Oblicon Cases 09-27 Scra

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Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-55300 March 15, 1990

FRANKLIN G. GACAL and CORAZON M. GACAL, the latter assisted by her husband,FRANKLIN G. GACAL,petitioners,vs.PHILIPPINE AIR LINES, INC., and THE HONORABLE PEDRO SAMSON C. ANIMAS, in hiscapacity as PRESIDING JUDGE of the COURT OF FIRST INSTANCE OF SOUTH COTABATO,BRANCH I, respondents.

PARAS, J .:

This is a, petition for review on certiorariof the decision of the Court of First Instance of South

Cotabato, Branch 1, *promulgated on August 26, 1980 dismissing three (3) consolidated cases fordamages: Civil Case No. 1701, Civil Case No. 1773 and Civil Case No. 1797 ( Rollo, p. 35).

The facts, as found by respondent court, are as follows:

Plaintiffs Franklin G. Gacal and his wife, Corazon M. Gacal, Bonifacio S. Anislag andhis wife, Mansueta L. Anislag, and the late Elma de Guzman, were then passengersboarding defendant's BAC 1-11 at Davao Airport for a flight to Manila, not knowingthat on the same flight, Macalinog, Taurac Pendatum known as Commander Zapata,Nasser Omar, Liling Pusuan Radia, Dimantong Dimarosing and Mike Randa, all ofMarawi City and members of the Moro National Liberation Front (MNLF), were theirco-passengers, three (3) armed with grenades, two (2) with .45 caliber pistols, and

one with a .22 caliber pistol. Ten (10) minutes after take off at about 2:30 in theafternoon, the hijackers brandishing their respective firearms announced thehijacking of the aircraft and directed its pilot to fly to Libya. With the pilot explaining tothem especially to its leader, Commander Zapata, of the inherent fuel limitations ofthe plane and that they are not rated for international flights, the hijackers directedthe pilot to fly to Sabah. With the same explanation, they relented and directed theaircraft to land at Zamboanga Airport, Zamboanga City for refueling. The aircraftlanded at 3:00 o'clock in the afternoon of May 21, 1976 at Zamboanga Airport. Whenthe plane began to taxi at the runway, it was met by two armored cars of the militarywith machine guns pointed at the plane, and it stopped there. The rebels thru itscommander demanded that a DC-aircraft take them to Libya with the President of thedefendant company as hostage and that they be given $375,000 and six (6)armalites, otherwise they will blow up the plane if their demands will not be met by

the government and Philippine Air Lines. Meanwhile, the passengers were notserved any food nor water and it was only on May 23, a Sunday, at about 1:00o'clock in the afternoon that they were served 1/4 slice of a sandwich and 1/10 cup ofPAL water. After that, relatives of the hijackers were allowed to board the plane butimmediately after they alighted therefrom, an armored car bumped the stairs. Thatcommenced the battle between the military and the hijackers which led ultimately tothe liberation of the surviving crew and the passengers, with the final score of ten(10) passengers and three (3) hijackers dead on the spot and three (3) hijackerscaptured.


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City Fiscal Franklin G. Gacal was unhurt. Mrs. Corazon M. Gacal suffered injuries inthe course of her jumping out of the plane when it was peppered with bullets by thearmy and after two (2) hand grenades exploded inside the plane. She washospitalized at General Santos Doctors Hospital, General Santos City, for two (2)days, spending P245.60 for hospital and medical expenses, Assistant City FiscalBonifacio S. Anislag also escaped unhurt but Mrs. Anislag suffered a fracture at the

radial bone of her left elbow for which she was hospitalized and operated on at theSan Pedro Hospital, Davao City, and therefore, at Davao Regional Hospital, DavaoCity, spending P4,500.00. Elma de Guzman died because of that battle. Hence, theaction of damages instituted by the plaintiffs demanding the following damages, towit:

Civil Case No. 1701

City Fiscal Franklin G. Gacal and Mrs. Corazon M. Gacalactualdamages: P245.60 for hospital and medical expenses of Mrs Gacal;P8,995.00 for their personal belongings which were lost and notrecovered; P50,000.00 each for moral damages; and P5,000.00 forattorney's fees, apart from the prayer for an award of exemplarydamages (Record, pp. 4-6, Civil Case No. 1701).

Civil Case No. 1773

xxx xxx xxx

Civil Case No. 1797

xxx xxx xxx

The trial court, on August 26, 1980, dismissed the complaints finding that all the damages sustained

in the premises were attributed toforce majeure.

On September 12, 1980 the spouses Franklin G. Gacal and Corazon M. Gacal, plaintiffs in CivilCase No. 1701, filed a notice of appeal with the lower court on pure questions of law ( Rollo, p. 55)and the petition for review oncertiorariwas filed with this Court on October 20, 1980 (Rollo, p. 30).

The Court gave due course to the petition (Rollo, p. 147) and both parties filed their respective briefsbut petitioner failed to file reply brief which was noted by the Court in the resolution dated May 3,1982 (Rollo, p. 183).

Petitioners alleged that the main cause of the unfortunate incident is the gross, wanton andinexcusable negligence of respondent Airline personnel in their failure to frisk the passengersadequately in order to discover hidden weapons in the bodies of the six (6) hijackers. They claimedthat despite the prevalence of skyjacking, PAL did not use a metal detector which is the mosteffective means of discovering potential skyjackers among the passengers (Rollo, pp. 6-7).

Respondent Airline averred that in the performance of its obligation to safely transport passengersas far as human care and foresight can provide, it has exercised the utmost diligence of a verycautious person with due regard to all circumstances, but the security checks and measures andsurveillance precautions in all flights, including the inspection of baggages and cargo and frisking ofpassengers at the Davao Airport were performed and rendered solely by military personnel who


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under appropriate authority had assumed exclusive jurisdiction over the same in all airports in thePhilippines.

Similarly, the negotiations with the hijackers were a purely government matter and a militaryoperation, handled by and subject to the absolute and exclusive jurisdiction of the militaryauthorities. Hence, it concluded that the accident that befell RP-C1161 was caused by fortuitous

event,force majeureand other causes beyond the control of the respondent Airline.

The determinative issue in this case is whether or not hijacking or air piracy during martial law andunder the circumstances obtaining herein, is a casofortuitoorforcemajeurewhich would exempt anaircraft from payment of damages to its passengers whose lives were put in jeopardy and whosepersonal belongings were lost during the incident.

Under the Civil Code, common carriers are required to exercise extraordinary diligence in theirvigilance over the goods and for the safety of passengers transported by them, according to all thecircumstances of each case (Article 1733). They are presumed at fault or to have acted negligentlywhenever a passenger dies or is injured (Philippine Airlines, Inc. v. National Labor RelationsCommission, 124 SCRA 583 [1983]) or for the loss, destruction or deterioration of goods in cases

other than those enumerated in Article 1734 of the Civil Code (Eastern Shipping Lines, Inc. v.Intermediate Appellate Court, 150 SCRA 463 [1987]).

The source of a common carrier's legal liability is the contract of carriage, and by entering into saidcontract, it binds itself to carry the passengers safely as far as human care and foresight canprovide. There is breach of this obligation if it fails to exert extraordinary diligence according to all thecircumstances of the case in exercise of the utmost diligence of a very cautious person (Isaac v.

Ammen Transportation Co., 101 Phil. 1046 [1957]; Juntilla v. Fontanar, 136 SCRA 624 [1985]).

