Edward A. Keller & Co., Ltd. vs. COB Group Marketing, Inc.

A corporation's liability for credit purchases is established by the admissions of its president and general manager, supported by invoices and delivery receipts, and a party declared in default cannot obtain affirmative relief via a counterclaim it never filed; stockholders are personally liable for corporate obligations to the extent of their unpaid subscriptions.

Edward A. Keller & Co., Ltd. (Keller) was a supplier of household products, including Brite and Nuvan. COB Group Marketing, Inc. was appointed as Keller's exclusive distributor in Panay and Negros under a sales agreement dated March 14, 1970, and later in Northern and Southern Luzon under a second agreement in July 1970. COB Group Marketing purchased products on credit from Keller. As security, Asuncion Manahan mortgaged her land for credit purchases up to P35,000, and Tomas C. Lorenzo, Jr. and his father Tomas, Sr. mortgaged their land in Nueva Ecija for credit purchases up to P25,000. Both mortgagors assumed solidary liability with COB Group Marketing for the faithful performance of all terms and conditions of the sales agreements.

Keller appointed COB Group Marketing as exclusive distributor of its household products, Brite and Nuvan, in Panay and Negros under a sales agreement dated March 14, 1970. Under that agreement, Keller sold its products to COB Group Marketing on credit. As security for credit purchases up to P35,000, Asuncion Manahan mortgaged her land to Keller and assumed solidary liability with COB Group Marketing for the faithful performance of all terms and conditions of the sales agreement. In July 1970, the parties executed a second sales agreement extending COB Group Marketing's territory to Northern and Southern Luzon. As security for credit purchases up to P25,000 in that area, Tomas C. Lorenzo, Jr. and his father Tomas, Sr. mortgaged their land in Nueva Ecija, likewise assuming solidary liability with COB Group Marketing.

COB Group Marketing's credit purchases began on October 15, 1969 and continued until January 22, 1971. On May 8, 1971, the board of directors of COB Group Marketing was apprised by Jose E. Bax, the firm's president and general manager, that the firm owed Keller approximately P179,000. The board authorized Bax to negotiate with Keller for settlement. On the same day, Bax and R. Oefeli of Keller signed conditions for settlement, which included increasing mortgaged collaterals to full market value, turning over receivables and four trucks for outright sale, assigning eight trucks to Keller, and requiring COB Group Marketing to put up securities totaling P200,000. The document noted that a discussion was held on May 8, 1971.

Twelve days later, on May 20, COB Group Marketing, through Bax, executed two second chattel mortgages over its twelve trucks, already mortgaged to Northern Motors, Inc., as security for its obligation to Keller amounting to P179,185.16 as of April 30, 1971. The second mortgages did not become effective because Northern Motors did not consent, but they served as admissions of COB Group Marketing's liability to Keller. On July 24, 1971, stockholders Moises P. Adao and Tomas C. Lorenzo, Jr. wrote to Keller's counsel proposing to pay P5,000 on November 30, 1971 and thereafter every thirtieth day of the month for three years until the mortgage obligation was fully satisfied, and to substitute the Manahan mortgage with a mortgage on Adao's lot in Cubao, Quezon City.

Keller filed suit on September 16, 1971 against COB Group Marketing, its stockholders, and mortgagors Manahan and Lorenzo. COB Group Marketing, Trinidad C. Ordonez, and Johnny de la Fuente were declared in default. Keller presented all invoices with delivery receipts covering the period from October 15, 1969 to January 22, 1971, and its finance manager Victor A. Mayo submitted a statement of account showing COB Group Marketing owed P184,509.60 as of July 31, 1971. Bax, although not an accountant, presented his own reconciliation statements purporting to show that COB Group Marketing overpaid Keller P100,596.72, though he had not alleged any overpayment in his answer and admitted receiving monthly statements of account without ever making a formal protest or written demand for reconciliation. The trial court, through Judge Tamayo, dismissed the complaint, ordered Keller to pay the supposed overpayment, awarded moral damages and attorney's fees, and declared the mortgages void. The Intermediate Appellate Court affirmed, eliminating only the moral damages award.

• Admissions of Liability: Petitioner maintained that the lower courts erred in nullifying the admissions of liability made in 1971 by Bax as president and general manager of COB Group Marketing, which admissions were supported by documentary evidence including invoices, delivery receipts, and a statement of account.
• Fabricated Reconciliation Statements: Petitioner argued that Bax's reconciliation statements showing overpayment were "fabricated," presented long after the case was filed, and should not have been credited over Bax's prior admissions and the documentary evidence.
• Erroneous Award for Defaulted Party: Petitioner contended that the lower courts erred in rendering judgment in favor of COB Group Marketing for the supposed overpayment of P100,596.72, notwithstanding that COB Group Marketing had been declared in default and had filed no counterclaim.

