Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No.

L-54171 October 28, 1980 JEWEL VILLACORTA, assisted by her husband, GUERRERO VILLACORTA, petitioner, vs. THE INSURANCE COMMISSION and EMPIRE INSURANCE COMPANY, respondents.

TEEHANKEE, Acting C.J.: The Court sets aside respondent Insurance Commission's dismissal of petitioner's complaint and holds that where the insured's car is wrongfully taken without the insured's consent from the car service and repair shop to whom it had been entrusted for check-up and repairs (assuming that such taking was for a joy ride, in the course of which it was totally smashed in an accident), respondent insurer is liable and must pay insured for the total loss of the insured vehicle under the theft clause of the policy. The undisputed facts of the case as found in the appealed decision of April 14, 1980 of respondent insurance commission are as follows: Complainant [petitioner] was the owner of a Colt Lancer, Model 1976, insured with respondent company under Private Car Policy No. MBI/PC-0704 for P35,000.00 Own Damage; P30,000.00 Theft; and P30,000.00 Third Party Liability, effective May 16, 1977 to May 16, 1978. On May 9, 1978, the vehicle was brought to the Sunday Machine Works, Inc., for general check-up and repairs. On May 11, 1978, while it was in the custody of the Sunday Machine Works, the car was allegedly taken by six (6) persons and driven out to Montalban, Rizal. While travelling along Mabini St., Sitio Palyasan, Barrio Burgos, going North at Montalban, Rizal, the car figured in an accident, hitting and bumping a gravel and sand truck parked at the right side of the road going south. As a consequence, the gravel and sand truck veered to the right side of the pavement going south and the car veered to the right side of the pavement going north. The driver, Benito Mabasa, and one of the passengers died and the other four sustained physical injuries. The car, as well, suffered extensive damage. Complainant, thereafter, filed a claim for total loss with the respondent company but claim was denied. Hence, complainant, was compelled to institute the present action. The comprehensive motor car insurance policy for P35,000.00 issued by respondent Empire Insurance Company admittedly undertook to indemnify the petitioner-insured against loss or damage to the car (a) by accidental collision or overturning, or collision or overturning consequent upon mechanical breakdown or consequent upon wear and tear; (b) by fire, external explosion, selfignition or lightning or burglary, housebreaking or theft; and (c) by malicious act. Respondent insurance commission, however, dismissed petitioner's complaint for recovery of the total loss of the vehicle against private respondent, sustaining respondent insurer's contention that

the accident did not fall within the provisions of the policy either for the Own Damage or Theft coverage, invoking the policy provision on "Authorized Driver" clause. 1 Respondent commission upheld private respondent's contention on the "Authorized Driver" clause in this wise: "It must be observed that under the above-quoted provisions, the policy limits the use of the insured vehicle to two (2) persons only, namely: the insured himself or any person on his (insured's) permission. Under the second category, it is to be noted that the words "any person' is qualified by the phrase ... on the insured's order or with his permission.' It is therefore clear that if the person driving is other than the insured, he must have been duly authorized by the insured, to drive the vehicle to make the insurance company liable for the driver's negligence. Complainant admitted that she did not know the person who drove her vehicle at the time of the accident, much less consented to the use of the same (par. 5 of the complaint). Her husband likewise admitted that he neither knew this driver Benito Mabasa (Exhibit '4'). With these declarations of complainant and her husband, we hold that the person who drove the vehicle, in the person of Benito Mabasa, is not an authorized driver of the complainant. Apparently, this is a violation of the 'Authorized Driver' clause of the policy. Respondent commission likewise upheld private respondent's assertion that the car was not stolen and therefore not covered by the Theft clause, ruling that "The element of 'taking' in Article 308 of the Revised Penal Code means that the act of depriving another of the possession and dominion of a movable thing is coupled ... with the intention. at the time of the 'taking', of withholding it with the character of permanency (People vs. Galang, 7 Appt. Ct. Rep. 13). In other words, there must have been shown a felonious intent upon the part of the taker of the car, and the intent must be an intent permanently to deprive the insured of his car," and that "Such was not the case in this instance. The fact that the car was taken by one of the residents of the Sunday Machine Works, and the withholding of the same, for a joy ride should not be construed to mean 'taking' under Art. 308 of the Revised Penal Code. If at all there was a 'taking', the same was merely temporary in nature. A temporary taking is held not a taking insured against (48 A LR 2d., page 15)." The Court finds respondent commission's dismissal of the complaint to be contrary to the evidence and the law. First, respondent commission's ruling that the person who drove the vehicle in the person of Benito Mabasa, who, according to its finding, was one of the residents of the Sunday Machine Works, Inc. to whom the car had been entrusted for general check-up and repairs was not an "authorized driver" of petitioner-complainant is too restrictive and contrary to the established principle that insurance contracts, being contracts of adhesion where the only participation of the other party is the signing of his signature or his "adhesion" thereto, "obviously call for greater strictness and vigilance on the part of courts of justice with a view of protecting the weaker party from abuse and imposition, and prevent their becoming traps for the unwary. 2 The main purpose of the "authorized driver" clause, as may be seen from its text, supra, is that a person other than the insured owner, who drives the car on the insured's order, such as his regular driver, or with his permission, such as a friend or member of the family or the employees of a car service or repair shop must be duly licensed drivers and have no disqualification to drive a motor vehicle. A car owner who entrusts his car to an established car service and repair shop necessarily entrusts his car key to the shop owner and employees who are presumed to have the insured's permission to

drive the car for legitimate purposes of checking or road-testing the car. The mere happenstance that the employee(s) of the shop owner diverts the use of the car to his own illicit or unauthorized purpose in violation of the trust reposed in the shop by the insured car owner does not mean that the "authorized driver" clause has been violated such as to bar recovery, provided that such employee is duly qualified to drive under a valid driver's license. The situation is no different from the regular or family driver, who instead of carrying out the owner's order to fetch the children from school takes out his girl friend instead for a joy ride and instead wrecks the car. There is no question of his being an "authorized driver" which allows recovery of the loss although his trip was for a personal or illicit purpose without the owner's authorization. Secondly, and independently of the foregoing (since when a car is unlawfully taken, it is the theft clause, not the "authorized driver" clause, that applies), where a car is admittedly as in this case unlawfully and wrongfully taken by some people, be they employees of the car shop or not to whom it had been entrusted, and taken on a long trip to Montalban without the owner's consent or knowledge, such taking constitutes or partakes of the nature of theft as defined in Article 308 of the Revised Penal Code, viz. "Who are liable for theft. Theft is committed by any person who, with intent to gain but without violence against or intimidation of persons nor force upon things, shall take personal property of another without the latter's consent," for purposes of recovering the loss under the policy in question. The Court rejects respondent commission's premise that there must be an intent on the part of the taker of the car "permanently to deprive the insured of his car" and that since the taking here was for a "joy ride" and "merely temporary in nature," a "temporary taking is held not a taking insured against." The evidence does not warrant respondent commission's findings that it was a mere "joy ride". From the very investigator's report cited in its comment, 3 the police found from the waist of the car driver
Benito Mabasa Bartolome who smashed the car and was found dead right after the incident "one cal. 45 Colt. and one apple type grenade," hardly the materials one would bring along on a "joy ride". Then, again, it is equally evident that the taking proved to be quite permanent rather than temporary, for the car was totally smashed in the fatal accident and was never returned in serviceable and useful condition to petitioner-owner.

Assuming, despite the totally inadequate evidence, that the taking was "temporary" and for a "joy ride", the Court sustains as the better view that which holds that when a person, either with the object of going to a certain place, or learning how to drive, or enjoying a free ride, takes possession of a vehicle belonging to another, without the consent of its owner, he is guilty of theft because by taking possession of the personal property belonging to another and using it, his intent to gain is evident since he derives therefrom utility, satisfaction, enjoyment and pleasure. Justice Ramon C. Aquino cites in his work Groizard who holds that the use of a thing constitutes gain and Cuello Calon who calls it "hurt de uso. " 4 The insurer must therefore indemnify the petitioner-owner for the total loss of the insured car in the sum of P35,000.00 under the theft clause of the policy, subject to the filing of such claim for reimbursement or payment as it may have as subrogee against the Sunday Machine Works, Inc. ACCORDINGLY, the appealed decision is set aside and judgment is hereby rendered sentencing private respondent to pay petitioner the sum of P35,000.00 with legal interest from the filing of the complaint until full payment is made and to pay the costs of suit. SO ORDERED.

Makasiar, Fernandez, Guerrero and Melencio-Herrera, JJ., concur.

Footnotes 1 The "Authorized Driver" clause reads, thus: AUTHORIZED DRIVER: Any of the following: (a) The insured (b) Any person driving on the Insured's Order, or with his permission; Provided, that the person driving is permitted, in accordance with the licensing or other laws or regulations, to drive the Scheduled Vehicle, or has been permitted and is not disqualified by order of a Court of Law or by reason or any enactment or regulation in that behalf." 2 Sweet Lines, Inc. vs. Teves, 83 SCRA 361 (1978), citing Qua Chee Gan vs. Law Union and Rock Insurance Co., Ltd., 98 Phil. 95. 3 Rollo, page 38. 4 Aquino's Revised Penal Code, Vol. III, 1977 Edition, p. 1516.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. 93048 March 3, 1994 BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner, vs. THE COURT OF APPEALS and STATE INVESTMENT HOUSE, INC., respondents. Teresita Gandiongco Oledan for petitioner. Acaban & Sabado for private respondent.

NOCON, J.: For our review is the decision of the Court of Appeals in the case entitled "State Investment House, Inc. v. Bataan Cigar & Cigarette Factory Inc.," 1 affirming the decision of the Regional Trial Court 2 in a
complaint filed by the State Investment House, Inc. (hereinafter referred to as SIHI) for collection on three unpaid checks issued by Bataan Cigar & Cigarette Factory, Inc. (hereinafter referred to as BCCFI). The foregoing decisions unanimously ruled in favor of SIHI, the private respondent in this case.

Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua George (herein after referred to as George King), to deliver 2,000 bales of tobacco leaf starting October 1978. In consideration thereof, BCCFI, on July 13, 1978 issued crossed checks post dated sometime in March 1979 in the total amount of P820,000.00. 3 Relying on the supplier's representation that he would complete delivery within three months from December 5, 1978, petitioner agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier's failure to deliver in accordance with their earlier agreement. Again petitioner issued post dated crossed checks in the total amount of P1,100,000.00, payable sometime in September 1979. 4 During these times, George King was simultaneously dealing with private respondent SIHI. On July 19, 1978, he sold at a discount check TCBT 551826 5 bearing an amount of P164,000.00, post dated
March 31, 1979, drawn by petitioner, naming George King as payee to SIHI. On December 19 and 26, 1978, he again sold to respondent checks TCBT Nos. 608967 & 608968, 6 both in the amount of P100,000.00, post dated September 15 & 30, 1979 respectively, drawn by petitioner in favor of George King.

In as much as George King failed to deliver the bales of tobacco leaf as agreed despite petitioner's demand, BCCFI issued on March 30, 1979, a stop payment order on all checks payable to George King, including check TCBT 551826. Subsequently, stop payment was also ordered on checks TCBT Nos. 608967 & 608968 on September 14 & 28, 1979, respectively, due to George King's failure to deliver the tobacco leaves. Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only BCCFI as party defendant. The trial court pronounced SIHI as having a valid claim being a holder in due course. It further said that the non-inclusion of King Tim Pua George as party defendant is immaterial in this case, since he, as payee, is not an indispensable party. The main issue then is whether SIHI, a second indorser, a holder of crossed checks, is a holder in due course, to be able to collect from the drawer, BCCFI. The Negotiable Instruments Law states what constitutes a holder in due course, thus: Sec. 52 A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. Section 59 of the NIL further states that every holder is deemed prima facie a holder in due course. However, when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims, acquired the title as holder in due course. The facts in this present case are on all fours to the case of State Investment House, Inc. (the very respondent in this case) v. Intermediate Appellate Court 7 wherein we made a discourse on the effects
of crossing of checks.

As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable on demand. 8 There are a variety of checks, the more popular of which are the memorandum check,
cashier's check, traveler's check and crossed check. Crossed check is one where two parallel lines are drawn across its face or across a corner thereof. It may be crossed generally or specially.

A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words "and company" are written or nothing is written at all between the parallel lines. It may be issued so that the presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL) does not mention "crossed checks," although Article 541 9 of the Code of Commerce refers to such instruments. According to commentators, the negotiability of a check is not affected by its being crossed, whether specially or generally. It may legally be negotiated from one person to another as long as the one who encashes the check with the drawee bank is another bank, or if it is specially crossed, by the bank mentioned between the parallel lines. 10This is specially true in England where the Negotiable
Instrument Law originated.

In the Philippine business setting, however, we used to be beset with bouncing checks, forging of checks, and so forth that banks have become quite guarded in encashing checks, particularly those which name a specific payee. Unless one is a valued client, a bank will not even accept second indorsements on checks. In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once to one who has an account with a bank; (c) and the act of crossing the check serves aswarning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course. 11 The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New Sikatuna Wood Industries, Inc. also sold at a discount to SIHI three post dated crossed checks, issued by Anita Pea Chua naming as payee New Sikatuna Wood Industries, Inc. Ruling that SIHI was not a holder in due course, we then said: The three checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for deposit only by the rightful person, i.e. the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable.

Consequently, no right of recourse is available to petitioner (SIHI) against the drawer of the subject checks, private respondent wife (Anita), considering that petitioner is not the proper party authorized to make presentment of the checks in question. xxx xxx xxx That the subject checks had been issued subject to the condition that private respondents (Anita and her husband) on due date would make the back up deposit for said checks but which condition apparently was not made, thus resulting in the non-consummation of the loan intended to be granted by private respondents to New Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is not a holder in due course. 12 It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorser's title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, 13 and as such the consensus of authority is
to the effect that the holder of the check is not a holder in due course.

In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George King. Because, really, the checks were issued with the intention that George King would supply BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the checks. The foregoing does not mean, however, that respondent could not recover from the checks. The only disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were non-negotiable. 14 Hence, respondent can collect from the immediate indorser, in this case, George King. WHEREFORE, finding that the court a quo erred in the application of law, the instant petition is hereby GRANTED. The decision of the Regional Trial Court as affirmed by the Court of Appeals is hereby REVERSED. Cost against private respondent. SO ORDERED. Narvasa, C.J., Regalado and Puno, JJ., concur. Padilla, J., took no part.

