Testate estate of Richard Thomas Fitzsimmons vs. Atlantic, Gulf and Pacific Company of Manila

Under Rule 123, section 26(c), the dead man's statute disqualifies only parties or assignors of parties, not officers or stockholders of a corporation that is a party; and a corporation cannot be compelled to pay officers' salaries for a period when it was not in operation and received no income, as that would deprive the corporation or its stockholders of property without due process of law. A declaration against interest is admissible notwithstanding its hearsay character if the declarant is dead or unavailable and the declaration was made under circumstances showing no probable motive to falsify.

Richard T. Fitzsimmons was the president and one of the largest stockholders of Atlantic, Gulf and Pacific Company of Manila, a foreign corporation duly registered and licensed to do business in the Philippines, with its office and principal place of business in Manila. He held 1,000 shares of stock, of which 545 shares had not been fully paid; for those shares he had executed promissory notes in favor of the company aggregating P245,250 at P450 a share. Under agreements dated April 4 and July 12, 1939, if he died without having fully paid for the 545 shares, the company, at its option, could either reacquire those shares by returning to his estate the amount applied thereon, or issue in favor of his estate the corresponding number of the company's shares equivalent to the amount paid at P450 a share. The Pacific war and the Japanese occupation forced the corporation to suspend operations and led to the internment of its American officials, including Fitzsimmons.

Atlantic, Gulf and Pacific Company of Manila was a foreign corporation duly registered and licensed to do business in the Philippines, with its office and principal place of business in the City of Manila. Richard T. Fitzsimmons was its president and one of its largest stockholders when the Pacific war broke out on December 8, 1941. As president he received a salary of P3,000 a month, or P36,000 a year. He held 1,000 shares of stock, of which 545 shares had not been fully paid; for those shares he had executed promissory notes in favor of the company aggregating P245,250 at P450 a share. In 1941 the sum of P64,500 had been credited in his favor on account of the purchase price of the 545 shares out of bonuses and dividends to which he was entitled. Under agreements dated April 4 and July 12, 1939, if he died without having fully paid for the 545 shares, the company, at its option, could either reacquire those shares by returning to his estate the amount applied thereon, or issue in favor of his estate the corresponding number of the company's shares equivalent to the amount paid at P450 a share.

After the Japanese army occupied Manila in January 1942, it seized and took possession of the office and all the properties and assets of the company and interned all its officials, who were American citizens. The company was forced to suspend business operations from December 29, 1941, to March 8, 1945. Fitzsimmons died on June 27, 1944, in the Santo Tomas internment camp. Special proceeding No. 70139 was subsequently instituted in the Court of First Instance of Manila for the settlement of his estate. The company resumed business operation in March 1945.

In due course the company filed an amended claim against the estate consisting of a personal overdraft of Fitzsimmons with the company in current account in the amount of P63,000, and charges from the San Francisco agent of the company not included in that figure as of November 30, 1945, in the amount of P1,002, less a subsequent credit advice from the San Francisco agent of P133.33, or P868.67, for a total of P63,868.67. In the same claim the company offered to reacquire the 545 shares sold to Fitzsimmons upon return to his estate of the P64,500 paid thereon, and asked the court to authorize the setoff of its claim of P63,868.67 from the P64,500 returnable to the estate. In his answer the administrator denied the alleged indebtedness, expressed conformity to the refund of P64,500 by the company to the estate and the retransfer of the 545 shares, and set up a counterclaim of P90,000 for salaries allegedly due the deceased from the company for 1942, 1943, and the first half of 1944 at P36,000 per annum.

