Estefania R. Vda. de Pirovano vs. De la Rama Steamship Co., Inc.

A corporation is bound only by acts that appear in its books or records, and an alleged assumption of a stockholder's debt by a third person does not constitute a novation binding on the corporation absent the creditor corporation's express consent. The consent of the creditor is necessary to substitute another for the debtor, and such consent must be shown to have been given by the corporation's board of directors.

The plaintiff was the registered owner of 3,424 shares of stock in the defendant corporation, De La Rama Steamship Co., Inc. The defendant corporation and Hijos de I. de la Rama & Co., Inc. were corporations practically owned by the late Esteban de la Rama, the plaintiff's father. The defendant corporation had executed a deed of trust with the National Development Company containing a prohibition against declaring dividends, which lasted from 26 February 1940 to 23 September 1949.

The plaintiff, Estefania R. Vda. de Pirovano, was the registered owner of 3,424 shares of stock in the defendant corporation, De La Rama Steamship Co., Inc. On 29 December 1950, the defendant corporation, by Resolution No. 50-127, declared a cash dividend of P100 per share, or P2,000,000 in total, in favor of stockholders of record as of 1 December 1950. The resolution further provided that the personal accounts of the stockholders of the De La Rama Steamship Co., Inc., which included that of the plaintiff in the sum of P444,202.52 set up in the books of the corporation against the Hijos de I. de la Rama & Co., Inc., be credited to the account of the last named corporation and debited to accounts receivable from the stockholders, and that from the amount of dividends, the personal account of each and every stockholder be deducted.

The plaintiff sought to recover P221,975.45, the balance of the dividends after deducting P120,424.55 she had withdrawn or received from the defendant for advances made to her after the death of the late Esteban de la Rama, plus 20 per cent of the sum sought for attorney's fees and expenses of litigation by way of damages, and costs. The defendant answered that although the plaintiff was entitled to the dividends, she was indebted to the defendant as of 29 December 1950 in the sum of P444,202.52, and that by reason of the unnecessary commencement of the suit, the defendant suffered damages in the sum of P100,000.

The plaintiff's theory was that the cash advances to her in the United States during the Pacific War for her personal expenses and for the support and education of her children were assumed by Esteban de la Rama, as set forth in his letter dated 5 May 1947 (Exhibit B) to the appellee and the Hijos de I. de la Rama & Co., Inc., consented to and approved by both corporations. She claimed that the advances made to her by the appellee were debited against the account of Hijos de I. de la Rama & Co., Inc., another corporation practically owned by Esteban de la Rama; that the only sum the appellee corporation may deduct from the amount of dividends to which she is entitled is P120,424.55 which she received after the death of her father and was not assumed by him; and that in special proceedings No. 401 of the Court of First Instance of Iloilo for the administration and settlement of the estate of the late Esteban de la Rama, the Hijos de I. de la Rama & Co., Inc. filed a claim charging the estate with the aforesaid advances for expenses of the appellant and of her children which had been assumed by the deceased in his lifetime, a claim which, although reduced to P26,000 as per Ballentyne schedule of monetary value, was approved by the Court of First Instance of Iloilo on 27 September 1950, and the executor of the estate was directed to pay the claim thus allowed (Exhibit O).

The appellee resisted the appellant's claim upon the ground that the assumption by Esteban de la Rama of the total sum of withdrawals by the appellant for her expenses and of her children was never consented to by the appellee and hence not binding upon it; and that the accounting method by which the withdrawals were charged against the Hijos de I. de la Rama & Co., Inc. was to circumvent the prohibition imposed upon the appellee to declare dividends, agreed upon in the deed of trust executed by the appellee and the National Development Company.

There was no dispute that the appellant was the registered owner of 3,424 shares of stock in the appellee corporation; that on 29 December 1950 the appellee declared a dividend of P100 for each share of stock; that the appellee further resolved that the personal accounts of the stockholders, which include that of the appellant in the sum of P444,202.52 set up in the books of De La Rama Steamship Co., Inc. against the Hijos de I. de la Rama & Co., Inc., be credited to the account of the last named corporation and debited to accounts receivable from the stockholders; and that from the amount of dividends, the personal account of each and every stockholder be deducted (Exhibit A-1). The appellant did not dispute the total sum of her withdrawals, which was P444,202.52 as claimed by the appellee.

