Philippine Stock Exchange, Inc. vs. Antonio K. Litonjua and Aurelio K. Litonjua, Jr.

Although a corporation is not bound by an agreement absent a board resolution, it may still be compelled to return money it accepted under that transaction when retention would result in unjust enrichment and its conduct estops it from denying any obligation to the payor.

The Philippine Stock Exchange, Inc. (PSE) is a domestic stock corporation licensed by the Securities and Exchange Commission to operate a market for the buying and selling of securities. Prior to its 2001 reorganization, PSE was a non-stock corporation with 200 members, one of which was Trendline Securities, Inc. (Trendline), which owned a trading seat and the right to conduct trading activities in PSE. The Litonjua Group sought to acquire 85% majority equity of Trendline's membership seat, while Trendline had incurred obligations to PSE and had its trading privileges suspended. The dispute concerns the payment made to PSE in connection with that acquisition and the lifting of Trendline's suspension.

On 20 April 1999, the Litonjua Group wrote a letter-agreement to Trendline through its President Priscilla D. Zapanta, confirming a previous agreement for the acquisition of 85% majority equity of Trendline's membership seat in PSE. The aggregate price was ₱23,000,000.00, broken down into ₱19,555,000.00 for the Litonjua Group's 85% equity and ₱3,445,000.00 for Zapanta's 15% equity. The terms provided that, on account of Trendline's outstanding claims with PSE, the Litonjua Group was willing to pay PSE ₱18,547,643.81 as full settlement of all of Trendline's obligations, including interest; that upon acceptance of payment and approval by the PSE board, PSE would lift the suspension and allow normal trading of the membership/seat; that PSE would agree and accept nominations of the Litonjua Group's assignee subject to PSE rules; and that the balance of ₱1,007,356.19 would be paid after incorporation of the new company to which the seat would be transferred. Zapanta conformed to the letter for and on behalf of Trendline.

In a letter-confirmation dated 21 April 1999, the Litonjua Group undertook to pay ₱18,547,643.81 directly to PSE within three working days upon confirmation that it would be for the full settlement of all claims and outstanding obligations, including interest, of Trendline, to lift its membership suspension and resume normal trading. Trendline was also obligated to secure PSE's approval and written confirmation for a new corporation that would own the seat. On 26 April 1999, Trendline advised PSE of the salient terms and conditions for the acquisition. On 29 April 1999, PSE, through Atty. Ruben L. Almadro, Vice-President for Compliance and Surveillance Department, informed Trendline that the Business Conduct and Ethics Committee had resolved to accept ₱19,000,000.00 as full and final settlement of Trendline's outstanding obligations, payable not later than 13 May 1999, broken down into ₱15,918,744.14 for unpaid PSE advances to the Clearing House and ₱3,081,255.86 for compromise fines/penalties. Trendline was warned that failure to pay by 13 May 1999 would result in collection in full of imposable fines/penalties and enforcement of payment by selling its seat at public auction.

On 3 May 1999, Trendline replied to PSE acknowledging receipt of the 29 April 1999 letter and assuring PSE that the Litonjua Group would comply with the terms of the agreement. On 12 May 1999, the Litonjua Group delivered to PSE, through Atty. Almadro, three checks all dated 13 May 1999 and payable to PSE, totaling ₱19,000,000.00: Metro Bank Check No. 0127631 for ₱1,700,000.00; Standard Chartered Check No. 0000062 for ₱1,350,000.00; and Standard Chartered Check No. 0000064 for ₱15,950,000.00. The covering letter, conformed to by Trendline, stated that the payment represented the Litonjua Group's advance payment for the acquisition of the seat/membership with PSE and as full settlement of Trendline's outstanding obligation. PSE received the letter and checks from Trendline on 13 May 1999, as evidenced by Official Receipt No. 42264, which bore an annotation that the checks were received as advance payment for full settlement of Trendline's outstanding obligation to PSE.

