PHILIPPINE NATIONAL BANK, PLAINTIFF AND APPELLEE, VS. UMBERTO DE POLI AND WISE & CO., DEFENDANTS AND APPELLANTS.

In a document (Exhibit A) dated October 22, 1920, and duly registered,
Umberto de Poli mortgaged the properties therein described to the Philippine
National Bank as security for a loan, credit or overdraft not exceeding
P650,000.

Later, on November 15, 1920, in another document also duly registered
(Exhibit B), Umberto de Poli and the Philippine National Bank agreed to release
some of the properties from the mortgage and replace them with other properties
which were described in the latter document.

Umberto de Poli having violated the conditions of the mortgage, the
Philippine National Bank, on December 7, 1920, filed a complaint against Umberto
de Poli, Henry Hunter Bayne and J. G. Lawrence, the latter two being the persons
who were holding the goods and the keys of the warehouses where they were kept,
and who refused to deliver them.

On the next day, December 8, 1920, Umberto de Poli was adjudged insolvent,
and in his place and stead Mr. Henry Hunter Bayne appeared, he being the
assignee in insolvency appointed by the court. Later the Chartered Bank of India
& Australia, the American Foreign Banking Corporation and Wise & Co.
intervened in the case, claiming to be creditors of the insolvent.

The object of this action is to recover from the defendants the possession of
the properties mortgaged, described in Exhibits A and B, or their value of
P662,000, plus P4,000 as damages.

After the commencement of this action and the adjudication of insolvency of
the defendant Umberto de Poli, certiorari proceedings were instituted in this
court against the Honorable Judge who had the case under consideration on the
ground that insolvency proceedings having been commenced against Umberto de
Poli, the Court of First Instance of Manila lost its jurisdiction over this
case, the same having been absorbed by the insolvency proceeding.

This court, in a decision published March 15, 1921,^[1] denied the application for a writ of
certiorari, declaring that the Court of First Instance continued to have
jurisdiction over the case notwithstanding the insolvency proceeding.

In the course of the proceedings in this case, the plaintiff Bank, making use
of the right granted it by rule 33 of Act No. 2938 and the contract of October
22, 1920, sold some of the mortgaged property.

After trial, the court below rendered judgment declaring the plaintiff to be
entitled to recover the mortgaged goods and holding the sale made by the
plaintiff of some of the goods valid. To this judgment the assignee in
insolvency of Umberto de Poli, and Wise & Co. took an exception.

The jurisdiction of the Court of First Instance of Manila to try and decide
this cause is again challenged on the ground that it was absorbed by the,
insolvency proceedings against Umberto de Poli. The decision of this court,
however, solving this question is, at least, the law in the case and we abide by
it.

Appellants claim that the mortgage on the properties described in the
document of November 15, 1920, constitutes an unlawful preference.

The mortgage evidenced by the second document was but a partial substitution
of the mortgage contained in the first. It was stipulated in the second document
that some of the properties covered by the first document should be released in
order that they might be used by Umberto de Poli in his business, and in lieu
thereof other properties should be mortgaged, which were described in the second
document. It clearly appears that the second mortgage was merely a partial
substitution for the first. For this reason, although this second mortgage was
made on November 15, 1920, that is, within thirty days prior to the adjudication
of the insolvency of Umberto de Poli, which took place on December 8th of that
same year, it does not constitute an unlawful preference. A mere exchange of
securities of equal value may be made at any time without the same being held to
constitute an unlawful preference.

The following citations made by the appellee are decisive on this
question:

“It is too well settled to require discussion, that an exchange of securities
within the four months is not a fraudulent preference within the meaning of the
Bankrupt Law, even when the creditor and the debtor know that the latter is
insolvent, if the security given up is a valid one when the exchange is made,
and if it be undoubtedly of equal value with the security substituted for it.
This was early decided with reference to the Massachusetts insolvent laws:
Stevens vs. Blanchard, 3 Cush., 169; and the same thing has been
determined with reference to the Bankrupt Act, 14 Stat. at L., 515; Cook
vs. Tullis, 18 Wall., 340 (85 U. S. XXI., 937); Clark vs. Iselin,
21 Wall., 360 (88 U. S. XXII., 568); Watson vs. Taylor, 21 Wall., 378 (88
U. S. XXII., 576) ; and Burnhisel vs. Firman, not yet reported (89 U. S.
XXII., 766). The reason is that the exchange takes nothing away from the other
creditors.” (Sawyer and Frazier vs. Turpin, 91 U. S., 114; 23 L. ed.,
235, 237.)

