believed
chloroformed him before, would not chloroform him anymore when he goes home.

3. This type of insanity which Paulino M. Dumaguin is suffering from is therefore that
of Paranoia, which runs a very chronic course of usually a lifetime, but which may
show improvement as the patient grow older. (See Exhibits 42, folio 195; Emphasis
ours).

After Paulino's discharge from the Hospital on or about November 11, 1929, in order to
enable his wife to withdraw his retirement gratuity from the government, on September 16,
1930, she filed guardianship proceedings in the Court of First Instance of Camarines Sur.
Said court relying presumably on the report of Dr. Joson above-quoted, granted the petition
and appointed her as Paulino's guardian.

On February 2, 1931, Paulino and his guardian in a joint motion before the Court of
Camarines Sur among others alleged that —
 4. Que en la actualidad, el citado Paulino M. Dumaguin, ya esta restablecido, por lo
que se le ha permitido dejar el Hospital y ahora vive con su familia en esta localidad,
que es su residencia.

5. Que el mencionado Paulino M. Dumaguin ha recibido un cheque del Gobierno por

la cantidad de P412.38, como parte de su pension.

6. Que los comparecientes necesitan el importe de dicho cheque para atender a su

subsistencia, pues se hallan en la actualidad faltos de todo necesario.

and asked that they be authorized to cash said check and use its proceeds for their support:

"Por tanto, suplican al Juzgado que se les autorice a cambiar el referido cheque, y
disponer de su producto para su manutencion."

In 1934, the guardianship proceedings were closed.

In and before the year 1930, defendants A.I. Reynolds and E.J. Harrison as gold prospectors had
located some mineral claims in the Itogon District, sub-province of Benguet, Mountain Province,
known as the "ANACONDA GROUP". They employed Fructuoso Dumaguin, brother of plaintiff
Paulino, in their work as prospectors.

At the beginning of 1931, Fructuoso Dumaguin was thus working for said defendants Reynolds and
Harrison relocating some of their mining claims previously located and locating new ones, for which
work he was paid P5.00 a day. About the same time his brother Paulino M. Dumaguin, plaintiff
herein, leaving his home in Camarines Sur went up to Baguio in search of work. To help him
Fructuoso got him employed by the defendants and the two brothers worked together in the mining
business for the defendants.

The theory of the plaintiffs that he was employed only to relocate defendants' mining claims in the
Anaconda Group while the defense claims that like his brother Fructuoso, Paulino was employed not
only to relocate mining claims within the Anaconda Group but also to stake and locate new mining
claims for them. For said work Paulino was also paid by the day by the defendants.

During the months of May, June and July of that year 1931 the two brothers Fructuoso and Paulino
staked and located ten mining claims or fractions thereof named Victoria, Greta, Triangle, Lolita,
Frank, Paul, Leo, Loreto, Arthur and G. Ubalde, all said claims or fractions being late registered in
the name of Paulino M. Dumaguin as locator in the office of the Mining Recorder. By virtue of an
instrument (Exhibit A) entitled "Deed of Transfer" dated September 10, 1931, Paulino M. Dumaguin
conveyed and transferred to defendants A.I. Reynolds and E.J. Harrison nine of the ten mineral
claims just mentioned, and in another instrument (Exhibit B) on the same date September 10, 1931,
Paulino transferred and conveyed to defendant Reynolds the remaining claim Victoria.

Later, Reynolds as vendee of the mining claim Victoria by virtue of a Deed of Sale (Exhibit C) dated
November 2, 1931 sold and transferred said claim to the defendant Big Wedge Mining Company the
claims Frank, Paul, Leo, Loreto, and Arthur. In still another Deed of Sale (Exhibit J) Reynolds and
Harrison sold and transferred to the same Big Wedge Mining Co. the Greta, Lolita and Triangle
fractions or mineral claims. As a result all the ten mineral claims or fractions transferred by Paulino
to Reynolds and Harrison, with the exception of the claim G. Ubalde were in turn sold and
transferred to the Big Wedge Mining Co.. What was done to this last claim or fraction G. Ubalde,
does not appear on the record, but it must still remain in the name of Reynolds and Harrison.
Plaintiff Dumaguin initiated this case in the Court of First Instance of Baguio by filing his original
complaint on November 5, 1934, later amending it on July 26, 1939 and finally re-amending it on
June 4, 1940. Under his re-amended complaint which contains three case of action, he alleges that
when he executed the deeds of transfer (Exhibits A and B) he was under guardianship and did not
possess the mental capacity to contract and so asked the court that the said two deeds be declared
null and void. He also alleged that those two deed being void, Reynolds and Harrison had no title to
transmit to the Big Wedge Mining Co., by virtue of the deeds of sale, Exhibits C and D (plaintiff
evidently overlooked the deed, Exhibit J) and therefore those two deeds of sale (Exhibit C and D)
should also be declared null and void, and that he, (Paulino) should be declared the owner of the ten
mining claims or fractions in question. Finally, he claimed that the Big Wedge Mining Co., had
illegally taken possession of the ten mining claims and profitably worked or operated them and so he
asked that said company be ordered to render an accounting of its operations and profits made
therefrom, and that the defendants should be ordered jointly and severally to pay to the plaintiff such
profits, as may have been derived by the Big Wedge Mining Co. as shown by its accounts.

Defendants Reynolds and Harrison fled their original answers on January 30, 1935 and April 12,
1935, respectively, both superseded by their amended answers on January 22, 1936. Defendant Big
Wedge Mining Co., filed its answer on January 30, 1935 which was amended January 18, 1936 and
later re-amended on February 5, 1940. Reynolds and Harrison claimed in their answers that plaintiff
Paulino and his brother Fructuoso had been expressly employed by them to locate and stake
mineral claims, and that said two brothers staked and located the ten mineral claims in question for
them (defendants), and that there was an understanding between the two brothers and the two
defendants that the said mineral claims so located would eventually be transferred to them. In its
turn defendant Big Wedge Mining Co., followed the theory of Reynolds and Harrison about Paulino
having been employed by them and having made the location of the mineral claims in question for
their employers, and that the company was not aware of the alleged mental incapacity of plaintiff at
the time that he executed the deeds of transfer in favor of Reynolds and Harrison, and that even if
the plaintiff was under guardianship at the time, yet he confirmed and ratified the deeds of transfer
by his acts and letters after his release from guardianship, and that said company bought the said
mineral claims in good faith and for valuable consideration from the registered owners.

Hearing was held on July 31, 1940. The evidence submitted was mainly documentary. Only three
witnesses took the witness stand. Atty. Alberto Jamir was presented by the Big Wedge Mining Co. to
identify a copy of a decision rendered by the Securities and Exchange Commission. Defendant
Reynolds testified for the defense. For the plaintiff, only Fructuoso Dumaguin testified for his brother.
Why Paulino, the plaintiff, did not take the witness stand, if not to support the allegations of his
complaint, at least to refute the evidence for the defense particularly that which tended to show that
he was employed by defendants Reynolds and Harrison to stake and locate mineral claims for them
with the understanding that he would later transfer said claims to his employers, is not known to this
court. After trial, Judge Jose R. Carlos before whom the hearing was held, rendered judgment on
January 16, 1941, dismissing the complaint.

Paulino Dumaguin appealed from that decision. His Record on Appeal was approved on April 16,
1941 and the brief was filed on November 3, 1941 and the brief for the Big Wedge Mining Co. was
filed or rather is dated December 31, 1941. It is not known whether defendants Reynolds and
Harrison ever filed a brief. The fact is that the record of the case was lost or destroyed during the
war and only copies of the record on appeal and the briefs were salvaged. As to the oral and
documentary evidence which was lost, only those portions of the transcript and documents
reproduced and appearing in the briefs are now available. But the parties have agreed to the
correctness of these portions so quoted in the briefs.
After the reconstitution of the case, the Court of Appeals which had taken charge of the appeal found
that the amount involved was beyond its jurisdiction and so certified the case to us. Neither
Reynolds nor Harrison has appeared before the Court of appeals or before this Court. Appellant's
attorney represented that Harrison's counsel could not appear in the appeal due to lack of authority,
not having heard from his client since liberation and being of the belief that his client is dead. There
was also information to the effect that defendant Reynolds had been killed during the early part of
the occupation by the Japanese. So, only the Big Wedge Mining Co., is opposing the present
appeal.