Also on 13 May 1999, Trendline sent PSE a letter advising of the payment of penalties and interest and the reactivation of its suspended seat/membership. Trendline further informed PSE that Zapanta had resigned as its nominee and nominated Aurelio K. Litonjua, Jr. as the new nominee to the seat/membership. Despite the exchange of letters of conformity and delivery of the checks representing full settlement of Trendline's obligations, PSE failed to lift the suspension imposed on Trendline's seat.

PSE presented a different version. It stated that, prior to its reorganization in 2001, it was a non-stock corporation with 200 members, one of which was Trendline, which owned a trading seat and the right to conduct trading activities in PSE. During its trading activities, Trendline violated PSE rules and failed to pay cash settlement payables to the Securities Clearing Corporation of the Philippines amounting to ₱113.7 million, compelling PSE to assume the obligation; PSE then suspended Trendline's trading privileges. On 30 October 1998, Zapanta negotiated for an extension until 31 July 1999 to settle Trendline's obligations, but the Business Conduct and Ethics Committee advised Trendline that it had until 31 March 1999 to settle. Before the deadline, Trendline and the Litonjua Group were already negotiating for the purchase of Trendline's membership/seat, and the 20 April 1999 letter-agreement was issued without PSE's consent or approval. PSE claimed that on 12 May 1999 it received the three checks totaling ₱19,000,000.00 for full settlement of Trendline's outstanding obligation, but that Trendline, not the Litonjua Group, was indicated as the payor.

On 26 August 1999, PSE's Compliance and Surveillance Group discovered during a follow-up audit that Trendline had considerable shortfalls and outstanding obligations to clients, in addition to unsettled and unliquidated accounts. On 1 March 2004, Zapanta requested an audit of accounts preparatory to the issuance of clearance to transfer Trendline's corporate membership seat to the Litonjua Group; the Compliance and Surveillance Group conducted a special audit on 8 March 2004 and confirmed that Trendline was not financially liquid to settle all its outstanding obligations to clients. On 3 January 2006, Atty. Sixto Jose C. Antonio informed PSE that Trendline had filed a petition for corporate rehabilitation before the Regional Trial Court of Manila and that he had been appointed rehabilitation receiver. PSE replied on 6 February 2006 that 85% of Trendline's membership seat was being claimed by the Litonjua Group and enumerated individuals with pending claims against Trendline totaling ₱19,600,000.00. On 30 July 2006, the Litonjua Group demanded reimbursement of the ₱19,000,000.00 with interest reckoned from 13 May 1999, upon knowledge that specific performance by PSE of transferring the membership seat under the agreement would no longer be possible. PSE refused, stating that the claim had no legal basis, and the Litonjua Group filed a Complaint for Collection of Sum of Money with Damages on 10 October 2006. The trial court found that PSE received the amount without any right to demand it and that the Litonjua Group delivered it under the mistaken belief that PSE had approved the transaction; PSE's corporate secretary testified that no board resolution authorized PSE to bind itself to the letter-agreement, and Antonio K. Litonjua admitted that he did not ask PSE for such a board resolution.

• Contractual Consent and Board Resolution: Petitioner maintained that it was not a party to the 20 April 1999 letter-agreement because no board resolution authorized the corporation to be bound by its terms; its contemporaneous and subsequent acts were not tantamount to consent.
• Inapplicability of Smith, Bell and Co.: Petitioner argued that the case of Smith, Bell and Co. is not applicable to the present case.
• Article 1236 and Article 1293: Petitioner contended that Article 1236 should not be read together with Article 1293 and that the proper party liable for refund is Trendline under Article 1236.
• Indispensable Party: Petitioner asserted that Trendline should be considered an indispensable party.
• No Unjust Enrichment: Petitioner argued that it was not unjustly enriched by its receipt of ₱19,000,000.00 because it had every right to accept the amount voluntarily and knowingly paid by the Litonjua Group to discharge Trendline's obligations.
• No Constructive Trust: Petitioner maintained that no constructive trust exists between PSE and the Litonjua Group.
• Exemplary Damages: Petitioner argued that the Litonjua Group is not entitled to exemplary damages, as it was merely exercising its right to be paid when it accepted the payment.

