A creditor who, after participating in a meeting with other creditors of an insolvent debtor to arrange for a fair pro-rata distribution of assets, takes advantage of information obtained therein to secretly assign its credit to another entity to attach the debtor's property abroad, acts in bad faith and contrary to morals and public policy, and is liable for damages to the insolvent's estate under the Civil Code.

Commercial Air Lines, Inc. (CALI), a Philippine corporation, was in a state of insolvency, owing significant debts to multiple creditors, including a substantial amount to Shell Company of the Philippine Islands, Ltd. (Shell) for fuel supplies. CALI's management, seeking to avoid formal insolvency proceedings and ensure an equitable settlement, convened a meeting of its principal creditors to disclose its financial situation and discuss a plan for the fair distribution of its remaining assets, one of which was a valuable Douglas C-54 airplane located in California, USA.

• On August 6, 1948, the management of Commercial Air Lines, Inc. (CALI) held a luncheon meeting with its principal creditors, informing them that CALI was insolvent and had to cease operations.
• Shell's Credit Manager, Mr. Desmond Fitzgerald, attended this meeting, where CALI's balance sheet, which listed a C-54 plane in the United States, was distributed and discussed.
• The creditors present agreed to form a working committee to preserve CALI's assets and study a fair pro-rata distribution among them, with the goal of avoiding formal insolvency proceedings.
• Mr. Fitzgerald was nominated and accepted to be a member of this working committee, representing the creditors as a whole.
• On August 9, 1948, the working committee, including Mr. Fitzgerald, held a meeting to discuss methods for achieving its objectives.
• On the very same day, August 9, 1948, Shell effected a telegraphic transfer assigning its credit against CALI to its American sister corporation, Shell Oil Company, Inc.
• On August 12, 1948, Shell Oil Company, Inc. filed a complaint in the Superior Court of California and secured a writ of attachment against CALI's C-54 plane.
• Prompted by Shell's action, which gave it an undue preference, CALI filed a petition for voluntary insolvency on October 7, 1948.
• Alfredo M. Velayo was subsequently appointed as the assignee for the insolvent estate of CALI and initiated the present action for damages against Shell.

• Shell acted in bad faith and betrayed the confidence and trust of the other creditors by using information gained from the creditors' meeting to its own advantage.
• Shell's assignment of its credit and the subsequent attachment of the C-54 plane in California was a scheme to defeat the purpose of the creditors' agreement and deprive the insolvent estate of a valuable asset.
• By securing an undue preference, Shell's actions prejudiced the other creditors who were consequently deprived of their rightful share in the value of the attached airplane.
• Shell should be held liable for damages, either under the Insolvency Law for double the value of the property disposed of or under the general principles of law concerning acts committed in bad faith.

• The assignment of its credit to its sister corporation in the U.S. was a legitimate commercial transaction for a valuable consideration and was not prohibited by law.
• Its representative, Mr. Fitzgerald, had no authority to bind Shell to any agreement made during the creditors' meeting.
• The American corporation that filed the attachment suit is a separate and distinct legal entity from the defendant, Shell Company of the Philippine Islands, Ltd.
• The assignment did not violate Sections 32 and 70 of the Insolvency Law because it was executed more than 30 days before CALI filed for insolvency.
• The provisions of the New Civil Code on human relations are not applicable to the case because the acts complained of occurred in 1948, before the Code's effectivity.

• Procedural Issues:
  • Whether the plaintiff-appellant is estopped from pursuing a theory of liability based on the New Civil Code on appeal when the case was originally prosecuted in the lower court under the provisions of the Insolvency Law.
• Substantive Issues:
  • Whether the defendant, Shell, acted in bad faith and betrayed the confidence of other creditors by assigning its credit to its U.S. sister corporation to attach CALI's plane after its representative participated in the creditors' meeting.
  • Whether the defendant can be held liable for damages to the assignee of the insolvent estate for its actions.