It is the duty of a common carrier to overcome the presumption of negligence (Philippine NationalRailways v. Court of Appeals, 139 SCRA 87 [1985]) and it must be shown that the carrier hadobserved the required extraordinary diligence of a very cautious person as far as human care andforesight can provide or that the accident was caused by a fortuitous event (Estrada v. Consolacion,71 SCRA 523 [1976]). Thus, as ruled by this Court, no person shall be responsible for those "eventswhich could not be foreseen or which though foreseen were inevitable. (Article 1174, Civil Code).The term is synonymous with caso fortuito(Lasam v. Smith, 45 Phil. 657 [1924]) which is of thesame sense as "force majeure" (Words and Phrases Permanent Edition, Vol. 17, p. 362).

In order to constitute a caso fortuito orforce majeurethat would exempt a person from liability underArticle 1174 of the Civil Code, it is necessary that the following elements must concur: (a) the causeof the breach of the obligation must be independent of the human will (the will of the debtor or theobligor); (b) the event must be either unforeseeable or unavoidable; (c) the event must be such as torender it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the debtor mustbe free from any participation in, or aggravation of the injury to the creditor (Lasam v. Smith, 45 Phil.657 [1924]; Austria v. Court of Appeals, 39 SCRA 527 [1971]; Estrada v. Consolacion, supra;

Vasquez v. Court of Appeals, 138 SCRA 553 [1985]; Juan F. Nakpil & Sons v. Court of Appeals, 144SCRA 596 [1986]). Caso fortuito orforce majeure, by definition, are extraordinary events notforeseeable or avoidable, events that could not be foreseen, or which, though foreseen, areinevitable. It is, therefore, not enough that the event should not have been foreseen or anticipated,as is commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty toforesee the happening is not impossibility to foresee the same (Republic v. Luzon StevedoringCorporation, 21 SCRA 279 [1967]).


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Manila

THIRD DIVISION

G.R. No. 102970 May 13, 1993

LUZAN SIA, petitioner,vs.COURT OF APPEALS and SECURITY BANK and TRUST COMPANY, respondents.

DAVIDE, JR., J .:

The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737, promulgated on 21August 1991,1reversing and setting aside the Decision, dated 19 February 1990, 2of Branch 47 of theRegional Trial Court (RTC) of Manila in Civil Case No. 87-42601, entitled "LUZAN SIAvs. SECURITYBANK and TRUST CO.," is challenged in this petition for review on certiorariunder Rule 45 of the RulesCourt.

Civil Case No. 87-42601 is an action for damages arising out of the destruction or loss of the stampcollection of the plaintiff (petitioner herein) contained in Safety Deposit Box No. 54 which had beenrented from the defendant pursuant to a contract denominated as a Lease Agreement. 3Judgmenttherein was rendered in favor of the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffand against the defendant, Security Bank & Trust Company, ordering the defendant bankto pay the plaintiff the sum of

a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as actual damages;

b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as moral damages;and

c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's fees and legal

expenses.The counterclaim set up by the defendant are hereby dismissed for lack of merit.

No costs.

SO ORDERED.4

The antecedent facts of the present controversy are summarized by the public respondent in itschallenged decision as follows:

The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of thedefendant bank at its Binondo Branch located at the Fookien Times Building, Soler St.,Binondo, Manila wherein he placed his collection of stamps. The said safety deposit boxleased by the plaintiff was at the bottom or at the lowest level of the safety deposit boxes ofthe defendant bank at its aforesaid Binondo Branch.

During the floods that took place in 1985 and 1986, floodwater entered into thedefendant bank's premises, seeped into the safety deposit box leased by the plaintiff andcaused, according to the plaintiff, damage to his stamps collection. The defendant bankrejected the plaintiff's claim for compensation for his damaged stamps collection, so, theplaintiff instituted an action for damages against the defendant bank.

The defendant bank denied liability for the damaged stamps collection of the plaintiffon the basis of the "Rules and Regulations Governing the Lease of Safe Deposit Boxes"(Exhs. "A-1", "1-A"), particularly paragraphs 9 and 13, which reads (sic):


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"9. The liability of the Bank by reason of the lease, is limited to the exercise of thediligence to prevent the opening of the safe by any person other than the Renter, hisauthorized agent or legal representative;

xxx xxx xxx

"13. The Bank is not a depository of the contents of the safe and it has neither thepossession nor the control of the same. The Bank has no interest whatsoever in saidcontents, except as herein provided, and it assumes absolutely no liability in connectiontherewith."

The defendant bank also contended that its contract with the plaintiff over safetydeposit box No. 54 was one of lease and not of deposit and, therefore, governed by thelease agreement (Exhs. "A", "L") which should be the applicable law; that the destruction ofthe plaintiff's stamps collection was due to a calamity beyond obligation on its part to notifythe plaintiff about the floodwaters that inundated its premises at Binondo branch whichallegedly seeped into the safety deposit box leased to the plaintiff.

The trial court then directed that an ocular inspection on (sic) the contents of thesafety deposit box be conducted, which was done on December 8, 1988 by its clerk of courtin the presence of the parties and their counsels. A report thereon was then submitted onDecember 12, 1988 (Records, p. 98-A) and confirmed in open court by both parties thrucounsel during the hearing on the same date ( Ibid., p. 102) stating:

"That the Safety Box Deposit No. 54 was opened by both plaintiff Luzan Siaand the Acting Branch Manager Jimmy B. Ynion in the presence of the undersigned,plaintiff's and defendant's counsel. Said Safety Box when opened contains twoalbums of different sizes and thickness, length and width and a tin box with printedword 'Tai Ping Shiang Roast Pork in pieces with Chinese designs and character."

Condition of the above-stated Items

"Both albums are wet, moldy and badly damaged.

1. The first album measures 10 1/8 inches in length, 8 inches in width and 3/4 inthick. The leaves of the album are attached to every page and cannot be lifted withoutdestroying it, hence the stamps contained therein are no longer visible.

2. The second album measure 12 1/2 inches in length, 9 3/4 in width 1 inch thick.Some of its pages can still be lifted. The stamps therein can still be distinguished butbeyond restoration. Others have lost its original form.

3. The tin box is rusty inside. It contains an album with several pieces of papersstuck up to the cover of the box. The condition of the album is the secondabovementioned album."5

The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC, appealed the trialcourt's decision to the public respondent Court of Appeals. The appeal was docketed as CA-G.R. CV No.26737.

In urging the public respondent to reverse the decision of the trial court, SBTC contended that thelatter erred in (a) holding that the lease agreement is a contract of adhesion; (b) finding that the

defendant had failed to exercise the required diligence expected of a bank in maintaining the safetydeposit box; (c) awarding to the plaintiff actual damages in the amount of P20,000.00, moraldamages in the amount of P100,000.00 and attorney's fees and legal expenses in the amount ofP5,000.00; and (d) dismissing the counterclaim.

On 21 August 1991, the respondent promulgated its decision the dispositive portion of which reads:

WHEREFORE, the decision appealed from is hereby REVERSED and instead theappellee's complaint is hereby DISMISSED. The appellant bank's counterclaim is likewiseDISMISSED. No costs.6


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In reversing the trial court's decision and absolving SBTC from liability, the public respondent found andruled that:

a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" ) constitutes the terms andconditions of the contract of lease which the appellee (now petitioner) had voluntarily and knowinglyexecuted with SBTC;

b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was not a contract ofdeposit wherein the bank became a depositary of the subject stamp collection; hence, as contendedby SBTC, the provisions of Book IV, Title XII of the Civil Code on deposits do not apply;

c) The following provisions of the questioned lease agreement of the safety deposit box limitingSBTC's liability:

9. The liability of the bank by reason of the lease, is limited to the exercise of thediligence to prevent the opening of the Safe by any person other than the Renter, hisauthorized agent or legal representative.

