National Power Corporation vs. Ibrahim

Payment made in good faith to a person in possession of the credit extinguishes the debtor's obligation even as against the real creditor, and a debtor who pays pursuant to a final and executory judgment and writ of garnishment cannot be held in bad faith for such payment.

In 1978, NPC occupied a 21,995-square-meter parcel of land in Marawi City for its Agus 1 hydroelectric project, mistakenly believing it was public land reserved under Proclamation No. 1354, s. 1974. The land was actually registered private property of Macapanton K. Mangondato under TCT No. 378-A. Mangondato discovered NPC's occupation in 1979 and demanded compensation, tracing his ownership to Datu Magayo-ong Maruhom through a 1981 letter. NPC initially rejected the claim but later acknowledged the private ownership.

• Nature of the Dispute: The controversy arose from NPC's occupation of a 21,995-square-meter parcel of land in Marawi City for its Agus 1 hydroelectric project. NPC initially believed the land was public land reserved under Proclamation No. 1354, s. 1974, but it was actually private property registered under TCT No. 378-A in the name of Macapanton K. Mangondato.
• Mangondato's Claim: Mangondato discovered NPC's occupation in 1979 and demanded compensation. In a September 28, 1981 letter, he traced his ownership to Datu Magayo-ong Maruhom, stating the land was set aside for the latter's descendants and that he acquired portions through purchase and inheritance.
• Prior Litigation: In July 1992, Mangondato filed Civil Case No. 605-92 for reconveyance and rentals, while NPC filed Civil Case No. 610-92 for expropriation. The RTC consolidated the cases and rendered judgment on August 21, 1992, condemning the land in favor of NPC effective July 1992 upon payment of P21,995,000.00 (P1,000/sqm) just compensation, plus monthly rentals of P15,000.00 from 1978 to July 1992 with 12% interest per annum.
• Intervening Suit: On March 29, 1993, while NPC's appeal was pending, respondents (Ibrahims and Maruhoms) filed Civil Case No. 967-93 claiming they were the true owners as lawful heirs of Datu Magayo-ong Maruhom and that Mangondato merely held the land in trust for them. They sought indemnity and rentals, plus a TRO and preliminary injunction to prevent NPC from paying Mangondato. RTC Branch 10 granted the TRO on March 30, 1993, and the writ of preliminary injunction on May 29, 1993.
• Finality of Prior Judgment: The Court of Appeals denied NPC's appeal in CA-G.R. CV No. 39353 on December 21, 1993. The Supreme Court affirmed this in G.R. No. 113194 on March 11, 1996, modifying only the interest rate to 6%. The decision became final on May 13, 1996.
• Execution and Payment: Mangondato moved for execution. Despite NPC's opposition citing the injunction in Civil Case No. 967-93, RTC Branch 8 issued a writ of execution and notice of garnishment on June 4, 1996, for P21,801,951.00 against NPC's bank accounts with PNB. The amount was paid to Mangondato in full satisfaction.
• Decision in Intervening Suit: On April 16, 1998, RTC Branch 10 decided Civil Case No. 967-93, finding the Ibrahims and Maruhoms to be the true owners but holding that the land could no longer be reconveyed as it was already expropriated. The court held NPC and Mangondato solidarily liable to pay the Ibrahims and Maruhoms the indemnity and rentals adjudged in the prior cases, plus P200,000.00 attorney's fees.
• Appeal and Partial Execution: NPC appealed to the Court of Appeals (CA-G.R. CV No. 68061). During pendency, respondents secured a writ of execution pending appeal, resulting in the garnishment of Mangondato's SSS funds amounting to P2,700,000.00 on September 18, 1998. The Court of Appeals denied NPC's appeal on June 24, 2005, affirming the RTC decision subject to the deduction of the P2.7M already garnished.

• Absence of Bad Faith: NPC argued that the lower courts erred in finding it acted in bad faith when it paid Mangondato. It maintained that the payment was not voluntary but was compelled by the final and executory decision in Civil Case No. 605-92 and Civil Case No. 610-92 and the writ of garnishment issued by the RTC.
• Extinguishment of Obligation: Petitioner contended that since it paid pursuant to a lawful court order, no bad faith could be attributed to it, and its obligation to pay for the land was already extinguished, regardless of who the true owner was.
• Dismissal of Civil Case No. 967-93: NPC prayed for the dismissal of Civil Case No. 967-93 as against it, arguing that it should be absolved from any liability to the Ibrahims and Maruhoms.

• Bad Faith: Respondents argued that NPC was in bad faith because it "allowed" payment to Mangondato despite: (1) prior knowledge since 1981 that the land belonged to Datu Magayo-ong Maruhom and not Mangondato, as evidenced by Mangondato's letter; and (2) the existence of the TRO and writ of preliminary injunction in Civil Case No. 967-93 enjoining such payment.
• Solidary Liability: Respondents maintained that NPC's payment to Mangondato was ineffective as to them because of this bad faith, and thus NPC remained solidarily liable with Mangondato to pay them the indemnity and rentals.

• Bad Faith: Whether NPC acted in bad faith when it paid Mangondato the expropriation indemnity and rentals pursuant to a final and executory judgment and writ of garnishment, despite the pendency of Civil Case No. 967-93 and the injunction issued therein.
• Subsisting Liability: Whether NPC may still be held liable to the Ibrahims and Maruhoms for the amounts already paid to Mangondato.