The decisive and pivotal question here is whether plaintiff Paulino M. Dumaguin and hid brother
Fructuoso acting on their account staked and located these mining claims or fractions in dispute for
Paulino, or whether they acting as employees and agents of defendants Reynolds and Harrison,
staked and located said claims for and in behalf of their employers. We agree with the trial court that
the great preponderance of evidence is to the effect that these claims were located for Reynolds and
Harrison by Paulino and Fructuoso as employees, and that the latter were purposely employed and
paid for this work. All the expenses incident to the skating and location of said claims and
registration of the corresponding declarations of location were paid by Reynolds and Harrison. It is
true that in one part of his testimony, Fructuoso claimed that he and his brother were employed
merely to relocate the mining claims of the defendants within the Anaconda Group but later on, he
admitted in his testimony and also in his affidavit (Exhibit 1) which was prepared before these
proceedings were initiated in court that he and his brother Paulino working together were paid by the
defendants Reynolds and Harrison to locate new mining claims outside the Anaconda Group; that as
a matter of fact, Paulino engaged in this work at the beginning, but because he (Fructuoso) found
that Paulino physically was not equal to the arduous work of climbing up and down mountains to
stake and locate claims, he was placed in charge of the payroll of the defendants and detailed to do
paper work which, it is presumed, included in the registration of the declarations of location of the
mining claims in the office of the Mining Recorder, in his name. Fructuoso also admitted that there
was an understanding before and pending the staking and location of said mining claims that they
would eventually be transferred to their real owners, Reynolds and Harrison.

In consonance to this correct theory that these mining claims were located for defendants Reynolds
and Harrison, as counsel for appellee well observes, Exhibit A and E are both entitled "Deed of
Transfer". This conveys the idea that Paulino was merely transferring to the real owners property
which technically and in name were registered as his own. Otherwise, if he really owned these
mining claims, the two deeds (Exhibit A and B) would have been more appropriately entitled "Deed
of Sale" and the body of said instruments should have stated that he was selling the mining claims.
On the other hand, we have the instruments (Exhibits C and D) wherein Reynolds and Harrison sold
said mining claims or fractions to the Big Wedge Mining Co., and the documents were each entitled
"Deed of Sale".

It would really be unfair, even against public policy to allow a person employed to stake and locate
mining claims for his employer to make locations on his own account and for his own benefit
tho done outside hours of work or employment, because there is an obvious incompatibility and
conflict of interest between those of the employer on the one hand and those of the employee on the
other, unless there is a clear and express agreement to the contrary. Judge Carlos in his well-
considered decision correctly states the fiduciary relation between Paulino and his employers
Reynolds and Harrison and the sound and correct rule and public policy on this matter.

The fiduciary relation between the plaintiff and the defendants A.I. Reynolds and E.J.
Harrison, is very clear from the evidence. Fructuoso M. Dumaguin, has clearly stated that his
brother, Paulino M. Dumaguin, was working under him while he was locating the claims in
question for A.I. Reynolds and E.J. Harrison. There can be no doubt that these claims in
question were among those which these defendants wanted staked because, according to
Fructuoso Dumaguin himself, they all adjoined the Anaconda Group, which ground he was
specially instructed to stake for the said defendants. The plaintiff, herein, therefore, learned
of the existence, especially of the fractional mineral claims, because he was with the party
who staked the rest of the claims in that locality. To permit the plaintiff herein to assert his
claim of ownership over these claims in question would be tantamount to allowing him to
violate and infringe all the sound and age-old rules which govern principal and agent. There
can be no doubt that this relation existed because Fructuoso M. Dumaguin, the sole witness
for the plaintiff, stated categorically in his affidavit Exhibit I that all the claims subject of this
litigation, except G. Ubalde mineral claim, had been located and staked by him for A.I.
Reynolds and E.J. Harrison, though the same were recorded in the name of his brother
Paulino. It is quite evident, therefore, that even if no transfers were made or Exhibit "A" and
"B did not exist, these two defendants would still be entitled to an assignment of the said
claims. The evidence of the fiduciary relation between plaintiff and the defendants A.I.
Reynolds and E.J. Harrison was given by none other than Fructuoso M. Dumaguin, the
brother the only witness of the plaintiff in this case.

Any act of an agent, the object or tendency of which is to commit a fraud or breach of the
agency, should be discouraged. In the first place, such acts are condemned by public policy.
They are against the morals; therefore, they should never be tolerated. An agent or trustee,
or anybody who acts in a fiduciary capacity, should never be permitted to capitalize on his
fiduciary position to mulct or take advantage of his principal or employer.

It has been the practice of miners to employ others to stake mining claims for them. This is
usually done after the prospectors have assured themselves that a mine exists in a certain
locality. The man who place the stake could easily leave fractional mineral claims in between
the claims without reporting the existence of this fractions to his principal. Later he could
stake and claim them. If this is permitted to happen, bona fide miners can easily be held up
by the very man whom they have employed to stake their mining claims. If the mining
industry shall be protected and the exploitation of the natural resource of this country
encouraged, such practice should not be tolerated. The wrong or the damage that can be
done is unlimited. If agents or employees or laborers are permitted to conceal or withhold
certain mining claims ordered staked by their employer who gave them specific instructions
to stake the entire ground in a certain locality, the effect will practically be the condonation
and legalization of a holdup. For this reason Mechem on Agency, Sec. 1224, said the
following:

"The well-settled and salutary principle that person who undertakes to act for another shall
not be in the same matter, act for himself, results also in the other rule, that all profits made
and advantage gained by the agent in the execution of the agency belong to the principal.
And it matters not whether such profit or advantage be the result of the performance or of the
violation of the duty of the agent if it be the fruit of the agency. If his duty be strictly
performed, the resulting profit accrues to their principal as the legitimate consequence of the
relation. If profit accrues from his violation of duty while executing the agency, that likewise
belongs to the principal, not only because the principal has to assume the responsibility of
the transaction, but also because the agent cannot be permitted to derive advantage from
his own fault.

"It is only by rigid adherence to this rule that all temptation can be removed from one acting
in a fiduciary capacity, to abuse his trust or seek his own advantage in the position which it
affords him."
In view of our conclusion and holding that these mining claims were staked and located for the
benefit of the defendants Reynolds and Harrison, the other points and questions involved in the
appeal exhaustively, in detail and with a wealth of authorities, discussed by counsel for both
appellant and appellee with ability and skill, become incidental and not of much if any relevancy
whatsoever, although we may discuss one or two of them not so much to strengthen our decision
but rather to render more clear our views.

Appellants contends that the deeds of transfer (Exhibits A and B) should be annulled for lack of
mental capacity because at the time of their execution he was under guardianship for insanity. It is
contended that altho in a case of execution of a will by a testator who was under guardianship for
mental derangement, the presumption of insanity is only juris tantum, subject to rebuttal, and
nevertheless, mental incapacity as regards contracts, particularly those transferring property, under
similar circumstances, involves a conclusive presumption which cannot be rebutted by evidence, We
have studied the arguments and authorities adduced by both counsel on this point and we are
inclined to agree with counsel for appellee that the better rule is that even in the execution of
contracts, in the absence of a statute to the contrary, the presumption of insanity and mental
incapacity is only prima facie and may be rebutted by evidence; and that a person under
guardianship for insanity may still enter into a valid contract and even convey property, provided it is
proven that at the time if entering into said contract, he was not insane or that his mental defect if
mentally deranged did not interfere with or affect his capacity to appreciate the meaning and
significance of the transaction entered into by him.

