Rizal Surety & Insurance Company vs. Court of Appeals

An insurer that holds disputed insurance proceeds in its name for the joint account of insureds, pending settlement of their claims, may be constituted an express trustee under Articles 1441 and 1444 of the Civil Code; a subsequent Loss and Subrogation Receipt releases it only from liabilities arising from the insurance policies, not from liability for accrued interest arising from its breach of fiduciary duty to deposit the funds in an interest-bearing account as instructed. Attorney’s fees must be disallowed where the text of the trial and appellate decisions states no factual, legal, or equitable justification, even if awarded in the dispositive portion.

The Reparations Commission (REPACOM) sold the vessel M/V Transocean Shipper to Transocean Transport Corporation payable in twenty annual installments. The vessel was insured with Rizal Surety & Insurance Company under Marine Hull Policies MH-1322 and MH-1331 for US$3,500,000, with a stipulated value of P23,763,000, naming REPACOM and Transocean as insured; Rizal reinsured the vessel with a foreign insurance firm.

On December 5, 1961, REPACOM sold to Transocean Transport Corporation the vessel M/V Transocean Shipper payable in twenty annual installments. On June 22, 1974, the vessel was insured with Rizal Surety & Insurance Company for US$3,500,000, with a stipulated value of P23,763,000 under Marine Hull Policy MH-1322 and MH-1331; the policies named REPACOM and Transocean as insured, and Rizal reinsured the vessel with a foreign insurance firm. In February 1975, during the effectivity of the policies, the vessel was lost in the Mediterranean Sea. The insured filed claims against Rizal for the insurance proceeds, and shortly thereafter REPACOM and Transocean entered into a partial compromise agreement regarding those proceeds.

On April 18, 1975, anticipating payment in dollars, Transocean requested the Central Bank to allow it to retain the expected dollar insurance proceeds for three months to study how to utilize them. The Central Bank granted the request subject to conditions, one of which required deposit of the proceeds with a local commercial bank in a special dollar account until July 31, 1975. On November 18, 1975, Transocean and REPACOM requested Rizal to pay the insurance proceeds in their joint names despite problems regarding the amount of their respective claims. On November 20, 1975, the Central Bank authorized Rizal to receive the insurance proceeds from the English reinsurance firm in foreign currency and to deposit them in the same currency with any local bank in a non-interest-bearing account, jointly in the names of Transocean and REPACOM. On December 2, 1975, upon Rizal’s request, the Central Bank authorized Rizal to receive and deposit the dollar insurance proceeds in a non-interest-bearing account in Rizal’s name and for the joint account of REPACOM and Transocean. On January 3, 1976, Rizal informed Transocean and REPACOM that the entire insurance proceeds for the loss—consisting of P2,614,150.00 from local insurance companies and reinsurers and US$3,083,850.00 from Rizal’s London insurance broker—had been deposited with Prudential Bank and Trust Company, Escolta Branch, Manila, the dollar sum in a non-interest-bearing account as authorized by the Central Bank.

On January 29, 1976, Transocean and REPACOM entered into a partial compromise agreement to divide and distribute the insurance proceeds so that each would receive as its initial share the portion not disputed by the other, with REPACOM receiving US$434,618.00 and Transocean receiving US$1,931,153.00. The balance remained in dispute for future settlement by compromise or litigation, and pending settlement the balance would continue to be kept in the same bank account in trust for Transocean and REPACOM unless the parties agreed to transfer it to another bank account. Copies of the agreement were sent to Rizal. In response to the parties’ March 10, 1976 letter-request, the Central Bank on March 15, 1976 authorized Transocean and REPACOM to transfer the balance of the insurance proceeds, US$718,078.20, into an interest-bearing special dollar account with any local commercial bank. The Central Bank’s letter-authorization was addressed to REPACOM, with Transocean and Rizal copy-furnished. Having obtained the authorization, REPACOM and Transocean wrote Rizal on April 21, 1976 requesting remittance of the US$718,078.20 to the Philippine National Bank, Escolta Branch, for their joint account. In a reply dated May 10, 1976, Rizal stated that it would effect the requested remittance when both REPACOM and Transocean had unconditionally and absolutely released Rizal from all liabilities under its policies by executing and delivering the Loss and Subrogation Receipt prepared by Rizal.

