J.R.S. Business Corporation vs. Imperial Insurance, Inc.

A corporate franchise, trade name, and capital stock may not be levied upon and sold under execution to satisfy a judgment debt unless the judgment itself specially decrees and orders such sale, and the sale is confirmed by the court after due notice. The absence of such a special directive in the judgment renders the levy and sale of these properties void.

J.R.S. Business Corporation was an establishment duly franchised by Congress under Republic Act No. 3260 to conduct a messenger and express delivery service. J.R. Da Silva served as its President. Imperial Insurance, Inc. was a creditor that had extended credit to the corporation and its officers. The dispute arose from the corporation's failure to satisfy a judgment debt arising from a compromise agreement, which led to execution proceedings targeting not only the corporation's tangible assets but also its intangible properties—its franchise, trade name, and capital stock.

J.R.S. Business Corporation was an establishment duly franchised by the Congress of the Philippines under Republic Act No. 3260 to conduct a messenger and express delivery service. J.R. Da Silva served as its President. On July 12, 1961, respondent Imperial Insurance, Inc. filed with the Court of First Instance of Manila a complaint for a sum of money against the petitioner corporation (Civ. Case No. 47520). After the defendants submitted their Answer, the parties, assisted by their respective counsels, entered into a Compromise Agreement. Under its terms, the defendants admitted and confessed their joint and solidary indebtedness to the plaintiff in the sum of ₱61,172.32, itemized as ₱50,000.00 principal, ₱5,706.14 interest at 12% per annum, ₱3,330.58 liquidated damages at 7% per annum, ₱135.60 costs of suit, and ₱2,000.00 attorney's fees. The defendants bound themselves to pay the obligation on or before May 14, 1962, and stipulated that in the event of non-payment, the plaintiff would be entitled as a matter of right to move for execution of the decision based on the compromise agreement.

On March 17, 1962, the lower court rendered judgment approving the compromise agreement and enjoining the parties to comply faithfully and strictly with its terms. The judgment debt was not paid by May 14, 1962. One day later, on May 15, 1962, respondent Imperial Insurance, Inc. filed a Motion for the Issuance of a Writ of Execution. On May 23, 1962, the respondent Sheriff of Manila issued the Writ of Execution, and on May 26, 1962, Notices of Sale were sent out for the auction of the personal properties of J.R.S. Business Corporation. On June 2, 1962, a further Notice of Sale was issued covering the "whole capital stocks of the defendants JRS Business Corporation, the business name, right of operation, the whole assets, furnitures and equipments, the total liabilities, and Net Worth, books of accounts, etc., etc."

Petitioners, through counsel, filed a series of urgent motions seeking postponement of the auction sale and release of the levy on the business name, right to operate, and capital stocks. They argued that they were negotiating for a loan to pay the judgment debt, that the judgment was for money only and did not authorize the plaintiff to take over the business name, and that the right to operate under the franchise was not transferable and could not be considered personal or immovable property subject to levy and sale. They also contended that the capital stocks could not be levied upon and sold under execution. The respondents opposed the motions, and on June 21, 1962, the lower court denied the motion for postponement.

The auction sale proceeded that same day at the premises of J.R.S. Business Corporation at 1341 Perez St., Paco, Manila. All the properties listed in the Notices of Sale—including the whole capital stocks, the business name, right of operation, the whole assets, furnishings and equipment, total liabilities and net worth, and books of accounts—were bought by respondent Imperial Insurance, Inc. for ₱10,000.00, the highest bid offered. Immediately after the sale, the respondent insurance company took possession of the properties and began operating the business of J.R.S. Business Corporation. Petitioners then elevated the matter to the Supreme Court via certiorari.

• Jurisdiction and Grave Abuse of Discretion: Petitioners maintained that respondent Judge acted without or in excess of his jurisdiction or with grave abuse of discretion in promulgating the Order of June 21, 1962, denying the motion for postponement of the scheduled public auction sale.
• Non-Leviable Character of Franchise and Trade Name: Petitioners argued that the judgment was for money only and did not authorize the plaintiff to take over and appropriate the business name of the defendants; that the right to operate under the franchise was not transferable and could not be considered personal or immovable property subject to levy and sale.
• Non-Leviable Character of Capital Stock: Petitioners claimed that the capital stocks of J.R.S. Business Corporation could not be levied upon and sold under execution.
• Pending Loan Negotiations: Petitioners alleged that the loan they had applied for was to be secured within the next ten days, enabling them to discharge the judgment debt, warranting postponement of the auction sale.

