Garcia v. Lim Chu Sing
REITERATIONFacts
The Antecedents: The plaintiff, as receiver of the Mercantile Bank of China, filed a complaint against the defendant, Lim Chu Sing, for the recovery of an unpaid balance of P9,105.17 on a promissory note. The promissory note, executed on June 20, 1930, was for P19,605.17 with 6% annual interest, payable in monthly installments. A condition stipulated was that default in any installment would make the entire unpaid balance due and payable on demand. The defendant had made partial payments, reducing the balance to P9,105.17, but defaulted on several installments, rendering the balance due. The defendant alleged that the debt was actually that of Lim Cuan Sy, guaranteed by him as surety, with chattel mortgage securities. The bank foreclosed the mortgage and sold the property privately. The defendant is also a shareholder of the Mercantile Bank of China, owning shares valued at P10,000. The bank was under liquidation. Procedural History: The Court of First Instance of Manila rendered a judgment sentencing the defendant to pay P9,105.17 with 6% annual interest, P910.51 as attorney's fees, and costs. The judgment was made subject to execution after ninety (90) days. The Petition: The defendant appealed the decision, assigning several errors, including the denial of his motion to include Lim Cuan Sy as a party defendant, the denial of compensation between his debt and the value of his shares, the failure to order liquidation of dividends on his shares, the imposition of attorney's fees and interest, and the denial of a motion for a new trial.
Issue(s)
Whether the court erred in denying the motion for the inclusion of Lim Cuan Sy as a party defendant. Whether the defendant's indebtedness of P9,105.17 can be compensated with the P10,000 value of his shares in the Mercantile Bank of China. Whether the court erred in sentencing the defendant to pay P910.51 as attorney's fees in addition to interest. Whether the court erred in denying the motion for a new trial.
Ruling
The judgment of the Court of First Instance of Manila is affirmed with the sole modification that the costs be eliminated from the appealed judgment. The appeal is dismissed without special pronouncement as to costs of this instance.
Ratio Decidendi
On the denial of the motion for inclusion of a party defendant: The Court held that the defendant-appellant failed to preserve his right to raise the issue of the denial of his motion for the inclusion of Lim Cuan Sy as a party defendant because he did not interpose an exception to the order of denial made in open court. According to Section 141 of the Code of Civil Procedure, rulings on minor matters and those addressed to the court's discretion are not subject to exception, but rulings on matters of law are. An exception is an objection taken to a decision upon a matter of law, serving as notice to the appellate court of a ruling deemed erroneous. Failure to except means the appellant is estopped from raising the question on appeal, citing Garcia de Lara vs. Gonzales de Lara and other cases. On the issue of compensation: The Court ruled that compensation is not proper. It cited the weight of authority stating that a share of stock or its certificate is not an indebtedness to the owner nor evidence of indebtedness, and thus not a credit. Stockholders, as such, are not creditors of the corporation. The capital stock of a corporation is a trust fund for the security of its creditors. Therefore, since the defendant-appellant was not a creditor of the Mercantile Bank of China with respect to his shares, compensation could not be legally effected under Article 1195 of the Civil Code, as affirmed in Acuña Co Chongco vs. Dievas. On the award of attorney's fees and interest: The Court clarified that the 6% interest per annum on the unpaid balance refers to the capital, while the 10% stipulated for attorney's fees and costs is an indemnity for damages incurred due to the collection process, not usurious interest. The promissory note explicitly stated that in case of default, the entire balance would be due, plus 6% interest and an additional 10% for costs and attorney's fees. The Court reasoned that these two amounts (interest on the capital and the stipulated percentage for collection) cannot be combined to be considered usurious. However, it noted that the 10% stipulated for costs and attorney's fees already covers judicial costs, thus the defendant should not be made to pay for them again, citing Bank of the Philippine Islands vs. Yulo. On the denial of the motion for a new trial: While this issue was raised as an assignment of error, the Court's resolution of the other issues rendered it moot or implicitly denied by the affirmation of the judgment with modification. The Court did not provide a separate detailed reasoning for this specific assignment of error beyond the general affirmation of the lower court's decision.
Main Doctrine
Shares of stock in a banking corporation do not constitute an indebtedness of the corporation to the stockholder, and therefore, the stockholder is not a creditor of the corporation for such shares. Consequently, the indebtedness of a shareholder to a banking corporation cannot be compensated with the value of his shares therein, as there is no relation of creditor and debtor with respect to such shares. Furthermore, failure to file an exception to a ruling denying a motion for the inclusion of a party as defendant deprives the petitioner, upon appeal, of the right to raise the question of the propriety of such denial.