Benedicto-Muñoz vs. Cacho-Olivares

Where defendants are sued under a common cause of action as indispensable parties, the dismissal of the complaint against some of them inures to the benefit of all, and a judicially approved compromise agreement with those defendants operates as res judicata against the remaining defendants who are privy-in-law by virtue of the common cause of action.

Respondents Maria Angeles Cacho-Olivares and her family (the Olivareses) entrusted shares of stock and funds to Jose Maximo Cuaycong III, a securities salesman who successively worked for Abacus Securities Corporation and Dharmala Securities Philippines, Inc. Cuaycong commingled and diverted the Olivareses' investments to his personal trading accounts and to the accounts of his brother Mark Angelo and his girlfriend Margarita Benedicto, with the alleged indispensable cooperation of the brokerage firms and individual defendants. The controversy spans multiple fora: the Securities and Exchange Commission, the Philippine Stock Exchange's Compliance and Regulatory Group, the Regional Trial Court of Pasig (where the Cuaycong brothers filed a consignation case), and the Regional Trial Court of Makati (where the damages case was ultimately docketed). The legal framework includes the Securities Regulation Code (Republic Act No. 8799), particularly its provisions on fraudulent transactions, aider-and-abettor liability, and the award of damages.

Respondents Maria Angeles Cacho-Olivares ("Niñez"), her husband Edgardo Olivares, and their son Peter Olivares (collectively, the "Olivareses") entrusted shares of stock and funds to Jose Maximo Cuaycong III ("Cuaycong"), a securities salesman who successively worked for Abacus Securities Corporation ("Abacus") and Dharmala Securities Philippines, Inc. ("Dharmala"). Cuaycong represented to the Olivareses that their stock and money investments were deposited in their respective trading accounts at Abacus and later at Dharmala, when in fact no such accounts existed. Instead, Cuaycong commingled and diverted the shares and money to his personal trading accounts at Lippo Securities, Inc. ("Lippo") and Sapphire Securities, Inc. ("Sapphire"), and to the account of his brother Mark Angelo Cuaycong at Abacus. The brokerage firms Lippo and Sapphire, through their respective agents Christine Litton and Jeannette Que, allegedly used the money and shares of the Olivareses without authorization to partially liquidate Cuaycong's margin liabilities. Abacus, through its agent Joel Chua Chiu ("Chiu"), allegedly made unauthorized purchases and sales of shares using Niñez's account to conceal Cuaycong's misappropriation. Cuaycong also transferred some of Niñez's money to the Dharmala account of his girlfriend, Margarita Benedicto ("Benedicto"). The total amount of investments lost was Php 7,040,645.22.

On August 20, 1997, respondents filed a Complaint for Damages and Revocation of Registration and License of Broker, Dealer and Salesman with the Securities and Exchange Commission against Abacus, Sapphire, Benedicto, Chiu, the Cuaycong brothers, Dharmala, Lippo, Que, and Litton. Respondents prayed that all defendants be held jointly and severally liable for actual damages of Php 7,040,645.22, moral damages of Php 33,000,000.00, exemplary damages of Php 50,000,000.00, and attorney's fees of Php 10,000,000.00. Niñez had also furnished the Philippine Stock Exchange with copies of letter-complaints against the brokerage firms. The PSE's Compliance and Regulatory Group conducted a preliminary investigation and concluded in its July 8, 1997 Investigation Report that there was no evidence linking the brokerage firms to Cuaycong's fraudulent acts, though it noted possible administrative and procedural lapses by the firms.

Even before respondents filed their complaint, the Cuaycong brothers had on June 20, 1997 filed a case for Consignation and Damages against respondents before the RTC of Pasig, docketed as Civil Case No. 66321. Cuaycong admitted possession of the Php 7,040,645.22 and offered to deposit it with the court, alleging that he acted as fund manager for respondents who knew he commingled their funds with those of other clients. On July 12, 2001, the parties manifested that they had entered into a Compromise Agreement, whereby respondents agreed to drop the Cuaycong brothers as defendants in the damages case in consideration of the payment of Php 7,040,645.22. The RTC of Pasig approved the Compromise Agreement on July 17, 2001. The Compromise Agreement expressly stated that the payment was "in full payment and settlement of the defendants' claim against the plaintiffs in the above-entitled case and in Civil Case No. 01-0059," which was the docket number of the damages case while pending before the RTC of Parañaque.