On the P63,000 claim, the company's evidence consisted of the testimony of Santiago Inacay, chief accountant, and Modesto Flores, assistant accountant. It was admitted that all the prewar books and records of the company were completely destroyed or lost during the war. Inacay testified that Fitzsimmons maintained a personal account consisting of cash advances and payments of bills for his account, with credits for salary, dividends, bonuses, and directors' fees; that as of the last statement of account rendered in 1941 the debit balance was around P63,000; and that at the end of each year, after dividends, bonuses, and directors' fees were credited, the account would balance to a credit balance at the start of the following year. Flores testified that he made the entries, that Fitzsimmons's account covered cash advances and payments for groceries, automobile, chauffeur, gasoline and oil, furniture, and other personal articles, and that on December 29, 1941, the account was on the debit side at about P63,000, although he could not state what part represented cash advances and what part represented payments to creditors. The company also called Henry J. Belden, vice-president-treasurer, and Samuel Garmezy, president, to testify on the status of the account, but the trial court refused to admit their testimony on the ground that they were incompetent under section 26(c) of Rule 123, being large stockholders, directors, and officers of the company. Offers of proof were made that Belden would testify that Fitzsimmons had a debit balance of P63,000 at the outbreak of the war and that it had not been paid, and that Garmezy had seen a trial balance in late November or early December 1941 showing Fitzsimmons's account with a debit of around P63,000 and his own account with a credit of around P63,000, and that the amount owed by Fitzsimmons had not been paid.

The administrator's evidence against the P63,000 claim consisted of Exhibit 1 and the testimony of Marcial P. Lichauco. On December 15, 1942, Fitzsimmons sued his wife Miguela Malayto for divorce in the Court of First Instance of Manila. On August 9, 1943, after trial, the court rendered judgment granting the divorce and ordering dissolution of the marriage. Lichauco represented Fitzsimmons in that case. After the decree became final, Fitzsimmons submitted to the court an inventory of the assets and liabilities of the conjugal partnership, with a proposed adjudication of the net assets. A carbon copy of the inventory, signed by Fitzsimmons on November 9, 1943, and filed on the same date in civil case No. 296, was presented as Exhibit 1. Lichauco testified that he prepared the inventory from data furnished by Fitzsimmons after explaining that all obligations incurred during the marriage and not yet paid had to be included because they would be deducted from the conjugal assets. Exhibit 1 showed gross assets of P174,700 and total obligations of P30,082, consisting only of P21,426 in favor of the Peoples Bank and Trust Company and P8,656 in favor of the Philippine Bank of Commerce. No obligation in favor of the Atlantic, Gulf and Pacific Company of Manila was listed. The administrator opposed the claim on that basis.

On the P868.67 item, the testimony of Inacay and Flores, supported by Exhibits A, B, C, and D, established that in November and December 1941 the San Francisco agent of the company deposited a total of $500 in the Crocker First National Bank of San Francisco to the account of Fitzsimmons, which the agent debited against the company, and that the debit notices were not received by the company until after liberation. A debit of P1,000 and P2 for Fitzsimmons's subscription to the San Francisco Chronicle made a total of P1,002; from this was deducted a credit of P133.33, consisting of a payment made on June 30, 1946, by Fitzsimmons's creditor J. H. Chew, as testified to by Flores and supported by Exhibit E, leaving a balance of P868.67.

On the salary counterclaim, the undisputed facts were that Fitzsimmons was president of the company in 1941 with a salary of P36,000 a year; that the corporation was forced to suspend business operations from December 29, 1941, to March 8, 1945, because of the war, its office and all its properties having been seized by the Japanese; and that Fitzsimmons, together with the other officers, was interned by the enemy in the Santo Tomas internment camp, where he died on June 27, 1944. At the annual meeting of stockholders held on January 21, 1946, President S. Garmezy reported that while interned the company borrowed money on notes signed by Fitzsimmons and Garmezy, that money was also received without notes, and that Mr. Kihlstedt, a Swedish citizen who could live outside the camp, helped obtain the money, brought it to the camp, and distributed it to families living outside. The stockholders approved resolutions ratifying and confirming all acts in 1941 through 1945 of the directors in office since their election in 1941 and elected in the interim, and adopted a resolution mourning Fitzsimmons's death and recognizing his service as president from March 1939 to the time of his death. No resolution of the stockholders or of the board of directors authorized the payment of salaries of the president or any other officer or employee for the period of the war when the corporation was forced completely to suspend its business operations and its officers were interned or virtually held prisoners by the enemy.

