INTANGIBLE PERSONAL PROPERTY

(CHOSES IN ACTION)

The concept of Intangible property is not widely understood for it has no

physical manifestation and is not subject to a persons senses. The application
of Lex Situs rule with regards to Intangible property seems to be troublesome
since in general intangibles have no actual location. The determination of situs
of the intangible property is essential in resolving conflict issues, thus they
have been given an artificial location. However, the application of these fictions
has resulted in divergent, and often conflicting, theories of determining situs. 1

In general, choses in action is divided into following: (a) debts or simple

rights of action arising from loans or ordinary commercial contracts (b)
negotiable instruments; and (c) corporate stocks or shares (d) Goodwill (e)
Franchise (f) Intellectual Property1

A. DEBTS

Overview

Despite the difficulty of determining the situs of intangible property, the

courts have nonetheless assigned a situs to debts. For purposes of taxation, the
domicile of the creditor may be the situs of the debt. In the administration of
an estate, the situs is the domicile of the debtor. A garnishment shows further
complication in that it involves two obligation and three parties. This situation
arises when A, an absent non-resident, is indebted to B. A has a claim against
E. Can B satisfy his claim against A by proceeding against E in A's continued
absence? This question presents a problem as to the situs of the original debt.
An example of which is the case of Harris v. Balk wherein the plaintiff
owed the defendant a sum of money, who are both resident of North Carolina.
The defendant also owed a sum of money to a certain Jacob Epstein residing in
Maryland. Plaintiff paid Epstein in a judicial proceeding in Maryland and
agreed to release him in his obligation to the defendant. However defendant
filed this action contending that Maryland has no jurisdiction over the debt of
the plaintiff in favor to him. Nevertheless, the US Supreme Court held that
while it is true that it is the domicile of the creditor or debtor has jurisdiction
over the debt, the payment made by the plaintiff could be effectively filed in
Maryland since it where the creditor of the defendant resides.

Moreover, to be able to understand the rules on debt in choses in action,

it is important to discuss and distinguish the different rules on voluntary and
involuntary assignment of debts.

1
Salonga, Private International Law, pp.495
 Involuntary Assignment of Debts (garnishment). For recovery of debts or for
involuntary assignment of debts, the proper point of contact is the place
where the debtor may effectively served with summons (usually, but not
always, this is the domicile of the debtor).2

According to Cambridge Law Journal:

an explanation for the adoption of the debtors residence as

the situs of the debt is found in the oft-quoted dictum of Lord field
in Commissioner of Stamp vs. Hope. He said that the place of the
debtors residence was chosen as the situs of the debt because a
debt, being merely a chose in actiona money to be recovered
from the debtor and nothing morecould have no other local
existence than the personal residence of the debtor, where assets
to satisfy it would presumably be.3

Thus, quoted above, it is clear that the application of this dictum

provides two points. First is the satisfaction of the debt against the debtors
assets because the debt is said to be situated where it can be enforced. Second,
the debt is held to be located where it is payable or recoverable. Thus, when a
foreigner who is domiciled in Germany but found in Italy, owes a Filipino
residing in Manila an amount of money, the question would be: where should
the Filipino file an action for the recovery of the debt? Generally, the action
must be instituted in Italy because it is where the debtor is found where the
debt is payable and recoverable.

Garnishment is an ancillary remedy in aid of execution to obtain

payment of a judgment whereby a persons property, money, or credits in
possession or under control of, or owing by, another are applied to payment of
a formers debt to a third person by proper statutory process against debtor
and garnishee.4

From the definition above, it only means that a garnishment proceeding

for the collection of debt may be instituted by a creditor against a third person
(garnishee) who is the debtor of the formers debtor. Example, in a final
judgement in favor of a Filipino resided in Manila against a Canadian domiciled
in Japan who failed to pay his obligation under the final judgment was actually
a creditor of a certain Taiwanese resided in Manila. The Filipino as a judgement
creditor may file a garnishment proceeding against the Taiwanese (garnishee)
to directly attach the payment of the latters debt in favor to him in Manila
because it is where the garnishee can be effectively served with summons.