Section 66. Generally. — Of course, not every substandard mentality or even every mental
infirmity has the effect of rendering the afflicted person disabled for the purpose of entering
into contract and making conveyance. . . . A reasonable test, suggested by several courts for
the purpose of determining whether an infirmity operates to render a person incapable of
binding himself absolutely by contract, is whether his mind has been so affected as to render
him incapable of understanding the nature and consequences of his acts, or more exactly,
whether his mental powers have become so far affected as to make him unable to
understand the character of the transaction in question. . . . Some authorities take a view that
a grantor may be competent to execute a deed notwithstanding his disability to transact
business generally, provided he understands the nature of what he is doing and recollects
the property of which he is making a disposition and to whom he is conveying it. Other
authorities, however, take the position that to sustain a deed, the grantor must have the
ability to transact ordinary business. In any event, if it appears that the grantor in a deed was
incapable of comprehending that the effect of the instrument, when made, executed, and
delivered, would be to divest him of title to the land covered by the instrument, it is not
binding upon him. . . . (28 Am. Jur., Insane, etc., See Sec. 66, pp. 701-702.)

. . . Even partial insanity will not render a contract voidable unless it exists in connection with
or is referable to the subject matter of the contract. Similarly, a delusion if unconnected with
the transaction in question, is not sufficient to affect the validity of a contract consummated
by the person thus affected. Monomania or a mental fixation or abnormality respecting a
matter disconnected with the act of conveying property will not affect the validity of the
conveyance. . . . (Ibid, p. 703.)

There are many case of persons mentally deranged who although they have been having
obsessions and delusions for many years regarding certain subjects and situations, still are mentally
sound in other respects. There are others who though insane, have their lucid intervals when in all
respects they are perfectly sane and mentally sound.
In the case of Paulino M. Dumaguin, according to the doctor who observed and examined him, and
who made his report on October 15, 1929, and that was more than two years before Exhibits A and
B were executed, he (Paulino) while in the hospital was "well-behaved, oriented in all spheres,
coherent in his speech and has no more illusions or hallucinations; but is having a delusions that one
of the patients in the hospital is trying to chloroform him. He consequently keeps away from said
patient and that he was "not sure that his former officemates whom he erroneously believed
chloroformed him before would not chloroform him anymore when he gets home". This was in 1929.
The same year Paulino was discharged from the hospital presumably because his condition had
improved, and on February 2, 1931, Paulino and his wife in a motion assured the court of Camarines
Sur that Paulino was already re-established (ya esta restablecido). Several months later he went to
Baguio looking for work. It is to be presumed that he was then no longer insane. It is equally to be
presumed that his brother Fructuoso would not have recommended him for employment by
defendants Reynolds and Harrison and actually let him work for them, at the beginning climbing up
and down mountains to stake and locate claims for his employers; and if Paulino was then insane, it
was not likely that Reynolds and Harrison would employ him to do the work of staking and locating
claims to say nothing of taking charge of the payroll of their employees, and registering with the
Mining Recorder the declarations of location of mining claims. There is every reason to believe as
we do and hold that at least from about the beginning of the year 1931 when Paulino began working
for his employers Reynolds and Harrison, and when he executed Exhibits A and B, he had the
mental capacity to transact ordinary business and was mentally capable of validity entering into a
contract even conveying property to another. But even assuming that at the time of executing
Exhibits A and B, Paulino were still mentally incapacitated, still, because of his moral and legal
obligation to transfer said claims to his employers, he could through his guardian have been
compelled by the court to execute said transfer, or after termination of his guardianship obliged
personally to execute said transfer to his employers. He acted as a trustee for his employers and the
law will not allow him to invoke insanity or mental in capacity to violate his trust.

In relation with this alleged incapacity of Paulino, it is interesting to note that when he and his
lawyers filed his first complaint in 1934, that is, about three years after executing Exhibits A and B,
they said nothing about being mentally incapacitated in 1931. They did not ask for the annulment of
the deeds of transfer (Exhibits A an B) on the ground of lack of mental capacity. They assumed and
took it for granted and led others to believe that said deeds of transfer were valid. They only asked
for the payment of damages. It was not until five years later in the year 1939 when they filed the first
amended complaint that they raised this question of mental incapacity. It took him and his lawyers
almost five years to discover and claim that he (Paulino) was not mentally capable to enter into a
contra when he executed exhibits A and B. In view of all this, we may well and logically presume that
all the time that Paulino was employed by Reynolds and Harrison to locate and register mining
claims for them, and at the same time he executed Exhibits A and B and for several years thereafter
when he continued in their employ, neither Fructuoso, Paulino's brother nor defendants Reynold and
Harrison had any reason to suspect, much less, to believe that Paulino was other than a sane,
responsible and mentally capable individual, able to take care not only of him and his interest but
also of the interest of his employers. Neither did the other employees of Reynolds and Harrison to
whom Paulino paid wages on pay-days, be being in charge of the payroll, and the Mining Recorder
before whom he executed proper and valid affidavits of locations for purpose of registration, note
any mental incapacity on the part of Paulino. All this goes to reinforce the finding that Paulino was
mentally sane and capable in 1931.

Counsel for appellant next contends that Exhibits A and B should be declared void for lack of
consideration. Said two deeds each mentions P1.00 and other valuable consideration, the receipt
whereof was acknowledge, to be the consideration. We believe that consideration is sufficient, this
aside from the provision of law (Article 1277 of the Civil Code), that consideration in a contract will
be presumed and that it is licit, unless the debtor prove the contrary which Paulino in this case failed
to establish. Furthermore, according to Reynolds, in consideration of the transfer of these mining
claims, he had later paid Paulino between P3,000 and P5,000. This was not refuted by Paulino.
Moreover, under the view we take of the mining claims having been located for the benefit of
defendants Reynolds and Harrison, by Paulino in his capacity as their employee, paid for that
purpose, no consideration for the conveyances was even necessary. He was merely fulfilling an
obligation and complying with a trust.

In conclusion we find and hold that Exhibits A and B were valid conveyances executed by one who
was mentally capable. Consequently, Reynolds and Harrison had a valid title to convey as they did
convey to defendant Big Wedge Mining Co., in Exhibits C, D, and J. 1âwphïl.nêt

In view of the foregoing, finding no reversible error in the decision appealed from the same is hereby
affirmed, with costs.
G.R. No. L-30573 October 29, 1971

VICENTE M. DOMINGO, represented by his heirs, ANTONINA RAYMUNDO VDA. DE

DOMINGO, RICARDO, CESAR, AMELIA, VICENTE JR., SALVADOR, IRENE and JOSELITO, all
surnamed DOMINGO, petitioners-appellants,
vs.
GREGORIO M. DOMINGO, respondent-appellee, TEOFILO P. PURISIMA, intervenor-respondent.

Petitioner-appellant Vicente M. Domingo, now deceased and represented by his heirs, Antonina
Raymundo vda. de Domingo, Ricardo, Cesar, Amelia, Vicente Jr., Salvacion, Irene and Joselito, all
surnamed Domingo, sought the reversal of the majority decision dated, March 12, 1969 of the
Special Division of Five of the Court of Appeals affirming the judgment of the trial court, which
sentenced the said Vicente M. Domingo to pay Gregorio M. Domingo P2,307.50 and the intervenor
Teofilo P. Purisima P2,607.50 with interest on both amounts from the date of the filing of the
complaint, to pay Gregorio Domingo P1,000.00 as moral and exemplary damages and P500.00 as
attorney's fees plus costs.

The following facts were found to be established by the majority of the Special Division of Five of the
Court of Appeals:

In a document Exhibit "A" executed on June 2, 1956, Vicente M. Domingo granted Gregorio
Domingo, a real estate broker, the exclusive agency to sell his lot No. 883 of Piedad Estate with an
area of about 88,477 square meters at the rate of P2.00 per square meter (or for P176,954.00) with
a commission of 5% on the total price, if the property is sold by Vicente or by anyone else during the
30-day duration of the agency or if the property is sold by Vicente within three months from the
termination of the agency to apurchaser to whom it was submitted by Gregorio during the
continuance of the agency with notice to Vicente. The said agency contract was in triplicate, one
copy was given to Vicente, while the original and another copy were retained by Gregorio.

On June 3, 1956, Gregorio authorized the intervenor Teofilo P. Purisima to look for a buyer,
promising him one-half of the 5% commission.

Thereafter, Teofilo Purisima introduced Oscar de Leon to Gregorio as a prospective buyer.

