The Supreme Court ruled that directors of an electric cooperative could not be charged with syndicated estafa for approving contracts, even if those contracts were later found to be irregular or disadvantageous. The court emphasized that mismanagement and errors in judgment, without evidence of misappropriation or conversion of funds for personal gain, do not constitute the crime of estafa. This decision clarifies the boundaries between civil liability for mismanagement and criminal liability for fraud in corporate governance.

BATELEC II Contracts: A Case of Bad Decisions or Criminal Intent?

The Batangas II Electric Cooperative, Inc. (BATELEC II) faced scrutiny when it entered into two contracts: one for computerization with I-SOLV Technologies, Inc. (ITI) for P75,000,000.00, and another for boom trucks with Supertrac Motors Corporation for P6,100,000.00. A National Electrification Administration (NEA) audit found these contracts to be riddled with irregularities, including lack of competitive bidding and potential overpricing. Consequently, some members-consumers filed an administrative complaint against the directors who approved these contracts, including petitioners Reynaldo G. Panaligan, et al., alleging gross mismanagement and corruption. The NEA ordered their removal and the filing of criminal charges.

Acting on behalf of BATELEC II, Ruperto H. Manalo filed a criminal complaint against the directors, along with the presidents of ITI and Supertrac, for syndicated estafa under Presidential Decree (PD) No. 1689. The Office of the City Prosecutor (OCP) found probable cause for simple estafa, but the Secretary of Justice initially upgraded the charges to syndicated estafa, then back to simple estafa, before finally reverting to syndicated estafa. This flip-flopping led to the filing of amended informations and warrants of arrest. The directors then sought relief from the Court of Appeals (CA), which denied their petition, leading to the Supreme Court appeal.

The central legal question was whether the directors’ actions constituted syndicated estafa, requiring the element of a ‘syndicate’ and misappropriation of funds contributed by members. The Supreme Court noted that the facts upon which the DOJ Secretary premised its finding of probable cause against petitioners are clear and not disputed. The petitioners were the directors of BATELEC II that approved, for the said cooperative, the contracts with ITI and Supertrac.

The contracts required BATELEC II to pay a total of P81,000,000.00 to ITI and Supertrac in exchange for the system-wide computerization of the cooperative and for ten (10) boom trucks. It was, however, alleged that petitioners—in approving the ITI and Supertrac contracts—have committed undue haste, violated various NEA guidelines and paid no regard to the disadvantageous consequences of the said contracts to the interests of BATELEC II in general. Meanwhile, it has been established that Trinidad and Bangayan—the presidents of ITI and Supertrac, respectively—have not been in conspiracy with petitioners insofar as the approval of the contracts were concerned.

The Supreme Court disagreed with the DOJ Secretary’s assessment and clarified the elements of estafa, particularly the requirements for it to be considered ‘syndicated’. At its core, estafa involves causing financial damage through abuse of confidence or deceit. Article 315(1)(b) of the Revised Penal Code (RPC) defines estafa as misappropriating or converting money, goods, or property received in trust, on commission, for administration, or under an obligation to deliver or return it, to the prejudice of another. The elements are: receipt of property; misappropriation or conversion; prejudice to another; and demand by the offended party.

Syndicated estafa, as defined in Section 1 of PD No. 1689, escalates the crime when it is committed by a ‘syndicate’ of five or more persons, resulting in the misappropriation of funds contributed by stockholders, members of cooperatives, or funds solicited from the public. Thus, in People v. Balasa, the Supreme Court detailed the elements of syndicated estafa as follows:

Section 1. Any person or persons who shall commit estafa or other forms of swindling as defined in Article 315 and 316 of the Revised Penal Code, as amended, shall be punished by life imprisonment to death if the swindling (estafa) is committed by a syndicate consisting of five or more persons formed with the intention of carrying out the unlawful or illegal act, transaction, enterprise or scheme, and the defraudation results in the misappropriation of moneys contributed by stockholders, or members of rural banks, cooperative, “samahang nayon(s)“, or farmers’ associations, or of funds solicited by corporations/associations from the general public.

The critical distinction between simple and syndicated estafa lies in the syndicate’s involvement and the source of misappropriated funds. The penalty for syndicated estafa is significantly heavier, ranging from life imprisonment to death, irrespective of the amount defrauded, whereas simple estafa’s penalty depends on the value of the damage and cannot exceed twenty years imprisonment.

