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.

The savings fund members pooled their funds to provide loans to borrowers and earn interest on the loans. 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.

Prove raps beyond doubt

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 the members themselves had designated Cheng 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 an obligation arises from a contract, such as a loan agreement, a failure to fulfill it constitutes a breach of contract 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.