• Equitable Refund Due to Absence of Contract: Respondent countered that since PSE insists there is no contract due to absence of consent, it is only equitable to return the money paid.
• Conditional Payment and Mistake: Respondent argued that the money was conditionally delivered by the Litonjua Group based on its belief that PSE had already approved the transaction and the obligations imposed by the letter-agreement.
• Implied Trust: Respondent maintained that because the money was acquired through mistake, PSE, by force of law, is considered a trustee of an implied trust for the benefit of the Litonjua Group.

• Party to the Letter-Agreement: Whether PSE is considered a party to the 20 April 1999 letter-agreement.
• Proper Party for Reimbursement: Whether the Litonjua Group should seek reimbursement from Trendline rather than PSE under Article 1236.
• Liability to Return Payment: Whether PSE is liable to return the ₱19,000,000.00 it received.
• Exemplary Damages: Whether PSE is liable to pay exemplary damages.
• Legal Interest: Whether the legal interest imposed on the ₱19,000,000.00 should be modified pursuant to BSP Circular No. 799.

• Party to the Letter-Agreement: No. No board resolution authorized PSE to bind itself; under Section 23 of the Corporation Code, corporate powers are exercised by the board, and without consent there is no contract.
• Proper Party for Reimbursement: Against PSE, not Trendline. Article 1236 does not apply because the Litonjua Group was not a disinterested third person; it paid to acquire 85% seat ownership and to secure the lifting of the suspension.
• Liability to Return Payment: Yes. Unjust enrichment under Article 22 and estoppel require PSE to return the money; it benefited without valid basis at the Litonjua Group's expense and cannot claim non-party status while retaining payment.
• Exemplary Damages: Yes. PSE's continuous refusal to return money despite having no legal right, and its reckless conduct, justified exemplary damages under Article 2232.
• Legal Interest: Modified. The rate is 12% per annum from 30 July 2006 to 30 June 2013 and 6% per annum from 1 July 2013 until full satisfaction under BSP Circular No. 799.

