Filipinas Compañia de Seguros vs. Christern, Huenefeld and Co., Inc.

A corporation organized under the laws of one state but controlled by enemy nationals becomes an enemy corporation upon the outbreak of hostilities, and its insurance policy with a company under the jurisdiction of the opposing belligerent ceases to be valid and enforceable from the date war is declared. The insurer is entitled to recover payments made under enemy occupation pressure, subject to return of the unearned premium for the unexpired term of the policy.

The respondent, Christern, Huenefeld and Co., Inc., was a corporation organized under the laws of the Philippines but controlled by German subjects, who constituted the majority of its stockholders. The petitioner, Filipinas Cia. de Seguros, was a Philippine insurance company under American jurisdiction at the relevant time. The dispute arose in the context of the Second World War: the United States declared war against Germany on December 10, 1941, and the Philippines was under Japanese military occupation from 1942 to 1945. The Philippine Insurance Law (Act No. 2427, as amended) governed the parties' contractual relationship, and the wartime framework of the Trading with the Enemy Acts and international law principles on enemy property and contracts supplied the legal backdrop for determining the policy's continued validity.

On October 1, 1941, the respondent corporation, Christern, Huenefeld and Co., Inc., after payment of the corresponding premium, obtained from the petitioner, Filipinas Cia. de Seguros, fire policy No. 29333 in the sum of P1,000,000, covering merchandise contained in a building located at No. 711 Roman Street, Binondo, Manila. The respondent was a corporation organized under and by virtue of the laws of the Philippines, but the majority of its stockholders were German subjects. The petitioner was a company under American jurisdiction at the time the policy was issued.

On December 10, 1941, the United States declared war against Germany. On February 27, 1942, during the Japanese military occupation of the Philippines, the building and the insured merchandise were burned. In due time, the respondent submitted its claim under the policy. The salvage goods were sold at public auction and, after deducting their value, the total loss suffered by the respondent was fixed at P92,650. The petitioner refused to pay, contending that the policy had ceased to be in force on the date the United States declared war against Germany, because the respondent corporation was controlled by German subjects and the petitioner was a company under American jurisdiction.

Notwithstanding this refusal, the Director of the Bureau of Financing, Philippine Executive Commission, issued an order dated April 9, 1943, directing the petitioner to pay the respondent's claim. The order expressly stated that it was issued "following the instruction" of the Financial Department of the Japanese Military Administration. On April 19, 1943, the petitioner paid the respondent the sum of P92,650 by means of a crossed check.

On August 6, 1946, after the liberation of the Philippines, the petitioner filed the present action in the Court of First Instance of Manila to recover the P92,650 paid, theorizing that the insured merchandise burned after the policy had ceased to be effective due to the outbreak of war and that the payment during the occupation was made under pressure. The Court of First Instance dismissed the action without pronouncement as to costs, and the Court of Appeals affirmed that dismissal with costs, holding that the policy did not cease to be in force and that the respondent's claim for payment was lawful. The Court of Appeals relied on English and American cases holding that a corporation is a citizen of the country under whose laws it was created, and rejected the theory that a private corporation's nationality is determined by the citizenship of its controlling stockholders.

• Enemy Character of Respondent: Petitioner argued that the respondent corporation became an enemy upon the outbreak of war between the United States and Germany on December 10, 1941, because the majority of its stockholders were German subjects, and that the insurance policy therefore ceased to be valid and enforceable from that date.
• Payment Under Duress: Petitioner maintained that the payment of P92,650 made on April 19, 1943, was made under pressure, having been ordered by the Director of the Bureau of Financing pursuant to instructions from the Japanese Military Administration, and was therefore recoverable.

• Corporate Nationality by Incorporation: Respondent countered that its nationality was determined by the laws of the state under which it was organized — the Philippines — and not by the citizenship of its controlling stockholders, relying on English and American cases cited by the Court of Appeals.
• Lawful Claim to Payment: Respondent argued that any intimidation resorted to in claiming payment was not unjust but the exercise of a lawful right to collect on the insurance policy, and that the ruling of the Bureau of Financing that it was entitled to payment was well founded.

