Garcia vs. Lim Chu Sing

A stockholder is not a creditor of the corporation by reason of his shares, so his debt to the corporation cannot be compensated with the value of those shares; the stipulated 10% for costs and attorney's fees is an indemnity, not interest, and includes judicial costs.

Mercantile Bank of China was under liquidation, and Lim Chu Sing held 200 shares of stock in it with a par value of P50 each, or P10,000 in total. Lim Chu Sing was also a surety for Lim Cuan Sy's trust receipts account with the same bank, which was secured by a chattel mortgage.

Tirso Garcia, as receiver of the Mercantile Bank of China, brought the action against Lim Chu Sing. The parties submitted a stipulation of facts in which Lim Chu Sing admitted the facts alleged in the complaint and the bank admitted the allegations in the answer, particularly that Lim Chu Sing owned 200 shares of stock of the bank at a par value of P50 each, or P10,000, and that the bank was under liquidation. The complaint alleged that on June 20, 1930, Lim Chu Sing executed and delivered to the Mercantile Bank of China a promissory note (Exhibit A) for P19,605.17 with interest at 6% per annum, payable at P1,000 on July 1, 1930, P500 on August 1, 1930, and P500 on the first of every month thereafter until the principal and interest were fully paid. The note stipulated that upon default in any monthly installment, the entire unpaid balance with interest at 6% per annum would become due and payable on demand. The parties further stipulated that the court may render judgment in accordance with the stipulation, subject to execution after 90 days.

Lim Chu Sing made several partial payments, leaving an unpaid balance of P9,105.17, but he defaulted in the payment of several installments, by reason of which the unpaid balance of P9,105.17 on the promissory note became ipso facto due and demandable.

According to the answer, which the bank admitted under the stipulation, the debt was not really that of Lim Chu Sing but of Lim Cuan Sy, who had an account with the bank in the form of trust receipts guaranteed by Lim Chu Sing as surety and secured by chattel mortgages. The bank, without the knowledge and consent of Lim Chu Sing, foreclosed the chattel mortgage and privately sold the property covered thereby. Because Lim Cuan Sy failed to comply with his obligations, the bank required Lim Chu Sing, as surety, to sign a promissory note for P19,105.17 payable in the manner already stated in Exhibit A. Lim Chu Sing paid the corresponding installments until the debt was reduced to P9,105.17 claimed in the complaint.

On December 27, 1932, Lim Chu Sing filed a motion praying for the inclusion of Lim Cuan Sy, the principal debtor, as party defendant so that he could avail himself of the benefit of the exhaustion of Lim Cuan Sy's property. The presiding judge denied the motion in open court, and Lim Chu Sing did not except to the order of denial. The proceeds of the sale of the mortgaged chattels together with other payments made were applied to the amount of the promissory note in question, leaving the balance which the bank sought to collect.

• Inclusion of Principal Debtor: Appellant Lim Chu Sing assigned as error the denial of his December 27, 1932 motion to include Lim Cuan Sy, the principal debtor, as party defendant so that he could avail himself of the benefit of exhaustion of Lim Cuan Sy's property.
• Compensation: Appellant assigned as error the holding that his debt of P9,105.17 could not be compensated with his credit of P10,000 with the Mercantile Bank of China.
• Liquidation of Dividends: Appellant assigned as error the failure to order that, after compensation, the receiver of the Mercantile Bank of China should liquidate the dividends of his shares.
• Attorney's Fees and Interest: Appellant assigned as error the sentence to pay P910.51 as attorney's fees, 6% interest on P9,105.17, and costs.
• New Trial: Appellant assigned as error the denial of his motion for a new trial.

• Exception to Denial of Inclusion: Whether the defendant-appellant may raise on appeal the denial of his motion to include Lim Cuan Sy as party defendant despite not having excepted to the in-court ruling.
• Compensation with Shares of Stock: Whether the defendant-appellant's debt of P9,105.17 may be compensated with the P10,000 value of his shares of stock in the Mercantile Bank of China.
• Attorney's Fees, Interest, and Costs: Whether the trial court erred in sentencing the defendant-appellant to pay P910.51 as attorney's fees plus 6% interest and costs.

• Exception to Denial of Inclusion: No. Failure to file an exception to the ruling rendered in open court deprived the appellant of the right to raise the denial on appeal; the inclusion or exclusion of a party is a question of law.
• Compensation with Shares of Stock: No. A share of stock is not an indebtedness of the corporation to the stockholder, so no creditor-debtor relation exists to support compensation.
• Attorney's Fees, Interest, and Costs: No as to attorney's fees and interest; yes as to costs. The 10% stipulation is an indemnity for costs and attorney's fees, not interest, and it includes judicial costs, so the separate award of costs must be eliminated.

• Exception to Denial of Inclusion: Section 141 of the Code of Civil Procedure provides that rulings upon minor matters are not subject to exception, but exception may be taken to any other ruling, order, or judgment made during the pendency of the action in the CFI. An exception is an objection taken to the CFI's decision upon a matter of law and a notice that the party preserves the ruling for appellate review. The inclusion in or exclusion from an action of a certain party is a question of law. Because Lim Chu Sing did not except to the CFI Manila's in-court denial of his motion to include Lim Cuan Sy, he was estopped from raising that denial on appeal. The SC cited Garcia de Lara vs. Gonzales de Lara, Roman Catholic Bishop of Lipa vs. Municipality of San Jose, Vergara vs. Laciapag, and Andrews vs. Morente Rosario.

