Jurisprudence: G.R. No. L-20850 November 29, 1965

EN BANC

G.R. No. L-20850           November 29, 1965

THE EDWARD J. NELL COMPANY, petitioner,
vs.
PACIFIC FARMS, INC., respondent.

Agrava & Agrava for petitioner.
Araneta, Mendoza & Papa for respondent.

CONCEPCION, J.:

Appeal by certiorari, taken by Edward J. Nell Co. — hereinafter referred to as appellant — from a decision of the Court of Appeals.

On October 9, 1958, appellant secured in Civil Case No. 58579 of the Municipal Court of Manila against Insular Farms, Inc. — hereinafter referred to as Insular Farms a judgment for the sum of P1,853.80 — representing the unpaid balance of the price of a pump sold by appellant to Insular Farms — with interest on said sum, plus P125.00 as attorney's fees and P84.00 as costs. A writ of execution, issued after the judgment had become final, was, on August 14, 1959, returned unsatisfied, stating that Insular Farms had no leviable property. Soon thereafter, or on November 13, 1959, appellant filed with said court the present action against Pacific Farms, Inc. — hereinafter referred to as appellee — for the collection of the judgment aforementioned, upon the theory that appellee is the alter ego of Insular Farms, which appellee has denied. In due course, the municipal court rendered judgment dismissing appellant's complaint. Appellant appealed, with the same result, to the court of first instance and, subsequently, to the Court of Appeals. Hence this appeal by certiorari, upon the ground that the Court of Appeals had erred: (1) in not holding the appellee liable for said unpaid obligation of the Insular Farms; and (2) in not granting attorney's fees to appellant.

With respect to the first ground, it should be noted that appellant's complaint in the municipal court was anchored upon the theory that appellee is an alter ego of Insular Farms, because the former had purchased all or substantially all of the shares of stock, as well as the real and personal properties of the latter, including the pumping equipment sold by appellant to Insular Farms. The record shows that, on March 21, 1958, appellee purchased 1,000 shares of stock of Insular Farms for P285,126.99; that, thereupon, appellee sold said shares of stock to certain individuals, who forthwith reorganized said corporation; and that the board of directors thereof, as reorganized, then caused its assets, including its leasehold rights over a public land in Bolinao, Pangasinan, to be sold to herein appellee for P10,000.00. We agree with the Court of Appeals that these facts do not prove that the appellee is an alter ego of Insular Farms, or is liable for its debts. The rule is set forth in Fletcher Cyclopedia Corporations, Vol. 15, Sec. 7122, pp. 160-161, as follows:

Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, except: (1) where the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a consolidation or merger of the corporations; (3) where the purchasing corporation is merely a continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in order to escape liability for such debts.

In the case at bar, there is neither proof nor allegation that appellee had expressly or impliedly agreed to assume the debt of Insular Farms in favor of appellant herein, or that the appellee is a continuation of Insular Farms, or that the sale of either the shares of stock or the assets of Insular Farms to the appellee has been entered into fraudulently, in order to escape liability for the debt of the Insular Farms in favor of appellant herein. In fact, these sales took place (March, 1958) not only over six (6) months before the rendition of the judgment (October 9, 1958) sought to be collected in the present action, but, also, over a month before the filing of the case (May 29, 1958) in which said judgment was rendered. Moreover, appellee purchased the shares of stock of Insular Farms as the highest bidder at an auction sale held at the instance of a bank to which said shares had been pledged as security for an obligation of Insular Farms in favor of said bank. It has, also, been established that the appellee had paid P285,126.99 for said shares of stock, apart from the sum of P10,000.00 it, likewise, paid for the other assets of Insular Farms.

Neither is it claimed that these transactions have resulted in the consolidation or merger of the Insular Farms and appellee herein. On the contrary, appellant's theory to the effect that appellee is an alter ego of the Insular Farms negates such consolidation or merger, for a corporation cannot be its own alter ego.

It is urged, however, that said P10,000.00 paid by appellee for other assets of Insular Farms is a grossly inadequate price, because, appellant now claims, said assets were worth around P285,126.99, and that, consequently, the sale must be considered fraudulent. However, the sale was submitted to and approved by the Securities and Exchange Commission. It must be presumed, therefore, that the price paid was fair and reasonable. Moreover, the only issue raised in the court of origin was whether or not appellee is an alter ego of Insular Farms. The question of whether the aforementioned sale of assets for P10,000.00 was fraudulent or not, had not been put in issue in said court. Hence, it may, not be raised on appeal.

Being a mere consequence of the first assignment of error, which is thus clearly untenable, appellant's second assignment of error needs no discussion.

WHEREFORE, the decision appealed from is hereby affirmed, with costs against the appellant. It is so ordered.

Bengzon, C.J., Bautista Angelo, Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon. J.P., and Zaldivar, JJ., concur.
Barrera, J., is on leave.