#Footnotes 1 CA-G.R. CV No. 03032, Justice Jorge R. Coquia, ponente, Justices Josue N. Bellosillo and Venancio D. Aldecoa, Jr., concurring, November 13, 1987. 2 Judge Agusto E. Villarin, presiding, Branch XL, National Capital Region, Manila. 3 Exhibit "1", Folder of Exhibits, p. 11. 4 Exhibit "4", Folder of Exhibits, p. 14.

5 Annex "A", Folder of Exhibits, p. 3. 6 Annexes "B" and "C", Folder of Exhibits, pp. 4-5. 7 G.R. No. 72764, 175 SCRA 310. 8 Sec. 185, Negotiable Instruments Law. 9 Article 541 -- The maker of any legal holder of a check shall be entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words "and company". 10 CAMPOS AND LOPEZ-CAMPOS, Negotiable Instruments Law, p. 574-575; AGBAYANI, AGUEDO, Commercial Laws of the Philippines, Vol. 1, 1987 Ed., p. 446. 11 Ocampo v. Gatchalian, G.R. No. L-15126, 3 SCRA 603 (1961); Associated Bank v. Court of Appeals, G.R. No. 89802, 208 SCRA 465; SIHI v. IAC, supra. 12 Id. at pp. 316-317. 13 quoted supra. 14 Chan Wan v. Tan Kim and Chen So, L-15380, 109 Phil., 706 (1960); SIHI v. IAC, supra.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. 96160 June 17, 1992 STELCO MARKETING CORPORATION, petitioner, vs. HON. COURT OF APPEALS and STEELWELD CORPORATION OF THE PHILIPPINES, INC., respondent.

NARVASA, c.J.:

Stelco Marketing Corporation is engaged in the distribution and sale to the public of structural steel bars. 1 On seven (7) different occasions in September and October, 1980, it sold to RYL Construction,
Inc. quantities of steels bars of various sizes and rolls of G.I. wire. These bars and wire were delivered at different places at the indication of RYL Construction, Inc. The aggregate price for the purchases was P126,859.61.

Although the corresponding invoices issued by STELCO stipulated that RYL pay "COD" (cash on delivery), the latter made no payments for the construction materials thus ordered and delivered despite insistent demands for payment by the former. On April 4, 1981, RYL gave to Armstrong, Industries described by STELCO as its "sister corporation" and "manufacturing arm" 2 a check drawn against Metrobank in the amount of
P126,129.86, numbered 765380 and dated April 4, 1981. That check was a company check of another corporation, Steelweld Corporation of the Philippines, signed by its President, Peter Rafael Limson, and its Vice-President, Artemio Torres.

The check was issued by Limson at the behest of his friend, Romeo Y. Lim, President of RYL. Romeo Lim had asked Limson, for financial assistance, and the latter had agreed to give Lim a check only by way of accommodation, "only as guaranty but not to pay for anything." 3 Why the check
was made out in the amount of P126,129.86 is not explained. Anyway, the check was actually issued in said amount of P126, 129.86, and as already stated, was given by R.Y. Lim to Armstrong Industries, 4 in payment of an obligation. When the latter deposited the check at its bank, it was dishonored because "drawn against insufficient funds." 5 When so deposited, the check bore two(2) endorsements, that of "RYL Construction," followed by that of "Armstrong Industries." 6

On account of the dishonor of Metrobank Check No. 765380, and on complaint of Armstrong Industries (through a Mr. Young), Rafael Limson and Artemio Torres were charged in the Regional Trial Court of Manila with a violation ofBatas Pambansa Bilang 22. 7 They were acquitted in a decision
rendered on June 28, 1984 "on the ground that the check in question was not issued by the drawer "to apply on account for value," it being merely for accommodation purposes. 8 The judgment however conditioned the
acquittal with the following pronouncement:

This is not however to release Steelweld Corporation from its liability under Sec. 29 of the Negotiable Instruments Law for having issued it for the accommodation of Romeo Lim. Eleven months or so later and some four (4) years after issuance of the check in question in May, 1985, STELCO filed with the Regional Trial Court at Caloocan City a civil complaint 9 against
both RYL and STEELWELD for the recovery of the valued of the steel bars and wire sold to and delivered to RYL (as already narrated) in the amount of P126,129.86, "plus 18% interest from August 20, 1980 . . . (and) 25% of the total amount sought to be recovered as and by way of attorney's fees . . . ." 10 Among the allegations of its complaint was that Metrobank Check No. 765380 above mentioned had been given to it in payment of RYL's indebtedness, duly indorsed by R.Y. Lim. 11 A preliminary attachment was issued by the trial court on the basis of the averments of the complaint but was shortly dissolved upon the filing of a counter-bond by STEELWELD.

RYL could no longer be located and could not be served with summons. 12 It never appeared. Only STEELWELD filed an answer, under date of July 16, 1985. 13 In
said pleading, it specifically denied the facts alleged in the complaint, the truth, according to Steelweld, being basically that

1) STELCO "is a complete stranger to it;" it had "not entered into any transaction or business dealing of any kind" with STELCO, the transactions described in the complaint having been solely and exclusively between the plaintiff and RYL Construction; 2) the check in question was "only given to a certain R. Lim to be used as collateral for another obligation . . . (but) in breach of his agreement (Lim) utilized and negotiated the check for another purpose. . . .; 3) nevertheless, the check "is wholly inoperative since . . . Steelweld . . . did not issue it for any valuable consideration either to R. Lim or to the plaintiff not to mention also the fact that the said plaintiff failed to comply with the requirements of the law to hold the said defendant (STEELWELD) liable . . ." Trial ensued upon these issues, after which judgment was rendered on June 26, 1986. 14 The
judgment sentenced "the defendant Steelweld Corporation to pay to . . . (Stelco Marketing Corporation) the amount of P126,129.86 with legal rate of interest from May 9, 1985, when this case was instituted until fully paid, plus another sum equivalent to 25% of the total amount due as and for attorney's fees . . . 15 That disposition was justified in the judgment as follows: 16

There is no question, then, that as far as any commercial transaction is concerned between plaintiff and defendant Steelweld no such transaction ever occurred. Ordinarily, under civil law rules, there having been no transaction between them involving the purchase of certain merchandise there would be no privity of contract between them, and plaintiff will have no right to sue the defendant for payment of said merchandise for the simple reason that the defendant did not order them, such less receive them. But we have here a case where the defendant Steelweld thru its President Peter Rafael Limson admitted to have issued a check payable to cash in favor of his friend Romeo Lim who was the President of RYL Construction by way of accommodation. Under the Negotiable Instruments Law an accommodation party is liable. Sec. 29. Liability of an accommodation party. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party. From this adverse judgment STEELWELD appealed to the Court of Appeals 17 and there succeeded
in reversing the judgment. By Decision promulgated on May 29, 1990, 18 the Court of Appeals 19 ordered "the complaint against appellant (STEELWELD) DISMISSED; (and the appellee, STELCO) to pay appellant the sum of P15,000.00 as attorney's fees and cost of litigation, the suit . . . (being) a baseless one that dragged appellant in court and caused it to incur attorney's fees and expense of litigation.

STELCO's motion for reconsideration was denied by the Appellate Tribunal's resolution dated November 13, 1990.20 The Court stressed that . . . as far as Steelweld is concerned, there was no commercial transaction between said appellant and appellee. Moreover, there is no evidence that appellee Stelco

Marketing became a holder for value. Nowhere in the check itself does the name of Stelco Marketing appear as payee, indorsee or depositor thereof. Finally, appellee's complaint is for the collection of the unpaid accounts for delivery of steels bars and construction materials. It having been established that appellee had no commercial transaction with appellant Stelco, appellee had no cause of action against said appellant. STELCO appealed to this Court in accordance with Rule 45 of the Rules of Court. In this Court it seeks to make the following points in connection with its plea for the overthrow of the Appellate Tribunal's aforesaid decision, viz.: 1) said decision is "not in accord with law and jurisprudence;" 2) "STELCO is a "holder" within the meaning of the Negotiable Instruments Law;" 3) "STELCO is a holder in due course of Metrobank Check No. 765380 . . . (and hence) holds the same free from personal or equitable defense;" and 4) "Negotiation in breach of faith is a personal defense . . . (and hence) not effective as against a holder in due course." The points are not well taken. The crucial question is whether or not STELCO ever became a holder in due course of Check No. 765380, a bearer instrument, within the contemplation of the Negotiable Instruments Law. It never did. STELCO evidently places much reliance on the pronouncement of the Regional Trial Court in Criminal Case No. 66571, 21 that the acquittal of the two (2) accused (Limson and Torres) did not
operate "to release Steelweld Corporation from its liability under Sec. 29 of the Negotiable Instruments Law for having issued . . . (the check) for the accommodation of Romeo Lim." The cited provision reads as follows:

Sec. 29. Liability of accommodation party. An accommodation party is one who has singed the instrument as maker, drawer, acceptor, or indorser, without receiving valued therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. It is noteworthy that the Trial Court's pronouncement containing reference to said Section 29 did not specify to whom STEELWELD, as accommodation party, is supposed to be liable; and certain it is that neither said pronouncement nor any other part of the judgment of acquittal declared it liable to STELCO. "A holder in due course," says the law, 22 "is a holder who has taken the instrument
under the following conditions:

(a) That is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the persons negotiating it. To be sure, as regards an accommodation party (such as STEELWELD), the fourth condition, i.e., lack of notice of any infirmity in the instruments or defect in title of the persons negotiating it, has no application. This is because Section 29 of the law above quoted preserves the right of recourse of a "holder for value" against the accommodation party notwithstanding that "such holder, at the time of taking the instrument, knew him to be only an accommodation party." 23 Now, STELCO theorizes that it should be deemed a "holder for value" of STEELWELD's Check No. 765380 because the record shows it to have been in "actual possession" thereof; otherwise, it "could not have presented, marked and introduced (said check) in evidence . . . before the court a quo." "Besides," it adds, the check in question was presented by STELCO to the drawee bank for payment through Armstrong Industries, the manufacturing arm of STELCO and its sister company." 24 The trouble is, there is no evidence whatever that STELCO's possession of Check No. 765380 ever dated back to nay time before the instrument's presentment and dishonor. There is no evidence whatsoever that the check was ever given to it, or indorsed to it in any manner or form in payment of an obligation or as security for an obligation, or for any other purpose before it was presented for payment. On the contrary, the factual finding of the Court of Appeals, which by traditional precept is normally conclusive on this Court, is that STELCO never became a holder for value and that "(n)owhere in the check itself does the name of Stelco Marketing appear as payee, indorsee or depositor thereof." 25 What the record shows is that: (1) the STEELWELD company check in question was given by its president to R.Y. Lim; (2) it was given only by way of accommodation, to be "used as collateral for another obligation;" (3) in breach of the agreement, however, R.Y. Lim indorsed the check to Armstrong in payment of obligation; (4) Armstrong deposited the check to its account, after indorsing it; (5) the check was dishonored. The record does not show any intervention or participation by STELCO in any manner of form whatsoever in these transactions, or any communication of any sort between STEELWELD and STELCO, or between either of them and Armstrong Industries, at any time before the dishonor of the check. The record does show that after the check had been deposited and dishonored, STELCO came into possession of it in some way, and was able, several years after the dishonor of the check, to give it in evidence at the trial of the civil case it had instituted against the drawers of the check (Limson and Torres) and RYL. But, as already pointed out, possession of a negotiable instrument after presentment and dishonor, or payment, is utterly inconsequential; it does not make the possessor a holder for value within the meaning of the law; it gives rise to no liability on the part of the maker or drawer and indorsers. It is clear from the relevant circumstances that STELCO cannot be deemed a holder of the check for value. It does not meet two of the essential requisites prescribed by the statute. It did not become "the holder of it before it was overdue, and without notice that it had been previously dishonored," and it did not take the check "in good faith and for value." 26

Neither is there any evidence whatever that Armstrong Industries, to whom R.Y. Lim negotiated the check accepted the instrument and attempted to encash it in behalf, and as agent of STELCO. On the contrary, the indications are that Armstrong was really the intended payee of the check and was the party actually injured by its dishonor; it was after all its representative (a Mr. Young) who instituted the criminal prosecution of the drawers, Limson and Torres, albeit unsuccessfully. The petitioner has failed to show any sufficient cause for modification or reversal of the challenged judgment of the Court of Appeals which, on the contrary, appears to be entirely in accord with the facts and the applicable law. WHEREFORE, the petition is DENIED and the Decision of the Court of Appeals in CA-G.R. CV No. 13418 is AFFIRMED in toto. Costs against petitioner. SO ORDERED Paras, Padilla and Regalado, JJ., concur. Nocon., J., is on leave.

Footnotes 1 Rollo, p. 33. 2 Rollo, pp. 12, 17, 112. 3 Rollo, p. 48: Trial Court Decision, p. 3. 4 Id., p. 55. 5 Idem. 6 Id., p. 63 7 Criminal Case No. 66571, raffled and assigned to Branch 30. 8 Rollo, pp. 48, 63. 9 With prayer for the issuance of a writ of preliminary attachment. 10 Rollo, pp. 32, 38. 11 Id., p. 36. 12 Id., p. 60. 13 "with application for damages against the attachment bond." 14 By Judge Segundino D. Chua, later Associate Justice, Court of Appeals.

15 Rollo, pp. 46, 50. 16 Id., p. 49. 17 The appeal was docketed as CA-G.R. CV No. 13418. 18 By Lapea, Jr., J., with the concurrence of Melo (Chairman) and Martinez, JJ.: Rollo, pp. 59-65. 19 Second Division. 20 Rollo, p. 66. 21 SEE footnote 7 and related text. 22 SEC. 52, Negotiable Instruments Law, Act No. 2031. 23 SEE Agbayani, Commercial Laws of the Philippines, 1975 ed., Vol. I, citing Prudential Bank and Trust Co. v. Ramesh Trading Co. C.A. 32908-R, Sept. 10, 1964. 24 Rollo, p. 119. 25 SEE footnote 19, supra. 26 See footnote 21 and relevant text, supra.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. 80599 September 15, 1989 ERNESTINA CRISOLOGO-JOSE, petitioner, vs. COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own behalf and as Vice-President for Sales of Mover Enterprises, Inc., respondents. Melquiades P. de Leon for petitioner. Rogelio A. Ajes for private respondent.

REGALADO, J.: Petitioner seeks the annulment of the decision 1 of respondent Court of Appeals, promulgated on
September 8, 1987, which reversed the decision of the trial Court 2 dismissing the complaint for consignation filed by therein plaintiff Ricardo S. Santos, Jr.