• Jurisdiction of the Trial Judge: Whether the respondent Judge acted without or in excess of his jurisdiction or with grave abuse of discretion in promulgating the Order of June 21, 1962, denying the motion for postponement of the scheduled sale at public auction of the properties of petitioner.
• Levy and Sale of Franchise, Trade Name, and Capital Stock: Whether the business name or trade name, franchise (right to operate), and capital stocks of the petitioner are properties or property rights which could be the subject of levy, execution, and sale.

• Jurisdiction of the Trial Judge: No. The respondent Judge had jurisdiction over the matter, there being a rendered decision and a corresponding writ of execution; any erroneous conclusions of law or fact committed in the exercise of such jurisdiction were merely errors of judgment not correctible by certiorari.
• Levy and Sale of Franchise, Trade Name, and Capital Stock: No, not under the circumstances. The franchise, trade name, and capital stocks could not be properly included in the levy and sale because the judgment based on the compromise agreement did not specially decree or order that these properties be answerable for the judgment debt, as required by Section 56 of the Corporation Law.

• Jurisdiction of the Trial Judge: The Court found that a decision had been rendered and the corresponding writ of execution issued. The respondent Judge had jurisdiction over the subject matter. The act of denying the motion for postponement of the auction sale was within the discretion of the judge, and the exercise of that discretion, one way or the other, did not constitute grave abuse of discretion or excess of jurisdiction. Any erroneous conclusions of law or fact committed in the exercise of such jurisdiction were merely errors of judgment, not correctible by certiorari, citing Villa Rey Transit vs. Bello and cases cited therein.

• Levy and Sale of Franchise, Trade Name, and Capital Stock: The Court applied Section 56 of the Corporation Law, which provides that any franchise granted to a corporation, together with the property necessary for the enjoyment, exercise of powers, and receipt of proceeds of such franchise, may be levied upon and sold under execution to satisfy a judgment against the corporation—provided that the sale of the franchise and the property necessary for its enjoyment is especially decreed and ordered in the judgment, and provided further that the sale shall not become effective until confirmed by the court after due notice. The Court distinguished between corporate or general franchises (the right to exist as a corporation, vested in the individuals who compose the corporation) and special or secondary franchises (certain rights and privileges conferred upon existing corporations, such as the right to use public streets), relying on Gulf Refining Co. vs. Cleveland Trust Co. and Fletcher's Cyclopedia of Corporations. The right to operate a messenger and express delivery service by virtue of Republic Act No. 3260 was admittedly a secondary franchise and, as such, subject to levy and sale under the Corporation Law—but only when the sale is especially decreed and ordered in the judgment and confirmed by the court after due notice. The compromise agreement and the judgment based thereon contained no special decree or order making the franchise answerable for the judgment debt. The same deficiency applied to the trade name or business name and the capital stock. The trade name, corresponding to the initials of the corporation's President, was necessarily included in the enjoyment of the franchise and could not be sold separately from it. The capital stock represented the interest and property of the stockholders in the corporation, who could only be deprived thereof in the manner provided by law. Accordingly, the inclusion of the franchise, trade name, and capital stock in the sale had no justification.

• Classification of Corporate Franchises — Corporate franchises are divisible into (1) corporate or general franchises, which is the franchise to exist as a corporation, vested in the individuals who compose the corporation and not in the corporation itself, and which cannot be conveyed absent legislative authority; and (2) special or secondary franchises, which are certain rights and privileges conferred upon existing corporations (such as the right to use public streets to lay pipes or tracks), vested in the corporation and ordinarily conveyable or mortgageable under a general power to dispose of property, except those charged with a public use. The Court applied this doctrine to classify J.R.S. Business Corporation's right to operate a messenger and express delivery service under R.A. No. 3260 as a secondary franchise, subject to levy and sale but only under the procedural safeguards of Section 56 of the Corporation Law.