• Compensation with Shares of Stock: Under the weight of authority, a share of stock or its certificate is not an indebtedness to the owner nor evidence of indebtedness, and therefore is not a credit. Stockholders as such are not creditors of the corporation. The capital stock is a trust fund for the security of creditors of the corporation, who presumably deal with it on the credit of its capital stock. Lim Chu Sing was not a creditor of the Mercantile Bank of China by reason of his shares, even though the bank was his creditor; without mutual creditor-debtor relation, there was no sufficient ground for compensation under Article 1195 of the Civil Code. The SC cited Acuña Co Chongco vs. Dievas.

• Attorney's Fees, Interest, and Costs: The promissory note (Exhibit A) stipulated that upon default the total unpaid balance would become due and payable on demand plus interest at 6% per annum from the date of the note until payment, and that Lim Chu Sing would pay an additional sum equivalent to 10% of the note to cover costs and attorney's fees for collection. The 6% interest referred to the capital, while the 10% for costs and attorney's fees was not interest but an indemnity for damages occasioned by collection of the indebtedness through judicial process. The two rates could not be combined and considered usurious interest. Because the 10% was stipulated for costs and attorney's fees incurred in judicial collection, Lim Chu Sing should not again be made to pay costs; the SC cited Bank of the Philippine Islands vs. Yulo. The CFI judgment was therefore affirmed except that costs were eliminated.

• Stockholder Not a Creditor for Shares — A share of stock or its certificate is not an indebtedness of the corporation to the stockholder and is not a credit; stockholders as such are not creditors of the corporation. Applied: Lim Chu Sing's P10,000 shares could not be set off against his P9,105.17 debt.
• Trust Fund Doctrine — The capital stock of a corporation is a trust fund for the security of creditors, who presumably deal with the corporation on the credit of its capital stock. Applied: the bank's shares could not be treated as a debt owed to Lim Chu Sing, so no compensation arose.
• Exception to Ruling — An exception is an objection taken to the trial court's decision upon a matter of law and a notice that the party preserves the ruling for appellate review; failure to except to an in-court ruling denying a motion to include a party bars raising that denial on appeal because inclusion or exclusion of a party is a question of law. Applied: Lim Chu Sing did not except, so his first assignment failed.
• Attorney's Fees as Indemnity — A stipulated percentage for costs and attorney's fees is not interest but an indemnity for damages occasioned by collection through judicial process; it cannot be combined with stipulated interest as usurious interest and includes judicial costs. Applied: the 10% stipulation was upheld, but the separate award of costs was eliminated.

• "a share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness and, therefore, it is not a credit" — The SC used this to deny compensation between Lim Chu Sing's debt and the value of his bank shares.
• "Stockholders, as such, are not creditors of the corporation" — The SC relied on this to hold that Lim Chu Sing had no credit against the bank by reason of his shares.
• "the 10 per cent stipulated for costs and attorney's fees cannot be considered as interest but an indemnity for damages occasioned by the collection of the indebtedness through judicial process." — The SC used this to reject the usury argument and to treat the 10% stipulation as covering costs and attorney's fees.
• "failure to interpose it deprived the appellant of the right to raise the question whether or not the court a quo committed the alleged error attributed to it in its ruling which had not been excepted to by the said appellant." — The SC used this to bar Lim Chu Sing from raising the denial of his motion to include the principal debtor.

• Garcia de Lara vs. Gonzales de Lara, 2 Phil., 297 — Cited for the definition of an exception and the rule that errors in a judgment are not noticed on appeal absent objections and exceptions.
• Roman Catholic Bishop of Lipa vs. Municipality of San Jose, 27 Phil., 571 — Cited in support of the holding that failure to except to the denial of inclusion estops the appellant from raising it on appeal.
• Vergara vs. Laciapag, 28 Phil., 439 — Cited for the same rule on the need to except to preserve the ruling for appeal.
• Andrews vs. Morente Rosario, 9 Phil., 634 — Cited for the same rule on the need to except to preserve the ruling for appeal.
• Acuña Co Chongco vs. Dievas, 12 Phil., 250 — Cited in support of the ruling that no compensation arises because the stockholder is not a creditor of the corporation by reason of his shares.
• Bank of the Philippine Islands vs. Yulo, 31 Phil., 476 — Cited for the rule that the stipulated 10% for costs and attorney's fees includes judicial costs, so costs cannot be awarded again.

• Section 141, Code of Civil Procedure — Provided that rulings on minor matters are not subject to exception, but exception may be taken to any other ruling, order, or judgment made during the penency of the action in the CFI. Applied: the denial of the motion to include Lim Cuan Sy was a ruling to which an exception was needed; without it, Lim Chu Sing could not raise the denial on appeal.
• Article 1195, Civil Code — Governed compensation. Applied: because Lim Chu Sing was not a creditor of the Mercantile Bank of China by reason of his shares, there was no mutual creditor-debtor relation and no legal compensation between his debt and the value of his shares.