G.R. No. L-3866
E. B. MERCHANT, plaintiff-appellee, vs. THE INTERNATIONAL BANKING CORPORATION, defendant-appellant.
January 11, 1908

FACTS:
E. B. Merchant (plaintiff-appellee) brought an action in the Court of First Instance of Manila against The International Banking Corporation (defendant-appellant) to recover the principal and interest on a promissory note. The note, dated January 5, 1904, was for $7,500, payable to Merchant by “P. P. DE LA CASA COMISION, VICENTE G. AZAOLA,” with a guarantee signed by “R. W. BROWN for The International Banking Corporation.”

In its amended answer, the Bank denied the allegations, denied executing the instrument, and alleged the guaranty was an accommodation one. Specifically, it raised two defenses: (1) the Bank’s charter did not authorize such a guaranty, and (2) R. W. Brown was not authorized to enter into such a contract.

This was the second action between the parties concerning the same obligation. In the first action, brought to recover the first interest installment, the Bank raised identical defenses. However, the judgment in the first action (affirmed by the Supreme Court in 6 Phil. Rep. 314) was rendered solely because the Bank failed to swear to its answer, which, under the Code of Civil Procedure, was deemed an admission of the genuineness of Brown’s signature, his authority, and the Bank’s corporate power.

The Bank, in this second action, appealed the CFI’s judgment in favor of Merchant, arguing that the issues of corporate power and agent’s authority were not decided on the merits in the first case and should be open for re-litigation. The Bank also claimed there was no proof of demand on the principal debtor (Casa Comision), no proof it had not paid, and no proof of its insolvency.

ISSUE:
I. Whether the issues of the International Banking Corporation’s corporate power to enter into a guaranty and R. W. Brown’s authority to sign it were conclusively adjudicated in a prior suit between the same parties on the same obligation, even though the judgment in the prior suit was based on the defendant’s admission due to an unsworn answer, rather than on a merits-based examination.
II. Whether, for a “guaranty of payment,” it is necessary to present proof of demand on the principal debtor, non-payment by the principal debtor, or the principal debtor’s insolvency.

RULING:
I. Yes, the issues were conclusively adjudicated. The Court, applying Section 307 of the Code of Civil Procedure, held that “That only is deemed to have been adjudged in a former judgment which appears upon its face to have been so adjudged, or which was actually or necessarily included therein, or necessary thereto.” A judgment could not have been rendered against the Bank without necessarily implying that the Bank had the corporate power to make the contract and that Brown was authorized to sign it. Therefore, these facts were “necessarily included” in the prior judgment. Citing Last Chance Milling Company vs. Tyler, the Court emphasized that a judgment based on default or admission (such as an unsworn answer) is just as conclusive as one rendered after contest, as it represents a judicial determination of fact, regardless of the means by which it was reached. Thus, the Bank is barred from re-litigating these defenses.

II. No, such proof is not required for a “guaranty of payment.” The Court reiterated that for a guaranty of payment, it is not necessary to prove demand on the principal debtor or to protest the note; it is sufficient to show non-payment by the principal. The burden of proving payment by the defendant (guarantor) rests on the defendant. The plaintiff’s possession and production of the note at trial constituted prima facie evidence that it had not been paid by either the principal debtor or anyone else.

The judgment of the court below was affirmed.