• Requirements for Forced Sale of Franchises under Section 56 of the Corporation Law — A franchise and the property necessary for its enjoyment may be levied upon and sold under execution to satisfy a judgment against the corporation only upon two conditions: (1) the sale of the franchise and the property necessary for its enjoyment is especially decreed and ordered in the judgment; and (2) the sale shall not become effective until confirmed by the court after due notice. The Court held that neither condition was satisfied in this case, as the compromise agreement and the judgment based thereon contained no special decree or order making the franchise, trade name, or capital stock answerable for the judgment debt.

• Trade Name as Incident of Franchise — A trade name or business name cannot be sold separately from the franchise, as it is necessarily included in the enjoyment of the franchise. The Court applied this principle to invalidate the separate levy and sale of J.R.S. Business Corporation's trade name.

• Capital Stock as Property of Stockholders — The capital stock of a corporation represents the interest and is the property of the stockholders in the corporation, who can only be deprived thereof in the manner provided by law. The Court relied on this principle to hold that the capital stock could not be levied upon and sold under execution absent a special directive in the judgment.

• "The right to operate a messenger and express delivery service, by virtue of a legislative enactment, is admittedly a secondary franchise (R.A. No. 3260, entitled 'An Act granting the JRS Business Corporation a franchise to conduct a messenger and express service)' and, as such, under our corporation law, is subject to levy and sale on execution together and including all the property necessary for the enjoyment thereof." — This passage establishes the classification of the petitioner's franchise as a secondary franchise and its theoretical susceptibility to execution, forming the premise for the Court's subsequent holding that the procedural requirements of Section 56 were nonetheless not satisfied.

• "Said franchise can be sold under execution, when such sale is especially decreed and ordered in the judgment and it becomes effective only when the sale is confirmed by the Court after due notice (Sec. 56, Corp. Law). The compromise agreement and the judgment based thereon, do not contain any special decree or order making the franchise answerable for the judgment debt." — This is the ratio decidendi: the judgment's failure to specially decree the sale of the franchise rendered the levy and sale void, notwithstanding the franchise's theoretical susceptibility to execution.

• "Moreover, a trade name or business name cannot be sold separately from the franchise, and the capital stock of the petitioner corporation or any other corporation, for the matter, represents the interest and is the property of stockholders in the corporation, who can only be deprived thereof in the manner provided by law." — This passage articulates two ancillary doctrines: the inseparability of the trade name from the franchise, and the nature of capital stock as stockholder property requiring statutory process for deprivation.

• Villa Rey Transit vs. Bello, L-18957, April 23, 1963 — Cited as controlling authority for the proposition that errors of judgment committed by a lower court in the exercise of its jurisdiction are not correctible by certiorari; only jurisdictional errors or grave abuse of discretion warrant the extraordinary remedy.
• Gulf Refining Co. vs. Cleveland Trust Co., 108 So. 158 — Cited as persuasive foreign authority for the distinction between corporate or general franchises and special or secondary franchises, and for the proposition that the primary franchise to exist as a corporation is vested in the individuals composing the corporation, not in the corporation itself, while secondary franchises are vested in the corporation and may ordinarily be conveyed or mortgaged.

• Section 56, Corporation Law (Act No. 1459, as amended) — Governs the forced sale of franchises granted to corporations. Provides that any franchise, together with the property necessary for its enjoyment, may be levied upon and sold under execution to satisfy a judgment against the corporation, provided that the sale is especially decreed and ordered in the judgment, and provided further that the sale shall not become effective until confirmed by the court after due notice. The Court applied this provision to hold that the levy and sale of J.R.S. Business Corporation's franchise, trade name, and capital stocks was invalid because the compromise judgment contained no special decree or order directing the sale of these properties.
• Republic Act No. 3260 — "An Act granting the JRS Business Corporation a franchise to conduct a messenger and express service." The Court identified the right to operate under this legislative franchise as a secondary franchise, bringing it within the coverage of Section 56 of the Corporation Law.

Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Regala, and Makalintal, JJ., concurred.