• Rejection of Corporate Officers' Testimony: Appellant Atlantic, Gulf and Pacific Company of Manila argued that the trial court erred in refusing to admit the testimony of Belden and Garmezy under Rule 123, section 26(c), because that provision disqualifies only parties or assignors of parties, not officers or stockholders of a corporation that is a party to the case.
• Admissibility of Exhibit 1: Appellant contended that Exhibit 1, the inventory signed by Fitzsimmons in the divorce case, was a self-serving declaration and therefore inadmissible as proof of the facts asserted.
• Claim of P63,000: Appellant maintained that its claim of P63,000 was established by the testimony of its chief and assistant accountants and by the offered testimony of Belden and Garmezy, despite the loss of the prewar books and records during the war.
• Claim of P868.67: Appellant maintained that the P868.67 item was sufficiently proven by the testimony of Inacay and Flores and by Exhibits A, B, C, D, and E.
• Counterclaim of P90,000: Appellant assailed the trial court's grant of the P90,000 salary counterclaim, arguing that no resolution of the stockholders or board authorized payment of salaries during the war, that the corporation was not in operation and received no income, and that compelling payment would deprive the corporation or its stockholders of property without due process of law; the ratification of Fitzsimmons's acts was intended only to relieve him of personal liability.

• Claim of P63,000 Not Proven: Appellee administrator denied the alleged indebtedness and relied on Exhibit 1, which listed only the two bank obligations and omitted any debt to the company, as evidence that the claim was not satisfactorily proven.
• Exhibit 1 as Declaration Against Interest: Appellee contended that Exhibit 1 was admissible as a declaration against interest, not a self-serving declaration, because Fitzsimmons had no probable motive to falsify it by omitting the company's claim.
• Back Salaries Due: Appellee maintained that as long as a corporation officer with a fixed salary retains the office, he is entitled to that salary notwithstanding his inability to perform his duties, citing Brown vs. Galvenston Wharf Co.; the trial court sustained this theory and granted the P90,000 counterclaim.
• Ratification of Acts: Appellee invoked the stockholders' resolutions ratifying Fitzsimmons's acts during internment to support the proposition that he performed acts as president during that period and that the corporation was obligated to pay his salary.

• Claim of P63,000: Whether the company's claim of P63,000 against the estate was established by satisfactory evidence.
• Claim of P868.67: Whether the company's claim of P868.67 against the estate was established by satisfactory evidence.
• Admissibility of Corporate Officers' Testimony: Whether officers and stockholders of a corporation that is a party to an action against an estate are disqualified under Rule 123, section 26(c), from testifying as to matters of fact occurring before the death of the deceased.
• Admissibility of Exhibit 1: Whether Exhibit 1, the inventory signed by Fitzsimmons, was admissible as a declaration against interest or inadmissible as a self-serving declaration.
• Back Salaries: Whether the deceased Richard T. Fitzsimmons was entitled to his salary as president of the company from January 1942 to June 27, 1944.

• Claim of P63,000: No. The claim was not satisfactorily proven; the oral testimony based on memory after more than five years was contradicted by Exhibit 1, and no sufficient basis existed to reverse the trial court's finding.
• Claim of P868.67: Yes. The item was sufficiently proven by the testimony of Inacay and Flores and Exhibits A, B, C, D, and E; the trial court erred in disallowing it.
• Admissibility of Corporate Officers' Testimony: Yes. Rule 123, section 26(c), disqualifies only parties or assignors of parties; officers and stockholders of a corporation are not disqualified from testifying for or against the corporation in a claim against a deceased person's estate.
• Admissibility of Exhibit 1: Yes. Exhibit 1 was a declaration against interest, not a self-serving declaration; it was admissible because the declarant had died and there was no probable motive to falsify.
• Back Salaries: No. The estate was not entitled to the P90,000 counterclaim or any part of it; no resolution authorized salaries during the corporation's wartime suspension, and compelling payment would deprive the corporation or its stockholders of property without due process of law.

