Sei sulla pagina 1di 207

[G.R. No. 125027.

August 12, 2002]


ANITA MANGILA, petitioner, vs. COURT OF APPEALS and LORETA GUINA, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition fore review on certiorari under Rule 45 of the Rules of Court, seeking to set aside the
Decision[1] of the Court of Appeals affirming the Decision [2] of the Regional Trial Court, Branch 108, Pasay
City. The trial court upheld the writ of attachment and the declaration of default on petitioner while
ordering her to pay private respondent P109,376.95 plus 18 percent interest per annum, 25 percent
attorneys fees and costs of suit.
The Facts
Petitioner Anita Mangila (petitioner for brevity) is an exporter of sea foods and doing business under
the name and style of Seafoods Products. Private respondent Loreta Guina (private respondent for brevity)
is the President and General Manager of Air Swift International, a single registered proprietorship engaged
in the freight forwarding business.
Sometime in January 1988, petitioner contracted the freight forwarding services of private respondent
for shipment of petitioners products, such as crabs, prawns and assorted fishes, to Guam (USA) where
petitioner maintains an outlet. Petitioner agreed to pay private respondent cash on delivery. Private
respondents invoice stipulates a charge of 18 percent interest per annum on all overdue accounts. In case
of suit, the same invoice stipulates attorneys fees equivalent to 25 percent of the amount due plus costs of
suit.[3]
On the first shipment, petitioner requested for seven days within which to pay private respondent.
However, for the next three shipments, March 17, 24 and 31, 1988, petitioner failed to pay private
respondent shipping charges amounting to P109, 376.95.[4]
Despite several demands, petitioner never paid private respondent. Thus, on June 10, 1988, private
respondent filed Civil Case No. 5875 before the Regional Trial Court of Pasay City for collection of sum of
money.
On August 1, 1988, the sheriff filed his Sheriffs Return showing that summons was not served on
petitioner. A woman found at petitioners house informed the sheriff that petitioner transferred her
residence to Sto. Nio, Guagua, Pampanga. The sheriff found out further that petitioner had left the
Philippines for Guam.[5]
Thus, on September 13, 1988, construing petitioners departure from the Philippines as done with
intent to defraud her creditors, private respondent filed a Motion for Preliminary Attachment. On
September 26, 1988, the trial court issued an Order of Preliminary Attachment [6] against petitioner. The
following day, the trial court issued a Writ of Preliminary Attachment.
The trial court granted the request of its sheriff for assistance from their counterparts in RTC,
Pampanga. Thus, on October 28, 1988, Sheriff Alfredo San Miguel of RTC Pampanga served on petitioners
household help in San Fernando, Pampanga, the Notice of Levy with the Order, Affidavit and Bond. [7]

On November 7, 1988, petitioner filed an Urgent Motion to Discharge Attachment [8] without submitting
herself to the jurisdiction of the trial court. She pointed out that up to then, she had not been served a
copy of the Complaint and the summons. Hence, petitioner claimed the court had not acquired jurisdiction
over her person.[9]
In the hearing of the Urgent Motion to Discharge Attachment on November 11, 1988, private
respondent sought and was granted a re-setting to December 9, 1988. On that date, private respondents
counsel did not appear, so the Urgent Motion to Discharge Attachment was deemed submitted for
resolution.[10]
The trial court granted the Motion to Discharge Attachment on January 13, 1989 upon filing of
petitioners counter-bond. The trial court, however, did not rule on the question of jurisdiction and on the
validity of the writ of preliminary attachment.
On December 26, 1988, private respondent applied for an alias summons, which the trial court issued
on January 19, 1989.[11] It was only on January 26, 1989 that summons was finally served on petitioner. [12]
On February 9, 1989, petitioner filed a Motion to Dismiss the Complaint on the ground of improper
venue. Private respondents invoice for the freight forwarding service stipulates that if court litigation
becomes necessary to enforce collection xxx the agreed venue for such action is Makati, Metro Manila.
[13]
Private respondent filed an Opposition asserting that although Makati appears as the stipulated venue,
the same was merely an inadvertence by the printing press whose general manager executed an
affidavit[14] admitting such inadvertence. Moreover, private respondent claimed that petitioner knew that
private respondent was holding office in Pasay City and not in Makati. [15] The lower court, finding credence
in private respondents assertion, denied the Motion to Dismiss and gave petitioner five days to file her
Answer. Petitioner filed a Motion for Reconsideration but this too was denied.
Petitioner filed her Answer[16] on June 16, 1989, maintaining her contention that the venue was
improperly laid.
On June 26, 1989, the trial court issued an Order setting the pre-trial for July 18, 1989 at 8:30 a.m. and
requiring the parties to submit their pre-trial briefs. Meanwhile, private respondent filed a Motion to Sell
Attached Properties but the trial court denied the motion.
On motion of petitioner, the trial court issued an Order resetting the pre-trial from July 18, 1989 to
August 24, 1989 at 8:30 a.m..
On August 24, 1989, the day of the pre-trial, the trial court issued an Order [17] terminating the pre-trial
and allowing the private respondent to present evidence ex-parte on September 12, 1989 at 8:30 a.m..
The Order stated that when the case was called for pre-trial at 8:31 a.m., only the counsel for private
respondent appeared. Upon the trial courts second call 20 minutes later, petitioners counsel was still
nowhere to be found. Thus, upon motion of private respondent, the pre-trial was considered terminated.
On September 12, 1989, petitioner filed her Motion for Reconsideration of the Order terminating the
pre-trial. Petitioner explained that her counsel arrived 5 minutes after the second call, as shown by the
transcript of stenographic notes, and was late because of heavy traffic. Petitioner claims that the lower
court erred in allowing private respondent to present evidence ex-parte since there was no Order
considering the petitioner as in default. Petitioner contends that the Order of August 24, 1989 did not state
that petitioner was declared as in default but still the court allowed private respondent to present evidence
ex-parte.[18]
On October 6, 1989, the trial court denied the Motion for Reconsideration and scheduled the
presentation of private respondents evidence ex-parte on October 10, 1989.

On October 10, 1989, petitioner filed an Omnibus Motion stating that the presentation of evidence exparte should be suspended because there was no declaration of petitioner as in default and petitioners
counsel was not absent, but merely late.
On October 18, 1989, the trial court denied the Omnibus Motion. [19]
On November 20, 1989, the petitioner received a copy of the Decision of November 10, 1989, ordering
petitioner to pay respondent P109,376.95 plus 18 percent interest per annum, 25 percent attorneys fees
and costs of suit. Private respondent filed a Motion for Execution Pending Appeal but the trial court denied
the same.
The Ruling of the Court of Appeals
On December 15, 1995, the Court of Appeals rendered a decision affirming the decision of the trial
court. The Court of Appeals upheld the validity of the issuance of the writ of attachment and sustained the
filing of the action in the RTC of Pasay. The Court of Appeals also affirmed the declaration of default on
petitioner and concluded that the trial court did not commit any reversible error.
Petitioner filed a Motion for Reconsideration on January 5, 1996 but the Court of Appeals denied the
same in a Resolution dated May 20, 1996.
Hence, this petition.
The Issues
The issues raised by petitioner may be re-stated as follows:
I.
WHETHER RESPONDENT COURT ERRED IN NOT HOLDING THAT THE WRIT OF ATTACHMENT WAS
IMPROPERLY ISSUED AND SERVED;
II.
WHETHER THERE WAS A VALID DECLARATION OF DEFAULT;
III.
WHETHER THERE WAS IMPROPER VENUE.
IV.
WHETHER RESPONDENT COURT ERRED IN DECLARING THAT PETITIONER IS OBLIGED TO PAY P109, 376.95,
PLUS ATTORNEYS FEES.[20]
The Ruling of the Court
Improper Issuance and Service of Writ of Attachment
Petitioner ascribes several errors to the issuance and implementation of the writ of attachment.
Among petitioners arguments are: first, there was no ground for the issuance of the writ since the intent to
defraud her creditors had not been established; second, the value of the properties levied exceeded the
value of private respondents claim. However, the crux of petitioners arguments rests on the question of

the validity of the writ of attachment. Because of failure to serve summons on her before or simultaneously
with the writs implementation, petitioner claims that the trial court had not acquired jurisdiction over her
person and thus the service of the writ is void.
As a preliminary note, a distinction should be made between issuance and implementation of the writ
of attachment. It is necessary to distinguish between the two to determine when jurisdiction over the
person of the defendant should be acquired to validly implement the writ. This distinction is crucial in
resolving whether there is merit in petitioners argument.
This Court has long settled the issue of when jurisdiction over the person of the defendant should be
acquired in cases where a party resorts to provisional remedies. A party to a suit may, at any time after
filing the complaint, avail of the provisional remedies under the Rules of Court. Specifically, Rule 57 on
preliminary attachment speaks of the grant of the remedy at the commencement of the action or at
any time thereafter.[21] This phrase refers to the date of filing of the complaint which is the moment that
marks the commencement of the action. The reference plainly is to a time before summons is served on
the defendant, or even before summons issues.
In Davao Light & Power Co., Inc. v. Court of Appeals, [22] this Court clarified the actual time when
jurisdiction should be had:
It goes without saying that whatever be the acts done by the Court prior to the acquisition of jurisdiction
over the person of defendant - issuance of summons, order of attachment and writ of attachment these do not and cannot bind and affect the defendant until and unless jurisdiction over his
person is eventually obtained by the court, either by service on him of summons or other coercive
process or his voluntary submission to the courts authority. Hence, when the sheriff or other proper officer
commences implementation of the writ of attachment, it is essential that he serve on the defendant not
only a copy of the applicants affidavit and attachment bond, and of the order of attachment, as explicitly
required by Section 5 of Rule 57, but also the summons addressed to said defendant as well as a copy of
the complaint xxx. (Emphasis supplied.)
Furthermore, we have held that the grant of the provisional remedy of attachment involves three stages:
first, the court issues the order granting the application; second, the writ of attachment issues pursuant to
the order granting the writ; and third, the writ is implemented. For the initial two stages, it is not
necessary that jurisdiction over the person of the defendant be first obtained. However, once
the implementation of the writ commences, the court must have acquired jurisdiction over the
defendant for without such jurisdiction, the court has no power and authority to act in any manner against
the defendant. Any order issuing from the Court will not bind the defendant. [23]
In the instant case, the Writ of Preliminary Attachment was issued on September 27, 1988 and
implemented on October 28, 1988. However, the alias summons was served only on
January 26, 1989 or almost three months after the implementation of the writ of attachment.
The trial court had the authority to issue the Writ of Attachment on September 27 since a motion for
its issuance can be filed at the commencement of the action. However, on the day the writ was
implemented, the trial court should have, previously or simultaneously with the implementation of the writ,
acquired jurisdiction over the petitioner. Yet, as was shown in the records of the case, the summons was
actually served on petitioner several months after the writ had been implemented.
Private respondent, nevertheless, claims that the prior or contemporaneous service of summons
contemplated in Section 5 of Rule 57 provides for exceptions. Among such exceptions are where the
summons could not be served personally or by substituted service despite diligent efforts or where the
defendant is a resident temporarily absent therefrom x x x. Private respondent asserts that when she
commenced this action, she tried to serve summons on petitioner but the latter could not be located at her

customary address in Kamuning, Quezon City or at her new address in Guagua, Pampanga. [24] Furthermore,
respondent claims that petitioner was not even in Pampanga; rather, she was in Guam purportedly on a
business trip.
Private respondent never showed that she effected substituted service on petitioner after her personal
service failed. Likewise, if it were true that private respondent could not ascertain the whereabouts of
petitioner after a diligent inquiry, still she had some other recourse under the Rules of Civil Procedure.
The rules provide for certain remedies in cases where personal service could not be effected on a
party. Section 14, Rule 14 of the Rules of Court provides that whenever the defendants whereabouts are
unknown and cannot be ascertained by diligent inquiry, service may, by leave of court, be effected upon
him by publication in a newspaper of general circulation x x x. Thus, if petitioners whereabouts could not
be ascertained after the sheriff had served the summons at her given address, then respondent could have
immediately asked the court for service of summons by publication on petitioner. [25]
Moreover, as private respondent also claims that petitioner was abroad at the time of the service of
summons, this made petitioner a resident who is temporarily out of the country. This is the exact situation
contemplated in Section 16,[26] Rule 14 of the Rules of Civil Procedure, providing for service of summons by
publication.
In conclusion, we hold that the alias summons belatedly served on petitioner cannot be deemed to
have cured the fatal defect in the enforcement of the writ. The trial court cannot enforce such a coercive
process on petitioner without first obtaining jurisdiction over her person. The preliminary writ of
attachment must be served after or simultaneous with the service of summons on the defendant whether
by personal service, substituted service or by publication as warranted by the circumstances of the case.
[27]
The subsequent service of summons does not confer a retroactive acquisition of jurisdiction over her
person because the law does not allow for retroactivity of a belated service.
Improper Venue
Petitioner assails the filing of this case in the RTC of Pasay and points to a provision in private
respondents invoice which contains the following:
3. If court litigation becomes necessary to enforce collection, an additional equivalent (sic) to 25% of the
principal amount will be charged. The agreed venue for such action is Makati, Metro Manila, Philippines. [28]
Based on this provision, petitioner contends that the action should have been instituted in the RTC of
Makati and to do otherwise would be a ground for the dismissal of the case.
We resolve to dismiss the case on the ground of improper venue but not for the reason stated by
petitioner.
The Rules of Court provide that parties to an action may agree in writing on the venue on which an
action should be brought.[29] However, a mere stipulation on the venue of an action is not enough to
preclude parties from bringing a case in other venues. [30] The parties must be able to show that such
stipulation is exclusive. Thus, absent words that show the parties intention to restrict the filing of a suit in a
particular place, courts will allow the filing of a case in any venue, as long as jurisdictional requirements
are followed. Venue stipulations in a contract, while considered valid and enforceable, do not as a rule
supersede the general rule set forth in Rule 4 of the Revised Rules of Court. [31] In the absence of qualifying
or restrictive words, they should be considered merely as an agreement on additional forum, not as
limiting venue to the specified place.[32]