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has neither thepossession nor the control of the same. The Bank has no interest whatsoever in saidcontents, except as herein provided, and it assumes absolutely no liability in connection

therewith.are valid since said stipulations are not contrary to law, morals, good customs, public order or publicpolicy; and

d) there is no concrete evidence to show that SBTC failed to exercise the required diligence inmaintaining the safety deposit box; what was proven was that the floods of 1985 and 1986, whichwere beyond the control of SBTC, caused the damage to the stamp collection; said floods werefortuitous events which SBTC should not be held liable for since it was not shown to haveparticipated in the aggravation of the damage to the stamp collection; on the contrary, it offered itsservices to secure the assistance of an expert in order to save most of the stamps, but the appelleerefused; appellee must then bear the lose under the principle of "res perit domino."

Unsuccessful in his bid to have the above decision reconsidered by the publicrespondent, 7petitioner filed the instant petition wherein he contends that:

I

IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE PART OF THERESPONDENT COURT WHEN IT RULED THAT RESPONDENT SBTC DID NOT FAIL TOEXERCISE THE REQUIRED DILIGENCE IN MAINTAINING THE SAFETY DEPOSIT BOXOF THE PETITIONER CONSIDERING THAT SUBSTANTIAL EVIDENCE EXIST (sic)PROVING THE CONTRARY.

II

THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING PRIVATERESPONDENT FROM ANY LIABILITY WHATSOEVER BY REASON OF THE PROVISIONSOF PARAGRAPHS 9 AND 13 OF THE AGREEMENT (EXHS. "A" AND "A-1").

III

THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING THE AWARDS OFTHE TRIAL COURT FOR ACTUAL AND MORAL DAMAGES, INCLUDING ATTORNEY'SFEES AND LEGAL EXPENSES, IN FAVOR OF THE PETITIONER. 8

We subsequently gave due course the petition and required both parties to submit their respectivememoranda, which they complied with.9

Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise the required diligenceexpected of a bank maintaining such safety deposit box . . . in the light of the environmental circumstanceof said safety deposit box after the floods of 1985 and 1986." He argues that such a conclusion is


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supported by the evidence on record, to wit: SBTC was fully cognizant of the exact location of the safetydeposit box in question; it knew that the premises were inundated by floodwaters in 1985 and 1986 andconsidering that the bank is guarded twenty-four (24) hours a day , it is safe to conclude that it was alsoaware of the inundation of the premises where the safety deposit box was located; despite suchknowledge, however, it never bothered to inform the petitioner of the flooding or take any appropriatemeasures to insure the safety and good maintenance of the safety deposit box in question.

SBTC does not squarely dispute these facts; rather, it relies on the rule that findings of facts of theCourt of Appeals, when supported by substantial exidence, are not reviewable on appealby certiorari. 10

The foregoing rule is, of course, subject to certain exceptions such as when there exists a disparitybetween the factual findings and conclusions of the Court of Appeals and the trial court. 11Such adisparity obtains in the present case.

As We see it, SBTC's theory, which was upheld by the public respondent, is that the "LeaseAgreement " covering Safe Deposit Box No. 54 (Exhibit "A and "1") is just that a contract of lease and not a contract of deposit, and that paragraphs 9 and 13 thereof, which expressly limit thebank's liability as follows:

9. The liability of the bank by reason of the lease, is limited to the exercise of thediligence to prevent the opening of the Safe by any person other than the Renter, his

autliorized agent or legal representative;xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has neither thepossession nor the control of the same. The Bank has no interest whatsoever saidcontents, except as herein provided, and it assumes absolutely no liability in connectiontherewith. 12

are valid and binding upon the parties. In the challenged decision, the public respondent further avers thateven without such a limitation of liability, SBTC should still be absolved from any responsibility for thedamage sustained by the petitioner as it appears that such damage was occasioned by a fortuitous eventand that the respondent bank was free from any participation in the aggravation of the injury.

We cannot accept this theory and ratiocination. Consequently, this Court finds the petition to be

impressed with merit.In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals,13this Court explicitlyrejected the contention that a contract for the use of a safety deposit box is a contract of lease governedby Title VII, Book IV of the Civil Code. Nor did We fully subscribe to the view that it is a contract of depositto be strictly governed by the Civil Code provision on deposit; 14it is, as We declared, a special kind ofdeposit. The prevailing rule in American jurisprudence that the relation between a bank renting outsafe deposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee,the bailment for hire and mutual benefit 15has been adopted in this jurisdiction, thus:

In the context of our laws which authorize banking institutions to rent out safetydeposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States hasbeen adopted. Section 72 of the General Banking Act [R.A. 337, as amended] pertinentlyprovides:

"Sec. 72. In addition to the operations specifically authorized elsewhere in this Act,banking institutions other than building and loan associations may perform the followingservices:

(a) Receive in custody funds, documents, and valuable objects, and rent safetydeposit boxes for the safequarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b) and (c) of thissection asdepositoriesor as agents. . . ."(emphasis supplied)


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Note that the primary function is still found within the parameters of a contractof deposit,i.e., the receiving in custody of funds, documents and other valuable objectsfor safekeeping. The renting out of the safety deposit boxes is not independent from, butrelated to or in conjunction with, this principal function. A contract of deposit may beentered into orally or in writing (Art. 1969, Civil Code] and, pursuant to Article 1306 of theCivil Code, the parties thereto may establish such stipulations, clauses, terms and

conditions as they may deem convenient, provided they are not contrary to law, morals,good customs, public order or public policy. The depositary's responsibility for thesafekeeping of the objects deposited in the case at bar is governed by Title I, Book IV ofthe Civil Code. Accordingly, the depositary would be liable if, in performing its obligation,it is found guilty of fraud, negligence, delay or contravention of the tenor of theagreement [Art. 1170, id.]. In the absence of any stipulation prescribing the degree ofdiligence required, that of a good father of a family is to be observed [Art. 1173, id.].Hence, any stipulation exempting the depositary from any liability arising from the loss ofthe thing deposited on account of fraud, negligence or delay would be void for beingcontrary to law and public policy. In the instant case, petitioner maintains that conditions13 and l4 of the questioned contract of lease of the safety deposit box, which read:

"13. The bank is a depositary of the contents of the safe and it has neither thepossession nor control of the same.

"14. The bank has no interest whatsoever in said contents, except as herein expresslyprovided, and it assumes absolutely no liability in connection therewith."

are void as they are contrary to law and public policy. We find Ourselves in agreementwith this proposition for indeed, said provisions are inconsistent with the respondentBank's responsibility as a depositary under Section 72 (a) of the General Banking Act.Both exempt the latter from any liability except as contemplated in condition 8 thereofwhich limits its duty to exercise reasonable diligence only with respect to who shall beadmitted to any rented safe, to wit:

"8. The Bank shall use due diligence that no unauthorized person shall beadmitted to any rented safe and beyond this, the Bank will not beresponsible for the contents of any safe rented from it."

