BETTY GABIONZA AND ISABELITA TAN, PETITIONERS, VS. COURT OF APPEALS, LUKE ROXAS AND EVELYN NOLASCO, RESPONDENTS.

Gabionza versus Court of Appeals

The Case

This is a petition for review brought by Betty Gabionza and Isabelita Tan against the Court of Appeals, Luke Roxas, and Evelyn Nolasco. The petitioners are investors who lent money to a corporation, and the private respondents are the corporation's president and its senior vice president and treasurer. The petitioners ask the Supreme Court to reverse the Court of Appeals, which had set aside the Department of Justice resolution finding probable cause and had ordered the dismissal of the criminal cases for estafa and for violation of the Revised Securities Act. The case matters because it defines the narrow scope of judicial interference with the prosecutor's determination of probable cause, and because it clarifies that a loan may still give rise to criminal liability for estafa by deceit when the lender was induced to part with money through false representations.

Procedural History

The petitioners, together with other complainants, filed complaints with the Department of Justice charging the private respondents with estafa under the Revised Penal Code, estafa under a presidential decree, violation of the Revised Securities Act, and violation of the General Banking Act. A special body, the Task Force on Financial Fraud, dismissed the complaint, and its dismissal was approved by the chief state prosecutor. The petitioners moved for reconsideration, but the motion was denied.

The petitioners then filed a joint petition for review with the Secretary of Justice. The Secretary of Justice partially reversed the Task Force and directed the filing of several Informations for estafa under Article 315, paragraph 2, subparagraph a, of the Revised Penal Code, and one Information for violation of Section 4 in relation to Section 56 of the Revised Securities Act. The motions for reconsideration were denied.

Even as the Informations were filed before the Regional Trial Court of Makati City, the private respondents assailed the resolution of the Department of Justice by a petition for certiorari with the Court of Appeals. The Court of Appeals reversed the Department of Justice and ordered the dismissal of the criminal cases, and it denied the petitioners' motion for reconsideration. Hence this petition filed by Gabionza and Tan before the Supreme Court.

Facts

The corporation ASB Holdings, Incorporated was incorporated in 1996 with a declared primary purpose of investing in real and personal properties and of acquiring and dealing in stocks, bonds, and other securities. Its articles of incorporation reflected an authorized capital stock of 500,000 pesos. Roxas was its president, and Nolasco was its senior vice president and treasurer. Both petitioners had previously placed monetary investments with the Bank of Southeast Asia.

Between 1996 and 1997, the petitioners alleged that they were convinced by the officers of the corporation to lend or deposit money with it. They and other investors were urged to lend, invest, or deposit money, and in return they would receive checks for the amount so lent, invested, or deposited. At first, receipts were issued in the name of ASB Realty Development, which they were told was the same entity as the bank or connected with it, but beginning in March 1998 the receipts were issued in the name of the corporation. The corporation would issue two postdated checks to its lenders, one for the principal and one for the interest, drawn against a bank and maturing in 30 to 45 days. On maturity, the lenders would renew the loans, collecting only the interest or rolling over the principal.

In the first quarter of 2000, the bank began to refuse to pay the checks, purportedly by virtue of stop payment orders from the corporation. In May of 2000, the corporation filed a petition for rehabilitation and receivership with the Securities and Exchange Commission and obtained an order enjoining it from paying its outstanding liabilities. This series of events led to the filing of the complaints. The Department of Justice found that the corporation had borrowed funds from about 700 individual investors amounting to close to 4 billion pesos, and that Gabionza lost 12,160,583.32 pesos while Tan lost 16,411,238.57 pesos.

Issues

• Whether or not the Court of Appeals erred in deviating from the general rule according respect to the discretion of the Department of Justice in the determination of probable cause.
• Whether or not the findings of the Department of Justice establish a prima facie case of estafa under Article 315, paragraph 2, subparagraph a, of the Revised Penal Code.
• Whether or not the findings of the Department of Justice establish a prima facie case of violation of Section 4 in relation to Section 56 of the Revised Securities Act.
• Whether or not the repeal of the Revised Securities Act by the Securities Regulation Code of 2000 bars the prosecution of the private respondents.

Applicable Provisions

Article 315, paragraph 2, subparagraph a, of the Revised Penal Code provides:

By means of any of the following false pretenses or fraudulent acts executed prior to or simultaneous with the commission of the fraud: By using a fictitious name, or falsely pretending to possess power, influence, qualifications, property, credit, agency, business or imaginary transactions, or by means of other similar deceits.

This is the provision under which the petitioners were allegedly defrauded, and the Court measures the findings of the Department of Justice against its elements.