Upon the effectivity of Republic Act No. 8799 (the Securities Regulation Code), the SEC case was transferred to the RTC of Parañaque and eventually re-raffled to the RTC of Makati, Branch 142, docketed as Civil Case No. 02-1049. The trial court granted respondents' ex parte motion to drop the Cuaycong brothers and directed respondents to file an amended complaint clarifying the "different and separable acts" committed by the remaining defendants, independent of the Cuaycongs' liability, and to sever the cause of action for revocation of registration. On September 17, 2003, respondents filed an Amended and Supplemental Complaint against the remaining defendants, deleting the prayer for actual damages and seeking moral and exemplary damages and attorney's fees. The trial court found that the Amended and Supplemental Complaint failed to allege different and separable acts by the remaining defendants independent of Cuaycong's acts. Holding that the Cuaycong brothers were indispensable parties sued under a common cause of action, the trial court dismissed the Amended and Supplemental Complaint on October 22, 2003. The Court of Appeals reversed, holding that the cause of action against the remaining defendants was separate and distinct from that against the Cuaycong brothers, and that the Compromise Agreement did not absolve the other defendants. The defendants' motion for reconsideration was denied. Some of the defendants — Benedicto, Abacus and Chiu, and Sapphire — elevated the case to the Supreme Court via consolidated petitions for review on certiorari.

• Common Cause of Action and Indispensable Parties: Petitioners argued that they were sued under a single and/or common cause of action with the Cuaycong brothers, and that the Cuaycong brothers are indispensable parties without whom no final determination can be had on the case. The dismissal of the case against the Cuaycong brothers therefore inures to the benefit of all defendants.

• Res Judicata: Petitioners Abacus and Chiu maintained that the Compromise Agreement has the effect of res judicata, having condoned and released the Cuaycong brothers from liability. Continuation of the case against the remaining defendants would be tantamount to relitigation of the Cuaycong brothers' liabilities, since the charges against the petitioners are predicated on the fraudulent acts of the Cuaycong brothers.

• Extinguishment of Damages Claim: Petitioners Abacus and Chiu asserted that the prayer for moral and exemplary damages has lost its legal basis because actual damages had already been paid under the Compromise Agreement, leaving respondents with no cause of action under the Amended and Supplemental Complaint.

• Benedicto's Lack of Involvement: Petitioner Benedicto alleged that she was dragged into the controversy merely on the allegation that she was Cuaycong's girlfriend, and that Cuaycong used her trading account in Dharmala without her knowledge or acquiescence. The PSE-CRG Investigation Report found that she had nothing to do with respondents' losses. She insisted that the Compromise Agreement extinguished her liability, if any, since all defendants were sued as joint tortfeasors and payment by the Cuaycong brothers operates as a defense in her favor.

• Integrity of Common Cause of Action: Petitioner Sapphire argued that the Amended and Supplemental Complaint alleges that all defendants indispensably cooperated and participated in the act of one another, and the integrity of the common cause of action does not permit the waiver of respondents' right only as to one or some of them.

• Separate and Distinct Causes of Action: Respondents countered that the Amended and Supplemental Complaint contains charges that do not involve the Cuaycong brothers, such as Abacus allowing Chiu to effect unauthorized sale and purchase of respondents' shares and misrepresenting unlicensed employees as salesmen. Thus, there is no common cause of action against the petitioners and the Cuaycong brothers, and the Cuaycong brothers are not indispensable parties.

• Inapplicability of Res Judicata: Respondents submitted that res judicata is inapplicable because there is no identity of parties and causes of action between Civil Case No. 02-1049 and Civil Case No. 66321. The former involves petitioners and respondents, while the latter involves only respondents and the Cuaycong brothers. The first is an action for damages, whereas the second is an action for consignation.