“There is nothing in the Bankrupt Act, either in its language or object,
which prevents an insolvent from dealing with his property, selling or
exchanging it for other property, at any time before proceedings in bankruptcy
are taken by or against him. His creditors can only complain if he waste his
estate or give preference to one over another in its disposition.” (Cook
vs. Tullis, 18 Wall., 332; 21 L. ed., 933.)

” ‘A fair exchange of values may be made at any time, even if one of the
parties to the transaction be insolvent There is nothing in the Bankrupt Act,
either in its language or object, which prevents an insolvent from dealing with
his property, selling it or exchanging it for other property, at any time before
proceedings in bankruptcy are taken by or against him, provided such dealing be
conducted without any purpose to defraud or delay his creditors or give
preference to anyone, and does not impair the value of his estate. An insolvent
is not bound in the misfortune of his insolvency to abandon all dealing with his
property; his creditors can only complain if he waste his estate or give
preference in its disposition to one over another. His dealing will stand if it
leave his estate in as good plight and condition as previously.’ Substantially,
the same doctrine was announced in Clark vs. Iselin, 21 Wall., 360 (88 U.
S. XXII., 568); Sawyer vs. Turpin, 91 U. S., 114 (XXIII., 235).” (Stewart
vs. Platt, 101 U. S., 731; 25 L. ed., 816, 819.)

It is claimed, however, that the securities substituted, as they appear in
the corresponding “quedans” (warehouse receipts), are worth less by P7,622.50
than the substitutes. But this assertion cannot be verified because said
“quedans” are not in the record. On the contrary, the evidence of record
(Exhibits BB and CC in connection with the testimony of the witness Gregorio
Litawa) shows that the value of the securities substituted is greater by P4,454
than the substitutes. Moreover, even admitting that they are less by P7,622.50,
as appellants claim, this difference is so small relatively to the total value
(P438,148) that, under sound principles, it cannot render the substitution
fraudulent. “Equal value” means substantially, not mathematically, equal. If
what makes a substitution fraudulent is the intention to defraud the creditors
or to give preference to some of them to the prejudice of the others, it cannot
be supposed, in reason, that in this case the substitution was made with such an
intention simply on account of this small difference, which, on the other hand,
is ordinarily the case with goods previously deposited in large lots.

It is true that there is in the first document a clause providing that in the
event that the pledgee should deliver to the debtor the possession of the
mortgaged goods for the sale thereof, it should not be construed as a
cancellation of the pledge and the debtor shall render an account of the
proceeds of the sale, and turn them over to the creditor. Appellants infer from
this clause that the plaintiff received the value of the securities released.
But the release of those securities was not made by virtue of this clause, but
in order to enable Umberto de Poli to use them in his business, as is clearly
stated in the second document evidencing the substitution.

Appellants assail the sufficiency of the description of the 165 bales of
knotted hemp, 159 cases of spooled hemp and 500 bales of hemp, all marked U. D.
P., which appear to have been pledged in the first document (Exhibit A).
According to appellants, there were other bales and cases of hemp bearing the
same mark, which were mortgaged to other banks. But aside from the fact that the
above-mentioned bales and cases of hemp mortgaged to plaintiff had their
respective “quedans” (A-77, A-78, and A-79), the record shows that before they
were mortgaged to the plaintiff, they were inspected by its employees and
separated from the others in the warehouse by putting pasteboard labels thereon,
which sufficiently identified and distinguished them.

Appellants claim that there were attached goods which were not mortgaged, and
mention the 160 bales of tobacco which appear in the return of the attachment
and which do not appear in the document of mortgage, but according to the
evidence, this tobacco is that referred to in “quedan” A-67, which, after the
stems were removed, was packed again.

Reference is also made by appellants to 696 bales of maguey and 729 bales of
barili tobacco, which were attached, but we believe that the former are
the same 686 bales of maguey, and the latter the 717 bales of tobacco from La
Union, which are referred to in “quedans” A-66 and A-73, respectively, mentioned
in the document of mortgage. The differences noted in the return of the
attachment and in the document of mortgage as to these goods must have been due
to a clerical mistake.

