PCL Industries Manufacturing Corporation vs. The Court of Appeals and Asa Color & Chemical Industries, Inc.

A writ of preliminary attachment under Section 1(d), Rule 57 cannot issue on bare allegations that the debtor agreed to pay within 30 days but refused to pay once in possession of the merchandise; fraud in contracting the debt must be supported by factual circumstances showing a preconceived plan or intention not to pay at the time the obligation was incurred.

ASA Color & Chemical Industries, Inc. supplied printing ink materials to PCL Industries Manufacturing Corporation, which used such materials in manufacturing plastic products. Their transactions were evidenced by invoices providing for payment within 30 days from their respective dates. The collection suit implicated the provisional remedy of preliminary attachment under Rule 57 of the Rules of Court.

ASA Color & Chemical Industries, Inc. supplied printing ink materials to PCL Industries Manufacturing Corporation. From January 18, 1994 to April 14, 1994, PCL purchased and received various printing ink materials from ASA with a total value of P504,906.00, payable within 30 days from the respective dates of invoices. According to ASA, PCL failed to comply with the terms of the sale and failed to pay its obligations despite repeated verbal and written demands.

PCL denied liability and claimed that the printing ink materials delivered by ASA were defective. It asserted that in August, October, and November 1993, it had returned ink materials to ASA as shown by several transmittal slips. PCL admitted that it continued to buy ink materials from ASA in 1994 despite having rejected ink materials delivered in 1993, but insisted that the 1994 deliveries were also defective and that it made known its complaints to Frankie, ASA's authorized representative. In a letter dated June 30, 1995, PCL informed ASA that it had been complaining to ASA's representative about the quality of the ink materials but nothing was done. ASA replied through a letter dated July 16, 1995, giving PCL the option to return the products delivered, "sealed and unused," within one week from receipt of the letter or pay the full amount of its obligation. PCL answered in a letter dated September 26, 1995, asking ASA to pick up at its plant the remaining unused defective ink materials and requesting a meeting to thresh out the matter. No meeting was ever held. PCL further claimed that it suffered damages in the amount of P1,592,794.50 because its customers rejected the finished plastic products it delivered, complaining of a bad smell allegedly caused by the defective ink materials supplied by ASA.

On October 10, 1995, ASA filed a complaint for Sum of Money with Preliminary Attachment against PCL. PCL filed its Answer with Counterclaim, reiterating its claims of defective ink and damages.

After trial, both the RTC and the CA found that PCL's evidence was insufficient to prove that the ink from ASA caused the unwanted smell in PCL's finished plastic products. The trial court observed that the transmittal receipts presented by PCL were all for deliveries made in 1993, whereas the unpaid items listed in the complaint were delivered from January 18, 1994 to April 14, 1994; thus, the items returned as defective and communicated to ASA were not the items left unpaid and in issue. It also found no proof of demand by PCL to communicate any defect in the 1994 printing ink materials except the demand letter dated September 26, 1995, and that PCL's witness could not remember exactly when the oral demands were made. The trial court further found that PCL failed to present sufficient evidence of its alleged damages.

The CA affirmed these findings and noted that as early as January 31, 1994, PCL had received complaints from its customers about the alleged unwanted smell of their plastic products, but it took no steps to investigate which of its several suppliers delivered the defective ink and sent no immediate communications to ASA. PCL continued to place orders and receive deliveries from ASA and failed to convincingly show that it stopped using the subject ink materials upon notice of its customers' complaints. The CA found that the work process forms contained the names of two or three suppliers, indicating that the supplier of the obnoxious paint materials had not been properly identified or pinpointed; that the internal memorandum did not indicate which supplier delivered the inferior quality of ink; that the memos from Frank F. Tanos of Omega Manufacturing did not indicate the source of the unwanted smell and were dated too far from the deliveries; and that PCL made returns of ink products to ASA much earlier in 1993, with no similar return slips for the subject ink materials. The CA also noted that PCL never made any written or formal complaint about the alleged inferior quality ink, and that its letter dated June 30, 1995 was the first communication to ASA about the alleged inferior quality of the ink, written as an answer to ASA's demand for payment. ASA's July 16, 1995 letter dared PCL to return the materials within one week, but no such return was made.

