GR L 9802; (February, 1916)

EN BANC

G.R. No. L-9802; February 5, 1916

TEC BI & CO., plaintiff-appelle,

vs.
THE CHARTERED BANK OF INDIA, AUSTRALIA & CHINA, defendant-appellant.

Gibbs, McDonough and Blanco for appellant.
Herrero and Masigan for appellee.

CARSON, J.:

The following statement of the facts upon which this case was submitted in the court below is taken literally from the brief of counsel for the appellant:

This is an action to recover from the defendant bank the sum of P11,572.96, the amount of a judgment recovered by the plaintiff against “La Urania Cigar Factory (Ltd.),” and for which the plaintiff seeks to hold the defendant liable by virtue of an attempted levy of attachment upon certain leaf tobacco in the possession of the defendant bank under a pledge executed by the said “La Urania Cigar Factory (Ltd.).” The Tobacco being pledged for an amount largely in excess of its value, the bank refused to deliver it to the sheriff, and the pledge having become due, sold the tobacco and applied the proceeds on account of the indebtedness, previous to the time when the plaintiff finally secured judgment against “La Urania Cigar Factory (Ltd.).” and issued execution thereon.

The case was submitted upon a stipulation of facts as follows:

It is hereby agreed that all the facts contained in paragraphs 1, 2, 3, and 4 of the complaint are true, with the exception of that part of the first five lines of paragraph 2, which alleges that the plaintiff had notice that some of the bales of tobacco in leaf which were sold to the “La Urania Cigar Factory (Ltd.),” were attempted to be sold for the manifest purpose of defrauding the plaintiff.

Referring to the answer of defendant corporation it stipulated that the allegations of paragraphs 2, 3, 4, 5, and 6 are true.

The defendant corporation offers in evidence the original contract of pledge marked Exhibit 1, as part of this stipulation.

With reference to the admission of the contents of paragraph 3 of the answer, it is understood that the word “neutral” is eliminated.

From the allegations of the complain and answer admitted to be true in conformity with the foregoing stipulation, it appears:

(1) That on the 7th of November 1912, the plaintiff sold to the “La Urania Cigar Factory (Ltd.),” a quantity of leaf tobacco. (Paragraph 1 of complaint.)

(2) That on the 16th January, 1913, the “La Urania Cigar Factory (Ltd.),” pledged to the defendant corporation as security for the payment of an indebtedness of P25,000 the bales of tobacco described in Exhibit A of the answer, the original of which has been offered in evidence in connection with the stipulation of facts as Exhibit 1.

(3) That the bales of tobacco thus pledged and described in Exhibit 1 were stored in the bodega of a third person, that is to say, in the bodega of Messrs. Sprungli & Co., situated at No. 42 (now No. 214) of Calle David, Manila. (Paragraph 3 of answer.)

(4) That on or about the 1st day of February, 1913, the defendant corporation demanded of the obtained from Messrs. Sprungli & Co. the keys to the said bodega, and discovered that of the 436 bales of tobacco described in Exhibit 1 there remained only those set forth in paragraph 4 of the answer. (Paragraph 4 of answer.)

(5) That the defendant bank did not know and had been unable to ascertain whether “La Urania Cigar Factory (Ltd.),” misrepresented the quantity of the tobacco in the said warehouse at the time of the execution of said document of pledge, or whether the difference between the amount described in the document of pledge and that found on hand on the 1st of February, 1913, and in the meantime been disposed of by “La Urania Cigar Factory (Ltd.),” in collusion with Messrs. Sprungli & Co., but that if such disposition was made it was without the knowledge or consent of the defendant bank. (Paragraph 5 of answer.)

(6) That from said 1st day of February, 1913, the defendant corporation had been in the absolute and exclusive possession of the tobacco described in the fourth paragraph of the answer and in Exhibit 1 of the stipulation of facts, until the 15th of May, 1913, when same was sold under and by virtue of the document of pledge Exhibit 1 by the defendant bank for the sum of P12,722.36 which was applied on account of said loan, the entire amount of which was then past due and unpaid, leaving a large balance thereof still due and unpaid. (Paragraph 6 of answer.)

(7) That on the 22nd day of April, 1913, the plaintiff Tec Bi & Co., filed a complaint in the Court of First Instance of Manila against “La Urania Cigar Factory (Ltd.),” claiming the payment of the sum of P11,572.96 as the balance of the unpaid purchase price of the tobacco referred to in paragraph 2. (Paragraph 1 of complaint.)