Furthermore condition 13 stands on a wrong premise and is contrary to the actualpractice of the Bank. It is not correct to assert that the Bank has neither the possessionnor control of the contents of the box since in fact, the safety deposit box itself is locatedin its premises and is under its absolute control; moreover, the respondent Bank keepsthe guard key to the said box. As stated earlier, renters cannot open their respectiveboxes unless the Bank cooperates by presenting and using this guard key. Clearly then,to the extent above stated, the foregoing conditions in the contract in question are voidand ineffective. It has been said:

"With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the parties, since the relation is a contractual one, may byspecial contract define their respective duties or provide for increasing or limitingthe liability of the deposit company, provided such contract is not in violation of

law or public policy. It must clearly appear that there actually was such a specialcontract, however, in order to vary the ordinary obligations implied by law from therelationship of the parties; liability of the deposit company will not be enlarged orrestricted by words of doubtful meaning. The company, in renting safe-depositboxes, cannot exempt itself from liability for loss of the contents by its own fraudor negligence or that, of its agents or servants, and if a provision of the contractmay be construed as an attempt to do so, it will be held ineffective for thepurpose. Although it has been held that the lessor of a safe-deposit box cannotlimit its liability for loss of the contents thereof through its own negligence, the


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view has been taken that such a lessor may limit its liability to some extent byagreement or stipulation ."[10 AM JUR 2d., 466]. (citations omitted) 16

It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety Deposit BoxinCA Agro-Industrial Development Corp.are strikingly similar to condition No. 13 in the instant case.On the other hand, both condition No. 8 in CA Agro-Industrial Development Corp.and condition No.9 in the present case limit the scope of the exercise of due diligence by the banks involved to merely

seeing to it that only the renter, his authorized agent or his legal representative should open or haveaccess to the safety deposit box. In short, in all other situations, it would seem that SBTC is notbound to exercise diligence of any kind at all. Assayed in the light of Our aforementionedpronouncements in CA Agro-lndustrial Development Corp., it is not at all difficult to conclude thatboth conditions No. 9 and No. 13 of the "Lease Agreement" covering the safety deposit box inquestion (Exhibits "A" and "1") must be stricken down for being contrary to law and public policy asthey are meant to exempt SBTC from any liability for damage, loss or destruction of the contents ofthe safety deposit box which may arise from its own or its agents' fraud, negligence or delay.

Accordingly, SBTC cannot take refuge under the said conditions.

Public respondent further postulates that SBTC cannot be held responsible for the destruction orloss of the stamp collection because the flooding was a fortuitous event and there was no showing ofSBTC's participation in the aggravation of the loss or injury. It states:

Article 1174 of the Civil Code provides:"Except in cases expressly specified by the law, or when it is otherwise declaredby stipulation, or when the nature of the obligation requires the assumption ofrisk, no person shall be responsible for those events which could not beforeseen, or which, though foreseen, were inevitable.'

In its dissertation of the phrase "caso fortuito" the Enciclopedia JurisdicadaEspaola 17says: "In a legal sense and, consequently, also in relation to contracts, a "caso fortuito"prevents (sic) 18thefollowing essential characteristics: (1) the cause of the unforeseen ands unexpected occurrence, or of the failure of the debtorto comply with his obligation, must be independent of the human will; (2) it must be impossible to foresee the event whichconstitutes the "caso fortuito,"or if it can be foreseen, it must be impossible to avoid; (3) the occurrence must be such as torender it impossible for one debtor to fulfill his obligation in a normal manner; and (4) the obligor must be free from anyparticipation in the aggravation of the injury resulting to the creditor." (cited in Servando vs.Phil., Steam Navigation

Co.,supra).19

Here, the unforeseen or unexpected inundating floods were independent of the will of theappellant bank and the latter was not shown to have participated in aggravating damage(sic) to the stamps collection of the appellee. In fact, the appellant bank offered its servicesto secure the assistance of an expert to save most of the then good stamps but the appellerefused and let (sic) these recoverable stamps inside the safety deposit box until they wereruined. 20

Both the law and authority cited are clear enough and require no further elucidation. Unfortunately,however, the public respondent failed to consider that in the instant case, as correctly held by the trialcourt, SBTC was guilty of negligence. The facts constituting negligence are enumerated in the petitionand have been summarized in thisponencia. SBTC's negligenceaggravated the injury or damage to thestamp collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwatersinundated the room where Safe Deposit Box No. 54 was located. In view thereof, it should have lost notime in notifying the petitioner in order that the box could have been opened to retrieve the stamps, thus

saving the same from further deterioration and loss. In this respect, it failed to exercise the reasonablecare and prudence expected of a good father of a family, thereby becoming a party to the aggravation ofthe injury or loss. Accordingly, the aforementioned fourth characteristic of a fortuitous event is absentArticle 1170 of the Civil Code, which reads:

Those who in the performance of their obligation are guilty of fraud, negligence, ordelay, and those who in any manner contravene the tenor thereof, are liable fordamages,


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thus comes to the succor of the petitioner. The destruction or loss of the stamp collection which was,in the language of the trial court, the "product of 27 years of patience and diligence" 21caused thepetitioner pecuniary loss; hence, he must be compensated therefor.

We cannot, however, place Our imprimatur on the trial court's award of moral damages. Since therelationship between the petitioner and SBTC is based on a contract, either of them may be heldliable for moral damages for breach thereof only if said party had acted fraudulently or in bad

faith. 22There is here no proof of fraud or bad faith on the part of SBTC.WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision and Resolution ofthe public respondent Court of Appeals of 21 August 1991 and 21 November 1991, respectively, inCA-G.R. CV No. 26737, are hereby SET ASIDE and the Decision of 19 February 1990 of Branch 47of the Regional Trial Court of Manila in Civil Case No. 87-42601 is hereby REINSTATED in full,except as to the award of moral damages which is hereby set aside.

Costs against the private respondent.

SO ORDERED.


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Manila

FIRST DIVISION

G.R. No. 147839 June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,vs.INSURANCE COMPANY OF NORTH AMERICA, Respondent.

D E C I S I O N

AUSTRIA-MARTINEZ, J .:

Before the Court is a petition for review on certiorari of the Decision1dated October 11, 2000 of theCourt of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated August 31,

1998 of the Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld thecauses of action for damages of Insurance Company of North America (respondent) againstGaisano Cagayan, Inc. (petitioner); and the CA Resolution dated April 11, 2001 which deniedpetitioner's motion for reconsideration.

The factual background of the case is as follows:

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss (Phils.)Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss & Co.. IMCand LSPI separately obtained from respondent fire insurance policies with book debt endorsements.The insurance policies provide for coverage on "book debts in connection with ready-made clothingmaterials which have been sold or delivered to various customers and dealers of the Insured

anywhere in the Philippines."2

The policies defined book debts as the "unpaid account still appearingin the Book of Account of the Insured 45 days after the time of the loss covered under thisPolicy."3The policies also provide for the following conditions:

1. Warranted that the Company shall not be liable for any unpaid account in respect of themerchandise sold and delivered by the Insured which are outstanding at the date of loss fora period in excess of six (6) months from the date of the covering invoice or actual delivery ofthe merchandise whichever shall first occur.

2. Warranted that the Insured shall submit to the Company within twelve (12) days after theclose of every calendar month all amount shown in their books of accounts as unpaid andthus become receivable item from their customers and dealers. x x x4

x x x x

Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, theGaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire.Included in the items lost or destroyed in the fire were stocks of ready-made clothing materials soldand delivered by IMC and LSPI.
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On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges thatIMC and LSPI filed with respondent their claims under their respective fire insurance policies withbook debt endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the saleand delivery of ready-made clothing materials with IMC was P2,119,205.00 while with LSPI itwas P535,613.00; that respondent paid the claims of IMC and LSPI and, by virtue thereof,respondent was subrogated to their rights against petitioner; that respondent made several demands

for payment upon petitioner but these went unheeded.5

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be heldliable because the property covered by the insurance policies were destroyed due to fortuities eventor force majeure; that respondent's right of subrogation has no basis inasmuch as there was nobreach of contract committed by it since the loss was due to fire which it could not prevent orforesee; that IMC and LSPI never communicated to it that they insured their properties; that it neverconsented to paying the claim of the insured.6

At the pre-trial conference the parties failed to arrive at an amicable settlement.7Thus, trial on themerits ensued.

