Spouses Timado vs. Rural Bank of San Jose, Inc.

Exemplary damages cannot be awarded when the claimant has not first established a right to moral, temperate, liquidated, or compensatory damages; attorney's fees under Article 2208(4) may be awarded for a clearly unfounded civil action where the decision states factual and legal justification, subject to reduction to a just and reasonable amount.

Petitioners were borrowers of Rural Bank of San Jose, Inc. Respondents are the bank, Teddy Monasterio as its president/manager, and Atty. Avelino Sales.

Petitioners Spouses Mamerto and Adelia Timado obtained a loan from Rural Bank of San Jose, Inc. on August 15, 1994 in the amount of P178,000.00. As security, they executed a real estate mortgage over a parcel of land in Nabua, Camarines Sur and a chattel mortgage over one unit of rice mill machinery with accessories and one unit of diesel engine in favor of the bank. The respondents in the actions were Rural Bank, Teddy Monasterio in his capacity as its president/manager, and Atty. Avelino Sales.

Petitioners eventually failed to pay their loan amortizations. As of August 27, 1997, their outstanding obligation to Rural Bank amounted to P125,700.00. Consequently, the bank informed the petitioners of its intention to foreclose the real estate and chattel mortgages to cover the unpaid balance.

On April 1, 1998, the petitioners filed a complaint for reformation of instruments with prayer for injunction and temporary restraining order and damages against the respondents before the RTC, Branch 35, Iriga City. No writ of injunction or temporary restraining order was ever issued by the RTC. On April 6, 1998, Rural Bank proceeded with the extrajudicial foreclosure of the real estate mortgage and sold the property at a public auction where it emerged as the highest bidder. The provisional deed of sale was registered with the Office of the Provincial Register of Camarines Sur. The petitioners failed to redeem the property within the one-year redemption period. As a result, the title was consolidated in Rural Bank's name and a definite certificate of sale was issued in its favor.

On November 9, 2000, the petitioners filed a petition for indirect contempt with damages against the respondents, alleging that the latter had pre-empted judicial authority by foreclosing the mortgages and selling the properties at a public auction during the pendency of the reformation of instruments case. On February 7, 2002, while the reformation of instruments and indirect contempt cases were pending, Rural Bank filed an ex-parte petition for issuance of writ of possession over the subject property. Because of this, the petitioners filed their third petition for indirect contempt. Rural Bank had earlier filed two ex-parte petitions for issuance of a writ of possession, docketed as Nos. IR-1781 and IR-1782, both dismissed due to some defects; despite the dismissals, the petitioners filed a second petition for indirect contempt, and the two petitions were re-filed as IR-1789, triggering the third petition for indirect contempt. The trial court subsequently ordered the consolidation of the reformation of instruments and the indirect contempt cases, and the dismissal of the second and third petitions for indirect contempt.

The RTC found that the petitioners knew they had executed two mortgages in favor of Rural Bank to secure their loan; that they failed to pay their loan amortizations; that they instituted the complaint for reformation of instruments to stop the foreclosure proceedings of the two mortgages; that they filed a complaint for indirect contempt against the respondents with awareness that no writ of injunction or TRO was ever issued to stay the foreclosure proceedings; and that they even tried to deceive the court by changing their signatures in their submissions in an attempt to support their claim.

• Exemplary Damages: Whether the award of exemplary damages is proper, considering the CA's deletion of the award of moral damages.
• Attorney's Fees: Whether the award of attorney's fees is supported by the factual and legal premises in the text of the RTC decision.

• Exemplary Damages: No. The CA's deletion of moral damages removed the legal basis for exemplary damages, which require that the claimant first establish a right to moral, temperate, liquidated, or compensatory damages.
• Attorney's Fees: Yes, but the amount was reduced. The RTC stated factual and legal justification for attorney's fees, and the petitioners' clearly unfounded civil action fell under Article 2208(4); the SC fixed the award at P100,000.00 as just and reasonable.

• Exemplary Damages: Article 2229 allows exemplary or corrective damages by way of example or correction for the public good, in addition to moral, temperate, liquidated, or compensatory damages. The SC laid down three requisites: first, exemplary damages may be imposed only in addition, among others, to compensatory damages, and cannot be recovered as a matter of right, their determination depending on the amount of compensatory damages; second, the claimant must first establish a right to moral, temperate, liquidated, or compensatory damages; and third, the wrongful act must be accompanied by bad faith, and the award is allowed only if the guilty party acted in a fraudulent, reckless, oppressive, or malevolent manner. Because the CA found that the respondents were not entitled to moral damages, the SC held that the award of exemplary damages had no legal basis and deleted it.

