Coastal Pacific v. Southern Rolling Mills (2006)
Coastal Pacific v. Southern Rolling Mills (2006)
Coastal Pacific v. Southern Rolling Mills (2006)
*
COASTAL PACIFIC TRADING, INC., petitioner, vs. SOUTHERN ROLLING MILLS, CO.,
INC. (now known as Visayan Integrated Steel Corporation), FAR EAST BANK & TRUST
COMPANY, PHILIPPINE COMMERCIAL INDUSTRIAL1 BANK, EQUITABLE BANKING
CORPORATION, PRUDENTIAL BANK, BOARD OF TRUSTEES-CONSORTIUM OF
BANKS-VISCO, UNITED COCONUT PLANTER’S BANK, CITYTRUST BANKING
CORPORATION, ASSOCIATED BANK, INSULAR BANK OF ASIA AND AMERICA,
INTERNATIONAL CORPORATE BANK, COMMERCIAL BANK OF MANILA, BANK OF
THE PHILIPPINE ISLANDS, NATIONAL STEEL CORPORATION, THE PROVINCIAL
SHERIFF OF BOHOL, and DEPUTY SHERIFF JOVITO DIGAL,2 respondents.
Actions; Res Judicata; Elements for the Principle of Res Judicata to Apply.—The CA erred in
applying Southern Industrial Projects v. United Coconut Planters Bank, as a bar
by res judicata with respect to the present case. For this principle to apply, the following elements
must concur: a) the former judgment was final; b) the court that rendered it had jurisdiction over
the subject matter and the parties; c) the judgment was based on the merits; and, d) between the
first and the second actions, there is an identity of parties, subject matters, and causes of action.
Res Judicata; Res judicata does not require an absolute but only a substantial identity of
parties; There is a substantial identity when there is privity between the two parties or they are
successors-in-interest by title subsequent to the commencement of the action, litigating for the same
thing, under the same thing, under the same
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* FIRST DIVISION.
1 Also referred to as “Philippine Commercial International Bank” in respondents’ Memorandum (Rollo, p. 223).
2 The Petition impleaded the Court of Appeals (CA) as a respondent. Pursuant to Sec. 4 of Rule 45 of the Rules of
Court, this Court has deleted the CA from the title of the case.
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Coastal Pacific Trading, Inc. vs. Southern Rolling
Mills, Co., Inc.
title and in the same capacity.—It is axiomatic that res judicata does not require an absolute,
but only a substantial, identity of parties. There is a substantial identity when there is privity
between the two parties or they are successors-in-interest by title subsequent to the commencement
of the action, litigating for the same thing, under the same title, and in the same capacity.
Petitioner was not acting in the same capacity as SIP when it filed Civil Case No. 3383, which
eventually became AC-GR CV No. 03719. It brought this latter action as a creditor under a
processing agreement with VISCO; on the other hand, the latter was sued by SIP, based on an
alleged breach of their management contract. Very clearly, their rights were entirely distinct and
separate from each other. In no manner were these two creditors privies of each other.
Actions; Southern Industrial Projects, Inc. (SIP) and Coastal are asserting distinct rights
arising from different legal obligations of the debtor corporation.—The causes of action in the two
Complaints were also different. Causes of action arise from violations of rights. A single right may
be violated by several acts or omissions, in which case the plaintiff has only one cause of action.
Likewise, a single act or omission may violate several rights at the same time, as when the act
constitutes a violation of separate and distinct legal obligations. The violation of each of these
separate rights is a separate cause of action in itself. Hence, although these causes of action arise
from the same state of facts, they are distinct and independent and may be litigated separately;
recovery on one is not a bar to subsequent actions on the others. In the present case, the right of SIP
(arising from its management contract with VISCO) is totally distinct and separate from the right of
Coastal (arising from its processing contract with VISCO). SIP and Coastal are asserting distinct
rights arising from different legal obligations of the debtor corporation. Thus, VISCO’s violation of
those separate rights has given rise to separate causes of action.