• Moral and Exemplary Damages Without Actual Damages: Respondents maintained that the existence of actual damages is not a condition for the grant of moral and exemplary damages.

• Public Interest: Respondents argued that public interest and the protection of market investors from fraud and misrepresentation require the case to proceed.

• Defective Verification: Respondents prayed that Sapphire's petition be dismissed for being "effectively unverified," for lack of a document proving the authority of Mr. Jeremias Cruzabra to sign the petition.

• Dismissal Benefiting Co-Defendants: Whether the dismissal of the case as against the Cuaycong brothers benefits the other defendants in Civil Case No. 02-1049.
• Res Judicata: Whether the approved Compromise Agreement operates as res judicata to Civil Case No. 02-1049.

• Dismissal Benefiting Co-Defendants: Yes. The dismissal of the case against the Cuaycong brothers inures to the benefit of the other defendants because all defendants were sued under a common cause of action and are indispensable parties whose liabilities cannot be separately determined.

• Res Judicata: Yes. The approved Compromise Agreement operates as res judicata to Civil Case No. 02-1049 because there is identity of object (the payment of respondents' claims) and substantial identity of parties (petitioners are privy-in-law to the compromise by virtue of the common cause of action).

• Dismissal Benefiting Co-Defendants: The Original Complaint and the Amended and Supplemental Complaint allege the same essential cause of action against the Cuaycong brothers and the petitioners — stock market fraud committed by Cuaycong principally through misappropriation, with the complicity and indispensable cooperation of the defendant brokerage firms and individual defendants. The Amended and Supplemental Complaint failed to allege "different and separable acts" committed by the remaining defendants independent of Cuaycong's acts and omissions. Under both complaints, Cuaycong was the central actor, while the defendants' alleged action or inaction made the wrongdoings possible. The allegations plead connivance and cooperation between Cuaycong and the remaining defendants, resulting in a single injury — the loss of investments amounting to Php 7,040,645.22. Respondents themselves acknowledged in their Appellants' Brief that conspiracy existed between the Cuaycong brothers and the petitioners. An indispensable party is one whose interest in the subject matter and the relief sought are so inextricably intertwined with the other parties that his legal presence is an absolute necessity. Since the Cuaycong brothers and the petitioners played various interconnected roles leading to the singular injury, their liabilities cannot be separately determined. Applying the rule in Co vs. Acosta and Lim Tanhu vs. Ramolete, two requisites must concur: (a) the defendants must be sued under a common cause of action, and (b) all must be indispensable parties. Both requisites are present. The integrity of the common cause of action does not permit the waiver of respondents' right only as to some defendants without including all of them. This is further supported by the Securities Regulation Code: Cuaycong is the person primarily liable under Section 58, while the petitioners who substantially assisted his wrongful acts are aiders or abettors under Sections 51.4 and 51.5, and their liability is joint and solidary. Liability attaches to the aider or abettor precisely because of the existence of the liability of the person primarily liable; respondents cannot condone Cuaycong's liability and proceed only against his aiders or abettors.

• Res Judicata: Article 2037 of the Civil Code provides that a compromise has upon the parties the effect and authority of res judicata. To have this effect, two tests must be met: first, the new litigation must involve the same subject matter covered by the compromise (identity of object), and second, the issue should be between the same parties (identity of persons). Both elements are present. The two litigations — Civil Case No. 66321 (consignation and damages) and Civil Case No. 02-1049 (damages) — involve the same subject matter: the satisfaction of the same damages claimed by respondents. The Compromise Agreement expressly stated that the payment was "in full payment and settlement of the defendants' claim against the plaintiffs in the above-entitled case and in Civil Case No. 01-0059." As to identity of parties, absolute identity is not required; substantial identity suffices. There is substantial identity when there is a community of interest between a party in the first case and a party in the second, making them privy-in-law. Res judicata may not be evaded by adding or eliminating some parties. Petitioners are privy-in-law to the compromise because they are sued under a common cause of action with the Cuaycong brothers. Furthermore, since petitioners and the Cuaycong brothers were sued as solidary debtors in the Original Complaint, payment by one solidary debtor under Article 1217 of the Civil Code extinguishes the obligation as to all. The payment of Php 7,040,645.22 by the Cuaycong brothers effectively satisfied the entire claim, including moral and exemplary damages and attorney's fees, since the Compromise Agreement covered the settlement of claims in both cases. A judgment based on a compromise agreement is a judgment on the merits, and the compromise in Civil Case No. 66321 bars the continuation of Civil Case No. 02-1049.