(8) That on the 5th day of May, 1913, Tec Bi & Co. asked for and obtained from the Court of First Instance an attachment against the said bales of tobacco, but inasmuch as the bodega was locked and the sheriff was informed that the keys were in the possession of the bank, he demanded the delivery thereof from the latter, which demand was refused by the bank, alleging that it held possession of the tobacco under a pledge. (Paragraph 2 of complaint.)

(9) That in view of the statement of the bank, the sheriff notified it that the bales of tobacco identified in Exhibit A of the complaint were attached subject to the results of the complaint were attached subject to the results of the complaint filed by Tec Bi & Co. against “La Urania Cigar Factory (Ltd.),” (Paragraph 2 of complaint.)

(10) That on the 8th day of May, 1913, the bank answered the notification of the sheriff, confirming the fact that it had in its possession the bales of tobacco specified in the notification, as security for the payment of a loan and that it intended to sell the same; that the sheriff communicated the answer of the bank to the attorneys to Tec Bi & Co., who replied insisting upon the levy of the attachment. (Paragraph 3 of complaint.)

(11) That on the 19th day of May, 1913, the Court of First Instance rendered judgment in said case against “La Urania Cigar Factory (Ltd.),” in favor of Tec Bi & Co., for the sum of P11,572.96, with legal interest from April 22, 1913, and costs. (Paragraph 4 of complaint.)

(12) That on the 22d day of May, 1913, the sheriff attempted to execute the judgment upon the bales of tobacco attached and in the possession of the defendant corporation, but was unable to do so due to the statement of the agent of said corporation, that the tobacco had been sold and that the proceeds of the sale had been applied upon the payment of the amount due to from “La Urania Cigar Factory (Ltd.),” (Paragraph 4 of complaint.)

The case having been submitted on the foregoing stipulation of facts, the Court of First Instance found that the plaintiff’s claim was a preferred credit under the provisions of paragraph 1 of article 1922 of the Civil Code; that the pledge executed by “La Urania Cigar Factory (Ltd.),” in favor of the defendant corporation (Exhibit 1) was not binding upon the plaintiff for the reason that it was not set forth in a public instrument as required by article 1865 of the Civil Code in order to be effective against, third person, and rendered judgment in favor of the plaintiff and against the defendant for the amount of the former’s judgment against “La Urania Cigar Factory (Ltd.),” with interest and costs. (Pages 17 to 23, inclusive, bill of exceptions.)

From this judgment the defendant corporation appeals, assigning the following errors:

ASSIGNMENT OF ERRORS

I. The court erred in holding that the plaintiff’s claim as vendor of the tobacco was entitled to preference over that of the defendant bank secured by a pledge on the same tobacco.

II. The court erred in applying article 1865 of the Civil Code to the defendant’s pledge, and in holding that such pledge was ineffective as to the plaintiff.

III. The court erred in holding that the plaintiff was a third person as contemplated by that term in article 1865 of the Civil Code.

IV. Assuming that article 1865 is applicable to the transaction in question, the court erred in holding that the plaintiff did not waive any defect in the private instrument of pledge by expressly admitting its genuineness and the correctness of its date by stipulation, and by failure to object to its introduction in evidence.

V. The court erred in rendering judgment in favor of the plaintiff and against the defendant, and in denying the latter’s motion for a new trial.

It will readily be seen that our disposition of this appeal must turn upon the force and effect which should be given the instrument referred to in the statement of facts as the “original contract of pledge marked Exhibit 1.”

Plaintiff’s contention is that under the provisions of clause 1 of article 1922, his right as a preferred creditor for the amount of the purchase price of the tobacco was not prejudice and could not be prejudiced by the pledge of the tobacco to the defendant, since the date of the contract of pledge is not evidenced by a public document; and, further, that he had a perfect right to attach the tobacco in the course of judicial proceedings for the recovery of his claim against the pledgor, for the purchase price of the tobacco pledged to the defendant bank.

The defendant bank, on the other hand, contends that under the provisions of clause 2 of article 1922 of the Civil Code read together with clause 1 of section 1926, the right of preference in favor of the bank, to which the tobacco had been pledged by the common debtor, excluded the preference in favor of the plaintiff; and that plaintiff could not rely on the provisions of article 1865 of the Code, because he was not a “third person” in the sense in which these words are used in that article.

