Title
Tec Bi and Co. vs. Chartered Bank of India
Case
G.R. No. 9802
Decision Date
Feb 5, 1916
Tobacco sold; pledged to bank; quantity mismatch; bank sold, applied to loan; vendor sued, attached; claim preferred, pledge invalid due to no public instrument.
pledge contract
tobacco
preferred creditor

Case Summary (G.R. No. 95594)

Factual Background

Tec Bi & Co. sold a quantity of leaf tobacco to La Urania Cigar Factory (Ltd.) on November 7, 1912. On January 16, 1913, La Urania Cigar Factory (Ltd.) pledged bales of leaf tobacco as security for a loan of P25,000 in favor of the bank. The pledged tobacco was stored in the bodega of Messrs. Sprungli & Co. at No. 42 (now No. 214) of Calle David, Manila. On or about February 1, 1913, the bank demanded and obtained the keys to the bodega and discovered that, out of 436 bales described in the pledge document, only those later identified in the pleadings remained.

The stipulation reflected that the bank could not ascertain whether La Urania Cigar Factory (Ltd.) misrepresented the tobacco quantity at the time of executing the pledge, or whether any difference had been disposed of in collusion with Sprungli & Co., but that any such disposition was without the bank’s knowledge or consent. From February 1, 1913, the bank remained in absolute and exclusive possession of the tobacco described in the pleadings and in Exhibit 1 until May 15, 1913, when the bank sold the tobacco under the pledge for P12,722.36 and applied the proceeds toward the loan, leaving a large balance unpaid.

Filing of the Complaint and Attachment Proceedings

On April 22, 1913, Tec Bi & Co. filed a complaint in the Court of First Instance of Manila against La Urania Cigar Factory (Ltd.) to recover P11,572.96, representing the unpaid balance of the purchase price of the tobacco. On May 5, 1913, Tec Bi & Co. requested and obtained an attachment against the bales of tobacco. Because the bodega was locked and the sheriff was informed that the keys were with the bank, the sheriff demanded delivery from the bank, but the bank refused, asserting that it held the tobacco under a pledge.

The sheriff then notified the bank that the bales of tobacco identified in the complaint were attached subject to the outcome of the suit. On May 8, 1913, the bank replied, confirming it possessed the specified bales as security for a loan and that it intended to sell them. Tec Bi & Co.’s attorneys insisted upon levy of the attachment. On May 19, 1913, the trial court rendered judgment against La Urania Cigar Factory (Ltd.) in favor of Tec Bi & Co. for P11,572.96, with legal interest from April 22, 1913, and costs. On May 22, 1913, the sheriff attempted to execute the attachment but could not because the bank’s agent asserted that the tobacco had already been sold and that the proceeds had been applied to the indebtedness.

Trial Court Ruling

Upon submission on stipulated facts and admitted allegations, the Court of First Instance of Manila found that Tec Bi & Co.’s claim as vendor was a preferred credit under paragraph 1 of Article 1922 of the Civil Code. It further held that the pledge executed in favor of the bank was not binding upon Tec Bi & Co. because it was not set forth in a public instrument as required by Article 1865 of the Civil Code for effectiveness against third persons. The court therefore rendered judgment for Tec Bi & Co. against the bank for the amount of Tec Bi & Co.’s judgment against La Urania Cigar Factory (Ltd.), with interest and costs.

Issues Raised on Appeal and the Parties’ Contentions

The bank assigned, among others, the error of the trial court in holding that the vendor’s preferred credit prevailed over the bank’s pledge, in applying Article 1865 to render the pledge ineffective as to the plaintiff, and in treating Tec Bi & Co. as a “third person” under Article 1865.

Tec Bi & Co. argued that its preference as vendor under Article 1922 could not be prejudiced by a pledge whose date was not evidenced by a public document, and that it had a right to attach the tobacco to recover its claim against the pledgor. The bank countered that under Article 1922, read with Article 1926, the bank’s pledge-based preference to the extent of the value of the pledged thing excluded the plaintiff’s preference. The bank also argued that Tec Bi & Co. could not invoke Article 1865 because Tec Bi & Co. was not a “third person” within the meaning of that article.

Legal Basis and Reasoning

The Supreme Court framed the controlling point as the legal force and effect of Exhibit 1, the original contract of pledge, specifically on the fact that its date was not evidenced by a public instrument. The Court reiterated that if the date of the pledge had been evidenced in a public document, the preferential right of the pledgee would have been superior and would have excluded the vendor’s preferential rights, citing Macke and Macke vs. Rubert (11 Phil., 480). However, the pledge date in the case was not evidenced by a public instrument, so the pledge could not prejudice Tec Bi & Co. if Tec Bi & Co. was a “third person” under Article 1865.

On this point, the Court held that Tec Bi & Co. was a third person in relation to the pledge contract. As to the pledgor and pledgee, Tec Bi & Co. had no privity with either party. It had no knowledge of the pledge’s execution and did not participate in it. Its rights concerning the pledged property were adverse to both. The Court concluded that the term “third person” was not reasonably susceptible of an interpretation that would exclude Tec Bi & Co. It followed that, because the pledge’s execution without a public-document date could not affect the plaintiff, the plaintiff was entitled to assert its claims as a preferred creditor and to levy an attachment. The bank could not lawfully assert a pledgee-based preferential right that would adversely affect the plaintiff’s rights.

The bank’s attempt to avoid this result by invoking Article 1922 was rejected. The bank contended that the bank’s delivery and possession of the tobacco defeated the vendor’s preference because the preference for the purchase price was limited to the period during which the purchaser retained possession. The Court gave two sufficient answers. First, it held that although the contract of pledge and delivery created a valid pledge as between the pledgor and pledgee, as to third persons the possession of the bank had to be deemed, for purposes of Article 1865, the same as the purchaser’s possession. Thus, as to third persons, the pledge and the pledged property had to be treated as if the pledge had never been executed. Second, even if one assumed the vendor’s statutory preference was lost by reason of possession, the vendor still retained a “perfect right” to levy an attachment pending its suit for recovery, unless the pledge had the effect of depriving that right, which the Court held the pledge could not do given the express operation of Article 1865.

The bank emphasized that, at the time of issuance of the attachment, it was in “absolute and exclusive possession” of the tobacco, an allegation the parties had admitted. The Court explained that this stipulation could not be treated as admitting an “impossible conclusion of fact” or an erroneous legal conclusion drawn from properly pleaded factual allegations. The Court reasoned that the stipulation either meant exclusivity as against the pledgor, or, if it was intended as an admission against others, it did not cover the legal characterization in the way counsel suggested. It concluded that the possession of the bank, even on the stipulated allegations, was not so “absolute and exclusive” as to affect the rights of another credit of the common debtor who was a third person relative to the pledge contract.

Finally, the Court addressed the bank’s fourth assignment of error. The bank argued that even assuming Article 1865 applied, Tec Bi & Co. waived the defect in the private pledge instrument by stipulating to the genuineness and correctness of its date and by failing to

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