Remedial Law; Persons do not become privies by the mere fact that they are interested in the
same question or in proving the same set of facts, or that one person is interested in the result of a
litigation involving the other.—Common but palpable is this misconception of the doctrine of res
judicata. Persons do not become privies by the mere fact that they are interested in the same
question or in proving the same set of facts, or that one person is interested in the result of
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a litigation involving the other. Hence, several creditors of one debtor cannot be considered as
identical parties for the purpose of assailing the acts of the debtor. They have distinct credits,
rights, and interests, such that the failure of one to recover should not preclude the other creditors
from also pursuing their legal remedies.
Civil Law; Contracts; Rescission; Elementary is the principle that the validity of a contract does
not preclude its rescission; Rescission implies that there is a contract that, while initially valid,
produces a lesion or pecuniary damage to someone.—By focusing on the innate validity of these
Contracts, the CA totally overlooked the issue of fraud as a ground for rescission. Elementary is the
principle that the validity of a contract does not preclude its rescission. Under Articles 1380 and
1381 (3) of the Civil Code, contracts that are otherwise valid between the contracting parties, may
nonetheless be subsequently rescinded by reason of injury to third persons, like creditors. In fact,
rescission implies that there is a contract that, while initially valid, produces a lesion or pecuniary
damage to someone. Thus, when the CA confined itself to the issue of the validity of these contracts,
it did not at all address the heart of petitioner’s cause of action: whether these transactions had
been undertaken by the Consortium to defraud VISCO’s other creditors.
Fraud; Fraud is present when the debtor knows that its actions would cause injury.—To be sure,
there was undue advantage. The payment scheme devised by the Consortium continued the efficacy
of the primary lien, this time in its favor, to the detriment of the other creditors. When one considers
its knowledge that VISCO’s assets might not be enough to meet its obligations to several creditors,
the intention to defraud the other creditors is even more striking. Fraud is present when the debtor
knows that its actions would cause injury.
Rescission; Assignment in favor of the Consortium was a rescissible contract for having been
undertaken in fraud of creditors.—The assignment in favor of the Consortium was a rescissible
contract for having been undertaken in fraud of creditors. Article 1385 of the Civil Code provides for
the effect of rescission, as follows: “Rescission creates the obligation to return the things which were
the object of the contract, together with their fruits, and the price with its interest; consequently, it
can be carried out only when he who demands
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Coastal Pacific Trading, Inc. vs. Southern Rolling
Mills, Co., Inc.
rescission can return whatever he may be obliged to restore. “Neither shall rescission take
place when the things which are the object of the contract are legally in the possession of third
persons who did not act in bad faith. “In this case, indemnity for damages may be demanded from
the person causing the loss.”
Same; Mutual restitution is required in all cases involving rescission; But when it is no longer
possible to return the object of the contract, an indemnity for damages operates as restitution.—
Mutual restitution is required in all cases involving rescission. But when it is no longer possible to
return the object of the contract, an indemnity for damages operates as restitution. The important
consideration is that the indemnity for damages should restore to the injured party what was lost.
Damages; On the basis of the finding of fraud, the award of exemplary damages is in order, to
serve as a warning to other creditors not to abuse their rights.—On the basis of the finding of fraud,
the award of exemplary damages is in order, to serve as a warning to other creditors not to abuse
their rights. Under Article 2229 of the Civil Code, exemplary or corrective damages are imposed by
way of example or correction for the public good. By their nature, exemplary damages should be
imposed in an amount sufficient and effective to deter possible future similar acts by respondent
banks. The court finds the amount of P250,000 sufficient in. the instant case.