In the instant case, the stipulation does not limit the venue exclusively to Makati. There are no
qualifying or restrictive words in the invoice that would evince the intention of the parties that Makati is
the only or exclusive venue where the action could be instituted. We therefore agree with private
respondent that Makati is not the only venue where this case could be filed.
Nevertheless, we hold that Pasay is not the proper venue for this case.
Under the 1997 Rules of Civil Procedure, the general rule is venue in personal actions is where the
defendant or any of the defendants resides or may be found, or where the plaintiff or any of the plaintiffs
resides, at the election of the plaintiff. [33] The exception to this rule is when the parties agree on an
exclusive venue other than the places mentioned in the rules. But, as we have discussed, this exception is
not applicable in this case. Hence, following the general rule, the instant case may be brought in the place
of residence of the plaintiff or defendant, at the election of the plaintiff (private respondent herein).
In the instant case, the residence of private respondent (plaintiff in the lower court) was not alleged in
the complaint. Rather, what was alleged was the postal address of her sole proprietorship, Air Swift
International. It was only when private respondent testified in court, after petitioner was declared in
default, that she mentioned her residence to be in Better Living Subdivision, Paraaque City.
In the earlier case of Sy v. Tyson Enterprises, Inc.,[34] the reverse happened. The plaintiff in that case
was Tyson Enterprises, Inc., a corporation owned and managed by Dominador Ti. The complaint, however,
did not allege the office or place of business of the corporation, which was in Binondo, Manila. What was
alleged was the residence of Dominador Ti, who lived in San Juan, Rizal. The case was filed in the Court of
First Instance of Rizal, Pasig. The Court there held that the evident purpose of alleging the address of the
corporations president and manager was to justify the filing of the suit in Rizal, Pasig instead of in Manila.
Thus, the Court ruled that there was no question that venue was improperly laid in that case and held that
the place of business of Tyson Enterpises, Inc. is considered as its residence for purposes of venue.
Furthermore, the Court held that the residence of its president is not the residence of the corporation
because a corporation has a personality separate and distinct from that of its officers and stockholders.
In the instant case, it was established in the lower court that petitioner resides in San Fernando,
Pampanga[35] while private respondent resides in Paraaque City. [36] However, this case was brought in Pasay
City, where the business of private respondent is found. This would have been permissible had private
respondents business been a corporation, just like the case in Sy v. Tyson Enterprises, Inc. However, as
admitted by private respondent in her Complaint[37] in the lower court, her business is a sole proprietorship,
and as such, does not have a separate juridical personality that could enable it to file a suit in court. [38] In
fact, there is no law authorizing sole proprietorships to file a suit in court. [39]
A sole proprietorship does not possess a juridical personality separate and distinct from the
personality of the owner of the enterprise. [40] The law merely recognizes the existence of a sole
proprietorship as a form of business organization conducted for profit by a single individual and requires its
proprietor or owner to secure licenses and permits, register its business name, and pay taxes to the
national government.[41] The law does not vest a separate legal personality on the sole proprietorship or
empower it to file or defend an action in court.[42]
Thus, not being vested with legal personality to file this case, the sole proprietorship is not the plaintiff
in this case but rather Loreta Guina in her personal capacity. In fact, the complaint in the lower court
acknowledges in its caption that the plaintiff and defendant are Loreta Guina and Anita Mangila,
respectively. The title of the petition before us does not state, and rightly so, Anita Mangila v. Air Swift
International, but rather Anita Mangila v. Loreta Guina. Logically then, it is the residence of private
respondent Guina, the proprietor with the juridical personality, which should be considered as one of the
proper venues for this case.

All these considered, private respondent should have filed this case either in San Fernando, Pampanga
(petitioners residence) or Paraaque (private respondents residence). Since private respondent
(complainant below) filed this case in Pasay, we hold that the case should be dismissed on the ground of
improper venue.
Although petitioner filed an Urgent Motion to Discharge Attachment in the lower court, petitioner
expressly stated that she was filing the motion without submitting to the jurisdiction of the court. At that
time, petitioner had not been served the summons and a copy of the complaint. [43] Thereafter, petitioner
timely filed a Motion to Dismiss[44] on the ground of improper venue. Rule 16, Section 1 of the Rules of
Court provides that a motion to dismiss may be filed [W]ithin the time for but before filing the answer to
the complaint or pleading asserting a claim. Petitioner even raised the issue of improper venue in his
Answer[45] as a special and affirmative defense. Petitioner also continued to raise the issue of improper
venue in her Petition for Review [46] before this Court. We thus hold that the dismissal of this case on the
ground of improper venue is warranted.
The rules on venue, like other procedural rules, are designed to insure a just and orderly
administration of justice or the impartial and evenhanded determination of every action and proceeding.
Obviously, this objective will not be attained if the plaintiff is given unrestricted freedom to choose where
to file the complaint or petition.[47]
We find no reason to rule on the other issues raised by petitioner.
WHEREFORE, the petition is GRANTED on the grounds of improper venue and invalidity of the service
of the writ of attachment. The decision of the Court of Appeals and the order of respondent judge denying
the motion to dismiss are REVERSED and SET ASIDE. Civil Case No. 5875 is hereby dismissed without
prejudice to refiling it in the proper venue. The attached properties of petitioner are ordered returned to
her immediately.
SO ORDERED.
Puno, (Chairman), and Panganiban, JJ., concur.
Sandoval-Gutierrez, J., on leave.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC

RE: QUERY OF MR. ROGER C.


PRIORESCHI RE EXEMPTION FROM
LEGAL AND FILING FEES OF THE
GOOD SHEPHERD FOUNDATION,
INC.

A. M. No. 09-6-9-SC
Present:
PUNO, CJ,
QUISUMBING*,
YNARES-SANTIAGO*,
CARPIO,
CORONA,
CARPIO MORALES,
CHICO-NAZARIO,
VELASCO, JR.,
NACHURA,
LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO**, and
ABAD**, JJ.
Promulgated:
August 19, 2009

x-----------------------------------------------------------------------------------------x
RESOLUTION
BERSAMIN, J.:
In his letter dated May 22, 2009 addressed to the Chief Justice, Mr. Roger C. Prioreschi,
administrator of the Good Shepherd Foundation, Inc., wrote:
The Good Shepherd Foundation, Inc. is very grateful for your 1rst. Indorsement to pay a
nominal fee of Php 5,000.00 and the balance upon the collection action of 10 million pesos,
thus giving us access to the Justice System previously denied by an up-front excessive court
fee.
The Hon. Court Administrator Jose Perez pointed out to the need of complying with OCA
Circular No. 42-2005 and Rule 141 that reserves this privilege to indigent persons. While
judges are appointed to interpret the law, this type of law seems to be extremely detailed
with requirements that do not leave much room for interpretations.
In addition, this law deals mainly with individual indigent and it does not include
Foundations or Associations that work with and for the most Indigent persons. As seen in our
Article of Incorporation, since 1985 the Good Shepherd Foundation, Inc. reached-out to the
poorest among the poor, to the newly born and abandoned babies, to children who never
saw the smile of their mother, to old people who cannot afford a few pesos to pay for
common prescriptions, to broken families who returned to a normal life. In other words, we
have been working hard for the very Filipino people, that the Government and the society
cannot reach to, or have rejected or abandoned them.
Can the Courts grant to our Foundation who works for indigent and
underprivileged people, the same option granted to indigent people?

The two Executive Judges, that we have approached, fear accusations of favoritism or
other kind of attack if they approve something which is not clearly and specifically stated in
the law or approved by your HONOR.
Can your Honor help us once more?
Grateful for your understanding, God bless you and your undertakings.
We shall be privileged if you find time to visit our orphanage the Home of Love and
the Spiritual Retreat Center in Antipolo City.
To answer the query of Mr. Prioreschi, the Courts cannot grant to foundations like the Good
Shepherd Foundation, Inc. the same exemption from payment of legal fees granted to indigent litigants
even if the foundations are working for indigent and underprivileged people.
The basis for the exemption from legal and filing fees is the free access clause, embodied in Sec.
11, Art. III of the 1987 Constitution, thus:
Sec. 11. Free access to the courts and quasi judicial bodies and adequate legal assistance
shall not be denied to any person by reason of poverty.
The importance of the right to free access to the courts and quasi judicial bodies and to adequate
legal assistance cannot be denied. A move to remove the provision on free access from the Constitution on
the ground that it was already covered by the equal protection clause was defeated by the desire to give
constitutional stature to such specific protection of the poor. [1]
In implementation of the right of free access under the Constitution, the Supreme Court promulgated rules,
specifically, Sec. 21, Rule 3, Rules of Court,[2] and Sec. 19, Rule 141, Rules of Court,[3] which respectively
state thus:
Sec. 21. Indigent party. A party may be authorized to litigate his action, claim or
defense as an indigent if the court, upon an ex parte application and hearing, is satisfied
that the party is one who has no money or property sufficient and available for food, shelter
and basic necessities for himself and his family.
Such authority shall include an exemption from payment of docket and other lawful
fees, and of transcripts of stenographic notes which the court may order to be furnished
him. The amount of the docket and other lawful fees which the indigent was exempted from
paying shall be a lien on any judgment rendered in the case favorable to the indigent, unless
the court otherwise provides.
Any adverse party may contest the grant of such authority at any time before
judgment is rendered by the trial court. If the court should determine after hearing that the
party declared as an indigent is in fact a person with sufficient income or property, the
proper docket and other lawful fees shall be assessed and collected by the clerk of court. If
payment is not made within the time fixed by the court, execution shall issue for the
payment thereof, without prejudice to such other sanctions as the court may impose. (22a)
Sec. 19. Indigent litigants exempt from payment of legal fees. Indigent litigants (a)
whose gross income and that of their immediate family do not exceed an amount double the
monthly minimum wage of an employee and (b) who do not own real property with a fair
market value as stated in the current tax declaration of more than three hundred thousand
(P300,000.00) pesos shall be exempt from payment of legal fees.
The legal fees shall be a lien on any judgment rendered in the case favorable to the
indigent litigant unless the court otherwise provides.
To be entitled to the exemption herein provided, the litigant shall execute an affidavit
that he and his immediate family do not earn a gross income abovementioned, and they do
not own any real property with the fair value aforementioned, supported by an affidavit of a

disinterested person attesting to the truth of the litigants affidavit.


declaration, if any, shall be attached to the litigants affidavit.

The current tax

Any falsity in the affidavit of litigant or disinterested person shall be sufficient cause to
dismiss the complaint or action or to strike out the pleading of that party, without prejudice
to whatever criminal liability may have been incurred.
The clear intent and precise language of the aforequoted provisions of the Rules of Court indicate
that only a natural party litigant may be regarded as an indigent litigant. The Good Shepherd Foundation,
Inc., being a corporation invested by the State with a juridical personality separate and distinct from that
of its members,[4] is a juridical person. Among others, it has the power to acquire and possess property of
all kinds as well as incur obligations and bring civil or criminal actions, in conformity with the laws and
regulations of their organization.[5] As a juridical person, therefore, it cannot be accorded the exemption
from legal and filing fees granted to indigent litigants.
That the Good Shepherd Foundation, Inc. is working for indigent and underprivileged people is of no
moment. Clearly, the Constitution has explicitly premised the free access clause on a persons poverty, a
condition that only a natural person can suffer.
There are other reasons that warrant the rejection of the request for exemption in favor of a
juridical person. For one, extending the exemption to a juridical person on the ground that it works for
indigent and underprivileged people may be prone to abuse (even with the imposition of rigid
documentation requirements), particularly by corporations and entities bent on circumventing the rule on
payment of the fees. Also, the scrutiny of compliance with the documentation requirements may prove too
time-consuming and wasteful for the courts.
IN VIEW OF THE FOREGOING, the Good Shepherd Foundation, Inc. cannot be extended the exemption
from legal and filing fees despite its working for indigent and underprivileged people.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 172428

November 28, 2008

HERMAN C. CRYSTAL, LAMBERTO C. CRYSTAL, ANN GEORGIA C. SOLANTE, and DORIS C.


MAGLASANG, as Heirs of Deceased SPOUSES RAYMUNDO I. CRYSTAL and DESAMPARADOS C.
CRYSTAL, petitioners,
vs.
BANK OF THE PHILIPPINE ISLANDS, respondent.
DECISION
TINGA, J.:
Before us is a Petition for Review1 of the Decision2 and Resolution3 of the Court of Appeals dated 24
October 2005 and 31 March 2006, respectively, in CA G.R. CV No. 72886, which affirmed the 8 June 2001
decision of the Regional Trial Court, Branch 5, of Cebu City. 4
The facts, as culled from the records, follow.
On 28 March 1978, spouses Raymundo and Desamparados Crystal obtained a P300,000.00 loan in behalf
of the Cebu Contractors Consortium Co. (CCCC) from the Bank of the Philippine Islands-Butuan branch (BPIButuan). The loan was secured by a chattel mortgage on heavy equipment and machinery of CCCC. On the
same date, the spouses executed in favor of BPI-Butuan a Continuing Suretyship5 where they bound
themselves as surety of CCCC in the aggregate principal sum of not exceeding P300,000.00. Thereafter, or
on 29 March 1979, Raymundo Crystal executed a promissory note6 for the amount of P300,000.00, also in
favor of BPI-Butuan.
Sometime in August 1979, CCCC renewed a previous loan, this time from BPI, Cebu City branch (BPI-Cebu
City). The renewal was evidenced by a promissory note7 dated 13 August 1979, signed by the spouses in
their personal capacities and as managing partners of CCCC. The promissory note states that the spouses
are jointly and severally liable with CCCC. It appears that before the original loan could be granted, BPICebu City required CCCC to put up a security.
However, CCCC had no real property to offer as security for the loan; hence, the spouses executed a real
estate mortgage8 over their own real property on 22 September 1977.9 On 3 October 1977, they executed
another real estate mortgage over the same lot in favor of BPI-Cebu City, to secure an additional loan
of P20,000.00 of CCCC.10
CCCC failed to pay its loans to both BPI-Butuan and BPI-Cebu City when they became due. CCCC, as well as
the spouses, failed to pay their obligations despite demands. Thus, BPI resorted to the foreclosure of the
chattel mortgage and the real estate mortgage. The foreclosure sale on the chattel mortgage was initially
stalled with the issuance of a restraining order against BPI. 11 However, following BPIs compliance with the
necessary requisites of extrajudicial foreclosure, the foreclosure sale on the chattel mortgage was
consummated on 28 February 1988, with the proceeds amounting to P240,000.00 applied to the loan from
BPI-Butuan which had then reached P707,393.90.12Meanwhile, on 7 July 1981, Insular Bank of Asia and
America (IBAA), through its Vice-President for Legal and Corporate Affairs, offered to buy the lot subject of
the two (2) real
estate mortgages and to pay directly the spouses indebtedness in exchange for the release of the
mortgages. BPI rejected IBAAs offer to pay.13

