INTANGIBLE PERSONAL PROPERTY

(CHOSES IN ACTION)

The type of personal property known to the law as intangible has long
been a cause of confusion and uncertainty as reflected by the judicial decisions
and opinions of commentators and text book writers. Intangibles, having no
physical existence, occupy no space and therefore can have no actual location.
In conflict of laws problems, however, situs of property often must be
determined upon a court, or to control the choice of law which will resolve an
action. Since situs can be essential, intangibles have been artificially located.
The application of these fictions has resulted in divergent, and often conflicting,
theories of determining situs.1

Obligations and interests arising out of legal relations among persons are
denominated intangible property created by operation of law. Accordingly,
choses in action are divided into three classes: (a) debts or simple rights of
action arising from loans or ordinary commercial contracts (b) negotiable
instruments; and (c) corporate stocks or shares.2 For purposes of convenience,
it might be necessary to deal separately, each class of choses in action.

A. DEBTS

Overview

Even though some may deny that debts are capable of having a situs,
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. Since an insurer's promise is
in the nature of a debt, the situs of this obligation is generally considered to be
at the residence 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.

Harris v. Balk 198 US 215

Facts: Plaintiff owed Defendant $180. Both parties resided in North

Carolina. Defendant owed Jacob Epstein, a resident of Maryland,
$300, and when Epstein knew that Plaintiff was coming to
Baltimore he had him served in a Maryland court. At the

1
St. Johns Law Review.,pp 5
2
Salonga, Private International Law, pp.495
 conclusion of proceedings in Maryland, Plaintiff agreed to pay the
$180 directly to Epstein and have his debt with Defendant wiped
away. However, within two days of returning to North Carolina,
Defendant brought this claim, arguing that the $180 judgment had
no significance in North Carolina because Maryland had no
jurisdiction to attach the debt to the Maryland case. The district
and Supreme courts of North Carolina held for Defendant.

Issue: The issue is whether Maryland had jurisdiction over the

debt between the two residents of North Carolina.

Held: The United States Supreme Court held that although the
general rule is that only states that are the domicile of the creditor
or debtor typically have jurisdiction, Defendant in could have
conceivably brought an action against Plaintiff for the debt when
Plaintiff in error was in Maryland. Defendant in error was even
aware that Plaintiff was in Maryland, as evidence by his suit filed
shortly after his return. The establishment of jurisdiction over
Plaintiff was proper in Maryland, and the judgment was valid, and
therefore North Carolina is required to give full faith in credit to the
Maryland judgment.

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.

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).3

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.4

3
Paras, Conflict of laws, p.331
4
Cambridge Law Journal, p.6
 Thus, it is evident that the application of this dictum provides two points.
First is that by focusing on 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.

Illustration:

A Frenchman, who is domiciled in Germany but found in Italy, owes a

Filipino in Manila an amount of money. The question would be: where
should the Filipino sue for the recovery of the debt?

Answer: 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.5

Illustration:

A who is domiciled in Japan but found in China owes by final

judgement a Filipino in Manila a sum of money. A, however failed to
pay the obligation; upon on the other hand, A is the creditor of B
domiciled in Florida but has been temporarily residing in Manila. The
Filipino filed a garnishment proceeding in Manila, that is, as a
judgment creditor of the A, attaching the amount money due to A
from B so that B may directly pay the money to him (Filipino). May
the garnishment proceedings prosper in Manila?

Answer: Yes because B (garnishee) is temporarily residing in Manila

where he may be effectively served with summons. If the garnishment
proceeding will be granted by the court, this garnishment operates as
an involuntary assignment to A of Bs debt.

Jurisdiction in garnishment procedure involves numerous complications

depending on classification of the nature of a garnishment proceeding.

5
Blacks Law Dictionary
 According to Washington Law Review:

One of the classifications of garnishment is that it may be 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.6

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.

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.7

Illustration:

A Filipino residing in Manila is the creditor of a Cuban domiciled in

Germany. As a result of business transaction, the credit was entered between
them in Manila. However, a stipulation was made that the payment shall be
made in Germany. If the Filipino assigns his credit in favour of a German, also
domiciled in Germany, the proper law that should control the validity and the
effectiveness of the assignment should be the German Law, for it is evident

6
Washington University Law Review, pp 86
7
Paras, Conflict of Laws., p.332
from the stipulation of their contract that it is this law that the parties
intended to be applicable (lex loci intentionis).

Unlike involuntary assignment of debt, voluntary assignment is governed

by various theories.

Justice Paras, in his book on 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.8

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. (Goodrich, Conflict of laws, pp426-427; American Restatement).9

(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. (Westlake, A Treatise on Private
International Law).10

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.

