G.R. No. 64515 - R and B Surety and Insurance Co., Inc. vs. Intermediate Appellate Court

Case Summary (G.R. No. 64515)

Transaction, Surety Bond, and Indemnity Agreement

The facts, as recounted in the Intermediate Appellate Court’s decision and adopted by the Supreme Court, began with a loan. On January 3, 1969, Maria Isabel Diaz was granted a loan of P20,000.00 by the Philippine National Bank. To secure repayment, Maria Isabel Diaz submitted a surety bond (Exh. B) issued by R & B for P20,000.00 in favor of the bank.

In connection with the surety bond, the defendants executed an indemnity agreement with the chattel mortgage (Exh. C). The indemnity agreement required the indemnitors to indemnify R & B, “for any damage, prejudice, loss, costs, payments, advances and expenses of whatever kind and nature, including attorney’s fees,” which R & B might incur as a consequence of executing the bond, including its renewals, extensions, or substitutions. The agreement also stipulated that the attorney’s fees would not be less than twenty (20%) percent of the total amount claimed by the corporation in each action, payable irrespective of whether the case was settled judicially or extrajudicially and irrespective of whether the amount had been actually paid.

Defendants’ Non-Compliance and Pleadings

The litigation record reflected that Maria Isabel Diaz did not file an answer to the complaint or to the crossclaim of Angelina Uson. She was therefore declared in default in both cases. Eliseo Santos filed an answer to the complaint. He admitted signing the indemnity agreement but claimed that he believed he was and actually intended to be a character witness only. In his counterclaim, he asked for attorney’s fees, expenses of litigation, and other damages, though in unspecified amounts.

Angelina Uson filed a separate answer asserting that the signatures appearing on the indemnity agreement were forgeries. Against R & B, she filed a counterclaim seeking P100,000.00 as moral damages and a sum equivalent to twenty-five (25%) percent of any amount she might recover as counsel fees. She also filed a crossclaim against Maria Isabel Diaz seeking moral damages and attorney’s fees in similar amounts based on the alleged forgeries or the causing to be forged of her signature.

Trial Court Ruling: Liability Between the Parties and Dismissal as to Uson

After trial, the Court of First Instance rendered judgment with the following dispositive portion: judgment was rendered in favor of R & B against Maria Isabel Diaz and Eliseo Santos, ordering them, jointly and severally, to pay R & B the sum of P20,000.00 with interest at 13-1/2% from January 16, 1974, the date when R & B paid the Philippine National Bank. The trial court likewise ordered a sum equal to 20% of the principal amount as attorney’s fees and ordered the payment of costs of suit. The complaint was dismissed as against Angelina Uson. Finally, the counterclaims of Eliseo Santos and Angelina Uson were dismissed.

Intermediate Appellate Court Modification Based on Bad Faith

On appeal, Uson specifically appealed the dismissal of her counterclaim. On April 29, 1982, the Intermediate Appellate Court modified the trial court’s decision and ordered R & B to pay Uson: P100,000.00 as moral damages; twenty-five (25%) percent of that amount as attorney’s fees; and P10,000.00 as exemplary damages. The Intermediate Appellate Court found that R & B acted in bad faith when it filed the action against Uson.

R & B moved for reconsideration, but the Intermediate Appellate Court denied the motion. R & B then filed the present petition for review on certiorari.

Petitioner’s Assignments of Error and Framed Issue

R & B assigned several errors, including that the Intermediate Appellate Court had drawn an erroneous conclusion of bad faith and negligence; overrode legal presumptions through conjectural deductions not supported by established facts; awarded exemplary damages allegedly not within the contemplation of the pleadings; and issued a decision allegedly not in accord with law and Supreme Court precedents.

The Supreme Court narrowed the controversy to a single issue: whether, based on the evidence in the record, the Intermediate Appellate Court correctly adjudged R & B guilty of bad faith and negligence in filing the complaint against Uson, sufficient to warrant an award of moral and exemplary damages and attorney’s fees in the aggregate sum of P135,000.00.

The Intermediate Appellate Court’s Reasoning

The Intermediate Appellate Court reasoned that Uson’s alleged forgery of her signatures in the indemnity agreement meant that someone other than Uson signed in her place, allegedly on the inducement of Maria Isabel Diaz. It posited that this could only have been done if the indemnity agreement was signed in the absence of R & B’s representative, or if R & B had entrusted blank copies or forms of the indemnity agreement to Maria Isabel Diaz for signing and accomplishment. From this, it concluded that R & B acted in bad faith.