On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint .

8

It held thatthe fire was purely accidental; that the cause of the fire was not attributable to the negligence of thepetitioner; that it has not been established that petitioner is the debtor of IMC and LSPI; that sincethe sales invoices state that "it is further agreed that merely for purpose of securing the payment ofpurchase price, the above-described merchandise remains the property of the vendor until thepurchase price is fully paid", IMC and LSPI retained ownership of the delivered goods and must bearthe loss.

Dissatisfied, petitioner appealed to the CA.9On October 11, 2000, the CA rendered its decisionsetting aside the decision of the RTC. The dispositive portion of the decision reads:

WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE anda new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:

1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to theinsured Inter Capitol Marketing Corporation, plus legal interest from the time of demand untilfully paid;

2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to theinsured Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully paid.

With costs against the defendant-appellee.

SO ORDERED.10

The CA held that the sales invoices are proofs of sale, being detailed statements of the nature,quantity and cost of the thing sold; that loss of the goods in the fire must be borne by petitioner sincetheprovisocontained in the sales invoices is an exception under Article 1504 (1) of the Civil Code,to the general rule that if the thing is lost by a fortuitous event, the risk is borne by the owner of thething at the time the loss under the principle of res perit domino; that petitioner's obligation to IMCand LSPI is not the delivery of the lost goods but the payment of its unpaid account and as such theobligation to pay is not extinguished, even if the fire is considered a fortuitous event; that bysubrogation, the insurer has the right to go against petitioner; that, being a fire insurance with bookdebt endorsements, what was insured was the vendor's interest as a creditor.11
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Petitioner filed a motion for reconsideration12but it was denied by the CA in its Resolution dated April11, 2001.13

Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT

CASE WAS ONE OVER CREDIT.

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODSIN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATICSUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14

Anent the first error, petitioner contends that the insurance in the present case cannot be deemed tobe over credit since an insurance "on credit" belies not only the nature of fire insurance but theexpress terms of the policies; that it was not credit that was insured since respondent paid on theoccasion of the loss of the insured goods to fire and not because of the non-payment by petitioner of

any obligation; that, even if the insurance is deemed as one over credit, there was no loss as theaccounts were not yet due since no prior demands were made by IMC and LSPI against petitionerfor payment of the debt and such demands came from respondent only after it had already paid IMCand LSPI under the fire insurance policies.15

As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC andLSPI assumed the risk of loss when they secured fire insurance policies over the goods.

Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent asno valid insurance could be maintained thereon by IMC and LSPI since all risk had transferred topetitioner upon delivery of the goods; that petitioner was not privy to the insurance contract or thepayment between respondent and its insured nor was its consent or approval ever secured; that this

lack of privity forecloses any real interest on the part of respondent in the obligation to pay, limitingits interest to keeping the insured goods safe from fire.

For its part, respondent counters that while ownership over the ready- made clothing materials wastransferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods ascreditors who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is liablefor loss of the ready-made clothing materials since it failed to overcome the presumption of liabilityunder Article 126516of the Civil Code; that the fire was caused through petitioner's negligence infailing to provide stringent measures of caution, care and maintenance on its property becauseelectric wires do not usually short circuit unless there are defects in their installation or when there islack of proper maintenance and supervision of the property; that petitioner is guilty of gross andevident bad faith in refusing to pay respondent's valid claim and should be liable to respondent forcontracted lawyer's fees, litigation expenses and cost of suit.17

As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it fromthe CA is limited to reviewing questions of law which involves no examination of the probative valueof the evidence presented by the litigants or any of them.18The Supreme Court is not a trier of facts;it is not its function to analyze or weigh evidence all over again.19Accordingly, findings of fact of theappellate court are generally conclusive on the Supreme Court.20

Nevertheless, jurisprudence has recognized several exceptions in which factual issues may beresolved by this Court, such as: (1) when the findings are grounded entirely on speculation, surmises
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or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) whenthere is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts;(5) when the findings of facts are conflicting; (6) when in making its findings the CA went beyond theissues of the case, or its findings are contrary to the admissions of both the appellant and theappellee; (7) when the findings are contrary to the trial court; (8) when the findings are conclusionswithout citation of specific evidence on which they are based; (9) when the facts set forth in the

petition as well as in the petitioner's main and reply briefs are not disputed by the respondent; (10)when the findings of fact are premised on the supposed absence of evidence and contradicted bythe evidence on record; and (11) when the CA manifestly overlooked certain relevant facts notdisputed by the parties, which, if properly considered, would justify a differentconclusion.21Exceptions (4), (5), (7), and (11) apply to the present petition.

At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that the CAerred in construing a fire insurance policy on book debts as one covering the unpaid accounts ofIMC and LSPI since such insurance applies to loss of the ready-made clothing materials sold anddelivered to petitioner.

The Court disagrees with petitioner's stand.

It is well-settled that when the words of a contract are plain and readily understood, there is no roomfor construction.22In this case, the questioned insurance policies provide coverage for "book debts inconnection with ready-made clothing materials which have been sold or delivered to variouscustomers and dealers of the Insured anywhere in the Philippines."23; and defined book debts as the"unpaid account still appearing in the Book of Account of the Insured 45 days after the time of theloss covered under this Policy."24Nowhere is it provided in the questioned insurance policies that thesubject of the insurance is the goods sold and delivered to the customers and dealers of the insured.

Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt toread into it any alleged intention of the parties, the terms are to be understood literally just as theyappear on the face of the contract.25Thus, what were insured against were the accounts of IMC andLSPI with petitioner which remained unpaid 45 days after the loss through fire, and not the loss or

destruction of the goods delivered.

Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of thegoods by stipulating in the sales invoices that "[i]t is further agreed that merely for purpose ofsecuring the payment of the purchase price the above described merchandise remains the propertyof the vendor until the purchase price thereof is fully paid."26

The Court is not persuaded.

The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:

ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein

is transferred to the buyer, but when the ownership therein is transferred to the buyer the goods areat the buyer's risk whether actual delivery has been made or not, except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, inpursuance of the contract and the ownership in the goods has been retained by the seller merely tosecure performance by the buyer of his obligations under the contract, the goods are at the buyer'srisk from the time of such delivery; (Emphasis supplied)

x x x x
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Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of lossis borne by the buyer.27Accordingly, petitioner bears the risk of loss of the goods delivered.

IMC and LSPI did not lose complete interest over the goods. They have an insurable interest untilfull payment of the value of the delivered goods. Unlike the civil law concept of res perit domino,where ownership is the basis for consideration of who bears the risk of loss, in property insurance,

one's interest is not determined by concept of title, but whether insured has substantial economicinterest in the property.28

Section 13 of our Insurance Code defines insurable interest as "every interest in property, whetherreal or personal, or any relation thereto, or liability in respect thereof, of such nature that acontemplated peril might directly damnify the insured." Parenthetically, under Section 14 of the sameCode, an insurable interest in property may consist in: (a) an existing interest; (b) an inchoateinterest founded on existing interest; or (c) an expectancy, coupled with an existing interest in thatout of which the expectancy arises.

Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lienupon, or possession of, the subject matter of the insurance, and neither the title nor a beneficial

interest is requisite to the existence of such an interest, it is sufficient that the insured is so situatedwith reference to the property that he would be liable to loss should it be injured or destroyed by theperil against which it is insured.29Anyone has an insurable interest in property who derives a benefitfrom its existence or would suffer loss from its destruction.30Indeed, a vendor or seller retains aninsurable interest in the property sold so long as he has any interest therein, in other words, so longas he would suffer by its destruction, as where he has a vendor's lien.31In this case, the insurableinterest of IMC and LSPI pertain to the unpaid accounts appearing in their Books of Account 45 daysafter the time of the loss covered by the policies.

The next question is: Is petitioner liable for the unpaid accounts?

Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 1174 32ofthe Civil Code is misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of theCivil Code.

Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but forpetitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly,petitioner's obligation is for the payment of money. As correctly stated by the CA, where theobligation consists in the payment of money, the failure of the debtor to make the payment even byreason of a fortuitous event shall not relieve him of his liability.33The rationale for this is that the rulethat an obligor should be held exempt from liability when the loss occurs thru a fortuitous event onlyholds true when the obligation consists in the delivery of a determinate thing and there is nostipulation holding him liable even in case of fortuitous event. It does not apply when the obligation ispecuniary in nature.34

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss ordestruction of anything of the same kind does not extinguish the obligation." If the obligation isgeneric in the sense that the object thereof is designated merely by its class or genus without anyparticular designation or physical segregation from all others of the same class, the loss ordestruction of anything of the same kind even without the debtor's fault and before he has incurred indelay will not have the effect of extinguishing the obligation.35This rule is based on the principle thatthe genus of a thing can never perish. Genus nunquan perit .36An obligation to pay money is generic;therefore, it is not excused by fortuitous loss of any specific property of the debtor.37
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Manila

EN BANC

G.R. No. L-7003 January 18, 1912

MANUEL ORIA Y GONZALES,plaintiff-appellant,vs.JOSE McMICKING, as sheriff of the city of Manila,GUTIERREZ HERMANOS, MIGUEL GUTIERREZ DE CELIS, DANIEL PEREZ, and LEOPOLDOCRIADO,defendants-appellees.

Chicote & Miranda for appellant.Eduardo Gutierrez Repide for appellees.

MORELAND, J .:

These are the facts:

In the month of August, 1909, Gutierrez Hermanos brought an action Oria Hermanos & Co. for therecovery of P147,204.28; that action is known as No. 7289 in the Court of First Instance of Manila. InMarch, 1910 the plaintiff began another action against the same defendant for the recovery ofP12,318.57; this case was known as No. 7719 in said court. Subsequent to the beginning of theabove actions, and on or about the 30th day of April, 1910, the members of the company of OriaHermanos & Co., on account of the expiration of the time stated in their agreement of copartnership,dissolved their relations and entered into liquidation. On the first day of June, 1910, Tomas Oria yBalbas, as managing partner in liquidation, acting for himself and on behalf of his other coownersCasimiro Oria y Balbas and Adolfo Fuster Robles, entered into a contract with the plaintiff in this

case, Manuel Orio Gonzales, which said contract was for the purpose of selling and transferring tothe plaintiff in this action all of the property of which the said Oria Hermanos & Co. was owner. Saidinstrument contained the following clauses:

5. I, Tomas Oria y Balbas, do further state declare that I have agreed with the other party hereto,Don Manuel Oria Gonzales, to sell all the property I have mentioned, which is specified more indetail in the general inventory of Orio Hermanos & Co., for the price and under the conditionshereinafter expressed; and in order to carry into effect such agreement made by me with the saidDon Manuel Orio Gonzales, in my own right and also in representation of my partners, Don CasimiroOria and Don Adolfo Fuster, I do hereby stipulate and agree:

6. As managing partner and liquidator of Oria Hermanos & Co., and further in my own right and inthe name and representation of Don Casimiro Oria y Balbas and Don Adolfo Fuster y Robles,

personally and as partners in Oria Hermanos & Co., in consideration of the sum of two hundredseventy-four thousand pesos (P274,000), which the said Don Manuel Oria y Gonzales undertakesand engages to pay to the firm of Oria Hermanos & Co., in liquidation, or to us the parties hereto,myself and the persons I represent, as partners in Oria Hermanos & Co., which whom shall be paidin installments, in the manner and under the conditions hereinafter set forth. I hereby sell, cede andtransfer absolutely and forever to the said Don Manuel Oria y Gonzales, his heirs and his assigns, alland every part of the property mentioned in the fourth section hereof and more specially described inthe general inventory of Oria Hermosa & Co.; under the following mutual conditions:


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(a) Don Manuel Oria y Gonzales engages and undertakes to pay and to settle the sumagreed upon for this sale, cession and transfer within a period of twelve (12) years, furtherengaging and undertaking to pay each year a sum of not less than ten thousand (10,000)pesos and at the end of the said period to settle the balance of said price.

(b) After the first six (6) years of the period for the payment of the stipulated price, that is,

during the last six years of said period, Don Manuel Oria y Gonzales engages andundertakes to pay the interest at 3 per cent a year on the price stipulated or the part thereofunpaid at such time; provided, that this is mutual obligation and interest payable annually.

(c) Don Manuel Oria y Gonzales further engages and undertakes to pay Don Tomas Oria,Don Casimiro Oria and Don Adolfo Fuster during the time that they remain in the Philippinesand do not reside abroad, the sum of one hundred and fifty (150) pesos monthly; whichobligation shall be understood to be contracted individually with each of the said parties; andthe amounts so paid to each and all of them shall be charged to the account of OriaHermanos & Co., in liquidation, in discharge of the stipulated consideration and theinstallments thereof and interest thereon when due.

(d) Don Manuel Oria y Gonzales engages and undertakes not to sell, alienate, transfer ormortgage, either wholly or in part, the property hereby sold to him, without the writtenauthorization of Don Tomas Oria as liquidator of the firm of Oria Hermanos & Co., so long asthe consideration of this sale is not fully satisfied, to guarantee which this restriction isimposed: provided, that this restriction applies only to the vessels, real estate and branchstores in the towns mentioned in the fourth section of this instrument, not to the rest of theproperty.

(e) Don Manuel Oria y Gonzales engages and undertakes to cede gratuitously in thedwelling-house in the town of Laoag, hereby sold, the use of the same or the portion thereofthat may be necessary for Don Tomas Oria to establish therein the liquidation office of OriaHermanos & Co.; provided, that this cession is made for a period of only two (2) years.

(f ) Don Tomas Oria y Balbas and Don Adolfo Fuster engage and undertake to place theirpersonal services at the disposal of Don Manuel Oria y Gonzales in everything relating to hisinstruction in the management and conduct of the property and business hereby sold;provided, that this obligation and promise shall be binding upon Don Adolfo Fuster only forthe time he may reside in the Philippines and upon both parties only for a maximum period of12 months.

7. I, Manuel Oria y Gonzales, being informed of the foregoing action and contract executed by DonTomas Oria y Balbas, do on my part stipulated and agree: that I accept the sale, cession andtransfer hereby made by him in my favor and engage and undertake to pay Oria Hermanos & Co.,either in liquidation, or if necessary to the partners of Oria Hermanos & Co., the price of said sale,cession and transfer, that is, the sum of P274,000 within a period of 12 years, in the manner and

under the conditions set forth by him in the preceding section, and especially engaged not to sell,alienate, transfer or mortgage the property involved in this sale which is specified in paragraph ( d) ofthe preceding section, without the previous written authorization of the vendor, Oria Hermanos &Co., such property being so exempted as a guaranty for the payment of the purchase price of thissale.

Among the goods transferred by this instrument was the steamship Serantes, which is the subject oflitigation.


