Reyes vs. Gubatan

A lawyer who borrows money from a client without fully protecting the client’s interests, and who deliberately fails to pay the resulting just debt, violates Rule 16.04 and Canon 7 of the Code of Professional Responsibility and may be suspended from the practice of law.

Rommel N. Reyes was the President and Chairman of Integra Asia Konstruct, Inc., and Atty. Gerald Z. Gubatan was a lawyer employed by the Corporation as Legal Consultant and Special Assistant to the Chairman and President, while also handling Reyes’ personal cases. Their relationship was both professional and personal, having been friends since college. The Code of Professional Responsibility governs the conduct of lawyers, including Canon 16 and Rule 16.04 on trust property and borrowing from clients, and Canon 7 on upholding the integrity and dignity of the legal profession.

Rommel N. Reyes was the President and Chairman of Integra Asia Konstruct, Inc. He and Atty. Gerald Z. Gubatan had been friends since college, and because of this friendship, Reyes agreed to lend money to Atty. Gubatan on six different occasions. The loans described in the Resolution include the following: on October 3, 2006, Reyes lent Atty. Gubatan ₱88,000.00, payable in 30 days and evidenced by a promissory note; on November 20, 2006, despite the lapse of the 30-day period without payment of the first loan, Atty. Gubatan again borrowed ₱150,000.00 with an interest of 2% per month, evidenced by an Acknowledgment/Agreement in which he promised to pay immediately after the release of his loan with Banco de Oro; and on November 24, 2006, Atty. Gubatan borrowed ₱17,000.00, payable in 30 days and evidenced by a promissory note.

After these three loan transactions, Atty. Gubatan again tried to borrow money from Reyes. Because Reyes claimed that he no longer had personal funds to lend, Atty. Gubatan persuaded him to allow borrowing from the Corporation. On December 19, 2006, Atty. Gubatan borrowed from the Corporation ₱200,000.00 with 2% interest per month, evidenced by a promissory note. Thereafter, on August 12, 2007, Atty. Gubatan again asked Reyes for a loan amounting to ₱57,676.00, payable in 30 days and likewise evidenced by a promissory note. Despite the fact that the promissory notes and the acknowledgment/agreement were all duly signed and executed by Atty. Gubatan, he failed and refused to pay his obligations to Reyes and the Corporation.

On March 13, 2009, Reyes sent a demand letter to Atty. Gubatan demanding settlement of his loans amounting to ₱769,014.00 inclusive of interest. Atty. Gubatan still failed to pay. On September 15, 2009, Reyes filed the instant complaint. In addition, Reyes and the Corporation filed two complaints against Atty. Gubatan for collection of sum of money with damages before the Metropolitan Trial Court in Quezon City.

In his Answer, Atty. Gubatan claimed that he was employed by the Corporation and retained as Legal Consultant and Special Assistant to the Chairman and President. By virtue of said employment, Atty. Gubatan, who is based in Dagupan City, was required by Reyes to be at the office of the Corporation in Quezon City at least once a week. Aside from his work in the Corporation, Atty. Gubatan claimed that he was asked by Reyes to handle the latter’s numerous personal cases. Since he only started his law practice in 2006, he claimed that Reyes graciously volunteered to give him several loans as evidenced by promissory notes and an acknowledgment/agreement. He further claimed that when these instruments of indebtedness were signed, he and Reyes agreed that the amounts stated therein would be set off against his compensation and professional fees for services rendered to Reyes and the Corporation.

Atty. Gubatan averred that there was no issue in the settlement of the loans as well as the handling of cases assigned to him. However, this all changed when he declined Reyes’ request to prepare and execute an affidavit in support of the latter’s complaint against the officials of Region I Medical Center and other officials of the Department of Health. The supposed affidavit would accuse the Director of the RIMC and the members of the Bids and Awards Committee of demanding sums of money from Reyes in consideration of the contracts already awarded to the Corporation. According to Atty. Gubatan, he declined the request because there was no factual basis for the alleged demand of money on the part of the RIMC officials. Because of his refusal, Reyes sent a demand letter for payment of the loans and eventually filed the instant complaint.