The parties are substantially agreed on the following facts as found by both lower courts: In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc. in-charge of marketing and sales; and the president of the said corporation was Atty. Oscar Z. Benares. On April 30, 1980, Atty. Benares, in accommodation of his clients, the spouses Jaime and Clarita Ong, issued Check No. 093553 drawn against Traders Royal Bank, dated June 14, 1980, in the amount of P45,000.00 (Exh- 'I') payable to defendant Ernestina Crisologo-Jose. Since the check was under the account of Mover Enterprises, Inc., the same was to be signed by its president, Atty. Oscar Z. Benares, and the treasurer of the said corporation. However, since at that time, the treasurer of Mover Enterprises was not available, Atty. Benares prevailed upon the plaintiff, Ricardo S. Santos, Jr., to sign the aforesaid chEck as an alternate story. Plaintiff Ricardo S. Santos, Jr. did sign the check. It appears that the check (Exh. '1') was issued to defendant Ernestina Crisologo-Jose in consideration of the waiver or quitclaim by said defendant over a certain property which the Government Service Insurance System (GSIS) agreed to sell to the clients of Atty. Oscar Benares, the spouses Jaime and Clarita Ong, with the understanding that upon approval by the GSIS of the compromise agreement with the spouses Ong, the check will be encashed accordingly. However, since the compromise agreement was not approved within the expected period of time, the aforesaid check for P45,000.00 (Exh. '1') was replaced by Atty. Benares with another Traders Royal Bank cheek bearing No. 379299 dated August 10, 1980, in the same amount of P45,000.00 (Exhs. 'A' and '2'), also payable to the defendant Jose. This replacement check was also signed by Atty. Oscar Z. Benares and by the plaintiff Ricardo S. Santos, Jr. When defendant deposited this replacement check (Exhs. 'A' and '2') with her account at Family Savings Bank, Mayon Branch, it was dishonored for insufficiency of funds. A subsequent redepositing of the said check was likewise dishonored by the bank for the same reason. Hence, defendant through counsel was constrained to file a criminal complaint for violation of Batas Pambansa Blg. 22 with the Quezon City Fiscal's Office against Atty. Oscar Z. Benares and plaintiff Ricardo S. Santos, Jr. The investigating Assistant City Fiscal, Alfonso Llamas, accordingly filed an amended information with the court charging both Oscar Benares and Ricardo S. Santos, Jr., for violation of Batas Pambansa Blg. 22 docketed as Criminal Case No. Q-14867 of then Court of First Instance of Rizal, Quezon City. Meanwhile, during the preliminary investigation of the criminal charge against Benares and the plaintiff herein, before Assistant City Fiscal Alfonso T. Llamas, plaintiff Ricardo S. Santos, Jr. tendered cashier's check No. CC 160152 for P45,000.00 dated April 10, 1981 to the defendant Ernestina Crisologo-Jose, the complainant in that criminal case. The defendant refused to receive the cashier's check in payment of the dishonored check in the amount of P45,000.00. Hence, plaintiff encashed the aforesaid cashier's check and subsequently deposited said amount of P45,000.00 with the Clerk of Court on August 14, 1981 (Exhs. 'D' and 'E').

Incidentally, the cashier's check adverted to above was purchased by Atty. Oscar Z. Benares and given to the plaintiff herein to be applied in payment of the dishonored check. 3 After trial, the court a quo, holding that it was "not persuaded to believe that consignation referred to in Article 1256 of the Civil Code is applicable to this case," rendered judgment dismissing plaintiff s complaint and defendant's counterclaim. 4 As earlier stated, respondent court reversed and set aside said judgment of dismissal and revived the complaint for consignation, directing the trial court to give due course thereto. Hence, the instant petition, the assignment of errors wherein are prefatorily stated and discussed seriatim. 1. Petitioner contends that respondent Court of Appeals erred in holding that private respondent, one of the signatories of the check issued under the account of Mover Enterprises, Inc., is an accommodation party under the Negotiable Instruments Law and a debtor of petitioner to the extent of the amount of said check. Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and not private respondent who merely signed the check in question in a representative capacity, that is, as vicepresident of said corporation, hence he is not liable thereon under the Negotiable Instruments Law. The pertinent provision of said law referred to provides: Sec. 29. Liability of accommodation party an accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. Consequently, to be considered an accommodation party, a person must (1) be a party to the instrument, signing as maker, drawer, acceptor, or indorser, (2) not receive value therefor, and (3) sign for the purpose of lending his name for the credit of some other person. Based on the foregoing requisites, it is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. From the standpoint of contract law, he differs from the ordinary concept of a debtor therein in the sense that he has not received any valuable consideration for the instrument he signs. Nevertheless, he is liable to a holder for value as if the contract was not for accommodation 5 in whatever capacity such
accommodation party signed the instrument, whether primarily or secondarily. Thus, it has been held that in lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. 6

Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this case, as petitioner suggests, the inevitable question is whether or not it may be held liable on the accommodation instrument, that is, the check issued in favor of herein petitioner. We hold in the negative.

The aforequoted provision of the Negotiable Instruments Law which holds an accommodation party liable on the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only an accommodation party, does not include nor apply to corporations which are accommodation parties. 7 This is because the issue or indorsement of negotiable paper by a
corporation without consideration and for the accommodation of another is ultra vires. 8 Hence, one who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party. If the form of the instrument, or the nature of the transaction, is such as to charge the indorsee with knowledge that the issue or indorsement of the instrument by the corporation is for the accommodation of another, he cannot recover against the corporation thereon. 9

By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for the accommodation of a third person only if specifically authorized to do so.10 Corollarily, corporate officers, such as the president and vicepresident, have no power to execute for mere accommodation a negotiable instrument of the corporation for their individual debts or transactions arising from or in relation to matters in which the corporation has no legitimate concern. Since such accommodation paper cannot thus be enforced against the corporation, especially since it is not involved in any aspect of the corporate business or operations, the inescapable conclusion in law and in logic is that the signatories thereof shall be personally liable therefor, as well as the consequences arising from their acts in connection therewith.

The instant case falls squarely within the purview of the aforesaid decisional rules. If we indulge petitioner in her aforesaid postulation, then she is effectively barred from recovering from Mover Enterprises, Inc. the value of the check. Be that as it may, petitioner is not without recourse. The fact that for lack of capacity the corporation is not bound by an accommodation paper does not thereby absolve, but should render personally liable, the signatories of said instrument where the facts show that the accommodation involved was for their personal account, undertaking or purpose and the creditor was aware thereof. Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the cheek was issued at the instance and for the personal account of Atty. Benares who merely prevailed upon respondent Santos to act as co-signatory in accordance with the arrangement of the corporation with its depository bank. That it was a personal undertaking of said corporate officers was apparent to petitioner by reason of her personal involvement in the financial arrangement and the fact that, while it was the corporation's check which was issued to her for the amount involved, she actually had no transaction directly with said corporation. There should be no legal obstacle, therefore, to petitioner's claims being directed personally against Atty. Oscar Z. Benares and respondent Ricardo S. Santos, Jr., president and vice-president, respectively, of Mover Enterprises, Inc. 2. On her second assignment of error, petitioner argues that the Court of Appeals erred in holding that the consignation of the sum of P45,000.00, made by private respondent after his tender of payment was refused by petitioner, was proper under Article 1256 of the Civil Code. Petitioner's submission is that no creditor-debtor relationship exists between the parties, hence consignation is not proper. Concomitantly, this argument was premised on the assumption that private respondent Santos is not an accommodation party.

As previously discussed, however, respondent Santos is an accommodation party and is, therefore, liable for the value of the check. The fact that he was only a co-signatory does not detract from his personal liability. A co-maker or co-drawer under the circumstances in this case is as much an accommodation party as the other co-signatory or, for that matter, as a lone signatory in an accommodation instrument. Under the doctrine in Philippine Bank of Commerce vs. Aruego, supra, he is in effect a co-surety for the accommodated party with whom he and his co-signatory, as the other co-surety, assume solidary liability ex lege for the debt involved. With the dishonor of the check, there was created a debtor-creditor relationship, as between Atty. Benares and respondent Santos, on the one hand, and petitioner, on the other. This circumstance enables respondent Santos to resort to an action of consignation where his tender of payment had been refused by petitioner. We interpose the caveat, however, that by holding that the remedy of consignation is proper under the given circumstances, we do not thereby rule that all the operative facts for consignation which would produce the effect of payment are present in this case. Those are factual issues that are not clear in the records before us and which are for the Regional Trial Court of Quezon City to ascertain in Civil Case No. Q-33160, for which reason it has advisedly been directed by respondent court to give due course to the complaint for consignation, and which would be subject to such issues or claims as may be raised by defendant and the counterclaim filed therein which is hereby ordered similarly revived. 3. That respondent court virtually prejudged Criminal Case No. Q-14687 of the Regional Trial Court of Quezon City filed against private respondent for violation of Batas Pambansa Blg. 22, by holding that no criminal liability had yet attached to private respondent when he deposited with the court the amount of P45,000.00 is the final plaint of petitioner. We sustain petitioner on this score. Indeed, respondent court went beyond the ratiocination called for in the appeal to it in CA-G.R. CV. No. 05464. In its own decision therein, it declared that "(t)he lone issue dwells in the question of whether an accommodation party can validly consign the amount of the debt due with the court after his tender of payment was refused by the creditor." Yet, from the commercial and civil law aspects determinative of said issue, it digressed into the merits of the aforesaid Criminal Case No. Q-14867, thus: Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of such insufficiency of funds or credit. Thus, the making, drawing and issuance of a check, payment of which is refused by the drawee because of insufficient funds in or credit with such bank is prima facie evidence of knowledge of insufficiency of funds or credit, when the check is presented within 90 days from the date of the check. It will be noted that the last part of Section 2 of B.P. 22 provides that the element of knowledge of insufficiency of funds or credit is not present and, therefore, the crime does not exist, when the drawer pays the holder the amount due or makes arrangements for payment in full by the drawee of such check within five (5) banking days after receiving notice that such check has not been paid by the drawee. Based on the foregoing consideration, this Court finds that the plaintiff-appellant acted within Ms legal rights when he consigned the amount of P45,000.00 on August 14, 1981, between August 7, 1981, the date when plaintiff-appellant receive (sic) the notice of non-payment, and August 14, 1981, the date when the debt due was deposited with the Clerk of Court (a Saturday and a Sunday which are not banking

days) intervened. The fifth banking day fell on August 14, 1981. Hence, no criminal liability has yet attached to plaintiff-appellant when he deposited the amount of P45,000.00 with the Court a quo on August 14, 1981. 11 That said observations made in the civil case at bar and the intrusion into the merits of the criminal case pending in another court are improper do not have to be belabored. In the latter case, the criminal trial court has to grapple with such factual issues as, for instance, whether or not the period of five banking days had expired, in the process determining whether notice of dishonor should be reckoned from any prior notice if any has been given or from receipt by private respondents of the subpoena therein with supporting affidavits, if any, or from the first day of actual preliminary investigation; and whether there was a justification for not making the requisite arrangements for payment in full of such check by the drawee bank within the said period. These are matters alien to the present controversy on tender and consignation of payment, where no such period and its legal effects are involved. These are aside from the considerations that the disputed period involved in the criminal case is only a presumptive rule, juris tantum at that, to determine whether or not there was knowledge of insufficiency of funds in or credit with the drawee bank; that payment of civil liability is not a mode for extinguishment of criminal liability; and that the requisite quantum of evidence in the two types of cases are not the same. To repeat, the foregoing matters are properly addressed to the trial court in Criminal Case No. Q14867, the resolution of which should not be interfered with by respondent Court of Appeals at the present posture of said case, much less preempted by the inappropriate and unnecessary holdings in the aforequoted portion of the decision of said respondent court. Consequently, we modify the decision of respondent court in CA-G.R. CV No. 05464 by setting aside and declaring without force and effect its pronouncements and findings insofar as the merits of Criminal Case No. Q-14867 and the liability of the accused therein are concerned. WHEREFORE, subject to the aforesaid modifications, the judgment of respondent Court of Appeals is AFFIRMED. SO ORDERED. Paras, Padilla and Sarmiento, JJ., concur. Melencio-Herrera J., took no part.

Footnotes 1 Penned by Justice Justo P. Torres, Jr. and concurred in by Associate Justices Leonor Ines Luciano and Oscar M. Herrera; Rollo, 18. 2 Civil Case No. Q-33160, Regional Trial Court of Quezon City, Branch XCVI. 3 Rollo, 19-20. 4 Rollo, 18.

5 Ang Tiong vs. Ting, et al., 22 SCRA 713 (1968). 6 Philipine Bank of Commerce vs. Aruego, 102 SCRA 530 (1981). 7 11 C.J.S. 309. 8 14A C.J. 732. 9 Oppenheim vs. Simon Reigel Cigar Co., 90 N.Y.S. 355, cited in 11 C.J.S. 309. 10 In re Wrentham Mfg. Co., 2 Low. 119; Hall vs. Auburn Turnp. Co., 27 Cal. 255, cited in 14A C.J. 461. 11 Rollo, 21-22.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 137172 June 15, 1999 UCPB GENERAL INSURANCE CO., INC., petitioner, vs. MASAGANA TELAMART, INC., respondent.

PARDO, J.: The case is an appeal via certiorari seeking to set aside the decision of the Court of Appeals, 1 affirming with modification that of the Regional Trial Court, Branch 58, Makati, ordering
petitioner to pay respondent the sum of P18,645,000.00, as the proceeds of the insurance coverage of respondent's property razed by fire; 25% of the total amount due as attorney's fees and P25,000.00 as litigation expenses, and costs.

The facts are undisputed and may be related as follows: On April 15, 1991, petitioner issued five (5) insurance policies covering respondent's various property described therein against fire, for the period from May 22, 1991 to May 22, 1992.