• Impropriety of Preliminary Attachment: Petitioner argued that the CA acted with grave abuse of discretion in issuing a writ of preliminary attachment ex parte without legal basis and on grounds not authorized under Rule 57 of the Rules of Court.
• Misapprehension of Facts: Petitioner maintained that the CA judgment was based on a misapprehension of facts and that its findings were not supported by the evidence on record.
• Defective Ink and Right to Return: Petitioner insisted that the work processes, Exhibits "12" to "21," proved that ASA supplied the ink that caused the unpleasant smell of petitioner's finished products; it explained that the other supplier names on the work processes were suppliers of plastic materials, not ink, and that its President, Jovencio Lim, testified that during the covered period it had only two ink suppliers, CDI Sakada and ASA Color.
• Disregard of Tanos Testimony: Petitioner argued that the CA erred in disregarding the testimony of Frank Tanos and the related exhibits.
• Failure to Reverse the RTC: Petitioner argued that the CA committed grave abuse of discretion in not reversing the ruling of the trial court.

• Propriety of Preliminary Attachment: Whether the writ of preliminary attachment issued by the trial court was proper under Section 1(d), Rule 57, based on allegations that PCL agreed to pay within 30 days but refused to pay once in possession of the merchandise.
• Proof of Defective Ink: Whether the CA erred in affirming the finding that PCL failed to prove that the ink materials supplied by ASA were defective and caused the unwanted smell in PCL's finished plastic products.
• Finality of Factual Findings: Whether the factual findings of the trial court, affirmed by the CA, are final and conclusive and may not be reviewed on appeal absent any of the established exceptions.
• Disregard of Tanos Testimony: Whether the CA disregarded the testimony of Frank Tanos and related exhibits in finding that PCL failed to prove the source of the unwanted smell.

• Propriety of Preliminary Attachment: No. The writ was improper; the affidavit's bare allegations did not show fraud in contracting the debt under Section 1(d), Rule 57.
• Proof of Defective Ink: No. The CA correctly found that PCL failed to prove that ASA supplied the defective ink; the evidence showed multiple possible suppliers and contradictory testimony.
• Finality of Factual Findings: Yes. The factual findings of the trial court, affirmed by the CA, are final and conclusive and may not be reviewed on appeal absent any established exception, none of which applied.
• Disregard of Tanos Testimony: No. The CA did not disregard Tanos's testimony; it considered the testimony and exhibits but found them unconvincing to prove the source of the unwanted smell.

• Propriety of Preliminary Attachment: The Court treated the petition as one for review on certiorari under Rule 45. It also noted that petitioner mistakenly stated that the CA issued the writ of preliminary attachment; the writ was issued by the trial court, and the CA merely upheld the trial court's order. On the merits, Section 1(d), Rule 57 permits attachment in an action against a party guilty of fraud in contracting the debt or incurring the obligation. To sustain attachment on this ground, it must be shown that the debtor, in contracting the debt or incurring the obligation, intended to defraud the creditor; the fraud must relate to the execution of the agreement and must have been the reason which induced the other party into giving consent which he would not have otherwise given. A debt is fraudulently contracted if at the time of contracting it the debtor has a preconceived plan or intention not to pay. Fraud is a state of mind and need not be proved by direct evidence but may be inferred from the circumstances attendant in each case. However, fraudulent intent not to honor an admitted obligation cannot be inferred from the debtor's inability to pay or to comply with the obligation. In this case, the affidavit alleged that PCL, after receiving the printing ink materials, acted in bad faith when it failed to comply with the terms and conditions of the sale, and that PCL was guilty of fraud in contracting the obligation when it agreed to pay the purchases within 30 days from date of purchase but once in possession of the merchandise refused to pay. These allegations were insufficient to prove fraud in contracting the debt. The affidavit did not contain statements of other factual circumstances showing that PCL, at the time of contracting the obligation, had a preconceived plan or intention not to pay. The mere fact that PCL failed to pay its purchases upon falling due and despite several demands was not enough to warrant the issuance of the harsh provisional remedy of preliminary attachment. Thus, the attachment was ordered lifted.