Same; A corporation is not entitled to moral damages because, not being a natural person, it
cannot experience physical suffering or sentiments like wounded feelings, serious anxiety, mental
anguish and moral shock; The only exception to this rule is when the corporation has a good
reputation that is debased resulting in its humiliation in the business realm.—As a rule, a
corporation is not entitled to moral damages because, not being a natural person, it cannot
experience physical suffering or sentiments like wounded feelings, serious anxiety, mental anguish
and moral shock. The only exception to this rule is when the corporation has a good reputation that
is debased, resulting in its humiliation in the business realm. In the present case, the records do not
show any evidence that the name or reputation of petitioner has been sullied as a result of the
Consortium’s fraudulent acts. Accordingly, moral damages are not warranted.
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Coastal Pacific Trading, Inc. vs. Southern Rolling Mills,
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PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Crisanto L. Francisco for petitioner.
Ignacio C. Moneda II and Sixto Marella, Jr. for respondents (Consortium of Banks).
The Government Corporate Counsel for respondent National Steel Corporation.
PANGANIBAN, C.J.:
Directors owe loyalty and fidelity to the corporation they serve and to its creditors. When
these directors sit on the board as representatives of shareholders who are also major
creditors, they cannot be allowed to use their offices to secure undue advantage for those
shareholders, in fraud of other creditors who do not have a similar representation in the
board of directors.
The Case
Before us is a Petition for Review3 under Rule 45 of the Rules of Court, assailing the
September 27, 1994 Decision4 and the January 5, 1995 Resolution5 of the Court of Appeals
(CA) in CA-G.R. CV No. 39385. The challenged Decision disposed as follows:
“WHEREFORE, the decision of the Regional Trial Court is hereby AFFIRMED in toto.”6
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3 Rollo, pp. 10-33.
4 Id., at pp. 35-54. Special Seventh Division. Penned by Justice Antonio M. Martinez (Division chair), with the
concurrence of Justices Ramon Mabutas, Jr., and Delilah Vidallon-Magtolis (members).
5 Id., at p. 56.
6 Assailed CA Decision, p. 20; Rollo, p. 54.
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The challenged Resolution denied reconsideration.
The Facts
Respondent Southern Rolling Mills Co., Inc. was organized in 1959 for the purpose of
engaging in a steel processing business. It was later renamed Visayan Integrated Steel
Corporation (VISCO).7
On December 11, 1961, VISCO obtained a loan from the Development Bank of the
Philippines (DBP) in the amount of P836,000. This loan was secured by a duly recorded
Real Estate Mortgage over VISCO’s three (3) parcels of land, including all the machineries
and equipment found there.8
On August 15, 1963, VISCO entered into a Loan Agreement9 with respondent banks
(later referred to as “Consortium”10) for the amount of US$5,776,186.71 or P21,745,707.36
(at the then prevailing exchange rate) to finance its importation of various raw materials.
To secure the full and faithful performance of its obligation, VISCO executed on August 3,
1965, a second mortgage11over the same land, machineries and equipment in favor of
respondent banks. This second mortgage remained unrecorded.12
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resolved to prioritize the adjudication of long-pending cases by redistributing them among all the justices. This case
was recently re-raffled and assigned to the undersigned ponente for study and report.
We now come to the heart of the Petition. Coastal alleges that the assignment of
mortgage, the extrajudicial foreclosure proceedings, and the sale of the properties of VISCO
should all be rescinded on the ground that they were done to defraud the latter’s creditors.
The CA found no merit in petitioner’s arguments. It ruled that the assignment
conformed to the requirements of law; that the consideration for the assignment had
allegedly been given by FEBTC; and that, hence, the Consortium had a right to foreclose on
the mortgaged properties.
By focusing on the innate validity of these Contracts, the CA totally overlooked the issue
of fraud as a ground for rescission. Elementary is the principle that the validity of a
contract does not preclude its rescission. Under Articles 1380 and 1381 (3) of the Civil Code,
contracts that are otherwise valid between the contracting parties, may nonetheless be
subsequently rescinded by reason of injury to third persons, like creditors. 106 In fact,
rescission implies that there is a contract that, while initially valid, produces a lesion or
pecuniary
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106 Guzman, Bocaling & Co. v. Bonnevie, 206 SCRA 668, March 2, 1992.