2
Paras, Philippine Conflict of laws Eight Edition (Manila, Phil: Rex Printing Company Inc., 2006), p.331
3
Cambridge Law Journal, p.6
4
Blacks Law Dictionary
 Jurisdiction in garnishment procedure involves numerous complications
depending on classification of the nature of a garnishment proceeding.

According to Washington Law Review:

One of the classifications of garnishment is that it maybe treated

as a proceeding in personam, that is, an action directed against
either the garnishee or the principal debtor, or both, personally.
The objective of an in personam action is the recovery of a personal
judgment which may be satisfied out of the general assets of the
defendant or defendants. This line of reasoning cannot consistently
be followed in garnishment, in as much as the real purpose of the
procedure is to reach a particular asset, consisting of the chose in
action represented by the debt owed to the principal debtor by the
garnishee. As to the garnishee the recovery sought is in personam
since its aim is an adjudication that he is indebted to the principal
debtor and that such debt be reduced to judgment in favor of the
plaintiff, and satisfies out of the garnishee's general assets.
However, as to the plaintiff, the garnishment proceeding is also an
attempt to establish his debt against the principal debtor, and to
satisfy that claim by an attachment of the property represented by
the intangible debt owed to the principal debtor by the garnishee.5

The above quoted is somehow in line with Section 2, Rule 4 of the

Philippine Rules of Court regarding actions in personam:

Section 2.Venue of personal actions. All other actions may be

commenced and tried where the plaintiff or any of the principal plaintiffs
resides, or where the defendant or any of the principal defendants resides, or in
the case of a non-resident defendant where he may be found, at the election of
the plaintiff.

However, in conflict of laws, while the action is in personam (for the

collection of debt), the action shall be filed in the place where the debtor is
found or in case of garnishment, the place where the garnishee may be found

Voluntary Assignment of Debts. The validity and effectiveness of a

voluntary assignment of a debt depends on the lex loci voluntatis or the lex loci
intentionis; or, the proper law of the contract controls.6

This means that the validity of voluntary assignment of debts as a rule shall
be determined generally on the intention of the parties embodied in the
contract. For example, when a contract entered into between two parties
domiciled in different States, wherein one party owed the other a sum of money
and stipulated in the contract that the payment shall be made in Manila, the

5
Washington University Law Review, pp 86
6
Paras, Philippine Conflict of laws Eight Edition (Manila, Phil: Rex Printing Company Inc., 2006)., p.332
proper law that should govern is the Philippine Law. The reason is that it is
evident from the stipulation of their contract that it is the Philippine law
intended by the parties to be applicable. Thus, the lex loci intentionis governs
the validity and effectiveness of voluntary assignment of debt.

However, unlike involuntary assignment of debt, voluntary assignment is

governed by various theories.

Justice Paras, in his book on Philippine Conflict of laws provides these

theories:

(1) One theory is that the controlling law is the national law of the debtor
and the creditor if the forum adheres to the nationality principle; and the
domiciliary law of the debtor and creditor if the forum is guided by the
domiciliary principle.7

Nevertheless, this theory was criticized as complicated and not

viable for application as when the personal law of each party differs from
one another. It would seem difficult to determine which between the two
laws should govern the case. On the other hand, in case of domiciliary
principle, the application would also be impractical where the parties are
domiciled in different State.

(2) Another theory insists on the lex loci celebrationis of the assignment, that
is, the law of the place where the voluntary assignment of the credit was
made.8

(3) Finally there is the theory that is the lex loci volutantis( the law of the
place of performance or law of the place where payment may be asked of
the debtor) that is controlling.9

The last two theories were also criticized as defective on the ground that
in case of lex loci celebrationis, the assignment may only be purely accidental to
the transaction and could not be considered as a factor in the determination of
the situs. Regarding lex loci voluntatis, the inherent defect of this theory is the
fact that there are many places where performance may be sought, namely,
any state where the debtor may be served with summons.

Nevertheless, despite various theories were presented for the validity and
effectiveness of a voluntary assignment of debt, still, the present rule that it
shall be based on lex loci intentionis or lex loci voluntatis is controlling.

