The Supreme Court (SC) has acquitted a former administrator of a paluwagan group of estafa, ruling that the mere failure to return entrusted funds does not automatically constitute criminal fraud without proof of misappropriation or conversion.

In a decision penned by Associate Justice Samuel Gaerlan, the SC’s First Division cleared Lourdes Cheng of estafa charges stemming from her role as secretary, treasurer and administrator of a paluwagan organized by employees and associates of the National Police Commission (NAPOLCOM).

The paluwagan members pooled their funds to provide loans to borrowers and earn interest from lending activities. Cheng was responsible for managing the funds, disbursing loans, collecting payments and overseeing the group's financial transactions.

Criminal charges were filed against Cheng after the paluwagan's funds were not returned in 1998. Several members accused her of misappropriating their contributions, leading to her conviction by lower courts on the basis that she failed to return the money despite demand.

However, the SC reversed the conviction, emphasizing that estafa under Article 315(1)(b) of the Revised Penal Code requires proof beyond reasonable doubt that the accused misappropriated or converted the funds.

The Court said the evidence showed that members voluntarily contributed money with the understanding that it would be lent to borrowers to generate income. It noted that Cheng had been designated by the members themselves to administer the lending operations.

According to the ruling, there was no evidence showing that Cheng appropriated the funds for herself or used them for purposes other than those agreed upon by the group.

Instead, the records indicated that the funds had been lent out in accordance with the objectives of the paluwagan and that the losses resulted from borrowers’ failure to repay their loans.

The Court underscored the distinction between criminal fraud and contractual obligations, stating that when the source of an obligation arises from a contract, such as a loan agreement, a failure to fulfill that obligation constitutes a contractual breach rather than estafa.

The prosecution also failed to establish that Cheng violated any rules by extending loans to non-members.

The Court found that lending to non-members had been a long-standing practice known to the members and had not been previously challenged.

In addition, the Court rejected the argument that Cheng’s failure to return the funds and provide an accounting automatically served as circumstantial evidence of misappropriation.

The ruling noted that she maintained records of transactions and made them available to members. It also found evidence that some complainants had overstated their claims and that several members themselves still owed money to the paluwagan.

“Petitioner’s mere failure to return the entrusted funds does not ipso facto constitute estafa absent clear proof of the elements of misappropriation and conversion,” the High Court said.

Despite acquitting Cheng of criminal liability, the SC ruled that she remained civilly liable for P691,912.81 belonging to the paluwagan members.

It ordered her to reimburse the amount, subject to applicable legal interest, to prevent unjust enrichment.