G.R. No. 27026, July 13, 1927
GEORGE C. ARNOLD, plaintiff-appellee, vs. INTERNATIONAL BANKING CORPORATION, defendant-appellant.

FACTS

George C. Arnold, the manager of Willits & Patterson, Ltd., had a contract entitling him to one-half of the corporation’s profits. The corporation became heavily indebted to the International Banking Corporation (the Bank). To secure this debt, the corporation and the Bank entered into an agreement on September 7, 1920, whereby the corporation assigned all its assets, contracts, and proceeds from sales to the Bank as security. The Bank financed the corporation’s operations and collected all proceeds, applying them to the corporation’s debt. Arnold, as president of the corporation, executed this agreement and subsequently acted as superintendent of operations under it. The Bank later paid Arnold P30,000 upon his severance from operations. Arnold sued the Bank, claiming it wrongfully applied to the corporate debt his one-half share of profits from specific transactions that occurred after the September 7, 1920 agreement.

ISSUE

Whether the International Banking Corporation is liable to account directly to Arnold for his alleged one-half share of the profits from transactions governed by the September 7, 1920 agreement between the Bank and Willits & Patterson, Ltd.

RULING

No. The Supreme Court reversed the lower court’s decision and dismissed Arnold’s complaint. The Court held that Arnold was estopped from asserting his claim against the Bank. By his own actionsexecuting the September 7, 1920 agreement as corporate president, knowingly operating under its terms which directed all proceeds to the Bank for application to the corporate debt, and accepting a substantial payment (P30,000) upon termination of his roleArnold ratified the agreement and could not later claim that the Bank should personally account to him for profits. The Bank’s payment to Arnold was construed as liberal compensation for his services under the new agreement, not an acknowledgment of liability for his pre-existing profit-sharing contract with the corporation. The Bank’s rights were derived from its agreement with the corporation, to which Arnold was not a party, and his personal contract with the corporation could not be enforced directly against the Bank under these circumstances.