Because the parties proposed amendments and corrections to the Loss and Subrogation Receipt, a revised version was presented to the Office of the Solicitor General, and on May 25, 1977, Acting Solicitor General Vicente V. Mendoza wrote Rizal demanding interest on the dollar balance per the Central Bank letter-authority. The letter asserted that effective as of Rizal’s receipt of a copy of the Central Bank authorization, the amount should bear interest at authorized rates; that Rizal, as trustee, had the duty to see that the funds earned the authorized interest and was morally and legally bound to deposit them under terms most advantageous to the beneficiaries; and that if Rizal did not wish to transfer the deposit from Prudential Bank, its sister company, to another bank where it could earn interest, it was obligated to require Prudential Bank to place the deposit in an interest-bearing account. The letter demanded payment of interest on the dollar deposit from the date of Rizal’s receipt of the authorization at the authorized rates. In a reply dated June 14, 1977, Rizal through counsel rejected the demand, asserting that there was no trust relationship, express or implied; that it had no obligation to transfer the dollar deposit into an interest-bearing account because the Central Bank authorization was given to REPACOM and not to Rizal; that REPACOM did not ask Rizal to place the dollars in an interest-bearing account; and that no Loss and Subrogation Receipt had been executed.

On October 10, 1977, Transocean and REPACOM sent Rizal the duly executed Loss and Subrogation Receipt, dated January 31, 1977, without prejudice to their claim for interest on the dollar balance from the time the Central Bank authorized its placement in an interest-bearing account. On February 27, 1978, Transocean and REPACOM entered into a final compromise agreement whereby REPACOM, in consideration of an additional P1,000,000.00 paid by Transocean, transferred, conveyed, and assigned to Transocean all its rights, interests, and claims in and to the insurance proceeds. The dollar balance was then remitted to the Philippine National Bank, Escolta Branch, for the sole account of Transocean. On April 14, 1978, Transocean’s counsel sent a demand letter for interest on the dollar balance to Rizal and Prudential Bank, but neither replied nor complied. On August 15, 1979, Transocean filed with the Regional Trial Court of Manila, Branch 33, a complaint for collection of unearned interest on the dollar balance of the insurance proceeds. The trial court found that Rizal had held the dollar balance in a non-interest-bearing account and that, from April 21, 1976, it should have deposited the remaining dollar deposit in an interest-bearing account either by remitting it to the Philippine National Bank as requested or by transferring it to an interest-bearing account with Prudential Bank; the Court of Appeals upheld that finding and extended the period for computing interest to January 10, 1978.

• Trust Relationship: Petitioner maintained that no trust relationship, express or implied, existed; it never intended to enter into a fiduciary relationship with private respondent and REPACOM and held the dollar balance only to protect its interest because it had not yet been granted subrogation over the total loss of the vessel. It also argued that it was not a party to the partial compromise agreement and should not be bound by its statement that the balance was kept in trust.
• Central Bank Authorization: Petitioner argued that it had no obligation to transfer the dollar deposit into an interest-bearing account because the Central Bank authorization was addressed to REPACOM and not to petitioner, and because REPACOM did not ask petitioner to place the dollars in an interest-bearing account.
• Loss and Subrogation Receipt: Petitioner insisted that the Loss and Subrogation Receipt signed by the insureds unconditionally and absolutely released and discharged it from all liabilities, including the claimed interest, and that the Court of Appeals erred in holding it liable after admitting that release.
• Bad Faith and Damages: Petitioner contended that Transocean acted in palpable bad faith and with malice in filing a clearly unfounded civil action and should be ordered to pay moral and punitive damages, attorney’s fees, and expenses of litigation.
• Attorney’s Fees: Petitioner argued that the trial court incorrectly awarded attorney’s fees and costs of suit to Transocean and that it is not sound public policy to place a premium on the right to litigate.

