Topic INTENTIONAL TORTS: ABUSE OF RIGHT

Case No. G.R. No. L-7817 / October 31, 1956

Case Name VELAYO vs. SHELL
Ponente FELIX, j.

RELEVANT FACTS
 Commercial Air Lines, Inc. (CALI) is a corporation engaged in air transportation business. While Shell
Company (Shell) supplies CALI’s fuel needs.
 As of August 1948, the CALI had a balance of P170,162.58 representing the goods that Shell sold and
delivered to it.
 On Aug. 6, 1948, the management of CALI informally convenes its principal creditors. They were invited
to a luncheon where CALI informed them that it was in a state of insolvency and had to stop operation.
o Among those present was Mr. Fitzgerald, Shell’s Credit Manager, representing Shell.
o In the meeting, out of the 194 creditors in all 15 were listed as principal creditors having big
balances.
 In the meeting, Mr. Alexander Sycip, Secretary of the Board of Directors of CALI, that the corp. was
insolvent. He explained the memorandum agreement between CALI and Philippine Airlines regarding
the proposed sale to the latter of the aviation equipment of the former.
o CPA Alfredo Velayo discussed CALI’s balance sheet and distributed copies thereof to the
creditors present.
o The said balance sheet made mention of a C-54 plane in the US.
o There was a general understanding among all creditors present on the desirability of
consummating the sale in favor of the PAL.
o Then there was a discussion on the payment of claims of creditors and the preferences of
credits. No agreement was reached so they decided to form a working committee instead. This
committee would continue the discussion of payment of claims and preferences and supervise
the preservation of properties of the corporation while the creditors attempted to come to an
understanding as to a fair distribution of the assets among them.
o Mr. Fitzgerald and 2 others were appointed to this working committee.
o It was the creditors 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.
o But the management of CALI announced that in case of non-agreement of the creditors on a
pro-rata division of the assets, it would file insolvency proceedings.
 Mr. Fitzgerald did not decline the nomination to form part of the working committee.
 On August 9, 1948, working committee had a meeting. On the same day, Shell effected a telegraphic
transfer of its credit against CALI to the American corporation Shell Oil Company (Shell US), Inc.
assigning its credit, amounting to $79,440 and later on followed by a deed of assignment of credit dated
Aug. 10, 1948 amounting this time to $85,081.29.
 Aug. 12, 1948 – Shell US filed a complaint against CALI in the Superior Court of California for the
collection of credit and a writ of attachment was applied for and issued against C-54 plane.
 By the first week of Sept. 1948, National Airports Corp. (one of CALI’s creditors) learned of Shell’s action
in the US and hastened to file its own complaint with attachment against CALI in the CFI of Manila.
 CALI, prompted by Shell’s action, filed a petition for voluntary insolvency.
 Mr. Velayo was elected by the creditors as Assignee in the proceedings, which was also confirmed by the
court.
  Mr. Velayo then filed the present case against Shell to secure a writ of injunction restraining Shell from
prosecuting the case in the US and to award in his favor damages equal to double the value of the
airplane.
 Court denied the petition for issuance of injunction because even if the writ is granted, it can’t be
enforced since Shell US is outside the jurisdiction of the Philippines.
 Mr. Velayo then confined his action to recovery of damages against Shell.
 Shell’s arguments:
1. Mr. Fitzgerald had no authority from his principal to commit the latter on any agreement
2. The assignment of credit in favor of Shell US was for a valuable consideration and in
accordance with established commercial practices
3. There’s no law prohibiting a creditor from assigning his credit to another
4. Shell US is a corporation different and independent from Shell
 Lower court dismissed the complaint.
 Velayo appealed to SC.

ISSUE AND RATIO DECIDENDI

Issue Ratio
W/N Shell is liable for YES.
damages?
1. Shell took advantage of its knowledge of the existence of CALI’s
airplane in the US. Knowledge was acquired first at the luncheon
meeting by Mr. Fitzgerald and subsequently at the Aug. 9 Working
Committee meeting.
- Shell also took advantage of the knowledge that insolvency
proceedings were to be instituted by CALI if the creditors did not
agree as to the manner of distribution of insolvent asset, and
believing that there would be no such agreement, schemed and
effected the transfer of credit to Shell US where CALI’s C-54 plane
is.

2. Sec. 37 of the Insolvency Law provides:

- “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 any 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.”

3. Moreover, the Civil Code provides:

- Art. 19. Any person must, in the exercise of his rights and in the
performances of his duties, act with justice, give everyone his due
and observe honesty and good faith.
- Art. 21. Any person who wilfully causes loss or injury to another
in a manner that is contrary to morals, good customs or public

W/N the provisions of the
New Civil Code is applicable
despite the fact that it only
took effect on Aug. 30, 1950
long after the incident
happened?
policy shall compensate the latter for the damage
4. Citing the Civil Code annotation of Ambrosio Padilla, SC said: “A moral
wrong or injury, even if it does not constitute a violation of a statute
law, should be compensated by damages. Moral damages may be
recovered.”
5. Furthermore, SC said that if Article 23 of the Civil Code goes as far as
to provide that:
- “Even if an act or event causing damage to another’s 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 mere much more reason the Defendant should be liable for
indemnity for acts it committed in bad faith and with betrayal of
confidence.
YES.
1. Art. 2252 of the NCC provides:
- “Changes made and new provisions and rules laid down by this
Code which may be prejudice or impair vested or acquired rights
in accordance with the old legislation, shall have no retroactive
effect.”
2. However, SC said that it can can’t be alleged that in the case at bar
Shell had any vested or acquired right to betray the confidence of the
insolvent CALI or of its creditors. Hence, said new provisions can be
given retroactive effect.
 What is the amount of
damages to be awarded?
2. The ponente, however, invoked different provisions of the Civil Code,
1. Some members of the SC had doubts as to the applicability of Sec. 37
of the Insolvency Law (which states that the amount of damages
would be double the value of the property). Because in their opinion
what Shell in reality disposed of was its own credit and not the
insolvent’s property, although this was practically the effect of the
scheme.
specifically Arts. 2229, 2232, 2234, 2143, to justify the damages in a
sum that is still double the amount of the C-54 plane.
- Basically, the ponente said that Shell is liable for compensatory
damages a sum equivalent to the value of the plane.
- Under Art. 2229, exemplary damages may be awarded as
correction for the public good provided, under Art. 2234, that the
plaintiff is also entitled to moral, temperate or compensatory
damages.
- In this case, the ponente additionally awarded exemplary
damages equivalent also to the value of the plane.

RULING
Wherefore, and on the strength of the foregoing considerations, the decision appealed from is reversed and
Defendant-Appellee-, Shell Company of the Philippine Islands, Ltd., is hereby sentenced to pay to Plaintiff-
Appellant, as Assignee of the insolvent CALI, damages in a sum double the amount of the value of the insolvent’s
airplane C-54 at the time Defendant’s credit against the CALI was assigned to its sister corporation in the United
States, which value shall be determined in the corresponding incident in the lower court after this decision
becomes final. Costs are taxed against Defendant-Appellee. It is SO ORDERED.