VELAYO V SHELL CO OF THE PHILS

100 PHIL 186

FELIX; October 31, 1956
NATURE
Appeal from a judgment of CFI Manila
FACTS
- Since the start of Commercial Air Line, Incs (CALI) operations, its fuel needs were all supplied by Shell
Company of the P.I., Ltd, (Shell). Desmond Fitzgerald, Shells Credit Manager was in charge of collecting
payment. Any extensions of term of payment, however, had to be decided by Stephen Crawford and later
by Wildred Wooding
- As of August 1948, Shells books showed a balance of P170,162.58 in its favor for goods it sold and
delivered to CALI. Shell had reasons to believe that the financial condition of Shell was far from being
satisfactory.
Alfonso Sycip, CALIs President of Board of Directors, offered to Fitzgerald CALIs Douglas C-54 plane,
which was then in California. The offer was declined by Crawford.
- Aug 6, 1948, management of CALI informally convened its principal creditors in a luncheon, and
informed them that CALI was in a state of insolvency and had to stop operation. Alexander Sycip,
Secretary of the Board of Directors of CALI, explained the memorandum agreement executed by CALI with
Phil Air Lines Inc on Aug 4, regarding the proposed sale to PAL of the aviation equipment of CALI. Alfredo
Velayo, Auditor of CALI, discussed the balance sheets of CALI. The balance sheet made mention of the
Douglas C-54 plane.
- There was a general understanding among all creditors present on the desirability of consummating the
sale in favor of PAL. Then followed a discussion on the payment of claims of creditors and the preferences
claimed for the accounts due to employees, the Government, and the National Airports Corp. The other
creditors disputed such contention of preference. No understanding was reached on the matter of
preference of payment and it was then generally agreed that the matter be further studied by a working
committee to be formed. Mr. Fitzgerald of Shell, Atty. Agcaoili of National Airports Corp., and Atty.
Alexander Sycip were appointed to the working committee.
- Those present in the meeting were of the unanimous opinion that it would be advantageous not to
present suits against CALI but to strive for a fair pro-rata division of its assets. The management of CALI
announced that in case of non-agreement of the creditors, it would file insolvency proceedings.
- Aug 9, 1948, working committee discussed methods of achieving objectives, which were to preserve the
assets of CALI and to study the way of making a fair division of all the assets among the creditors.
However, negotiation on the division of assets was left pending.
- On the same day (Aug 9), Shell effected a telegraphic transfer of all its credit against CALI to the
American Corporation Shell Oil Co., Inc., assigning its credit amounting to $79,440. This was followed on
Aug 10 by a deed of assignment of credit amounting to $85,081.29.
- Aug 12, 1948 American Shell Oil Co filed a complaint against CALI in the Superior Court of the State of
California, USA, for the collection of assigned credit of $79,440, and a writ of attachment was applied for
and issued against a C-54 plane. Sept 17, 1948 an amended complaint was filed to recover assigned
credit of $85,081.29 and a supplemental attachment for a higher sum against the C-54 plane, plus
miscellaneous personal properties.
- Unaware of Shells assignment of credit, CALI on Aug 12, 1948 approved the memorandum agreement
of sale to PAL, and noted that the Board had been trying to reach an agreement with creditors to
prevent insolvency proceedings, but so far no definite agreement had been reached.
- First week of Sept 1948, National Airports Corp learned of Shells action in the US and hastened to file
its own complaint with attachment against CALI in the CFI of Manila.
- Oct 7, 1948 CALI filed a petition for voluntary insolvency. An order of insolvency was issued by the
court on the same day. Mr. Alfredo Velayo was appointed Assignee in the proceedings.
- Velayo instituted case against Shell for the purpose of securing writ of injunction restraining Shell from
prosecuting against CALI, and as an alternative, that Shell be ordered to pay damages double the value of
the plane if the case in the US will defeat the procurement of CALI of its plane.
- Dec 22, 1948, Court denied petition because whether the conveyance of Shells credit was fraudulent or
not, the Phil court would not be in a position to enforce its orders as against the American corporation
Shell Oil Co., Inc., which is outside the jurisdiction of the Phils.
- Plaintiff confined his action to the recovery of damages against Shell. Lower court dismissed the case.
Defendants Comments