• Overpayment: Bax claimed that COB Group Marketing overpaid Keller P100,596.72, as shown in his reconciliation statements (Exhibits 7 and 8), though he did not allege any overpayment in his answer.
• Failure to Reconcile Accounts: The lower courts, adopting the respondents' position, harped on Keller's alleged failure to thresh out with representatives of COB Group Marketing their "diverse statements of credits and payments," a contention the Supreme Court found to have no factual basis.

• Admissions of Liability: Whether the admissions of liability made by Bax as president and general manager of COB Group Marketing, supported by documentary evidence, established the corporation's obligation to Keller.
• Credibility of Overpayment Claim: Whether Bax's reconciliation statements purporting to show overpayment of P100,596.72 should be credited over his prior admissions of liability and Keller's invoices and delivery receipts.
• Judgment Against a Defaulted Party: Whether the lower courts erred in rendering affirmative judgment in favor of COB Group Marketing for the supposed overpayment despite its having been declared in default and having filed no counterclaim.
• Stockholder Liability: Whether the stockholders of COB Group Marketing are personally liable for the corporation's obligations to the extent of their unpaid subscriptions.
• Validity of Mortgages: Whether the mortgages executed by Manahan and Lorenzo are valid and subject to foreclosure.

• Admissions of Liability: Yes. COB Group Marketing's liability was established by Bax's admissions as president and general manager, corroborated by invoices with delivery receipts and a statement of account showing P184,509.60 due as of July 31, 1971.
• Credibility of Overpayment Claim: No. Bax's reconciliation statements were an afterthought, presented long after the case was filed, and contradicted by his own prior admission that COB Group Marketing owed Keller around P179,000, as well as by his failure to make any formal protest against Keller's monthly statements of account.
• Judgment Against a Defaulted Party: No. The lower courts erred in rendering judgment in favor of COB Group Marketing for the supposed overpayment, because COB Group Marketing was declared in default and did not file any counterclaim; a judgment in favor of a defaulted party for an unclaimed amount is improper.
• Stockholder Liability: Yes. A stockholder is personally liable for the financial obligations of a corporation to the extent of his unpaid subscription, pursuant to settled jurisprudence.
• Validity of Mortgages: Yes. The mortgages executed by Manahan and Lorenzo were valid and subject to foreclosure if the judgment against COB Group Marketing remained unsatisfied after ninety days from finality.

• Admissions of Liability: Section 22, Rule 130 of the Rules of Court provides that the act, declaration, or omission of a party as to a relevant fact may be given in evidence against him as an admission. Bax, as president and general manager of COB Group Marketing, admitted on May 8, 1971 that the firm owed Keller approximately P179,000. This admission was formalized in Exhibit J, signed by Bax and Keller's Oefeli, which set out conditions for settlement. Twelve days later, Bax executed two second chattel mortgages over COB Group Marketing's twelve trucks as security for the obligation of P179,185.16. Although these mortgages did not become effective due to Northern Motors' lack of consent, they served as admissions of liability. Keller presented all invoices with delivery receipts (Exhibits KK-1 to KK-277-a and N to N-149-a) covering the period from October 15, 1969 to January 22, 1971, and its finance manager submitted a statement of account showing P184,509.60 due as of July 31, 1971. These admissions and documentary evidence were sufficient to prove COB Group Marketing's liability and to justify foreclosure of the two mortgages.

• Credibility of Overpayment Claim: Bax's reconciliation statements (Exhibits 7 and 8) showing overpayment of P100,596.72 were an afterthought, presented long after the case was filed. Bax admitted that Keller sent his company monthly statements of account but could not produce any formal protest against the supposed inaccuracy of those statements, lamely explaining that he would have to dig up his company's records. He did not make any written demand for reconciliation of accounts. Critically, Bax did not allege any overpayment in his answer, and the Appellate Court's statement that COB Group Marketing alleged overpayment in its answer was manifestly erroneous because COB Group Marketing did not file any answer, having been declared in default. Even before filing his answer, Bax had admitted that COB Group Marketing owed Keller around P179,000. The discussion held on May 8, 1971, as noted in Exhibit J, demonstrated that there was a conference on COB Group Marketing's liability, at which Bax did not present his reconciliation statements to show overpayment.

• Judgment Against a Defaulted Party: The lower courts not only allowed Bax to nullify his admissions as to COB Group Marketing's liability but also erroneously rendered judgment in its favor for the supposed overpayment of P100,596.72, despite the fact that COB Group Marketing was declared in default and did not file any counterclaim. A party in default cannot obtain affirmative relief for a claim it never asserted. The lower courts' reliance on Keller's alleged failure to reconcile accounts had no factual basis, as Exhibit J expressly noted that a discussion was held on May 8, 1971, at which Bax did not raise any overpayment. While the evidence showed P184,509.60 due as of July 31, 1971, the amount prayed for in Keller's complaint was P182,994.60, and a judgment entered against a party in default cannot exceed the amount prayed for under Section 5, Rule 18 of the Rules of Court.