BPI filed a complaint for sum of money against CCCC and the spouses before the Regional Trial Court of
Butuan City (RTC Butuan), seeking to recover the deficiency of the loan of CCCC and the spouses with BPIButuan. The trial court ruled in favor of BPI. Pursuant to the decision, BPI instituted extrajudicial foreclosure
of the spouses mortgaged property.14
On 10 April 1985, the spouses filed an action for Injunction With Damages, With A Prayer For A Restraining
Order and/ or Writ of Preliminary Injunction.15 The spouses claimed that the foreclosure of the real estate
mortgages is illegal because BPI should have exhausted CCCCs properties first, stressing that they are
mere guarantors of the renewed loans. They also prayed that they be awarded moral and exemplary
damages, attorneys fees, litigation expenses and cost of suit. Subsequently, the spouses filed an
amended complaint,16 additionally alleging that CCCC had opened and maintained a foreign currency
savings account (FCSA-197) with bpi, Makati branch (BPI-Makati), and that said FCSA was used as security
for a P450,000.00 loan also extended by BPI-Makati. TheP450,000.00 loan was allegedly paid, and
thereafter the spouses demanded the return of the FCSA passbook. BPI rejected the demand; thus, the
spouses were unable to withdraw from the said account to pay for their other obligations to BPI.
The trial court dismissed the spouses complaint and ordered them to pay moral and exemplary damages
and attorneys fees to BPI.17 It ruled that since the spouses agreed to bind themselves jointly and severally,
they are solidarily liable for the loans; hence, BPI can validly foreclose the two real estate mortgages.
Moreover, being guarantors-mortgagors, the spouses are not entitled to the benefit of exhaustion. Anent
the FCSA, the trial court found that CCCC originally had FCDU SA No. 197 with BPI, Dewey Boulevard
branch, which was transferred to BPI-Makati as FCDU SA 76/0035, at the request of Desamparados Crystal.
FCDU SA 76/0035 was thus closed, but Desamparados Crystal failed to surrender the passbook because it
was lost. The transferred FCSA in BPI-Makati was the one used as security for CCCCs P450,000.00 loan
from BPI-Makati. CCCC was no longer allowed to withdraw from FCDU SA No. 197 because it was already
closed.
The spouses appealed the decision of the trial court to the Court of Appeals, but their appeal was
dismissed.18 The spouses moved for the reconsideration of the decision, but the Court of Appeals also
denied their motion for reconsideration.19 Hence, the present petition.
Before the Court, petitioners who are the heirs of the spouses argue that the failure of the spouses to pay
the BPI-Cebu City loan of P120,000.00 was due to BPIs illegal refusal to accept payment for the loan
unless the P300,000.00 loan from BPI-Butuan would also be paid. Consequently, in view of BPIs unjust
refusal to accept payment of the BPI-Cebu City loan, the loan obligation of the spouses was extinguished,
petitioners contend.
The contention has no merit. Petitioners rely on IBAAs offer to purchase the mortgaged lot from them and
to directly pay BPI out of the proceeds thereof to settle the loan. 20 BPIs refusal to agree to such payment
scheme cannot extinguish the spouses loan obligation. In the first place, IBAA is not privy to the loan
agreement or the promissory note between the spouses and BPI. Contracts, after all, take effect only
between the parties, their successors in interest, heirs
and assigns.21 Besides, under Art. 1236 of the Civil Code, the creditor is not bound to accept payment or
performance by a third person who has no interest in the fulfillment of the obligation, unless there is a
stipulation to the contrary. We see no stipulation in the promissory note which states that a third person
may fulfill the spouses obligation. Thus, it is clear that the spouses alone bear responsibility for the same.
In any event, the promissory note is the controlling repository of the obligation of the spouses. Under the
promissory note, the spouses defined the parameters of their obligation as follows:
On or before June 29, 1980 on demand, for value received, I/we promise to pay, jointly and
severally, to the BANK OF THE PHILIPPINE ISLANDS, at its office in the city of Cebu Philippines, the
sum of ONE HUNDRED TWENTY THOUSAND PESOS (P120,0000.00), Philippine Currency, subject to
periodic installments on the principal as follows: P30,000.00 quarterly amortization starting
September 28, 1979. x x x 22
A solidary obligation is one in which each of the debtors is liable for the entire obligation, and each of the
creditors is entitled to demand the satisfaction of the whole obligation from any or all of the debtors. 23 A

liability is solidary "only when the obligation expressly so states, when the law so provides or when the
nature of the
obligation so requires."24 Thus, when the obligor undertakes to be "jointly and severally" liable, it means
that the obligation is solidary,25 such as in this case. By stating "I/we promise to pay, jointly and severally,
to the BANK OF THE PHILIPPINE ISLANDS," the spouses agreed to be sought out and be demanded
payment from, by BPI. BPI did demand payment from them, but they failed to comply with their obligation,
prompting BPIs valid resort to the foreclosure of the chattel mortgage and the real estate mortgages.
More importantly, the promissory note, wherein the spouses undertook to be solidarily liable for the
principal loan, partakes the nature of a suretyship and therefore is an additional security for the loan. Thus
we held in one case that if solidary liability was instituted to "guarantee" a principal obligation, the law
deems the contract to be one of suretyship.26 And while a contract of a surety is in essence secondary only
to a valid principal obligation, the suretys liability to the creditor or promisee of the principal is said to be
direct, primary, and absolute; in other words, the surety is directly and equally bound with the principal.
The surety therefore becomes liable for the debt or duty of another even if he possesses no direct or
personal interest over the obligations nor does he receive any benefit therefrom. 27
Petitioners contend that the Court of Appeals erred in not granting their counterclaims, considering that
they suffered moral damages in view of the unjust refusal of BPI to accept the payment scheme proposed
by IBAA and the allegedly unjust and illegal foreclosure of the real estate mortgages on their
property.28 Conversely, they argue that the Court of Appeals erred in awarding moral damages to BPI,
which is a corporation, as well as exemplary damages, attorneys fees and expenses of litigation. 29
We do not agree. Moral damages are meant to compensate the claimant for any physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation
and similar injuries unjustly caused.30 Such damages, to be recoverable, must be the proximate result of a
wrongful act or omission the factual basis for which is satisfactorily established by the aggrieved
party.31 There being no wrongful or unjust act on the part of BPI in demanding payment from them and in
seeking the foreclosure of the chattel and real estate mortgages, there is no lawful basis for award of
damages in favor of the spouses.
Neither is BPI entitled to moral damages. A juridical person is generally not entitled to moral damages
because, unlike a natural person, it cannot experience physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral shock.32 The Court of Appeals found BPI as "being
famous and having gained its familiarity and respect not only in the Philippines but also in the whole world
because of its good will and good reputation must protect and defend the same against any unwarranted
suit such as the case at bench."33 In holding that BPI is entitled to moral damages, the Court of Appeals
relied on the case of People v. Manero,34 wherein the Court ruled that "[i]t is only when a juridical person
has a good reputation that is debased, resulting in social humiliation, that moral damages may be
awarded."35
We do not agree with the Court of Appeals. A statement similar to that made by the Court in Manerocan be
found in the case of Mambulao Lumber Co. v. PNB, et al.,36 thus:
x x x Obviously, an artificial person like herein appellant corporation cannot experience physical
sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social
humiliation which are basis of moral damages. A corporation may have good reputation
which, if besmirched may also be a ground for the award of moral damages. x x x
(Emphasis supplied)
Nevertheless, in the more recent cases of ABS-CBN Corp. v. Court of Appeals, et al.,37 and Filipinas
Broadcasting Network, Inc. v. Ago Medical and Educational Center-Bicol Christian College of Medicine
(AMEC-BCCM),38 the Court held that the statements in Manero and Mambulao were mere obiter dicta,
implying that the award of moral damages to corporations is not a hard and fast rule. Indeed, while the
Court may allow the grant of moral damages to corporations, it is not automatically granted; there must
still be proof of the existence of the factual basis of the damage and its causal relation to the defendants
acts. This is so because moral damages, though incapable of pecuniary estimation, are in the category of
an award designed to compensate the claimant for actual injurysuffered and not to impose a penalty on
the wrongdoer.39

The spouses complaint against BPI proved to be unfounded, but it does not automatically entitle BPI to
moral damages. Although the institution of a clearly unfounded civil suit can at times be a legal
justification for an award of attorney's fees, such filing, however, has almost invariably been held not to be
a ground for an award of moral damages. The rationale for the rule is that the law could not have meant to
impose a penalty on the right to litigate. Otherwise, moral damages must every time be awarded in favor
of the prevailing defendant against an unsuccessful plaintiff. 40 BPI may have been inconvenienced by the
suit, but we do not see how it could have possibly suffered besmirched reputation on account of the single
suit alone. Hence, the award of moral damages should be deleted.
The awards of exemplary damages and attorneys fees, however, are proper. Exemplary damages, on the
other hand, are imposed by way of example or correction for the public good, when the party to a contract
acts in a wanton, fraudulent, oppressive or malevolent manner, while attorneys fees are allowed when
exemplary damages are awarded and when the party to a suit is compelled to incur expenses to protect
his interest.41 The spouses instituted their complaint against BPI notwithstanding the fact that they were
the ones who failed to pay their obligations. Consequently, BPI was forced to litigate and defend its
interest. For these reasons, BPI is entitled to the awards of exemplary damages and attorneys fees.
WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court of Appeals dated 24 October
2005 and 31 March 2006, respectively, are hereby AFFIRMED, with the MODIFICATION that the award of
moral damages to Bank of the Philippine Islands is DELETED.
Costs against the petitioners.
SO ORDERED.

[G.R. No. 141994. January 17, 2005]


FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO MEDICAL AND EDUCATIONAL
CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM) and ANGELITA F.
AGO, respondents.
DECISION
CARPIO, J.:
The Case
This petition for review[1] assails the 4 January 1999 Decision[2] and 26 January 2000 Resolution of the
Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed with modification the 14
December 1992 Decision[3] of the Regional Trial Court of Legazpi City, Branch 10, in Civil Case No. 8236.
The Court of Appeals held Filipinas Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre
and Carmelo Rima liable for libel and ordered them to solidarily pay Ago Medical and Educational CenterBicol Christian College of Medicine moral damages, attorneys fees and costs of suit.
The Antecedents
Expos is a radio documentary[4] program hosted by Carmelo Mel Rima (Rima) and Hermogenes Jun
Alegre (Alegre).[5] Expos is aired every morning over DZRC-AM which is owned by Filipinas Broadcasting
Network, Inc. (FBNI). Expos is heard over Legazpi City, the Albay municipalities and other Bicol areas. [6]
In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged complaints
from students, teachers and parents against Ago Medical and Educational Center-Bicol Christian College of
Medicine (AMEC) and its administrators. Claiming that the broadcasts were defamatory, AMEC and Angelita
Ago (Ago), as Dean of AMECs College of Medicine, filed a complaint for damages [7] against FBNI, Rima and
Alegre on 27 February 1990. Quoted are portions of the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking medical course at AMEC-BCCM,
advise them to pass all subjects because if they fail in any subject they will repeat their year
level, taking up all subjects including those they have passed already. Several students had
approached me stating that they had consulted with the DECS which told them that there is no such
regulation. If [there] is no such regulation why is AMEC doing the same?
xxx
Second: Earlier AMEC students in Physical Therapy had complained that the course is not
recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if the subject does not have
an instructor - such greed for money on the part of AMECs administration. Take the subject
Anatomy: students would pay for the subject upon enrolment because it is offered by the school. However
there would be no instructor for such subject. Students would be informed that course would be moved to
a later date because the school is still searching for the appropriate instructor.
xxx
It is a public knowledge that the Ago Medical and Educational Center has survived and has been surviving
for the past few years since its inception because of funds support from foreign foundations. If you will take
a look at the AMEC premises youll find out that the names of the buildings there are foreign soundings.
There is a McDonald Hall. Why not Jose Rizal or Bonifacio Hall? That is a very concrete and undeniable
evidence that the support of foreign foundations for AMEC is substantial, isnt it? With the report which is
the basis of the expose in DZRC today, it would be very easy for detractors and enemies of the Ago family

to stop the flow of support of foreign foundations who assist the medical school on the basis of the latters
purpose. But if the purpose of the institution (AMEC) is to deceive students at cross purpose with its reason
for being it is possible for these foreign foundations to lift or suspend their donations temporarily. [8]
xxx
On the other hand, the administrators of AMEC-BCCM, AMEC Science High School and the
AMEC-Institute of Mass Communication in their effort to minimize expenses in terms of salary
are absorbing or continues to accept rejects. For example how many teachers in AMEC are former
teachers of Aquinas University but were removed because of immorality? Does it mean that the present
administration of AMEC have the total definite moral foundation from catholic administrator of Aquinas
University. I will prove to you my friends, that AMEC is a dumping ground, garbage, not merely of
moral and physical misfits. Probably they only qualify in terms of intellect. The Dean of Student Affairs
of AMEC is Justita Lola, as the family name implies. She is too old to work, being an old woman. Is the
AMEC administration exploiting the very [e]nterprising or compromising and undemanding Lola? Could it
be that AMEC is just patiently making use of Dean Justita Lola were if she is very old. As in atmospheric
situation zero visibility the plane cannot land, meaning she is very old, low pay follows. By the way, Dean
Justita Lola is also the chairman of the committee on scholarship in AMEC. She had retired from Bicol
University a long time ago but AMEC has patiently made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral and physically misfit people.
What does this mean? Immoral and physically misfits as teachers.
May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that your are no longer fit to
teach. You are too old. As an aviation, your case is zero visibility. Dont insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship committee at
that. The reason is practical cost saving in salaries, because an old person is not fastidious, so long as she
has money to buy the ingredient of beetle juice. The elderly can get by thats why she (Lola) was taken in
as Dean.
xxx
xxx On our end our task is to attend to the interests of students. It is likely that the students would be
influenced by evil. When they become members of society outside of campus will be liabilities
rather than assets. What do you expect from a doctor who while studying at AMEC is so much burdened
with unreasonable imposition? What do you expect from a student who aside from peculiar problems
because not all students are rich in their struggle to improve their social status are even more burdened
with false regulations. xxx[9] (Emphasis supplied)
The complaint further alleged that AMEC is a reputable learning institution. With the supposed exposs,
FBNI, Rima and Alegre transmitted malicious imputations, and as such, destroyed plaintiffs (AMEC and
Ago) reputation. AMEC and Ago included FBNI as defendant for allegedly failing to exercise due diligence in
the selection and supervision of its employees, particularly Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an Answer [10] alleging that
the broadcasts against AMEC were fair and true. FBNI, Rima and Alegre claimed that they were plainly
impelled by a sense of public duty to report the goings-on in AMEC, [which is] an institution imbued with
public interest.
Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty. Edmundo Cea,
collaborating counsel of Atty. Lozares, filed a Motion to Dismiss [11] on FBNIs behalf. The trial court denied
the motion to dismiss. Consequently, FBNI filed a separate Answer claiming that it exercised due diligence
in the selection and supervision of Rima and Alegre. FBNI claimed that before hiring a broadcaster, the
broadcaster should (1) file an application; (2) be interviewed; and (3) undergo an apprenticeship and
training program after passing the interview. FBNI likewise claimed that it always reminds its broadcasters