In March 1992, petitioner evaluated the policies and decided not to renew them upon expiration of their terms on May 22, 1992. Petitioner advised respondent's broker, Zuellig Insurance Brokers, Inc. of its intention not to renew the policies. On April 6, 1992, petitioner gave written notice to respondent of the non-renewal of the policies at the address stated in the policies. On June 13, 1992, fire razed respondent's property covered by three of the insurance policies petitioner issued. On July 13, 1992, respondent presented to petitioner's cashier at its head office five (5) manager's checks in the total amount of P225,753.95, representing premium for the renewal of the policies from May 22, 1992 to May 22, 1993. No notice of loss was filed by respondent under the policies prior to July 14, 1992. On July 14, 1992, respondent filed with petitioner its formal claim for indemnification of the insured property razed by fire. On the same day, July 14, 1992, petitioner returned to respondent the five (5) manager's checks that it tendered, and at the same time rejected respondent's claim for the reasons (a) that the policies had expired and were not renewed, and (b) that the fire occurred on June 13, 1992, before respondent's tender of premium payment. On July 21, 1992, respondent filed with the Regional Trial Court, Branch 58, Makati City, a civil complaint against petitioner for recovery of P18,645,000.00, representing the face value of the policies covering respondent's insured property razed by fire, and for attorney's fees. 2 On October 23, 1992, after its motion to dismiss had been denied, petitioner filed an answer to the complaint. It alleged that the complaint "fails to state a cause of action"; that petitioner was not liable to respondent for insurance proceeds under the policies because at the time of the loss of respondent's property due to fire, the policies had long expired and were not renewed. 3 After due trial, on March 10, 1993, the Regional Trial Court, Branch 58, Makati, rendered decision, the dispositive portion of which reads: WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendant, as follows: (1) Authorizing and allowing the plaintiff to consign/deposit with this Court the sum of P225,753.95 (refused by the defendant) as full payment of the corresponding premiums for the replacement-renewal policies for Exhibits A, B, C, D and E; (2) Declaring plaintiff to have fully complied with its obligation to pay the premium thereby rendering the replacement-renewal policy of Exhibits A, B, C, D and E effective and binding for the duration May 22, 1992 until May 22, 1993; and, ordering defendant to deliver forthwith to plaintiff the said replacement-renewal policies; (3) Declaring Exhibits A & B, in force from August 22, 1991 up to August 23, 1992 and August 9, 1991 to August 9, 1992, respectively; and

(4) Ordering the defendant to pay plaintiff the sums of: (a) P18,645,000.00 representing the latter's claim for indemnity under Exhibits A, B & C and/or its replacement-renewal policies; (b) 25% of the total amount due as and for attorney's fees; (c) P25,000.00 as necessary litigation expenses; and, (d) the costs of suit. All other claims and counterclaims asserted by the parties are denied and/or dismissed, including plaintiff's claim for interests. SO ORDERED. Makati, Metro-Manila, March 10, 1993. ZOSIMO Z. ANGELES. Judge. 4 In due time, petitioner appealed to the Court of Appeals. 5 On September 7, 1998, the Court of Appeals promulgated its decision 6 affirming that of the Regional
Trial Court with the modification that item No. 3 of the dispositive portion was deleted, and the award of attorney's fees was reduced to 10% of the total amount due. 7

The Court of Appeals held that following previous practise, respondent was allowed a sixty (60) to ninety (90) day credit term for the renewal of its policies, and that the acceptance of the late premium payment suggested an understanding that payment could be made later. Hence, this appeal. By resolution adopted on March 24, 1999, we required respondent to comment on the petition, not to file a motion to dismiss within ten (10) days from notice. 8 On April 22, 1999, respondent filed its
comment. 9

Respondent submits that the Court of Appeals correctly ruled that no timely notice of non-renewal was sent. The notice of non-renewal sent to broker Zuellig which claimed that it verbally notified the insurance agency but not respondent itself did not suffice. Respondent submits further that the Court of Appeals did not err in finding that there existed a sixty (60) to ninety (90) days credit agreement between UCPB and Masagana, and that, finally, the Supreme Court could not review factual findings of the lower court affirmed by the Court of Appeals. 10 We give due course to the appeal. The basic issue raised is whether the fire insurance policies issued by petitioner to the respondent covering the period May 22, 1991 to May 22, 1992, had expired on the latter date or had been extended or renewed by an implied credit arrangement though actual payment of premium was tendered on a later date after the occurrence of the risk (fire) insured against. The answer is easily found in the Insurance Code. No, an insurance policy, other than life, issued originally or on renewal, is not valid and binding until actual payment of the premium. Any agreement to the contrary is void. 11 The parties may not agree expressly or impliedly on the extension of creditor
time to pay the premium and consider the policy binding before actual payment.

The case of Malayan Insurance Co., Inc. vs. Cruz-Arnaldo, 12 cited by the Court of Appeals, is not
applicable. In that case, payment of the premium was in fact actually made on December 24, 1981, and the fire occurred on January 18, 1982. Here, the payment of the premium for renewal of the policies was tendered on July 13, 1992, a month after the fire occurred on June 13, 1992. The assured did not even give the insurer a notice of loss within a reasonable time after occurrence of the fire.

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals in CA-G.R. CV No. 42321. In lieu thereof the Court renders judgment dismissing respondent's complaint and petitioner's counterclaims thereto filed with the Regional Trial Court, Branch 58, Makati City, in Civil Case No. 92-2023. Without costs.
1w phi1.nt

SO ORDERED. Davide, Jr., C.J., Melo, Kapunan and Ynares-Santiago, JJ., concur.
Footnotes

1 In CA-G.R. CV No. 42321, promulgated on September 7, 1998. Alio-Hormachuelos, J., ponente, Guerero and Villarama, Jr., JJ., concurring. 2 RTC Original Record, pp. 1-10. 3 RTC Original Record, pp. 103-117. 4 RTC Original Record, pp. 454-466. 5 Docketed as CA-G.R. CV No. 42321. 6 Alio-Hormachuelos, J., ponente, Guerrero and Villarama, Jr. JJ., concurring. 7 Petition, Annex "A", Rollo, pp. 38-54. 8 Rollo, p. 72. 9 Rollo, p. 73-106. 10 Comment, Rollo, on p. 84. 11 Sec. 77, Insurance Code of the Philippines; Valenzuela vs. Court of Appeals, 191 SCRA 1; South Sea Surety and Insurance Co., Inc. vs. Court of Appeals, 244 SCRA 744; Tibay vs. Court of Appeals, 275 SCRA 126. 12 154 SCRA 672.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-44349 October 29, 1976 JESUS V. OCCENA and EFIGENIA C. OCCENA, petitioners, vs. HON. RAMON V. JABSON, Presiding Judge of the Court Of First Instance of Rizal, Branch XXVI; COURT OF APPEALS and TROPICAL HOMES, INC., respondents. Occena Law Office for petitioners. Serrano, Diokno & Serrano for respondents.

TEEHANKEE, J.: The Court reverses the Court of Appeals appealed resolution. The Civil Code authorizes the release of an obligor when the service has become so difficult as to be manifestly beyond the contemplation of the parties but does not authorize the courts to modify or revise the subdivision contract between the parties or fix a different sharing ratio from that contractually stipulated with the force of law between the parties. Private respondent's complaint for modification of the contract manifestly has no basis in law and must therefore be dismissed for failure to state a cause of action. On February 25, 1975 private respondent Tropical Homes, Inc. filed a complaint for modification of the terms and conditions of its subdivision contract with petitioners (landowners of a 55,330 square meter parcel of land in Davao City), making the following allegations: "That due to the increase in price of oil and its derivatives and the concomitant worldwide spiralling of prices, which are not within the control of plaintiff, of all commodities including basis raw materials required for such development work, the cost of development has risen to levels which are unanticipated, unimagined and not within the remotest contemplation of the parties at the time said agreement was entered into and to such a degree that the conditions and factors which formed the original basis of said contract, Annex 'A', have been totally changed; 'That further performance by the plaintiff under the contract. That further performance by the plaintiff under the contract,Annex 'S', will result in situation where defendants would be unustly enriched at the expense of the plaintiff; will cause an inequitous distribution of proceeds from the sales of subdivided lots in manifest actually result in the unjust and intolerable exposure of plaintiff to implacable losses, all such situations resulting in an unconscionable, unjust and immoral situation contrary to and in violation of the primordial concepts of good faith, fairness and equity which should pervade all human relations. Under the subdivision contract, respondent "guaranteed (petitioners as landowners) as the latter's fixed and sole share and participation an amount equivalent to forty (40%) percent of all cash receifpts fromthe sale of the subdivision lots"

Respondent pray of the Rizal court of first instance that "after due trial, this Honorable Court render judgment modifying the terms and conditions of the contract ... by fixing the proer shares that shouls pertain to the herein parties out of the gross proceeds from the sales of subdivided lots of subjects subdivision". Petitioners moved to dismiss the complaint principally for lack of cause of action, and upon denial thereof and of reconsideration by the lower court elevated the matter on certiorari to respondent Court of Appeals. Respondent court in its questioned resolution of June 28, 1976 set aside the preliminary injunction previously issued by it and dimissed petition on the ground that under Article 1267 of the Civil Code which provides that ART. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. 1
... a positive right is created in favor of the obligor to be released from the performance of an obligation in full or in part when its performance 'has become so difficult as to be manifestly beyond the contemplation of the parties.

Hence, the petition at abar wherein petitioners insist that the worldwide increase inprices cited by respondent does not constitute a sufficient casue of action for modification of the subdivision contrct. After receipt of respondent's comment, the Court in its Resolution of September 13, 1976 resolved to treat the petition as special civil actionand declared the case submitted for decision. The petition must be granted. While respondent court correctly cited in its decision the Code Commission's report giving the rationale for Article 1267 of the Civil Code, to wit; The general rule is that impossibility of performance releases the obligor. However, it is submitted that when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to release the obligor in whole or in part. The intention of the parties should govern and if it appears that the service turns out to be so difficult as have been beyond their contemplation, it would be doing violence to that intention to hold the obligor still responsible. ... 2 It misapplied the same to respondent's complaint. If respondent's complaint were to be released from having to comply with the subdivision contract, assuming it could show at the trial that the service undertaken contractually by it had "become so difficult as to be manifestly beyond the contemplation of the parties", then respondent court's upholding of respondet's complaint and dismissal of the petition would be justifiable under the cited codal article. Without said article, respondent would remain bound by its contract under the theretofore prevailing doctrine that performance therewith is ot excused "by the fact that the contract turns out to be hard and improvident, unprofitable, or unespectedly burdensome", 3 since in case a
party desires to be excuse from performance in the event of such contingencies arising, it is his duty to provide threfor in the contract.

But respondent's complaint seeks not release from the subdivision contract but that the court "render judgment I modifying the terms and Conditions of the Contract by fixing the proper shares that

should pertain to the herein parties out of the gross proceed., from the sales of subdivided lots of subject subdivision". The cited article does not grant the courts this authority to remake, modify or revise the contract or to fix the division of shares between the parties as contractually stipulated with the force of law between the parties, so as to substitute its own terms for those covenanted by the partiesthemselves. Respondent's complaint for modification of contract manifestly has no basis in law and therefore states no cause of action. Under the particular allegations of respondent's complaint and the circumstances therein averred, the courts cannot even in equity grant the relief sought. A final procedural note. Respondent cites the general rule that an erroneous order denying a motion to dismiss is interlocutory and should not be corrected by certiorari but by appeal in due course. This case however manifestly falls within the recognized exception that certiorari will lie when appeal would not prove to be a speedy and adequate remedy.' Where the remedy of appeal would not, as in this case, promptly relieve petitioners from the injurious effects of the patently erroneous order maintaining respondent's baseless action and compelling petitioners needlessly to go through a protracted trial and clogging the court dockets by one more futile case, certiorari will issue as the plain, speedy and adequate remedy of an aggrieved party. ACCORDINGLY, the resolution of respondent appellate court is reversed and the petition for certiorari is granted and private respondent's complaint in the lower court is ordered dismissed for failure to state a sufficient cause of action. With costs in all instances against private respondent. Makasiar, Muoz Palma, Concepcion, Jr., and Martin JJ., concur.

Footnotes

1 Other Civil Code articles cited by respondent court as justifyng the complaint were Articles 19 and 1159 which read: ART. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due and observe honesty and good faith. xxx xxx xxx ART. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 95546 November 6, 1992

MAKATI TUSCANY CONDOMINIUM CORPORATION, petitioner, vs. THE COURT OF APPEALS, AMERICAN HOME ASSURANCE CO., represented by American International Underwriters (Phils.), Inc., respondent.

BELLOSILLO, J.: This case involves a purely legal question: whether payment by installment of the premiums due on an insurance policy invalidates the contract of insurance, in view of Sec. 77 of P.D. 612, otherwise known as the Insurance Code, as amended, which provides: Sec. 77. An insurer is entitled to the payment of the premium as soon as the thing is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies. Sometime in early 1982, private respondent American Home Assurance Co. (AHAC), represented by American International Underwriters (Phils.), Inc., issued in favor of petitioner Makati Tuscany Condominium Corporation (TUSCANY) Insurance Policy No. AH-CPP-9210452 on the latter's building and premises, for a period beginning 1 March 1982 and ending 1 March 1983, with a total premium of P466,103.05. The premium was paid on installments on 12 March 1982, 20 May 1982, 21 June 1982 and 16 November 1982, all of which were accepted by private respondent. On 10 February 1983, private respondent issued to petitioner Insurance Policy No. AH-CPP9210596, which replaced and renewed the previous policy, for a term covering 1 March 1983 to 1 March 1984. The premium in the amount of P466,103.05 was again paid on installments on 13 April 1983, 13 July 1983, 3 August 1983, 9 September 1983, and 21 November 1983. All payments were likewise accepted by private respondent. On 20 January 1984, the policy was again renewed and private respondent issued to petitioner Insurance Policy No. AH-CPP-9210651 for the period 1 March 1984 to 1 March 1985. On this renewed policy, petitioner made two installment payments, both accepted by private respondent, the first on 6 February 1984 for P52,000.00 and the second, on 6 June 1984 for P100,000.00. Thereafter, petitioner refused to pay the balance of the premium. Consequently, private respondent filed an action to recover the unpaid balance of P314,103.05 for Insurance Policy No. AH-CPP-9210651. In its answer with counterclaim, petitioner admitted the issuance of Insurance Policy No. AH-CPP9210651. It explained that it discontinued the payment of premiums because the policy did not contain a credit clause in its favor and the receipts for the installment payments covering the policy for 1984-85, as well as the two (2) previous policies, stated the following reservations: 2. Acceptance of this payment shall not waive any of the company rights to deny liability on any claim under the policy arising before such payments or after the expiration of the credit clause of the policy; and

3. Subject to no loss prior to premium payment. If there be any loss such is not covered. Petitioner further claimed that the policy was never binding and valid, and no risk attached to the policy. It then pleaded a counterclaim for P152,000.00 for the premiums already paid for 1984-85, and in its answer with amended counterclaim, sought the refund of P924,206.10 representing the premium payments for 1982-85. After some incidents, petitioner and private respondent moved for summary judgment. On 8 October 1987, the trial court dismissed the complaint and the counterclaim upon the following findings: While it is true that the receipts issued to the defendant contained the aforementioned reservations, it is equally true that payment of the premiums of the three aforementioned policies (being sought to be refunded) were made during the lifetime or term of said policies, hence, it could not be said, inspite of the reservations, that no risk attached under the policies. Consequently, defendant's counterclaim for refund is not justified. As regards the unpaid premiums on Insurance Policy No. AH-CPP-9210651, in view of the reservation in the receipts ordinarily issued by the plaintiff on premium payments the only plausible conclusion is that plaintiff has no right to demand their payment after the lapse of the term of said policy on March 1, 1985. Therefore, the defendant was justified in refusing to pay the same. 1 Both parties appealed from the judgment of the trial court. Thereafter, the Court of Appeals rendered a decision 2modifying that of the trial court by ordering herein petitioner to pay the balance of the
premiums due on Policy No. AH-CPP-921-651, or P314,103.05 plus legal interest until fully paid, and affirming the denial of the counterclaim. The appellate court thus explained