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damage to someone.107 Thus, when the CA confined itself to the issue of the validity of these
contracts, it did not at all address the heart of petitioner’s cause of action: whether these
transactions had been undertaken by the Consortium to defraud VISCO’s other creditors.
There is more than a preponderance of evidence showing the Consortium’s deliberate
plan to defraud VISCO’s other creditors.
Consortium Banks as Directors
It will be recalled that Respondent Consortium took over management and control of
VISCO by acquiring 90 percent of the latter’s equity. Thus, 9 out of the 10 directors of the
corporation were all officials of the Consortium,108 which may thus be said to have effectively
occupied and/or controlled the board. Significantly, nowhere in the records can we find any
denial by respondent of this allegation by petitioner.109
As directors of VISCO, the officials of the Consortium were in a position of trust; thus,
they owed it a duty of loyalty. This trust relationship sprang from the fact that they had
control
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107 A. TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES 571, Vol. IV
(1991). See Ong v. Court of Appeals, 310 SCRA 1, July 6, 1999.
108 The members of the board of directors were Jose B. Fernandez, Jr. (FEBTC), Arturo P. Samonte (FEBTC),
Benjamin J. Aldaba (PBC), Ruperto M. Carpio, Jr. (EBC), Rene H. Peronilla (PCIB), Octavio D. Fule (PBTC),
Primer B. Leonen (BPI), Caesar U. Querubin (FBTC), Felicisimo Asoy (OBM), and Gregorio A. Concon. The vice-
president and assistant corporate secretary was Vicente T. Garcia (FEBTC). Refer to Minutes dated October 4, 1974
(Rollo, p. 61), in relation to Minutes of September 20, 1974 (Rollo, p. 57).
109 Petitioner’s Memorandum, p. 4; Rollo, p. 261. See International Corporate Bank Inc. v. Court of Appeals, 214
SCRA 364, September 30, 1992.
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and guidance over its corporate affairs and property.110Their duty was more stringent
when it became insolvent or without sufficient assets to meet its outstanding obligations
that arose. Because they were deemed trustees of the creditors in those instances, they
should have managed the corporation’s assets with strict regard for the creditors’ interests.
When these directors became corporate creditors in their own right, they should not have
permitted themselves to secure any undue advantage over other creditors.111 In the instant
case, the Consortium miserably failed to observe its duty of fidelity towards VISCO and its
creditors.
Duty of the Consortium Banks
to VISCO’s Creditors
Recall that as early as 1966, the Consortium, through its directors on the board of
VISCO, had already assumed management and control over the latter. Hence, when VISCO
recognized its outstanding liability to petitioner in 1970 and offered a Compromise
Agreement,112 respondent banks were already at the helm of the debtor corporation. The
members of the Consortium, therefore, cannot deny that they were aware of those claims
against the corporation. Nonetheless, they did not adopt any measure to protect petitioner’s
credit.
Quite the opposite, they even took steps to hide VISCO’s unexpended funds. Garcia’s
1972 letter to Samonte unmistakably reveals that they kept those funds in an account
named “Board of Trustees VISCO Consortium of Banks.” This fact alone shows an effort to
hide, with the evident intent to keep, those funds for themselves. The letter even says that,
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110 Prime White Cement Corporation v. Intermediate Appellate Court,G.R. No. 68555, March 19, 1993, 220
SCRA 103.
111 J. CAMPOS, JR. and M.C. CAMPOS, THE CORPORATION CODE: COMMENTS, NOTES AND SELECTED CASES 780,
Vol. I (1990) citing Mead v. McCullough, 21 Phil. 95, December 26, 1911.
