G.R. No. 64693 - Lita Enterprises, Inc. vs. Intermediate Appellate Court

In 1966, spouses Nicasio M. Ocampo and Francisca P. Garcia purchased five Toyota Corona Standard cars on an installment basis from Delta Motor Sales Corporation intended for use as taxicabs.
Lacking a franchise to operate taxicabs, the spouses contracted with petitioner Lita Enterprises, Inc., represented by Manuel Concordia, to utilize Lita’s Certificate of Public Convenience (CPC).
The agreement involved an initial payment of P1,000.00 and a monthly rental fee of P200.00 per taxicab unit.
To formalize the arrangement, the purchased cars were registered under the name of Lita Enterprises, Inc., but physical possession remained with the Ocampos who operated and maintained the vehicles under the trade name “Acme Taxi.”

On March 18, 1967, one of the taxicabs driven by employee Emeterio Martin collided with a motorcycle, resulting in the death of the motorcycle driver, Florante Galvez.
A criminal case was filed against Emeterio Martin for the incident.
A civil case for damages was instituted by Rosita Sebastian Vda. de Galvez, the heir of the victim, against Lita Enterprises, as the registered owner of the taxicab.
The Court of First Instance (CFI) of Manila ruled Lita Enterprises liable for damages amounting to P25,000.00 plus P7,000.00 for attorney’s fees. The decision became final and a writ of execution was issued.

Following the writ of execution, two of the taxicabs owned by the respondents were levied and sold at public auction:

In March 1973, Nicasio Ocampo attempted to register the taxicabs in his name and requested Lita Enterprises to turn over registration papers, which was allegedly refused.
The Ocampos filed a complaint for reconveyance of the vehicles with damages against Lita Enterprises, Rosita Sebastian Vda. de Galvez, Visayan Surety & Insurance Co., and the Manila Sheriff before the CFI, docketed as Civil Case No. 90988 .
On July 22, 1975, the CFI ordered Lita Enterprises to transfer the certificates of registration for three of the Toyota cars not levied upon and to receive rental payments for the period from March to May 1973 at P200 per month per unit. The complaint was dismissed against the other defendants.
Lita Enterprises filed for reconsideration, which was denied by the lower court on October 27, 1975.

On appeal, the Intermediate Appellate Court modified the decision by adding a clause requiring Lita Enterprises to pay plaintiffs the fair market value of the three Toyota cars if these vehicles became unserviceable or unavailable due to deterioration.
Lita Enterprises filed motions for reconsideration with CA which were denied.
The petitioner then elevated the case to the Supreme Court, praying for:

Deletion of the additional paragraph introduced by the appellate court.
Declaration of liability of the private respondents for whatever amounts paid/due for the damages awarded in the earlier civil case arising from the accident.

The parties’ relationship was identified as the “kabit system,” whereby the CPC holder allows another entity owning vehicles to operate with the franchise in exchange for fees.
This system is an abuse of a government-granted privilege and is known to foster corruption within transport authorities.
The “kabit system” is considered contrary to public policy and therefore void and nonexistent under Article 1409 of the Civil Code.

Whether or not the contractual relationship between the parties under the “kabit system” was legal and enforceable.
Whether the courts below erred in granting relief to the parties despite the illegality of their agreement.
Whether the petitioner (Lita Enterprises) can recover damages or enforce any rights arising from the illegal contract or hold the private respondents liable for payments made in relation to the accident case.
The effect of Article 1412 of the Civil Code in contracts with unlawful or forbidden causes where no criminal offense is constituted.