The obligation to pay premiums when due is ordinarily as indivisible obligation to pay the entire premium. Here, the parties herein agreed to make the premiums payable in installments, and there is no pretense that the parties never envisioned to make the insurance contract binding between them. It was renewed for two succeeding years, the second and third policies being a renewal/replacement for the previous one. And the insured never informed the insurer that it was terminating the policy because the terms were unacceptable. While it may be true that under Section 77 of the Insurance Code, the parties may not agree to make the insurance contract valid and binding without payment of premiums, there is nothing in said section which suggests that the parties may not agree to allow payment of the premiums in installment, or to consider the contract as valid and binding upon payment of the first premium. Otherwise, we would allow the insurer to renege on its liability under the contract, had a loss incurred (sic) before completion of payment of the entire premium, despite its voluntary acceptance of partial payments, a result eschewed by a basic considerations of fairness and equity. To our mind, the insurance contract became valid and binding upon payment of the first premium, and the plaintiff could not have denied liability on the ground that payment was not made in full, for the reason that it agreed to accept installment payment. . . . 3

Petitioner now asserts that its payment by installment of the premiums for the insurance policies for 1982, 1983 and 1984 invalidated said policies because of the provisions of Sec. 77 of the Insurance Code, as amended, and by the conditions stipulated by the insurer in its receipts, disclaiming liability for loss for occurring before payment of premiums. It argues that where the premiums is not actually paid in full, the policy would only be effective if there is an acknowledgment in the policy of the receipt of premium pursuant to Sec. 78 of the Insurance Code. The absence of an express acknowledgment in the policies of such receipt of the corresponding premium payments, and petitioner's failure to pay said premiums on or before the effective dates of said policies rendered them invalid. Petitioner thus concludes that there cannot be a perfected contract of insurance upon mere partial payment of the premiums because under Sec. 77 of the Insurance Code, no contract of insurance is valid and binding unless the premium thereof has been paid, notwithstanding any agreement to the contrary. As a consequence, petitioner seeks a refund of all premium payments made on the alleged invalid insurance policies. We hold that the subject policies are valid even if the premiums were paid on installments. The records clearly show that petitioner and private respondent intended subject insurance policies to be binding and effective notwithstanding the staggered payment of the premiums. The initial insurance contract entered into in 1982 was renewed in 1983, then in 1984. In those three (3) years, the insurer accepted all the installment payments. Such acceptance of payments speaks loudly of the insurer's intention to honor the policies it issued to petitioner. Certainly, basic principles of equity and fairness would not allow the insurer to continue collecting and accepting the premiums, although paid on installments, and later deny liability on the lame excuse that the premiums were not prepared in full. We therefore sustain the Court of Appeals. We quote with approval the well-reasoned findings and conclusion of the appellate court contained in its Resolution denying the motion to reconsider its Decision While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the validity of the contract, We are not prepared to rule that the request to make installment payments duly approved by the insurer, would prevent the entire contract of insurance from going into effect despite payment and acceptance of the initial premium or first installment. Section 78 of the Insurance Code in effect allows waiver by the insurer of the condition of prepayment by making an acknowledgment in the insurance policy of receipt of premium as conclusive evidence of payment so far as to make the policy binding despite the fact that premium is actually unpaid. Section 77 merely precludes the parties from stipulating that the policy is valid even if premiums are not paid, but does not expressly prohibit an agreement granting credit extension, and such an agreement is not contrary to morals, good customs, public order or public policy (De Leon, the Insurance Code, at p. 175). So is an understanding to allow insured to pay premiums in installments not so proscribed. At the very least, both parties should be deemed in estoppel to question the arrangement they have voluntarily accepted. 4 The reliance by petitioner on Arce vs. Capital Surety and Insurance Co. 5 is unavailing because the facts therein are substantially different from those in the case at bar.
In Arce, no payment was made by the insured at all despite the grace period given. In the case before Us, petitioner paid the initial installment and thereafter made staggered payments resulting in full payment of the 1982 and 1983 insurance policies. For the 1984 policy, petitioner paid two (2) installments although it refused to pay the balance.

It appearing from the peculiar circumstances that the parties actually intended to make three (3) insurance contracts valid, effective and binding, petitioner may not be allowed to renege on its obligation to pay the balance of the premium after the expiration of the whole term of the third policy (No. AH-CPP-9210651) in March 1985. Moreover, as correctly observed by the appellate court, where the risk is entire and the contract is indivisible, the insured is not entitled to a refund of the premiums paid if the insurer was exposed to the risk insured for any period, however brief or momentary. WHEREFORE, finding no reversible error in the judgment appealed from, the same is AFFIRMED. Costs against petitioner. SO ORDERED. Cruz, Padilla and Grio-Aquino, JJ., concur. Medialdea, J., is on leave.

Footnotes 1 Rollo, p. 85. 2 Penned by Mme. Justice Minerva P. Gonzaga-Reyes, concurred by Mr. Justice Ricardo J. Francisco and Mme. Justice Salome A. Montoya. 3 Decision, pp. 6-7; Rollo, pp. 36-37. 4 Rollo, pp. 41-42. 5 No. L-28501, September 30, 1982, 117 SCRA 63.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 114427 February 6, 1995 ARMANDO GEAGONIA, petitioner, vs. COURT OF APPEALS and COUNTRY BANKERS INSURANCE CORPORATION, respondents.

DAVIDE, JR., J.: Four our review under Rule 45 of the Rules of Court is the decision 1 of the Court of Appeals in CAG.R. SP No. 31916, entitled "Country Bankers Insurance Corporation versus Armando Geagonia," reversing the decision of the Insurance Commission in I.C. Case No. 3340 which awarded the claim of petitioner Armando Geagonia against private respondent Country Bankers Insurance Corporation.

The petitioner is the owner of Norman's Mart located in the public market of San Francisco, Agusan del Sur. On 22 December 1989, he obtained from the private respondent fire insurance policy No. F14622 2 for P100,000.00. The period of the policy was from 22 December 1989 to 22 December 1990 and
covered the following: "Stock-in-trade consisting principally of dry goods such as RTW's for men and women wear and other usual to assured's business."

The petitioner declared in the policy under the subheading entitled CO-INSURANCE that Mercantile Insurance Co., Inc. was the co-insurer for P50,000.00. From 1989 to 1990, the petitioner had in his inventory stocks amounting to P392,130.50, itemized as follows: Zenco Sales, Inc. F. Legaspi Gen. Merchandise Cebu Tesing Textiles P55,698.00 86,432.50 250,000.00 (on credit) P392,130.50

The policy contained the following condition: 3. The insured shall give notice to the Company of any insurance or insurances already affected, or which may subsequently be effected, covering any of the property or properties consisting of stocks in trade, goods in process and/or inventories only hereby insured, and unless such notice be given and the particulars of such insurance or insurances be stated therein or endorsed in this policy pursuant to Section 50 of the Insurance Code, by or on behalf of the Company before the occurrence of any loss or damage, all benefits under this policy shall be deemed forfeited, provided however, that this condition shall not apply when the total insurance or insurances in force at the time of the loss or damage is not more than P200,000.00. On 27 May 1990, fire of accidental origin broke out at around 7:30 p.m. at the public market of San Francisco, Agusan del Sur. The petitioner's insured stock-in-trade were completely destroyed prompting him to file with the private respondent a claim under the policy. On 28 December 1990, the private respondent denied the claim because it found that at the time of the loss the petitioner's stocks-in-trade were likewise covered by fire insurance policies No. GA-28146 and No. GA-28144, for P100,000.00 each, issued by the Cebu Branch of the Philippines First Insurance Co., Inc. (hereinafter PFIC). 3 These policies indicate that the insured was "Messrs. Discount Mart (Mr. Armando
Geagonia, Prop.)" with a mortgage clause reading:

MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing Textiles, Cebu City as their interest may appear subject to the terms of this policy. CO-INSURANCE DECLARED: P100,000. Phils. First CEB/F 24758. 4 The basis of the private respondent's denial was the petitioner's alleged violation of Condition 3 of the policy.

The petitioner then filed a complaint 5 against the private respondent with the Insurance Commission
(Case No. 3340) for the recovery of P100,000.00 under fire insurance policy No. F-14622 and for attorney's fees and costs of litigation. He attached as Annex "AM" 6 thereof his letter of 18 January 1991 which asked for the reconsideration of the denial. He admitted in the said letter that at the time he obtained the private respondent's fire insurance policy he knew that the two policies issued by the PFIC were already in existence; however, he had no knowledge of the provision in the private respondent's policy requiring him to inform it of the prior policies; this requirement was not mentioned to him by the private respondent's agent; and had it been mentioned, he would not have withheld such information. He further asserted that the total of the amounts claimed under the three policies was below the actual value of his stocks at the time of loss, which was P1,000,000.00.

In its answer, 7 the private respondent specifically denied the allegations in the complaint and set up as
its principal defense the violation of Condition 3 of the policy.

In its decision of 21 June 1993, 8 the Insurance Commission found that the petitioner did not violate
Condition 3 as he had no knowledge of the existence of the two fire insurance policies obtained from the PFIC; that it was Cebu Tesing Textiles which procured the PFIC policies without informing him or securing his consent; and that Cebu Tesing Textile, as his creditor, had insurable interest on the stocks. These findings were based on the petitioner's testimony that he came to know of the PFIC policies only when he filed his claim with the private respondent and that Cebu Tesing Textile obtained them and paid for their premiums without informing him thereof. The Insurance Commission then decreed:

WHEREFORE, judgment is hereby rendered ordering the respondent company to pay complainant the sum of P100,000.00 with legal interest from the time the complaint was filed until fully satisfied plus the amount of P10,000.00 as attorney's fees. With costs. The compulsory counterclaim of respondent is hereby dismissed. Its motion for the reconsideration of the decision 9 having been denied by the Insurance Commission in
its resolution of 20 August 1993, 10 the private respondent appealed to the Court of Appeals by way of a petition for review. The petition was docketed as CA-G.R. SP No. 31916.

In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of the Insurance
Commission because it found that the petitioner knew of the existence of the two other policies issued by the PFIC. It said:

It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that the insurance was taken in the name of private respondent [petitioner herein]. The policy states that "DISCOUNT MART (MR. ARMANDO GEAGONIA, PROP)" was the assured and that "TESING TEXTILES" [was] only the mortgagee of the goods. In addition, the premiums on both policies were paid for by private respondent, not by the Tesing Textiles which is alleged to have taken out the other insurance without the knowledge of private respondent. This is shown by Premium Invoices nos. 46632 and 46630. (Annexes M and N). In both invoices, Tesing Textiles is indicated to be only the mortgagee of the goods insured but the party to which they were issued were the "DISCOUNT MART (MR. ARMANDO GEAGONIA)." In is clear that it was the private respondent [petitioner herein] who took out the policies on the same property subject of the insurance with petitioner. Hence, in failing to disclose the existence of these insurances private respondent violated Condition No. 3 of Fire Policy No. 1462. . . .

Indeed private respondent's allegation of lack of knowledge of the provisions insurances is belied by his letter to petitioner [of 18 January 1991. The body of the letter reads as follows;] xxx xxx xxx Please be informed that I have no knowledge of the provision requiring me to inform your office about my prior insurance under FGA-28146 and F-CEB-24758. Your representative did not mention about said requirement at the time he was convincing me to insure with you. If he only die or even inquired if I had other existing policies covering my establishment, I would have told him so. You will note that at the time he talked to me until I decided to insure with your company the two policies aforementioned were already in effect. Therefore I would have no reason to withhold such information and I would have desisted to part with my hard earned peso to pay the insurance premiums [if] I know I could not recover anything. Sir, I am only an ordinary businessman interested in protecting my investments. The actual value of my stocks damaged by the fire was estimated by the Police Department to be P1,000,000.00 (Please see xerox copy of Police Report Annex "A"). My Income Statement as of December 31, 1989 or five months before the fire, shows my merchandise inventory was already some P595,455.75. . . . These will support my claim that the amount claimed under the three policies are much below the value of my stocks lost. xxx xxx xxx The letter contradicts private respondent's pretension that he did not know that there were other insurances taken on the stock-in-trade and seriously puts in question his credibility. His motion to reconsider the adverse decision having been denied, the petitioner filed the instant petition. He contends therein that the Court of Appeals acted with grave abuse of discretion amounting to lack or excess of jurisdiction: A . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE COMMISSION, A QUASI-JUDICIAL BODY CHARGED WITH THE DUTY OF DETERMINING INSURANCE CLAIM AND WHOSE DECISION IS ACCORDED RESPECT AND EVEN FINALITY BY THE COURTS; B . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT PRESENTED AS EVIDENCE DURING THE HEARING OR TRIAL; AND C . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN AGAINST THE PRIVATE RESPONDENT. The chief issues that crop up from the first and third grounds are (a) whether the petitioner had prior knowledge of the two insurance policies issued by the PFIC when he obtained the fire insurance

policy from the private respondent, thereby, for not disclosing such fact, violating Condition 3 of the policy, and (b) if he had, whether he is precluded from recovering therefrom. The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter of reconsideration of 18 January 1991, is without merit. The petitioner claims that the said letter was not offered in evidence and thus should not have been considered in deciding the case. However, as correctly pointed out by the Court of Appeals, a copy of this letter was attached to the petitioner's complaint in I.C. Case No. 3440 as Annex "M" thereof and madeintegral part of the complaint. 12 It
has attained the status of a judicial admission and since its due execution and authenticity was not denied by the other party, the petitioner is bound by it even if it were not introduced as an independent evidence. 13

As to the first issue, the Insurance Commission found that the petitioner had no knowledge of the previous two policies. The Court of Appeals disagreed and found otherwise in view of the explicit admission by the petitioner in his letter to the private respondent of 18 January 1991, which was quoted in the challenged decision of the Court of Appeals. These divergent findings of fact constitute an exception to the general rule that in petitions for review under Rule 45, only questions of law are involved and findings of fact by the Court of Appeals are conclusive and binding upon this Court. 14 We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the PFIC. His letter of 18 January 1991 to the private respondent conclusively proves this knowledge. His testimony to the contrary before the Insurance Commissioner and which the latter relied upon cannot prevail over a written admission made ante litem motam. It was, indeed, incredible that he did not know about the prior policies since these policies were not new or original. Policy No. GA-28144 was a renewal of Policy No. F-24758, while Policy No. GA-28146 had been renewed twice, the previous policy being F-24792. Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not proscribed by law. Its incorporation in the policy is allowed by Section 75 of the Insurance Code 15 which provides
that "[a] policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy." Such a condition is a provision which invariably appears in fire insurance policies and is intended to prevent an increase in the moral hazard. It is commonly known as the additional or "other insurance" clause and has been upheld as valid and as a warranty that no other insurance exists. Its violation would thus avoid the policy. 16 However, in order to constitute a violation, the other insurance must be upon same subject matter, the same interest therein, and the same risk. 17

As to a mortgaged property, the mortgagor and the mortgagee have each an independent insurable interest therein and both interests may be one policy, or each may take out a separate policy covering his interest, either at the same or at separate times. 18 The mortgagor's insurable interest
covers the full value of the mortgaged property, even though the mortgage debt is equivalent to the full value of the property. 19 The mortgagee's insurable interest is to the extent of the debt, since the property is relied upon as security thereof, and in insuring he is not insuring the property but his interest or lien thereon. His insurable interest is prima facie the value mortgaged and extends only to the amount of the debt, not exceeding the value of the mortgaged property. 20 Thus, separate insurances covering different insurable interests may be obtained by the mortgagor and the mortgagee.