When the sheriff levied the attachment, he did not find the 1,600 bales of
loose hemp referred to in “quedan” A-82 mentioned in the document of mortgage,
and as the appellee pointed out 419 bales as part of this lot of hemp, said
bales were, by agreement of the parties, deposited with the appellee, subject to
the decision that might be rendered as to them. After an examination of the
evidence, we find that said 1,600 bales of hemp were later classified and
packed, and the 419 bales deposited with appellee are a part thereof.

As has been stated above, the appellee sold to third persons, without the
intervention of the assignee in insolvency, some of the mortgaged goods, and
appellants contend that this sale was illegal and void.

In the document of mortgage the creditor was expressly authorized, in case of
a violation of any of the conditions of the contract, to sell the mortgaged
goods or part thereof at private sale without previous notice or advertisement
of any kind, for the purpose of applying the proceeds of the sale on the payment
of the debt. This stipulation is perfectly valid. Article 1255 of the Civil Code
authorizes the contracting parties to make the stipulations, clauses and
conditions they may deem fit, provided the same are not contrary to law, morals
or public order. In the case of Peterson vs. Azada (8 Phil., 432) a
similar stipulation was held to be within the authority granted by the
aforecited article 1255 to the contracting parties. In that case, to secure the
payment of a loan, the debtor turned over to his creditor certain jewels listed
at the bottom of the document evidencing the loan, with a note to the effect
that in case the debt was not paid on or before its maturity, the creditor was
authorized to sell said jewels, with the intervention of the debtor, at the best
obtainable price in the market. Pursuant to this stipulation, the creditor sold
the jewels, with the intervention of the debtor, at private sale. This court
held that this stipulation was not contrary to law, morals or public order, and
was valid. The only difference between that case and the one now before us lies
in that here the sale was made without the intervention of the debtor. But this
does not affect the question, since in the present case, the intervention of the
debtor was previously waived by the latter at the time of the making of the
contract.

Moreover, Act No. 2938, creating the appellee Bank, in its section 33, grants
the latter express authority to sell the mortgaged goods under those conditions.
The constitutionality of this Act is challenged in so far as it grants this
power to the appellee, but the fact that the parties themselves may stipulate to
this effect is in itself alone a sufficient refutation of the argument advanced
against its constitutionality.

Therefore the sale made by the appellee of some of the goods mortgaged
(Exhibit FF) is perfectly valid, not only because the same is authorized by the
contract made by the parties, but also because it is in accordance with law.

When, at the hearing in the court below, the defendants-appellants rested,
they reserved their right to present a stipulation upon certain facts and, in
case that should not be possible, to introduce more evidence. They now contend
that the trial court erred in rendering judgment without giving them an
opportunity to introduce said evidence. But it does not apear in the record that
the lower court granted them that right. On the other hand, it does not appear
that after the defendants rested and before the judgment was rendered, which was
three months thereafter, the defendants ever informed the court as to what they
had done toward the making of said stipulation, nor urged the reception of the
evidence that they intended to introduce. Under such circumstances, we hold that
the lower court did not err in rendering judgment without any further
hearing.

The judgment appealed from is affirmed, with the costs against the
appellants. So ordered.

Araullo, C.J., Street, Villamor, and
Romualdez, JJ., concur.

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^[1] Chartered Bank of India, Australia and
China vs. Imperial, and National Bank, R. G. No. 17222, not
reported.

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MALCOLM, J.:

Notwithstanding the learned opinion, prepared for the majority by Mr. Justice
Avanceña, in this important case, I am forced to state that, according to my
view, a number of errors were committed by the trial court which require the
reversal of the decision. The case can be best understood by making a brief
statement of the case and the facts and by thereafter announcing decisive
propositions.

The plaintiff in this case, the Philippine National Bank, is a banking
corporation created by the Philippine Legislature. The principal defendant,
Umberto de Poli, was, up to the time he was declared insolvent on December 8,
1920, a merchant engaged in the import and export business in the City of
Manila. In connection with his import and export business he also conducted the
business of a public warehouseman.