• Violation of Rule 16.04: Reyes alleged that Atty. Gubatan violated the Code of Professional Responsibility by borrowing money from him and the Corporation while a lawyer-client relationship existed and by failing to pay despite demand.
• Penalty: Reyes moved for reconsideration of the IBP Board’s February 13, 2013 Resolution, arguing that the Board erred in dismissing the case after adopting and approving the Investigating Commissioner’s finding of violation, and that the penalty should be modified to disbarment.

• Set-off/Compensation: Atty. Gubatan claimed that when the instruments of indebtedness were signed, he and Reyes agreed that the amounts stated therein would be set off against his compensation and professional fees for services rendered to Reyes and the Corporation.
• Retaliatory Filing: Atty. Gubatan averred that there was no issue in the settlement of the loans and handling of cases until he declined Reyes’ request to prepare an affidavit against RIMC and DOH officials because there was no factual basis; thereafter, Reyes demanded payment and filed the complaint.
• Entitlement to Fees: Atty. Gubatan claimed that he should be paid for the services he had rendered to Reyes and the Corporation, contrary to Reyes’ claim that he volunteered legal services without payment.

• Violation of Rule 16.04 and Canon 7: Whether Atty. Gubatan violated Rule 16.04 and Canon 7 of the Code of Professional Responsibility by borrowing money from Reyes and the Corporation during the existence of a lawyer-client relationship and failing to pay despite demands.
• Set-off Defense: Whether Atty. Gubatan’s claim that the loans were to be set off against his compensation and professional fees is meritorious.
• Penalty: Whether the penalty for Atty. Gubatan’s violation should be reprimand, as recommended by the IBP Board, or suspension from the practice of law.
• Return of Money: Whether the administrative case should include an order for the return of the money borrowed by Atty. Gubatan from Reyes and the Corporation.

• Violation of Rule 16.04 and Canon 7: Yes. Atty. Gubatan obtained loans from his clients without fully protecting their interests and failed to pay, violating Rule 16.04 and Canon 7; deliberate failure to pay just debts constitutes gross misconduct.
• Set-off Defense: No. The claim is self-serving; no subsequent agreement was shown; the filing of collection cases by Reyes and the Corporation counters the alleged offsetting.
• Penalty: Suspension for three months. The IBP’s reprimand is modified because jurisprudence holds that deliberate failure to pay just debts constitutes gross misconduct for which a lawyer may be suspended.
• Return of Money: No. The loans were contracted in Atty. Gubatan’s private capacity; administrative-disciplinary findings have no bearing on purely civil liabilities, which should be threshed out in a proper proceeding; the return is already the subject of collection cases.