8
Ibid
9
Paras, Conflict of laws, p.333
10
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 business11

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.12

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.13 However, this rule is still generally applicable and they are taxed
at the domicile of the owner or creditor as to intangibles, which can have no
actual situs. 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.

In 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.14

Administration of Debts. For the purpose of administering of debts, the

situs is the place where the assets of the debtor are actually situated.15 An
example is in case of insolvency, where the assignee, for eventual distribution
of the assets among the creditors, required to take hold of the assets of the
debtor. From the foregoing instances, it is clear that the lex situs or the place

11
Blacks Law Dictionary
12
Ibid.,9
13
Harvard Law Review.,p.918
14
Welch v. City of Boston (Mass, 1915) 109 N.E 174,
15
Paras, Conflict of laws, p.334
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.16

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

Accordingly, 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.17

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,
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. The negotiability or the non-negotiability of an instrument (such
as bill of exchange) is determined by the right embodied in the instrument.
(Wolff, Private International Law).18 Thus, for example in the Philippines,
cheque 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. Consequently, when a

16
Cambridge Law Journal, p.130
17
Blacks Law Dictionary
18
Ibid.,15
 negotiable instrument has been negotiated in a foreign country,
the courts, influenced by this doctrine, hold that the person to
whom the payor is liable is determined by the law governing the
negotiation, rather than by the law governing the promise. This
identity of the obligation with the instrument further led the courts
to regard the negotiation of an instrument as analogous to the
transfer of a chattel and, hence, to apply to negotiation a rule
similar to that governing the transfer of chattels: that the effect of
negotiation is determined by the law of the place of the instrument
at the time of the negotiation.19

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. (Cheshire, Private
International Law).20 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.21

C. CORPORATE SHARES OF STOCK

Accordingly, 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.22

Stock, representing a right to property, constitutes intangible personal

property. Its situs has been variously held to be at the domicile of the
owner and at the place where the certificate is found. However, the more
authoritative rule would seem to be 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. (Beale,
Foreign Corporations, Sec. 376).23

Sec. 63 of the Corporation Code provides that:

19
Spears v. Wilson Sewing Machine Co
20
Ibid.,15
21
Salonga, Conflict of laws, p.500
22
Blacks Law Dictionary
23
Paras, Conflict of laws, p.334
 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.

Hence, the steps necessary 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 most closely connected to
the transaction entered between assignor and assignee.

Uson v. Diosomito et al. (1935)

Facts: Diosomito, who owned 75 shares (of the North Electric Co.,
Inc.,), sold said shares to Barcelon and delivered to the latter the
corresponding stock certificates. Uson sued Diosomito for a debt
and that upon institution of said action an attachment was duly
issued and levied upon 75 shares (of the North Electric Co., Inc.,)
which stood in Diosomito name on the books of the company when
the attachment was levied. Barcelon only presented the
certificates for registration 9 months after the attachment had
been levied. Subsequently, Uson obtained judgment against the
defendant Diosomito. To satisfy said judgment, the sheriff sold said
shares at public auction. The plaintiff Toribia Uson was the highest
bidder and said shares were adjudicated to her. In the present
action, H. P. L. Jollye claims to be the owner of said 75 shares of
the North Electric Co., Inc., and presents a certificate of stock
issued to him by the company on February 13, 1933.

Issue: Whether a bona fide transfer of the shares of a corporation,

not registered or noted on the book,; of the corporation, is valid as
against a subsequent lawful attachment of said shares, regardless
of whether the attaching creditor had actual notice of said transfer
or not?

Held: The transfer of the 75 shares in the North Electric

Company.Inc., made by the defendant Diosomito to the defendant
Barcelon was not valid as to the plaintiff-appellee, Toribia Uson, on
January 18, 1932, the date on which she obtained her attachment
lien on said shares of stock which still stood in the name of
Diosomito, on the books of the corporation. The right of the owner
of the shares of stock of a Philippine 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 the parties,
until the transfer is entered and noted upon the books of the
corporation."

Therefore, an attachment lien prevails over a prior unregistered bona fide

stock transfer.