Clauses 1 and 2 of article 1922 of the Civil Code are as follows:

1922. With regard to the specified personal property of the debtor, the following are preferred:

1. Credits for the construction, repair, preservation, or for the amount of the sale of personal property which may be in the possession of the debtor to the extent of the value of the same.

2. Those secured by a pledge which may be in the possession of the creditor, with regard to the thing pledged and to the extent of its value.

Clause 1 of article 1926 of the Civil Code is as follows:

1926. Credits which enjoy preference with regard to certain personal property, exclude all the other to the extent of the value of the personal property to which the preference refers.

When two or more, creditors claim preference with regard to certain personal property, the following rules shall be observed as to priority of payment:

1. Credits secured by a pledge exclude all other to the extent of the value of the thing given in pledge.

Article 1865 of the Civil Code is as follows:

A pledge shall not be effective against a third person, when evidence of its date does not appear in a public instrument.

Under these provisions of the Code there can be no doubt that had the date of the contract of pledge been evidenced by a public document, the preferential right of the pledgee would have been superior to and excluded all and any preferential rights of the vendor. We so held in Macke and Macke vs. Rubert (11 Phil., 480).

The pledge contract (Exhibit 1) is before us, however, and it is admitted that the date is not evidenced by a public instrument. It cannot therefore be permitted to prejudice the rights of the vendor of the tobacco if he is a “third person: in the sense in which that term is used in the above-cited article 1865 of the code.

It cannot be doubted that with relation to the pledgor and the pledgee the original vendor of the goods was a third person. The words are not susceptible of any possible explanation which would exclude him. He had no privity with either of the parties to the pledge contract. He had no knowledge of the execution of that contract. He did not participate in it in any way whatever. His rights so far as they affected the pledged property, were adverse to both pledgor and pledgee. In a word he was as to them a third person.

It necessarily follows that since the execution of the pledge in favor of the defendant bank without the date of execution being evidenced by a public instrument could have no effect as again the plaintiff, he was strictly within his rights in asserting his claims as a preferred creditor and in levying an attachment against the tobacco; and the defendant bank could not lawfully assert any right as a pledgee or preferred creditor which adversely affected the rights of the plaintiff in the premises.

To these conclusions a number of objections have been raised, none of which, however, will bear close inspection.

It is said that even though the date of the defendant bank’s pledge is not evidenced in a public document, still the delivery of the tobacco into the possession of the bank defeated the right of the plaintiff to a preference. This contention is based on the provision of article 1922 which limits the preference for the purchase price of goods sold to the time during which they continue in the possession of the purchaser.

To this contention there are two sufficient answers.

First. While the contract of pledge and the delivery of the tobacco undoubtedly created a valid pledge as between the pledgor and the pledgee, so that the pledgor himself could not disturb the possession of the pledgee; still, with relation to third person, the possession of the bank must be deemed to be that of the purchaser of the tobacco, since under the provisions of article 1865 of the Code, the execution of the pledge could not affect the right of third person. As to third persons the pledge and the pledged property must be treated as if the pledge never had been executed.

Second. Even if it were true that the plaintiff had lost his statutory right of preference as a result of the execution of the pledge and the delivery of possession to the bank, still he had a perfect right to levy an attachment on the tobacco pending his action to recover the amount of the pledgor’s indebtedness, unless the execution of the pledge had the effect of depriving him of that right. But it is very clear that under the express provisions of article 1865 of the code no such effect could be given the pledge.

Much is made in the brief of the appellant of the fact that one of the allegations of the answer set forth that at the date of the issuance of the attachment the defendant bank was in the absolute and exclusive possession of the tobacco in question; and that the truth of this allegation was admitted in the agreed statement of facts.