The Court emphasized that for a group to be considered a syndicate, they must have formed or managed an association to defraud its own members. In Galvez v. Court of Appeals, et al., the Supreme Court laid down standards for determining a syndicate under PD No. 1689, which include the perpetrators must have used the association they formed or managed to defraud its own stockholders, members or depositors. The court cited the text of Section 1 of PD No. 1689 as well as previous cases that applied the said law, Galvez declared that in order to be considered as a syndicate under PD No. 1689, the perpetrators of an estafa must not only be comprised of at least five individuals but must have also used the association that they formed or managed to defraud its own stockholders, members or depositors. Thus:

On review of the cases applying the law, we note that the swindling syndicate used the association that they manage to defraud the general public of funds contributed to the association. Indeed, Section 1 of Presidential Decree No. 1689 speaks of a syndicate formed with the intention of carrying out the unlawful scheme for the misappropriation of the money contributed by the members of the association. In other words, only those who formed [or] manage associations that receive contributions from the general public who misappropriated the contributions can commit syndicated estafa. xxx.

The court found that while the BATELEC II directors were more than five in number and managed the cooperative, they did not use the cooperative as a means to defraud its members. The contributions from members were legitimate payments for electricity, and there was no evidence of a fraudulent act in receiving these contributions. Any alleged misuse of funds after their legitimate receipt would constitute mismanagement rather than defrauding members through the cooperative.

Moreover, the Court highlighted that the directors did not receive funds of BATELEC II in a manner that would qualify as ‘juridical possession’ under Article 315(1)(b) of the RPC. As directors of BATELEC II that Approved the IT/ and Supertrac Contracts, the Supreme Court pointed out that Petitioners Did Not Receive Funds of the Cooperative; They Don’t Have Juridical Possession of Cooperative Funds. Juridical possession implies a right over the funds that can be asserted even against the owner, which the directors did not have.

Furthermore, there was no evidence of misappropriation or conversion. Approving contracts, even if later found to be irregular, is an exercise of prerogative, not necessarily an act of misappropriation. There was no proof that the funds were spent for purposes other than those stipulated in the contracts, and the absolution of Trinidad and Bangayan, the presidents of ITI and Supertrac, negated any inference of conspiracy to embezzle funds.

In conclusion, the Court found that the evidence did not support a finding of probable cause for either syndicated or simple estafa. The directors’ actions, at most, could give rise to civil liability for the prejudice caused to BATELEC II, but did not warrant criminal prosecution. The Supreme Court granted the petition, reversing the CA’s decision and directing the dismissal of the criminal complaint.

FAQs

What was the key issue in this case?	The key issue was whether the directors of BATELEC II could be charged with syndicated estafa for approving contracts that were later found to be irregular or disadvantageous to the cooperative. The court examined if their actions met the elements of estafa, particularly the ‘syndicate’ requirement and the misappropriation of funds.
What is syndicated estafa?	Syndicated estafa, as defined in PD No. 1689, is estafa or swindling committed by a syndicate of five or more persons, resulting in the misappropriation of funds contributed by stockholders, members of cooperatives, or funds solicited from the public. It carries a heavier penalty than simple estafa.
What is the difference between estafa and syndicated estafa?	Estafa is a general crime involving deceit or abuse of confidence leading to financial damage. Syndicated estafa involves a syndicate of five or more people misappropriating funds contributed by members of specific types of organizations.
Who were the petitioners in this case?	The petitioners were Jose Rizal L. Remo, Reynaldo G. Panaligan, Tita L. Matulin, Isagani Casalme, Cipriano P. Roxas, Cesario S. Gutierrez, Celso A. Landicho, and Eduardo L. Tagle, who were the directors of BATELEC II.
What was the role of the NEA in this case?	The NEA conducted an audit of BATELEC II’s contracts, found irregularities, and ordered the removal of the directors and the filing of criminal charges. The NEA’s findings triggered the legal proceedings.
What did the Supreme Court decide?	The Supreme Court ruled that the directors could not be charged with syndicated estafa. The court found no evidence that the directors had used the cooperative to defraud its members or that they had misappropriated or converted funds for personal gain.
What is the significance of the Galvez case cited in the decision?	The Galvez case provided the standards for determining what constitutes a ‘syndicate’ under PD No. 1689. It clarified that the perpetrators must have used the association they formed or managed to defraud its own stockholders, members or depositors.
What is juridical possession, and why was it important in this case?	Juridical possession is the type of possession where the transferee acquires a right over the property that can be asserted even against the owner. The Court held that the directors, even in their capacity as such, do not acquire juridical possession of the funds of the cooperative.
What is the potential liability of the directors in this case?	The Court suggested that the directors, at most, may be held civilly liable for the prejudice sustained by BATELEC II due to their mismanagement or errors in judgment, subject to defenses they may raise.

This case serves as a crucial reminder that corporate mismanagement, while potentially leading to civil liabilities, does not automatically equate to criminal fraud. The ruling underscores the necessity of proving intentional misappropriation or conversion of funds for personal gain to warrant a conviction for estafa.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: JOSE RIZAL L. REMO, ET AL. v. AGNES VST DEVANADERA, ET AL., G.R. No. 192925, December 09, 2016