A mortgagor may, however, take out insurance for the benefit of the mortgagee, which is the usual practice. The mortgagee may be made the beneficial payee in several ways. He may become the assignee of the policy with the consent of the insurer; or the mere pledgee without such consent; or the original policy may contain a mortgage clause; or a rider making the policy payable to the mortgagee "as his interest may appear" may be attached; or a "standard mortgage clause," containing a collateral independent contract between the mortgagee and insurer, may be attached;

or the policy, though by its terms payable absolutely to the mortgagor, may have been procured by a mortgagor under a contract duty to insure for the mortgagee's benefit, in which case the mortgagee acquires an equitable lien upon the proceeds. 21 In the policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his interest may appear, the mortgagee is only a beneficiary under the contract, and recognized as such by the insurer but not made a party to the contract himself. Hence, any act of the mortgagor which defeats his right will also defeat the right of the mortgagee. 22 This kind of policy covers only such
interest as the mortgagee has at the issuing of the policy. 23

On the other hand, a mortgagee may also procure a policy as a contracting party in accordance with the terms of an agreement by which the mortgagor is to pay the premiums upon such insurance. 24 It
has been noted, however, that although the mortgagee is himself the insured, as where he applies for a policy, fully informs the authorized agent of his interest, pays the premiums, and obtains on the assurance that it insures him, the policy is in fact in the form used to insure a mortgagor with loss payable clause. 25

The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a mortgage clause which reads: Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu City as their interest may appear subject to the terms of this policy. This is clearly a simple loss payable clause, not a standard mortgage clause. It must, however, be underscored that unlike the "other insurance" clauses involved in General Insurance and Surety Corp. vs. Ng Hua 26 or in Pioneer Insurance & Surety Corp. vs. Yap, 27 which
read:

The insured shall give notice to the company of any insurance or insurances already effected, or which may subsequently be effected covering any of the property hereby insured, and unless such notice be given and the particulars of such insurance or insurances be stated in or endorsed on this Policy by or on behalf of the Company before the occurrence of any loss or damage, all benefits under this Policy shall be forfeited. or in the 1930 case of Santa Ana vs. Commercial Union Assurance Co. 28 which provided "that any outstanding insurance upon the whole or a portion of the objects
thereby assured must be declared by the insured in writing and he must cause the company to add or insert it in the policy, without which such policy shall be null and void, and the insured will not be entitled to indemnity in case of loss," Condition 3in the private respondent's policy No. F14622 does not absolutely declare void any violation thereof. It expressly provides that the condition "shall not apply when the total insurance or insurances in force at the time of the loss or damage is not more than P200,000.00."

It is a cardinal rule on insurance that a policy or insurance contract is to be interpreted liberally in favor of the insured and strictly against the company, the reason being, undoubtedly, to afford the greatest protection which the insured was endeavoring to secure when he applied for insurance. It is also a cardinal principle of law that forfeitures are not favored and that any construction which would result in the forfeiture of the policy benefits for the person claiming thereunder, will be avoided, if it is possible to construe the policy in a manner which would permit recovery, as, for example, by finding a waiver for such forfeiture. 29 Stated differently, provisions, conditions or exceptions in policies which
tend to work a forfeiture of insurance policies should be construed most strictly against those for whose

benefits they are inserted, and most favorably toward those against whom they are intended to operate. 30 The reason for this is that, except for riders which may later be inserted, the insured sees the contract already in its final form and has had no voice in the selection or arrangement of the words employed therein. On the other hand, the language of the contract was carefully chosen and deliberated upon by experts and legal advisers who had acted exclusively in the interest of the insurers and the technical language employed therein is rarely understood by ordinary laymen. 31

With these principles in mind, we are of the opinion that Condition 3 of the subject policy is not totally free from ambiguity and must, perforce, be meticulously analyzed. Such analysis leads us to conclude that (a) the prohibition applies only to double insurance, and (b) the nullity of the policy shall only be to the extent exceeding P200,000.00 of the total policies obtained. The first conclusion is supported by the portion of the condition referring to other insurance "covering any of the property or properties consisting of stocks in trade, goods in process and/or inventories only hereby insured," and the portion regarding the insured's declaration on the subheading COINSURANCE that the co-insurer is Mercantile Insurance Co., Inc. in the sum of P50,000.00. A double insurance exists where the same person is insured by several insurers separately in respect of the same subject and interest. As earlier stated, the insurable interests of a mortgagor and a mortgagee on the mortgaged property are distinct and separate. Since the two policies of the PFIC do not cover the same interest as that covered by the policy of the private respondent, no double insurance exists. The non-disclosure then of the former policies was not fatal to the petitioner's right to recover on the private respondent's policy. Furthermore, by stating within Condition 3 itself that such condition shall not apply if the total insurance in force at the time of loss does not exceed P200,000.00, the private respondent was amenable to assume a co-insurer's liability up to a loss not exceeding P200,000.00. What it had in mind was to discourage over-insurance. Indeed, the rationale behind the incorporation of "other insurance" clause in fire policies is to prevent over-insurance and thus avert the perpetration of fraud. When a property owner obtains insurance policies from two or more insurers in a total amount that exceeds the property's value, the insured may have an inducement to destroy the property for the purpose of collecting the insurance. The public as well as the insurer is interested in preventing a situation in which a fire would be profitable to the insured. 32 WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals in CAG.R. SP No. 31916 is SET ASIDE and the decision of the Insurance Commission in Case No. 3340 is REINSTATED. Costs against private respondent Country Bankers Insurance Corporation. SO ORDERED. Padilla, Bellosillo, Quiason and Kapunan, JJ., concur.

Footnotes 1 Annex "A" of Petition; Rollo, 18-26. Per Associate Justice Vicente V. Mendoza, concurred in by Associate Justices Jesus M. Elbinias and Lourdes K. Tayao-Jaguros. 2 Exhibit "1"; Original Records (OR) (CA-G.R. SP. No. 31916), 34.

3 Exhibit "4"; Annex "C" of Petition; OR (CA-G.R. SP No. 31916), 27. 4 Exhibits "2" and "3"; Annexes "F" and "G," Id., 45-46. 5 Annex "E," Id.; Rollo, 38. 6 Annex "L," Id.; OR (CA-G.R. SP No. 31916), 66. 7 Annex "E" of Petition; Rollo, 43. 8 Annex "D," Id.; Id., 32. 9 Annex "G," Id.; Id., 47. 10 Annex "H" of Petition; Rollo, 52. 11 Annex "A," Id.; Id., 18. 12 It is specifically referred to in paragraph 7 of the complaint. Rollo, 40. 13 Philippine Bank of Communications vs. Court of Appeals, 195 SCRA 567 [1991]. 14 Tolentino vs. De Jesus, 56 SCRA 167 [1974]; Remalante vs. Tibe, 158 SCRA 138 [1988]. 15 P.D. No. 1460. 16 MARIA CLARA L. CAMPOS, Insurance (1983 ed.) citing General Insurance & Surety Corp. vs. Ng Hua, 106 Phil. 1117 [1960]; Petitioner Insurance & Surety Corp. vs. Yap, 61 SCRA 426 [1974]; Union Manufacturing Co., Inc. vs. Philippine Guaranty Co., Inc., 47 SCRA 271 [1972]. 17 Id., JOHN F. DOBBYN, Insurance Law in a Nutshell 204 (2d ed. 1989.) 18 COUCH on Insurance 2d 24:68 (1960 ed.). 19 Id., 24:69. 20 Id., 24:72. 21 WILLIAM R. VANCE, Handbook on the Law on Insurance 773-774 (3rd ed.) 22 Id., 775. 23 COUCH, op cit., 24:72. 24 VANCE, op cit., 775. 25 COUCH, op cit., 23:36.

26 Supra note 16. 27 Supra note 16. 28 55 Phil. 329, 334 [1930]. 29 2 TEODORICO C. MARTIN, Commentaries and Jurisprudence on the Philippine Commercial Laws, 143 (1986 rev. ed.). 30 Trinidad vs. Orient Protective Assurance Association, 67 Phil. 181 [1939]. 31 CAMPOS, op cit., 12. 32 Pioneer Insurance and Surety Corp. vs. Yap, supra note 16.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-34583 October 22, 1931

THE BANK OF THE PHILIPPINE ISLANDS, administrator of the estate of the late Adolphe Oscar Schuetze,plaintiff-appellant, vs. JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellee. Araneta, De Joya, Zaragoza and Araneta for appellant. Attorney-General Jaranilla for appellee.

VILLA-REAL, J.: The Bank of the Philippine Islands, as administrator of the estate of the deceased Adolphe Oscar Schuetze, has appealed to this court from the judgment of the Court of First Instance of Manila absolving the defendant Juan Posadas, Jr., Collector of Internal Revenue, from the complaint filed against him by said plaintiff bank, and dismissing the complaint with costs. The appellant has assigned the following alleged errors as committed by the trial court in its judgment, to wit: 1. The lower court erred in holding that the testimony of Mrs. Schuetze was inefficient to established the domicile of her husband.

2. The lower court erred in holding that under section 1536 of the Administrative Code the tax imposed by the defendant is lawful and valid. 3. The lower court erred in not holding that one-half () of the proceeds of the policy in question is community property and that therefore no inheritance tax can be levied, at least on one-half () of the said proceeds. 4. The lower court erred in not declaring that it would be unconstitutional to impose an inheritance tax upon the insurance policy here in question as it would be a taking of property without due process of law. The present complaint seeks to recover from the defendant Juan Posadas, Jr., Collector of Internal Revenue, the amount of P1,209 paid by the plaintiff under protest, in its capacity of administrator of the estate of the late Adolphe Oscar Schuetze, as inheritance tax upon the sum of P20,150, which is the amount of an insurance policy on the deceased's life, wherein his own estate was named the beneficiary. At the hearing, in addition to documentary and parol evidence, both parties submitted the following agreed statement of facts of the court for consideration: It is hereby stipulated and agreed by and between the parties in the above-entitled action through their respective undersigned attorneys: 1. That the plaintiff, Rosario Gelano Vda. de Schuetze, window of the late Adolphe Oscar Schuetze, is of legal age, a native of Manila, Philippine Islands, and is and was at all times hereinafter mentioned a resident of Germany, and at the time of the death of her husband, the late Adolphe Oscar Schuetze, she was actually residing and living in Germany; 2. That the Bank of the Philippine Islands, is and was at all times hereinafter mentioned a banking institution duly organized and existing under and by virtue of the laws of the Philippine Islands; 3. That on or about August 23, 1928, the herein plaintiff before notary public Salvador Zaragoza, drew a general power appointing the above-mentioned Bank of the Philippine Islands as her attorney-in-fact, and among the powers conferred to said attorney-in-fact was the power to represent her in all legal actions instituted by or against her; 4. That the defendant, of legal age, is and at all times hereinafter mentioned the duly appointed Collector of Internal Revenue with offices at Manila, Philippine Islands; 5. That the deceased Adolphe Oscar Schuetze came to the Philippine Islands for the first time of March 31, 1890, and worked in the several German firms as a mere employee and that from the year 1903 until the year 1918 he was partner in the business of Alfredo Roensch; 6. That from 1903 to 1922 the said Adolphe Oscar Schuetze was in the habit of making various trips to Europe; 7. That on December 3, 1927, the late Adolphe Oscar Schuetze coming from Java, and with the intention of going to Bremen, landed in the Philippine Islands where he met his death on February 2, 1928;

8. That on March 31, 1926, the said Adolphe Oscar Schuetze, while in Germany, executed a will, in accordance with its law, wherein plaintiff was named his universal heir; 9. That the Bank of the Philippine Islands by order of the Court of First Instance of Manila under date of May 24, 1928, was appointed administrator of the estate of the deceased Adolphe Oscar Schuetze; 10. That, according to the testamentary proceedings instituted in the Court of First Instance of Manila, civil case No. 33089, the deceased at the time of his death was possessed of not only real property situated in the Philippine Islands, but also personal property consisting of shares of stock in nineteen (19) domestic corporations; 11. That the fair market value of all the property in the Philippine Islands left by the deceased at the time of his death in accordance with the inventory submitted to the Court of First Instance of Manila, civil case No. 33089, was P217,560.38; 12. That the Bank of the Philippine Islands, as administrator of the estate of the deceased rendered its final account on June 19, 1929, and that said estate was closed on July 16, 1929; 13. That among the personal property of the deceased was found life-insurance policy No. 194538 issued at Manila, Philippine Islands, on January 14, 1913, for the sum of $10,000 by the Sun Life Assurance Company of Canada, Manila branch, a foreign corporation duly organized and existing under and by virtue of the laws of Canada, and duly authorized to transact business in the Philippine Islands; 14. That in the insurance policy the estate of the said Adolphe Oscar Schuetze was named the beneficiary without any qualification whatsoever; 15. That for five consecutive years, the deceased Adolphe Oscar Schuetze paid the premiums of said policy to the Sun Life Assurance Company of Canada, Manila branch; 16. That on or about the year 1918, the Sun Life Assurance Company of Canada, Manila branch, transferred said policy to the Sun Life Assurance Company of Canada, London branch; 17. That due to said transfer the said Adolphe Oscar Schuetze from 1918 to the time of his death paid the premiums of said policy to the Sun Life Assurance Company of Canada, London Branch; 18. That the sole and only heir of the deceased Adolphe Oscar Schuetze is his widow, the plaintiff herein; 19. That at the time of the death of the deceased and at all times thereafter including the date when the said insurance policy was paid, the insurance policy was not in the hands or possession of the Manila office of the Sun Life Assurance Company of Canada, nor in the possession of the herein plaintiff, nor in the possession of her attorney-in-fact the Bank of the Philippine Islands, but the same was in the hands of the Head Office of the Sun Life Assurance Company of Canada, at Montreal, Canada;