In order for De Poli to carry on his business, he obtained large credits from
various banking institutions in the City of Manila, including the Philippine
National Bank. To secure the payment of these credits, he issued and signed
warehouse receipts on his property, consisting principally of hemp, maguey, and
tobacco.

On June 14, 1920, De Poli had a credit by way of overdraft with the
Philippine National Bank in the sum of P650,000. Probably because the
quedans which De Poli had issued to the Philippine National Bank to
secure the overdraft were not negotiable, on October 22, 1920, De Poli executed
and delivered to the Bank the contract of pledge Exhibit A. This document was
duly registered in the office of the registry of deeds of Manila on November 5,
1920.

On November 15, 1920, De Poli executed and delivered to the Bank the
instrument Exhibit B, which purports to be an amendment to the contract of
pledge Exhibit A. The latter instrument was registered in the office of the
registry of deeds of Manila on November 16, 1920.

During the month of November, 1920, De Poli was generally known to be
insolvent. While, however, the other banks were holding meetings to decide what
would be the proper steps to take to protect themselves, the Philippine National
Bank on December 7, 1920, commenced foreclosure proceedings pursuant to the
instruments Exhibits A and B. On the following day, the property claimed by the
Philippine National Bank was seized by the sheriff. On the same day, that is,
December 8, 1920, a petition in insolvency was presented to the Court of First
Instance by the Chartered Bank of India, Australia and China, the Hongkong &
Shanghai Banking Corporation, and W. F. Stevenson & Co., Ltd. Later, the
case was taken to the Supreme Court by certiorari and prohibition, with an
unfavorable outcome to the parties last mentioned.

In the lower court, on the issues above set forth, between the Philippine
National Bank on the one hand and the parties interested in the insolvency of
Umberto de Poli on the other, judgment was rendered declaring that the
Philippine National Bank has the right to the property described in the
documents Exhibits A and B, and that the sale by the Bank of this merchandise
was valid and legal. It is from this judgment that appeal has been taken to this
Court on six errors.

First proposition.—The trial court was without jurisdiction to proceed
with this action, pending the determination of the insolvency proceedings.

The decision in case No. 17222 of this court, entitled Chartered Bank of
India, Australia and China vs. Imperial, and National Bank, is not res
judicata as claimed by the appellee, although it may constitute the law of
the case. This is clear because the judgment of the Supreme Court was only
grounded on the opinion of three members.

The clear and unequivocal provisions of the Insolvency Law mean, if they mean
anything, that every civil action or proceeding of whatever nature must, upon
application of the debtor, or of any creditor or of the assignee of the estate
be stayed, save and except only those actions in which the amount due the
creditor may be in dispute, and even in those cases may only proceed to judgment
for the purpose of ascertaining the amount due. The purpose of the law will be
defeated if various legal proceedings in various courts shall be permitted to go
on notwithstanding the adjudication of insolvency. (Insolvency Law, secs. 24,
32, 60; Bastida vs. Peñalosa [1915], 30 Phil., 148; De Amuzategui
vs. Macleod [1915], 33 Phil., 80; Hill vs. Harding [1883], 107 U.
S., 631.)

Second proposition.—The document, Exhibit B, constituted an illegal
preference under the Insolvency Law.

The contract of pledge Exhibit B was executed by De Poli on November 15,
1920, and he was declared insolvent on December 8, 1920. In other words, the
transfer was accomplished within thirty days before the filing of the petition
against him. At the time Exhibit B was executed, the Philippine National Bank
not only had reasonable cause to believe that De Poli was insolvent as is
required by law but it actually knew that he was insolvent. The property covered
by Exhibit B was not merely in substitution of other property released by it
from the pledge Exhibit A, and there was no fair exchange of securities. (Note
in this connection the fourth paragraph of the contract of pledge Exhibit A, and
section 70 of the Insolvency Law.)

Third proposition.—The sale made by the Philippine National Bank of
the property described in Exhibit FF was illegal and void.