• Party to the Letter-Agreement: Under Article 1305, a contract is a meeting of minds; Article 1318 requires consent, certain subject matter, and cause. Consent under Article 1319 is the meeting of offer and acceptance; a qualified acceptance is a counter-offer. In corporations, consent is manifested through a board resolution because corporate powers are exercised by the board of directors under Section 23 of the Corporation Code. A corporation is a juridical entity separate and distinct from its stockholders and members, and absent board authority, no person, not even its officers, can validly bind it. PSE's corporate secretary testified that no board resolution from 1998 to July 2009 authorized PSE to bind itself to the letter-agreement or to lift the suspension under its terms, and Antonio K. Litonjua admitted he did not ask PSE for a board resolution. Thus, PSE did not consent and was not a party to the letter-agreement.
• Proper Party for Reimbursement: Article 1236 provides that a creditor is not bound to accept payment by a third person who has no interest in the fulfillment of the obligation, and that whoever pays for another may demand from the debtor what he paid, except that if he paid without the debtor's knowledge or against his will, he can recover only insofar as the payment benefited the debtor. PSE invoked this provision to argue that the Litonjua Group's recourse was against Trendline. The provision was inapplicable because the Litonjua Group was not a disinterested third person. From the initial meeting among the Litonjua Group, PSE, and Trendline, there was a clear understanding that the Litonjua Group intended to settle Trendline's outstanding obligation in consideration of its acquisition of 85% seat ownership and PSE's lifting of the suspension of the trading seat. The Litonjua Group therefore had an interest in the fulfillment of the obligation, and PSE could not treat it as a stranger whose only remedy was against Trendline.
• Liability to Return Payment: Although PSE was not a party to the letter-agreement, it was still liable to return the ₱19,000,000.00 under the principles of unjust enrichment and estoppel. Article 22 of the Civil Code requires every person who, through an act of performance by another or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, to return the same. Unjust enrichment exists when a person unjustly retains a benefit to the loss of another, or retains money or property of another against the fundamental principles of justice, equity, and good conscience. It requires two conditions: the person is benefited without a valid basis or justification, and the benefit is derived at the expense of another. PSE benefited from the ₱19,000,000.00 without valid justification and at the expense of the Litonjua Group. Estoppel also applied. Estoppel is rooted in equity and requires a declaration, act, or omission by the party sought to be bound, and reliance by the party claiming its benefits. PSE led the Litonjua Group to believe that payment of ₱19,000,000.00 would fully settle Trendline's obligations, including penalties and interest, and would lift the suspension. The 29 April 1999 letter of Atty. Almadro stated that the Business Conduct and Ethics Committee accepted ₱19,000,000.00 as full and final settlement payable not later than 13 May 1999, with the warning that failure to pay would result in full fines and sale of the seat at public auction. Trendline assured PSE that the Litonjua Group would pay. Before turning over the checks, the Litonjua Group sent a letter to Atty. Almadro stating that the payment was for the acquisition of the seat/membership. Upon receipt, PSE annotated the checks as advance payment for full settlement of Trendline's outstanding obligation. PSE was an active participant in the transactions. By accepting the payment, PSE was estopped from claiming that Trendline still had a penalty obligation that had to be settled before transfer of the seat. It could not assert that it was a non-party to the letter-agreement while claiming a right to receive the money for Trendline's obligation; it had to take a position. Since it was not a party for lack of consent, it was estopped from claiming the right to be paid.
• Exemplary Damages: Article 2232 allows exemplary damages in contracts and quasi-contracts if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Article 2233 provides that exemplary damages cannot be recovered as a matter of right; the court decides whether they should be adjudicated. Article 2234 requires the plaintiff to show entitlement to moral, temperate, or compensatory damages before exemplary damages may be considered. The rationale, as reiterated in Arco Pulp and Paper Co., Inc. vs. Dan T. Lim, is to deter serious wrongdoings, vindicate undue sufferings, and punish outrageous conduct. PSE continuously refused to return the money despite demands and despite having received it without legal right. The trial court found this conduct wanton, oppressive, and malevolent. The Court of Appeals found that, if not fraudulent, PSE's actions were definitely reckless, especially given the huge amount involved, and that PSE should have been more cautious in dealing with the Litonjua Group. Absent any compelling reason to overturn these findings, the award of exemplary damages was upheld.
• Legal Interest: Under BSP Circular No. 799 dated 21 June 2013, the rate of interest for the loan or forbearance of any money, goods, or credits, and the rate allowed in judgments, in the absence of an express contract as to such rate, is six percent (6%) per annum. The trial court imposed 12% per annum from 30 July 2006, as affirmed by the Court of Appeals. The rate was modified: 12% per annum from 30 July 2006 to 30 June 2013, and 6% per annum from 1 July 2013 until full satisfaction.