to observe truth, fairness and objectivity in their broadcasts and to refrain from using libelous and indecent
language. Moreover, FBNI requires all broadcasters to pass the Kapisanan ng mga Brodkaster sa
Pilipinas (KBP) accreditation test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a Decision [12] finding FBNI and Alegre liable for libel
except Rima. The trial court held that the broadcasts are libelous per se. The trial court rejected the
broadcasters claim that their utterances were the result of straight reporting because it had no factual
basis. The broadcasters did not even verify their reports before airing them to show good faith. In holding
FBNI liable for libel, the trial court found that FBNI failed to exercise diligence in the selection and
supervision of its employees.
In absolving Rima from the charge, the trial court ruled that Rimas only participation was when he
agreed with Alegres expos. The trial court found Rimas statement within the bounds of freedom of speech,
expression, and of the press. The dispositive portion of the decision reads:
WHEREFORE, premises considered, this court finds for the plaintiff. Considering the degree of
damages caused by the controversial utterances, which are not found by this court to be really
very serious and damaging, and there being no showing that indeed the enrollment of plaintiff
school dropped, defendants Hermogenes Jun Alegre, Jr. and Filipinas Broadcasting Network (owner of the
radio station DZRC), are hereby jointly and severally ordered to pay plaintiff Ago Medical and Educational
Center-Bicol Christian College of Medicine (AMEC-BCCM) the amount of P300,000.00 moral damages,
plus P30,000.00 reimbursement of attorneys fees, and to pay the costs of suit.
SO ORDERED. [13] (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the other, appealed
the decision to the Court of Appeals. The Court of Appeals affirmed the trial courts judgment with
modification. The appellate court made Rima solidarily liable with FBNI and Alegre. The appellate court
denied Agos claim for damages and attorneys fees because the broadcasts were directed against AMEC,
and not against her. The dispositive portion of the Court of Appeals decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the modification that
broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes Alegre.
SO ORDERED.[14]
FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals denied in its 26
January 2000 Resolution.
Hence, FBNI filed this petition.[15]
The Ruling of the Court of Appeals
The Court of Appeals upheld the trial courts ruling that the questioned broadcasts are libelous per
se and that FBNI, Rima and Alegre failed to overcome the legal presumption of malice. The Court of
Appeals found Rima and Alegres claim that they were actuated by their moral and social duty to inform the
public of the students gripes as insufficient to justify the utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMECs administrators, the Court of Appeals ruled
that the broadcasts were made with reckless disregard as to whether they were true or false. The appellate
court pointed out that FBNI, Rima and Alegre failed to present in court any of the students who allegedly
complained against AMEC. Rima and Alegre merely gave a single name when asked to identify the
students. According to the Court of Appeals, these circumstances cast doubt on the veracity of the
broadcasters claim that they were impelled by their moral and social duty to inform the public about the
students gripes.
The Court of Appeals found Rima also liable for libel since he remarked that (1) AMEC-BCCM is a
dumping ground for morally and physically misfit teachers; (2) AMEC obtained the services of Dean Justita
Lola to minimize expenses on its employees salaries; and (3) AMEC burdened the students with
unreasonable imposition and false regulations.[16]

The Court of Appeals held that FBNI failed to exercise due diligence in the selection and supervision of
its employees for allowing Rima and Alegre to make the radio broadcasts without the proper KBP
accreditation. The Court of Appeals denied Agos claim for damages and attorneys fees because the
libelous remarks were directed against AMEC, and not against her. The Court of Appeals adjudged FBNI,
Rima and Alegre solidarily liable to pay AMEC moral damages, attorneys fees and costs of suit.
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR PAYMENT OF MORAL DAMAGES,
ATTORNEYS FEES AND COSTS OF SUIT.
The Courts Ruling
We deny the petition.
This is a civil action for damages as a result of the allegedly defamatory remarks of Rima and Alegre
against AMEC.[17] While AMEC did not point out clearly the legal basis for its complaint, a reading of the
complaint reveals that AMECs cause of action is based on Articles 30 and 33 of the Civil Code. Article
30[18] authorizes a separate civil action to recover civil liability arising from a criminal offense. On the other
hand, Article 33[19] particularly provides that the injured party may bring a separate civil action for
damages in cases of defamation, fraud, and physical injuries. AMEC also invokes Article 19 [20] of the Civil
Code to justify its claim for damages. AMEC cites Articles 2176 [21] and 2180[22] of the Civil Code to hold FBNI
solidarily liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel[23] is a public and malicious imputation of a crime, or of a vice or defect, real or imaginary, or
any act or omission, condition, status, or circumstance tending to cause the dishonor, discredit, or
contempt of a natural or juridical person, or to blacken the memory of one who is dead. [24]
There is no question that the broadcasts were made public and imputed to AMEC defects or
circumstances tending to cause it dishonor, discredit and contempt. Rima and Alegres remarks such as
greed for money on the part of AMECs administrators; AMEC is a dumping ground, garbage of xxx moral
and physical misfits; and AMEC students who graduate will be liabilities rather than assets of the society
are libelous per se. Taken as a whole, the broadcasts suggest that AMEC is a money-making institution
where physically and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima and Alegre were
plainly impelled by their civic duty to air the students gripes. FBNI alleges that there is no evidence that ill
will or spite motivated Rima and Alegre in making the broadcasts. FBNI further points out that Rima and
Alegre exerted efforts to obtain AMECs side and gave Ago the opportunity to defend AMEC and its
administrators. FBNI concludes that since there is no malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious. [25] Rima and Alegre failed to show adequately
their good intention and justifiable motive in airing the supposed gripes of the students. As hosts of a
documentary or public affairs program, Rima and Alegre should have presented the public issues free
from inaccurate and misleading information.[26] Hearing the students alleged complaints a month before
the expos,[27] they had sufficient time to verify their sources and information. However, Rima and Alegre
hardly made a thorough investigation of the students alleged gripes. Neither did they inquire about nor
confirm the purported irregularities in AMEC from the Department of Education, Culture and Sports. Alegre
testified that he merely went to AMEC to verify his report from an alleged AMEC official who refused to
disclose any information. Alegre simply relied on the words of the students because they were many and

not because there is proof that what they are saying is true. [28] This plainly shows Rima and Alegres
reckless disregard of whether their report was true or not.
Contrary to FBNIs claim, the broadcasts were not the result of straight reporting. Significantly, some
courts in the United States apply the privilege of neutral reportage in libel cases involving matters of public
interest or public figures. Under this privilege, a republisher who accurately and disinterestedly reports
certain defamatory statements made against public figures is shielded from liability, regardless of the
republishers subjective awareness of the truth or falsity of the accusation. [29] Rima and Alegre cannot
invoke the privilege of neutral reportage because unfounded comments abound in the broadcasts.
Moreover, there is no existing controversy involving AMEC when the broadcasts were made. The privilege
of neutral reportage applies where the defamed person is a public figure who is involved in an existing
controversy, and a party to that controversy makes the defamatory statement. [30]
However, FBNI argues vigorously that malice in law does not apply to this case. Citing Borjal v. Court
of Appeals,[31] FBNI contends that the broadcasts fall within the coverage of qualifiedly privileged
communications for being commentaries on matters of public interest. Such being the case, AMEC should
prove malice in fact or actual malice. Since AMEC allegedly failed to prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the doctrine of fair comment,
thus:
[F]air commentaries on matters of public interest are privileged and constitute a valid defense in an action
for libel or slander. The doctrine of fair comment means that while in general every discreditable
imputation publicly made is deemed false, because every man is presumed innocent until his guilt is
judicially proved, and every false imputation is deemed malicious, nevertheless, when the discreditable
imputation is directed against a public person in his public capacity, it is not necessarily actionable. In
order that such discreditable imputation to a public official may be actionable, it must either
be a false allegation of fact or a comment based on a false supposition. If the comment is an
expression of opinion, based on established facts, then it is immaterial that the opinion happens to
be mistaken, as long as it might reasonably be inferred from the facts. [32] (Emphasis supplied)
True, AMEC is a private learning institution whose business of educating students is genuinely imbued
with public interest. The welfare of the youth in general and AMECs students in particular is a matter which
the public has the right to know. Thus, similar to the newspaper articles in Borjal, the subject broadcasts
dealt with matters of public interest. However, unlike in Borjal, the questioned broadcasts are not based
on established facts. The record supports the following findings of the trial court:
xxx Although defendants claim that they were motivated by consistent reports of students and parents
against plaintiff, yet, defendants have not presented in court, nor even gave name of a single student who
made the complaint to them, much less present written complaint or petition to that effect. To accept this
defense of defendants is too dangerous because it could easily give license to the media to malign people
and establishments based on flimsy excuses that there were reports to them although they could not
satisfactorily establish it. Such laxity would encourage careless and irresponsible broadcasting which is
inimical to public interests.
Secondly, there is reason to believe that defendant radio broadcasters, contrary to the mandates of their
duties, did not verify and analyze the truth of the reports before they aired it, in order to prove that they
are in good faith.
Alegre contended that plaintiff school had no permit and is not accredited to offer Physical Therapy
courses. Yet, plaintiff produced a certificate coming from DECS that as of Sept. 22, 1987 or more than 2
years before the controversial broadcast, accreditation to offer Physical Therapy course had already been
given the plaintiff, which certificate is signed by no less than the Secretary of Education and Culture
herself, Lourdes R. Quisumbing (Exh. C-rebuttal). Defendants could have easily known this were they
careful enough to verify. And yet, defendants were very categorical and sounded too positive when they
made the erroneous report that plaintiff had no permit to offer Physical Therapy courses which they were
offering.
The allegation that plaintiff was getting tremendous aids from foreign foundations like Mcdonald
Foundation prove not to be true also. The truth is there is no Mcdonald Foundation existing. Although a big
building of plaintiff school was given the name Mcdonald building, that was only in order to honor the first

missionary in Bicol of plaintiffs religion, as explained by Dr. Lita Ago. Contrary to the claim of defendants
over the air, not a single centavo appears to be received by plaintiff school from the aforementioned
McDonald Foundation which does not exist.
Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that when medical
students fail in one subject, they are made to repeat all the other subject[s], even those they have already
passed, nor their claim that the school charges laboratory fees even if there are no laboratories in the
school. No evidence was presented to prove the bases for these claims, at least in order to give semblance
of good faith.
As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers, defendant[s]
singled out Dean Justita Lola who is said to be so old, with zero visibility already. Dean Lola testified in
court last Jan. 21, 1991, and was found to be 75 years old. xxx Even older people prove to be effective
teachers like Supreme Court Justices who are still very much in demand as law professors in their late
years. Counsel for defendants is past 75 but is found by this court to be still very sharp and effective. So is
plaintiffs counsel.
Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally infirmed, but is still alert
and docile.
The contention that plaintiffs graduates become liabilities rather than assets of our society is a mere
conclusion. Being from the place himself, this court is aware that majority of the medical graduates of
plaintiffs pass the board examination easily and become prosperous and responsible professionals. [33]
Had the comments been an expression of opinion based on established facts, it is immaterial that the
opinion happens to be mistaken, as long as it might reasonably be inferred from the facts. [34] However, the
comments of Rima and Alegre were not backed up by facts. Therefore, the broadcasts are not privileged
and remain libelous per se.
The broadcasts also violate the Radio Code [35] of the Kapisanan ng mga Brodkaster sa Pilipinas,
Ink. (Radio Code). Item I(B) of the Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues free from personal bias, prejudice
and inaccurate and misleading information. x x x Furthermore, the station shall strive to
present balanced discussion of issues. x x x.
xxx
7. The station shall be responsible at all times in the supervision of public affairs, public issues and
commentary programs so that they conform to the provisions and standards of this code.
8. It shall be the responsibility of the newscaster, commentator, host and announcer to protect
public interest, general welfare and good order in the presentation of public affairs and public
issues.[36](Emphasis supplied)
The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down the code of
ethical conduct governing practitioners in the radio broadcast industry. The Radio Code is a voluntary code
of conduct imposed by the radio broadcast industry on its own members. The Radio Code is a public
warranty by the radio broadcast industry that radio broadcast practitioners are subject to a code by which
their conduct are measured for lapses, liability and sanctions.
The public has a right to expect and demand that radio broadcast practitioners live up to the code of
conduct of their profession, just like other professionals. A professional code of conduct provides the
standards for determining whether a person has acted justly, honestly and with good faith in the exercise
of his rights and performance of his duties as required by Article 19 [37] of the Civil Code. A professional
code of conduct also provides the standards for determining whether a person who willfully causes loss or

injury to another has acted in a manner contrary to morals or good customs under Article 21 [38] of the Civil
Code.
II.
Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral damages because it is a corporation. [39]
A juridical person is generally not entitled to moral damages because, unlike a natural person, it
cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental
anguish or moral shock.[40] The Court of Appeals cites Mambulao Lumber Co. v. PNB, et al.[41] to justify
the award of moral damages. However, the Courts statement in Mambulao that a corporation may have a
good reputation which, if besmirched, may also be a ground for the award of moral damages is an obiter
dictum.[42]
Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 [43] of the Civil Code.
This provision expressly authorizes the recovery of moral damages in cases of libel, slander or any other
form of defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can validly complain for libel or any other form of
defamation and claim for moral damages.[44]
Moreover, where the broadcast is libelous per se, the law implies damages.[45] In such a case, evidence
of an honest mistake or the want of character or reputation of the party libeled goes only in mitigation of
damages.[46] Neither in such a case is the plaintiff required to introduce evidence of actual damages as a
condition precedent to the recovery of some damages. [47] In this case, the broadcasts are libelous per se.
Thus, AMEC is entitled to moral damages.
However, we find the award of P300,000 moral damages unreasonable. The record shows that even
though the broadcasts were libelous per se, AMEC has not suffered any substantial or material damage to
its reputation. Therefore, we reduce the award of moral damages from P300,000 to P150,000.