The appellate court added that R & B’s alleged negligence enabled the forgeries. It noted the testimony of R & B’s Assistant Manager, Crisoforo Lopez, who claimed that Uson signed Exh. C. It also considered Uson’s testimony that, before the case was filed in court, she had personally informed an official of R & B, Atty. Armando Abad, that her signatures on the indemnity agreement were forgeries. Finally, the Intermediate Appellate Court faulted R & B for omission, allegedly required by Commonwealth Act No. 465 (the Residence Certificate Law), to request Uson’s latest residence certificate, which it treated as indicative that Uson was not present during the execution of Exh. C.

Supreme Court’s Assessment: Negligence Was Not Equal to Bad Faith

The Supreme Court found merit in R & B’s petition. The Court accepted that R & B might have been negligent in not verifying the authenticity of the signatures in Exh. C. However, it held that negligence did not amount to bad faith so as to justify damages and a conclusion that the filing of the complaint against Uson amounted to malicious prosecution.

The Supreme Court emphasized that, in filing the action, R & B was primarily protecting its business interests and attempting to recover the amount it had already paid to the Philippine National Bank. It invoked longstanding doctrine that, in the absence of a wrongful act or omission or of fraud or bad faith, moral damages could not be awarded. It stressed that the adverse result of an action does not by itself make the action wrongful or subject the initiator to damages, because the law could not have intended to penalize the right to litigate. The Court cited multiple cases supporting that proposition, including Salao v. Salao, Barreto v. Arevalo, Herrera v. Luy Kim Guan, Heirs of Justina v. Gustilo, Castillo v. Castillo, Mirasol v. De la Cruz, and others.

Lack of Malice and Absence of Wrongful Motivation

The Supreme Court further reasoned that the evidence did not show that the complaint was motivated by ill will or any desire to vex or humiliate Uson. It relied on a notable circumstance: after the trial court dismissed the case as to Uson, R & B did not appeal that dismissal. The Court considered that R & B would have had a greater chance of collecting its payment if all defendants were adjudged liable, since the principal signatory, Maria Isabel Diaz, had been declared in default and was not to be found. The Court treated this post-trial litigation choice as inconsistent with a malicious or bad-faith intent to harass Uson.

The Supreme Court agreed with the trial court’s view on Uson’s counterclaim. It endorsed the trial court’s reasoning that the evidence did not support a finding that the filing against Uson was done in bad faith and with malice. The Court treated it as proper that R & B was guided by the records within its possession when it impleaded Uson, because Uson’s name appeared in the indemnity agreement and other supporting papers. It also found relevant that the case was filed more than four years after the indemnity agreement was executed and that, in view of the volume of R & B’s business, Uson could be seen as “only a name” as far as R & B was concerned.

Forged-Signature Denial Did Not Automatically Imply Bad Faith in Suing

The Supreme Court also rejected the Intermediate Appellate Court’s suggestion that bad faith could be presumed from R & B’s inclusion of Uson despite her declaration outside court that her signature was forged. The Supreme Court held that there was no reason for R & B to give Uson’s out-of-court declaration full faith and credit to exclude her from the complaint. The Court stated that it was natural for a prospective defendant to deny participation. It also underscored that the purpose of trial was precisely to determine whether the signatures were forged. It reiterated that an action being later found erroneo

Case Syllabus (G.R. No. 64515)

Parties and Procedural Posture

R & B Surety & Insurance Co., Inc. (petitioner) filed a petition for review on certiorari to set aside the decision of the Intermediate Appellate Court awarding moral and exemplary damages plus attorney’s fees to Angelina Uson (respondent).
The dispute originated in the Court of First Instance of Manila, Branch XVI, which rendered judgment on the suit involving an indemnity agreement connected with a surety bond for a Philippine National Bank loan.
The Intermediate Appellate Court modified the trial court’s judgment by ordering petitioner to pay moral damages, attorney’s fees, and exemplary damages to Uson after finding bad faith in the filing of the action.
The Intermediate Appellate Court denied petitioner’s motion for reconsideration, prompting petitioner’s petition before the Supreme Court.
The Supreme Court framed the controversy around whether the evidence supported the appellate court’s adjudication of bad faith and negligence, sufficient to warrant moral and exemplary damages and attorney’s fees.

