Haw Pia vs. China Banking Corporation

A belligerent occupant has authority under international law to order the liquidation of enemy banks in occupied territory as a measure of sequestration, not confiscation, and payments made by debtors to the liquidator so appointed extinguish their obligations to the creditor banks. The liquidation of a bank's business to collect its assets and determine its liabilities is a permissible sequestration of enemy property, distinct from the confiscation of private property prohibited by Article 46 of the Hague Regulations of 1907.

The plaintiff-appellant Haw Pia obtained an overdraft accommodation from the defendant-appellee China Banking Corporation, a bank incorporated under Philippine laws but controlled by nationals of countries with which Japan was at war. The debt was secured by a real estate mortgage over property covered by Transfer Certificate of Title No. 47634 of the Register of Deeds of Manila. During World War II, the Japanese Military Administration occupied the Philippines and, through Administrative Ordinance No. 11, placed the China Banking Corporation and other "banks of hostile countries" under liquidation, appointing the Bank of Taiwan as liquidator. The case required the Court to determine the extent of a belligerent occupant's authority over enemy private property in occupied territory under the Hague Regulations of 1907 and general principles of international law.

Haw Pia obtained an overdraft accommodation from the China Banking Corporation, a bank incorporated under Philippine laws but considered an "enemy bank" because it was controlled by nationals of countries at war with Japan. As of December 26, 1941, her overdraft account had a debit balance of P5,103.35. On September 14, 1941, she mortgaged her property covered by Transfer Certificate of Title No. 47634 of the Register of Deeds of Manila as security for the indebtedness.

On January 2, 1942, the Japanese Military Administration appointed the Bank of Taiwan as liquidator of the China Banking Corporation pursuant to Administrative Ordinance No. 11, which ordered the liquidation of "banks of hostile countries." From October 7, 1942, to August 29, 1944, Haw Pia made payments to the Bank of Taiwan totaling P6,055.21 to liquidate her obligation, all payments being made in Japanese military notes. The Bank of Taiwan refused Haw Pia's requests to cancel the mortgage and deliver her title.

After liberation, the China Banking Corporation did not recognize the payments made to the Bank of Taiwan and demanded payment of the debt. Haw Pia filed suit on September 4, 1945, and the bank filed a cross-claim for collection. The trial court held that the payments were invalid because the Bank of Taiwan, as an agency of the Japanese invading army, was not authorized under international law to liquidate the China Banking Corporation, and because there was no evidence the bank had authorized the Bank of Taiwan to accept payment. The trial court ordered Haw Pia to pay the debt with interest, failing which the mortgaged property would be sold at public auction.

The record showed that out of approximately P34,000,000 collected from debtors by the Bank of Taiwan, about P9,000,000 was paid to depositors and creditors of the bank. Members of Chinese Associations were permitted to withdraw considerable amounts from their deposits to pay contributions legally exacted by the military occupant. All collections and payments were regularly entered in the banks' books, enabling the banks to reopen and continue business after liberation.

• Authority of the Japanese Military Administration: Haw Pia argued that the Japanese Military Administration had authority under international law to order the liquidation of the China Banking Corporation and to appoint the Bank of Taiwan as liquidator authorized to accept payment of her debt.
• Extinguishment of Obligation: Haw Pia argued that her payments to the Bank of Taiwan, as the duly appointed liquidator, extinguished her obligation to the China Banking Corporation under Article 1162 of the Civil Code, which permits payment to a person authorized to receive it.

• Lack of Authority: The China Banking Corporation argued that the Japanese Military Administration had no authority under international law to liquidate the bank, and that the Bank of Taiwan, as an agency of the Japanese invading army, was not authorized to accept payment of the plaintiff's debt.
• Confiscation Prohibited: The bank contended that the liquidation constituted confiscation of private property, which is prohibited by Article 46, Section III of the Hague Regulations of 1907.
• No Extinguishment of Debt: The bank argued that since the Bank of Taiwan was not authorized to receive payment, the payments did not extinguish Haw Pia's indebtedness under Article 1162 of the Civil Code.

• Authority to Liquidate: Whether the Japanese Military Administration had authority under international law to order the liquidation of the China Banking Corporation and to appoint the Bank of Taiwan as liquidator authorized to accept payment from the plaintiff-appellant.
• Extinguishment of Obligation: Whether the payments made by the plaintiff-appellant to the Bank of Taiwan extinguished her obligation to the defendant-appellee.