7
Ibid
8
Paras, Philippine Conflict of laws Eight Edition (Manila, Phil: Rex Printing Company Inc., 2006), p.333
9
Ibid.
 Situs of Debt for Taxation Purposes. Situs of taxation literally means the
place of taxation, or the country that has jurisdiction to levy a particular tax on
persons, property, rights or business10

In conflict of laws, the situs of a debt for purposes of taxation is the

domicile of the creditor, and accordingly, the collectible credit may be taxed
therein. In our country, it should be noted that interests on the debts are
deductible from the gross income of the taxpayer.11

Thus, it is true that debts are generally taxable. As in the case of debt
financing, a business raises money by issuing debt, usually by selling a bond.
Any interest therein, accordingly, is deducted from the gross income of the
taxpayer. The rationale is that if the lenders are required to pay a tax on their
interest income, results is, they will demand a higher interest rate from
borrowers than they would have in the absence of that tax.

Moreover, the situs of personal property for the purposes of taxation is no

longer determined by a strict application of the rule mobilia sequuntue
personam.12 However, this rule is still generally applicable and they are taxed
at the domicile of the owner or creditor. An example is in the case of Welch v.
City of Boston (Mass, 1915) 109 N.E 174--
The court of Maine appointed the plaintiffs, residents of
Massachusetts, trustees for certain beneficiaries domiciled in
California, the corpus of the fund being stocks and bonds of foreign
corporation to Massachusetts and deposited in Maine. These
stocks and bonds were taxed in Massachusetts under a statute
expressly covering such case. The tax having been paid, the trustee
sued for the recovery, but the courts held that the statute was
valid as the situs of the property was at the domicile of the
creditors, the trustees.13

The rationale is that the creditor is, nonetheless subject to taxation since
he holds the debt as trustee. The legal title to the debt is present at his
domicile and is there taxable if the State so declares Thus, in conflict of laws,
taxes on debts are generally, collectible in the domicile of the creditor.

Administration of Debts. In conflict of laws, for the purpose of

administering of debts, the situs is the place where the assets of the debtor are
actually situated.14

10
Blacks Law Dictionary
11
Ibid.,9
12
Harvard Law Review.,p.918
13
Welch v. City of Boston (Mass, 1915) 109 N.E 174,
14
Paras, Philippine Conflict of laws Eight Edition (Manila, Phil: Rex Printing Company Inc., 2006), p.334
An example is in case of insolvency, where the assignee, for eventual
distribution of the assets among the creditors, is required to take hold of the
assets of the debtor. From the foregoing instances, it is clear that the lex situs
or the place where the property is situated will be the determining factor for
purposes of administering debts.

According to Cambridge Law Journal:

A debtor may be sued wherever process may be served upon him.

This fact justifies the decision which allows an administrator to
sue a foreign debtor who comes within the jurisdiction in which
the administrator permitted to sue. Power to collect the debt exists
there, as there is power to control over the debtor. If an
administrator wishes to recover property or debts outside the state,
he must be granted ancillary administrative power.15

Hence, the courts will grant the ancillary administration in the state
where the tangible property of a non-resident decedent is situated. Power of
control over the debtor is required to give the necessary power of control over
the debt.

B. NEGOTIABLE BILL OF EXCHANGE

A negotiable instrument is a document guaranteeing the payment of a

specific amount of money, either on demand, or at a set time, with the payer
named on the document.16

This means that it is a document usually contemplated by or embodied

in a contract, such as a promising note or a bill of exchange, which, without
condition, promises the payment of money either on demand or at a future
date. However, in conflict of laws, the application of negotiable instruments
may vary from one place to another depending on what law is being applied
and what country it is used in as well as its context. This only means that
negotiability or the non-negotiability of an instrument is determined by the
right embodied in the instrument. Thus, for example in the Philippines, check
is generally governed by Philippine Negotiable Instruments Law; in case of
Canadian bill of exchange, it is the Canadian Law that settles whether or not
the instrument is negotiable. However, in United States, Sec. 348 of American
Restatement provides different conditionthe place where the instrument was
executed. The case of Spears v. Wilson Sewing Machine Co provides that the
obligation of a negotiable instrument is generally regarded as embodied in the
instrument so that a transfer of the instrument transfers the right to collect the
debt.