Oscar de Leon submitted a written offer which was very much lower than the price of P2.00 per
square meter (Exhibit "B"). Vicente directed Gregorio to tell Oscar de Leon to raise his offer. After
several conferences between Gregorio and Oscar de Leon, the latter raised his offer to P109,000.00
on June 20, 1956 as evidenced by Exhibit "C", to which Vicente agreed by signing Exhibit "C". Upon
demand of Vicente, Oscar de Leon issued to him a check in the amount of P1,000.00 as earnest
money, after which Vicente advanced to Gregorio the sum of P300.00. Oscar de Leon confirmed his
former offer to pay for the property at P1.20 per square meter in another letter, Exhibit "D".
Subsequently, Vicente asked for an additional amount of P1,000.00 as earnest money, which Oscar
de Leon promised to deliver to him. Thereafter, Exhibit "C" was amended to the effect that Oscar de
Leon will vacate on or about September 15, 1956 his house and lot at Denver Street, Quezon City
which is part of the purchase price. It was again amended to the effect that Oscar will vacate his
house and lot on December 1, 1956, because his wife was on the family way and Vicente could stay
in lot No. 883 of Piedad Estate until June 1, 1957, in a document dated June 30, 1956 (the year
1957 therein is a mere typographical error) and marked Exhibit "D". Pursuant to his promise to
Gregorio, Oscar gave him as a gift or propina the sum of One Thousand Pesos (P1,000.00) for
succeeding in persuading Vicente to sell his lot at P1.20 per square meter or a total in round figure
of One Hundred Nine Thousand Pesos (P109,000.00). This gift of One Thousand Pesos (P1,000.00)
was not disclosed by Gregorio to Vicente. Neither did Oscar pay Vicente the additional amount of
One Thousand Pesos (P1,000.00) by way of earnest money. In the deed of sale was not executed
on August 1, 1956 as stipulated in Exhibit "C" nor on August 15, 1956 as extended by Vicente,
Oscar told Gregorio that he did not receive his money from his brother in the United States, for which
reason he was giving up the negotiation including the amount of One Thousand Pesos (P1,000.00)
given as earnest money to Vicente and the One Thousand Pesos (P1,000.00) given to Gregorio
as propina or gift. When Oscar did not see him after several weeks, Gregorio sensed something
fishy. So, he went to Vicente and read a portion of Exhibit "A" marked habit "A-1" to the effect that
Vicente was still committed to pay him 5% commission, if the sale is consummated within three
months after the expiration of the 30-day period of the exclusive agency in his favor from the
execution of the agency contract on June 2, 1956 to a purchaser brought by Gregorio to Vicente
during the said 30-day period. Vicente grabbed the original of Exhibit "A" and tore it to pieces.
Gregorio held his peace, not wanting to antagonize Vicente further, because he had still duplicate of
Exhibit "A". From his meeting with Vicente, Gregorio proceeded to the office of the Register of
Deeds of Quezon City, where he discovered Exhibit "G' deed of sale executed on September 17,
1956 by Amparo Diaz, wife of Oscar de Leon, over their house and lot No. 40 Denver Street, Cubao,
Quezon City, in favor Vicente as down payment by Oscar de Leon on the purchase price of Vicente's
lot No. 883 of Piedad Estate. Upon thus learning that Vicente sold his property to the same buyer,
Oscar de Leon and his wife, he demanded in writting payment of his commission on the sale price of
One Hundred Nine Thousand Pesos (P109,000.00), Exhibit "H". He also conferred with Oscar de
Leon, who told him that Vicente went to him and asked him to eliminate Gregorio in the transaction
and that he would sell his property to him for One Hundred Four Thousand Pesos (P104,000.0 In
Vicente's reply to Gregorio's letter, Exhibit "H", Vicente stated that Gregorio is not entitled to the 5%
commission because he sold the property not to Gregorio's buyer, Oscar de Leon, but to another
buyer, Amparo Diaz, wife of Oscar de Leon.

The Court of Appeals found from the evidence that Exhibit "A", the exclusive agency contract, is
genuine; that Amparo Diaz, the vendee, being the wife of Oscar de Leon the sale by Vicente of his
property is practically a sale to Oscar de Leon since husband and wife have common or identical
interests; that Gregorio and intervenor Teofilo Purisima were the efficient cause in the
consummation of the sale in favor of the spouses Oscar de Leon and Amparo Diaz; that Oscar de
Leon paid Gregorio the sum of One Thousand Pesos (P1,000.00) as "propina" or gift and not as
additional earnest money to be given to the plaintiff, because Exhibit "66", Vicente's letter addressed
to Oscar de Leon with respect to the additional earnest money, does not appear to have been
answered by Oscar de Leon and therefore there is no writing or document supporting Oscar de
Leon's testimony that he paid an additional earnest money of One Thousand Pesos (P1,000.00) to
Gregorio for delivery to Vicente, unlike the first amount of One Thousand Pesos (P1,000.00) paid by
Oscar de Leon to Vicente as earnest money, evidenced by the letter Exhibit "4"; and that Vicente did
not even mention such additional earnest money in his two replies Exhibits "I" and "J" to Gregorio's
letter of demand of the 5% commission.

The three issues in this appeal are (1) whether the failure on the part of Gregorio to disclose to
Vicente the payment to him by Oscar de Leon of the amount of One Thousand Pesos (P1,000.00)
as gift or "propina" for having persuaded Vicente to reduce the purchase price from P2.00 to P1.20
per square meter, so constitutes fraud as to cause a forfeiture of his commission on the sale price;
(2) whether Vicente or Gregorio should be liable directly to the intervenor Teofilo Purisima for the
latter's share in the expected commission of Gregorio by reason of the sale; and (3) whether the
award of legal interest, moral and exemplary damages, attorney's fees and costs, was proper.
Unfortunately, the majority opinion penned by Justice Edilberto Soriano and concurred in by Justice
Juan Enriquez did not touch on these issues which were extensively discussed by Justice Magno
Gatmaitan in his dissenting opinion. However, Justice Esguerra, in his concurring opinion, affirmed
that it does not constitute breach of trust or fraud on the part of the broker and regarded same as
merely part of the whole process of bringing about the meeting of the minds of the seller and the
purchaser and that the commitment from the prospect buyer that he would give a reward to Gregorio
if he could effect better terms for him from the seller, independent of his legitimate commission, is
not fraudulent, because the principal can reject the terms offered by the prospective buyer if he
believes that such terms are onerous disadvantageous to him. On the other hand, Justice
Gatmaitan, with whom Justice Antonio Cafizares corner held the view that such an act on the part of
Gregorio was fraudulent and constituted a breach of trust, which should deprive him of his right to
the commission.

The duties and liabilities of a broker to his employer are essentially those which an agent owes to his
principal.
1

Consequently, the decisive legal provisions are in found Articles 1891 and 1909 of the New Civil
Code.

Art. 1891. Every agent is bound to render an account of his transactions and to
deliver to the principal whatever he may have received by virtue of the agency, even
though it may not be owing to the principal.

Every stipulation exempting the agent from the obligation to render an account shall
be void.

xxx xxx xxx

Art. 1909. The agent is responsible not only for fraud but also for negligence, which
shall be judged with more less rigor by the courts, according to whether the agency
was or was not for a compensation.

Article 1891 of the New Civil Code amends Article 17 of the old Spanish Civil Code which provides
that:

Art. 1720. Every agent is bound to give an account of his transaction and to pay to
the principal whatever he may have received by virtue of the agency, even though
what he has received is not due to the principal.

The modification contained in the first paragraph Article 1891 consists in changing the phrase "to
pay" to "to deliver", which latter term is more comprehensive than the former.

Paragraph 2 of Article 1891 is a new addition designed to stress the highest loyalty that is required
to an agent — condemning as void any stipulation exempting the agent from the duty and liability
imposed on him in paragraph one thereof.

Article 1909 of the New Civil Code is essentially a reinstatement of Article 1726 of the old Spanish
Civil Code which reads thus:
 Art. 1726. The agent is liable not only for fraud, but also for negligence, which shall
be judged with more or less severity by the courts, according to whether the agency
was gratuitous or for a price or reward.