• Unjust Enrichment — Under Article 22 of the Civil Code, every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground shall return the same. There is unjust enrichment when a person unjustly retains a benefit to the loss of another, or retains money or property of another against the fundamental principles of justice, equity, and good conscience. It requires two conditions: (1) that a person is benefited without a valid basis or justification, and (2) that such benefit is derived at the expense of another. The Court applied this doctrine because PSE benefited from the ₱19,000,000.00 without valid justification and at the expense of the Litonjua Group, requiring PSE to return the money.
• Estoppel — Estoppel has its roots in equity and is a response to the demands of moral right and natural justice. For estoppel to exist, there must be a declaration, act, or omission by the party sought to be bound, and the party claiming its benefits must have altered his position, having been intentionally and deliberately led to comport himself by what was declared or done or failed to be done. The Court applied estoppel because PSE led the Litonjua Group to believe that payment of ₱19,000,000.00 would fully settle Trendline's obligations and lift the suspension; by accepting the payment, PSE was estopped from claiming that Trendline still had a penalty obligation that had to be settled before transfer of the seat, and from asserting non-party status while claiming a right to receive the money.
• Corporate Consent Through Board Resolution — Under Section 23 of the Corporation Code, corporate powers are exercised, all business conducted, and all property controlled and held by the board of directors or trustees. A corporation is a juridical entity separate and distinct from its stockholders and members, and absent authority from the board, no person, not even its officers, can validly bind the corporation. Consent, as a requisite to a valid contract, is manifested through a board resolution. The Court applied this doctrine to hold that PSE was not a party to the letter-agreement because no board resolution authorized it to bind itself to the agreement's terms.
• Payment by a Third Person Under Article 1236 — The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation unless there is a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. The Court held Article 1236 inapplicable because the Litonjua Group was not a disinterested third person; it had a clear interest in settling Trendline's obligation in consideration of acquiring 85% seat ownership and securing the lifting of the suspension.
• Exemplary Damages — In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Exemplary damages cannot be recovered as a matter of right; the court decides whether they should be adjudicated, and the plaintiff must show entitlement to moral, temperate, or compensatory damages before exemplary damages may be considered. The Court applied this doctrine because PSE continuously refused to return the money despite demands and without legal right, and its conduct was found wanton, oppressive, malevolent, or at least reckless.
• Legal Interest Under BSP Circular No. 799 — Pursuant to BSP Circular No. 799 dated 21 June 2013, the rate of interest for the loan or forbearance of any money, goods, or credits, and the rate allowed in judgments, in the absence of an express contract as to such rate, is six percent (6%) per annum. The Court applied this circular by modifying the interest on the ₱19,000,000.00 to 12% per annum from 30 July 2006 to 30 June 2013 and 6% per annum from 1 July 2013 until full satisfaction.

• "There is unjust enrichment when a person unjustly retains a benefit to the loss of another, or when a person retains money or property of another against the fundamental principles of justice, equity and good conscience." — This passage defines unjust enrichment, the primary basis for requiring PSE to return the ₱19,000,000.00 despite not being a party to the letter-agreement.
• "The principle of unjust enrichment requires two conditions: (1) that a person is benefited without a valid basis or justification, and (2) that such benefit is derived at the expense of another." — This passage states the requisites of unjust enrichment applied by the Court to PSE's receipt and retention of the payment.
• "PSE cannot assert to be a non-party to the letter-agreement and at the same time claim a right to receive the money for the satisfaction of the obligation of Trendline. PSE must not be allowed to contradict itself. A position must be made." — This passage articulates the estoppel rationale: PSE could not simultaneously deny contractual party status and retain the payment made for Trendline's obligation.
• "In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner." — This passage states the statutory basis for the exemplary damages upheld against PSE.