• Authority to Liquidate: Yes. The Japanese Military Administration had power under international law to order the liquidation of the China Banking Corporation and to appoint the Bank of Taiwan as liquidator, because such liquidation was a mere sequestration of assets, not a confiscation of private property prohibited by Article 46 of the Hague Regulations of 1907.
• Extinguishment of Obligation: Yes. The payments made by Haw Pia to the Bank of Taiwan, as the duly authorized liquidator, extinguished her obligation to the China Banking Corporation under Article 1162 of the Civil Code, and payment in Japanese military notes did not affect the validity of the payments.

• Authority to Liquidate: The Court held that the liquidation of the China Banking Corporation was not confiscation but a mere sequestration of its assets, which required the winding up of the bank's business to determine its liabilities and net assets. The Hague Regulations of 1907, particularly Article 46, prohibit only the confiscation of private property, not the sequestration or control of enemy property. The Court cited the practice of the Allied nations during World War I and World War II, including the United States, England, and other countries, which resorted to freezing, blocking, placing under custody, and sequestrating enemy private property as measures of prevention that do not amount to confiscation. The Court noted that the United States Army and Navy Manual of Military Government and Civil Affairs expressly authorizes the liquidation of banks in occupied territories. The Court further found that the Japanese Military Administration's acts demonstrated no intent to confiscate, as evidenced by: (1) the payment of about P9,000,000 to depositors and creditors out of the P34,000,000 collected; (2) the permitting of withdrawals by Chinese Association members to pay contributions; (3) the regular entry of collections and payments in the banks' books; (4) the absence of any reason to confiscate funds collected in Japanese war notes; and (5) the report of the Chartered Bank of India, Australia, and China showing that the liquidation of its Manila branch was a mere sequestration. The Court also applied the international law principle that "what is permitted to one belligerent is also allowed to the other," noting that Japan had the same right to sequestrate enemy property as the Allied nations.

• Extinguishment of Obligation: The Court held that since the Japanese Military Administration had the power to sequestrate and liquidate the China Banking Corporation and to appoint the Bank of Taiwan as liquidator, the payments made by Haw Pia to the Bank of Taiwan extinguished her obligation. The Court interpreted Article 1162 of the Civil Code, which requires payment to "a person authorized to receive it," to include not only a person authorized by the creditor but also a person authorized by law, such as a guardian, executor, administrator, or assignee or liquidator of a partnership or corporation. The Court further held that the fact that payments were made in Japanese war notes did not affect their validity, because the contract between the parties was to pay Philippine pesos generally, not a specific species of money. The Court cited the Legal Tender Cases and the principle that "the obligation of contract to pay money is to pay that which the law shall recognize as money when the payment is made." The Court noted that the Japanese war notes were issued as legal tender at par with the Philippine peso and guaranteed by the Japanese Government, and that the power of military governments in occupied territory to issue military currency has never been seriously questioned. The Court concluded that if the enemy banks suffered losses from the depreciation of the war notes, they had the right to demand compensation from Japan through their respective States or Governments.

• Sequestration vs. Confiscation of Enemy Property — A belligerent occupant may sequestrate, impound, or block enemy private property in occupied territory as a measure of prevention to prevent its use in aid of the enemy, without violating Article 46 of the Hague Regulations of 1907, which prohibits only the confiscation of private property. The Court applied this doctrine in holding that the liquidation of the China Banking Corporation was a lawful sequestration, not a confiscation, because the liquidation was necessary to collect the bank's assets and determine its liabilities, and the evidence showed no intent to appropriate the bank's property.

• Payment to a Person Authorized by Law — Under Article 1162 of the Civil Code, payment must be made to the person in whose favor the obligation is constituted, or to another authorized to receive it in his name. The phrase "a person authorized to receive it" includes not only a person authorized by the creditor but also a person authorized by law, such as a guardian, executor, administrator, or assignee or liquidator of a partnership or corporation. The Court applied this doctrine in holding that the Bank of Taiwan, as the duly appointed liquidator, was authorized to receive payment from Haw Pia, and such payment extinguished her obligation.

• Payment in Legal Tender Currency — The obligation of a contract to pay money is to pay that which the law shall recognize as money when the payment is made. Where a contract calls for payment in Philippine pesos generally, and not a specific species of money, payment in currency that is legal tender at the time of payment is valid. The Court applied this doctrine in holding that payment in Japanese military notes, which were issued as legal tender at par with the Philippine peso, validly extinguished Haw Pia's obligation.