Key Factual Allegations

Maria Isabel Diaz obtained a PHP 20,000.00 loan from the Philippine National Bank.
To secure repayment, Maria Isabel Diaz submitted a surety bond issued by R & B Surety & Insurance Co., Inc. in favor of the Philippine National Bank for PHP 20,000.00.
The parties executed an indemnity agreement (Exh. C) requiring Maria Isabel Diaz and the other signatories to indemnify the surety for any damage, prejudice, loss, costs, payments, advances, and expenses, including attorney’s fees, which the corporation might incur because of the bond and related actions.
The indemnity agreement further stipulated that attorney’s fees would not be less than twenty (20%) per cent of the total amount claimed in each action, and would be due regardless of whether the case was settled judicially or extrajudicially and whether the amount had been actually paid.
Maria Isabel Diaz did not file an answer to the complaint or the crossclaim of Angelina Uson, and was declared in default in both cases.
Eliseo Santos filed an answer admitting he signed the indemnity agreement but claiming he only intended to be a character witness.
Eliseo Santos filed a counterclaim seeking attorney’s fees, expenses of litigation, and other damages in unspecified amounts.
Angelina Uson filed a separate answer asserting that the signatures appearing on the indemnity agreement as her signatures were forgeries.
Uson filed a counterclaim for PHP 100,000.00 as moral damages and an amount equivalent to 25% of the sum she might recover as counsel fees.
Uson also filed a crossclaim against Maria Isabel Diaz for moral damages and attorney’s fees on the theory of forged signatures attributed to Maria Isabel Diaz.
The trial court ordered Maria Isabel Diaz and Eliseo Santos, jointly and severally, to pay R & B PHP 20,000.00 with interest from the date R & B paid the bank, plus 20% of that amount as attorney’s fees, while dismissing Uson’s counterclaims.

Trial Court Disposition

The Court of First Instance ruled in favor of R & B against Maria Isabel Diaz and Eliseo Santos.
The trial court awarded R & B PHP 20,000.00 with interest at thirteen and one-half percent (13-1/2%) from the date when R & B paid the Philippine National Bank.
The trial court awarded attorney’s fees equal to twenty percent (20%) of the principal sum and imposed costs of suit.
The trial court dismissed Uson’s counterclaim against R & B.
The trial court dismissed the other counterclaims filed by Eliseo Santos and Uson.

Appellate Court Modification

Uson appealed the dismissal of her counterclaim.
On April 29, 1982, the Intermediate Appellate Court modified the trial court’s disposition.
The Intermediate Appellate Court ordered R & B to pay PHP 100,000.00 as moral damages, twenty-five percent (25%) of that amount as attorney’s fees, and PHP 10,000.00 as exemplary damages.
The appellate court grounded its award on a finding that petitioner acted in bad faith in filing the case against Uson.
The appellate court reasoned that since the signatures in Exh. C were found to be forgeries, the forgeries could have occurred only if the document was signed without a representative of petitioner, or if blank forms were entrusted to Maria Isabel Diaz without proper safeguards.
The appellate court also relied on uncontradicted testimony that Uson personally informed an official of petitioner before the case was filed that her signatures were forgeries.
The appellate court further treated petitioner’s omission to request, as allegedly required by Commonwealth Act No. 465 (Residence Certificate Law), Uson’s latest residence certificate before signing, as indicative of negligence and the non-presence of Uson during execution of Exh. C.

Issues Presented

The Supreme Court identified the only issue as whether the appellate court correctly adjudged petitioner guilty of bad faith and negligence in filing the complaint against Uson.
The issue included whether such purported bad faith warranted moral and exemplary damages and attorney’s fees totaling PHP 135,000.00.
The case also required evaluating whether the appellate court’s conclusions amounted to an impermissible inference of malice or malicious prosecution from the surrounding circumstances.

Parties’ Arguments

Petitioner argued that bad faith and negligence could not be deduced merely because it allegedly handed out blank forms of the indemnity agreement to Maria Isabel Diaz and received them already notarized.
Petitioner contended that it could not be inferred to have acted in bad faith merely because it proceeded with filing the action despite Uson’s prior declaration outside court that her signatures were forged.
Petitioner insisted that the appellate court overrode legal presumptions by drawing conjectural and unsupp