• Enemy Character of Corporation: Whether the respondent corporation became an enemy corporation upon the outbreak of war between the United States and Germany on December 10, 1941.
• Validity of Insurance Policy: Whether the fire insurance policy issued on October 1, 1941, ceased to be valid and enforceable upon the respondent becoming an enemy corporation.
• Recovery of Payment Made Under Occupation: Whether the petitioner is entitled to recover the sum of P92,650 paid to the respondent during the Japanese military occupation pursuant to an order of the Bureau of Financing issued under instruction of the Japanese Military Administration.

• Enemy Character of Corporation: Yes. The respondent became an enemy corporation upon the outbreak of war, the Court adopting the "control test" under which a corporation's enemy character is determined by the nationality of its controlling stockholders, not merely the state of incorporation.
• Validity of Insurance Policy: Yes, the policy ceased to be valid. Because the respondent became an enemy corporation on December 10, 1941, and the insured goods were burned after that date during the war, the respondent was not entitled to any indemnity under the policy.
• Recovery of Payment Made Under Occupation: Yes. The payment was made under compulsion of the Japanese Military Administration through the Bureau of Financing, and the petitioner is entitled to recover the equivalent in actual Philippine currency, less the unearned premium for the unexpired term of the policy.

• Enemy Character of Corporation: The Court of Appeals had relied on English and American cases holding that a corporation is a citizen of the country under whose laws it was created, rejecting the theory that corporate nationality is determined by the citizenship of controlling stockholders. The Supreme Court rejected this approach, holding that those cases "have lost their force" in light of the United States Supreme Court's decision in Clark vs. Uebersee Finanz Korporation (December 8, 1947), which adopted the "control test." Under this test, a corporation is subject to enemy legislation when it is controlled by enemies — that is, managed under the influence of individuals or corporations themselves considered enemies. The Court cited scholarly authority (Martin Domke, "Enemy Corporation") explaining that since World War I, the determination of enemy nationality of corporations had shifted to the control concept, whereby courts "pierce the corporate veil" to determine whether enemy interests are cloaked behind a domestic corporate structure. The Court further noted its own prior ruling in Haw Pia vs. China Banking Corporation, where it had already held that a corporation came within the meaning of "enemy" not only because it was incorporated under the laws of an enemy country but because it was controlled by enemies. Since the majority of the respondent's stockholders were German subjects, the respondent became an enemy corporation upon the outbreak of war between the United States and Germany on December 10, 1941.

• Validity of Insurance Policy: Section 8 of the Philippine Insurance Law (Act No. 2427, as amended) provides that "anyone except a public enemy may be insured." The Court reasoned that an insurance policy ceases to be allowable as soon as an insured becomes a public enemy. Drawing on principles of international law, the Court explained that all intercourse between citizens of belligerent powers inconsistent with a state of war is prohibited, including all commerce or trading with the enemy and all acts tending to increase the enemy's income or resources. Insurance upon trade with or by the enemy is specifically prohibited, because it is inconsistent for one country to destroy its enemy's property and then repay in insurance the value of what has been destroyed. Citing Vance's The Law on Insurance, the Court noted that in the case of an ordinary fire policy, when the parties become alien enemies, the contractual tie is broken and contractual rights, so far as not vested, are lost. Because the respondent became an enemy corporation on December 10, 1941, and the insured goods were burned on February 27, 1942 — after that date and during the war — the respondent was not entitled to any indemnity under the policy. However, the Court held that elementary rules of justice required the petitioner to return the premium paid by the respondent for the unexpired period of the policy from December 11, 1941.

