R & B SURETY & INSURANCE CO., INC., PETITIONER, VS. THE INTERMEDIATE APPELLATE COURT AND ANGELINA USON, RESPONDENTS.

R and B Surety and Insurance versus Intermediate Appellate Court

The Case

This is a petition for review on certiorari brought by R and B Surety and Insurance Company against the Intermediate Appellate Court and Angelina Uson. The surety company had sued Uson and others to recover on an indemnity agreement, and the trial court dismissed the complaint against her. The appellate court then found that the company had acted in bad faith in filing that suit and awarded her moral and exemplary damages plus attorney's fees. The case matters because it draws the line between mere negligence in verifying signatures and the bad faith required to support an award of moral and exemplary damages for the act of litigating.

Procedural History

The surety company filed a complaint in the Court of First Instance of Manila against Maria Isabel Diaz, Eliseo Santos, and Angelina Uson, seeking to recover on an indemnity agreement. After trial, the trial court rendered judgment in favor of the company against Diaz and Santos, dismissed the complaint as against Uson, and dismissed the counterclaims of Santos and Uson. Uson appealed the dismissal of her counterclaim to the Intermediate Appellate Court. The appellate court modified the trial court's decision and ordered the company to pay her moral damages, attorney's fees, and exemplary damages, finding that the company had acted in bad faith in filing the action against her. The company's motion for reconsideration was denied. The company then filed this petition for review on certiorari before the Supreme Court.

Facts

On January 3, 1969, Maria Isabel Diaz obtained a loan of 20,000 pesos from the Philippine National Bank. To secure repayment, Diaz submitted a surety bond issued by R and B Surety and Insurance Company in favor of the bank for the same amount. In turn, an indemnity agreement was executed to indemnify the surety for any damage, loss, costs, and expenses, including attorney's fees, that it might incur as a consequence of having executed the bond.

When the surety later paid the bank and sought to recover, it filed a complaint impleading Diaz, Santos, and Uson. Diaz did not answer and was declared in default. Santos admitted signing the indemnity agreement but claimed he thought he was only a character witness. Uson filed a separate answer stating that her signatures on the indemnity agreement were all forgeries, and she set up a counterclaim for moral damages and attorney's fees.

After trial, the trial court found that the signatures purporting to be Uson's were forgeries, dismissed the complaint against her, and dismissed her counterclaim, finding no bad faith or malice in the filing of the complaint. On appeal, the Intermediate Appellate Court found the company guilty of bad faith and negligence, reasoning that the forgeries were made possible by the company's negligence in entrusting blank forms and in failing to verify the signatures, and that it pursued the case despite Uson's prior declaration that her signatures were forged.

Issues

• Whether or not, on the evidence in the records, the appellate court correctly adjudged the petitioner 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.

Applicable Provisions

The decision applies the rule on moral damages under Article 2219 and Article 2220 of the Civil Code, which condition such an award on a wrongful act or omission, fraud, or bad faith. Article 2219 of the Civil Code provides:

Moral damages may be recovered in the following and analogous cases: (1) A criminal offense resulting in physical injuries; (2) Quasi-delicts causing physical injuries; (3) Seduction, abduction, rape, or other lascivious acts; (4) Adultery or concubinage; (5) Illegal or arbitrary detention or arrest; (6) Illegal search; (7) Libel, slander or any other form of defamation; (8) Malicious prosecution; (9) Acts mentioned in Article 309; (10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

This provision bears on the case because Uson's claim rested on the theory that the filing of the complaint amounted to malicious prosecution, which requires bad faith rather than mere negligence.

Article 2220 of the Civil Code provides:

Public officers, or private persons or entities, shall be liable for damages caused by their wrongful acts or omissions, if the defendant acted with malice or bad faith.

This provision bears on the case because it makes malice or bad faith the condition for liability, and the Court found that condition absent.

Ruling

The Court ruled that the petition has merit. While the company might have been negligent in not verifying the authenticity of the signatures on the indemnity agreement, such negligence does not amount to bad faith as to justify an award of damages or a conclusion that the filing of the complaint amounted to malicious prosecution. In filing the action, the company was only protecting its business interests by trying to recover the amount it had already paid to the bank.

The Court held that in the absence of a wrongful act or omission, or of fraud or bad faith, moral damages cannot be awarded, and that the adverse result of an action does not per se make the action wrongful and subject the actor to the payment of damages, for the law could not have meant to impose a penalty on the right to litigate. The Court found that the filing of the complaint was not motivated by ill will or by any desire to vex and humiliate Uson, as shown by the fact that the company did not appeal the dismissal of the case against her.

The Court also held that bad faith cannot be presumed from the fact that, despite Uson's out-of-court declaration that her signatures were forged, the company still included her in the complaint. It is natural for a prospective defendant to deny any participation in the subject matter of the litigation, and the very purpose of going to trial was to ascertain whether her signatures were indeed forged. The Court stressed that sound principles of justice and public policy demand that persons shall have free resort to courts of law for redress of wrongs and vindication of their rights without fear of later standing trial for damages should their actions lose ground.

Finally, the Court held that the award of exemplary damages and attorney's fees was likewise untenable, for these can only be given where the petitioner acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner and where the action instituted was clearly unfounded and so untenable as to amount to gross and evident bad faith. The records were bereft of proof to support any finding of bad faith.

Doctrine

A Bar candidate must retain these rules. First, in the absence of a wrongful act or omission, or of fraud or bad faith, moral damages cannot be awarded. Second, the adverse result of an action does not per se make the action wrongful and subject the actor to the payment of damages, for the law could not have meant to impose a penalty on the right to litigate. Third, mere negligence in verifying signatures does not amount to bad faith sufficient to support an award of moral and exemplary damages for the act of filing suit. Fourth, exemplary damages and attorney's fees may be awarded only where the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner and the action was clearly unfounded and so untenable as to amount to gross and evident bad faith. These rules tie directly to Article 2219 and Article 2220 of the Civil Code, which condition liability on malice or bad faith.

Disposition

The petition was granted; the decision of the Intermediate Appellate Court was reversed and set aside, and the decision of the Court of First Instance of Manila was reinstated and affirmed in toto.

Remember This

The single line worth memorizing is that the adverse result of an action does not per se make the action wrongful, for the law could not have meant to impose a penalty on the right to litigate. Examiners like to use this case to test the distinction between negligence and bad faith, and to test when moral and exemplary damages and attorney's fees may be awarded for the act of filing suit.