• Indispensable Parties; Common Cause of Action — An indispensable party is one whose interest in the subject matter of the suit and the relief sought are so inextricably intertwined with the other parties that his legal presence as a party to the proceeding is an absolute necessity. A party is not indispensable if his interest is distinct and divisible from the interest of the other parties and will not necessarily be prejudiced by a judgment which does complete justice to the parties in court. Where defendants are sued under a common cause of action and all are indispensable parties, the dismissal of the complaint against some of them inures to the benefit of all. The integrity of the common cause of action does not permit the waiver of the plaintiff's right only as to one or some defendants without including all of them. Two requisites must concur for this rule to apply: (a) the defendants must be sued under a common cause of action, and (b) all must be indispensable parties. (Co vs. Acosta, citing Lim Tanhu vs. Ramolete)

• Res Judicata via Compromise Agreement — Under Article 2037 of the Civil Code, a compromise has upon the parties the effect and authority of res judicata. Two elements must concur: (a) identity of object — the new litigation must involve the same subject matter covered by the compromise; and (b) identity of persons — the issue should be between the same parties. Absolute identity of parties is not required; substantial identity suffices, which exists when there is a community of interest between a party in the first case and a party in the second, making them privy-in-law. Res judicata may not be evaded by the expedient of adding or eliminating some parties to the first and second action. A judgment based on a compromise agreement is a judgment on the merits.

• Solidary Obligation; Payment by One Debtor — Under Article 1217 of the Civil Code, payment made by one of the solidary debtors extinguishes the obligation. Where defendants are sued as solidary debtors and one of them pays the full amount under a compromise agreement, the entire obligation is extinguished as to all solidary debtors, including claims for moral and exemplary damages and attorney's fees.

• Aider and Abettor Liability under the Securities Regulation Code — Under Section 51.4 of the SRC, a person who substantially assists the act or omission of any person primarily liable, with knowledge or in reckless disregard that such act or omission is wrongful, shall be jointly and severally liable as an aider and abettor. The person primarily liable under Section 58 and the aiders or abettors under Sections 51.4 and 51.5 are held solidarity liable for damages. Liability attaches to the aider or abettor precisely because of the existence of the liability of the person primarily liable; the principal's liability cannot be condoned while proceeding against the aiders and abettors alone.

• "The substantive unity of the plaintiffs cause against all the defendant is carried through to its objective phase as ineluctably demanded by the homogeniety and indivisibility of justice itself. Indeed, since the singleness of the cause of action also inevitably implies that the defendants are indispensable parties, the court's power to act is integral and cannot be split such that it cannot relieve any of them and at the same time render judgment against the rest." — This passage, quoted from Lim Tanhu vs. Ramolete via Co vs. Acosta, articulates the core rationale for why dismissal of a common cause of action against some indispensable parties necessarily benefits all defendants.

• "The integrity of the common cause of action against all the defendants and the indispensability of all of them in the proceedings do not permit any possibility of waiver of the plaintiffs right only as to one or some of them, without including all of them, and so, as a rule, withdrawal must be deemed to be a confession of weakness as to all." — This formulation from Lim Tanhu vs. Ramolete establishes the rule that a plaintiff cannot selectively waive the action against some indispensable parties sued under a common cause of action while proceeding against the rest.

• "Respondents cannot condone Cuaycong's liability and proceed only against his aiders or abettors because the liability of the latter are tied up with the former. Liability attaches to the aider or abettor precisely because of the existence of the liability of the person primarily liable." — This statement defines the relationship between primary liability and aider-and-abettor liability under the Securities Regulation Code, explaining why the extinguishment of the principal's liability necessarily extinguishes that of the aiders and abettors.

