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PNB v. The Philippine Vegetable Oil Co., Inc.

January 14, 1927 | Malcolm | Contracts covered by Statute of Frauds how ratified
PLAINTIFF-APPELLEE: The Philippine National Bank
DEFENDANT-APPELLEE: The Philippine Vegetable Oil Company, Inc.
INTERVENOR-APPELLANT: Phil Whitaker
DOCTRINE: The broad view is that the Statute of Frauds applies only to agreements not to be performed on either
side within a year from the making thereof. Agreements to be fully performed on one side within the year are taken
out of the operation of the statute. In this case, as Whitakers theory proceeds on the assumption that he has
entirely performed his part of the agreement, equity would argue that all evidence be admitted to prove the alleged
agreement. Surely since the Statute of Frauds was enacted for the purpose of preventing frauds, it should not be
made the instrument to further them.
FACTS:
1. In 1920, PVO, on the brink of insolvency, owed
its creditors P30M.
a. PNB was its largest creditor. The P17M
debt to the bank was secured principally
by two chattel mortgages for P3.5M and
P4M, respectively.
2. In 1921, Whitaker, as general manager of PVO,
offered to pledge his private properties to
secure the creditors. At his instance, a receiver
for the company was also appointed by the
court.
3. During the period of receivership (March 11,
1921 Feb. 28, 1922), several important
events took place:
a. Between PVO and its creditors =
creditors transferred part of their
claims against the company to
Whitaker in consideration of a trust
deed of Ws property
b. Between PNB and PVO = bank obtained
a new mortgage from the company
(Feb. 20 mortgage)
4. Receivership terminated shortly thereafter. The
bank suspended the companys operation in
May 1922, and closed its plant in August 1922.
5. PNB sought judicial foreclosure of its mortgage
on the PVOs property.
a. Trial court ruled in favor of PNB;
ordered PVO to pay P15,787,454 and
other costs.
6. The trial courts decision resolved three
questions: (1) whether execution of the
mortgage was the free act of PVO; (2) whether
this mortgage was null and without force
because at the time of its execution, PVOs
properties were under receivership; and (3)
whether PNB failed to comply with its
undertaking to furnish funds to PVO for the
latter to continue operating.
ISSUES:
1. Whether the new/latest mortgage was valid
NO (voidable)
2. Whether PNB obligated itself to furnish the
necessary operating capital to PVO NO
RULING: PNB entitled to money judgment for P14M
with legal interest against PVO. Case remanded.
RATIO:
1. PNB could not legally secure a new mortgage
by
the
accomplishment
of
documents
between its officers and the officers of PVO

while PVOs property was in custodia legis.


The receiver was not party to the mortgage,
and the court had not authorized the receiver
to consent to the same.
Mortgage was executed on Feb. 20, 1922. The
receivership ended on Feb. 28, 1922. The
mortgage was executed by the PNB through its
GM, and PVO before the termination of the
receivership of PVO, though not acknowledged
and registered until after termination of
receivership.
Property was in custodia legis. Receiver was
neither party to the mortgage, nor was it
authorized by the court to give consent to the
mortgage. It is also doubtful whether the court
could/would
give
such
authorization
considering the desire to protect the rights of
all creditors and not just those of only one
creditor.
While the mortgage could not have been
executed without the dissolution of the
receivership, the same took place because the
banks counsel made it appear that PNB would
continue to finance PVOs operations, which it
didnt do. Instead, the bank, within less than
two months after recording of the mortgage,
withdrew its support from the PVO and closed
its establishment.
The mortgage was definitely perfect prior to
the lifting of receivership pursuant to implied
promises that PNB would sustain operations of
PVO. The mortgage was accomplished when
PNB was a dominating influence in the
companys affairs. It would be unconscionable
to allow PNB, after tying the hands of other
creditors, to appropriate to itself virtually all of
PVOs properties.
The mortgage is voidable, whether based on its
not having expressed PVOs free will, as
disclosing undue influence, or constituting
deceit on the part of PNB.
The Court noted that prior to this mortgage,
the PNB already held three mortgages on PVOs
property. These mortgages remain in effect and
may be foreclosed.
2. The evidence, documentary and oral, disclose
no binding promise, tacit or express, made
by PNB to continue indefinitely its backing of
PVO.
The Court noted that the PNB Charter provides
that the General Manager can make, with the
advice and consent of the board of directors,

