REPUBLIC OF THE PHILIPPINES, PLAINTIFF-APPELLANT, VS. PEDRO C. HERNAEZ AND RAMON M. DE LA RAMA, DEFENDANTS-APPELLEES.

Republic versus Hernaez

The Case

This is a collection suit brought by the Republic of the Philippines against Pedro Hernaez and Ramon de la Rama to recover loans obtained from the Bank of Taiwan, Ltd. during the Japanese occupation. The trial court dismissed the complaint on the ground that the action had already prescribed, and the Republic appealed directly to the Supreme Court. The case matters because it settles how the prescriptive period is computed when the moratorium laws, the vesting of enemy assets in the United States Government, and the transfer of those assets to the Republic successively interrupt the running of prescription — and because it reminds us that prescription does not run against the State.

Procedural History

The Republic filed its complaint in the Court of First Instance of Manila. The trial court rendered judgment dismissing the complaint, holding that the action had prescribed even after deducting the period of the moratorium. The Republic moved for reconsideration, but its motion proved unavailing. The Republic then appealed directly to the Supreme Court on a pure question of law, namely whether the trial court erred in dismissing the complaint on the ground of prescription. Before the Supreme Court, the appellee Hernaez also raised his own assigned errors, but these were factual in nature and could not be reviewed in an appeal that brought up no evidence.

Facts

On various dates in 1943, during the Japanese occupation, Ramon de la Rama, brother-in-law and negotiorum gestor of Pedro Hernaez, obtained loans from the former Bank of Taiwan, Ltd. The loans were evidenced by ten promissory notes bearing six percent annual interest compounded quarterly, payable at the bank's offices in Bacolod City, in the total amount of 14,786 pesos and 61 centavos. As security, de la Rama, also as negotiorum gestor, executed two chattel mortgages on the standing crops growing on lots belonging to Hernaez, and these mortgages were registered under the Chattel Mortgage Law.

By transfer agreements dated July 20, 1954 and June 5, 1957, between the governments of the United States and the Philippines, all the assets of the Bank of Taiwan, including the promissory notes and the chattel mortgages, were transferred by the United States Government, through its Attorney General as successor of the Philippine Alien Property Administration, to the Government of the Republic of the Philippines. These assets are now administered by the Board of Liquidators. Under the Ballantyne Schedule the principal of 14,786 pesos and 61 centavos was reduced to 10,652 pesos and 49 centavos, and with interest compounded quarterly as of December 31, 1961, the total came to 31,900 pesos and 91 centavos. Despite repeated demands, the amount remained unpaid.

The Republic filed its complaint on March 30, 1962. The trial court held that the obligations were due one year after execution, and that even deducting the moratorium period of three years, four months and sixteen days, a period of fourteen years and seventeen days had elapsed, so the action had prescribed.

Issues

• Whether or not the action of the Republic of the Philippines to collect the loans had already prescribed.
• Whether or not the assigned errors of appellee Hernaez, which raise questions of fact, may be reviewed by the Supreme Court in an appeal taken directly to it on a question of law.

Applicable Provisions

Paragraph 4 of Article 1108 of the Civil Code, as quoted in the decision, provides:

Prescription does not run against the State.

This provision is the foundation of the ruling that once the notes passed to the Republic, the statute of limitations ceased to run against it.

Ruling

On the first issue, the Court ruled that the action had not prescribed. The Court applied its earlier rulings in Republic versus Grijaldo and Republic versus Rodriguez, which held that the moratorium laws suspended the running of the prescriptive period, and that prescription does not run against the State. Tracing the periods, the Court found that only two years and twenty-six days of the prescriptive period had elapsed when ownership of the first note fell into the hands of the Republic: seven months and eleven days from April 7, 1944 to November 18, 1944; four months and thirteen days from January 21, 1946 to July 4, 1946; and one year, one month and two days from May 18, 1953 to July 20, 1954. From July 20, 1954, the statute of limitations ceased to run against the Republic, since, as the Court held, prescription does not run against the State which seeks to enforce the obligation in the exercise of its sovereign role. The Court therefore held that the lower court erred in holding that the action had prescribed.

On the second issue, the Court held that while an appellee may assign errors to sustain a judgment in his favor on other grounds, the assigned errors of Hernaez raised questions of fact requiring a review of the evidence. Since the appeal was taken directly on a question of law and the record did not incorporate the evidence, the Court could not review them. The appropriate procedure is for the appellee to raise them in an appeal from the judgment the trial court will render after remand.

Doctrine

Prescription does not run against the State. When the Republic sues to collect a debt in the exercise of its sovereign functions, the statute of limitations does not run against its right of action. The moratorium laws, Executive Orders Number 25 and 32 and Republic Act Number 342, suspended the running of the prescriptive period from November 18, 1944 until May 18, 1953, when they were declared unconstitutional in Rutter versus Esteban. Where loans were contracted during the Japanese occupation and the assets later vested in the United States Government and then were transferred to the Republic, the periods during which prescription was suspended must be deducted in computing whether the action has prescribed. An appellee who has not appealed may assign errors only to sustain the judgment on other grounds, but errors of fact cannot be reviewed in an appeal taken directly to the Supreme Court on a question of law.

Disposition

The Supreme Court reversed the judgment of dismissal, denied the motion to dismiss on the ground of prescription, and remanded the case to the trial court to render judgment on the merits and pass on all issues other than prescription, with costs against the appellees.

Remember This

The single line worth memorizing is that prescription does not run against the State, and the moratorium laws suspended the prescriptive period until they were struck down in May 1953. Examiners like to use this case to test the computation of prescriptive periods interrupted by the moratorium and by the transfer of enemy assets to the Republic.