• Prudential Bank Liability: Private respondent alleged that the trial court erred in absolving defendant Prudential Bank and Trust Company from liability.
• Interest Period: Private respondent alleged that the trial court erred in computing interest on the dollar deposit only until January 31, 1977, when the Loss and Subrogation Receipt was signed, instead of January 10, 1978, when the dollar deposit was actually transferred to the bank chosen by private respondent.
• Undue Enrichment: Private respondent argued that the dollar balance of US$718,078.20 was a large sum and that leaving it in a non-interest-bearing account for about one year and nine months prejudiced the owners while benefiting Prudential Bank, petitioner’s sister company, which could earn income by utilizing and relending the funds without paying interest; this constituted undue enrichment.

• Trust Relationship: Whether a trust relationship was established between petitioner and the two insureds over the balance of the insurance proceeds held by petitioner for their account pending final settlement of their respective claims.
• Loss and Subrogation Receipt: Whether the Loss and Subrogation Receipt executed by the insureds released petitioner from liability for accrued interest on the dollar balance.
• Accrued Interest: Whether petitioner, as trustee or otherwise, is liable for interest on the dollar balance for failing or neglecting to deposit it in an interest-bearing account contrary to the insureds’ written instructions.
• Attorney’s Fees: Whether the award of attorney’s fees in favor of private respondent is proper.

• Trust Relationship: Yes. A trust relationship was established; petitioner held the dollar balance in its name for the joint account of REPACOM and Transocean, and the surrounding communications and partial compromise agreement showed intent to create an express trust under Civil Code Articles 1441 and 1444.
• Loss and Subrogation Receipt: No. The receipt did not bar the interest claim; it released petitioner only from liabilities arising from the insurance policies, not from its liability as trustee for accrued interest.
• Accrued Interest: Yes. Petitioner was liable for accrued interest from April 21, 1976 to January 10, 1978, because as trustee it failed to deposit the dollar balance in an interest-bearing account as instructed and remained silent.
• Attorney’s Fees: No. The award was improper and deleted because the text of the trial and appellate decisions contained no factual, legal, or equitable justification for attorney’s fees.