The defendant’s answer contains a series of allegations setting forth the precise nature and character of the possession of the tobacco by the bank, and of all the circumstances under the by virtue of which the bank came into possession; and there is attached to the answer, as an exhibit a copy of the pledge contract itself. We have shown that accepting these allegations as true, the possession of the bank was not absolute and exclusive in the sense that it could in any wise affect the right of another credit of the common debtor, a “third person” with relation to the pledge contract, to levy an attachment upon the tobacco. We must conclude therefore that the stipulation as to the truth of the allegation of the answer that the possession of the tobacco by the bank was “absolute and exclusive” was intended only to mean that it was “absolute and exclusive” so far as the pledgor himself was concerned; or else that the stipulation as to the truth of the allegations of the answer did not include this averment as to the “absolute and exclusive” possession of the tobacco by the bank it being merely a conclusion of law, based upon the other allegations of facts alleged by the pleader.

A general admission of the truth of the allegations set forth in a pleading is not an admission of the truth of an impossible conclusion of fact drawn from other facts set out in the pleading, nor of a wrong conclusion of law based on the allegations of fact well pleaded, nor of the truth of a general averment of facts contradicted by more specific averments. Thus, if a pleader alleges that two pesos were borrowed on one day and two more borrowed on another making five Pin all, a stipulation of the truth of the allegations in the pleading does not amount to an admission by the opposing party that twice two make five. Again if a pleader alleges that one hundred pesos were loaned without interest for one year and had not been paid, and that the borrower is indebted to the lender in the sum of one hundred and ten pesos, that being the amount of the capital together with interest for the year for which the money was loaned, a stipulation as to the truth of the allegation set forth in the pleadings is not an admission of the truth of the conclusion of law as to the interest due by the borrower. These elementary principles have been quite fully developed in a great variety of cases arising on demurrers, and sufficiently dispose of the attempt of counsel to fix the attention of the court upon this single averment of the answer, apart from the context and to the exclusion of the specific allegations of fact, the truth of which, as stipulated by the parties, cannot be questioned. (Cf. 144 U.S., 75¹; 97 Ala., 491 ²; 31 Cyc., 333-337; 6 Encyc. Pl. & Pr., 334-338.)

One other contention of counsel for the appellant remains to be considered. It is that on which his fourth assignment of error is based. Counsel insist that “assuming that article 1865 is applicable to the transaction in question, the court erred in holding that the plaintiff did not waive any defect in the private instrument of pledge by expressly admitting its genuineness and the correctness of its date by stipulation, and by failure to object to its introduction in evidence.”

This contention rests on a misconception of the real purpose and object of the provisions of article 1865 of the code. This article is not a mere rule of adjective law, prescribing the mode whereby proof may be made of the date of a contract of pledge. It is a rule of substantive law, prescribing a condition without which the execution of a pledge contract cannot affect third person adversely.

The plaintiff in this action does not question the truth of the bank’s allegations that the pledge contract was executed on the day on which it purports on its face to have been signed and delivered. There is no suggestion of bad faith or sharp practice on the part of either the pledgor or pledgee in the execution of the pledge. Under the circumstances plaintiff had no reason to object to the introduction of evidence which tended direct to establish his claim that although the pledge had been executed as alleged by the defendant bank, it could not affect his rights on the premises. On the contrary he must have welcomed the introduction of this evidence, which conclusively established the very point upon which his whole case necessarily turns.

Plaintiff stands strictly on the rule of substantive law laid down in this article of the code which declared that this rights, as a “third person,” cannot be adversely affected by a pledge the date of which is not evidenced in a public document. His right so to do cannot be successfully challenged; and indeed we are inclined to think that the equities of the case, as far as they appear from the record, are with the vendor of a large quantity of tobacco, in his effort to recover the unpaid purchase price, rather than the creditor, who succeeded in having the debtor who had failed to pay the purchase price of this tobacco, bought on credit, turn it over to him by way of a pledge to secure the payment of a preexisting debt.

What has been said would seem to dispose of all the contentions of the appellant; but at the risk of extending this opinion to an undue length, we here insert the comment of a learned Spanish commentator (Manresa) on the provisions of article 1865 of the code, because he seems to have anticipated every contention of appellant in this case, and the citation demonstrates quite conclusively that the plaintiff is entitled to rely on his rights in the premises as a “third person,” who cannot be adversely affected by the execution of a pledge in the manner and form in which the pledge to the defendant bank was made.

Article 1865. A pledge will not be valid against a third party if the certainty of the date is not expressed in a public instrument.

This article, the precept of which did not exist in our old law, answers the necessity for not disturbing the relationship or the status of the ownership of things with hidden or simulated contract of pledge, in the same way and for the identical reasons that were taken into account by the mortgage law in order to suppress the implied and legal mortgages which produced so much instability in real property.