20. That on July 13, 1928, the Bank of the Philippine Islands as administrator of the decedent's estate received from the Sun Life Assurance Company of Canada, Manila branch, the sum of P20,150 representing the proceeds of the insurance policy, as shown in the statement of income and expenses of the estate of the deceased submitted on June 18, 1929, by the administrator to the Court of First Instance of Manila, civil case No. 33089; 21. That the Bank of the Philippine Islands delivered to the plaintiff herein the said sum of P20,150; 22. That the herein defendant on or about July 5, 1929, imposed an inheritance tax upon the transmission of the proceeds of the policy in question in the sum of P20,150 from the estate of the late Adolphe Oscar Schuetze to the sole heir of the deceased, or the plaintiff herein, which inheritance tax amounted to the sum of P1,209; 23. That the Bank of the Philippine Islands as administrator of the decedent's estate and as attorney-in-fact of the herein plaintiff, having been demanded by the herein defendant to pay inheritance tax amounting to the sum of P1,209, paid to the defendant under protest the above-mentioned sum; 24. That notwithstanding the various demands made by plaintiff to the defendant, said defendant has refused and refuses to refund to plaintiff the above mentioned sum of P1,209; 25. That plaintiff reserves the right to adduce evidence as regards the domicile of the deceased, and so the defendant, the right to present rebuttal evidence; 26. That both plaintiff and defendant submit this stipulation of facts without prejudice to their right to introduce such evidence, on points not covered by the agreement, which they may deem proper and necessary to support their respective contentions. In as much as one of the question raised in the appeal is whether an insurance policy on said Adolphe Oscar Schuetze's life was, by reason of its ownership, subject to the inheritance tax, it would be well to decide first whether the amount thereof is paraphernal or community property. According to the foregoing agreed statement of facts, the estate of Adolphe Oscar Schuetze is the sole beneficiary named in the life-insurance policy for $10,000, issued by the Sun Life Assurance Company of Canada on January 14, 1913. During the following five years the insured paid the premiums at the Manila branch of the company, and in 1918 the policy was transferred to the London branch. The record shows that the deceased Adolphe Oscar Schuetze married the plaintiff-appellant Rosario Gelano on January 16, 1914. With the exception of the premium for the first year covering the period from January 14, 1913 to January 14, 1914, all the money used for paying the premiums, i. e., from the second year, or January 16, 1914, or when the deceased Adolphe Oscar Schuetze married the plaintiff-appellant Rosario Gelano, until his death on February 2, 1929, is conjugal property inasmuch as it does not appear to have exclusively belonged to him or to his wife (art. 1407, Civil Code). As the sum of P20,150 here in controversy is a product of such premium it must also be deemed community property, because it was acquired for a valuable consideration, during said Adolphe Oscar Schuetze's marriage with Rosario Gelano at the expense of the common fund (art. 1401, No. 1, Civil Code), except for the small part corresponding to the first premium paid with the deceased's own money.

In his Commentaries on the Civil Code, volume 9, page 589, second edition, Manresa treats of life insurance in the following terms, to wit: The amount of the policy represents the premiums to be paid, and the right to it arises the moment the contract is perfected, for at the moment the power of disposing of it may be exercised, and if death occurs payment may be demanded. It is therefore something acquired for a valuable consideration during the marriage, though the period of its fulfillment, depend upon the death of one of the spouses, which terminates the partnership. So considered, the question may be said to be decided by articles 1396 and 1401: if the premiums are paid with the exclusive property of husband or wife, the policy belongs to the owner; if with conjugal property, or if the money cannot be proved as coming from one or the other of the spouses, the policy is community property. The Supreme Court of Texas, United States, in the case of Martin vs. Moran (11 Tex. Civ. A., 509) laid down the following doctrine: COMMUNITY PROPERTY LIFE INSURANCE POLICY. A husband took out an endowment life insurance policy on his life, payable "as directed by will." He paid the premiums thereon out of community funds, and by his will made the proceeds of the policy payable to his own estate. Held, that the proceeds were community estate, one-half of which belonged to the wife. In In re Stan's Estate, Myr. Prob. (Cal.), 5, the Supreme Court of California laid down the following doctrine: A testator, after marriage, took out an insurance policy, on which he paid the premiums from his salary. Held that the insurance money was community property, to one-half of which, the wife was entitled as survivor. In In re Webb's Estate, Myr. Prob. (Cal.), 93, the same court laid down the following doctrine: A decedent paid the first third of the amount of the premiums on his life-insurance policy out of his earnings before marriage, and the remainder from his earnings received after marriage. Held, that one-third of the policy belonged to his separate estate, and the remainder to the community property. Thus both according to our Civil Code and to the ruling of those North American States where the Spanish Civil Code once governed, the proceeds of a life-insurance policy whereon the premiums were paid with conjugal money, belong to the conjugal partnership. The appellee alleges that it is a fundamental principle that a life-insurance policy belongs exclusively to the beneficiary upon the death of the person insured, and that in the present case, as the late Adolphe Oscar Schuetze named his own estate as the sole beneficiary of the insurance on his life, upon his death the latter became the sole owner of the proceeds, which therefore became subject to the inheritance tax, citing Del Val vs. Del Val (29 Phil., 534), where the doctrine was laid down that an heir appointed beneficiary to a life-insurance policy taken out by the deceased, becomes the absolute owner of the proceeds of such policy upon the death of the insured. The estate of a deceased person cannot be placed on the same footing as an individual heir. The proceeds of a life-insurance policy payable to the estate of the insured passed to the executor or administrator of such estate, and forms part of its assets (37 Corpus Juris, 565, sec. 322); whereas the proceeds of a life-insurance policy payable to an heir of the insured as beneficiary belongs

exclusively to said heir and does not form part of the deceased's estate subject to administrator. (Del Val vs. Del Val, supra; 37 Corpus Juris, 566, sec. 323, and articles 419 and 428 of the Code of Commerce.) Just as an individual beneficiary of a life-insurance policy taken out by a married person becomes the exclusive owner of the proceeds upon the death of the insured even if the premiums were paid by the conjugal partnership, so, it is argued, where the beneficiary named is the estate of the deceased whose life is insured, the proceeds of the policy become a part of said estate upon the death of the insured even if the premiums have been paid with conjugal funds. In a conjugal partnership the husband is the manager, empowered to alienate the partnership property without the wife's consent (art. 1413, Civil Code), a third person, therefore, named beneficiary in a life-insurance policy becomes the absolute owner of its proceeds upon the death of the insured even if the premiums should have been paid with money belonging to the community property. When a married man has his life insured and names his own estate after death, beneficiary, he makes no alienation of the proceeds of conjugal funds to a third person, but appropriates them himself, adding them to the assets of his estate, in contravention of the provisions of article 1401, paragraph 1, of the Civil Code cited above, which provides that "To the conjugal partnership belongs" (1) Property acquired for a valuable consideration during the marriage at the expense of the common fund, whether the acquisition is made for the partnership or for one of the spouses only." Furthermore, such appropriation is a fraud practised upon the wife, which cannot be allowed to prejudice her, according to article 1413, paragraph 2, of said Code. Although the husband is the manager of the conjugal partnership, he cannot of his own free will convert the partnership property into his own exclusive property. As all the premiums on the life-insurance policy taken out by the late Adolphe Oscar Schuetze, were paid out of the conjugal funds, with the exceptions of the first, the proceeds of the policy, excluding the proportional part corresponding to the first premium, constitute community property, notwithstanding the fact that the policy was made payable to the deceased's estate, so that one-half of said proceeds belongs to the estate, and the other half to the deceased's widow, the plaintiffappellant Rosario Gelano Vda. de Schuetze. The second point to decide in this appeal is whether the Collector of Internal Revenue has authority, under the law, to collect the inheritance tax upon one-half of the life-insurance policy taken out by the late Adolphe Oscar Schuetze, which belongs to him and is made payable to his estate. According to the agreed statement of facts mentioned above, the plaintiff-appellant, the Bank of the Philippine Islands, was appointed administrator of the late Adolphe Oscar Schuetze's testamentary estate by an order dated March 24, 1928, entered by the Court of First Instance of Manila. On July 13, 1928, the Sun Life Assurance Company of Canada, whose main office is in Montreal, Canada, paid Rosario Gelano Vda. de Schuetze upon her arrival at Manila, the sum of P20,150, which was the amount of the insurance policy on the life of said deceased, payable to the latter's estate. On the same date Rosario Gelano Vda. de Schuetze delivered the money to said Bank of the Philippine Islands, as administrator of the deceased's estate, which entered it in the inventory of the testamentary estate, and then returned the money to said widow. Section 1536 of the Administrative Code, as amended by section 10 of Act No. 2835 and section 1 of Act No. 3031, contains the following relevant provision: SEC. 1536. Conditions and rate of taxation. Every transmission by virtue of inheritance, devise, bequest, gift mortis causa or advance in anticipation of inheritance, devise, or bequest of real property located in the Philippine Islands and real rights in such property; of

any franchise which must be exercised in the Philippine Islands; of any shares, obligations, or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippine Islands in accordance with its laws; of any shares or rights in any partnership, business or industry established in the Philippine Islands or of any personal property located in the Philippine Islands shall be subject to the following tax: xxx xxx xxx

In as much as the proceeds of the insurance policy on the life of the late Adolphe Oscar Schuetze were paid to the Bank of the Philippine Islands, as administrator of the deceased's estate, for management and partition, and as such proceeds were turned over to the sole and universal testamentary heiress Rosario Gelano Vda. de Schuetze, the plaintiff-appellant, here in Manila, the situs of said proceeds is the Philippine Islands. In his work "The Law of Taxation," Cooley enunciates the general rule governing the levying of taxes upon tangible personal property, in the following words: GENERAL RULE. The suits of tangible personal property, for purposes of taxation may be where the owner is domiciled but is not necessarily so. Unlike intangible personal property, it may acquire a taxation situs in a state other than the one where the owner is domiciled, merely because it is located there. Its taxable situs is where it is more or less permanently located, regardless of the domicile of the owner. It is well settled that the state where it is more or less permanently located has the power to tax it although the owner resides out of the state, regardless of whether it has been taxed for the same period at the domicile of the owner, provided there is statutory authority for taxing such property. It is equally well settled that the state where the owner is domiciled has no power to tax it where the property has acquired an actual situs in another state by reason of its more or less permanent location in that state. ... (2 Cooley, The Law of Taxation, 4th ed., p. 975, par. 451.) With reference to the meaning of the words "permanent" and "in transit," he has the following to say: PERMANENCY OF LOCATION; PROPERTY IN TRANSIT. In order to acquire a situs in a state or taxing district so as to be taxable in the state or district regardless of the domicile of the owner and not taxable in another state or district at the domicile of the owner, tangible personal property must be more or less permanently located in the state or district. In other words, the situs of tangible personal property is where it is more or less permanently located rather than where it is merely in transit or temporarily and for no considerable length of time. If tangible personal property is more or less permanently located in a state other than the one where the owner is domiciled, it is not taxable in the latter state but is taxable in the state where it is located. If tangible personal property belonging to one domiciled in one state is in another state merely in transitu or for a short time, it is taxable in the former state, and is not taxable in the state where it is for the time being. . . . . Property merely in transit through a state ordinarily is not taxable there. Transit begins when an article is committed to a carrier for transportation to the state of its destination, or started on its ultimate passage. Transit ends when the goods arrive at their destination. But intermediate these points questions may arise as to when a temporary stop in transit is such as to make the property taxable at the place of stoppage. Whether the property is taxable in such a case usually depends on the length of time and the purpose of the interruption of transit. . . . .

. . . It has been held that property of a construction company, used in construction of a railroad, acquires a situs at the place where used for an indefinite period. So tangible personal property in the state for the purpose of undergoing a partial finishing process is not to be regarded as in the course of transit nor as in the state for a mere temporary purpose. (2 Cooley, The Law of Taxation, 4th ed., pp. 982, 983 and 988, par. 452.) If the proceeds of the life-insurance policy taken out by the late Adolphe Oscar Schuetze and made payable to his estate, were delivered to the Bank of the Philippine Islands for administration and distribution, they were not in transit but were more or less permanently located in the Philippine Islands, according to the foregoing rules. If this be so, half of the proceeds which is community property, belongs to the estate of the deceased and is subject to the inheritance tax, in accordance with the legal provision quoted above, irrespective of whether or not the late Adolphe Oscar Schuetze was domiciled in the Philippine Islands at the time of his death. By virtue of the foregoing, we are of opinion and so hold: (1) That the proceeds of a life-insurance policy payable to the insured's estate, on which the premiums were paid by the conjugal partnership, constitute community property, and belong one-half to the husband and the other half to the wife, exclusively; (2) that if the premiums were paid partly with paraphernal and partly conjugal funds, the proceeds are likewise in like proportion paraphernal in part and conjugal in part; and (3) that the proceeds of a life-insurance policy payable to the insured's estate as the beneficiary, if delivered to the testamentary administrator of the former as part of the assets of said estate under probate administration, are subject to the inheritance tax according to the law on the matter, if they belong to the assured exclusively, and it is immaterial that the insured was domiciled in these Islands or outside.
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Wherefore, the judgment appealed from is reversed, and the defendant is ordered to return to the plaintiff the one-half of the tax collected upon the amount of P20,150, being the proceeds of the insurance policy on the life of the late Adolphe Oscar Schuetze, after deducting the proportional part corresponding to the first premium, without special pronouncement of costs. So ordered. Avancea, C.J., Johnson, Street, Malcolm, Villamor, and Ostrand, JJ., concur.