• Attorney's Fees: Under Article 2208, in the absence of stipulation, attorney's fees may be awarded as actual or compensatory damages only under the enumerated circumstances; the general rule is that attorney's fees cannot be recovered as part of damages because no premium should be placed on the right to litigate, and they are not awarded every time a party wins. The power to award them demands factual, legal, and equitable justification, lies within judicial discretion, and must be stated in the body of the decision; an unheralded appearance in the dispositive portion is not allowed. The RTC expressly stated that the petitioners' vexatious and baseless action gave rise to damages for unnecessarily dragging the respondents to court and compelling them to defend themselves, causing anxiety and embarrassment. The RTC's findings supported this: the petitioners knew they had executed two mortgages, failed to pay amortizations, instituted reformation to stop foreclosure, filed indirect contempt despite awareness that no injunction or TRO was issued, and tried to deceive the court by changing signatures. The SC therefore found attorney's fees proper under Article 2208(4) for a clearly unfounded civil action, but modified the amount to P100,000.00 as just and reasonable.

• Exemplary Damages — Exemplary or corrective damages are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated, or compensatory damages. The SC applied the three requisites: (1) they may be imposed only in addition, among others, to compensatory damages, and cannot be recovered as a matter of right, their determination depending on the amount of compensatory damages; (2) the claimant must first establish a right to moral, temperate, liquidated, or compensatory damages; and (3) the wrongful act must be accompanied by bad faith, and the award is allowed only if the guilty party acted in a fraudulent, reckless, oppressive, or malevolent manner. Because the CA found respondents not entitled to moral damages, the SC deleted exemplary damages.

• Attorney's Fees — In the absence of stipulation, attorney's fees may be awarded as actual or compensatory damages only under the circumstances in Article 2208; the general rule is no premium on the right to litigate, and fees are not awarded every time a party wins. The SC requires factual, legal, and equitable justification, judicial discretion, and the reason stated in the body of the decision; an unheralded appearance in the dispositive portion is not allowed. The SC applied Article 2208(4) because petitioners' action was clearly unfounded and forced respondents to litigate, but reduced the amount to P100,000.00.

• Clearly Unfounded Civil Action — Article 2208(4) permits attorney's fees when the civil action or proceeding against the plaintiff is clearly unfounded. The SC found the reformation and contempt actions unfounded, given the petitioners' knowledge of the mortgages, nonpayment, and absence of any injunction or TRO.

• "Exemplary or corrective damages are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated, or compensatory damages." — States the nature of exemplary damages and the additive requirement that grounds the SC's deletion.
• "First, they may be imposed by way of example or correction only in addition, among others, to compensatory damages, and cannot be recovered as a matter of right, their determination depending upon the amount of compensatory damages that may be awarded to the claimant." — Sets out the first requisite for exemplary damages.
• "In the light of the appellate court's finding that the respondents are not entitled to moral damages, the award of exemplary damages, too, must be deleted for lack of legal basis." — Applies the requisite to the CA's deletion of moral damages.
• "The power of the court to award attorney's fees under Article 2208 demands factual, legal, and equitable justification." — States the standard the SC used to sustain but reduce the attorney's fees award.

• Tan vs. OMC Carriers, Inc., G.R. No. 190521, January 12, 2011, 639 SCRA 471, 485 — Cited for the purpose of exemplary damages as a warning to the public and a deterrent against repetition of socially deleterious actions.
• Octot vs. Ybañez, G.R. No. L-48643, January 18, 1982, 111 SCRA 79-80 — Cited for the requisites of exemplary damages.
• ABS-CBN Broadcasting Corporation vs. Court of Appeals, 361 Phil. 528, 529 (1999) — Cited for the rule on attorney's fees under Article 2208 and the need for factual, legal, and equitable justification.
• Alcatel Philippines, Inc. vs. I.M. Bongar & Co., Inc., G.R. No. 182946, October 5, 2011, 658 SCRA 741, 744 — Cited for the requirement that the court state the reason for attorney's fees in the body of the decision; an unheralded appearance in the dispositive portion is not allowed.

• Article 2229, Civil Code — Exemplary or corrective damages are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated, or compensatory damages; applied to require deletion of exemplary damages because moral damages were denied.
• Article 2208, Civil Code — In the absence of stipulation, attorney's fees and expenses of litigation other than judicial costs cannot be recovered except in the enumerated cases; applied to require factual, legal, and equitable justification and to reject the idea that fees are awarded every time a party wins.
• Article 2208(4), Civil Code — Attorney's fees may be recovered in case of a clearly unfounded civil action or proceeding against the plaintiff; applied to sustain the award because the petitioners' actions were unfounded and forced the respondents to litigate.