• Assumption of Advances: The appellant argued that the cash advances to her in the United States during the Pacific War for her personal expenses and for the support and education of her children were assumed by Esteban de la Rama, as set forth in his letter dated 5 May 1947 (Exhibit B) to the appellee and the Hijos de I. de la Rama & Co., Inc., consented to and approved by both corporations.
• Deductible Amount: The appellant claimed that the only sum the appellee corporation may deduct from the amount of dividends to which she is entitled is P120,424.55, which she received after the death of her father Esteban de la Rama and was not assumed by him.
• Probate Claim: The appellant argued that in special proceedings No. 401 of the Court of First Instance of Iloilo, the Hijos de I. de la Rama & Co., Inc. filed a claim charging the estate with the advances for expenses of the appellant and of her children which had been assumed by the deceased in his lifetime, a claim which was approved by the court on 27 September 1950.

• Lack of Consent: The appellee resisted the appellant's claim upon the ground that the assumption by Esteban de la Rama of the total sum of withdrawals by the appellant for her expenses and of her children was never consented to by the appellee and hence not binding upon it.
• Circumvention of Prohibition: The appellee argued that the accounting method by which the withdrawals were charged against the Hijos de I. de la Rama & Co., Inc. was to circumvent the prohibition imposed upon the appellee to declare dividends, agreed upon in the deed of trust executed by the appellee and the National Development Company, a prohibition which lasted from 26 February 1940 to 23 September 1949 (Exhibit 7).

• Novation and Consent: Whether the assumption made by the late Esteban de la Rama in his lifetime of all the advances made by the appellee to the appellant was binding upon the appellee corporation.
• Validity of Resolution No. 50-127: Whether Resolution No. 50-127 of the board of directors of the appellee of 29 December 1950, declaring a cash dividend subject to the deduction of stockholders' personal accounts, suffers from any legal infirmity.
• Application of In Pari Delicto: Whether the in pari delicto principle applies to the instant case.

• Novation and Consent: No. The assumption by Esteban de la Rama of the advances made to the appellant by the appellee was not binding upon the appellee because no consent to the substitution of debtor was given by the appellee's board of directors, and no such consent appeared in the books or records of the appellee.
• Validity of Resolution No. 50-127: No. Resolution No. 50-127 does not suffer from any legal infirmity, the segregation and setting up of the withdrawals as accounts receivable having been even suggested by the President of Hijos de I. de la Rama & Co., Inc. in a letter dated 9 April 1945.
• Application of In Pari Delicto: No. There is no room for the application of the in pari delicto principle because the appellee corporation and the Hijos de I. de la Rama & Co., Inc. committed no crime or violation of law, but a violation of section 12 of the deed of trust by the appellee corporation which gave rise to a cause of action by the National Development Company, the injured party.