III.
Whether the award of attorneys fees is proper
FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the award of
attorneys fees. FBNI adds that the instant case does not fall under the enumeration in Article 2208 [48] of
the Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify satisfactorily its claim for
attorneys fees. AMEC did not adduce evidence to warrant the award of attorneys fees. Moreover, both the
trial and appellate courts failed to explicitly state in their respective decisions the rationale for the award
of attorneys fees.[49] In Inter-Asia Investment Industries, Inc. v. Court of Appeals,[50] we held that:
[I]t is an accepted doctrine that the award thereof as an item of damages is the exception rather than the
rule, and counsels fees are not to be awarded every time a party wins a suit. The power of the court to
award attorneys fees under Article 2208 of the Civil Code demands factual, legal and equitable
justification, without which the award is a conclusion without a premise, its basis being
improperly left to speculation and conjecture. In all events, the court must explicitly state in the text
of the decision, and not only in the decretal portion thereof, the legal reason for the award of attorneys
fees.[51] (Emphasis supplied)
While it mentioned about the award of attorneys fees by stating that it lies within the discretion of the
court and depends upon the circumstances of each case, the Court of Appeals failed to point out any
circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre
for moral damages, attorneys fees
and costs of suit

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages and
attorneys fees because it exercised due diligence in the selection and supervision of its employees,
particularly Rima and Alegre. FBNI maintains that its broadcasters, including Rima and Alegre, undergo a
very regimented process before they are allowed to go on air. Those who apply for broadcaster are
subjected to interviews, examinations and an apprenticeship program.
FBNI further argues that Alegres age and lack of training are irrelevant to his competence as a
broadcaster. FBNI points out that the minor deficiencies in the KBP accreditation of Rima and Alegre do not
in any way prove that FBNI did not exercise the diligence of a good father of a family in selecting and
supervising them. Rimas accreditation lapsed due to his non-payment of the KBP annual fees while Alegres
accreditation card was delayed allegedly for reasons attributable to the KBP Manila Office. FBNI claims that
membership in the KBP is merely voluntary and not required by any law or government regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and severally liable for the tort
which they commit.[52] Joint tort feasors are all the persons who command, instigate, promote, encourage,
advise, countenance, cooperate in, aid or abet the commission of a tort, or who approve of it after it is
done, if done for their benefit.[53] Thus, AMEC correctly anchored its cause of action against FBNI on Articles
2176 and 2180 of the Civil Code.
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay for damages
arising from the libelous broadcasts. As stated by the Court of Appeals, recovery for defamatory
statements published by radio or television may be had from the owner of the station, a
licensee, the operator of the station, or a person who procures, or participates in, the making of the
defamatory statements.[54] An employer and employee are solidarily liable for a defamatory statement by
the employee within the course and scope of his or her employment, at least when the employer
authorizes or ratifies the defamation.[55] In this case, Rima and Alegre were clearly performing their official
duties as hosts of FBNIs radio program Expos when they aired the broadcasts. FBNI neither alleged nor
proved that Rima and Alegre went beyond the scope of their work at that time. There was likewise no
showing that FBNI did not authorize and ratify the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence in
the selection and supervision of its employees, particularly Rima and Alegre. FBNI merely showed that
it exercised diligence in the selection of its broadcasters without introducing any evidence to prove that it
observed the same diligence in the supervision of Rima and Alegre. FBNI did not show how it exercised
diligence in supervising its broadcasters. FBNIs alleged constant reminder to its broadcasters to observe
truth, fairness and objectivity and to refrain from using libelous and indecent language is not enough to
prove due diligence in the supervision of its broadcasters. Adequate training of the broadcasters on the
industrys code of conduct, sufficient information on libel laws, and continuous evaluation of the
broadcasters performance are but a few of the many ways of showing diligence in the supervision of
broadcasters.
FBNI claims that it has taken all the precaution in the selection of Rima and Alegre as broadcasters,
bearing in mind their qualifications. However, no clear and convincing evidence shows that Rima and
Alegre underwent FBNIs regimented process of application. Furthermore, FBNI admits that Rima and Alegre
had deficiencies in their KBP accreditation, [56] which is one of FBNIs requirements before it hires a
broadcaster. Significantly, membership in the KBP, while voluntary, indicates the broadcasters strong
commitment to observe the broadcast industrys rules and regulations. Clearly, these circumstances show
FBNIs lack of diligence in selecting and supervising Rima and Alegre. Hence, FBNI is solidarily liable to pay
damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January 1999 and Resolution
of 26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with the MODIFICATION that the award
of moral damages is reduced from P300,000 to P150,000 and the award of attorneys fees is deleted. Costs
against petitioner.

[G.R. No. 128690. January 21, 1999]


ABS-CBN BROADCASTING CORPORATION, petitioners, vs. HONORABLE COURT OF APPEALS,
REPUBLIC BROADCASTING CORP., VIVA PRODUCTIONS, INC., and VICENTE DEL
ROSARIO, respondents.
DECISION
DAVIDE, JR., C.J.:
In this petition for review on certiorari, petitioners ABS-CBN Broadcasting Corp. (hereinafter ABS-CBN)
seeks to reverse and set aside the decision [1] of 31 October 1996 and the resolution [2] of 10 March 1997 of
the Court of Appeals in CA-G.R. CV No. 44125. The former affirmed with modification the decision[3] of 28
April 1993 of the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case No. Q-12309.The latter
denied the motion to reconsider the decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:
In 1990, ABS-CBN and VIVA executed a Film Exhibition Agreement (Exh. A) whereby Viva gave ABS-CBN an
exclusive right to exhibit some Viva films. Sometime in December 1991, in accordance with paragraph 2.4
[sic] of said agreement stating that1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva films for TV telecast
under such terms as may be agreed upon by the parties hereto, provided, however, that such right shall be
exercised by ABS-CBN from the actual offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president Charo Santos-Concio, a
list of three (3) film packages (36 title) from which ABS-CBN may exercise its right of first refusal under the
afore-said agreement (Exhs. 1 par. 2, 2, 2-A and 2-B Viva). ABS-CBN, however through Mrs. Concio, can tick
off only ten (10) titles (from the list) we can purchase (Exh. 3 Viva) and therefore did not accept said list
(TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs. Concio are not the subject of the case at bar
except the film Maging Sino Ka Man.
For further enlightenment, this rejection letter dated January 06, 1992 (Exh 3 Viva) is hereby quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I would like to express my difficulty in
recommending the purchase of the three film packages you are offering ABS-CBN.
From among the three packages I can only tick off 10 titles we can purchase. Please see attached. I hope
you will understand my position. Most of the action pictures in the list do not have big action stars in the
cast.They are not for primetime. In line with this I wish to mention that I have not scheduled for telecast
several action pictures in our very first contract because of the cheap production value of these movies as
well as the lack of big action stars. As a film producer, I am sure you understand what I am trying to say as
Viva produces only big action pictures.
In fact, I would like to request two (2) additional runs for these movies as I can only schedule them in out
non-primetime slots. We have to cover the amount that was paid for these movies because as you very
well know that non-primetime advertising rates are very low. These are the unaired titles in the first
contract.
1.
2.
3.
4.
5.

Kontra Persa [sic]


Raider Platoon
Underground guerillas
Tiger Command
Boy de Sabog

6. lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us before and have been rejected because of the ruling of
MTRCB to have them aired at 9:00 p.m. due to their very adult themes.
As for the 10 titles I have choosen [sic] from the 3 packages please consider including all the other Viva
movies produced last year, I have quite an attractive offer to make.
Thanking you and with my warmest regards.
(Signed)
Charo Santos-Concio
On February 27, 1992, defendant Del Rosario approached ABS-CBNs Ms. Concio, with a list consisting of 52
original movie titles (i.e., not yet aired on television) including the 14 titles subject of the present case, as
well as 104 re-runs (previously aired on television) from which ABS-CBN may choose another 52 titles, as a
total of 156 titles, proposing to sell to ABS-CBN airing rights over this package of 52 originals and 52 reruns for P60,000,000.00 of which P30,000,000.00 will be in cash and P30,000,000.00 worth of television
spots (Exh. 4 to 4-C Viva; 9 Viva).
On April 2, 1992, defendant Del Rosario and ABS-CBNs general manager, Eugenio Lopez III, met at the
Tamarind Grill Restaurant in Quezon City to discuss the package proposal of VIVA. What transpired in that
lunch meeting is the subject of conflicting versions. Mr. Lopez testified that he and Mr. Del Rosario
allegedly agreed that ABS-CBN was granted exclusive film rights to fourteen (14) films for a total
consideration ofP36 million; that he allegedly put this agreement as to the price and number of films in a
napkin and signed it and gave it to Mr. Del Rosario (Exh. D; TSN, pp. 24-26, 77-78, June 8, 1992). On the
other hand. Del Rosario denied having made any agreement with Lopez regarding the 14 Viva films; denied
the existence of a napkin in which Lopez wrote something; and insisted that what he and Lopez discussed
at the lunch meeting was Vivas film package offer of 104 films (52 originals and 52 re-runs) for a total price
of P60 million. Mr. Lopez promising [sic]to make a counter proposal which came in the form of a proposal
contract Annex C of the complaint (Exh. 1 Viva; Exh C ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president for Finance discussed
the terms and conditions of Vivas offer to sell the 104 films, after the rejection of the same package by
ABS-CBN.
On April 07, 1992, defendant Del Rosario received through his secretary , a handwritten note from Ms.
Concio, (Exh. 5 Viva), which reads: Heres the draft of the contract. I hope you find everything in order, to
which was attached a draft exhibition agreement (Exh. C ABS-CBN; Exh. 9 Viva p. 3) a counter-proposal
covering 53 films, 52 of which came from the list sent by defendant Del Rosario and one film was added by
Ms. Concio, for a consideration of P35 million. Exhibit C provides that ABS-CBN is granted film rights to 53
films and contains a right of first refusal to 1992 Viva Films. The said counter proposal was however
rejected by Vivas Board of Directors [in the] evening of the same day, April 7, 1992, as Viva would not sell
anything less than the package of 104 films for P60 million pesos (Exh. 9 Viva), and such rejection was
relayed to Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN and following several negotiations and meetings
defendant Del Rosario and Vivas President Teresita Cruz, in consideration of P60 million, signed a letter of
agreement dated April 24, 1992, granting RBS the exclusive right to air 104 Viva-produced and/or acquired
films (Exh. 7-A - RBS; Exh. 4 RBS) including the fourteen (14) films subject of the present case. [4]
On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a prayer for a
writ of preliminary injunction and/or temporary restraining order against private respondents Republic
Broadcasting Corporation[5] (hereafter RBS), Viva Production (hereafter VIVA), and Vicente del Rosario. The
complaint was docketed as Civil Case No. Q-92-12309.

On 28 May 1992, the RTC issued a temporary restraining order [6] enjoining private respondents from
proceeding with the airing, broadcasting, and televising of the fourteen VIVA films subject of the
controversy, starting with the film Maging Sino Ka Man, which was scheduled to be shown on private
respondent RBS channel 7 at seven oclock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued an order [7] directing the issuance of a
writ of preliminary injunction upon ABS-CBNs posting of a P35 million bond. ABS-CBN moved for the
reduction of the bond,[8] while private respondents moved for reconsideration of the order and offered to
put up a counterbond.[9]
In the meantime, private respondents filed separate answer with counterclaim. [10] RBS also set up a
cross-claim against VIVA.
On 3 August 1992, the RTC issued an order [11] dissolving the writ of preliminary injunction upon the
posting by RBS of a P30 million counterbond to answer for whatever damages ABS-CBN might suffer by
virtue of such dissolution. However, it reduced petitioners injunction bond to P15 million as a condition
precedent for the reinstatement of the writ of preliminary injunction should private respondents be unable
to post a counterbond.
At the pre-trial[12] on 6 August 1992, the parties upon suggestion of the court, agreed to explore the
possibility of an amicable settlement. In the meantime, RBS prayed for and was granted reasonable time
within which to put up a P30 million counterbond in the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement, RBS posted on 1 October 1992 a
counterbond, which the RTC approved in its Order of 15 October 1992. [13]
On 19 October 1992, ABS-CBN filed a motion for reconsideration [14] of the 3 August and 15 October
1992 Orders, which RBS opposed.[15]
On 29 October, the RTC conducted a pre-trial.[16]
Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals a
petition[17] challenging the RTCs Order of 3 August and 15 October 1992 and praying for the issuance of a
writ of preliminary injunction to enjoin the RTC from enforcing said orders. The case was docketed as CAG.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary restraining order [18] to enjoin the airing,
broadcasting, and televising of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a decision [19] dismissing the petition in CAG.R. SP No. 29300 for being premature. ABS-CBN challenged the dismissal in a petition for review filed with
this Court on 19 January 1993, which was docketed s G.R. No. 108363.
In the meantime the RTC received the evidence for the parties in Civil Case No. Q-9212309. Thereafter, on 28 April 1993, it rendered a decision [20] in favor of RBS and VIVA and against ABSCBN disposingas follows:
WHEREFORE, under cool reflection and prescinding from the foregoing, judgment is rendered in favor of
defendants and against the plaintiff.
(1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:
a) P107,727.00 the amount of premium paid by RBS to the surety which issued defendants
RBSs bond to lift the injunction;
b) P191,843.00 for the amount of print advertisement for Maging Sino Ka Man in various
newspapers;
c) Attorneys fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
(3) For the defendant VIVA, plaintiff ABS-CBN is ordered to pay P212,000.00 by way of reasonable
attorneys fees.

(4) The cross-claim of defendant RBS against defendant VIVA is dismissed.