• Recovery of Payment Made Under Occupation: The Court of Appeals had held that any intimidation in securing payment was not unjust and that the respondent's claim was lawful. The Supreme Court found factually that the Director of the Bureau of Financing, in ordering the petitioner to pay, "merely obeyed the instruction of the Japanese Military Administration," as evidenced by the text of the order itself, which stated it was issued "following the instruction of said authority." The payment was therefore made under compulsion of the Japanese occupation forces, not as a voluntary discharge of a valid obligation. Since the policy was void from December 10, 1941, the respondent had no lawful right to the payment, and the petitioner was entitled to recover. The Court fixed the recoverable amount at P77,208.33 in actual Philippine currency, computed according to the Ballantyne scale as the equivalent of the P92,650 paid on April 19, 1943, less the amount of the premium to be returned for the unexpired term of the policy.

• Control Test for Enemy Character of Corporations — A corporation's enemy or friendly character is determined not by the state under whose laws it was incorporated, but by the nationality of the individuals or entities that control it. Where the majority of a corporation's stockholders are subjects of an enemy state, the corporation itself becomes an enemy corporation upon the outbreak of hostilities, regardless of its place of incorporation. The Court adopted this test following the United States Supreme Court's decision in Clark vs. Uebersee Finanz Korporation and its own earlier ruling in Haw Pia vs. China Banking Corporation, rejecting the incorporation test previously applied by the Court of Appeals.

• Effect of War on Insurance Contracts — When the insured becomes a public enemy upon the outbreak of war, the insurance policy ceases to be valid and enforceable, because all intercourse between belligerents inconsistent with a state of war — including insurance that would increase the enemy's resources — is prohibited by the law of nations. The contractual tie is broken and contractual rights, so far as not vested, are lost. However, the insurer must return the premium paid for the unexpired term of the policy, as a matter of elementary justice.

• Recovery of Payments Made Under Enemy Compulsion — A payment made during enemy military occupation pursuant to an order issued under the instruction of the occupying military authority is deemed made under compulsion and is recoverable after liberation, where the underlying obligation was void. The payer is entitled to recover the equivalent in actual Philippine currency of the amount paid, computed according to the Ballantyne scale.

• "There is no question that majority of the stockholders of the respondent corporation were German subjects. This being so, we have to rule that said respondent became an enemy corporation upon the outbreak of the war between the United States and Germany." — This passage states the ratio decidendi on the control test: the Court's definitive ruling that corporate enemy character is determined by the nationality of controlling stockholders.

• "The respondent having become an enemy corporation on December 10, 1941, the insurance policy issued in its favor on October 1, 1941, by the petitioner (a Philippine corporation) had ceased to be valid and enforcible, and since the insured goods were burned after December 10, 1941, and during the war, the respondent was not entitled to any indemnity under said policy from the petitioner." — This passage applies the control test to the insurance contract, establishing the doctrinal rule that war between belligerents voids insurance policies between their respective nationals from the date hostilities commence.

• "It results that the petitioner is entitled to recover what paid to the respondent under the circumstances on this case." — This passage establishes the principle that payments made under compulsion of enemy occupation authorities are recoverable, linking the voidness of the policy to the right of restitution.

• Clark vs. Uebersee Finanz Korporation, 92 Law. Ed. Advance Opinions, No. 4, pp. 148-153 (U.S. Supreme Court, December 8, 1947) — Controlling authority for the control test. The United States Supreme Court approved the "control theory," holding that the vesting power of the Alien Property Custodian extended to property of foreign interests so that enemy interests "masqueraded under innocent fronts" could be reached. The Philippine Supreme Court relied on this decision to reject the incorporation test applied by the Court of Appeals.

• Haw Pia vs. China Banking Corporation, 45 Off. Gaz., (Supp. 9) 299 (80 Phil. 604) — Philippine precedent followed. The Court had previously held that China Banking Corporation was an "enemy" within the meaning of the Trading with the Enemy Acts not only because it was incorporated under the laws of an enemy country but because it was controlled by enemies. This case was cited to show the Court had already adopted the control test in local jurisprudence.

• Section 8, Philippine Insurance Law (Act No. 2427, as amended) — Provides that "anyone except a public enemy may be insured." The Court reasoned from this provision that an insurance policy ceases to be allowable as soon as the insured becomes a public enemy, thereby voiding the policy upon the respondent becoming an enemy corporation on December 10, 1941.

Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo, and Bautista Angelo, JJ., concurred.