• Co vs. Acosta, G.R. No. L-64591, January 17, 1985, 134 SCRA 185 — Controlling precedent applied. The Court cited and applied its ruling that where defendants are sued as indispensable parties under a common cause of action, and the plaintiff moves to drop some defendants, the dismissal inures to the benefit of all defendants.

• Lim Tanhu vs. Ramolete, G.R. No. L-40098, August 29, 1975, 66 SCRA 425 — Foundational precedent followed via Co vs. Acosta. Established the doctrine that the integrity of a common cause of action against indispensable parties does not permit waiver of the plaintiff's right as to only some defendants, and that withdrawal must be deemed a confession of weakness as to all.

• P.L. Uy Realty Corporation vs. ALS Management and Development Corporation, G.R. No. 166462, October 24, 2012, 684 SCRA 453 — Followed on the concept of substantial identity of parties for res judicata, holding that there is substantial identity when there is a community of interest between a party in the first case and a party in the second, making them privy-in-law.

• Imson vs. Court of Appeals, G.R. No. 106436, December 8, 1994, 239 SCRA 58 — Cited for the definition of an indispensable party and the distinction between indispensable and non-indispensable parties.

• Securities and Exchange Commission vs. Court of Appeals, G.R. No. 106425 & 106431-32, July 21, 1995, 246 SCRA 738 — Cited for the definition of "fraud" under Section 26.3 of the SRC as fraud akin to bad faith implying a conscious design to do a wrongful act for a dishonest purpose or moral obliquity.

• Uy vs. Chua, G.R. No. 183965, September 18, 2009, 600 SCRA 806 — Cited for the proposition that a judgment based on a compromise agreement is a judgment on the merits.

• Jacinto vs. Gumani, Jr., G.R. No. 191906, June 2, 2014, 724 SCRA 343 — Cited for the rule that non-compliance with or a defect in verification does not necessarily render a pleading fatally defective.

• Article 2037, Civil Code of the Philippines — Provides that a compromise has upon the parties the effect and authority of res judicata. Applied to hold that the Compromise Agreement between respondents and the Cuaycong brothers bars the continuation of Civil Case No. 02-1049.

• Article 1217, Civil Code of the Philippines — Provides that payment made by one of the solidary debtors extinguishes the obligation. Applied to hold that the Cuaycong brothers' payment under the Compromise Agreement extinguished the entire solidary obligation, including the claims against the remaining defendants.

• Section 26, Securities Regulation Code (Republic Act No. 8799) — Defines fraudulent transactions, including employing any device, scheme, or artifice to defraud; obtaining money or property by means of untrue statements or omissions of material fact; and engaging in any act, transaction, practice, or course of business which operates as a fraud or deceit. Applied to characterize the acts of Cuaycong and the petitioners as fraudulent transactions.

• Section 51.4, Securities Regulation Code — Provides that a person who substantially assists the act or omission of any person primarily liable, with knowledge or reckless disregard that such act or omission is wrongful, shall be jointly and severally liable as an aider and abettor. Applied to classify the petitioners as aiders or abettors of Cuaycong's fraudulent acts.

• Section 58, Securities Regulation Code — Imposes civil liability on any person who engages in any act or transaction in violation of Sections 19.2, 20, or 26 of the Code. Applied to classify Cuaycong as the person primarily liable for the fraudulent transactions.

• Section 63, Securities Regulation Code — Authorizes the court to award damages not exceeding triple the amount of the transaction plus actual damages, exemplary damages in cases of bad faith or fraud, and attorney's fees not exceeding 30% of the award. Discussed in the context of the public policy objective of deterring securities fraud, which respondents gave up by compromising with the principal actor.

Brion, Peralta (Acting Chairperson), Villarama, Jr., and Reyes, JJ., concurred. Associate Justice Presbitero J. Velasco, Jr. recused himself due to relation to a party.