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Velayo vs Shell October 31, 1956 Ponente: J.

Felix Facts:       Defendant Shell Company of the Philippine Islands is the official supplier of gasoline of Commercial Airlines, Inc. (CALI) Prior to 1948, Commercial Airlines (CALI) owed P170,162 to Shell and CAL offered its C-54 plane as payment to Shell Company (the plane was in California) but Shell at that time declined as it thought CALI had sufficient money to pay its debt In 1948 however, CALI was going bankrupt so it called upon an informal meeting of its creditors. In that meeting, the creditors agreed to appoint representatives to a working committee that would determine the order of preference as to how each creditor should be paid They also agreed not to file suit against CALI but CALI did reserve that it will file insolvency proceedings should its assets be not enough to pay them up Shell Company was represented by a certain Fitzgerald to the three man working committee Later, the working committee convened to discuss how CALI’s asset should be divided amongst the creditors but while such was pending, Fitzgerald sent a telegraph message to Shell USA advising the latter that Shell Philippines is assigning its credit to Shell USA in the amount of $79k, thereby effectively collecting almost all if not the entire indebtedness of CALI to Shell Philippines Shell USA got wind of the fact that CALI has a C-54 plane is California and so Shell USA petitioned before a California court to have the plane be the subject of a writ of attachment which was granted Meanwhile, the stockholders of CALI were unaware of the assignment of credit made by Shell Philippines to Shell USA and they went on to approve the sale of CALI’s asset to the Philippine Airlines In September 1948, the other creditors learned of the assignment made by Shell. This prompted these other creditors to file their own complaint of attachment against CALI’s assets. CALI then filed for insolvency proceedings to protect its assets in the Philippines from being attached Velayo’s appointment as CALI’s assignee was approved in lieu of the insolvency proceeding. In order for him to recover the C-54 plane in California, it filed for a writ of injunction against Shell Philippines in order for the latter to restrain Shell USA from proceeding with the attachment and in the alternative that judgment be awarded in favor of CALI for damages double the amount of the C-54 plane The C-54 plane was not recovered. Shell Company argued it is not liable for damages because there is nothing in the law which prohibits a company from assigning its credit, it being a common practice

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 Issue:

Whether or not the defendant acted in bad faith and is therefore liable for damages? Held:       The Supreme Court ruled in the affirmative The basis of such liability, in the absence of law, is Article 21 of the Civil Code The defendant clearly acted in bad faith when it schemed and effected the attachment of the C-54 plane of its debtor CALI by assigning its credit to its sister company in the United States It took advantage of its knowledge that insolvency proceedings would most probably be instituted by CALI if its creditors fail to come up with an understanding as to the manner of distribution of the assets According to Article 21 of the New Civil Code, “Any person who willfully causes loss and injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage” A moral wrong or injury, even if it does not constitute a violation of a statute law, should be compensated by damages. Moral damages (Art. 2217) may be recovered (Art. 2219). In Article 20, the liability for damages arises from a willful or negligent act contrary to law. In this article, the act is contrary to morals, good customs or public policy.