• Proof of Defective Ink: Petitioner insisted that the work processes, Exhibits "12" to "21," proved that ASA supplied the ink that caused the unpleasant smell of petitioner's finished products. Petitioner argued that the CA erred in concluding that the work processes failed to prove that the defective ink definitely came from ASA because said documents showed not only the name of ASA Color as supplier but also the names of several other suppliers; petitioner explained that the other names of suppliers appearing on the work processes were suppliers of plastic materials, so the only supplier of ink appearing on said documents was ASA, and that Jovencio Lim, petitioner's President, testified that during the period covered by the work processes, they had only two suppliers of ink, CDI Sakada and ASA Color. The Court subjected the records to close scrutiny but found petitioner's allegation that the CA judgment was based on misapprehension of facts absolutely unfounded. There was no testimonial evidence whatsoever to support petitioner's belated explanation that the other names of suppliers appearing on the work processes were suppliers of plastic materials and not ink. Moreover, petitioner's witnesses contradicted each other: Lim claimed that during the period covered by the work processes they had only two suppliers of ink, namely, CDI Sakada and ASA Color; on the other hand, Victor Montañez, petitioner's Head of the Accounting Department, testified that at that time they had three or four suppliers of ink materials. The work process form dated April 29, 1994 marked as Exhibit "20" also listed the suppliers as "SYNPAC/ASA/CDI," and the colors used as "Brown-ASA" and "Yellow-CDI." Hence, petitioner's own evidence revealed that there were at least two suppliers of ink for that batch of production. The CA was correct in ruling that petitioner's evidence failed to prove that it was indeed respondent ASA Color who supplied the defective ink. Having failed to prove that the ink materials delivered by respondent were defective, petitioner did not have any basis for claiming the right to return and not pay for the materials it purchased from respondent. It was therefore no longer necessary to discuss whether it was the obligation of respondent to pick up the ink from petitioner's warehouse. As to Frank Tanos, the CA made no ruling on the admissibility of his testimony; it merely stated that the memos, Exhibits "30" to "32," from said witness also did not prove the source of the unwanted smell. The CA obviously considered Tanos's testimony and the documents he identified for whatever they were worth, but still found them unconvincing to prove petitioner's claim that it was respondent who delivered defective ink materials.

• Finality of Factual Findings: The Court reiterated the well-settled rule that generally, factual findings of the trial court, affirmed by the Court of Appeals, are final and conclusive and may not be reviewed on appeal. The established exceptions are: (1) when the inference made is manifestly mistaken, absurd or impossible; (2) when there is grave abuse of discretion; (3) when the findings are grounded entirely on speculations, surmises or conjectures; (4) when the judgment of the Court of Appeals is based on misapprehension of facts; (5) when the findings of fact are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee; (7) when the findings of fact are conclusions without citation of specific evidence on which they are based; (8) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion; and (9) when the findings of fact of the Court of Appeals are premised on the absence of evidence and are contradicted by the evidence on record. The findings of fact of both the trial court and the CA were strongly rooted in testimonial and documentary evidence submitted by both parties. The case evidently did not fall under any of the enumerated exceptions.

• Disregard of Tanos Testimony: The CA did not rule on the admissibility of Tanos's testimony. It merely stated that the memos from said witness also did not prove the source of the unwanted smell. The CA considered Tanos's testimony and the documents he identified for whatever they were worth, but still found them unconvincing to prove petitioner's claim that it was respondent who delivered defective ink materials.

• Preliminary Attachment on Ground of Fraud in Contracting the Debt — Under Section 1(d), Rule 57, attachment may issue in an action against a party guilty of fraud in contracting the debt or incurring the obligation. To sustain it, the debtor must have intended to defraud the creditor in contracting the debt; the fraud must relate to the execution of the agreement and must have induced the other party's consent. A debt is fraudulently contracted if at the time of contracting it the debtor had a preconceived plan or intention not to pay. Fraud is a state of mind and may be inferred from attendant circumstances, but bare allegations of nonpayment despite demand are insufficient. Applied: the affidavit's allegations that PCL agreed to pay within 30 days but refused once in possession did not show a preconceived plan not to pay at the time of contracting; the attachment was lifted.

• Provisional Remedy of Preliminary Attachment is Harsh and Extraordinary — Preliminary attachment requires more than mere deliberate failure to pay a debt; it cannot be based on allegations that merely assert nonpayment or inability to pay. Applied: PCL's failure to pay despite demands, without more, did not justify the writ.