Considering the effects of a contract of pledge, it is easily understood that, without this warranty demanded by law, the case may happen wherein a debtor in bad faith from the moment that he sees his movable property in danger of execution may attempt to withdraw the same from the action of justice and the reach of his creditors by simulating, through criminal confabulations, anterior and fraudulent alterations in his possession by means of feigned contract of this nature; and, with the object of avoiding or preventing such abuses, almost all the foreign writers advise that for the effectiveness of the pledge, it be demanded as a precise condition that in every case the contract be executed in a public writing, for, otherwise, the determination of its date will be rendered difficult and its proof more so, even in cases in which it is executed before witnesses, due to the difficulty to be encountered in seeking those before whom it was executed.

Our code has not gone so far, for it does not demand in express terms that in all cases the pledge be constituted or formalized in a public writing, nor even in private document, but only that the certainty of the date be expressed in the first of the said class of instruments in order that it may be valid against a third party; and, in default of any express provision of law, in the cases where no agreement requiring the execution in a public writing exists, it should be subjected to the general rule, especially to that established in the last paragraph of article 1280, according to which all contracts not included in the foregoing cases of the said article should be made in writing even though it be private, whenever the amount of the prestation of one or of the two contracting parties exceeds 1,500 pesetas.

The pledge, therefore, can be constituted in whatever form, as all other contracts, and the one formalized in that way will be valid and will produce its natural and legal consequences in the juridical order with respect to the contracting parties and to their assigns; but it will not have effect with respect to a third party if the certainty of the date is not evidenced in a public writing, by which means the legislator has tried to render impossible the existence of the fraudulent confabulations which we have hereinbefore indicated as otherwise possible.

That is to say, what the law wishes in the precept that we are examining is to impose the existence, not only of an efficacious and authentic means of proof of the constitution of a pledge, but also of a security of its certainty and the reality of the pledge in order to avoid frauds and damages to the creditors, arising from the bad faith of the debtor; something like the inscription of the mortgage in the Registry of Property, as has been said by an author, although with less warranties than this one.

Some authors criticise the limitations in the wording of the article insofar as it does not demand an identical expression respecting the other essential circumstances of the contract, they upholding the necessity or at lest the convenience of expressing in the public instrument principally the debt for the security of which the pledge is constituted, the date of debt, the designation of the thing pledged, the period during which the accessory obligation is contracted form, with all the other stipulations which constitute the essence of the contract. But his should not be imposed by the law but by the private interest which is the only one affected, and for the same reason, a like determination should be demanded in all contracts.

The only thing in this case that could interest or concern the legislator would be to prevent or to make impossible any simulation or fraud, supposing the existence of fraudulent pledged to be to the prejudice of third parties and to that end, it is sufficient that the date of its constitution be evidenced with all certainty in a public instrument. Any thing else would amount to an attempt against the principle of liberty with which contract of the modern legislation are inspired, placing obstacles to it by demanding the execution in every case of a public writing, a thing which though it constitutes a worthy and just aspiration, yet, ca not take precedence over the will and the freedom of the contracting parties.

Hence, any one who may wish to constitute a pledge in a private document or verbally, if the prestations of the parties do not exceed 1,500 pesetas, can validly make it; but the contract celebrated will not prejudice a third party while the requisite of the execution of a public instrument referred to in the article is not complied with.

There exists another reason which justifies the precept we are discussing. In fact, from the contract of pledge arises the preference established in No. 2 of article 1922, respecting the credits guaranteed by the thing pledged which is in the possession of the creditor, up to the amount of its value, which preference may be opposed against third parties; and, in order that the latter may not be prejudiced, it is necessary that the date of the contract be expressed in a true, indubitable and authentic manner and that it be certain to the end that even the bare possibility of fraud and of collusion between the creditor keeping the pledge and the debtor owner thereof may be excluded.

What has been said necessitates the entry of judgment affirming the judgment entered in the court below, with the costs of this instance against the appellant.

Let judgment be entered accordingly. So ordered.

Arellano, C.J., Torres and Trent, JJ., concur.
Johnson, J., took no part.
Moreland, J., dissents.

Footnotes

¹ Kent vs. Lak Superio etc. Railway & Iron Co.

² Dickerson vs. Winslow.

Batas Pinas