• Novation and Consent: The determination of the controversy hinged on whether the assumption made by the late Esteban de la Rama in his lifetime of all the advances made by the appellee to the appellant was binding upon it. Because of the prohibition agreed upon in the deed of trust to the effect that no dividends could be declared by the appellee during the period of time already stated, advances to the stockholders would constitute a violation of section 12 of the deed of trust. For that reason, it was made to appear that such advances were made to the Hijos de I. de la Rama & Co., Inc. and debited the same against the latter in the books of the appellee, and in the books of the Hijos de I. de la Rama & Co., Inc. the said advances were debited against the individual stockholders, the stockholders of both corporations being the same. The pivotal point was whether the assumption by Esteban de la Rama of the advances made to the appellant by the appellee, as stated in his letter of 5 May 1947, was consented to by the appellee to constitute a novation. Express consent sent by the creditor is necessary to substitute another for the debtor, pursuant to Article 1293 of the new Civil Code. Such consent did not appear to have been given by the board of directors of the appellee. Corporate acts of a corporation must appear in its books or records, and no such consent appeared in the books or records of the appellee.
• Validity of Resolution No. 50-127: The entries on the withdrawals by the appellant entered in the account of Hijos de I. de la Rama & Co., Inc. or transferred to the account of Esteban de la Rama were explained satisfactorily — they were done in order to circumvent the prohibition referred to above. The withdrawals made by the appellant were made by her and not by the Hijos de I. de la Rama & Co., Inc., and there was no evidence that those advances were used by the Hijos de I. de la Rama & Co., Inc. As to the inclusion of the withdrawals made by the appellant in the claim of the Hijos de I. de la Rama & Co., Inc. filed against the estate of the late Esteban de la Rama in special proceedings No. 401 and allowed by the court, such act of the Hijos de I. de la Rama & Co., Inc. cannot and does not bind the appellee. Its appearance in the probate court was by order of that court of 19 June 1950 (Exhibit M), and in its pleading the appellee disclaimed any interest in the claim filed by the Hijos de I. de la Rama & Co., Inc. against the estate of the late Esteban de la Rama (Exhibit N). Resolution No. 50-127 does not suffer from any legal infirmity. The segregation from the account of Hijos de I. de la Rama & Co., Inc. and the setting up in the books of the De La Rama Steamship Co., Inc. of withdrawals made by the stockholders of the appellee as accounts receivable due from said stockholders was even suggested by the President of Hijos de I. de la Rama & Co., Inc. in a letter dated 9 April 1945, addressed to the De La Rama Steamship Co., Inc. (Exhibit A-1).
• Application of In Pari Delicto: There is no room for the application of the in pari delicto principle to the instant case, because the appellee corporation and the Hijos de I. de la Rama & Co., Inc. have committed no crime or violation of law, but a violation of section 12 of the deed of trust by the appellee corporation which gave rise to a cause of action by the National Development Company, the injured party, against the appellee corporation. However, the National Development Company chose not to avail itself of its right. The appellant must answer for the personal advances made to her by the appellee corporation, and the latter may set off the total sum of such advances against the amount of dividends to which she is entitled.

• Novation by Substitution of Debtor — Under Article 1293 of the new Civil Code, the consent of the creditor is necessary to substitute another for the debtor. In this case, the alleged assumption by Esteban de la Rama of the appellant's advances did not constitute a novation binding on the appellee because no express consent was given by the appellee's board of directors.
• Corporate Acts Must Appear in Books or Records — Corporate acts of a corporation must appear in its books or records. Because no consent to the substitution of debtor appeared in the books or records of the appellee, the alleged assumption was not binding upon it.
• In Pari Delicto — The principle does not apply where the parties have committed no crime or violation of law, but merely a violation of a contractual prohibition in a deed of trust, which gave rise to a cause of action in favor of the injured party, the National Development Company, which chose not to avail itself of its right.

• "The pivotal point is whether the assumption by Esteban de la Rama of the advances made to the appellant by the appellee, as stated in his letter of 5 May 1947, was consented to by the appellee to constitute a novation. Express sent by the creditor is necessary to substitute another for the debtor." — This passage identifies the central issue of the case and the controlling rule on novation by substitution of debtor.
• "Corporate acts of a corporation must appear in its books or records. No such consent appears in the books or records of the appellee." — This passage establishes the doctrine that corporate acts must be evidenced in the corporation's books or records, which was the decisive ground for denying the appellant's claim.
• "There is no room for the application of the in pari delicto principle to the instant case, because the appellee corporation and the Hijos de I. de la Rama & Co., Inc. have committed no crime or violation of law, but a violation of section 12 of the deed of trust by the appellee corporation which gave rise to a cause of action by the National Development Company, the injured party, against the appellee corporation." — This passage clarifies the scope of the in pari delicto principle and why it does not apply to a mere contractual violation.

N/A — No precedents were cited in the provided case text.

• Article 1293, New Civil Code — Provides that the consent of the creditor is necessary to substitute another for the debtor. The Court applied this provision to hold that the alleged assumption by Esteban de la Rama was not binding on the appellee because no consent was given by its board of directors.
• Section 12, Deed of Trust — The provision in the deed of trust between the appellee and the National Development Company prohibiting the declaration of dividends during a specified period. The Court noted that the accounting method used was to circumvent this prohibition, but this did not give rise to the in pari delicto principle.

Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Concepcion, Reyes, J.B.L., Endencia, and Felix, JJ., concurred.

N/A — No dissenting opinions were noted in the provided case text.