all contracts on behalf of the said bank,


The minutes of the Board of Directors of the
PNB shows that the GM was authorized to
finance the operation of PVO to the extent of
P500,000, to be secured by copra and oil and
to be further secured by P500,000 pledged by
Whitaker in his creditors agreement.
The release of an additional P200,000 for the
purchase of more copra was approved by the
Board.
The GM was also ordered to report and secure
the approval of the Board for necessary credits
from time to time. Another portion of the
minutes disclosed that advances to the extent
of P1M were authorized by the Board.
At this point, the Courts review of the evidence
provides no indication in any action taken by
the Board that it had ever consented to an
agreement for unlimited backing of the PVO.
Whitakers letter to HSB confirmed his
undertaking to assume an obligation to pledge
and mortgage certain personal property on the
further condition that the banks parties to the
proposed arrangement will supply, per
approval of their representatives on the PVO
Board, funds to enable PVO to continue
operating. The condition related to all banks
and did not specify PNB.
Whitakers trust deed in favor of H.C. Sanford
secured the PNB only to the extent of P500k. It
was general as to further advances, and PNB
was not party to the document.
Power of attorney from the Roman Catholic
Archbishop of Manila to Whitaker mentioned
Whitakers arrangement with PNB for funds to
sustain operations, but the same was not
binding on the officials of PNB.
Letters of Wilson as PNB GM to Whitaker were
mere friendy warnings and expressions of
gratification regarding the additional mortgage
and emphasis on the P500k guarantee.
Oral testimony by Whitaker and Gibbs provided
no definite agreement binding on the bank, but
merely general intimations by the GM in
conference with the bank that it contemplated
financing operations of PVO.

Dissenting opinion (Johnson, J.)


Mortgage in question was executed by the PVO to

the PNB, and is a valid and subsisting contract.


Statement that the mortgage was executed upon
property in custodia legis is not supported by the
facts.
The property was under receivership when the
document was signed, but the document, at that
time, wasnt a mortgage but a mere evidence of
indebtedness. It was not a public document at that
time, and it had not been registered in the registry
of property, which is a prereq to becoming a
mortgage. Even when it was notarized, it wasnt a
mortgage because it hadnt been registered as
such. It was registered nearly a month after the
property had ceased to be in custodia legis.
Said mortgage expressed the free will of PVO. PVO
signed the mortgage voluntarily, before witnesses,
and ratified its due execution before a notary
public three weeks later. PVO later recognized the
validity of the document by making payments
thereon.
Record clearly shows that the mortgage was given
to secure payment of preexisting indebtedness.
PVO had recognized the validity of the mortgage by
making payments thereon, and nothing in the
record shows that it had intimated that the
mortgage was illegal and void. PVOs failure to
appeal the decision is additional proof of its belief
that the defense of illegality is baseless.
At the time Whitaker entered into an alleged
contract with PNB for the latter to furnish adequate
funds to sustain the operations of PVO, all parties
to the agreement fully understood and believed
that such contract had been entered into with full
and sufficient consideration.
Whitaker honestly believed that PNB had entered
into a valid contract with him to sustain the
operations of PVO, and such fact was one of the
precedent conditions upon which Whitaker had
obligated his private property to the extent of P4M.
Other creditors also believed that such a contract
existed between Whitaker and PNB, as evidenced
by the creditors agreement (re: creation of a fund
of P500k by PNB).
Whitaker should be given opportunity to show that
he is entitled to recover some damages. Whitaker
only promised to pay out of his private property for
the debts of PVO because of the contract with PNB
to finance the operation of PVO.

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