The aforecited provisions demand the utmost good faith, fidelity, honesty, candor and fairness on the
part of the agent, the real estate broker in this case, to his principal, the vendor. The law imposes
upon the agent the absolute obligation to make a full disclosure or complete account to his principal
of all his transactions and other material facts relevant to the agency, so much so that the law as
amended does not countenance any stipulation exempting the agent from such an obligation and
considers such an exemption as void. The duty of an agent is likened to that of a trustee. This is not
a technical or arbitrary rule but a rule founded on the highest and truest principle of morality as well
as of the strictest justice.
2

Hence, an agent who takes a secret profit in the nature of a bonus, gratuity or personal benefit from
the vendee, without revealing the same to his principal, the vendor, is guilty of a breach of his loyalty
to the principal and forfeits his right to collect the commission from his principal, even if the principal
does not suffer any injury by reason of such breach of fidelity, or that he obtained better results or
that the agency is a gratuitous one, or that usage or custom allows it; because the rule is to prevent
the possibility of any wrong, not to remedy or repair an actual damage.  By taking such profit or
3

bonus or gift or propina from the vendee, the agent thereby assumes a position wholly inconsistent
with that of being an agent for hisprincipal, who has a right to treat him, insofar as his commission is
concerned, as if no agency had existed. The fact that the principal may have been benefited by the
valuable services of the said agent does not exculpate the agent who has only himself to blame for
such a result by reason of his treachery or perfidy.

This Court has been consistent in the rigorous application of Article 1720 of the old Spanish Civil
Code. Thus, for failure to deliver sums of money paid to him as an insurance agent for the account
of his employer as required by said Article 1720, said insurance agent was convicted estafa.  An 4

administrator of an estate was likewise under the same Article 1720 for failure to render an account
of his administration to the heirs unless the heirs consented thereto or are estopped by having
accepted the correctness of his account previously rendered. 5

Because of his responsibility under the aforecited article 1720, an agent is likewise liable for estafa
for failure to deliver to his principal the total amount collected by him in behalf of his principal and
cannot retain the commission pertaining to him by subtracting the same from his collections. 6

A lawyer is equally liable unnder said Article 1720 if he fails to deliver to his client all the money and
property received by him for his client despite his attorney's lien.  The duty of a commission agent to
7

render a full account his operations to his principal was reiterated in Duhart, etc. vs. Macias. 8

The American jurisprudence on this score is well-nigh unanimous.

Where a principal has paid an agent or broker a commission while ignorant of the
fact that the latter has been unfaithful, the principal may recover back the
commission paid, since an agent or broker who has been unfaithful is not entitled to
any compensation.

xxx xxx xxx

In discussing the right of the principal to recover commissions retained by an

unfaithful agent, the court in Little vs. Phipps (1911) 208 Mass. 331, 94 NE 260, 34
LRA (NS) 1046, said: "It is well settled that the agent is bound to exercise the utmost
 good faith in his dealings with his principal. As Lord Cairns said, this rule "is not a
technical or arbitrary rule. It is a rule founded on the highest and truest principles, of
morality." Parker vs. McKenna (1874) LR 10,Ch(Eng) 96,118 ... If the agent does not
conduct himself with entire fidelity towards his principal, but is guilty of taking a secret
profit or commission in regard the matter in which he is employed, he loses his right
to compensation on the ground that he has taken a position wholly inconsistent with
that of agent for his employer, and which gives his employer, upon discovering it, the
right to treat him so far as compensation, at least, is concerned as if no agency had
existed. This may operate to give to the principal the benefit of valuable services
rendered by the agent, but the agent has only himself to blame for that result."

xxx xxx xxx

The intent with which the agent took a secret profit has been held immaterial where
the agent has in fact entered into a relationship inconsistent with his agency, since
the law condemns the corrupting tendency of the inconsistent relationship. Little vs.
Phipps (1911) 94 NE 260. 9

As a general rule, it is a breach of good faith and loyalty to his principal for an agent,
while the agency exists, so to deal with the subject matter thereof, or with information
acquired during the course of the agency, as to make a profit out of it for himself in
excess of his lawful compensation; and if he does so he may be held as a
trustee and may be compelled to account to his principal for all profits, advantages,
rights, or privileges acquired by him in such dealings, whether in performance or in
violation of his duties, and be required to transfer them to his principal upon being
reimbursed for his expenditures for the same, unless the principal has consented to
or ratified the transaction knowing that benefit or profit would accrue or had accrued,
to the agent, or unless with such knowledge he has allowed the agent so as to
change his condition that he cannot be put in status quo. The application of this rule
is not affected by the fact that the principal did not suffer any injury by reason of the
agent's dealings or that he in fact obtained better results; nor is it affected by the fact
that there is a usage or custom to the contrary or that the agency is a gratuitous one.
(Emphasis applied.)  10

In the case at bar, defendant-appellee Gregorio Domingo as the broker, received a gift or propina in
the amount of One Thousand Pesos (P1,000.00) from the prospective buyer Oscar de Leon, without
the knowledge and consent of his principal, herein petitioner-appellant Vicente Domingo. His
acceptance of said substantial monetary gift corrupted his duty to serve the interests only of his
principal and undermined his loyalty to his principal, who gave him partial advance of Three Hundred
Pesos (P300.00) on his commission. As a consequence, instead of exerting his best to persuade his
prospective buyer to purchase the property on the most advantageous terms desired by his
principal, the broker, herein defendant-appellee Gregorio Domingo, succeeded in persuading his
principal to accept the counter-offer of the prospective buyer to purchase the property at P1.20 per
square meter or One Hundred Nine Thousand Pesos (P109,000.00) in round figure for the lot of
88,477 square meters, which is very much lower the the price of P2.00 per square meter or One
Hundred Seventy-Six Thousand Nine Hundred Fifty-Four Pesos (P176,954.00) for said lot originally
offered by his principal.

The duty embodied in Article 1891 of the New Civil Code will not apply if the agent or broker acted
only as a middleman with the task of merely bringing together the vendor and vendee, who
themselves thereafter will negotiate on the terms and conditions of the transaction. Neither would the
rule apply if the agent or broker had informed the principal of the gift or bonus or profit he received
from the purchaser and his principal did not object therto.   Herein defendant-appellee Gregorio
11

Domingo was not merely a middleman of the petitioner-appellant Vicente Domingo and the buyer
Oscar de Leon. He was the broker and agent of said petitioner-appellant only. And therein petitioner-
appellant was not aware of the gift of One Thousand Pesos (P1,000.00) received by Gregorio
Domingo from the prospective buyer; much less did he consent to his agent's accepting such a gift.

The fact that the buyer appearing in the deed of sale is Amparo Diaz, the wife of Oscar de Leon,
does not materially alter the situation; because the transaction, to be valid, must necessarily be with
the consent of the husband Oscar de Leon, who is the administrator of their conjugal assets
including their house and lot at No. 40 Denver Street, Cubao, Quezon City, which were given as part
of and constituted the down payment on, the purchase price of herein petitioner-appellant's lot No.
883 of Piedad Estate. Hence, both in law and in fact, it was still Oscar de Leon who was the buyer.

As a necessary consequence of such breach of trust, defendant-appellee Gregorio Domingo must

forfeit his right to the commission and must return the part of the commission he received from his
principal.

Teofilo Purisima, the sub-agent of Gregorio Domingo, can only recover from Gregorio Domingo his
one-half share of whatever amounts Gregorio Domingo received by virtue of the transaction as his
sub-agency contract was with Gregorio Domingo alone and not with Vicente Domingo, who was not
even aware of such sub-agency. Since Gregorio Domingo received from Vicente Domingo and
Oscar de Leon respectively the amounts of Three Hundred Pesos (P300.00) and One Thousand
Pesos (P1,000.00) or a total of One Thousand Three Hundred Pesos (P1,300.00), one-half of the
same, which is Six Hundred Fifty Pesos (P650.00), should be paid by Gregorio Domingo to Teofilo
Purisima.

Because Gregorio Domingo's clearly unfounded complaint caused Vicente Domingo mental anguish
and serious anxiety as well as wounded feelings, petitioner-appellant Vicente Domingo should be
awarded moral damages in the reasonable amount of One Thousand Pesos (P1,000.00) attorney's
fees in the reasonable amount of One Thousand Pesos (P1,000.00), considering that this case has
been pending for the last fifteen (15) years from its filing on October 3, 1956.

