View full case

WESTMONT BANK v. FUNAI PHILIPPINES CORPORATION

FACTS:

Respondents, Funai Philippines Corporation (Funai) and Spouses Antonio and Sylvia Yutingco, obtained loans from Westmont Bank (now United Overseas Bank Phils.) that they failed to repay. Westmont filed a complaint against them and obtained a writ of preliminary attachment from the Regional Trial Court (RTC). Sheriffs Duncan and Cachero levied and seized properties in Quezon City and Rizal, some of which were claimed by Panamax Corporation as its rightful ownership. Westmont filed an amended complaint, impleading Panamax and other individuals as additional defendants, alleging they were alter egos of the Yutingcos. The RTC held the original defendants liable but dismissed the claims against the additional defendants. Westmont's motion for reconsideration was denied.

Westmont filed a notice of partial appeal while the additional defendants filed a Motion for Execution Pending Appeal and sought the return of the seized items. The RTC granted the motion, and the court issued an order directing Westmont to comply. Westmont, however, refused to release the items, and the RTC enjoined them to comply. Westmont then filed a petition for certiorari with the Court of Appeals (CA) but the RTC proceeded with the enforcement of the execution order despite the CA's temporary restraining order (TRO). Westmont filed a case of indirect contempt against the sheriff.

The CA affirmed the RTC decision with modifications, awarding attorney's fees to Westmont. It also nullified the execution orders and found the sheriff guilty of indirect contempt. The sheriff and Westmont both filed separate petitions for review before the Supreme Court. The accounts involved in the case were assigned to the Philippine Deposit Insurance Corporation. The Court will decide on issues relating to the alter ego doctrine, the additional defendants as necessary parties, exemplary damages, attorney's fees, and the sheriff's contention regarding the notice of the TRO.

ISSUES:

  1. Whether the Amended and Second Amended Complaints failed to state a cause of action.

  2. Whether the dismissal of the case on the ground of lack of cause of action is proper.

  3. Whether the amount of attorney's fees should be reduced.

  4. Whether exemplary damages should be awarded.

RULING:

  1. The Amended and Second Amended Complaints failed to sufficiently state a cause of action. They only contained conclusions of law rather than particular averments of circumstances that would show how the additional defendants were mere alter egos, conduits, dummies, or nominees of the original defendants to defraud creditors. The allegations of fraud were merely unfounded conclusions of law. Therefore, the RTC's dismissal of the complaints on the ground of failure to state a cause of action is proper.

  2. Since no stipulations, admissions, or evidence have yet been presented, it is impossible to assess the insufficiency of the factual basis for the cause of action. Hence, the dismissal of the case on the ground of lack of cause of action is not valid.

  3. The amount of attorney's fees should be reduced to 5% of the principal debt. While the stipulated rate of 20% of the total amount due may be upheld by the court, it is deemed exorbitant in this case where the interest alone runs to more than thrice the principal amount of the loan obligation.

  4. Exemplary damages cannot be awarded as there is no factual and legal basis for such an award. The complaints failed to allege specific acts that would show wanton, fraudulent, reckless, oppressive, or malevolent conduct in relation to the loan obligation sought to be enforced.

PRINCIPLES:

  • Failure to state a cause of action and lack of cause of action are distinct grounds to dismiss an action. The former refers to the insufficiency of the allegations in the pleading, while the latter refers to the insufficiency of the factual basis for the action.

  • A complaint states a cause of action if it sufficiently avers the three essential elements: (a) a right in favor of the plaintiff, (b) an obligation on the part of the defendant, and (c) an act or omission by the defendant that violates the plaintiff's right or constitutes a breach of the defendant's obligation.

  • Allegations of fraud must be stated with particularity and supported by specific averments of circumstances to show why or how a conclusion of fraud was reached.

  • The filing of a motion to dismiss on the ground of failure to state a cause of action does not admit the truth of conclusions of law, legal conclusions, erroneous statements of law, mere inferences or conclusions from unstated facts, or matters that are subject to judicial notice.

  • The award of attorney's fees contained in a contract may be considered a penal clause and is in the nature of liquidated damages rather than indemnity.

  • The court has the power to reduce the amount of attorney's fees if it is found to be iniquitous or unconscionable, even if it is stipulated in the contract.

  • Exemplary damages can only be awarded if there is evidence of wanton, fraudulent, reckless, oppressive, or malevolent acts committed by the defendants.