(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price and terms of the offer. The alleged
agreement between Lopez III and Del Rosario was subject to the approval of the VIVA Board of Directors,
and said agreement was disapproved during the meeting of the Board on 7 April 1992. Hence, there was
no basis for ABS-CBNs demand that VIVA signed the 1992 Film Exhibition Agreement. Furthermore, the
right of first refusal under the 1990 Film Exhibition Agreement had previously been exercised per Ms.
Concios letter to Del Rosario ticking off ten titles acceptable to them, which would have made the 1992
agreement an entirely new contract.
On 21 June 1993, this Court denied[21] ABS-CBNs petition for review in G.R. No. 108363, as no
reversible error was committed by the Court of Appeals in its challenged decision and the case had
become moot and academic in view of the dismissal of the main action by the court a quo in its decision of
28 April 1993.
Aggrieved by the RTCs decision, ABS-CBN appealed to the Court of Appeals claiming that there was a
perfected contract between ABS-CBN and VIVA granting ABS-CBN the exclusive right to exhibit the subject
films. Private respondents VIVA and Del Rosario also appealed seeking moral and exemplary damages and
additional attorneys fees.
In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract between
ABS-CBN and VIVA had not been perfected, absent the approval by the VIVA Board of Directors of whatever
Del Rosario, its agent, might have agreed with Lopez III. The appellate court did not even believe ABS-CBNs
evidence that Lopez III actually wrote down such an agreement on a napkin, as the same was never
produced in court. It likewise rejected ABS-CBNs insistence on its right of first refusal and ratiocinated as
follows:
As regards the matter of right of first refusal, it may be true that a Film Exhibition Agreement was entered
into between Appellant ABS-CBN and appellant VIVA under Exhibit A in 1990 and that parag. 1.4 thereof
provides:
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) VIVA films for TV telecast
under such terms as may be agreed upon by the parties hereto, provided, however, that such right shall be
exercised by ABS-CBN within a period of fifteen (15) days from the actual offer in writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still be subjected to such
terms as may be agreed upon by the parties thereto, and that the said right shall be exercised by ABS-CBN
within fifteen (15) days from the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit A on the right of first refusal did not fix the price of the film right
to the twenty-four (24) films, nor did it specify the terms thereof. The same are still left to be agreed upon
by the parties.
In the instant case, ABS-CBNs letter of rejection Exhibit 3 (Records, p. 89) stated that it can only tick off ten
(10) films, and the draft contract Exhibit C accepted only fourteen (14) films, while parag. 1.4 of Exhibit A
speaks of the next twenty-four (24) films.
The offer of VIVA was sometime in December 1991, (Exhibits 2, 2-A, 2-B; Records, pp. 86-88; Decision, p.
11, Records, p. 1150), when the first list of VIVA films was sent by Mr. Del Rosario to ABS-CBN. The Vice
President of ABS-CBN, Mrs. Charo Santos-Concio, sent a letter dated January 6, 1992 (Exhibit 3, Records, p.
89) where ABS-CBN exercised its right of refusal by rejecting the offer of VIVA. As aptly observed by the
trial court, with the said letter of Mrs. Concio of January 6, 1992, ABS-CBN had lost its right of first
refusal. And even if We reckon the fifteen (15) day period from February 27, 1992 (Exhibit 4 to 4-C) when
another list was sent to ABS-CBN after the letter of Mrs. Concio, still the fifteen (15) day period within
which ABS-CBN shall exercise its right of first refusal has already expired. [22]
Accordingly, respondent court sustained the award factual damages consisting in the cost of print
advertisements and the premium payments for the counterbond, there being adequate proof of the
pecuniary loss which RBS has suffered as a result of the filing of the complaint by ABS-CBN. As to the
award of moral damages, the Court of Appeals found reasonable basis therefor, holding that RBSs

reputation was debased by the filing of the complaint in Civil Case No. Q-92-12309 and by the non-showing
of the film Maging Sino Ka Man. Respondent court also held that exemplary damages were correctly
imposed by way of example or correction for the public good in view of the filing of the complaint despite
petitioners knowledge that the contract with VIVA had not been perfected. It also upheld the award of
attorneys fees, reasoning that with ABS-CBNs act of instituting Civil Case No. Q-92-12309, RBS was
unnecessarily forced to litigate. The appellate court, however, reduced the awards of moral damages
to P 2 million, exemplary damages to P2 million, and attorneys fees to P500,000.00.
On the other hand, respondent Court of Appeals denied VIVA and Del Rosarios appeal because it was
RBS and not VIVA which was actually prejudiced when the complaint was filed by ABS-CBN.
Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case, contending
that the Court of Appeals gravely erred in
I
RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN PETITIONER AND PRIVATE
RESPONDENT VIVA NOTWITHSTANDING PREPONFERANCE OF EVIDENCE ADDUCED BY
PETITIONER TO THE CONTRARY.
II
IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF PRIVATE RESPONDENT
RBS.
III
IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE RESPONDENT RBS.
IV
IN AWARDING ATORNEYS FEES OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles under the
1990 Film Exhibition Agreement, as it had chosen only ten titles from the first list. It insists that we give
credence to Lopezs testimony that he and Del Rosario met at the Tamarind Grill Restaurant, discussed the
terms and conditions of the second list (the 1992 Film Exhibition Agreement) and upon agreement thereon,
wrote the same on a paper napkin. It also asserts that the contract has already been effective, as the
elements thereof, namely, consent, object, and consideration were established. It then concludes that the
Court of Appeals pronouncements were not supported by law and jurisprudence, as per our decision of 1
December 1995 in Limketkai Sons Milling, Inc. v. Court of Appeals, [23] which cited Toyota Shaw, Inc. v. Court
of Appeals;[24] Ang Yu Asuncion v. Court of Appeals,[25] and Villonco Realty Company v. Bormaheco, Inc.[26]
Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent for the
premium on the counterbond of its own volition in order to negate the injunction issued by the trial court
after the parties had ventilated their respective positions during the hearings for the purpose. The filing of
the counterbond was an option available to RBS, but it can hardly be argued that ABS-CBN compelled RBS
to incur such expense. Besides, RBS had another available option, i.e., move for the dissolution of the
injunction; or if it was determined to put up a counterbond, it could have presented a cash
bond. Furthermore under Article 2203 of the Civil Code, the party suffering loss injury is also required to
exercise the diligence of a good father of a family to minimize the damages resulting from the act or
omission. As regards the cost of print advertisements, RBS had not convincingly established that this was a
loss attributable to the non-showing of Maging Sino Ka Man; on the contrary, it was brought out during trial
that with or without the case or injunction, RBS would have spent such an amount to generate interest in
the film.
ABS-CBN further contends that there was no other clear basis for the awards of moral and exemplary
damages. The controversy involving ABS-CBN and RBS did not in any way originate from business
transaction between them. The claims for such damages did not arise from any contractual dealings or
from specific acts committed by ABS-CBN against RBS that may be characterized as wanton, fraudulent, or
reckless; they arose by virtue only of the filing of the complaint. An award of moral and exemplary
damages is not warranted where the record is bereft of any proof that a party acted maliciously or in bad
faith in filing an action.[27] In any case, free resort to courts for redress of wrongs is a matter of public
policy. The law recognizes the right of every one to sue for that which he honestly believes to be his right
without fear of standing trial for damages where by lack of sufficient evidence, legal technicalities, or a
different interpretation of the laws on the matter, the case would lose ground. [28] One who, makes use of

his own legal right does no injury. [29] If damage results from filing of the complaint, it is damnum absque
injuria.[30] Besides, moral damages are generally not awarded in favor of a juridical person, unless it enjoys
a good reputation that was debased by the offending party resulting in social humiliation. [31]
As regards the award of attorneys fees, ABS-CBN maintains that the same had no factual, legal, or
equitable justification. In sustaining the trial courts award, the Court of Appeals acted in clear disregard of
the doctrine laid down in Buan v. Camaganacan[32] that the text of the decision should state the reason why
attorneys fees are being awarded; otherwise, the award should be disallowed. Besides, no bad faith has
been imputed on, much less proved as having been committed by, ABS-CBN. It has been held that where
no sufficient showing of bad faith would be reflected in a partys persistence in a case other than an
erroneous conviction of the righteousness of his cause, attorneys fees shall not be recovered as cost. [33]
On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and VIVA
absent meeting of minds between them regarding the object and consideration of the alleged contract. It
affirms that ABS-CBNs claim of a right of first refusal was correctly rejected by the trial court. RBS insists
the premium it had paid for the counterbond constituted a pecuniary loss upon which it may recover. It
was obliged to put up the counterbond due to the injunction procured by ABS-CBN. Since the trial court
found that ABS-CBN had no cause of action or valid claim against RBS and, therefore not entitled to the
writ of injunction, RBS could recover from ABS-CBN the premium paid on the counterbond. Contrary to the
claim of ABS-CBN, the cash bond would prove to be more expensive, as the loss would be equivalent to the
cost of money RBS would forego in case the P30 million came from its funds or was borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled showing of the
film Maging Sino Ka Man because the print advertisements were out to announce the showing on a
particular day and hour on Channel 7, i.e., in its entirety at one time, not as series to be shown on a
periodic basis. Hence, the print advertisements were good and relevant for the particular date of showing,
and since the film could not be shown on that particular date and hour because of the injunction, the
expenses for the advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and secured
injunctions purely for the purpose of harassing and prejudicing RBS. Pursuant then to Articles 19 and 21 of
the Civil Code, ABS-CBN must be held liable for such damages. Citing Tolentino,[34] damages may be
awarded in cases of abuse of rights even if the done is not illicit, and there is abuse of rights where a
plaintiff institutes an action purely for the purpose of harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and exemplary damages, private
respondent RBS cited People v. Manero, [35] where it was stated that such entity may recover moral and
exemplary damages if it has a good reputation that is debased resulting in social humiliation. It then
ratiocinates; thus:
There can be no doubt that RBS reputation has been debased by ABS-CBNs acts in this case. When RBS
was not able to fulfill its commitment to the viewing public to show the film Maging Sino Ka Man on the
scheduled dates and times (and on two occasions that RBS advertised), it suffered serious embarrassment
and social humiliation. When the showing was cancelled, irate viewers called up RBS offices and subjected
RBS to verbal abuse (Announce kayo ng announce, hindi ninyo naman ilalabas, nanloloko yata kayo) (Exh.
3-RBS, par.3). This alone was not something RBS brought upon itself. It was exactly what ABS-CBN had
planted to happen.
The amount of moral and exemplary damages cannot be said to be excessive. Two reasons justify the
amount of the award.
The first is that the humiliation suffered by RBS, is national in extent. RBS operations as a broadcasting
company is [sic] nationwide. Its clientele, like that of ABS-CBN, consists of those who own and watch
television. It is not an exaggeration to state, and it is a matter of judicial notice that almost every other
person in the country watches television. The humiliation suffered by RBS is multiplied by the number of
televiewers who had anticipated the showing of the film, Maging Sino Ka Man on May 28 and November 3,
1992 but did not see it owing to the cancellation. Added to this are the advertisers who had placed
commercial spots for the telecast and to whom RBS had a commitment in consideration of the placement
to show the film in the dates and times specified.

The second is that it is a competitor that caused RBS suffer the humiliation. The humiliation and injury are
far greater in degree when caused by an entity whose ultimate business objective is to lure customers
(viewers in this case) away from the competition.[36]
For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court and the
Court of Appeals do not support ABS-CBNs claim that there was a perfected contract. Such factual findings
can no longer be disturbed in this petition for review under Rule 45, as only questions of law can be raised,
not questions of fact. On the issue of damages and attorneys fees, they adopted the arguments of RBS.
The key issues for our consideration are (1) whether there was a perfected contract between VIVA and
ABS-CBN, and (2) whether RBS is entitled to damages and attorneys fees. It may be noted that that award
of attorneys fees of P212,000 in favor of VIVA is not assigned as another error.
I
The first issue should be resolved against ABS-CBN. A contract is a meeting of minds between two
persons whereby one binds himself to give something or render some service to another [37] for a
consideration.There is no contract unless the following requisites concur: (1) consent of the contracting
parties; (2) object certain which is the subject of the contract; and (3) cause of the obligation, which is
established.[38] A contract undergoes three stages:
(a) preparation, conception, or generation, which is the period of negotiation and bargaining,
ending at the moment of agreement of the parties;
(b) perfection or birth of the contract, which is the moment when the parties come to agree on the
terms of the contract; and
(c) consummation or death, which is the fulfillment or performance of the terms agreed upon in
the contract.[39]
Contracts that are consensual in nature are perfected upon mere meeting of the minds. Once there is
concurrence between the offer and the acceptance upon the subject matter, consideration, and terms of
payment a contract is produced. The offer must be certain. To convert the offer into a contract, the
acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal,
unconditional, and without variance of any sort from the proposal. A qualified acceptance, or one that
involves a new proposal, constitutes a counter-offer and is a rejection of the original offer. Consequently,
when something is desired which is not exactly what is proposed in the offer, such acceptance is not
sufficient to generate consent because any modification or variation from the terms of the offer annuls the
offer.[40]
When Mr. Del Rosario of Viva met Mr. Lopez of ABS-CBN at the Tamarind Grill on 2 April 1992 to discuss
the package of films, said package of 104 VIVA films was VIVAs offer to ABS-CBN to enter into a new Film
Exhibition Agreement. But ABS-CBN, sent through Ms. Concio, counter-proposal in the form a draft contract
proposing exhibition of 53 films for a consideration of P35 million. This counter-proposal could be nothing
less than the counter-offer of Mr. Lopez during his conference with Del Rosario at Tamarind Grill
Restaurant. Clearly, there was no acceptance of VIVAs offer, for it was met by a counter-offer which
substantially varied the terms of the offer.
ABS-CBNs reliance in Limketkai Sons Milling, Inc. v. Court of Appeals [41] and Villonco Realty Company v.
Bormaheco, Inc.,[42] is misplaced. In these cases, it was held that an acceptance may contain a request for
certain changes in the terms of the offer and yet be a binding acceptance as long as it is clear that the
meaning of the acceptance is positively and unequivocally to accept the offer, whether such request is
granted or not. This ruling was, however, reversed in the resolution of 29 March 1996, [43] which ruled that
the acceptance of an offer must be unqualified and absolute, i.e., it must be identical in all respects with
that of the offer so as to produce consent or meetings of the minds.
On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-offer
were not material but merely clarificatory of what had previously been agreed upon. It cited the statement
inStuart v. Franklin Life Insurance Co. [44] that a vendors change in a phrase of the offer to purchase, which
change does not essentially change the terms of the offer, does not amount to a rejection of the offer and
the tender of a counter-offer.[45] However, when any of the elements of the contract is modified upon
acceptance, such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of VIVAs offer hence, they underwent
period of bargaining. ABS-CBN then formalized its counter-proposals or counter-offer in a draft

contract.VIVA through its Board of Directors, rejected such counter-offer. Even if it be


conceded arguendo that Del Rosario had accepted the counter-offer, the acceptance did not bind VIVA, as
there was no proof whatsoever that Del Rosario had the specific authority to do so.
Under the Corporation Code,[46] unless otherwise provided by said Code, corporate powers, such as the
power to enter into contracts, are exercised by the Board of Directors. However, the Board may delegate
such powers to either an executive committee or officials or contracted managers. The delegation, except
for the executive committee, must be for specific purposes. [47] Delegation to officers makes the latter
agents of the corporation; accordingly, the general rules of agency as to the binding effects of their acts
would apply.[48] For such officers to be deemed fully clothed by the corporation to exercise a power of the
Board, the latter must specially authorize them to do so. that Del Rosario did not have the authority to
accept ABS-CBNs counter-offer was best evidenced by his submission of the draft contract to VIVAs Board
of Directors for the latters approval. In any event, there was between Del Rosario and Lopez III no meeting
of minds. The following findings of the trial court are instructive:
A number of considerations militate against ABS-CBNs claim that a contract was perfected at that lunch
meeting on April 02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred to the price and the
number of films, which he wrote on a napkin. However, Exhibit C contains numerous provisions which were
not discussed at the Tamarind Grill, if Lopez testimony was to be believed nor could they have been
physically written on a napkin. There was even doubt as to whether it was a paper napkin or cloth
napkin. In short what were written in Exhibit C were not discussed, and therefore could not have been
agreed upon, by the parties. How then could this court compel the parties to sign Exhibit C when the
provisions thereof were not previously agreed upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the contract was 14
films. The complaint in fact prays for delivery of 14 films. But Exhibit C mentions 53 films as its subject
matter.Which is which? If Exhibit C reflected the true intent of the parties, then ABS-CBNs claim for 14 films
in its complaint is false or if what it alleged in the complaint is true, then Exhibit C did not reflect what was
agreed upon by the parties. This underscores the fact that there was no meeting of the minds as to the
subject matter of the contract, so as to preclude perfection thereof. For settled is the rule that there can be
no contract where there is no object certain which is its subject matter (Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. D) States:
We were able to reach an agreement. VIVA gave us the exclusive license to show these fourteen (14) films,
and we agreed to pay Viva the amount of P16,050,000.00 as well as grant Viva commercial slots
worthP19,950,000.00. We had already earmarked this P16,050,000.00.
which gives a total consideration of P36 million (P19,951,000.00 plus P16,050,000.00
equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q What was written in this napkin?
A The total price, the breakdown the known Viva movies, the 7 blockbuster movies and the other 7 Viva
movies because the price was broken down accordingly. The none [sic] Viva and the seven other
Viva movies and the sharing between the cash portion and the concerned spot portion in the total
amount of P35 million pesos.
Now, which is which? P36 million or P35 million? This weakens ABS-CBNs claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit C to Mr. Del Rosario with a
handwritten note, describing said Exhibit C as a draft. (Exh. 5 Viva; tsn pp. 23-24, June 08, 1992). The said
draft has a well defined meaning.
Since Exhibit C is only a draft, or a tentative, provisional or preparatory writing prepared for discussion, the
terms and conditions thereof could not have been previously agreed upon by ABS-CBN and Viva. Exhibit C