• Procedural:
  • No, the plaintiff is not estopped from invoking the Civil Code. The Court ruled that the articles of the New Civil Code concerning human relations are rules of substantive law. If they are applicable to the facts of the case, they must be given effect, regardless of whether that specific legal theory was raised in the lower court.
• Substantive:
  • Yes, the defendant acted in bad faith. The Court found that Shell's "shrewd and surprise move" was a betrayal of the confidence reposed in it by the other creditors during their meeting. By using the information from that meeting to gain a secret advantage, Shell's actions were contrary to morals, good customs, and public policy, even if the act of assigning a credit was not in itself illegal.
  • Yes, the defendant is liable for damages. While the Court expressed doubt about the strict applicability of Section 37 of the Insolvency Law, it found clear basis for liability under the principles of human relations in the Civil Code, particularly Articles 19 and 21. The Court held that these provisions could be applied retroactively because the defendant had no vested right to act in bad faith. Shell was sentenced to pay compensatory damages equal to the value of the airplane and exemplary damages for its malevolent conduct.

• Principle of Abuse of Rights (Article 19, Civil Code) — This principle states that every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. The Court applied this to find that Shell abused its right to collect its credit by exercising it in a manner that betrayed the trust of other creditors and was contrary to honesty and good faith.
• Acts Contra Bonus Mores (Article 21, Civil Code) — This doctrine holds that any person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs, or public policy shall compensate the latter for the damage. The Court used this to establish Shell's liability, reasoning that its scheme to gain preference, while not explicitly illegal, was a moral wrong that caused damage to the other creditors.
• Retroactivity of Laws (Articles 2252 & 2253, Civil Code) — This principle allows for the retroactive application of new provisions of the Civil Code if they do not prejudice or impair vested or acquired rights. The Court applied the chapter on Human Relations retroactively to the events of 1948, stating that Shell had no vested right to betray the confidence of others or to act in bad faith.
• Unjust Enrichment (Article 2142, Civil Code) — This principle, related to quasi-contracts, posits that no one shall be unjustly enriched or benefited at the expense of another. The Court's decision to award compensatory damages was rooted in preventing Shell from benefiting from its bad faith act at the expense of the insolvent estate and the other creditors.

• "The telegraphic transfer made without knowledge and at the back of the other creditors of CALI may be a shrewd and surprise move that enabled Defendant to collect almost all if not the entire amount of its credit, but the Court of Justice cannot countenance such attitude at all, and much less from a foreign corporation to the detriment of our Government and local business."

• Juan Castro vs. Aero Taxicab Company — Cited to support the retroactive application of the New Civil Code's provisions on damages to acts that occurred prior to its effectivity, establishing a precedent for applying modern legal principles to past events where no vested rights are impaired.
• Dimaliwat vs. Asuncion — Referenced in the resolution on the motion for reconsideration to reject the respondent's argument of estoppel, affirming that rules of substantive law, such as those in the Civil Code, must be given effect if applicable to the facts, even if not the primary theory argued in the trial court.

• Insolvency Law (Act No. 1956), Section 37 — This section holds a person liable for double the value of property if they, believing insolvency proceedings are imminent, dispose of the insolvent's effects. The Court considered this but ultimately based its decision on the Civil Code, though the spirit of this provision influenced the initial award of damages.
• Civil Code, Article 19 — Cited as the legal basis for finding that Shell abused its rights by acting without honesty and good faith.
• Civil Code, Article 21 — Applied to hold Shell liable for damages for an act that, while not necessarily illegal, was contrary to morals and good customs and caused injury to others.
• Civil Code, Articles 2229, 2232, 2234 — These provisions on exemplary damages were the basis for awarding damages to correct Shell's wanton, fraudulent, and malevolent conduct.
• Civil Code, Articles 2252, 2253, 2254 — These articles on transitional provisions were crucial for the Court's reasoning that the principles of human relations could be applied retroactively to the acts committed in 1948.

• Justices Reyes, Bengzon, Bautista Angelo, and Labrador — They concurred with the main decision finding Shell liable but expressed that the ends of justice would be sufficiently served if the exemplary damages were reduced to P10,000.
• Justice Montemayor — Concurred in the result of the decision without providing additional reasoning.