• Trust Relationship: The Court defined a trust as the right, enforceable solely in equity, to beneficial enjoyment of property, legal title to which is vested in another, and as a fiduciary relationship concerning property obliging the holder to deal with it for another’s benefit. Under Civil Code Articles 1441 and 1444, express trusts are created by the intention of the trustor or parties, and no particular words are required so long as a trust is clearly intended. The evidence showed that Rizal requested Central Bank authority to deposit the dollar proceeds in its name for the joint account of REPACOM and Transocean; the Central Bank authorized that arrangement; Rizal confirmed the deposit with Prudential Bank under its name for the joint account; and the partial compromise agreement stated that the disputed balance would be kept in the same bank deposit in trust for and in the joint name of REPACOM and Transocean. Although Rizal was not a party to the compromise agreement, it was furnished a copy, did not object, and implemented provisions thereof, thereby accepting its role as trustee. Its claim that it held the funds only to protect its interest did not negate the trust because it continued holding the deposit for the benefit of the insureds and recognized a fiduciary relationship. The elements of an express trust—competent trustor and trustee, ascertainable trust res, sufficiently certain beneficiaries, present and complete disposition of trust property, active purpose not contrary to law or public policy, some power of administration beyond a mere contractual duty, and terms stated with reasonable certainty—were all present. The insureds’ adverse positions over their respective claims did not affect the trust because Rizal held the funds for the real owners.
• Loss and Subrogation Receipt: The receipt stated that the insureds unconditionally and absolutely accepted full payment from Rizal as insurer of its total liabilities and assigned to Rizal all claims arising from the total loss, acknowledging Rizal’s subrogation. The Court held that the receipt absolved Rizal only from claims arising from the insurance policies it issued; it did not exculpate Rizal from liability for accrued interest, which arose from its role as trustee and its unjustified refusal to deposit the money in an interest-bearing account as required. The insureds released Rizal only as to the principal amount representing the insurance proceeds, not as to accrued interest stemming from the breach of its duty as trustee to deposit the funds under terms most advantageous to them. Rizal was subrogated to rights stemming from the insurance contract but not to those arising from the trust relationship. At most, the signing of the receipt was a valid precondition before Rizal could be compelled to turn over the whole insurance proceeds.
• Accrued Interest: Petitioner argued that it was not a trustee and therefore not obligated to transfer the dollar balance into an interest-bearing account, and that the Central Bank order did not bind it because it was not directed to it. The Court found these arguments unconvincing. Initially, Rizal agreed to receive and deposit the money in its name for the joint account of the insureds in a non-interest-bearing account; as trustee, it could have discharged its obligation by transferring and paying the dollar balance to the insureds, thereby dissolving the trust. When the trustors instructed Rizal to deposit the funds in an interest-bearing account, Rizal should at least have informed them that it could not or would not carry out the instructions. Instead, it remained silent. After receiving the April 21, 1976 letter, Rizal merely tendered payment in exchange for the signed Loss and Subrogation Receipt. Such silence and inaction misled the trustors into thinking that the trustee was amenable to and carrying out their instructions, preventing them from discharging the unwilling trustee, appointing a new trustee, or otherwise transferring the deposit into an interest-bearing account. The trustors thus suffered loss of interest income. The Court also found undue enrichment: leaving US$718,078.20 in a non-interest-bearing account for about one year and nine months prejudiced the owners and benefited Prudential Bank, Rizal’s sister company, which could earn income by utilizing and relending the funds without paying interest. Whether Rizal benefited directly or indirectly was immaterial; its violation of duty was at private respondent’s expense and for the ultimate benefit of Rizal or its stockholders.
• Attorney’s Fees: Attorney’s fees should not be awarded absent stipulation except under the instances in Article 2208 of the Civil Code. Under Solid Homes, Inc. vs. Court of Appeals, Article 2208 allows attorney’s fees when the claimant is compelled to litigate with third persons or incur expenses to protect his interest by reason of an unjustified act or omission of the party from whom it is sought; while judicial discretion exists, an award demands factual, legal, or equitable justification and cannot be left to speculation and conjecture. Under Stronghold Insurance Company, Inc. vs. Court of Appeals, the reason for the award must be stated in the text of the court’s decision; if stated only in the dispositive portion, it must be disallowed on appeal. The text of the trial court and appellate court decisions contained no justification for the award of attorney’s fees made in the fallo. The award was therefore disallowed and deleted.

• Express trust; creation and proof — A trust is the right, enforceable solely in equity, to beneficial enjoyment of property, legal title to which is vested in another; it is a fiduciary relationship obliging the holder to deal with the property for another’s benefit. Under Civil Code Articles 1441 and 1444, express trusts are created by the intention of the trustor or parties, and no particular words are required so long as a trust is clearly intended. The Court found such intent from Rizal’s communications with the Central Bank, its deposit of the dollar proceeds in its name for the joint account of the insureds, and the partial compromise agreement, which it did not object to and implemented.
• Elements of an express trust — The Court, citing Mindanao Development Authority vs. Court of Appeals, enumerated: a competent trustor and trustee; an ascertainable trust res; sufficiently certain beneficiaries; a present and complete disposition of the trust property; an active purpose not contrary to law or public policy; some power of administration beyond a mere duty to perform a contract; and a declaration of terms with reasonable certainty. All were present in this case.
• Trustee’s duty to communicate refusal or repudiation — A trustee faced with specific written instructions from the trustors-beneficiaries must at least inform them if it cannot or will not comply. Silence and inaction can mislead the beneficiaries into believing the trustee is carrying out their instructions, preventing them from replacing the trustee or protecting the trust property, and can render the trustee liable for resulting loss, including accrued interest.
• Scope of a Loss and Subrogation Receipt — A loss and subrogation receipt releases an insurer only from liabilities arising from the insurance policies; it does not release the insurer from liability arising from a separate trust relationship or from its breach of fiduciary duty to deposit trust funds in an interest-bearing account as instructed.
• Attorney’s fees require justification in the decision text — Under Article 2208 of the Civil Code, attorney’s fees may be awarded only in the enumerated instances and require factual, legal, or equitable justification. The reason for the award must be stated in the text of the court’s decision; if it appears only in the dispositive portion, the award must be disallowed on appeal.
• Undue enrichment by trustee — A trustee may not retain or enable an affiliate to retain income earned from another’s money without sharing it with the owner. Whether the trustee benefited directly or indirectly is immaterial; violation of fiduciary duty at the beneficiary’s expense and for the trustee’s or its stockholders’ ultimate benefit supports liability.