could not therefore legally bind Viva, not having agreed thereto. In fact, Ms. Concio admitted that the
terms and conditions embodied in Exhibit C were prepared by ABS-CBNs lawyers and there was no
discussion on said terms and conditions.
As the parties had not yet discussed the proposed terms and conditions in Exhibit C, and there was no
evidence whatsoever that Viva agreed to the terms and conditions thereof, said document cannot be a
binding contract. The fact that Viva refused to sign Exhibit C reveals only two [sic] well that it did not agree
on its terms and conditions, and this court has no authority to compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at the Tamarind Grill was
only provisional, in the sense that it was subject to approval by the Board of Directors of Viva. He testified:
Q Now, Mr. Witness, and after that Tamarinf meeting the second meeting wherein you claimed that you
have the meeting of the minds between you and Mr. Vic del Rosario, what happened?
A Vic Del Rosario was supposed to call us up and tell us specifically the result of the discussion with the
Board of Directors.
Q And you are referring to the so-called agreement which you wrote in [sic] a piece of paper?
A Yes, sir.
Q So, he was going to forward that to the board of Directors for approval?
A Yes, sir (Tsn, pp. 42-43, June 8, 1992)
Q Did Mr. Del Rosario tell you that he will submit it to his Board for approval?
A Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del Rosario had no authority to
bind Viva to a contract with ABS-CBN until and unless its Board of Directors approved it. The complaint, in
fact, alleges that Mr. Del Rosario is the Executive Producer of defendant Viva which is a corporation. (par. 2,
complaint). As a mere agent of Viva, Del Rosario could not bind Viva unless what he did is ratified by its
Directors. (Vicente vs.Geraldez, 52 SCRA 210; Arnold vs. Willets and Paterson, 44 Phil. 634). As a mere
agent, recognized as such by plaintiff, Del Rosario could not be held liable jointly and severally with Viva
and his inclusion as party defendant has no legal basis. (Salonga vs. Warner Barnes [sic],COLTA, 88 Phil.
125; Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations in the complaint are clear admissions that what was
supposed to have been agreed upon at the Tamarind Grill between Mr. Lopez and Del Rosario was not a
binding agreement. It is as it should be because corporate power to enter into a contract is lodged in the
Board of Directors. (Sec. 23, Corporation Code). Without such board approval by the Viva board, whatever
agreement Lopez and Del Rosario arrived at could not ripen into a valid binding upon Viva (Yao Ka Sin
Trading vs. Court of Appeals, 209 SCRA 763). The evidence adduced shows that the Board of Directors of
Viva rejected Exhibit C and insisted that the film package for 104 films be maintained (Exh. 7-1 Cica). [49]
The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four films
under the 1990 Film Exhibition Agreement and that the meeting between Lopez and Del Rosario was a
continuation of said previous contract is untenable. As observed by the trial court, ABS-CBNs right of first
refusal had already been exercised when Ms. Concio wrote to Viva ticking off ten films. Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent, was for an
entirely different package. Ms. Concio herself admitted on cross-examination to having used or
exercised the right of first refusal. She stated that the list was not acceptable and was indeed not
accepted by ABS-CBN, (Tsn, June 8, 1992, pp. 8-10). Even Mr. Lopez himself admitted that the right of
first refusal may have been already exercised by Ms. Concio (as she had). (TSN, June 8, 1992, pp. 7175). Del Rosario himself knew and understand [sic] that ABS-CBN has lost its right of first refusal when
his list of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-11). [50]
II

However, we find for ABS-CBN on the issue of damages. We shall first take up actual
damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or compensatory
damages. Except as provided by law or by stipulation, one is entitled to compensation for actual damages
only for such pecuniary loss suffered by him as he has duly proved. [51] The indemnification shall
comprehend not only the value of the loss suffered, but also that of the profits that the obligee failed to
obtain.[52] In contracts and quasi-contracts the damages which may be awarded are dependent on whether
the obligor acted with good faith or otherwise. In case of good faith, the damages recoverable are those
which are the natural and probable consequences of the breach of the obligation and which the parties
have foreseen or could have reasonably foreseen at the time of the constitution of the obligation. If the
obligor acted with fraud, bad faith, malice, or wanton attitude, he shall be responsible for all damages
which may be reasonably attributed to the non-performance of the obligation. [53] In crimes and quasidelicts, the defendants shall be liable for all damages which are the natural and probable consequences of
the act or omission complained of, whether or not such damages have been foreseen or could have
reasonably been foreseen by the defendant.[54]
Actual damages may likewise be recovered for loss or impairment of earning capacity in cases of
temporary or permanent personal injury, or for injury to the plaintiffs business standing or commercial
credit.[55]
The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or quasidelict. It arose from the fact of filing of the complaint despite ABS-CBNs alleged knowledge of lack of cause
of action. Thus paragraph 12 of RBSs Answer with Counterclaim and Cross-claim under the heading
COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has no cause of action against RBS. As a
result thereof, RBS suffered actual damages in the amount of P6,621,195.32.[56]
Needless to state the award of actual damages cannot be comprehended under the above law on actual
damages. RBS could only probably take refuge under Articles 19, 20, and 21 of the Civil Code, which read
as follows:
ART. 19. Every person must, in the exercise of hid rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.
ART. 20. Every person who, contrary to law, wilfully or negligently causes damage to another shall
indemnify the latter for the same.
ART. 21. Any person who wilfully 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.
It may further be observed that in cases where a writ of preliminary injunction is issued, the damages
which the defendant may suffer by reason of the writ are recoverable from the injunctive bond. [57] In this
case, ABS-CBN had not yet filed the required bond; as a matter of fact, it asked for reduction of the bond
and even went to the Court of Appeals to challenge the order on the matter. Clearly then, it was not
necessary for RBS to file a counterbond. Hence, ABS-CBN cannot be held responsible for the premium RBS
paid for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for Maging Sino Ka Man for lack of
sufficient legal basis. The RTC issued a temporary restraining order and later, a writ of preliminary
injunction on the basis of its determination that there existed sufficient ground for the issuance
thereof. Notably, the RTC did not dissolve the injunction on the ground of lack of legal and factual basis,
but because of the plea of RBS that it be allowed to put up a counterbond.
As regards attorneys fees, the law is clear that in the absence of stipulation, attorneys fees may be
recovered as actual or compensatory damages under any of the circumstances provided for in Article 2208
of the Civil Code.[58]
The general rule is that attorneys fees cannot be recovered as part of damages because of the policy
that no premium should be placed on the right to litigate. [59] They are not to be awarded every time a party
wins a suit. The power of the court t award attorneys fees under Article 2208 demands factual, legal, and
equitable justification.[60] Even when a claimant is compelled to litigate with third persons or to incur
expenses to protect his rights, still attorneys fees may not be awarded where no sufficient showing of bad

faith could be reflected in a partys persistence in a case other than an erroneous conviction of the
righteousness of his cause.[61]
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code. Article 2217
thereof defines what are included in moral damages, while Article 2219 enumerates the cases where they
may be recovered. Article 2220 provides that moral damages may be recovered in breaches of contract
where the defendant acted fraudulently or in bad faith. RBSs claim for moral damages could possibly fall
only under item (10) of Article 2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34 and 35.
Moral damages are in the category of an award designed to compensate the claimant for actual injury
suffered and not to impose a penalty on the wrongdoer. [62] The award is not meant to enrich the
complainant at the expense of the defendant, but to enable the injured party to obtain means, diversion,
or amusements that will serve to obviate the moral suffering he has undergone. It is aimed at the
restoration, within the limits of the possible, of the spiritual status quo ante, and should be proportionate
to the suffering inflicted.[63] Trial courts must then guard against the award of exorbitant damages; they
should exercise balanced restrained and measured objectivity to avoid suspicion that it was due to
passion, prejudice, or corruption or the part of the trial court. [64]
The award of moral damages cannot be granted in favor of a corporation because, being an artificial
person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. It
cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by
one having a nervous system.[65] The statement in People v. Manero[66] and Mambulao Lumber Co. v.
PNB[67] that a corporation may recover moral damages if it has a good reputation that is debased, resulting
in social humiliation is an obiter dictum. On this score alone the award for damages must be set aside,
since RBS is a corporation.
The basic law on exemplary damages is Section 5 Chapter 3, Title XVIII, Book IV of the Civil
Code. These are imposed by way of example or correction for the public good, in addition to moral,
temperate, liquidated, or compensatory damages.[68] They are recoverable in criminal cases as part of the
civil liability when the crime was committed with one or more aggravating circumstances; [69] in quasidelicts, if the defendant acted with gross negligence; [70] and in contracts and quasi-contracts, if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. [71]
It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-contract,
delict, or quasi-delict. Hence, the claims for moral and exemplary damages can only be based on Articles
19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the following: (1) the existence of a legal right or
duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or injuring another. Article
20 speaks of the general sanction for all provisions of law which do not especially provide for their own
sanction; while Article 21 deals with acts contra bonus mores, and has the following elements: (1) there is
an act which is legal, (2) but which is contrary to morals, good custom, public order, or public policy, and
(3) and it is done with intent to injure.[72]
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith implies a
conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity. [73] Such
must be substantiated by evidence.[74]
There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly
convinced of the merits of its cause after it had undergone serious negotiations culminating in its formal
submission of a draft contract. Settled is the rule that the adverse result of an action does not per se make
the action wrongful and subject the actor to damages, for the law could not have meant impose a penalty
on the right to litigate. If damages result from a persons exercise of a right, it is damnum absque injuria.[75]
WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of Appeals in CAG.R. CV No. 44125 is hereby REVERSED except as to unappealed award of attorneys fees in favor of VIVA
Productions, Inc.
No pronouncement as to costs.
SO ORDERED.
Melo, Kapunan, Martinez, and Pardo, JJ., concur.

G.R. No. 128066

June 19, 2000

JARDINE DAVIES INC., petitioner,


vs.
COURT OF APPEALS and FAR EAST MILLS SUPPLY CORPORATION, respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 128069
PURE FOODS CORPORATION, petitioner,
vs.
COURT OF APPEALS and FAR EAST MILLS SUPPLY CORPORATION, respondents.
BELLOSILLO, J.:
This is rather a simple case for specific performance with damages which could have been resolved
through mediation and conciliation during its infancy stage had the parties been earnest in expediting the
disposal of this case. They opted however to resort to full court proceedings and denied themselves the
benefits of alternative dispute resolution, thus making the process more arduous and long-drawn.
The controversy started in 1992 at the height of the power crisis which the country was then experiencing.
To remedy and curtail further losses due to the series of power failures, petitioner PURE FOODS
CORPORATION (hereafter PUREFOODS) decided to install two (2) 1500 KW generators in its food processing
plant in San Roque, Marikina City.
Sometime in November 1992 a bidding for the supply and installation of the generators was held. Several
suppliers and dealers were invited to attend a pre-bidding conference to discuss the conditions, propose
scheme and specifications that would best suit the needs of PUREFOODS. Out of the eight (8) prospective
bidders who attended the pre-bidding conference, only three (3) bidders, namely, respondent FAR EAST
MILLS SUPPLY CORPORATION (hereafter FEMSCO), MONARK and ADVANCE POWER submitted bid proposals
and gave bid bonds equivalent to 5% of their respective bids, as required.
Thereafter, in a letter dated 12 December 1992 addressed to FEMSCO President Alfonso Po, PUREFOODS
confirmed the award of the contract to FEMSCO
Gentlemen:
This will confirm that Pure Foods Corporation has awarded to your firm the project: Supply and Installation
of two (2) units of 1500 KW/unit Generator Sets at the Processed Meats Plant, Bo. San Roque, Marikina,
based on your proposal number PC 28-92 dated November 20, 1992, subject to the following basic terms
and conditions:
1. Lump sum contract of P6,137,293.00 (VAT included), for the supply of materials and labor for the
local portion and the labor for the imported materials, payable by progress billing twice a month,
with ten percent (10%) retention. The retained amount shall be released thirty (30) days after
acceptance of the completed project and upon posting of Guarantee Bond in an amount equivalent
to twenty percent (20%) of the contract price. The Guarantee Bond shall be valid for one (1) year
from completion and acceptance of project. The contract price includes future increase/s in costs of
materials and labor;