Moreover, authority provides:

Until the transfer has been thus entered and noted on the
corporate books, said transfer is not valid as to attaching or
execution creditors of the assignor unless said creditors actually
knew or had notice of unregistered transfer. It should be noted,
however, that what should be registered are transfer or absolute
conveyance of the ownership in shares; therefore, registration on
the corporate books of a chattel mortgage or a pledge of the
corporate shares is not essential to bind the corporation or third
persons so long as the requirements of the Chattel Mortgage Law
and the law on pledge have been complied.24

Chua Guan v. SAMAHANG MAGSASAKA INC. (1935)

Facts: Gonzalo H. Co Toco was the owner of 5,894 shares of the capital
stock of the said corporation represented by nine certificates and a
resident of Manila, mortgaged said 5,894 shares to Chua Chiu to
guarantee the payment of a debt. The said certificates of stock were
delivered with the mortgage to the mortgagee, Chua Chiu. The said
mortgage was duly registered in the office of the register of deeds of
Manila and in the office of the said corporation. Subsequently, Chua
Chiu assigned all his right and interest in said mortgage to the plaintiff
and the assignment was registered in the office of the register of deeds in
the City of Manila and in the office of the said corporation. The debtor,
Gonzalo H. Co Toco, having defaulted in the payment of said debt at
maturity, the plaintiff foreclosed said mortgage and delivered the
certificates of stock and copies of the mortgage and assignment to the
sheriff in order to sell the said shares at public auction. In the name of
Gonzalo H. Co Toco to the proper officers of the corporation for
cancellation and demanded that they issue new certificates in the name
of the plaintiff. The said officers (the individual defendants) refused and
still refuse to issue said new shares in the name of the plaintiff on the
ground that prior to the date when the plaintiff made his demand, nine

24
Ibid.,23
 attachments had been issued and served and noted on the books of the
corporation against the shares of Gonzalo H. Co Toco and the plaintiff
objected to having these attachments noted on the new certificates which
he demanded. No question is raised as to the validity of said mortgage or
of said writs of attachment.

Issue: the sole question presented for decision is whether the said
mortgage takes priority over the said writs of attachment.

Held: The attaching creditors are entitled to priority over the defectively
registered mortgage of the appellant

Ratio: The property in the shares may be deemed to be situated in the

province in which the corporation has its principal office or place of
business. If this province is also the province of the owner's domicile, a
single registration is sufficient. If not, the chattel mortgage should be
registered both at the owner's domicile and in the province where the
corporation has its principal office or place of business. In this sense the
property mortgaged is not the certificate but the participation and share
of the owner in the assets of the corporation.

(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. (Cheshire, Private International Law)25

(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. (Wells Fargo
Bank v. Coll. Of Int. Rev., 40 O.G (85) No.,2 p. 159; 70 Phil. 325)26

Wells Fargo vs. Collector of Internal Revenue

GR 46720, 28 June 1940
Facts: Birdie Lillian Eye died on 16 September 1932, at Los Angeles,
California, the place of her alleged last residence and domicile. Among
the properties she left was 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

25
Paras, Conflict of laws, p..335
26
Ibid
 in California where her estate was administered and settled. Wells Fargo
bank and Union Trust Co. was duly appointed trustee of the trust by the
said will. The Federal and California States inheritance taxes due
thereon have been duly paid. The Collector of Internal Revenue in the
Philippines, however, sought to subject the shares of stock to inheritance
tax, to which Wells Fargo objected.

Issue: Whether the shares of stock are subject to Philippine inheritance

tax considering that the decedent was domiciled in California.

Held: Originally, the settled law in the United States is that intangibles
have only one situs for the purpose of inheritance tax, and such situs is
in the domicile of the decedent at the time of his or her death. But the
rule has been relaxed. The maxim mobila sequuntur personam, upon
which the rule rests, has been decried as a mere fiction of law having its
origin in considerations of general convenience and public policy, and
cannot be applied to limit or control teh right of the State to tax property
within its jurisdiction and must yield to established fact of legal
ownership, actual presence and control elsewhere, and cannot be applied
if to do so would result in inescapable and patent injustice. The
relaxation of the original rule rests on either of two fundamental
considerations: (1) upon the recognition of the inherent power of each
government to tax persons, properties, and rights within its jurisdiction
and enjoying, thus, the protection of its laws; and (2)upon the principle
that as to intangibles, a single location in space is hardly possible,
considering the multiple, distinct relationships which may be entered
into with respect thereto. Herein, the actual situs of the shares of stock
is in the Philippines, the corporation being domiciled therein. The
certificates of stock remained in the Philippines up to the time when the
deceased died in California, and they were in possession of one Syrena
McKee, secretary of the corporation, to whom they have been delivered
and indorsed in blank. McKee had the legal title to the certificates of
stock held in trust for the true owner thereof. The owner residing in
California has extended here her activities with respect to her 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.

Situs of property, for tax purposes, is determined by whether the taxing

state has sufficient contact with the personal property sought to be taxed to
justify in fairness the particular tax. (Blacks Law Dictionary).