Republic of the Philippines vs. Jose Grijaldo

The Republic of the Philippines, as successor in interest to the Bank of Taiwan, Ltd.’s assets vested in the United States and transferred to the Republic, is a privy to the original loan contracts and may enforce them; the borrower’s obligation to pay money is not extinguished by the loss of the mortgaged crops; the action is not barred by prescription because prescription does not run against the State and was suspended by the moratorium laws; and the Ballantyne scale is applied as of the date the obligation was incurred.

Jose Grijaldo was a borrower from the Bacolod City branch of the Bank of Taiwan, Ltd., an entity that was under the jurisdiction of enemy country Japan during the Japanese occupation. After the war, the bank’s Philippine assets were vested in the Government of the United States under the Trading with the Enemy Act, as amended, and Vesting Order No. P-4 dated January 21, 1946. Pursuant to the Philippine Property Act of 1946 of the United States, those assets, including the loans in question, were transferred to the Republic of the Philippines under a Transfer Agreement dated July 20, 1954, and were administered by the Board of Liquidators created under Executive Order No. 372 dated November 24, 1950. The Republic claimed the outstanding loans as part of those transferred assets.

In 1943, Jose Grijaldo obtained five loans from the Bacolod City branch of the Bank of Taiwan, Ltd., in the total sum of P1,281.97, with interest at 6% per annum compounded quarterly. The loans were evidenced by five promissory notes executed by Grijaldo in favor of the bank: P600.00 on June 1, 1943; P159.11 on June 3, 1943; P22.86 on June 18, 1943; P300.00 on August 9, 1943; and P200.00 on August 13, 1943. The notes had no due dates, but the loans were due one year after they were incurred. To secure payment, Grijaldo executed a chattel mortgage on the standing crops on his land, Lot No. 1494, known as Hacienda Campugas in Hinigiran, Negros Occidental.

By virtue of Vesting Order No. P-4 dated January 21, 1946, and under the authority of the Trading with the Enemy Act, as amended, the assets in the Philippines of the Bank of Taiwan, Ltd. were vested in the Government of the United States. Pursuant to the Philippine Property Act of 1946 of the United States, these assets, including the loans in question, were subsequently transferred to the Republic of the Philippines by the Government of the United States under a Transfer Agreement dated July 20, 1954. The assets were among those placed under the administration of the Board of Liquidators created under Executive Order No. 372 dated November 24, 1950, and in accordance with Republic Acts Nos. 8 and 477 and other pertinent laws.

On September 29, 1954, the Republic, represented by the Chairman of the Board of Liquidators, made a written extrajudicial demand upon Grijaldo for payment of the account. Grijaldo actually received the written demand but failed to pay. The aggregate amount due as principal of the five loans, computed under the Ballantyne scale of values as of the time the loans were incurred in 1943, was P889.64; the interest due thereon at 6% per annum compounded quarterly, computed as of December 31, 1959, was P2,377.23.

The demand went unpaid. On January 17, 1961, the Republic filed a complaint in the Justice of the Peace Court of Hinigaran, Negros Occidental, to collect the unpaid account. The Justice of the Peace dismissed the case on the ground that the action had prescribed; the Republic appealed to the Court of First Instance of Negros Occidental, which later ordered Grijaldo to pay the amount claimed; and Grijaldo appealed directly to the Supreme Court. During the pendency of the appeal, Grijaldo died, and his legal heirs were substituted as appellants.

• No Cause of Action / Privity: Appellant Jose Grijaldo maintained that the Republic had no cause of action because it had no privity of contract with him; the transaction was between him and the Bank of Taiwan, Ltd., so the Republic could not legally sue to enforce the obligation.
• Extinguishment by Loss of Mortgaged Crops: Appellant argued that because the loans were secured by a chattel mortgage on standing crops and those crops were lost or destroyed through enemy action, his obligation to pay the loans was extinguished.
• Prescription: Appellant contended that the action had prescribed because the loans became due on June 1, 1944, and the complaint was filed on January 17, 1961, more than 16 years later, beyond the 10-year period for an action based on a written contract.
• Ballantyne Scale / Amount Due: Appellant claimed the lower court erred in ordering him to pay P2,377.23 because the Ballantyne scale of values should have been applied as of the time the loans became due in June 1944, not as of June 1943 when they were incurred.