• Stockholder Liability: It is settled that a stockholder is personally liable for the financial obligations of a corporation to the extent of his unpaid subscription, as held in Vda. de Salvatierra vs. Garlitos. Accordingly, the stockholders of COB Group Marketing were held solidarily liable with the corporation up to the amounts of their respective unpaid subscriptions: Jose E. Bax, P36,000; Francisco C. de Castro, P36,000; Johnny de la Fuente, P12,000; Sergio C. Ordonez, P12,000; Trinidad C. Ordonez, P3,000; Magno C. Ordonez, P3,000; Adoracion C. Ordonez, P3,000; Tomas C. Lorenzo, Jr., P3,000; and Luz M. Aguilar-Adao, P6,000.

• Validity of Mortgages: The mortgages executed by Manahan and Lorenzo as security for COB Group Marketing's credit purchases were valid. Manahan mortgaged her land for credit purchases up to P35,000, and Lorenzo mortgaged his land for credit purchases up to P25,000, both assuming solidary liability. The documentary evidence — including the sales agreements, the mortgages, Bax's admissions, the chattel mortgages, and the stockholders' proposal to pay — justified foreclosure. If the judgment against COB Group Marketing was not fully satisfied within ninety days from finality, the mortgages were to be foreclosed and the proceeds applied to the obligation, with the mortgage obligations bearing six percent legal interest per annum after the expiration of the ninety-day period.

• Admissions of a Party (Section 22, Rule 130, Rules of Court) — The act, declaration, or omission of a party as to a relevant fact may be given in evidence against him. The Court applied this rule to hold that Bax's admissions of COB Group Marketing's liability — made in the board meeting, formalized in Exhibit J, and embodied in the second chattel mortgages — were binding admissions that established the corporation's obligation to Keller, and could not be nullified by afterthought reconciliation statements prepared long after the suit was filed.

• Personal Liability of Stockholders for Unpaid Subscriptions — A stockholder is personally liable for the financial obligations of a corporation to the extent of his unpaid subscription. The Court applied this doctrine to hold each stockholder of COB Group Marketing solidarily liable with the corporation up to the amount of his or her respective unpaid subscription, as enumerated in the dispositive portion.

• Judgment Against a Party in Default (Section 5, Rule 18, Rules of Court) — A judgment entered against a party in default cannot exceed the amount or demand prayed for in the complaint. The Court applied this rule to limit the award to P182,994.60, the amount prayed for in Keller's complaint, rather than the P184,509.60 or P186,354.70 shown in the evidence. The Court also held that a defaulted party cannot obtain affirmative relief for a counterclaim it never filed.

• "The lower courts not only allowed Bax to nullify his admissions as to the liability of COB Group Marketing but they also erroneously rendered judgment in its favor in the amount of its supposed overpayment in the sum of P100,596.72 (Exh. 8-A), in spite of the fact that COB Group Marketing was declared in default and did not file any counterclaim for the supposed overpayment." — This passage states the ratio decidendi for reversing the lower courts: a defaulted party cannot obtain affirmative relief for an unclaimed overpayment, and admissions of liability cannot be nullified by afterthought evidence.

• "As to the liability of the stockholders, it is settled that a stockholder is personally liable for the financial obligations of a corporation to the extent of his unpaid subscription." — This passage articulates the controlling doctrine on stockholder liability for corporate obligations, applied to hold each stockholder solidarily liable up to the amount of unpaid subscription.

• "Section 22, Rule 130 of the Rules of Court provides that the act, declaration or omission of a party as to a relevant fact may be given in evidence against him 'as admissions of a party'." — This passage identifies the evidentiary rule underpinning the Court's reliance on Bax's admissions and the chattel mortgages as binding evidence of COB Group Marketing's liability.

• Director of Lands vs. Zartiga, L-46068-69, September 30, 1982, 117 SCRA 346, 355 — Cited as authority for the proposition that the Supreme Court is not bound by the factual findings of the Appellate Court where those findings are contradicted by the evidence, as was the case here where Judge Tamayo acted under a misapprehension of facts.

• Vda. de Salvatierra vs. Garlitos, 103 Phil. 757, 763 — Cited as controlling authority for the doctrine that a stockholder is personally liable for the financial obligations of a corporation to the extent of his unpaid subscription, applied to hold the stockholders of COB Group Marketing solidarily liable.

• Section 22, Rule 130, Rules of Court — Provides that the act, declaration, or omission of a party as to a relevant fact may be given in evidence against him as admissions of a party. Applied to hold that Bax's admissions of COB Group Marketing's liability, formalized in Exhibit J and the second chattel mortgages, were binding and could not be nullified by later-prepared reconciliation statements.

• Section 5, Rule 18, Rules of Court — Provides that a judgment entered against a party in default cannot exceed the amount or demand prayed for in the complaint. Applied to limit the award to P182,994.60, the amount prayed for in Keller's complaint, rather than the higher amounts shown in the evidence.

Concepcion, Jr. (Chairman), Escolin, Cuevas, and Alampay, JJ., concurred.