15
Cambridge Law Journal, p.130
16
Blacks Law Dictionary
 Moreover, regarding the validity of the transfer, delivery or negotiation of
the instrument is, in general, governed by the law of the situs of the instrument
at the time of transfer, delivery, or negotiation.17

Thus, if under the law of the obligation, an instrument payable to bearer has
been validly created, the law of the situs of the instrument at the time of
transfer determines the method and effect of disposal.

C. CORPORATE SHARES OF STOCK

Corporate stock is defined as an instrument that signifies an

ownership position, or equity, in a corporation, and represents a claim on
its proportionate share in the corporation's assets and profits.18

This means that a stock, which represents a right to property, is also

considered as an intangible personal property. In conflict of laws, the
general rule is that the domicile of the owner of the stock and the place
where the certificate is found determines its situs. However, it has also
been ruled that the domicile of the corporation is the basis of situs

Rules

(1) The effect on a corporation of the sale of corporate shares is governed by

the law of the place of incorporation. The reason is simple: to bind the
corporation, the transfer must be recorded in its books.19

Sec. 63 of the Corporation Code provides that:

In the case of a corporation incorporated in our country, no

transfer of the share of stock shall be valid, except as
between the parties, until the transfer is recorded in the
books of the corporation so as to shoe the number of the
certificate/s, and the number of shares transferred.

In the case of Uson v Diosomito et al. (1935), the court held that the right
of the owner of the shares of stock of a corporation to transfer the same by
delivery of the certificate, whether it be regarded as statutory or common law
right, is limited and restricted by the express provision of Sec.63 of the
Corporation Code that "no transfer, however, shall be valid, except as between

17
Ibid.,15
18
Blacks Law Dictionary
19
Paras, Philippine Conflict of laws Eight Edition (Manila, Phil: Rex Printing Company Inc., 2006), p.334
the parties, until the transfer is entered and noted upon the books of the
corporation."

Hence, the necessary steps to perfect the assignment against the

corporation or attaching creditor of the assignor are governed by the law where
the company is incorporated. However, the effect of an assignment or transfer
of the share certificate will be governed by the law connected to the transaction
entered between assignor and assignee.

(2) The effect between the parties of the sale of corporate shares is governed
by the lex loci voluntatis or the lex loci intentionis (the proper law of the
contact) because this sale or transfer is really a contract. In many cases,
the proper law of the contract is the place where the certificate is
delivered.20

Regarding sale of corporate share it would seem to apply the

general rule that it should be based upon the intention of the parties
stipulated in the contract. Since a sale is one a contract, parties thereto
are given by the law to stipulate their own terms and condition as long
as the same is not contrary to law, moral, public policy or public order.
Thus, the intention of the parties governs the sale.

(3) Taxation on the dividends of corporate shares is governed by the law of

the place of incorporation. Thus, it has been held that shares of stock of
a foreigner, even if they are considered personal property under our law
(Art. 417, No.2, Civil Code) can be taxed in the Philippines.21

In the case of Wells Fargo vs. Collector of Internal Revenue (1940),

this rule was applied. Birdie Lillian Eye died in his domicile in California.
She left her 1/2 conjugal shares of stock in the Benguet Consolidated
Mining Co., an anonymous partnership, organized under the laws of the
Philippines. She left a will duly admitted to probate in California. Wells
Fargo bank and Union Trust Co. Was appointed as trustee of the trust by
the said will. The Collector of Internal Revenue in the Philippines sought
to subject the shares of stock to inheritance tax, to which Wells Fargo
objected. The issue to be resolved is that whether the shares of stock are
subject to Philippine inheritance tax considering that the decedent was
domiciled in California. It was held that since a partnership was created
under Philippine law, it does only mean that the owner of the stock
residing in California has extended here her activities with respect to her

20
Paras, Conflict of laws, p..335
21
Ibid
intangibles so as to avail hereself of the protection and benefit of
Philippine laws. Accordingly, the jurisdiction of the Philippine
Government to tax must be upheld.