• Finality of Factual Findings of the Trial Court Affirmed by the CA — Factual findings of the trial court, affirmed by the CA, are final and conclusive and may not be reviewed on appeal. Exceptions include: (1) manifestly mistaken, absurd or impossible inference; (2) grave abuse of discretion; (3) findings grounded entirely on speculations, surmises or conjectures; (4) judgment based on misapprehension of facts; (5) conflicting findings of fact; (6) CA went beyond the issues and contrary to admissions; (7) findings are conclusions without citation of specific evidence; (8) CA overlooked relevant undisputed facts; and (9) findings premised on absence of evidence and contradicted by evidence on record. Applied: none of the exceptions applied; the findings were supported by testimonial and documentary evidence.

• Buyer's Burden to Prove Defective Goods — A buyer claiming that delivered goods are defective and seeking to avoid payment or recover damages must prove that the goods supplied by the seller were defective and caused the claimed injury. Applied: PCL failed to prove that the ink supplied by ASA was the defective ink that caused the unwanted smell; its evidence showed multiple possible suppliers and contradictory testimony.

• "To sustain an attachment on this ground, it must be shown that the debtor in contracting the debt or incurring the obligation intended to defraud the creditor. The fraud must relate to the execution of the agreement and must have been the reason which induced the other party into giving consent which he would not have otherwise given. To constitute a ground for attachment in Section 1 (d), Rule 57 of the Rules of Court, fraud should be committed upon contracting the obligation sued upon." — This passage states the controlling standard for preliminary attachment based on fraud in contracting the debt, which the Court applied in finding the writ improper.
• "A debt is fraudulently contracted if at the time of contracting it the debtor has a preconceived plan or intention not to pay, as it is in this case. Fraud is a state of mind and need not be proved by direct evidence but may be inferred from the circumstances attendant in each case (Republic v. Gonzales, 13 SCRA 633)." — This excerpt defines when a debt is fraudulently contracted and clarifies that fraud may be inferred, but only from attendant circumstances.
• "The affidavit does not contain statements of other factual circumstances to show that petitioner, at the time of contracting the obligation, had a preconceived plan or intention not to pay. Verily, in this case, the mere fact that petitioner failed to pay its purchases upon falling due and despite several demands made by private respondent, is not enough to warrant the issuance of the harsh provisional remedy of preliminary attachment." — This is the ratio for lifting the attachment: the affidavit's allegations were insufficient to establish fraud at the time of contracting.
• "Generally, factual findings of the trial court, affirmed by the Court of Appeals, are final and conclusive and may not be reviewed on appeal." — This excerpt states the finality rule that the Court applied in affirming the CA's factual findings on the defective-ink issue.

• Philippine Bank of Communications vs. Court of Appeals, G.R. No. 115678, February 23, 2001, 352 SCRA 616 — Cited for the rule that failure to remit proceeds or return goods is not sufficient for attachment, and that fraudulent intent cannot be inferred from a debtor's inability to pay or comply with obligations.
• Liberty Insurance Corporation vs. Court of Appeals — Cited in the decision for the rule that fraud in contracting the debt must relate to the execution of the agreement and must have induced the other party's consent; the provided text does not supply a citation.
• Philippine National Construction Corporation vs. Dy, G.R. No. 156887, October 3, 2005 — Cited for the rule that allegations of nonpayment and sale of assets are insufficient to support preliminary attachment.
• Republic vs. Gonzales, 13 SCRA 633 — Cited for the proposition that fraud is a state of mind and may be inferred from attendant circumstances.
• Child Learning Center, Inc. vs. Tagario, G.R. No. 150920, November 25, 2005 — Cited for the finality of factual findings of the trial court affirmed by the CA and the exceptions thereto.

• Section 1(d), Rule 57, Rules of Court — Allows preliminary attachment in an action against a party guilty of fraud in contracting the debt or incurring the obligation. Applied: the Court found the affidavit failed to show fraud at the time of contracting; the attachment was improper.
• Section 1(e), Rule 57, Rules of Court — Allows attachment when a party has removed or disposed of property with intent to defraud creditors. Cited in the PNCC vs. Dy discussion; not applied to PCL.
• Rule 45, Rules of Court — Governs petitions for review on certiorari. Applied: the Court treated the petition as one under Rule 45 because it was filed within the reglementary period and sought review of the CA judgment.
• Rule 65, Rules of Court — Governs petitions for certiorari. Mentioned as the rule initially invoked by petitioner; the Court treated the petition as one under Rule 45 instead.

Panganiban, C.J. (Chairperson), Ynares-Santiago, Callejo, Sr., and Chico-Nazario, JJ., concur.