• Violation of Rule 16.04 and Canon 7: The relationship between lawyers and clients is imbued with trust and confidence, and this trust and confidence is susceptible to abuse. Rule 16.04 prohibits a lawyer from borrowing money from a client unless the client’s interests are fully protected by the nature of the case or by independent advice. Atty. Gubatan obtained several loans from Reyes and the Corporation, evidenced by promissory notes and an acknowledgment/agreement, during the existence of a lawyer-client relationship, when he was employed by the Corporation and retained as legal consultant and special assistant to the president. The loans lacked security; the clients relied solely on his word that he would return the money plus interest. By unduly borrowing and refusing to pay, he abused the trust and confidence reposed in him and failed to uphold the integrity and dignity of the legal profession under Canon 7. The Court cited HDI Holdings Philippines, Inc. vs. Cruz and Spouses Concepcion vs. Dela Rosa. Atty. Gubatan did not deny the existence of the loans and the fact that they remain unpaid.
• Set-off Defense: Atty. Gubatan’s assertions of extension and offsetting were self-serving. The promissory notes stated that he would pay the amount including interest immediately after the release of his loan from Banco de Oro, which was never fulfilled, manifesting his intent to mislead Reyes into giving a substantial amount. No subsequent agreement was shown that the sums sought to be collected would be set off with his claimed compensation for professional services. The filing of two collection cases by Reyes and the Corporation contradicted the allegations of extension and offsetting. Although Reyes admitted in the MTC collection case that he did not pay Atty. Gubatan for legal services, and Atty. Gubatan claimed he should be paid, any disagreement over professional fees cannot be taken into the lawyer’s own hands; proper legal steps must be followed. Lawyers are not entitled to unilaterally appropriate their clients’ money for themselves by the mere fact that the clients owe them attorney’s fees. Regardless of the veracity of his claim of nonpayment of professional fees, Atty. Gubatan was not justified in refusing to pay his debts. The disposition is without prejudice to any action he may institute to collect his professional fees. The Court cited Vda. De Fajardo vs. Bugaring, J.K. Mercado and Sons Agricultural Enterprises, Inc. vs. De Vera, and Luna vs. Galarrita.
• Penalty: The IBP Board recommended reprimand, but the Court disagreed. Jurisprudence holds that deliberate failure to pay just debts constitutes gross misconduct for which a lawyer may be sanctioned with suspension from the practice of law. Lawyers are expected to maintain not only legal proficiency but also a high standard of morality, honesty, integrity, and fair dealing so that the people’s faith and confidence in the judicial system is ensured. They must faithfully perform their duties to society, the bar, the courts, and their clients, which include prompt payment of financial obligations. The Court reviewed Junio vs. Grupo, where the errant lawyer was found guilty of violating Rule 16.04 and suspended for one month; Spouses San Pedro vs. Mendoza, where the respondent refused to return the money of his clients despite failure to facilitate the transfer of title and was suspended for three months; Spouses Anaya vs. Alvarez, where the respondent was suspended for one year for deliberate failure to pay debts and issuing worthless checks; and Delloro vs. Atty. Tagueg, where the respondent was suspended for three months for violating Rule 16.04. The Court found three months’ suspension proper.
• Return of Money: The IBP Board was correct in not including an order for the return of the money borrowed by Atty. Gubatan from Reyes and the Corporation since these loans were contracted in his private capacity. In Tria-Samonte vs. Obias, the Court held that findings during administrative-disciplinary proceedings have no bearing on the liabilities of the parties involved which are purely civil in nature, meaning those liabilities which have no intrinsic link to the lawyer’s professional engagement, as the same should be threshed out in a proper proceeding of such nature. The return of the money is already the subject of two complaints filed by Reyes and the Corporation against Atty. Gubatan for collection of sum of money with damages.

• Prohibition on borrowing from clients (Rule 16.04, CPR) — A lawyer shall not borrow money from a client unless the client’s interests are fully protected by the nature of the case or by independent advice. The Court applied this rule to Atty. Gubatan, who obtained several loans from Reyes and the Corporation during the existence of a lawyer-client relationship, without any security, and with the clients relying solely on his word that he would return the money plus interest.
• Deliberate failure to pay just debts as gross misconduct — Jurisprudence holds that the deliberate failure to pay just debts constitutes gross misconduct for which a lawyer may be sanctioned with suspension from the practice of law. The Court applied this doctrine because Atty. Gubatan failed and refused to pay his obligations despite demand, and imposed a three-month suspension.
• Duty to uphold integrity and dignity of the legal profession (Canon 7, CPR) — A lawyer shall at all times uphold the integrity and dignity of the legal profession and support the activities of the integrated bar. The Court found that Atty. Gubatan’s undue borrowing and refusal to pay abused the trust and confidence reposed in him by his clients and contravened Canon 7.
• No unilateral appropriation of client’s money for attorney’s fees — A lawyer is not entitled to unilaterally appropriate his client’s money for himself by the mere fact that the client owes him attorney’s fees; any disagreement over professional fees must be pursued through proper legal steps. The Court held that regardless of the veracity of Atty. Gubatan’s claim of nonpayment of professional fees, he was not justified in refusing to pay his debts, without prejudice to any action he may institute to collect his fees.
• Administrative-disciplinary proceedings vs. civil liabilities — Findings during administrative-disciplinary proceedings have no bearing on the liabilities of the parties involved which are purely civil in nature, meaning those liabilities which have no intrinsic link to the lawyer’s professional engagement, as the same should be threshed out in a proper proceeding of such nature. The Court applied this doctrine in declining to order the return of the borrowed money in the administrative case, since the loans were contracted in Atty. Gubatan’s private capacity and were already the subject of collection cases.