• Peoples Aircargo and Warehousing Co. Inc. vs. Court of Appeals and Stefani Sao, 357 Phil. 850, 862 (1998) — Cited for the rule that a corporation acts through its board of directors and that, absent board authority, no person, not even its officers, can validly bind the corporation.
• Philippine National Bank vs. The Honorable Intermediate Appellate Court (First Civil Cases Division) and Romeo Alcedo, 267 Phil. 720 (1990) — Cited for the doctrine of estoppel, including its basis in public policy, fair dealing, good faith, and justice, and its purpose to forbid one from speaking against its own act, representations, or commitments to the injury of one who reasonably relied thereon.
• Dizon vs. Suntay, 150-C Phil. 861, 867-868 (1972) — Cited for the requisites of estoppel: a declaration, act, or omission by the party sought to be bound, and reliance by the party claiming its benefits.
• Philippine Realty and Holdings Corporation vs. Ley Construction and Development Corporation, 667 Phil. 32, 65 (2011) — Cited for the definition of unjust enrichment as unjust retention of a benefit to the loss of another, or retention of money or property against justice, equity, and good conscience.
• Flores vs. Spouses Lindo, Jr., 664 Phil. 210, 221 (2011) — Cited for the two conditions of unjust enrichment and the objective of preventing one from enriching himself at the expense of another without just cause or consideration.
• Land Bank of the Philippines vs. Ong, 650 Phil. 627, 638 (2010) — Cited for reference in relation to Article 1236 and the payment by a third person.
• Arco Pulp and Paper Co., Inc. vs. Dan T. Lim, 737 Phil. 133 (2014) — Cited for the rationale behind exemplary damages as deterrent to serious wrongdoings, vindication of undue sufferings, and punishment for outrageous conduct.
• Tankeh vs. Development Bank of the Philippines, et al., 720 Phil. 641, 693 (2013) — Cited within Arco Pulp and Paper Co., Inc. vs. Dan T. Lim for the rationale of exemplary damages.

• Article 1305, Civil Code — Defines a contract as a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or render some service. The Court used this to frame the requirement of consent for PSE to be bound.
• Article 1318, Civil Code — Provides the requisites of a contract: consent of the contracting parties, certain subject matter, and cause of the obligation. The Court applied this in finding no contract between PSE and the Litonjua Group due to lack of consent.
• Article 1319, Civil Code — Provides that consent is manifested by the meeting of the offer and acceptance upon the thing and the cause which are to constitute the contract; the offer must be certain and the acceptance absolute, and a qualified acceptance constitutes a counter-offer. The Court used this in analyzing whether PSE consented to the letter-agreement.
• Section 23, Corporation Code — Provides that corporate powers of all corporations shall be exercised, all business conducted, and all property controlled and held by the board of directors or trustees. The Court applied this to hold that PSE's consent had to be manifested through a board resolution, which was absent.
• Article 1236, Civil Code — Provides that the creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation unless there is a stipulation to the contrary; whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. The Court held this inapplicable because the Litonjua Group was not a disinterested third person.
• Article 1293, Civil Code — Provides that novation consisting in substituting a new debtor in the place of the original one may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor; payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. This was quoted in the CA ruling but the Supreme Court did not rely on it, finding Article 1236 inapplicable because the Litonjua Group had an interest in the obligation.
• Article 22, Civil Code — Provides that every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him. The Court applied this as the primary basis for PSE's liability to return the ₱19,000,000.00.
• Article 2154, Civil Code — Defines solutio indebiti: if something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. The RTC anchored its decision on this provision, but the Supreme Court grounded liability on Article 22 and estoppel.
• Article 2232, Civil Code — Provides that in contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. The Court applied this to uphold the award of exemplary damages against PSE.
• Article 2233, Civil Code — Provides that exemplary damages cannot be recovered as a matter of right; the court will decide whether or not they should be adjudicated. The Court cited this in discussing the award.
• Article 2234, Civil Code — Provides that while the amount of exemplary damages need not be proven, the plaintiff must show that he is entitled to moral, temperate, or compensatory damages before the court may consider whether exemplary damages should be awarded. The Court cited this in upholding the award.
• BSP Circular No. 799 dated 21 June 2013 — Provides that the rate of interest for the loan or forbearance of any money, goods, or credits, and the rate allowed in judgments, in the absence of an express contract as to such rate, shall be six percent (6%) per annum. The Court applied this to modify the interest on the ₱19,000,000.00 from 1 July 2013 until full satisfaction.

Velasco, Jr. (Chairperson), Peralta, Reyes, and Jardeleza, JJ., concurred.