Insurance Case Digest: Tanco Jr. v. Philippine Guaranty Co. (1965)

G.R. No.L-17312           November 29, 1965

Lessons Applicable: Definition and Coverage of Casualty Insurance (Insurance)

Laws Applicable: 

FACTS:

• While Tanco's automobile was driven by his brother Manuel Tanco, who at the time didn't have a valid license since it was not renewed until the next week, had a collision with a pick-up delivery van at the southern approach of the Jones bridge
• The repairs cost P2,536.99 so he filed a claim against the insurance company which was rejected 
• He filed a claim in the Municipal Court of Manila and elevated to the Court of First Instance of Manila on Appeal which favored Tanco
• exception clause "the company shall not be liable in respect of any accident, loss, damage or liability caused, sustained or incurred ... whilst (the insured vehicle) is ... being driven by or is for the purpose of being driven by him in the charge of any person other than an Authorized Driver.
• Authorized Driver" to be the insured himself and "(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 Motor Vehicle or has been permitted and is not disqualified by order of a court of law or by reason of any enactment or regulation in that behalf from driving such Motor Vehicle.

ISSUE: W/N the Tanco can claim because it was not covered by the exemption clause

HELD: NO. appealed from is reversed, with costs

• The exclusion clause in the contract invoked by appellant is clear. It does not refer to violations of law in general, which indeed would tend to render automobile insurance practically a sham, but to a specific situation where a person other than the insured himself, even upon his order or with his permission, drives the motor vehicle without a license or with one that has already expired. No principle of law or of public policy militates against the validity of such a provision.

Jurisprudence: G.R. No. L-17312

EN BANC

G.R. No. L-17312           November 29, 1965

ARTURO R. TANCO, JR., plaintiff-appellee,
vs.
THE PHILIPPINE GUARANTY COMPANY, defendant-appellant.

Manuel Y. Macias and Julio R. Vicencio for plaintiff-appellee.
Rufino Y. Luna and Josue H. Gustilo for defendant-appellant.

MAKALINTAL, J.:

Plaintiff's automobile, while being driven at the southern approach of the Jones bridge by his brother Manuel Tanco on September 1, 1959, figured in a collision with a pick-up delivery van, as a result of which both vehicles were damaged. Plaintiff paid for repairs the total sum of P2,536.99 and then filed his claim with defendant company under a car insurance policy issued by the latter. The claim was rejected, whereupon suit was commenced in the Municipal Court of Manila, whence it was elevated on appeal to the Court of First Instance of Manila, which gave judgment for plaintiff in the amount stated, plus interest at 8% and P500.00 as attorney's fees. Appeal was taken by defendant directly to this Court, there being no dispute as to the facts.

The policy sued upon covers, up to a certain limit, loss or damage to the insured vehicle as well as damage to property of third persons as a consequence of or incident to the operation of said vehicle. There is an exception clause, however, which provides that "the company shall not be liable in respect of any accident, loss, damage or liability caused, sustained or incurred ... whilst (the insured vehicle) is ... being driven by or is for the purpose of being driven by him in the charge of any person other than an Authorized Driver." The policy defined the term "Authorized Driver" to be the insured himself and "(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 Motor Vehicle or has been permitted and is not disqualified by order of a court of law or by reason of any enactment or regulation in that behalf from driving such Motor Vehicle."

At the time of the collision plaintiff's brother who was at the wheel, did not have a valid license, the one he had obtained for the year 1958 not having been renewed on or before the last working day of February 1959, as required by section 31 of the Motor Vehicle Law, Act No. 3992. That section states that any license not so renewed "shall become delinquent and invalid," and section 21 states that "except as otherwise specifically provided in this Act no person shall operate any motor vehicle on the public highways without having procured a license for the current year, nor while such license is delinquent, invalid, suspended or revoked."

In rendering judgment for plaintiff the trial court adverted to the absence of evidence that Manuel Tanco had been "disqualified by order of a court of law or by reason of any enactment or regulation in that behalf from driving such motor vehicle," and ruled that if there is any ambiguity in the definition of the term "authorized driver" in the policy the ambiguity should be construed in favor of plaintiff, since the policy had been prepared in its entirety by defendant. The trial court's advertence is true as a matter of fact; and its ruling is correct as a matter of law. But neither one nor the other is relevant in this case. Appellant does not rely on the portion of the proviso in the policy quoted by the court but on that which states that "the person driving is permitted in accordance with the licensing or other laws." And as to this there is no ambiguity whatsoever, because the Motor Vehicle Law expressly prohibits any person from operating a motor vehicle on the highways without a license for the current year or while such license is delinquent or invalid. That Manuel Tanco renewed his license on September 8,1959, one week after the accident did not cure the delinquency or revalidate the license which had already expired.