• Ballantyne Scale: Appellee Republic maintained that the Ballantyne scale of values should be applied as of the time the obligation was incurred, in June 1943.

• Cause of Action / Privity: Whether the Republic of the Philippines has a cause of action against Jose Grijaldo despite the absence of direct privity of contract between them.
• Extinguishment of Obligation: Whether Grijaldo’s obligation to pay the loans was extinguished by the loss or destruction of the standing crops mortgaged to secure them.
• Prescription: Whether the Republic’s action to collect the loans had prescribed.
• Ballantyne Scale / Amount Due: Whether the lower court erred in ordering Grijaldo to pay P2,377.23 by applying the Ballantyne scale of values as of June 1943, when the loans were incurred, rather than June 1944, when they became due.

• Cause of Action / Privity: Yes. The Republic is a privy to the original loan contracts because the Bank of Taiwan’s assets were vested in the United States and then transferred to the Republic, making the Republic successor to the rights, title, and interest in the loans.
• Extinguishment of Obligation: No. The obligation was to pay a generic thing—money—not to deliver the crops; under Article 1263, loss of the mortgaged crops did not extinguish the obligation, the chattel mortgage being mere security.
• Prescription: No. Prescription does not run against the State under Article 1108(4), and the moratorium laws suspended the prescriptive period from November 18, 1944 to May 18, 1953, leaving time remaining when the complaint was filed.
• Ballantyne Scale / Amount Due: No. The Ballantyne scale is applied as of the date and place the obligation was incurred, June 1943, unless the parties agreed otherwise, as held in Hilado vs. De la Costa.

• Cause of Action / Privity: The original creditor was the Bank of Taiwan, Ltd., and the transaction was a private contract of loan. However, under the Trading with the Enemy Act, as amended, Executive Order No. 9095 of the United States, and Vesting Order No. P-4 dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity under the jurisdiction of enemy country Japan, were vested in the United States Government. Pursuant to the Philippine Property Act of 1946, the assets, including the loans, were transferred to the Republic under the Transfer Agreement dated July 20, 1954. This successive transfer made the Republic successor to the rights, title, and interest in the loans, creating privity of contract between the Republic and Grijaldo. The Court cited Alpurto vs. Perez: the word “privy” denotes succession; an assignee of a credit or one subrogated to it is a privy. The United States, as belligerent sovereign, seized enemy assets, and the Republic, as successor and transferee, became privy to the original loan contracts. Thus the Republic had the legal right to sue.

• Extinguishment of Obligation: The promissory notes and chattel mortgage did not obligate Grijaldo to deliver the crops or their value. His obligation was to pay a generic thing—money representing the total loans with interest. The transaction was a series of five contracts of simple loan under Article 1933 of the Civil Code. Under Article 1263, in an obligation to deliver a generic thing, loss or destruction of anything of the same kind does not extinguish the obligation. The chattel mortgage on the crops was merely security for fulfillment of the obligation; loss of the crops did not extinguish the debt because it could still be paid from other sources.