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On the 17th day of September, 1910, case No. 7719, above referred to, was resolved by the Courtof First Instance in favor of Gutierrez Hermanos and against Oria Hermanos & Co. for the sumdemanded in the complaint. The cause was appealed to the Supreme Court and, the judgmenttherein having been affirmed,1execution was issued thereon and placed in the hands of the sheriff ofManila. The sheriff immediately demanded that Tomas Oria y Balbas, as liquidator of the firm of OriaHermanos & Co. make payment of the said judgment, to which he replied that there were no funds

with which to pay the same. Thereupon the sheriff levied upon the said steamer Serantes, tookpossession of the same, and announced it for sale at public auction on the 21st day of October,19110. On the 18th day of October, 190, three days before the sale, the plaintiff in this actionpresented to the sheriff a written statement claiming to be the owner of the said steamship, and tohave the right of possession of the same by reason of the sale to him by Oria Hermanos & Co. of allof the property belonging to said company, including the said steamer Serantes, a shown by theinstrument above referred to the quoted. The sheriff thereupon required Gutierrez Hermanos topresent a bond for his protection, which having been done, the sheriff proceeded to the sale of thesteamship. At the sale Gutierrez Hermanos became the purchaser, said company being the highestbidder, and the sum which it paid being the highest sum bidden for the same.

On the 19th day of October, 191, the plaintiff began the present action, which has for its object, asshown by the prayer of the complaint: First, the issuance of a preliminary injunction to prevent thesale of the steamship; and, second, the declaration that the plaintiff is the owner of said steamshipand is entitled to the possession of the same, and that the defendant be required to restore the sameto the plaintiff and to pay P10,000 damages for its detention.

Upon the trial judgment was found in favor of the defendant and against the plaintiff, and thecomplaint was dismissed upon the merits with costs. From that judgment this appeal is taken.

The substantial question presented for our consideration is the validity of the sale from OriaHermanos & Co. to Manuel Oria y Gonzalez as against the creditors of said company. It is thecontention of Gutierrez Hermanos that said sale is fraudulent as against the creditors of OriaHermanos & Co., and that the transfer thereby consummated of the steamship in question was voidas to said creditors and as to Gutierrez Hermanos in particular.

There is some contention on the part of the plaintiffs that aside from the property included in the salereferred to, Oria Hermanos & Co. had sufficient other property to pay the judgment of GutierrezHermanos. The trial court found, however, against the plaintiff in this regard. A careful examinationof the record fails to disclose any sufficient reason for the reversal of the finding. While the evidenceis somewhat conflicting, we are of the opinion that there is sufficient to sustain the findings made.

In determining whether or not the sale in question was fraudulent as against creditors, these factsmust be kept in mind:

1. At the time of said sale the value of the assets of Oria Hermanos & Co., as stated by thepartners themselves, was P274,000.

2. That at the time of said sale actions were pending against said company by one singlecreditor for sums aggregating in amount nearly P160,000.

3. The vendee of said sale was a son of Tomas Oria y Balbas and a nephew of the other twopersons heretofore mentioned which said three brothers together constituted all of themembers of said company.


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4. Nothing of value seems to have been delivered by the plaintiff in consideration of said saleand no security whatsoever was given for the payments therein provided for.

5. The plaintiff is a young man twenty-five years of age. There is no pretense whatsoeverthat he owned any property or had any business at the time of the sale. On the contrary itappears without contradiction that, when the sale took place, he was merely a student

without assets and without gainful occupation.

6. Plaintiff, at the time of the sale, was fully aware of the two suits that have already beenbegun against the company whose assets he was purchasing and well knew that if said suitsshould terminate in favor of the plaintiffs therein the judgments in which they terminatedwould have to be paid out of the property which he was then taking over or they would not bepaid at all.

7. Under all the circumstances the sale in question was, so far as the creditors wereconcerned, without consideration. To turn over a business worth P274,000 to an"impecunious and vocationless youth" who knew absolutely nothing about the business hereceived, and whose adaptability to the management of that business was entirely unknown,

without a penny being paid down, without any security whatsoever, is a proceeding sounusual, so devoid of care and caution, and so wholly outside of the well defined lines ofordinary business transactions, as to startle any person interested in the concern.

8. It is certain that the members of the company of Oria Hermanos & Co. would never havemade a similar contract or executed a similar instrument with a stranger.

9. The prohibition in the contract against the sale of certain portions of the property by theplaintiff offers no protection whatever to the creditors. Such prohibitions is not security. Theparties who made the original transfer can waive and release it at pleasure. Such restrictionsis of no value to the creditors of the company. They can not utilize it for the reduction of theirclaims or in any other beneficial ways.

In determining whether or not a certain conveyance is fraudulent the question in every case iswhether the conveyance was a bona fide transaction or a trick and contrivance to defeat creditors, orwhether it conserves to the debtor a special right. It is not sufficient that it is founded on goodconsideration or is made with bona fide intent: it must have both elements. If defective in either ofthese particulars, although good between the parties, it is voidable as to creditors. The rule isuniversal both at law and in equity that whatever fraud creates justice will destroy. The test as towhether or not a conveyance is fraudulent is, does it prejudice the rights of creditors?

In the consideration of whether or not certain transfers were fraudulent, courts have laid downcertain rules by which the fraudulent character of the transaction may be determined. The followingare some of the circumstances attending sales which have been dominated by the courts badges offraud:

1. The fact that the consideration of the conveyance is fictitious or is inadequate.

2. A transfer made by a debtor after suit has been begun and while it is pending against him.

3. A sale upon credit by an insolvent debtor.

4. Evidence of large indebtedness or complete insolvency.


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5. The transfer of all or nearly all of his property by a debtor, especially when he is insolventor greatly embarrassed financially.

6. The fact that the transfer is made between father and son, when there are present other ofthe above circumstances.

7. The failure of the vendee to take exclusive possession of all the property.

The case at bar presents every one of the badges of fraud above enumerated. Tested by the inquiry,does the sale prejudice the rights of the creditors, the result is clear. The sale in the form in which itwas made leaves the creditors substantially without recourse. The property of the company is gone,its income is gone, the business itself is likely to fail, the property is being dissipated, and isdepreciating in value. As a result, even if the claims of the creditors should live twelve years and thecreditors themselves wait that long, it more than likely that nothing would be found to satisfy theirclaim at the end of the long wait. (Regalado vs.Luchsinger & Co., 5 Phil. Rep., 625; art. 1297, CivilCode, par. 1; Manresa's Commentaries, vol. 8, pp. 713-719.)

Since the records shows that there was no property with which the judgment in question could be

paid, the defendants were obliged to resort to and levy upon the steamer in suit. The court belowwas correct in finding the sale fraudulent and void as to Gutierrez Hermanos in so far as wasnecessary to permit the collection of its judgment. As a corollary, the court below found that theevidence failed to show that the plaintiff was the owner or entitled to the possession of the steamerin question at the time of the levy and sale complained of, or that he was damaged thereby.Defendant had the right to make the levy and test the validity of the sale in that way, without firstresorting to a direct action to annul the sale. The creditor may attack the sale by ignoring it andseizing under his execution the property, or any necessary portion thereof, which is the subject ofthe sale.

For these reasons the judgment is affirmed, without special finding as to costs. So ordered.


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Manila

EN BANC

G.R. No. L-22611 May 27, 1968

COMMISSIONER OF INTERNAL REVENUE,petitioner,vs.VISAYAN ELECTRIC COMPANY and THE COURT OF TAX APPEALS, respondents.

Office of the Solicitor General for petitioner.Jesus P. Garcia for respondents.