• Claim of P63,000: The claim rested on the oral testimony of Inacay and Flores, whose prewar books and records were destroyed. They testified from memory that Fitzsimmons's personal account showed a debit balance of about P63,000 as of December 29, 1941. That testimony was contradicted by Exhibit 1, the inventory signed by Fitzsimmons on November 9, 1943, in his divorce case, which listed only two obligations totaling P30,082 and omitted any debt to the company. The Court noted Inacay's testimony that at the end of each year dividends, bonuses, and directors' fees were credited and brought the account to a credit balance; had the war not closed the office on December 29, 1941, such credits for 1941 would likely have been declared, so Fitzsimmons may have justifiably considered his account on the credit side. Given the frailty of memory as to figures after more than five years and the contradicting documentary evidence, the trial court's finding that the P63,000 claim was not satisfactorily proven was affirmed.
• Claim of P868.67: The item was sufficiently proven by Inacay and Flores and Exhibits A, B, C, and D. In November and December 1941, the San Francisco agent deposited $500 to Fitzsimmons's account and debited the company; the debit notices were received only after liberation. A P1,000 debit and P2 for a San Francisco Chronicle subscription made P1,002; less the P133.33 credit paid on June 30, 1946, by J. H. Chew, the balance was P868.67. The trial court erred in disallowing this claim.
• Admissibility of Corporate Officers' Testimony: Rule 123, section 26(c), disqualifies only parties or assignors of parties, or persons in whose behalf a case is prosecuted, against an executor or administrator upon a claim against the estate of a deceased person, from testifying as to matters of fact occurring before the death. It was taken from section 383, paragraph 7, of the Code of Civil Procedure, which in turn was derived from section 1880 of the California Code of Civil Procedure. California decisions in City Savings Bank vs. Enos and Merriman vs. Wickersman held that officers and stockholders of a corporation are not "parties" under such a statute and that interest no longer disqualifies. The weight of authority supported appellant. The trial court therefore erred in rejecting Belden and Garmezy. Remand was unnecessary because their testimony would be merely corroborative and their offers of proof were already in the record.
• Admissibility of Exhibit 1: Self-serving declarations are inadmissible hearsay. Declarations against interest are admissible if relevant and the declarant has died, become insane, or is otherwise unavailable, provided the declaration was uttered under circumstances showing no probable motive to falsify. Fitzsimmons had no probable motive to omit the company's claim from his 1943 inventory: he did not know he would die within a year, that the company would claim against his estate, or that its records would be lost. He listed bank obligations over P30,000 but not the company debt. If he owed P63,000, including it would have been to his interest because it would reduce the conjugal net assets and his wife's share; his own adjudicated share would have been short by nearly P27,000 if the debt were omitted. Exhibit 1 was therefore a declaration against interest and was correctly admitted.
• Back Salaries: The corporation suspended operations from December 29, 1941, to March 8, 1945, because of the war; its office and properties were seized, and its officers were interned. No resolution of the stockholders or board authorized payment of salaries during that period. The theory that a fixed-salary officer retaining office is entitled to salary notwithstanding inability to perform, as in Brown vs. Galvenston Wharf Co., cannot apply where the corporation was not in operation and received no income. Compelling payment would deprive the corporation or its stockholders of property without due process of law. The stockholders' resolutions ratified acts of borrowing money for the officers' and their families' existence, to relieve Fitzsimmons of personal liability; they did not obligate the corporation to pay P90,000 in salaries. The estate was not entitled to the counterclaim.