• Prescription: The complaint was filed by the Republic not as a nominal party but in the exercise of sovereign functions to protect State interests over public property. Under Article 1108(4) of the Civil Code, prescription, both acquisitive and extinctive, does not run against the State. The Court cited Government of the Philippine Islands vs. Monte de Piedad. Additionally, the running of prescription was interrupted by moratorium laws: Executive Order No. 25 dated November 18, 1944; Executive Order No. 32 dated March 10, 1945; and Republic Act No. 342 approved July 26, 1948. The loans were incurred in 1943 during the Japanese occupation, covered by Executive Order No. 25 suspending payments of debts incurred after December 31, 1941. Rutter vs. Esteban declared the moratorium laws unconstitutional on May 18, 1953, but ruled that they had suspended the prescriptive period until May 18, 1953; Manila Motors vs. Flores reiterated this ruling. Thus, the prescriptive period was suspended for 8 years and 6 months. The cause of action arose on June 1, 1944. The complaint was filed on January 17, 1961, after 16 years, 6 months, and 16 days. Deducting the suspension left 8 years and 16 days, leaving 1 year, 11 months, and 14 days of the prescriptive period when the complaint was filed. The action had not prescribed.

• Ballantyne Scale / Amount Due: The lower court ordered payment of P2,377.23 as of December 31, 1959, plus 6% interest compounded quarterly from the filing of the complaint. The total loans were P1,281.97 in Japanese war notes. Computed under the Ballantyne scale as of June 1943, this was equivalent to P889.64 in genuine Philippine currency, considered the principal; P2,377.23 as of December 31, 1959 was arrived at after computing interest on P889.64 compounded quarterly from 1943. The Republic’s position that the Ballantyne scale should apply as of the time the obligation was incurred was upheld. Hilado vs. De la Costa held that contracts stipulating payments presumably in Japanese war notes may be enforced to the extent of the just obligation, and what the debtor should pay is the value of the Japanese military notes in relation to the peso in Philippine currency obtaining on the date and place the obligation was incurred unless the parties agreed otherwise. The lower court correctly applied June 1943.

• Privity by succession/assignment — A privy includes one who by succession is placed in the position of a party to the contract, such as an assignee of a credit or one subrogated to it. In this case, the Republic became a privy to the Bank of Taiwan loans because the bank’s assets were vested in the United States and then transferred to the Republic, making it successor in interest with the right to enforce the loans.

• Obligation to deliver a generic thing; loss of security — Under Article 1263, loss or destruction of anything of the same kind does not extinguish an obligation to deliver a generic thing. A chattel mortgage is merely security. Grijaldo’s obligation was to pay money, a generic thing, so the loss of the mortgaged crops through enemy action did not extinguish the debt.

• Non-running of prescription against the State — Under Article 1108(4) of the Civil Code, both acquisitive and extinctive prescription do not run against the State. The Republic sued in its sovereign capacity to protect State interests over public property, so prescription did not bar the collection action.

• Suspension of prescriptive period by moratorium laws — The moratorium laws (Executive Orders Nos. 25 and 32, and Republic Act No. 342) suspended the prescriptive period for debts incurred during the Japanese occupation. Although declared unconstitutional in Rutter vs. Esteban, the suspension lasted until May 18, 1953, as reiterated in Manila Motors vs. Flores. The period from November 18, 1944 to May 18, 1953 (8 years and 6 months) was excluded from the computation.

• Ballantyne Scale valuation of Japanese war notes — Contracts stipulating payments presumably in Japanese war notes may be enforced to the extent of the just obligation; the debtor must pay the value of the Japanese military notes in relation to the Philippine peso obtaining on the date and place the obligation was incurred, unless the parties agreed otherwise. The Court applied the scale as of June 1943, when the loans were incurred, not June 1944 when they became due.

• "The word "privy" denotes the idea of succession ... hence an assignee of a credit, and one subrogated to it, etc. will be privies; in short, he who by succession is placed in the position of one of those who contracted the judicial relation and executed the private document and appears to be substituting him in the personal rights and obligation is a privy (Alpurto vs. Perez, 38 Phil. 785, 790)." — This passage defines privity by succession, the basis for holding that the Republic could enforce the Bank of Taiwan loans despite no direct contract with Grijaldo.