The merchandise mentioned in Exhibit FF was sold by the Philippine National
Bank at private sale without any authority of the court in insolvency and
without the consent of the assignee. The sale was made by virtue of section 33
of Act No. 2938 which provides as follows:

“If, from any cause whatsoever, any of the securities specified for the loans
provided for in this Act or accepted by said Bank as security for loans or
discount decline or depreciate in market value in part or as a whole, or on
nonperformance of any promise made to secure the loan or discount, or upon bills
of exchange, notes, and checks, the said Bank may demand additional securities
or may forthwith declare any such obligation due and payable and upon three
days’ notice, if practicable, or without such notice, if otherwise demand, sell,
assign, transfer, and deliver the whole of said securities or any part thereof,
or any substitutes therefor, or any additions thereto, or any other securities
or property given unto or left in the possession of, or thereafter given unto or
left in the possession of the said Bank for safekeeping or otherwise, at any
brokers’ board or at public or private sale, at the option of said Bank, without
either demand, advertisement, or notice of any kind, and at such sale, if
public, the said Bank may itself purchase the whole or any part of the property
sold, free from any right of redemption on the part of the mortgagor or
pledgor. In case of sale for any cause, after deducting all costs or expenses of
any kind for collection, sale or delivery, the said Bank may apply the residue
of the proceeds of the sale so made, to pay one or more or any or all of the
said liabilities to the said Bank, as its general manager shall deem proper,
whether then due or not due, making proper rebate for interest on liabilities
not then due, returning the overplus, if any, to the mortgagor or pledgor who
shall remain liable to and pay to said Bank or any deficiency arising upon such
sale or sales.”

The section of the Charter of the Philippine National Bank which is above
quoted is invalid for the very good reason that it deprives a person of his
property without due process of law. The law attempts to prescribe a particular
secret procedure for the foreclosure of certain securities for a particular
bank, which, of course, operates as a discrimination against other persons
holding the same kind of securities. (Mahoney vs. Tuason [1919], 39
Phil., 952.)

In my opinion, therefore, the P662,000 involved in this case
have been wrongly adjudicated to the plaintiff, by a court without jurisdiction,
in conformity with an illegal preference under the Insolvency Law, and by reason
of a private sale pursuant to a section of the Charter of the Philippine
National Bank which is invalid.

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JOHNS, J., with whom concurs OSTRAND,
J.:

I agree with the majority opinion upon all legal questions, except as to
appellants’ fifth assignment of error to the effect that “the trial court erred
in holding that the sale made by the plaintiff bank of the property described in
Exhibit FF was legal and valid.”

In the instant case, the sale was made under section 33, Act No. 2938, which
is “An Act to amend Act Numbered Twenty-six hundred and twelve, entitled ‘An Act
creating the Philippine National Bank,’ as amended by Act Numbered Twenty-seven
hundred and forty-seven,” known as the Legislative Act creating the Philippine
National Bank.

Among other things, section 33 provides:

“* * * The said bank may demand additional securities or may forthwith
declare any such obligation due and payable and upon three days’ notice, if
practicable, or without such notice, if otherwise demand, sell, assign,
transfer, and deliver, etc., at any brokers’ board or at public or private sale,
at the option of said Bank, without either demand, advertisement, or notice of
any kind, and at such sale, if public, the said Bank may itself purchase the
whole or any part of the property sold * * *.”

In so far as the above provisions discriminate in favor of the Philippine
National Bank or give it rights, which are not common to all other banks, or in
so far as they authorize the sale of any property “without either demand,
advertisement, or notice of any kind,” it is my opinion that all of such
provisions are unconstitutional, null and void, and give the Bank an arbitrary
and autocratic power, which ought not to be sanctioned or approved by the court.
This is especially true where the debtor is insolvent at the time the power was
exercised and conferred.

The record shows that at the time the power was given Umberto de Poli was
insolvent, and that the Bank knew that he was insolvent.

Whatever may be the rule between the parties to the instrument, in such
cases, in the interest of justice, a debtor known to be insolvent has no legal
right to confer arbitrary, autocratic power upon one of his creditors at the
expense of, and to the prejudice of, other creditors. Under such conditions the
rights of his remaining creditors should be considered, respected and protected,
and no insolvent debtor should have the right by any act, word or deed to in any
manner favor one creditor at the expense of another. In all of such cases, the
property should only be sold after reasonable notice to all parties in interest,
to the end that the rights of all creditors would be protected.

In my
opinion, the chattel mortgages were valid, but the sale made under them in the
manner in which it was made is void, and to that extent I dissent.