WHEREFORE, the judgment is hereby rendered, reversing the decision of the Court of Appeals and
directing defendant-appellee Gregorio Domingo: (1) to pay to the heirs of Vicente Domingo the sum
of One Thousand Pesos (P1,000.00) as moral damages and One Thousand Pesos (P1,000.00) as
attorney's fees; (2) to pay Teofilo Purisima the sum of Six Hundred Fifty Pesos (P650.00); and (3) to
pay the costs.
 EN BANC
[G.R. No. L-9572.  July 31, 1956.]
JOAQUIN GUZMAN, Petitioner, vs. THE HONORABLE COURT OF APPEALS, Respondent.
 
DECISION
REYES, J.B.L., J.:
Appeal by certiorari from the decision of the Court of Appeals finding Appellant Joaquin Guzman guilty
of the crime of qualified theft.
The facts, as found by the Court of Appeals, are as follows: chanroblesvirtuallawlibrary

“That accused Joaquin Guzman was a travelling sales agent of the New Life Commercial of Aparri,
Cagayan. On March 2, 1903, Guzman left Manila with 45 cases of different assortments of La Tondeña
wine, in a truck driven by Andres Buenaventura, with Federico Cabacungan as washing (helper), on their
return trip to Aparri, by way of Ilocos Norte. Along the route, the accused made various cash sales of
wine and when they reached Ballesteros, Cagayan, at about 3 o’clock in the afternoon of March 5, 1953,
said accused had in his possession the amount of P4,873.62. Here, they parked their truck at the
Sambrano Station and the accused left his companions until supper time at past 7: 00 p.m. When they
chanroblesvirtuallawlibrary

retired for the night, driver Buenaventura and the accused occupied the driver’s compartment of the
truck, Buenaventura lying on the driver’s seat and the accused taking the upper deck with which the
truck was provided (see photograph Exhibit A). The washing, Cabacungan, slept in the body of the truck
where the wines were kept. There was a wall between the body of the truck and the driver’s
compartment;  and on that night all the windows were locked from inside. In the morning of March 6,
chan roblesvirtualawlibrary

1953, accused Guzman told the driver that he lost the amount of P2,840.50, and his firearm license.
Upon the advice of the driver, said accused reported the matter to the Chief of Police of Ballesteros,
who gave him a certificate of loss of his firearm license. They were proceeding to their home journey
when, at the outskirts of Ballesteros, they were met by a tax collector and policeman Mariano David
who told the accused to return to Ballesteros and execute an affidavit regarding the alleged theft.
Before the accused returned to Ballesteros, he entrusted to the driver Buenaventura, the amount of
P1,630 in cash and a check for P403.12 under the proper receipt (Exhibit C), with the sales invoices, for
delivery to the manager, Enrique Go, of the company of Aparri. Driver and washing continued the trip
and arrived at Aparri between 3 and 4 o’clock in the afternoon of the same day. The driver delivered the
money and invoices to Enrique Go and informed the latter of the loss. Go reported the matter to the
Philippine Constabulary. The PC investigators and Go picked the accused at his house at Aparri at 8
o’clock in the morning, on March 7, 1953, after having failed to see him (accused) at Ballesteros the
previous night. Questioned at the PC barracks as to how much money he still had, the accused stated
that he had only P3, in his person. On March 10, 1953, the accused wrote to Go, requesting him to defer
the filing of the criminal complaint until March 16, 1953, on which date he promised to refund the
amount lost (Exhibit G). On March 17, 1953, the said accused paid the amount of P1,500 to Go. On April
1, 1953, the accused was prosecuted for theft for the shortage of P804.70.” (Appellant’s Brief, pp. 13-
15.)
Appellant Guzman claims, first, that under the above findings of fact, he had committed only the crime
of estafa;  and second, as the crimes of estafa and theft are essentially different offenses, he should be
chan roblesvirtualawlibrary

acquitted of the present charge for qualified theft, although proceedings may be filed anew against him
for the proper offense.
We agree with Appellant that under the above facts, the Court of Appeals erred in holding that he “had
only the material or physical possession of the said merchandise or its proceeds, because he was not the
owner thereof;  he was simply holding the money for and in behalf of his employer”.
chan roblesvirtualawlibrary

While it is true that Appellant received the proceeds of his wine sales as travelling salesman for the
complainant, for and in behalf of the latter as his principal, and that possession of the agent is
possession of the principal, an agent, unlike a servant or messenger, has both the physical and juridical
possession of the goods received in agency, or the proceeds thereof, which takes the place of the goods
after their sale by the agent. His duty to turn over the proceeds of the agency depends upon his
discharge, as well as the result of the accounting between him and the principal;  and he may set up chan roblesvirtualawlibrary

his right of possession as against that of the principal until the agency is terminated.
The case cited by the Court of Appeals (People vs. Locson, 57 Phil., 325), in support of its theory
that Appellant only had the material possession of the merchandise he was selling for his principal, or
their proceeds, is not in point. In said case, the receiving teller of a bank who misappropriated money
received by him for the bank, was held guilty of qualified theft on the theory that the possession of the
teller is the possession of the bank. There is an essential distinction between the possession by a
receiving teller of funds received from third persons paid to the bank, and an agent who receives the
proceeds of sales of merchandise delivered to him in agency by his principal. In the former case,
payment by third persons to the teller is payment to the bank itself;  the teller is a mere custodian or chan roblesvirtualawlibrary

keeper of the funds received, and has no independent right or title to retain or possess the same as
against the bank. An agent, on the other hand, can even assert, as against his own principal, an
independent, autonomous, right to retain the money or goods received in consequence of the agency;  chan

as when the principal fails to reimburse him for advances he has made, and indemnify him for
roblesvirtualawlibra ry

damages suffered without his fault (Article 1915, new Civil Code;  Article 1730, old). chan roblesvirtualawlibrary

As Appellant converted to his own use proceeds of sales of merchandise delivered to him as agent,
which he received in trust for and under obligation to deliver and turn over to his principal, he is guilty
of the crime of estafa as defined by Article 315, paragraph 1, subparagraph (c), of the Revised Penal
Code. This has been the consistent ruling of this Court in cases where a sales agent misappropriates or
fails to turn over to his principal proceeds of things or goods he was commissioned or authorized to sell
for the latter. (U. S. vs. Reyes, 36 Phil., 791;  U. S. vs. Lim, 36 Phil., 682;  People vs. Leachon, 56 Phil., chan roblesvirtualawlibrary chan roblesvirtualawlibrary

737).
The next question is whether the present information for qualified theft alleges sufficient facts to sustain
a conviction for estafa under Article 315, paragraph 1, subparagraph (b), of the Revised Penal Code. The
information reads: chanroblesvirtuallawlibrary

“The undersigned accuses Joaquin Guzman of the crime of Qualified Theft, defined and penalized under
Articles 308 and 309, No. 3 in connection with Article 310 of the Revised Penal Code, as amended by
Commonwealth Acts Nos. 273 and 417 and Republic Act No. 120, committed as follows: . chanroblesvirtua llawlibrary

That on or about the 6th day of March, 1953, in the municipality of Aparri, province of Cagayan, and
within the jurisdiction of this Honorable Court, the said accused Joaquin Guzman, while in the employ of
Enrique Go and with grave abuse of confidence did then and there, willfully, unlawfully, and feloniously,
with intent to gain but without violence against or intimidation of persons nor force upon things,
without the consent of the owner Enrique Go alias Ngo Yat, take and carry away for his personal use and
benefit the sum of eight hundred four pesos and seventy centavos (P804.70) to the damages and
prejudice of said Enrique Go alias Ngo Yat, in the amount of P804.70.” (Original Records p. 22.)
Article 315, paragraph 1, subparagraph (b), on the other hand, provides: chanroblesvirtua llawlibrary

“Swindling (estafa). — Any person who shall defraud another by any of the means mentioned
hereinbelow shall be punished by: chanroblesvirtuallawlibrary

x x x                    x x x                    x x x
(2)  With unfaithfulness or abuse of confidence, namely: chanroblesvirtua llawlibrary

x x x                    x x x                    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, good, or other
chan roblesvirtualawlibrary

property;
Under the above definition of estafa, it is an essential element of the crime that the money or goods
misappropriated or converted by the accused to the prejudice of another was received by him “in trust
or on commission, or for administration, or under any other obligation involving the duty to make
delivery of, or to retain the same”. No such allegation appears in the above information. Consequently,
we agree with Appellant that he cannot be convicted thereunder of the crime of estafa as defined by the
article above.’
Wherefore, the decision appealed from is reversed, and Appellant Joaquin Guzman acquitted of the
crime of qualified theft. Appellant should, however, be held in custody pending the filing of another
information against him for estafa under Article 315, paragraph 1, subparagraph (b), of the Revised
Penal Code. Without costs in this instance. SO ORDERED.
G.R. No. 109595             April 27, 2000

CRISTETA CHUA-BURCE, petitioner, vs. COURT OF APPEALS AND PEOPLE OF THE

PHILIPPINES, respondents.