We are not aware that the question presented here has been decided by this Court in any previous case. Indeed all the authorities cited by the parties consist of decisions Courts United States. We note, however, that those relied upon by appellee are not in point by reason of material differences in the facts or issues presented. In Messersmith vs. American Fidelity Co., 187 App. Div. 35, 175 N.Y. Supp. 169; and Fireman's Fund Insurance Co. vs. Haley, 129 Miss. 525, 90 So. 635, the question was whether the insured could recover on an automobile policy for damage sustained in a collision which occurred while the vehicle was being driven in violation of law — in the first case by an infant at the instance of the insured, and in the second by the insured himself beyond the statutory speed limit. In neither case was there a provision in the policy expressly excluding liability by reason of the particular violation involved. We have no reason to disagree with the pronouncement of the court in the second case, after citing the first, that "if such a defense (that the vehicle was being driven in violation of law) were permissible automobile insurance would be practically valueless."

In MacMahon vs. Pearlman, 13 N.E. 154-156, a Massachusetts case, the defense of the insurer was also the violation of law by the insured, namely, that she was driving without a license; but as stated in the decision, "the casualty company does not urge that the unlawful conduct is forbidden in express terms, (but) that because of public policy it ought not to be compelled to pay damages." The court, citing Messersmith v. American Fidelity Co., supra, similarly allowed recovery, saying that to restrict such insurance to cases where there has been no violation of criminal law or ordinance would reduce indemnity to a shadow.

In the case before Us now appellant's defense does not rest on the general proposition that if a law is violated at the time of the accident which causes the damage or injury there can be no recovery, but rather on a specific provision in the policy that appellant shall not be liable if the accident occurs while the vehicle is being driven by any person other than an authorized driver and that an authorized driver, if not the insured himself, is one who is acting on his order or with his permission, provided he is permitted to drive under the licensing laws.

The cases cited by appellant are apropos. In Crahan v. Automobile Underwriters, Inc., et al., 176 A. (Pa.) 817, a clause in the policy excluding loss while the motor vehicle "is being operated by any person prohibited by law from driving an automobile" was held to be free from doubt or ambiguity, reasonable in its terms and in furtherance of the policy of the law prohibiting unlicensed drivers to operate motor vehicles. In Zabonick v. Ralston, et al., 261 N.W. (Mich.) 316, the insured was driving with an expired license, in violation of law (Act No. 91 of the Public Acts of 1931), when the accident occurred. Under a provision in the policy that the insurer "shall not be liable while the automobile is operated ... by any person prohibited by law from driving," the insurance company was absolved, the Supreme Court of Michigan saying: "To require a person to secure an operator's license and meet certain requirements before driving an automobile is a regulation for the protection of life and property, the wisdom of which can scarcely be questioned. The Legislature has also provided that every three years such licenses expire and may be renewed under certain conditions. If one fails to comply with the regulation, the statute says, he or she shall not drive a motor vehicle upon the highway. Under the terms of the contract, while under such statutory prohibition, plaintiff could not recover under his policy. To permit such recovery, notwithstanding the lack of a driver's license, would tend to undermine the protection afforded the public by virtue of Act No. 91."

The exclusion clause in the contract invoked by appellant is clear. It does not refer to violations of law in general, which indeed would tend to render automobile insurance practically a sham, but to a specific situation where a person other than the insured himself, even upon his order or with his permission, drives the motor vehicle without a license or with one that has already expired. No principle of law or of public policy militates against the validity of such a provision.

The judgment appealed from is reversed, with costs.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon, Regala, Bengzon, J.P. and Zaldivar, JJ., concur.

Corporate Law Case Digest: Edward J. Nell Co. v. Pacific Farms Inc. (1965)

G.R. No. L-20850           November 29, 1965

Lessons Applicable: Types of Acquisitions / Transfers (Corporate Law)

FACTS:

• March 21, 1958: Pacific Farms Inc. (Pacific) purchased as highest bidder from a bank auction 1,000 shares of stock of Insular Farms for P285,126.99 and BOD of Insular as reorganized, then caused its assets, including its leasehold rights over a public land in Bolinao, Pangasinan, to be sold to Insular for P10,000.00 and paid for the other assets of Insular Farms.
• October 9, 1958:  Edward J. Nell Co. (Edward) in Civil Case No. 58579 of the Municipal Court of Manila against Insular Farms, Inc. (Insular) a judgment for the sum of P1,853.80 unpaid balance for a pump sold with interest plus P125 attorney's fees and P84.00 as costs. 
• August 14, 1959: A writ of execution, issued after the judgment had become final returned unsatisfied, stating that Insular Farms had no leviable property. 
• November 13, 1959:  Edward filed the present action against Pacific upon the theory that Pacific is the alter ego of Insular Farms
• CA affirmed Municipal Court: dismissed the complaint

ISSUE: W/N Pacific Farms is an alter ego of Insular Farms

HELD: NO.  Appeal Affirmed

• GR: where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor
• EX: 

1. where the purchaser expressly or impliedly agrees to assume such debts - no proof
2. where the transaction amounts to a consolidation or merger of the corporations - not claimed
3. where the purchasing corporation is merely a continuation of the selling corporation; - no proof
4. where the transaction is entered into fraudulently in order to escape liability for such debts - no proof
• price paid was fair and reasonable