• "It is basic in law that a trust is the right, enforceable solely in equity, to the beneficial enjoyment of property, the legal title to which is vested in another." — This passage states the Court’s foundational definition of a trust, which it used to characterize Rizal’s holding of the dollar balance for the insureds.
• "Said receipt absolved the petitioner only from all claims arising from the insurance policies it issued. It did not exculpate petitioner from its liability for the accrued interest as this obligation arose in connection with its role as trustee and its unjustified refusal to deposit the money in an interest-bearing account as required." — This is the ratio on the limited scope of the Loss and Subrogation Receipt and why it did not bar the accrued-interest claim.
• "Such silence and inaction in the face of specific written instructions from the trustors-beneficiaries could not but have misled the latter into thinking that the trustee was amenable to and was carrying out their instructions, there being no reason for them to think otherwise." — This passage explains why Rizal’s failure to communicate its refusal or inability to comply with the insureds’ instructions made it liable as trustee.
• "[t]he reason for the award of attorney’s fees must be stated in the text of the court’s decision, otherwise, if it is stated only in the dispositive portion of the decision, the same must be disallowed on appeal. . . ." — This passage supplies the rule applied to delete the attorney’s fees award because the trial and appellate decisions contained no justification in their text.

• Mindanao Development Authority vs. Court of Appeals, 113 SCRA 429, 436-437 (April 5, 1982) — Cited for the elements of an express trust; the Court applied the enumerated requisites and found all present.
• Solid Homes, Inc. vs. Court of Appeals, 235 SCRA 299, 303-304 (August 12, 1994) — Cited for the rule that attorney’s fees under Article 2208 require factual, legal, or equitable justification and cannot rest on speculation or conjecture.
• Stronghold Insurance Company, Inc. vs. Court of Appeals, 173 SCRA 619, 628 (May 29, 1989) — Cited for the rule that the reason for an award of attorney’s fees must be stated in the text of the decision; if only in the dispositive portion, it must be disallowed on appeal.
• Ramos vs. Ramos, 61 SCRA 284, 297 (December 3, 1974) — Cited for the definition of a trust as a right enforceable in equity to beneficial enjoyment of property, legal title to which is vested in another.
• Medina vs. Court of Appeals, 109 SCRA 437, 445 (November 27, 1981) — Cited for the proposition that intention to create a trust may be inferred from surrounding factual circumstances if proof is clear, satisfactory, and convincing.
• Abrogar vs. Intermediate Appellate Court, G.R. No. 67970, January 15, 1988, 157 SCRA 57 — Cited for the rule that attorney’s fees must be justified in the text of the decision, not merely in the dispositive portion.

• Article 1441, Civil Code — Provides that trusts are either express or implied and that express trusts are created by the intention of the trustor or of the parties. The Court used this to recognize an express trust despite no formal trust instrument.
• Article 1444, Civil Code — Provides that no particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended. The Court applied this to hold that the parties’ communications and conduct sufficiently showed an intention to create a trust.
• Article 2208, Civil Code — Allows attorney’s fees in the enumerated instances, including when a claimant is compelled to litigate with third persons or incur expenses to protect his interest by reason of an unjustified act or omission. The Court applied this to disallow the award because the decisions did not state any justification in their text.

Narvasa, C.J.; Davide, Jr.; Melo; and Francisco, JJ.