> Assignment of credit in favor of American Shell was for valuable consideration and made in accordance
with established commercial practices
> It has no interest in the case instituted by American Shell, as they are separate and distinct
corporations.
> Fitzgerald was merely invited to the luncheon-meeting, without knowing the purpose for which it was
called. Fitzgerald could not have officially represented Shell because authority resides on Crawford.
ISSUES
1. WON Shell Co., of the P.I. Ltd, taking advantage of its knowledge of the existence of CALIs airplane C54 at California, USA, acted in bad faith and betrayed the confidence and trust of other creditors of CALI
present in said meeting by affecting a hasty telegraphic transfer of its credit to the American corporation
Shell Oil Company, Inc., thus defeating the purpose of the informal meetings of CALIs principal creditors
and depriving the plaintiff of the means of obtaining the plane, or its value, to the detriment and prejudice
of other CALI creditors who were consequently deprived of their share in the distribution of said value
2. WON by reason of said betrayal of confidence and trust, Shell may be made to answer for the damages,
and if so, the amount of such damages
HELD
1. YES, Shell acted in bad faith.
- It is evident that Shell, upon learning the precarious economic situation of CALI and that will all
probability, it could not get much of its outstanding credit because of the preferred claims of other
creditors, entirely disregarded all moral inhibitory tenets.
- The telegraphic transfer made without knowledge and at the back of other creditors of CALI may be a
shrewd and surprise move that enabled Shell to collect almost all if not the entire amount of its credit,
but the Court of Justice (SC) cannot countenance such attitude at all, and much less from a foreign
corporation to the detriment of Philippine Government and local business.
- Shells transfer of credit would have been justified only if Fitzgerald had declined to take part in the
working committee and frankly and honestly informed the other creditors present that he had no
authority to bind his principal and that the latter was to be left free to collect its credit from CALI by
whatever means his principal deemed wise and were available to it. But then, such information would
have dissolved all attempts to come to an amicable conciliation and would have precipitated the filing of
CALIs voluntary insolvency proceedings and nullified the intended transfer of Shells credit to American
Shell.
2. YES, Shell must answer for damages.
- Section 37 of the Insolvency Law states
Sec 37. If any person, before the assignment is made, having notice of the commencement of the
proceedings in insolvency, or having reason to believe that insolvency proceedings are
about to be commenced, embezzles or disposes of ay money, goods, chattels, or effects of the insolvent, he
is chargeable therewith, and liable to an action by the assignee for double the value of the property
sought to be embezzled or disposed of, to be received for the benefit of the insolvent estate.
- There are doubts, however, as to the applicability of this provision, as it is contented that what Shell
really disposed of was its own credit and not CALIs property, although this was practically the effect and
result of the scheme. The same result, however, may be achieved in applying the provisions of the Civil
Code.
Article 19 of the Civil Code provides
Art 19. Any 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.
- While Art 19 contains a mere declaration of principles, such declaration is implemented by Article 21 of
the Civil Code, which states
Art 21. Any person who willfully causes loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the damage.
- Code Commission on Article 21: (it) would vouchsafe adequate legal remedy for that untold numbers of
moral wrongs which is impossible for human foresight to provide for specifically in the statutes. (It) is a
prudent earnest of justice in the face of the impossibility of enumerating, one by one, all wrongs which
cause damage.
- If Article 23 of Civil Code goes as far as to provide that Even if an act or event causing damage to
anothers property was not due to the fault or negligence of the defendant, the latter shall be liable for
indemnity if through the act or event he was benefited., with much more reason that Shell should be
liable for indemnity for acts it committed in bad faith and with betrayal of confidence.

- Anent the argument that Civil Code provisions cannot be applicable as they came into effect only on Aug
30, 1950, Art 2252 of Civil Code provides by implication that when new provisions of the Code does not
prejudice or impair vested or acquired rights in accordance with the old legislation, they may be given
retroactive effect. Shell did not have any vested or acquired right to betray confidence of CALI or of its
creditors. Moreover, according to Art 2254 of Civil Code, no vested or acquired right can arise from acts
or omissions which are against the law or which infringe upon the right of others.
Disposition Shell is liable to pay plaintiff, for the benefit of CALI and its creditors, compensatory
damages a sum equivalent to the value of the plane at the time Shell assigned its credit to American
Shell, and another equal sum as exemplary damages.
Defendant-appellees contentions
- It is not guilty of bad faith, it having done nothing but to protect legitimately its own interest or credit
against the bad faith of its debtor, the insolvent CALI, under the control of the latters president Alfonso
Sycip
- The transfer of credit to its sister corporation in the US did not prejudice the Government, because its
claims were fully paid, not caused any loss or injury to other creditors, except the entities and groups
controlled by Alfonso Sycip.
It is not liable for exemplary damages because the provisions of the new Civil Code on the matter are not
applicable to this case
- Plaintiff-appellant has no cause of action against it and is not the real party in interest
- Plaintiffs right of action was based and prosecuted in the lower court under the provisions of the
Insolvency Law and consequently he is stopped from pursuing another theory and is not entitled to
damages under the provisions of the new Civil Code.
HELD
- The facts on which Court based its conclusion that Shell acted in bad faith are not and cannot be
denied or contradicted by defendant.
- There is no sensible reason for disturbing the finding that Shell is liable for exemplary damages. The
amount of the award, however, may be modified.
- According to the Civil Code, exemplary or corrective damages are imposed by way of example or
correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages,
and that the amount of the exemplary damages need not be proved, for it is left to the sound discretion of
the Court.
- Majority of the Court is of the opinion that the value of the C-54 plane might result too high, and that
exemplary damages should not be left to speculation but properly determined by a certain and fixed
amount. The amount of exemplary damages is thus modified, and fixed at P25,000.