SANCHEZ, J .:

The problems cast in legal setting in this petition for review1of the judgment of the Court of Tax

Appeals are:

Is Visayan Electric Company liable for deficiency income tax on dividends from the stockinvestment of its employees' reserve fund for pensions?

Is it also liable for 25% surcharge on alleged late payment of franchise tax?

Respondent company is the holder of a legislative franchise, Act 3499 of the Philippine Legislature,to operate and maintain an electric light, heat, and power system in the City of Cebu, certainmunicipalities in the Province of Cebu, and other surrounding places.

In a board of directors' meeting held on March 14, 1949, respondent company established a pension

fund, known as the "Employees' Reserve for Pensions." Said fund is for the benefit of its "presentand future" employees, in the event of retirement, accident or disability. Every month thereafter anamount has been set aside for this purpose. It is taken from the gross operating receipts of thecompany. This reserve fund was later invested by the company in stocks of San Miguel Brewery,Inc., for which dividends have been regularly received. But these dividends were not declared for taxpurposes.

It was in a letter dated August 9, 1957 that the Auditor General gave notice that as the company hasretained full control of the fund, therefore, the dividends are not tax exempt; but that such dividendsmay be excluded from gross receipts for franchise tax purposes, provided the same are declared forincome tax purposes.

In pursuance of the above letter, the Provincial Auditor of Cebu allowed the company the option todeclare the dividends either as part of the company's income for income tax purposes or as part ofits income for franchise tax purposes. The company elected the latter. 2

The Revenue Examiner of Cebu, however, conducted a separate investigation for the Bureau ofInternal Revenue. His report dated September 17, 1959 likewise revealed that the "company itself isthe custodian or has the complete control of the fund." That report disagreed with the action of theProvincial Auditor, instead considered the dividends as subject to corporate income tax underSection 24 of the National Internal Revenue Code.


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Said report further disclosed that: (a) during the years 1957, 1958 and 1959, some payments of thefranchise tax were made after fifteen days although within twenty daysof the month followingthe end of each calendar quarter, allegedly contrary to Section 259 of the Tax Code, which imposesa 25% surcharge if the franchise faxes "remain unpaid for fifteen days from and after the date onwhich they must be paid"; and (b) from 1954 to 1959, the company had not paid additional residencetax imposed by Section 2 of Act 465.

With the foregoing report as basis, the Commissioner of Internal Revenue, in two letters of demanddated September 7 and 15, 1960, assessed the following amounts against the company: (a)P2,443.30 representing deficiency income tax for the years 1953 to 1958, plus interest and 50%surcharge; (b) P3,850.00 as additional residence tax from 1954 to 1959; and (c) P35,419.05 as 25%surcharge for late payment of franchise taxes for the years 1957, 1958 and 1959. Reconsiderationhaving been denied, the company went to the Court of Tax Appeals on petition for review.

On January 31, 1964, the Court of Tax Appeals sustained the correctness of the additionalresidence tax assessments3but freed the company from liability for deficiency income tax and the25% surcharge for late payment of franchise taxes.

It is now the turn of the Commissioner of Internal Revenue to appeal to this Court.

1. Admittedly, the investment of the fund in shares of stocks of the San Miguel Brewery, Inc. is not apart of respondent company's business. Neither is it necessary or incidental to its operation under itsfranchise. And yet those dividends were assessed by petitioner as part of the income of respondentcompany. The tax court joins petitioner in this, but applied the following provision in Section 8, Act3499the company's legislative franchisein holding that the dividends are not subject toincome tax, viz.:

SEC. 8. The grantee shall pay the same taxes as are now or may hereafter be required bylaw from other persons, on its real estate, buildings, plant, machinery, and other personalproperty, except property declared exempt in this section. In consideration of the franchiseand rights hereby granted, the grantee shall pay into the municipal treasury of eachmunicipality in which it is supplying electricity to the public under this franchise, a tax equal totwo per centum of the gross earnings for electric current sold under this franchise in each ofthe respective municipalities.Said percentage shall be due and payable quarterly and shallbe in lieu of all taxes of any kind levied, established or collected by any authority whatsoever,now or in the future, on its poles, wires, insulators, switches, transformers and otherstructures, installations, conductors and accessories, placed in and over the public streets,avenues, roads, thoroughfares, squares, bridges, and other places andon its franchises,rights, privileges, receipts, revenues and profits, from which taxes the grantee is herebyexpressly exempted.4

We perceive incorrectness of this approach by the Tax Court. What is envisioned in the statutegranting exemption, so far as is pertinent to this case, is the last underscored portion thereof which

speaks of its receipts, revenues and profits, "from which taxes the grantee is hereby expresslyexempted." The heavy accent is on the wordits. Plain import of this word, taken in context, is thatthe receipts, revenues and profits, which could be tax-exempt under the statute, must be thecompany's not somebody else's. No doubt this provision should not be broadened so as toinclude situations which by fail intendment are excluded therefrom. To do so is to take too loose aview of the statute.

The disputed income are not receipts, revenues or profits of the company. They do not go to thegeneral fund of the company. They are dividends from the San Miguel Brewery, Inc. investment


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(b) Exception.The tax imposed by this Title shall not apply to employees' trust whichforms part of a pension, stock bonus or profit-sharingplanof an employer for the benefit ofsome or all of his employees (1) if contributions are made to the trust by such employer, oremployees, or both for the purpose of distributing to such employees the earnings andprincipal of the fund accumulated by the trust in accordance with suchplan, and (2) if underthe trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with

respect to employees under the trust, for any part of the corpus or income to be (within thetaxable year or thereafter) used for, or diverted to, purposes other then for the exclusivebenefit of his employees: Provided, That any amount actually distributed to any employee ordistributee shall be taxable to him in the year in which so distributed to the extent that itexceeds the amount contributed by such employee or distributee.16

A dig into the legislative history unearths the fact that this exemption in Republic Act 1983 wasconceived in order to encourage the formation of pension trust systems for the benefit of laborersand employees outside the Social Security Act.17

Understandably, the second requirement in paragraph (b) of Section 56 of the Tax Code as it wasinserted by Republic Act 1983non-diversion of fundwas written into the statute the better toinsure that the trust fund and its income will be used "for the exclusive benefit" of the employees.

Of importance is the employment of the wordplanas it is applied to pension set forth in the first partof paragraph (b) aforesaid. Worth mentioning is that a sizeable portion of our Tax Code has beenlifted from the United States Internal Revenue Code. To be sure, Republic Act 1983 which amendsSection 56 of our Tax Code is substantially similar in terms to Section 165 of the United StatesInternal Revenue Code of 1939.18It is thus permissible for this Court to look into the interpretationsof the American counterpart in an effort to determine the congressional scheme in exemptingemployees' trust from taxation.

In the American jurisdiction, the wordplanis emphasized. To qualify for exemption, the employees'trust must refer to a definite program, scheme or plan. It must be set up in good faith. It must beacturially sound. Under such plan, employees generally are to be extended retirement and pension

benefits. But why? The fund is not thereafter to be controlled or used for the benefit of the companyin any way.19A trust device used to disguise added compensation to the shareholders and officers ofa companyand thereby avoid present payment of income tax thereoninstead of providing forfuture security of the employees in general will not qualify under the exemption. 20Hubbell vs.Commissioner of Internal Revenue, 150 F. 2d 516, 161 A.L.R. 764, 773, which was decided underthe 1939 version, confirms this view. There, the United States Circuit Court of Appeals took intoaccount the direction of the amendments in construing congressional purpose, and held that the1942 amendment which added the requirement of non-discrimination in favor of shareholders,officials, or highly-compensated employees

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