• "In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation." — This is the Article 1263 rule that defeated Grijaldo’s claim that the loss of the mortgaged crops extinguished his debt.

• "Under paragraph 4 of Article 1108 of the Civil Code prescription, both acquisitive and extinctive, does not run against the State." — This is the statutory basis for rejecting Grijaldo’s defense of prescription.

• "... Contracts stipulating for payments presumably in Japanese war notes may be enforced in our Courts after the liberation to the extent of the just obligation of the contracting parties and, as said notes have become worthless, in order that justice may be done and the party entitled to be paid can recover their actual value in Philippine Currency, what the debtor or defendant bank should return or pay is the value of the Japanese military notes in relation to the peso in Philippine Currency obtaining on the date when and at the place where the obligation was incurred unless the parties had agreed otherwise." — This is the Hilado vs. De la Costa formulation of the Ballantyne scale rule, applied to uphold the computation as of June 1943.

• Alpurto vs. Perez, 38 Phil. 785, 790 — Cited for the definition of “privy” as one who by succession is placed in the position of a contracting party, such as an assignee of a credit or one subrogated to it; used to establish the Republic’s privity to the loans.

• Government of the Philippine Islands vs. Monte de Piedad, etc., 35 Phil. 738-751 — Cited for the rule that the statute of limitations does not run against the right of action of the Government of the Philippines.

• Rutter vs. Esteban, L-3708, May 18, 1953, 93 Phil. 68 — Cited for the ruling that the moratorium laws are unconstitutional but had suspended the prescriptive period until May 18, 1953.

• Manila Motors vs. Flores, L-9396, August 16, 1956 — Cited as reiterating the Rutter vs. Esteban ruling on the suspension of the prescriptive period by the moratorium laws.

• Hilado vs. De la Costa, G.R. No. L-150, April 30, 1949; 46 O.G. 5472 — Cited for the rule that Japanese war notes are valued under the Ballantyne scale as of the date and place the obligation was incurred, unless the parties agreed otherwise.

• Article 1933, Civil Code — Defines a simple loan as one where a party delivers money or another consumable thing on the condition that the same amount of the same kind and quality shall be paid. The Court used it to characterize the five transactions as simple loans of money, making Grijaldo’s obligation to pay a generic thing.

• Article 1263, Civil Code — Provides that in an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. Applied to hold that the loss of the mortgaged crops did not extinguish Grijaldo’s debt.

• Article 1108(4), Civil Code — Provides that prescription, both acquisitive and extinctive, does not run against the State. Applied because the Republic sued in its sovereign capacity to protect State interests over public property.

• Trading with the Enemy Act, as amended; Executive Order No. 9095 of the United States; Vesting Order No. P-4 dated January 21, 1946 — Authorized the vesting of the Bank of Taiwan, Ltd.’s Philippine assets in the United States Government. These were the basis for finding that the United States succeeded to the bank’s rights.

• Philippine Property Act of 1946 of the United States; Transfer Agreement dated July 20, 1954 — Transferred the vested assets, including the loans in question, to the Republic of the Philippines. These established the Republic’s privity to the loan contracts.

• Executive Order No. 372 dated November 24, 1950; Republic Acts Nos. 8 and 477 — Placed the assets under the administration of the Board of Liquidators. These provided the context for the Republic’s demand through the Board of Liquidators.

• Executive Order No. 25 dated November 18, 1944; Executive Order No. 32 dated March 10, 1945; Republic Act No. 342 approved July 26, 1948 — Moratorium laws suspending payment of debts incurred after December 31, 1941. Applied to suspend the prescriptive period until May 18, 1953.

• Section 17, Rule 3, Rules of Court — Governs substitution of legal heirs. Applied when Grijaldo died during the appeal and his heirs were substituted as appellants.

Bengzon, C.J.; Concepcion; Barrera; Regala; Bautista Angelo; Reyes, J.B.L.; Makalintal; and Bengzon, J.P., JJ.