• Dead Man's Statute (Rule 123, section 26(c)) — The rule disqualifies only parties or assignors of parties, or persons in whose behalf a case is prosecuted, from testifying against an executor or administrator upon a claim against the estate of a deceased person as to matters of fact occurring before the death. It does not disqualify officers or stockholders of a corporation that is a party. The Court applied this by holding that the trial court erred in excluding Belden and Garmezy, whose testimony was merely corroborative and whose offers of proof were already in the record.
• Declaration Against Interest — A declaration against the declarant's interest is admissible notwithstanding its hearsay character if it is relevant and the declarant has died, become insane, or is otherwise unavailable. The reliability test is whether the declaration was uttered under circumstances justifying the conclusion that there was no probable motive to falsify. The Court applied this to Exhibit 1: Fitzsimmons's omission of the company's claim, while listing bank debts, was against his interest if he actually owed the company, and he had no probable motive to falsify because he did not know he would die within a year, that the company would claim against his estate, or that its records would be lost.
• Corporate Officer's Salary During Suspension of Business — A corporation cannot be compelled to pay the salaries of its officers for a period during which it was not in operation and received no income, even if the officers retained their offices and were incapacitated and performed no service. Such payment would deprive the corporation or its stockholders of property without due process of law. The Court applied this to deny the P90,000 salary counterclaim; the stockholders' ratification of Fitzsimmons's borrowing acts was intended to relieve him of personal liability and did not create a salary obligation.

• "Inasmuch as section 26(c) of Rule 123 disqualifies only parties or assignors of parties, we are constrained to hold that the officers and/or stockholders of a corporation are not disqualified from testifying, for or against the corporation which is a party to an action upon a claim or demand against the estate of a deceased person, as to any matter of fact occurring before the death of such deceased person." — States the Court's holding on the dead man's statute and explains why the trial court erred in excluding Belden and Garmezy.
• "We know of no principle of law that would authorize the court to compel a corporation, which for a long period was not in operation and did not receive any income, to pay the salaries of its officers during such period, even though they were incapacitated and did not perform any service. To do so would be tantamount to depriving the corporation or its stockholders of their property without due process of law." — States the ratio for denying the estate's P90,000 salary counterclaim.
• "Realizing the frailty and unreability of human memory, especially with regard to figures, after the lapse of more than five years, we find no sufficient basis upon which to reverse the trial court's finding that this claim had not been satisfactorily proven." — Explains why the P63,000 claim was disallowed despite the accountants' testimony.
• "The true test in reference to the reliability of the declaration is not whether it was made ante litem motam, as is the case with reference to some classes of hearsay evidence, whether the declaration was uttered under circumstances justifying the conclusion that there was no probable motive to falsify." — States the test for admitting a declaration against interest, applied to Exhibit 1.

• City Savings Bank vs. Enos, 135 Cal. 167; 67 Pac. 52 — Cited as interpreting the California dead man's statute, from which Rule 123, section 26(c), was derived; held that a cashier and stockholder of a bank was not disqualified because the statute applies only to parties or assignors of parties.
• Merriman vs. Wickersman, 141 Cal. 567; 75 Pac. 180 — Reaffirmed City Savings Bank vs. Enos; held that a vice-president and principal stockholder of a corporation was competent to testify because interest no longer disqualifies and officers or directors are not parties under the statute.
• Brown vs. Galvenston Wharf Co., 50 S.W. 126, 128; 92 Tex. 520 — Cited by the appellee for the theory that a president retaining office is entitled to salary despite failure to perform duties; the Court declined to apply that sweeping pronouncement where the corporation was not in operation and received no income.

• Rule 123, section 26(c), Rules of Court — The dead man's statute disqualifies parties or assignors of parties, or persons in whose behalf a case is prosecuted, from testifying against an executor or administrator upon a claim against the estate of a deceased person as to matters occurring before death. The Court held it does not disqualify corporate officers or stockholders.
• Section 383, paragraph 7, Code of Civil Procedure — The predecessor provision from which Rule 123, section 26(c), was taken; the Court traced the rule's scope through this provision.
• Section 1880, California Code of Civil Procedure — The source of the predecessor provision; the Court relied on California decisions interpreting it to conclude that officers and stockholders are not disqualified.
• Due process of law — The Court reasoned that compelling a corporation that was not in operation and received no income to pay officers' salaries for that period would be tantamount to depriving the corporation or its stockholders of property without due process of law.

Chief Justice Moran and Justices Paras, Feria, Bengzon, Padilla, Tuason, and Montemayor concurred.