Separate Opinions

IMPERIAL, J., dissenting: I cannot concur with the majority in holding that one-half of the insurance policy on the life of the late Adolphe Oscar Schuetze, excepting the proportional part corresponding to the first year's premium is community property belonging to the deceased's widow, named Rosario Gelano, and as such is not subject to the inheritance tax. There is no question in regard to the facts: It is admitted that Schuetze insured himself in the Sun Life Insurance Company of Canada in Manila, and that the policy was issued on January 14, 1913,

payable to his estate after death. He died in Manila on February 2, 1928, leaving his widow as his sole testamentary heiress. The appellant, the Bank of the Philippine Islands, as administrator of the late Schuetze's testamentary estate, received from the insurer the amount of this policy, or the net sum of P20,150. It is an established and generally recognized principle that in a life-insurance policy where the insured has named a beneficiary, the proceeds belong to said beneficiary, and to him alone. "Vested Interest of Beneficiary. In practically every jurisdiction it is the rule that in an ordinary life insurance policy made payable to a beneficiary, and which does not authorize a change of beneficiary, the named beneficiary has an absolute, vested interest in the policy from the date of its issuance, delivery and acceptance, and this is true of a policy payable to the children of the insured equally, without naming them, or their executors, administrators or assigns." (14 R.C.L., 1376.) (Del Valvs. Del Val, 29 Phil., 534 et seq.; Gercio vs. Sun Life Assurance Co. of Canada, 48 Phil., 53 et seq.) When in a life-insurance policy the insured's estate is named beneficiary, the proceeds must be delivered not to the decedent's heirs, but to his administrator or legal representative. "Policy Payable to Insured, His Estate, or Legal Representatives. ... Ordinarily the proceeds of a life insurance policy are payable to the executor or administrator of insured as assets of his estate where by the terms of the policy the proceeds are payable to insured, his estate, his legal representatives, his executors or administrators, his "executors, administrators, or assigns," or even his "heirs, executors, administrators, or assigns." ..." (37 C.J., 565.) "Personal Representatives or Legal Representatives. While there is some authority to the effect that "legal representatives" means the persons entitled to the estate of the insured, and not his executor or administrator, the better view is that ordinarily the proceeds of such a policy pass to his executor or administrator." (14 R.C.L., 1372.) If the foregoing are the principles which should govern life-insurance policies with reference to beneficiaries and the right to the proceeds of such policies, it is evident that Schuetze's estate, and not his widow or the conjugal partnership, is entitled to the proceeds of said policy exclusively, and may receive them from the insurer. The parties must have so understood it when the insurer delivered the net amount of the policy to the Bank of the Philippine Islands, as judicial administrator of the insured. It is stated in the majority opinion that the money with which the premiums were paid during the marriage of the Schuetzes is presumed to have been taken from the conjugal funds, according to article 1407 of the Civil Code, which provides that "All the property of the spouses shall be deemed partnership property in the absence of proof that it belongs exclusively to the husband or to the wife." This is the very argument which led to the settlement of the point of law raised. The provisions of the Civil Code on conjugal property have been improperly applied without considering that a lifeinsurance contract is a peculiar contract governed by special laws, such as Act No. 2427 with its amendments, and the Code of Commerce, which is still in force. In Del Val, supra, it was already held: We cannot agree with these contentions. The contract of life insurance is a special contract and the destination of the proceeds thereof is determined by special laws which deal exclusively with that subject. The Civil Code has no provisions which relate directly and specially to life insurance contracts or to the destination of life insurance proceeds. That subject is regulated exclusively by the Code of Commerce which provides for the terms of the contract, the relations of the parties and the destination of the proceeds of the policy. The main point to be decided was not whether the premiums were paid out of conjugal or personal funds of one of the spouses, but whether or not the proceeds of the policy became assets of the insured's estate. If it be admitted that the estate is the sole owner of the aforesaid proceeds, which

cannot be denied, inasmuch as the policy itself names the estate as the beneficiary, it is beside the point to discuss the nature and origin of the amounts used to pay the premiums, as the title to the proceeds of the policy is vested in the insured's estate, and any right the widow might have should be vindicated in another action. In such a case she might be entitled to reimbursement of her share in the conjugal funds, but not in the present case, for she has been instituted the sole testamentary heiress. From the foregoing, it follows that as the proceeds of the policy belong to Schuetze's estate, and inasmuch as the inheritance tax is levied upon the transmission of a deceased person's estate upon, or, on the occasion of his death, it is clear that the whole proceeds, and not one-half thereof, are subject to such tax. In my opinion the judgment appealed from should have been affirmed in its entirely. Romualdez, J., concurs.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-9374 February 16, 1915

FRANCISCO DEL VAL, ET AL., plaintiffs-appellants, vs. ANDRES DEL VAL, defendant-appellee. Ledesma, Lim and Irureta Goyena for appellants. O'Brien and DeWitt for appellee. MORELAND, J.: This is an appeal from a judgment of the Court of First Instance of the city of Manila dismissing the complaint with costs. The pleadings set forth that the plaintiffs and defendant are brother and sisters; that they are the only heirs at law and next of kin of Gregorio Nacianceno del Val, who died in Manila on August 4, 1910, intestate; that an administrator was appointed for the estate of the deceased, and, after a partial administration, it was closed and the administrator discharged by order of the Court of First Instance dated December 9, 1911; that during the lifetime of the deceased he took out insurance on his life for the sum of P40,000 and made it payable to the defendant as sole beneficiary; that after his death the defendant collected the face of the policy; that of said policy he paid the sum of P18,365.20 to redeem certain real estate which the decedent had sold to third persons with a right to repurchase; that the redemption of said premises was made by the attorney of the defendant in the name of the plaintiff and the defendant as heirs of the deceased vendor; that the redemption of said

premises they have had the use and benefit thereof; that during that time the plaintiffs paid no taxes and made no repairs. It further appears from the pleadings that the defendant, on the death of the deceased, took possession of most of his personal property, which he still has in his possession, and that he has also the balance on said insurance policy amounting to P21,634.80. Plaintiffs contend that the amount of the insurance policy belonged to the estate of the deceased and not to the defendant personally; that, therefore, they are entitled to a partition not only of the real and personal property, but also of the P40,000 life insurance. The complaint prays a partition of all the property, both real and personal, left by the deceased; that the defendant account for P21,634.80, and that that sum be divided equally among the plaintiffs and defendant along with the other property of deceased. The defendant denies the material allegations of the complaint and sets up as special defense and counterclaim that the redemption of the real estate sold by his father was made in the name of the plaintiffs and himself instead of in his name alone without his knowledge or consent; and that it was not his intention to use the proceeds of the insurance policy for the benefit of any person but himself, he alleging that he was and is the sole owner thereof and that it is his individual property. He, therefore, asks that he be declared the owner of the real estate redeemed by the payment of the P18,365.20, the owner of the remaining P21,634.80, the balance of the insurance policy, and that the plaintiff's account for the use and occupation of the premises so redeemed since the date of the redemption. The learned trial court refused to give relief to either party and dismissed the action. It says in its opinion: "This purports to be an action for partition, brought against an heir by his coheirs. The complaint, however, fails to comply with Code Civ., Pro. sec. 183, in that it does not 'contain an adequate description of the real property of which partition is demanded.' Because of this defect (which has not been called to our attention and was discovered only after the cause was submitted) it is more than doubtful whether any relief can be awarded under the complaint, except by agreement of all the parties." This alleged defect of the complaint was made one of the two bases for the dismissal of the action. We do not regard this as sufficient reason for dismissing the action. It is the doctrine of this court, set down in several decisions, Lizarraga Hermanos vs. Yap Tico, 24 Phil. Rep., 504, that, even though the complaint is defective to the extent of failing in allegations necessary to constitute a cause of action, if, on the trial of the cause, evidence is offered which establishes the cause of action which the complaint intended to allege, and such evidence is received without objection, the defect is thereby cured and cannot be made the ground of a subsequent objection. If, therefore, evidence was introduced on the trial in this case definitely and clearly describing the real estate sought to be partitioned, the defect in the complaint was cured in that regard and should not have been used to dismiss the action. We do not stop to inquire whether such evidence was or was not introduced on the trial, inasmuch as this case must be turned for a new trial with opportunity to both parties to present such evidence as is necessary to establish their respective claims. The court in its decision further says: "It will be noticed that the provision above quoted refers exclusively to real estate. . . . It is, in other words, an exclusive real property action, and the institution thereof gives the court no jurisdiction over chattels. . . . But no relief could possibly be granted in this action as to any property except the last (real estate), for the law contemplated that all the personal property of an estate be distributed before the administration is closed. Indeed, it is only

in exceptional cases that the partition of the real estate is provided for, and this too is evidently intended to be effected as a part of the administration, but here the complaint alleges that the estate was finally closed on December 9, 1911, and we find upon referring to the record in that case that subsequent motion to reopen the same were denied; so that the matter of the personal property at least must be considered res judicata (for the final judgment in the administration proceedings must be treated as concluding not merely what was adjudicated, but what might have been). So far, therefore, as the personal property at least is concerned, plaintiffs' only remedy was an appeal from said order." We do not believe that the law is correctly laid down in this quotation. The courts of the Islands have jurisdiction to divide personal property between the common owners thereof and that power is as full and complete as is the power to partition real property. If an actual partition of personal property cannot be made it will be sold under the direction of the court and the proceeds divided among the owners after the necessary expenses have been deducted. The administration of the estate of the decedent consisted simply, so far as the record shows, in the payment of the debts. No division of the property, either real or personal, seems to have been made. On the contrary, the property appears, from the record, to have been turned over to the heirs in bulk. The failure to partition the real property may have been due either to the lack of request to the court by one or more of the heirs to do so, as the court has no authority to make a partition of the real estate without such request; or it may have been due to the fact that all the real property of decedent had been sold under pacto de retro and that, therefore, he was not the owner of any real estate at the time of his death. As to the personal property, it does not appear that it was disposed of in the manner provided by law. (Sec. 753, Code of Civil Procedure.) So far as this action is concerned, however, it is sufficient for us to know that none of the property was actually divided among the heirs in the administration proceeding and that they remain coowners and tenants-in- common thereof at the present time. To maintain an action to partition real or personal property it is necessary to show only that it is owned in common. The order finally closing the administration and discharging the administrator, referred to in the opinion of the trial court, has nothing to do with the division of either the real or the personal property. The heirs have the right to ask the probate court to turn over to them both the real and personal property without division; and where that request is unanimous it is the duty of the court to comply with it, and there is nothing in section 753 of the Code of Civil Procedure which prohibits it. In such case an order finally settling the estate and discharging the administrator would not bar a subsequent action to require a division of either the real or personal property. If, on the other hand, an order had been made in the administration proceedings dividing the personal or the real property, or both, among the heirs, then it is quite possible that, to a subsequent action brought by one of the heirs for a partition of the real or personal property, or both, there could have been interposed a plea of res judicata based on such order. As the matter now stands, however, there is no ground on which to base such a plea. Moreover, no such plea has been made and no evidence offered to support it. With the finding of the trial court that the proceeds of the life-insurance policy belong exclusively to the defendant as his individual and separate property, we agree. That the proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate of the person whose life was insured, and that such proceeds are the separate and individual property of the beneficiary, and not of the heirs of the person whose life was insured, is the doctrine in America. We believe that the same doctrine obtains in these Islands by virtue of section 428 of the Code of Commerce, which reads:

The amount which the underwriter must deliver to the person insured, in fulfillment of the contract, shall be the property of the latter, even against the claims of the legitimate heirs or creditors of any kind whatsoever of the person who effected the insurance in favor of the former. It is claimed by the attorney for the plaintiffs that the section just quoted is subordinate to the provisions of the Civil Code as found in article 1035. This article reads: An heir by force of law surviving with others of the same character to a succession must bring into the hereditary estate the property or securities he may have received from the deceased during the life of the same, by way of dowry, gift, or for any good consideration, in order to compute it in fixing the legal portions and in the account of the division. Counsel also claim that the proceeds of the insurance policy were a donation or gift made by the father during his lifetime to the defendant and that, as such, its ultimate destination is determined by those provisions of the Civil Code which relate to donations, especially article 819. This article provides that "gifts made to children which are not betterments shall be considered as part of their legal portion." We cannot agree with these contentions. The contract of life insurance is a special contract and the destination of the proceeds thereof is determined by special laws which deal exclusively with that subject. The Civil Code has no provisions which relate directly and specifically to life- insurance contracts or to the destination of life insurance proceeds. That subject is regulated exclusively by the Code of Commerce which provides for the terms of the contract, the relations of the parties and the destination of the proceeds of the policy. The proceeds of the life-insurance policy being the exclusive property of the defendant and he having used a portion thereof in the repurchase of the real estate sold by the decedent prior to his death with right to repurchase, and such repurchase having been made and the conveyance taken in the names of all of the heirs instead of the defendant alone, plaintiffs claim that the property belongs to the heirs in common and not to the defendant alone. We are not inclined to agree with this contention unless the fact appear or be shown that the defendant acted as he did with the intention that the other heirs should enjoy with him the ownership of the estate in other words, that he proposed, in effect, to make a gift of the real estate to the other heirs. If it is established by the evidence that that was his intention and that the real estate was delivered to the plaintiffs with that understanding, then it is probable that their contention is correct and that they are entitled to share equally with the defendant therein. If, however, it appears from the evidence in the case that the conveyances were taken in the name of the plaintiffs without his knowledge or consent, or that it was not his intention to make a gift to them of the real estate, then it belongs to him. If that facts are as stated, he has two remedies. The one is to compel the plaintiffs to reconvey to him and the other is to let the title stand with them and to recover from them the sum he paid on their behalf. For the complete and proper determination of the questions at issue in this case, we are of the opinion that the cause should be returned to the trial court with instructions to permit the parties to frame such issues as will permit the settlement of all the questions involved and to introduce such evidence as may be necessary for the full determination of the issues framed. Upon such issues and evidence taken thereunder the court will decide the questions involved according to the evidence, subordinating his conclusions of law to the rules laid down in this opinion.

We do not wish to be understood as having decided in this opinion any question of fact which will arise on the trial and be there in controversy. The trial court is left free to find the facts as the evidence requires. To the facts as so found he will apply the law as herein laid down. The judgment appealed from is set aside and the cause returned to the Court of First Instance whence it came for the purpose hereinabove stated. So ordered. Arellano, C.J., and Carson, J., concur. Torres, J., concurs in the result.

Separate Opinions ARAULLO, J., concurring: I concur in the result and with the reasoning of the foregoing decision, only in so far as concerns the return of the record to the lower court in order that it fully and correctly decide all the issues raised therein, allow the parties to raise such questions as may help to decide all those involved in the case, and to present such evidence as they may deem requisite for a complete resolution of all the issues in discussion, because it is my opinion that it is inopportune to make, and there should not be made in the said majority decision the findings therein set forth in connection with articles 428 of the Code of Commerce and 1035 of the Civil Code, in order to arrive at the conclusion that the amount of the insurance policy referred to belongs exclusively to the defendant, inasmuch a this is one of the questions which, according to the decision itself, should be decided by the lower court after an examination of the evidence introduced by the parties; it is the lower court that should make those findings, which ought afterwards to be submitted to this court, if any appeal be taken from the judgment rendered in the case by the trial court in compliance with the foregoing decision.