KALILID WOOD INDUSTRIES CORPORATION, ALFREDO SALONGA AND JOAQUIN MIGUEL DE JESUS, PETITIONERS, VS. HONORABLE INTERMEDIATE APPELLATE COURT AND PHILIPPINE BANKING CORPORATION, RES…

Kalilid Wood Industries versus Intermediate Appellate Court

The Case

This is a petition for review brought by Kalilid Wood Industries Corporation, formerly known as P.B. De Jesus and Company, Incorporated, together with Alfredo Salonga and Joaquin Miguel de Jesus, against the Intermediate Appellate Court and the Philippine Banking Corporation. The Bank sued to collect on two promissory notes, and the case matters because it draws a sharp line between what a party is deemed to have admitted when it fails to deny a document under oath, and what it is not. The Supreme Court teaches that the implied admission of genuineness and due execution reaches the instrument sued upon, but not the creditor's own unilateral statements of account.

Procedural History

The Bank filed a complaint for collection before Branch 23 of the then Court of First Instance of Rizal, Seventh Judicial District. The complaint was dismissed without prejudice as to Salonga and de Jesus, whose whereabouts could not be ascertained, leaving Kalilid as the sole defendant. The Bank moved for summary judgment, and Kalilid neither objected nor opposed. The trial court rendered summary judgment in favor of the Bank, ordering Kalilid to pay the full amount claimed, plus legal interest, attorney's fees, and costs. Kalilid appealed, and the then Intermediate Appellate Court, Third Civil Cases Division, affirmed the judgment in its entirety. Kalilid's motion for reconsideration was denied. Kalilid then came to the Supreme Court by petition for review, no longer denying its liability under the notes but contesting the correctness of the aggregate amount claimed.

Facts

On 17 November 1976, Joaquin Miguel de Jesus and Alfredo Salonga, respectively President and General Manager and Comptroller of P.B. De Jesus and Company, Incorporated, executed a promissory note in favor of the Philippine Banking Corporation for 600,000 pesos, maturing on 29 December 1976. On 2 December 1976, they executed a second promissory note for 300,000 pesos, payable on or before 3 January 1977. Both notes carried interest at fourteen percent per annum and stipulated attorney's fees of ten percent of the amount due. Both were signed by the two men for the corporation and again, expressly, in their personal capacities.

On 5 March 1978, the corporation changed its name to Kalilid Wood Industries Corporation, a change validated by the Securities and Exchange Commission. The Bank sent several letters of demand, but Kalilid disowned the indebtedness. On 15 May 1981, the Bank filed a complaint for collection, alleging that as of 30 April 1981 the total indebtedness had risen to 1,780,253 pesos and 8 centavos, supported by two statements of account prepared by the Bank and attached to the complaint.

Kalilid's answer asserted that it had no knowledge or information sufficient to form a belief as to the material allegations, and that the authority to borrow had not been granted to de Jesus and Salonga. The answer was not verified. The trial court treated the unverified answer as an admission of the genuineness and due execution of the notes and held Kalilid liable for the full amount. The appellate court affirmed, reasoning that the statements of account were integral parts of the complaint and were likewise deemed admitted.

Issues

• Whether or not Kalilid's failure to verify its answer amounted to an implied admission of the genuineness and due execution of the two promissory notes, warranting summary judgment.
• Whether or not that implied admission extended to the two statements of account prepared by the Bank, so as to bind Kalilid to the charges and computations appearing therein.
• Whether or not service charges, penalty charges, and interest on past due interest may be included in Kalilid's liability absent any stipulation in the promissory notes.

Applicable Provisions

Section 8 of Rule 8 of the Revised Rules of Court provides:

Section 8. How to contest genuineness of such documents. -- When an action or defense is founded upon a written instrument, copied in or attached to the corresponding pleading as provided in the preceding section, the genuineness and due execution of the instrument shall be deemed admitted unless the adverse party, under oath, specifically denies them, and sets forth what he claims to be the facts; but this provision does not apply when the adverse party does not appear to be a party to the instrument or when compliance with an order for an inspection of the original instrument is refused.

This is the provision that fixes the scope of the implied admission and limits it to the instrument upon which the action is founded.

Ruling

On the first issue, the Court held that Kalilid, by failing to verify its answer, is deemed to have admitted by implication the authenticity and due execution of the two promissory notes annexed to and made the basis of the complaint. Defenses going to genuineness and due execution, such as forgery, unauthorized signing, or want of corporate authority, are effectively cut off, placing Kalilid in estoppel from disclaiming liability. No genuine issue having been raised, summary judgment was proper.

On the second issue, the Court ruled that it was error to expand the implied admission to cover the statements of account. The Court examined the two documents and found that both were printed on the Bank's letterhead, prepared by the Bank's Loans and Discounting Department, and bore only the approving signature of the Bank's officer. They were prepared exclusively by the Bank. Kalilid, not having been privy thereto, did not admit their genuineness and due execution, and is not conclusively bound by the charges or computations set out in them.

On the third issue, the Court held that Kalilid's obligations are determinable from the common stipulations of the notes: interest at fourteen percent per annum, payable monthly and compounded monthly if unpaid, and attorney's fees of ten percent of the entire amount due. It does not appear on the face of either note that Kalilid agreed to pay service charges and penalty charges for late payment. Since such an undertaking cannot be presumed, evidence must be adduced by both parties to prove or disprove the basis and propriety of including those charges, as well as the computation of interest on past due interest.

Doctrine

Under Section 8 of Rule 8, the failure to deny under oath the genuineness and due execution of a written instrument sued upon produces an implied admission that cuts off defenses directed at the instrument itself. That admission, however, is confined to the instrument attached to the pleading. It does not extend to a statement of account prepared unilaterally by the creditor, to which the debtor was not a party. An undertaking to pay service charges, penalty charges, or interest on past due interest cannot be presumed; it must be stipulated or proved.

Disposition

The Court affirmed the judgments below as to the principal amounts, the stipulated interest, and the ten percent attorney's fees, and remanded the case to the trial court to determine whether service charges and penalty charges are due and in what amount, as well as the interest on past due interest, with no pronouncement as to costs.

Remember This

The single line to memorize: the implied admission of genuineness and due execution covers the instrument sued upon, but never the creditor's unilateral statement of account. Examiners use this case to test the exact reach of Section 8 of Rule 8 and the rule that penalty and service charges cannot be presumed.