• "A lawyer shall not borrow money from his client unless the client's interests are fully protected by the nature of the case or by independent advice." — This is the controlling text of Rule 16.04 of the Code of Professional Responsibility, which the Court found Atty. Gubatan violated by borrowing from Reyes and the Corporation without fully protecting their interests.
• "Jurisprudence holds that the deliberate failure to pay just debts constitutes gross misconduct for which a lawyer may be sanctioned with suspension from the practice of law." — This passage states the ratio for the penalty, justifying the modification of the IBP’s recommended reprimand to a three-month suspension.
• "Lawyers are not entitled to unilaterally appropriate their clients' money for themselves by the mere fact that the clients owe them attorney's fees." — This passage rejects Atty. Gubatan’s set-off defense and clarifies that any claim for professional fees must be pursued through proper legal steps, not self-help.
• "findings during administrative-disciplinary proceedings have no bearing on the liabilities of the parties involved which are purely civil in nature — meaning, those liabilities which have no intrinsic link to the lawyer's professional engagement — as the same should be threshed out in a proper proceeding of such nature." — This passage, quoted from Tria-Samonte vs. Obias, explains why the Court did not order the return of the borrowed money in the administrative case and left the civil liability to the collection suits.

• HDI Holdings Philippines, Inc. vs. Cruz, A.C. No. 11724, July 31, 2018 — Cited for the principle that the lawyer-client relationship is imbued with trust and confidence and that the rule prohibiting lawyers from borrowing from clients prevents the lawyer from taking advantage of his influence over the client.
• Junio vs. Grupo, 423 Phil. 808 (2001) — Cited as precedent where a lawyer was found guilty of violating Rule 16.04 and suspended from the practice of law for one month.
• Spouses San Pedro vs. Mendoza, 749 Phil. 540 (2014) — Cited as precedent where a lawyer who refused to return his clients’ money despite his failure to facilitate the transfer of title was suspended for three months.
• Spouses Anaya vs. Alvarez, 792 Phil. 1 (2016) — Cited as precedent where a lawyer was suspended for one year for deliberate failure to pay debts and for issuing worthless checks.
• Delloro vs. Atty. Tagueg, A.C. No. 12422, July 17, 2019 — Cited as a more recent precedent where a lawyer was suspended for three months for violating Rule 16.04.
• Tria-Samonte vs. Obias, 719 Phil. 70 (2013) — Cited for the rule that findings during administrative-disciplinary proceedings have no bearing on purely civil liabilities, which must be resolved in a proper civil proceeding.
• Luna vs. Galarrita, 763 Phil. 175 (2015) — Cited for the rule that lawyers may not unilaterally appropriate their clients’ money to satisfy attorney’s fees.
• Foster vs. Agtang, 749 Phil. 576 (2014) — Cited for the rule that deliberate failure to pay just debts constitutes gross misconduct and that lawyers must maintain high standards of morality, honesty, integrity, and fair dealing.

• Canon 16, Code of Professional Responsibility — A lawyer shall hold in trust all moneys and properties of his client that may come into his possession. The Court cited this canon in finding that Atty. Gubatan violated his professional duties.
• Rule 16.04, Code of Professional Responsibility — A lawyer shall not borrow money from his client unless the client’s interests are fully protected by the nature of the case or by independent advice; neither shall a lawyer lend money to a client except, when in the interest of justice, he has to advance necessary expenses in a legal matter he is handling for the client. The Court found Atty. Gubatan violated this rule by borrowing from Reyes and the Corporation without fully protecting their interests.
• Canon 7, Code of Professional Responsibility — A lawyer shall at all times uphold the integrity and dignity of the legal profession and support the activities of the integrated bar. The Court found that Atty. Gubatan’s undue borrowing and refusal to pay abused the trust and confidence reposed in him and contravened this canon.

Peralta, C.J. (Chairperson), Carandang, Zalameda, and Gaerlan, JJ., concurred.