• Bad Faith: Bad faith was not established. The Court found that NPC's payment to Mangondato was not a product of deliberate choice but was made in compliance with the lawful orders of a court with jurisdiction. The payment was compelled through a writ of garnishment issued by the court that rendered the final decision in Civil Case No. 605-92 and Civil Case No. 610-92. The essence of bad faith consists in the deliberate commission of a wrong, requiring knowledge that an action is wrong and voluntary, conscious proceeding with such action despite such knowledge. Since NPC merely complied with a lawful court order, no bad faith could be attributed to it.
• Payment to a Possessor of Credit: Even assuming the Ibrahims and Maruhoms were the true owners, Mangondato qualified as a "possessor of credit" under Article 1242 of the Civil Code. As the registered owner of the subject land and the judgment creditor in the prior cases, Mangondato appeared to be the real creditor. Payment made in good faith to a person in possession of the credit releases the debtor. Therefore, NPC's payment to Mangondato extinguished its obligation to pay for the rental fees and expropriation indemnity, even as against the true owners.
• Effect of Extinguishment: The extinguishment of NPC's obligation negated any cause of action the Ibrahims and Maruhoms had against NPC in Civil Case No. 967-93. If Mangondato was the real owner, the respondents had no claim. If the respondents were the true owners, they could only recover from Mangondato whatever payments he received, not from NPC.
• Attorney's Fees: The dismissal of Civil Case No. 967-93 as against NPC necessarily absolved NPC from paying attorney's fees to the respondents.

• Bad Faith Defined — Bad faith is a breach of a known duty through some motive of interest or ill will; a state of mind affirmatively operating with furtive design or with some motive of self-interest or will or for ulterior purpose; it does not simply connote bad judgment or negligence but imports a dishonest purpose or some moral obliquity and conscious doing of wrong, partaking of the nature of fraud.
• Elements of Bad Faith — A finding of bad faith requires: (1) that the actor knew or should have known that a particular course of action is wrong or illegal; and (2) that despite such actual or imputable knowledge, the actor voluntarily, consciously, and out of his own free will proceeds with such course of action. Only with the concurrence of these elements can the wrong be considered deliberate and thus in bad faith.
• Article 1242 of the Civil Code (Payment to Possessor of Credit) — Payment made in good faith to any person in possession of the credit shall release the debtor. This is an exception to the rule that valid payment must be made to the person rightfully owed. It applies where a debtor pays someone who is not the real creditor but appears, under the circumstances, to be the real creditor. The law considers such payment valid even as against the real creditor, taking into account the good faith of the debtor.
• Compelled Payment vs. Voluntary Payment — Payment made pursuant to a final and executory judgment and writ of garnishment is not voluntary but legally compelled, negating any finding of bad faith even if the payee is later found not to be the true creditor.

• "The essence of bad faith consists in the deliberate commission of a wrong. Indeed, the concept has often been equated with malicious or fraudulent motives, yet distinguished from the mere unintentional wrongs resulting from mere simple negligence or oversight."
• "A finding of bad faith, thus, usually assumes the presence of two (2) elements: first, that the actor knew or should have known that a particular course of action is wrong or illegal, and second, that despite such actual or imputable knowledge, the actor, voluntarily, consciously and out of his own free will, proceeds with such course of action."
• "Branch 10 of the Marawi City RTC and the Court of Appeals erred in their finding of bad faith because they have overlooked the utter significance of one important fact: that petitioner's payment to Mangondato of the rental fees and expropriation indemnity adjudged due for the subject land in Civil Case No. 605-92 and Civil Case No. 610-92, was required by the final and executory decision in the said two cases and was compelled thru a writ of garnishment issued by the court that rendered such decision."
• "Article 1242 of the Civil Code is an exception to the rule that a valid payment of an obligation can only be made to the person to whom such obligation is rightfully owed. It contemplates a situation where a debtor pays a 'possessor of credit' i.e., someone who is not the real creditor but appears, under the circumstances, to be the real creditor."

• Lopez v. Pan American World Airways, 123 Phil. 256 (1966) — Cited for the definition of bad faith as a breach of a known duty through some motive of interest or ill will.
• Air France v. Carrascoso, 124 Phil. 722 (1966) — Cited for the definition of bad faith as a state of mind affirmatively operating with furtive design or with some motive of self-interest or will or for ulterior purpose.
• Board of Liquidators v. Heirs of M. Kalaw, 127 Phil. 399 (1967) — Cited for the principle that bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong.
• Far East Bank and Trust Company v. Court of Appeals, 311 Phil. 783 (1995) — Cited for the description of bad faith as implying a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity.
• Sps. Alcaraz v. Tangga-an, 449 Phil. 62 (2003) — Cited regarding the status of a registered owner as a possessor of credit.

• Article 1242, Civil Code of the Philippines — "Payment made in good faith to any person in possession of the credit shall release the debtor." Applied to hold that payment to Mangondato, as registered owner and judgment creditor, extinguished NPC's obligation even if respondents were the true owners.
• Article 1231(1) in relation to Article 1240, Civil Code of the Philippines — Cited regarding the general rule that payment to the creditor extinguishes the obligation.
• Rule 45, Rules of Court — Basis for the petition for review on certiorari.

Maria Lourdes P.A. Sereno (Chief Justice, Chairperson), Teresita J. Leonardo-De Castro, Lucas P. Bersamin, and Estela M. Perlas-Bernabe.