112 Documentary Evidence of Coastal Pacific; Records, pp. 4-5.
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for the protection of the Consortium, the name “VISCO” should be eliminated entirely, so
that the account name would read “Board of Trustees Consortium of Banks.” Clearly, this
particular move was found to be necessary to avoid a takeover by the government, which
was also a creditor of VISCO.113 This express intent of the latter, under the direction and for
the benefit of the Consortium, corroborated petitioner’s contention that respondent banks
had defrauded VISCO’s creditors.
Assignment of Mortgage
in Favor of the Consortium Banks
The assignment of mortgage in favor of the Consortium also bears the earmarks of fraud.
Initially, respondent banks had agreed that VISCO should sell two of its generator sets, so
that the proceeds could be utilized to pay DBP. This plan was direct, simple, and would
extinguish the encumbrance in favor of the bank.
Then, quite surprisingly, the Consortium set down the following payment procedure:
Filmag would pay VISCO; the latter would pay the Consortium, which would pay DBP; and
the Consortium would then subrogate DBP to the latter’s rights as first mortgagee. One is
then led to ask: if the intention was to pay DBP; from the sales proceeds of the generator
sets, why did the money have to pass through the Consortium?
The answer lies in the nature of respondent’s mortgage. It will be recalled that this
mortgage remained unrecorded and not legally binding on the other creditors.114 Thus, if
DBP had been directly paid by VISCO, the latter could have freed up its properties to the
satisfaction of all its other creditors. This
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113 Minutes of the Luncheon Meeting of the Creditors’ Consortium for Visayan Integrated Steel Corporation
held at the FEBTC Boardroom on Friday, September 20, 1974, p. 2; Rollo, p. 58.
114 See CIVIL CODE, Art. 2125.
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procedure would have been fair to all, but it was not followed by the Consortium.
Instead, the proceeds from the sale of the generator sets were first paid to respondent
banks, which used the money to pay DBP. The last step in the payment procedure explains
the reason for this preferred though roundabout manner of payment. This final step
entitled the Consortium to obtain DBP’s primary lien through an assignment by allowing it
to pay VISCO’s loan to the bank, without incurring additional expenses.
In the end, by collecting the money from VISCO, respondent banks recovered what they
had ostensibly remitted to DBP. Moreover, the primary lien that respondent banks acquired
allowed them, as unsecured creditors of VISCO, to foreclose on the assets of the corporation
without regard to its inferior claims. It was a clever ruse that would have worked, were it
not done by creditors who were duty-bound, as directors, not to take clever advantage of
other creditors.
To be sure, there was undue advantage. The payment scheme devised by the Consortium
continued the efficacy of the primary lien, this time in its favor, to the detriment of the
other creditors. When one considers its knowledge that VISCO’s assets might not be enough
to meet its obligations to several creditors,115 the intention to defraud the other creditors is
even more striking. Fraud is present when the debtor knows that its actions would cause
injury.116
The assignment in favor of the Consortium was a rescissible contract for having been
undertaken in fraud of creditors.117 Article 1385 of the Civil Code provides for the effect of
rescission, as follows:
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115 SGV Report to VISCO Board of Directors (Records, Vol. I, pp. 171-178).
116 A. TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES 580, Vol. IV
(1991).
117 CIVIL CODE, Art. 1381(3).
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“Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only
when he who demands rescission can return whatever he may be obliged to restore.
“Neither shall rescission take place when the things which are the object of the contract are
legally in the possession of third persons who did not act in bad faith.
“In this case, indemnity for damages may be demanded from the person causing the loss.”
Indeed, mutual restitution is required in all cases involving rescission. But when it is no
longer possible to return the object of the contract, an indemnity for damages operates as
restitution. The important consideration is that the indemnity for damages should restore
to the injured party what was lost.
In the case at bar, it is no longer possible to order the return of VISCO’s properties. They
have already been sold to the NSC, which has not been shown to have acted in bad faith.