Subject of the present appeal by certiorari is the decision dated November 27, 1992 of the Court of
Appeals in CA-G.R. CR No. 12037, (a) affirming in toto the trial court's decision finding petitioner
guilty of estafa and (b) denying her Motion for Reconsideration in a Resolution dated March 25,
1993. The Regional Trial Court, Calapan, Oriental Mindoro, Branch 40, rendered a joint decision
finding petitioner guilty of estafa under Article 315, par. 1 (b) of the Revised Penal Code, in Criminal
Case No. C-2313, and likewise found petitioner liable for the amount of P150,000.00 in Civil Case
No. R-3733. Only the criminal case is before us for review.

The uncontroverted facts, as found by the Court of Appeals, are as follows:

On August 16, 1985, Ramon Rocamora, the Manager (of Metropolitan Bank and Trust Company,
Calapan Branch, Oriental Mindoro) requested Fructuoso Peñaflor, Assistant Cashier, to conduct a
physical bundle count of the cash inside the vault, which should total P4,000,000.00, more or less.
During this initial cash count, they discovered a shortage of fifteen bundles of One Hundred Pesos
denominated bills totalling P150,000.00. The One Hundred Peso bills actually counted was
P3,850,000.00 as against the balance of P4,000,000.00 in the Cash in Vault (CIV) Summary Sheet,
or a total shortage of P150,000.00. The next day, to determine if there was actually a shortage, a re-
verification of the records and documents of the transactions in the bank was conducted. There was
still a shortage of P150,000.00.

The bank initiated investigations totalling four (4) in all. The first was by Ramon Rocamora, the
Manager. The second was by the bank's internal auditors headed by Antonio Batungbakal. Then, the
bank's Department of Internal Affairs conducted an independent investigation. Thereafter, the
National Bureau of Investigation (NBI) came in to investigate. All of these investigations concluded
that there was a shortage of P150,000.00, and the person primarily responsible was the bank's Cash
Custodian, Cristeta Chua-Burce, the herein accused.

On November 4, 1985, unable to satisfactorily explain the shortage of P150,000.00, the accused's
service with the bank was terminated.

To recover the missing amount, Metropolitan Bank and Trust Company (Metrobank) filed a Civil
Case for Sum of Money and Damages with Preliminary Attachment and Garnishment docketed as
Civil Case No. R-3733 against petitioner and her husband, Antonio Burce.

Prior to the filing of the Answer, the following Information for Estafa was filed against petitioner:

That on or about the 16th day of August 1985, and for a period prior and subsequent thereto,
the above-named accused, with unfaithfulness or abuse of confidence, and with intent to
defraud, did then and there wilfully, unlawfully, and feloniously, in her capacity as Cash
Custodian of the Metrobank, Calapan Branch, take from the Bank's Vault the amount of ONE
HUNDRED FIFTY THOUSAND (P150,000.00) PESOS, which is under her direct custody
and/or accountability, misappropriate and convert to her own personal use and benefit,
 without the knowledge and consent of the offended party, despite repeated demands for her
to account and/or return the said amount, she refused and failed, and still fails and refuses to
the damage and prejudice of the Metrobank, Calapan Branch, in the aforementioned amount
of ONE HUNDRED FIFTY THOUSAND (P150,000.00) PESOS.

Contrary to Article 315 of the Revised Penal Code.

Calapan, Oriental Mindoro, November 27, 1985.  1

Both civil and criminal cases were raffled to the same branch of the Regional Trial Court of Calapan,
Oriental Mindoro, Branch 40.

Thereafter, petitioner moved for the suspension of the criminal case on the ground of the existence
of a prejudicial question, viz., that the resolution of the civil case was determinative of her guilt or
innocence in the criminal case.  The trial court, over the vehement opposition of the private and
2 

public prosecutors, granted the motion and suspended the trial of the criminal case.  On petition
3 

for certiorari to the Court of Appeals, the appellate court ruled that there was no prejudicial
question. 4

Petitioner was arraigned and assisted by counsel de parte, entered a plea of not guilty.  While the
5 

trial of the criminal case was suspended, the trial of the civil case continued. At the time of
arraignment, the civil case was already submitted for decision. Hence, during the pre-trial
conference of the criminal case, the parties agreed to adopt their respective evidence in the civil
case as their respective evidence in the criminal case.  The trial court ordered the parties to submit
6 

their written agreement pursuant to Section 4 of Rule 118 of the Rules of Court.  Thereafter,
7 

petitioner, duly assisted by her counsel, with the conforme of the public prosecutor, entered into the
following pre-trial agreement: 8

COMES NOW, the accused, assisted by counsel, and unto this Honorable Court most
respectfully submits this Pre-Trial agreement:

1. That the evidence already adduced by the plaintiff in Civil Case No. R-3733 will be
adopted by the prosecution as its evidence in Criminal Case No. C-2313;

2. That the evidence to be adduced by the defendant in Civil Case No. R-3733 will
also be adopted as evidence for the defense in Criminal Case No. C-2313.

WHEREFORE, premises considered, it is prayed that the foregoing pre-trial agreement be

admitted in compliance with the Order of this Court dated April 19, 1988.

RESPECTFULLY SUBMITTED.

Calapan, Oriental Mindoro, August 20, 1990.

CRISTETTA CHUA-BURCE (sgd.)

Accused

Assisted By:

RODRIGO C. DIMAYACYAC (sgd.)

 Defense Counsel

San Vicente, Calapan

Oriental Mindoro

IBP O.R. No. 292575

May 11, 1990

Quezon City

With Conformity:

EMMANUEL S. PANALIGAN (sgd.)

Prosecuting Fiscal

Pursuant to the pre-trial agreement, the public prosecutor filed a Motion to Adopt Evidence.  Both
9 

the pre-trial agreement and said Motion were granted by the trial court.  10

On March 18, 1991, the trial court rendered a consolidated decision  finding petitioner (a) guilty of
11 

estafa under Article 315 (1) (b) of the Revised Penal Code in the criminal case, and (b) liable for the
amount of P150,000.00 in the civil case. The dispositive portion of decision provides —

In Criminal Case No. C-2313 —

WHEREFORE, the Court hereby finds the accused Cristeta Chua-Burce guilty beyond
reasonable doubt of the crime of Estafa, punishable under Art. 315, paragraph 1 (b) of the
Revised Penal Code, which imposes a penalty of prision correccional in its maximum period
to prision mayor in its minimum period but considering that the amount involved exceeds
P22,000.00, the penalty provided for shall be imposed in its maximum period, adding one
year for each additional P10,000.00, but the total amount not to exceed twenty years.

Applying the Indeterminate Sentence Law, the imposable penalty shall be one degree lower
as minimum of arresto mayor with a penalty range of One Month and One Day to Six
Months, as minimum to prision mayor in its maximum period, as maximum, or a penalty of
Six years to Twelve Years. Considering the mitigating circumstance of voluntary surrender,
the court hereby imposes upon the accused to suffer imprisonment from SIX (6) MONTHS
of arresto mayor in its maximum period, as minimum, to EIGHT (8) YEARS of prision mayor,
in its minimum period, as maximum. The civil liability shall not be imposed in this case due to
a separate civil action.