• "The sequestration or liquidation of enemy banks in occupied territories is authorized expressly by the United States Army and Navy Manual of Military Government and Civil Affairs F.M. 2710 OPNAV 50-E-3, which, mandatory and controlling upon the theatre commanders of the U. S. forces in said territories, provides in its paragraph 12 the following: Functions of Civil Affairs Officers. — In the occupation of such territories for a considerable period of time, the civil affairs officers will in most cases be concerned with the following and other activities: 1. MONEY AND BANKING. — Closing, if necessary and guarding of banks, bank funds, safe deposit boxes, securities and records; providing interim banking and credit needs; liquidation; reorganization, and reopening of banks at appropriate times; regulations and supervisions of credit cooperatives and other financial agencies and organizations; execution of policies on currency fixed by higher authority, such as the designation of types of currency to be used and rates of exchange supervision of the issue and use of all types of money and credit; declaration of debt moratoria; prevention of financial transactions with enemy occupied territory." — This passage establishes that the liquidation of enemy banks in occupied territories is a recognized and authorized measure of military government, supporting the Court's conclusion that the Japanese Military Administration's liquidation of the China Banking Corporation was lawful.

• "Because it is evident the words 'a person authorized to receive it,' as used therein, means not only a person authorized by the same creditor, but also a person authorized by law to do so, such as guardian, executor or administrator of estate of a deceased, and assignee or liquidator of a partnership or corporation, as well as any other who may be authorized to do so by law (Manresa, Civil Code, 4th ed. p. 254.)" — This passage articulates the Court's interpretation of Article 1162 of the Civil Code, holding that the Bank of Taiwan, as the duly appointed liquidator, was a person authorized by law to receive payment from Haw Pia.

• "The obligation of contract to pay money is to pay that which the law shall recognize as money when the payment is made. If there is anything settled by decision it is this, and we do not understand it to be controverted." — This passage, quoted from the Legal Tender Cases, supports the Court's holding that payment in Japanese military notes, which were legal tender at the time, validly extinguished Haw Pia's obligation despite the notes' subsequent depreciation.

• Knox vs. Lee and Parker (Legal Tender Cases), 12 Wall. 457 — Cited as controlling authority for the principle that the obligation of a contract to pay money is to pay that which the law recognizes as money when payment is made, supporting the validity of payment in Japanese military notes.
• Thorington vs. Smith, 8 Wall. 1 — Cited for the proposition that currency issued by a belligerent occupant in occupied territory must be considered in courts of law in the same light as currency issued by a foreign government temporarily occupying part of the territory of the United States.
• Rogers vs. Smith Bell, 10 Phil. 319 — Cited for the holding that a debt created in 1876 could be paid in 1908 by the Philippine pesos authorized by the Act of Congress of March 2, 1903, supporting the principle that payment in the legal tender currency at the time of payment is valid.

• Article 46, Section III, Hague Regulations of 1907 — Provides that private property must be respected and cannot be confiscated. The Court held that the liquidation of the China Banking Corporation was a sequestration, not a confiscation, and therefore did not violate this provision.
• Article 1162, Civil Code — Provides that payment must be made to the person in whose favor the obligation is constituted, or to another authorized to receive it in his name. The Court held that the Bank of Taiwan, as the duly appointed liquidator, was a person authorized by law to receive payment.
• Article 1170, Civil Code — Provides that payment of debts of money must be made in the species stipulated, and if it is not possible to deliver such specie, in silver or gold coins which are legal tender. The Court held this provision inapplicable because the contract was to pay Philippine pesos generally, not a specific species of money.
• Section 612, Administrative Code, as amended by Act No. 4199 — Provides that the Philippine peso and half-pesos, including the Philippine Treasury Certificate, are legal tender in the Philippines. The Court cited this provision in holding that Japanese military notes, issued at par with the Philippine peso, were valid currency for payment.

Moran, C.J., Paras, Pablo, and Bengzon, JJ., concurred. Justice Perfecto wrote a separate concurring opinion, and Justice Briones wrote a separate concurring opinion in Spanish.

• Justice Hilado, with whom concurred Padilla and Tuason, JJ. — Dissented on the grounds that: (1) the Japanese occupation army had no authority under international law to liquidate the enemy banks, as such liquidation constituted confiscation of private property prohibited by the Hague Regulations of 1907; (2) the Bank of Taiwan was not authorized to receive payment of the debts, and the payments made by Haw Pia did not extinguish her obligation; (3) the Japanese military notes were not legal tender, and their receipt was not compulsory; (4) the liquidation impaired the obligation of pre-war contracts in violation of the Philippine Constitution and the Hague Regulations; and (5) the Allied powers, including the Commonwealth of the Philippines, had reserved the right to declare invalid the acts of the Axis occupants through the London Declaration of January 5, 1943.