PETRON CORPORATION, PETITIONER, VS. NATIONAL COLLEGE OF BUSINESS AND ARTS, RESPONDENT.

Petron Corporation versus National College of Business and Arts

The Case

This is a petition for review on certiorari filed by Petron Corporation against the National College of Business and Arts. The dispute is the tail end of a long controversy over seven parcels of land in the V. Mapa area of Sta. Mesa, Manila. The only question before the Supreme Court is whether Petron should be held liable to pay attorney's fees and exemplary damages to the college. The case matters because it draws a bright line between a losing legal position and bad faith, and because it restates the rule that exemplary damages cannot stand without a prior award of moral, temperate, liquidated, or compensatory damages.

Procedural History

The college sued Felipe and Enrique Monserrat for specific performance, with an alternative prayer for rescission and damages, in the Regional Trial Court of Manila. It later impleaded the Development Bank of the Philippines as an additional defendant to compel the release of the mortgage. Petron intervened to assert its claim to the properties. On March 11, 1996, the trial court ruled that Petron never acquired valid title, that the college was the lawful owner, and that Petron, the bank, Felipe, and Enrique were jointly and severally liable for exemplary damages of 100,000 pesos and attorney's fees of 150,000 pesos. Enrique, the bank, and Petron appealed to the Court of Appeals, which affirmed the trial court in full on June 21, 2002. Their motions for reconsideration were denied on October 16, 2002. Petron then elevated the matter to the Supreme Court by petition for review on certiorari.

Facts

In 1969, the V. Mapa properties, then owned by Felipe and Enrique Monserrat, Jr., were mortgaged to the Development Bank of the Philippines as part of the security for a loan of Manila Yellow Taxicab Co., Inc. and Monserrat Enterprises Co. In 1975, Felipe's undivided half interest was levied upon in execution of a money judgment in a Manila case. The bank's third-party claim was quashed. In 1981, the taxicab company and the Monserrats settled the loan through a dacion en pago, conveying four Quiapo properties to the bank, but the bank did not release the V. Mapa properties from the mortgage.

In May 1982, Felipe, for himself and as attorney-in-fact of Enrique, sold the V. Mapa properties to the college. The Monserrats undertook to secure the release of the titles free of all liens and encumbrances, including the bank's mortgage and the levy, on or before July 31, 1982. They failed. The college annotated an adverse claim, sued for specific performance, and inscribed a notice of lis pendens.

In 1985, during the pendency of that suit, Enrique's half interest was levied upon in execution of a Makati judgment holding him liable to Petron, then known as Petrophil Corporation, on a 1972 promissory note. The properties were sold at public auction, and Petron, the highest bidder, acquired both undivided interests, with final deeds of sale awarded in 1986. New titles were issued to Petron, which intervened in the college's suit in 1987. The trial court voided the levy and sale and held Petron liable for exemplary damages and attorney's fees, and the Court of Appeals affirmed.

Issues

• Whether or not Petron may be held liable to the college for attorney's fees under Article 2208 of the Civil Code.
• Whether or not Petron may be held liable for exemplary damages in the absence of an award of moral, temperate, liquidated, or compensatory damages.

Applicable Provisions

Article 2208 of the Civil Code provides:

In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered, except: (1) When exemplary damages are awarded; (2) When the defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur expense to protect his interest; (3) In criminal cases of malicious prosecution against the plaintiff; (4) In case of a clearly unfounded civil action or proceeding against the plaintiff; (5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim; (6) In actions for legal support; (7) In actions for the recovery of wages of household helpers, laborers and skilled workers; (8) In actions for indemnity under workmen's compensation and employer's liability laws; (9) In a separate civil action to recover civil liability arising from a crime; (10) When at least double judicial costs are awarded; (11) In any other case where the court deems it just and equitable that attorney's fees and expenses of litigation should be recovered.

This is the provision under which the trial court awarded attorney's fees, invoking paragraph five on gross and evident bad faith.

Article 2234 of the Civil Code provides:

Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated, or compensatory damages.

This provision supplies the rule that exemplary damages presuppose an award of one of the other classes of damages.

Ruling

On the first issue, the Court ruled that Petron is not liable for attorney's fees. The trial court relied on paragraph five of Article 2208, but its only justification was that Petron had no reason to claim the properties because the levy and sale were void. The Court held that this was sorely inadequate. The provision contemplates a situation where one refuses unjustifiably and in evident bad faith to satisfy another's plainly valid, just, and demandable claim, compelling the latter needlessly to seek redress from the courts. It does not mean that the losing party should pay attorney's fees merely because the court finds his legal position erroneous. Even a clearly untenable defense does not justify the award unless it amounts to gross and evident bad faith. Petron's claim rested on final deeds of sale on execution and was far from untenable, so no bad faith could be imputed to it for intervening to assert what it believed were its rights.

On the second issue, the Court ruled that Petron is not liable for exemplary damages. The plaintiff must first show entitlement to moral, temperate, or compensatory damages before the court may even consider awarding exemplary damages. Since Petron cannot be made liable for compensatory damages in the form of attorney's fees, it cannot be held liable for exemplary damages either.

Doctrine

Attorney's fees under paragraph five of Article 2208 require gross and evident bad faith in refusing to satisfy a plainly valid, just, and demandable claim. A losing party is not penalized for exercising the right to have contending claims settled by a court of law, and even a clearly untenable defense does not justify the award absent gross and evident bad faith. Exemplary damages may not be awarded unless the plaintiff's right to moral, temperate, liquidated, or compensatory damages has first been established. When the award of compensatory damages falls, the award of exemplary damages must fall with it.

Disposition

The petition was granted, and the imposition of liability on Petron Corporation for exemplary damages and attorney's fees was revoked.

Remember This

Memorize the line that a losing legal position is not bad faith, and that exemplary damages cannot stand alone. Examiners use this case to test Article 2208 paragraph five and the dependency of exemplary damages on a prior award of actual or compensatory damages.