Section 4 of Batas Pambansa Blg. 176, the Revised Securities Act, generally requires the registration of securities and prohibits the sale or distribution of unregistered securities. This is the provision the Department of Justice found to have been violated through the issuance of the postdated checks.

Ruling

On the first issue, the Court held that the Court of Appeals deviated from the general rule according respect to the discretion of the Department of Justice in the determination of probable cause. The Court consistently adheres to its policy of non-interference in the conduct of preliminary investigations and leaves to the investigating prosecutor sufficient latitude of discretion in determining what constitutes sufficient evidence to establish probable cause.

On the second issue, the Court held that the findings of the Department of Justice do establish a prima facie case of estafa by deceit. The elements of estafa under Article 315, paragraph 2, subparagraph a, are that there must be a false pretense, fraudulent act, or fraudulent means; that it must be made or executed prior to or simultaneously with the commission of the fraud; that the offended party must have relied on it and was induced to part with money or property because of it; and that as a result the offended party suffered damage. The Court found all four elements present. The false pretense was the representation that the corporation had the financial capacity to repay the loans despite its meager capitalization. The representation was made before the petitioners parted with their money. It was the representation that induced them to extend the loans. And they sustained considerable damage. The Court stressed that it is essential that the false statement constitute the very cause or the only motive which induces the complainant to part with the thing. The Court also rejected the argument that the true capitalization was a matter of public record, holding that there is no legal obligation on the part of petitioners to investigate the corporation before agreeing to provide the loans.

The Court further held that the citation to Sesbreno was misplaced. Sesbreno involved estafa through misappropriation or conversion under Article 315, paragraph 1, subparagraph b, while this case involves estafa by means of deceit under Article 315, paragraph 2, subparagraph a. The Court explained that it is possible to hold the borrower in a money market placement liable for estafa if the creditor was induced to extend a loan upon the false or fraudulent misrepresentations of the borrower.

On the third issue, the Court held that the findings of the Department of Justice also establish a prima facie case of violation of the Revised Securities Act. The Court found that the postdated checks assumed the character of evidences of indebtedness and therefore of securities under the Act, and that the definition of securities in Section 2 of the Revised Securities Act includes commercial papers evidencing indebtedness of any person. The Court held that the question of whether the checks fall within the classification of securities may still be the subject of debate, but at the very least the Department of Justice established a prima facie case, and the thorough determination of the issue is best left to a full-blown trial on the merits.

On the fourth issue, the Court held that the private respondents cannot make capital of the fact that the Revised Securities Act had already been repealed by the Securities Regulation Code of 2000 when the resolution was issued. The new Code punishes the same offense, and the complained acts occurred during the effectivity of the old law. The Court applied the doctrine that when the repealing act reenacts substantially the former law and does not increase the punishment, the right still exists to punish the accused for an offense committed before the passage of the later act.

Doctrine

A Bar candidate must retain that the courts generally do not interfere with the discretion of the Department of Justice in the determination of probable cause during preliminary investigation, and that a finding of probable cause does not require a full trial on the merits.

A loan or money market placement does not, by itself, give rise to criminal liability for estafa through misappropriation or conversion. But a borrower may be held liable for estafa by means of deceit under Article 315, paragraph 2, subparagraph a, of the Revised Penal Code if the creditor was induced to extend the loan upon the false or fraudulent misrepresentations of the borrower. The false pretense must be the very cause or the only motive which induces the complainant to part with the thing.

There is no legal obligation on the part of a lender to investigate the borrower's financial standing before extending a loan, even if the borrower's lack of financial integrity is verifiable from public records.

Postdated checks issued in exchange for loans solicited from the public may assume the character of evidences of indebtedness and therefore of securities under the Revised Securities Act, and their issuance without prior registration may constitute a violation of that law.

The repeal of a penal law does not extinguish criminal liability for acts committed under the old law where the repealing act reenacts the former statute and punishes the act previously penalized under the old law.

Disposition

The petition was granted. The Court reversed and set aside the decision and resolution of the Court of Appeals and reinstated the resolution of the Department of Justice directing the filing of the Informations for estafa and for violation of the Revised Securities Act.

Remember This

The single line worth memorizing is that a loan may give rise to criminal liability for estafa by deceit when the lender was induced to part with money through false representations, and that probable cause findings of the Department of Justice are entitled to respect absent grave abuse of discretion. Examiners like to use this case in questions on the elements of estafa under Article 315, paragraph 2, subparagraph a, on the distinction between estafa by deceit and estafa by misappropriation, and on the doctrine that a repealing penal law that reenacts the former offense does not bar prosecution for acts committed under the old law.