In Civil Case No. R-3733 —

WHEREFORE, judgment is hereby rendered in favor of the plaintiff Metrobank, ordering

defendants Cristeta Chua-Burce and Antonio Burce, spouses, to pay Metrobank the amount
of P150,000.00 representing the amount misappropriated with the legal rate of six percent
(6%) per annum from August 15, 1985 until fully paid and to pay the costs of suit.

SO ORDERED.
Petitioner seasonably appealed her conviction in the criminal case to the Court of Appeals. Petitioner
filed a separate appeal in the civil case.

In a decision dated November 27, 1992,  the Court of Appeals affirmed the trial court's decision in
12 

toto. Petitioner's Motion for Reconsideration was likewise denied.  Hence, the recourse to this Court.
13 

Petitioner raises the following issues: 14

1. IS THE RESULT OF POLYGRAPH EXAMINATION ADMISSIBLE IN EVIDENCE?

2. CAN THE PRESIDING JUDGE OF THE REGIONAL TRIAL COURT ADMIT IN

EVIDENCE THE EVIDENCE WHICH WAS ALREADY DENIED ADMISSION IN THE
ORDER OF THE FORMER JUDGE OF THE SAME COURT?

3. DOES PRIMA FACIE PRESUMPTION OF MISAPPROPRIATION OR CONVERSION

EXISTS (sic) AGAINST THE PETITIONER WHEN THERE WERE OTHER PERSONS WHO
HAD DIRECT AND GREATER ACCESS IN THE CASH-IN-VAULT?

4. IS RULE 111 SECTION 2 (a) OF THE REVISED RULES ON CRIMINAL PROCEDURE

APPLICABLE IN (sic) THE CASE AT BAR?

5. WAS THERE A VALID PROCEEDING WHEN THE FISCAL WAS NOT ACTUALLY
PRESENT AND DID NOT CONTROL AND SUPERVISE THE PROSECUTION OF THE
CASE?

In gist, (1) petitioner contends that the trial court erred in taking into account the results of the
polygraph examination as circumstantial evidence of guilt considering the inherent unreliability of
such tests, and the fact that the previous trial judge who handled the case already ruled such
evidence as inadmissible; (2) petitioner insists that there can be no presumption of misappropriation
when there were other persons who had access to the cash in vault; and (3) petitioner questions the
validity of the trial of criminal case considering that the pre-trial agreement dispensed with the
intervention of the public prosecutor in a full-blown trial of the criminal case.

The Office of the Solicitor General, for the State, contends that the guilt of petitioner has been
proven beyond reasonable doubt by the following facts which were duly established during trial
— first, petitioner was the cash custodian who was directly responsible and accountable for the
cash-in-vault. Second, the other persons who had access to the vault facilities never used the
duplicate keys to open the safety deposit boxes and the cash safe from where the P100.00 bill
denominations were located. In fact, the duplicate keys were offered in evidence still in their sealed
envelopes. Third, alterations and superimposition on the cash-in-vault summary sheet were made by
petitioner to cover the cash shortage. Lastly, there was a valid joint trial of the civil and criminal
cases.

The crucial issues, in our mind, are (1) whether there was a valid trial of the criminal case, and (2)
whether the elements of the crime of estafa under Article 315 (1) (b) of the Revised Penal Code
were duly proven beyond reasonable doubt.

First, petitioner assails the validity of the proceedings in the trial court on the ground that the public
prosecutor did not intervene and present any evidence during the trial of the criminal case. The
records clearly show that the pre-trial agreement was prepared by petitioner with the conforme of
the public prosecutor. Thereafter, petitioner filed a consolidated memorandum for both civil and
criminal cases. Section 5 of Rule 110  requires that all criminal actions shall be prosecuted under
15 

the direction and control of the public prosecutor. The rationale behind the rule is "to prevent
malicious or unfounded prosecutions by private persons."  The records show that the public
16 

prosecutor actively participated in the prosecution of the criminal case from its inception. It was
during pre-trial conference when the parties agreed to adopt their respective evidence in the civil
case to the criminal case. This is allowed under Section 2 (e) of Rule 118 of the Rules of
Court  which provides that during pre-trial conference, the parties shall consider "such other matters
17 

as will promote a fair and expeditious trial." The parties, in compliance with Section 4 of Rule
118,  reduced to writing such agreement. Petitioner, her counsel, and the public prosecutor signed
18 

the agreement. Petitioner is bound by the pre-trial agreement, and she cannot now belatedly
disavow its contents.  19

On the second issue. Petitioner was charged with the crime of estafa under Article 315 (1) (b) of the
Revised Penal Code.  In general, the elements of estafa are: (1) that the accused defrauded
20 

another (a) by abuse of confidence or (b) by means of deceit; and (2) that damage or prejudice
capable of pecuniary estimation is caused to the offended party or third person.  Deceit is not an
21 

essential requisite of estafa with abuse of confidence, since the breach of confidence takes the place
of the fraud or deceit, which is a usual element in the other estafas.  22

The elements of estafa through conversion or misappropriation under Art. 315 (1) (b) of the Revised
Penal Code are:  23

(1) that personal property is received in trust, on commission, for administration or under any
other circumstance involving the duty to make delivery of or to return the same, even though
the obligation is guaranteed by a bond;

(2) that there is conversion or diversion of such property by the person who has so received
it or a denial on his part that he received it;

(3) that such conversion, diversion or denial is to the injury of another and

(4) that there be demand for the return of the property.

Have the foregoing elements been met in the case at bar? We find the first element absent. When
the money, goods, or any other personal property is received by the offender from the offended
party (1) in trust or (2) on commission or (3) for administration, the offender acquires both material
or physical possession and juridical possession of the thing received.  Juridical possession means
24 

a possession which gives the transferee a right over the thing which the transferee may set up even
against the owner.  In this case, petitioner was a cash custodian who was primarily responsible for
25 

the cash-in-vault. Her possession of the cash belonging to the bank is akin to that of a bank teller,
both being mere bank employees.

In People v. Locson,  the receiving teller of a bank misappropriated the money received by him for
26 

the bank. He was found liable for qualified theft on the theory that the possession of the teller is the
possession of the bank. We explained in Locson that —

The money was in the possession of the defendant as receiving teller of the bank, and the
possession of the defendant was the possession of the bank. When the defendant, with
grave abuse of confidence, removed the money and appropriated it to his own use without
the consent of the bank, there was the taking or apoderamiento contemplated in the
definition of the crime of theft. 
27
In the subsequent case of Guzman v. Court of Appeals,  a travelling sales agent misappropriated or
28 

failed to return to his principal the proceeds of things or goods he was commissioned or authorized
to sell. He was, however, found liable for estafa under Article 315 (1) (b) of the Revised Penal Code,
and not qualified theft. In the Guzman case, we explained the distinction between possession of a
bank teller and an agent for purposes of determining criminal liability —

The case cited by the Court of Appeals (People vs. Locson. 57 Phil. 325), in support of its
theory that appellant only had the material possession of the merchandise he was selling for
his principal, or their proceeds, is not in point. In said case the receiving teller of a bank who
misappropriated money received by him for the bank, was held guilty of qualified theft on the
theory that the possession of the teller is the possession of the bank. There is an essential
distinction between the possession by a receiving teller of funds received from third persons
paid to the bank, and an agent who receives the proceeds of sales of merchandise delivered
to him in agency by his principal. In the former case, payment by third persons to the teller is
payment to the bank itself; the teller is a mere custodian or keeper of the funds received, and
has no independent right or title to retain or possess the same as against the bank. An
agent, on the other hand, can even assert, as against his own principal, an independent,
autonomous, right to retain money or goods received in consequence of the agency; as
when the principal fails to reimburse him for advances he has made, and indemnify him for
damages suffered without his fault (Article 1915, [N]ew Civil Code: Article 1730, old).

Petitioner herein being a mere cash custodian had no juridical possession over the missing
funds.  Hence, the element of juridical possession being absent, petitioner cannot be convicted of
1âwphi1

the crime of estafa under Article 315, No. 1 (b) of the Revised Penal Code.  29

WHEREFORE, the petition is hereby granted and petitioner is ACQUITTED of the crime of estafa
under Article 315 (1) (b) of the Revised Penal Code. Petitioner is ordered RELEASED from custody
unless she is being held for some other lawful cause. No costs. 1âwphi1.nêt

SO ORDERED.