The party alleging bad faith must establish it by competent proof. Sans that proof,
purchasers are deemed to be in good faith, and their interest in the subject property must
not be disturbed. Purchasers in good faith are those who buy the property of another
without notice that some other person has a right to or interest in the property; and who
pay the full and fair price for it at the time of the purchase, or before they get notice of some
other persons’ claim of interest in the property.118
In the present case, petitioner failed to discharge its burden of proving bad faith on the
part of NSC. There is insufficient evidence on record that the latter participated in the
design to defraud VISCO’s creditors. To NSC, petitioner imputes fraud from the sole fact
that the former was allegedly
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118 Agricultural and Home Extension Development Group v. Court of Appeals, 213 SCRA 563, September 3,
1992; Co v. Court of Appeals, 196 SCRA 705, May 6, 1991.
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aware that its vendor, the Consortium, had taken control over VISCO including the
corporation’s assets.119 We cannot appreciate how knowledge of the takeover would
necessarily implicate anyone in the Consortium’s fraudulent designs. Besides, NSC was not
shown to be privy to the information that VISCO had no other assets to satisfy other
creditors’ respective claims.
The right of an innocent purchaser for value must be respected and protected, even if its
vendors obtained their title through fraud.120 Pursuant to this principle, the remedy of the
defrauded creditor is to sue for damages against those who caused or employed the fraud.
Hence, petitioner is entitled to damages from the Consortium.
Award of Damages
It is essential that for damages to be awarded, a claimant must satisfactorily prove
during the trial that they have a factual basis, and that the defendant’s acts have a causal
connection to them.121 Thus, the question of damages should normally call for a remand of
the case to the lower court for further proceedings. Considering, however, the length of time
that petitioner’s just claim has been thwarted, we find it in the best interest of substantial
justice to decide the issue of damages now on the basis of the available records. A remand
for further proceedings would only result in a needless delay.
Going over the records of the case, we find that petitioner has a final and executory
judgment in its favor in Civil Case No. 21272. The judgment in that case reads as follows:
“WHEREFORE, judgment is hereby rendered in favor of the plaintiffs ordering defendant
VISCO/SRM to pay the plaintiffs the
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119 Petitioner’s Consolidated Reply, pp. 1-9; Rollo, pp. 146-152.
120 Veloso v. Court of Appeals, 260 SCRA 593, August 21, 1996.
121 Air France v. Court of Appeals, 171 SCRA 399, March 21, 1989.
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sum of P851,316.19 with interest thereon at the legal rate from the filing of this complaint, plus
attorney’s fees of P50,000.00 and to pay the costs.”122
The foregoing is the judgment credit that petitioner cannot enforce against VISCO
because of Respondent Consortium’s fraudulent disposition of the corporation’s assets. In
other words, the above amounts define the extent of the actual damage suffered by Coastal
and the amount that respondent has to restore pursuant to Article 1385.
On the basis of the finding of fraud, the award of exemplary damages is in order, to serve
as a warning to other creditors not to abuse their rights. Under Article 2229 of the Civil
Code, exemplary or corrective damages are imposed by way of example or correction for the
public good. By their nature, exemplary damages should be imposed in an amount sufficient
and effective to deter possible future similar acts by respondent banks. The court finds the
amount of P250,000 sufficient in. the instant case.
As a rule, a corporation is not entitled to moral damages because, not being a natural
person, it cannot experience physical suffering or sentiments like wounded feelings, serious
anxiety, mental anguish and moral shock.123 The only exception to this rule is when the
corporation has a good reputation that is debased, resulting in its humiliation in the
business realm.124 In the present case, the records do not show any evidence that the name
or reputation of petitioner has been sullied as a result of the Consortium’s fraudulent acts.
Accordingly, moral damages are not warranted.
WHEREFORE, the Petition is GRANTED. The assailed Decision of the Court of Appeals
dated September 27, 1994,