2. The projects shall be undertaken pursuant to the attached specifications. It is understood that
any item required to complete the project, and those not included in the list of items shall be
deemed included and covered and shall be performed;
3. All materials shall be brand new;
4. The project shall commence immediately and must be completed within twenty (20) working
days after the delivery of Generator Set to Marikina Plant, penalty equivalent to 1/10 of 1% of the
purchase price for every day of delay;
5. The Contractor shall put up Performance Bond equivalent to thirty (30%) of the contract price,
and shall procure All Risk Insurance equivalent to the contract price upon commencement of the
project. The All Risk Insurance Policy shall be endorsed in favor of and shall be delivered to Pure
Foods Corporation;
6. Warranty of one (1) year against defective material and/or workmanship.
Once finalized, we shall ask you to sign the formal contract embodying the foregoing terms and conditions.
Immediately, FEMSCO submitted the required performance bond in the amount of P1,841,187.90 and
contractor's all-risk insurance policy in the amount of P6,137,293.00 which PUREFOODS through its Vice
President Benedicto G. Tope acknowledged in a letter dated 18 December 1992. FEMSCO also made
arrangements with its principal and started the PUREFOODS project by purchasing the necessary
materials. PUREFOODS on the other hand returned FEMSCO's Bidder's Bond in the amount of
P1,000,000.00, as requested.
Later, however, in a letter dated 22 December 1992, PUREFOODS through its Senior Vice President Teodoro
L. Dimayuga unilaterally canceled the award as "significant factors were uncovered and brought to (their)
attention which dictate (the) cancellation and warrant a total review and re-bid of (the) project."
Consequently, FEMSCO protested the cancellation of the award and sought a meeting with PUREFOODS.
However, on 26 March 1993, before the matter could be resolved, PUREFOODS already awarded the
project and entered into a contract with JARDINE NELL, a division of Jardine Davies, Inc. (hereafter
JARDINE), which incidentally was not one of the bidders.1wphi1.nt
FEMSCO thus wrote PUREFOODS to honor its contract with the former, and to JARDINE to cease and desist
from delivering and installing the two (2) generators at PUREFOODS. Its demand letters unheeded,
FEMSCO sued both PUREFOODS and JARDINE: PUREFOODS for reneging on its contract, and JARDINE for its
unwarranted interference and inducement. Trial ensued. After FEMSCO presented its evidence, JARDINE
filed a Demurrer to Evidence.
On 27 June 1994 the Regional Trial Court of Pasig, Br. 68, 1 granted JARDINE's Demurrer to Evidence. The
trial court concluded that "[w]hile it may seem to the plaintiff that by the actions of the two defendants
there is something underhanded going on, this is all a matter of perception, and unsupported by hard
evidence, mere suspicions and suppositions would not stand up very well in a court of law." 2 Meanwhile
trial proceeded as regards the case against PUREFOODS.
On 28 July 1994 the trial court rendered a decision ordering PUREFOODS: (a) to indemnify FEMSCO the sum
of P2,300,000.00 representing the value of engineering services it rendered; (b) to pay FEMSCO the sum of
US$14,000.00 or its peso equivalent, and P900,000.00 representing contractor's mark-up on installation
work, considering that it would be impossible to compel PUREFOODS to honor, perform and fulfill its
contractual obligations in view of PUREFOOD's contract with JARDINE and noting that construction had
already started thereon; (c) to pay attorney's fees in an amount equivalent to 20% of the total amount

due; and, (d) to pay the costs. The trial court dismissed the counterclaim filed by PUREFOODS for lack of
factual and legal basis.
Both FEMSCO and PUREFOODS appealed to the Court of Appeals. FEMSCO appealed the 27 June 1994
Resolution of the trial court which granted the Demurrer to Evidence filed by JARDINE resulting in the
dismissal of the complaint against it, while PUREFOODS appealed the 28 July 1994 Decision of the same
court which ordered it to pay FEMSCO.
On 14 August 1996 the Court of Appeals affirmed in toto the 28 July 1994 Decision of the trial court. 3 It
also reversed the 27 June 1994 Resolution of the lower court and ordered JARDINE to pay FEMSCO
damages for inducing PUREFOODS to violate the latter's contract with FEMSCO. As such, JARDINE was
ordered to pay FEMSCO P2,000,000.00 for moral damages. In addition, PUREFOODS was also directed to
pay FEMSCO P2,000,000.00 as moral damages and P1,000,000.00 as exemplary damages as well as 20%
of the total amount due as attorney's fees.
On 31 January 1997 the Court of Appeals denied for lack of merit the separate motions for reconsideration
filed by PUREFOODS and JARDINE. Hence, these two (2) petitions for review filed by PUREFOODS and
JARDINE which were subsequently consolidated.
PUREFOODS maintains that the conclusions of both the trial court and the appellate court are premised on
a misapprehension of facts. It argues that its 12 December 1992 letter to FEMSCO was not an acceptance
of the latter's bid proposal and award of the project but more of a qualified acceptance constituting a
counter-offer which required FEMSCO's express conforme. Since PUREFOODS never received
FEMSCO's conforme, PUREFOODS was very well within reason to revoke its qualified acceptance or
counter-offer. Hence, no contract was perfected between PUREFOODS and FEMSCO. PUREFOODS also
contends that it was never in bad faith when it dealt with FEMSCO. Hence moral and exemplary damages
should not have been awarded.
Corollarily, JARDINE asserts that the records are bereft of any showing that it had prior knowledge of the
supposed contract between PUREFOODS and FEMSCO, and that it induced PUREFOODS to violate the
latter's alleged contract with FEMSCO. Moreover, JARDINE reasons that FEMSCO, an artificial person, is not
entitled to moral damages. But granting arguendo that the award of moral damages is proper,
P2,000,000.00 is extremely excessive.
In the main, these consolidated cases present two (2) issues: first, whether there existed a perfected
contract between PUREFOODS and FEMSCO; and second, granting there existed a perfected contract,
whether there is any showing that JARDINE induced or connived with PUREFOODS to violate the latter's
contract with FEMSCO.
A contract is defined as "a juridical convention manifested in legal form, by virtue of which one or more
persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to
give, to do, or not to do."4 There can be no contract unless the following requisites concur: (a) consent of
the contracting parties; (b) object certain which is the subject matter of the contract; and, (c) cause of the
obligation which is established. 5 A contract binds both contracting parties and has the force of law
between them.
Contracts are perfected by mere consent, upon the acceptance by the offeree of the offer made by the
offeror. From that moment, the parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according to their nature, may be in keeping with good
faith, usage and law. 6 To produce a contract, the acceptance must not qualify the terms of the offer.
However, the acceptance may be express or implied. 7 For a contract to arise, the acceptance must be
made known to the offeror. Accordingly, the acceptance can be withdrawn or revoked before it is made
known to the offeror.

In the instant case, there is no issue as regards the subject matter of the contract and the cause of the
obligation. The controversy lies in the consent whether there was an acceptance of the offer, and if so, if
it was communicated, thereby perfecting the contract.
To resolve the dispute, there is a need to determine what constituted the offer and the acceptance. Since
petitioner PUREFOODS started the process of entering into the contract by conducting a bidding, Art. 1326
of the Civil Code, which provides that "[a]dvertisements for bidders are simply invitations to make
proposals," applies. Accordingly, the Terms and Conditions of the Bidding disseminated by petitioner
PUREFOODS constitutes the "advertisement" to bid on the project. The bid proposals or quotations
submitted by the prospective suppliers including respondent FEMSCO, are the offers. And, the reply of
petitioner PUREFOODS, the acceptance or rejection of the respective offers.
Quite obviously, the 12 December 1992 letter of petitioner. PUREFOODS to FEMSCO constituted
acceptance of respondent FEMSCO's offer as contemplated by law. The tenor of the letter, i.e., "This will
confirm that Pure Foods has awarded to your firm (FEMSCO) the project," could not be more categorical.
While the same letter enumerated certain "basic terms and conditions," these conditions were imposed on
the performance of the obligation rather than on the perfection of the contract. Thus, the first "condition"
was merely a reiteration of the contract price and billing scheme based on the Terms and Conditions of
Bidding and the bid or previous offer of respondent FEMSCO. The second and third "conditions" were
nothing more than general statements that all items and materials including those excluded in the list but
necessary to complete the project shall be deemed included and should be brand new. The fourth
"condition" concerned the completion of the work to be done, i.e., within twenty (20) days from the
delivery of the generator set, the purchase of which was part of the contract. The fifth "condition" had to
do with the putting up of a performance bond and an all-risk insurance, both of which should be given
upon commencement of the project. The sixth "condition" related to the standard warranty of one (1) year.
In fine, the enumerated "basic terms and conditions" were prescriptions on how the obligation was to be
performed and implemented. They were far from being conditions imposed on the perfection of the
contract.
In Babasa v. Court of Appeals 8 we distinguished between a condition imposed on the perfection of a
contract and a condition imposed merely on the performance of an obligation. While failure to comply with
the first condition results in the failure of a contract, failure to comply with the second merely gives the
other party options and/or remedies to protect his interests.
We thus agree with the conclusion of respondent appellate court which affirmed the trial court
As can be inferred from the actual phrase used in the first portion of the letter, the decision to
award the contract has already been made. The letter only serves as a confirmation of such
decision. Hence, to the Court's mind, there is already an acceptance made of the offer received by
Purefoods. Notwithstanding the terms and conditions enumerated therein, the offer has been
accepted and/or amplified the details of the terms and conditions contained in the Terms and
Conditions of Bidding given out by Purefoods to prospective bidders. 9
But even granting arguendo that the 12 December 1992 letter of petitioner PUREFOODS constituted a
"conditional counter-offer," respondent FEMCO's submission of the performance bond and contractor's allrisk insurance was an implied acceptance, if not a clear indication of its acquiescence to, the "conditional
counter-offer," which expressly stated that the performance bond and the contractor's all-risk insurance
should be given upon the commencement of the contract. Corollarily, the acknowledgment thereof by
petitioner PUREFOODS, not to mention its return of FEMSCO's bidder's bond, was a concrete manifestation
of its knowledge that respondent FEMSCO indeed consented to the "conditional counter-offer." After all, as
earlier adverted to, an acceptance may either be express or implied, 10 and this can be inferred from the
contemporaneous and subsequent acts of the contracting parties.

Accordingly, for all intents and purposes, the contract at that point has been perfected, and respondent
FEMSCO'sconforme would only be a mere surplusage. The discussion of the price of the project two (2)
months after the 12 December 1992 letter can be deemed as nothing more than a pressure being exerted
by petitioner PUREFOODS on respondent FEMSCO to lower the price even after the contract had been
perfected. Indeed from the facts, it can easily be surmised that petitioner PUREFOODS was haggling for a
lower price even after agreeing to the earlier quotation, and was threatening to unilaterally cancel the
contract, which it eventually did. Petitioner PUREFOODS also makes an issue out of the absence of a
purchase order (PO). Suffice it to say that purchase orders or POs do not make or break a contract. Thus,
even the tenor of the subsequent letter of petitioner PUREFOODS, i.e., "Pure Foods Corporation is hereby
canceling the award to your company of the project," presupposes that the contract has been perfected.
For, there can be no cancellation if the contract was not perfected in the first place.
Petitioner PUREFOODS also argues that it was never in bad faith.1avvphi1 On the contrary, it believed in
good faith that no such contract was perfected. We are not convinced. We subscribe to the factual findings
and conclusions of the trial court which were affirmed by the appellate court
Hence, by the unilateral cancellation of the contract, the defendant (petitioner PURE FOODS) has
acted with bad faith and this was further aggravated by the subsequent inking of a contract
between defendant Purefoods and erstwhile co-defendant Jardine. It is very evident that Purefoods
thought that by the expedient means of merely writing a letter would automatically cancel or nullify
the existing contract entered into by both parties after a process of bidding. This, to the Court's
mind, is a flagrant violation of the express provisions of the law and is contrary to fair and just
dealings to which every man is due. 11
This Court has awarded in the past moral damages to a corporation whose reputation has been
besmirched. 12 In the instant case, respondent FEMSCO has sufficiently shown that its reputation was
tarnished after it immediately ordered equipment from its suppliers on account of the urgency of the
project, only to be canceled later. We thus sustain respondent appellate court's award of moral damages.
We however reduce the award from P2,000,000.00 to P1,000,000.00, as moral damages are never
intended to enrich the recipient. Likewise, the award of exemplary damages by way of example for the
public good is excessive and should be reduced to P100,000.00.
Petitioner JARDINE maintains on the other hand that respondent appellate court erred in ordering it to pay
moral damages to respondent FEMSCO as it supposedly induced PUREFOODS to violate the contract with
FEMSCO. We agree. While it may seem that petitioners PUREFOODS and JARDINE connived to deceive
respondent FEMSCO, we find no specific evidence on record to support such perception. Likewise, there is
no showing whatsoever that petitioner JARDINE induced petitioner PUREFOODS. The similarity in the
design submitted to petitioner PUREFOODS by both petitioner JARDINE and respondent FEMSCO, and the
tender of a lower quotation by petitioner JARDINE are insufficient to show that petitioner JARDINE indeed
induced petitioner PUREFOODS to violate its contract with respondent FEMSCO.
WHEREFORE, judgment is hereby rendered as follows:
(a) The petition in G.R. No. 128066 is GRANTED. The assailed Decision of the Court of Appeals
reversing the 27 June 1994 resolution of the trial court and ordering petitioner JARDINE DAVIES,
INC., to pay private respondent FAR EAST MILLS SUPPLY CORPORATION P2,000,000.00 as moral
damages is REVERSED and SET ASIDE for insufficiency of evidence; and
(b) The petition in G.R. No. 128069 is DENIED. The assailed Decision of the Court of Appeals
ordering petitioner PUREFOODS CORPORATION to pay private respondent FAR EAST MILLS SUPPLY
CORPORATION the sum of P2,300,000.00 representing the value of engineering services it rendered,
US$14,000.00 or its peso equivalent, and P900,000.00 representing the contractor's mark-up on
installation work, as well as attorney's fees equivalent to twenty percent (20%) of the total amount

due, is AFFIRMED. In addition, petitioner PURE FOODS CORPORATION is ordered to pay private
respondent FAR EAST MILLS SUPPLY CORPORATION moral damages in the amount of P1,000,000.00
and exemplary damages in the amount of P1,000,000.00. Costs against petitioner.
G.R. No. L-22973

January 30, 1968

MAMBULAO LUMBER COMPANY, plaintiff-appellant,


vs.
PHILIPPINE NATIONAL BANK and ANACLETO HERALDO Deputy Provincial Sheriff of Camarines
Norte,defendants-appellees.
Ernesto P. Vilar and Arthur Tordesillas for plaintiff-appellant.
Tomas Besa and Jose B. Galang for defendants-appellees.
ANGELES, J.:
An appeal from a decision, dated April 2, 1964, of the Court of First Instance of Manila in Civil Case No.
52089, entitled "Mambulao Lumber Company, plaintiff, versus Philippine National Bank and Anacleto
Heraldo, defendants", dismissing the complaint against both defendants and sentencing the plaintiff to pay
to defendant Philippine National Bank (PNB for short) the sum of P3,582.52 with interest thereon at the
rate of 6% per annum from December 22, 1961 until fully paid, and the costs of suit.
In seeking the reversal of the decision, the plaintiff advances several propositions in its brief which may be
restated as follows:
1. That its total indebtedness to the PNB as of November 21, 1961, was only P56,485.87 and not
P58,213.51 as concluded by the court a quo; hence, the proceeds of the foreclosure sale of its real
property alone in the amount of P56,908.00 on that date, added to the sum of P738.59 it remitted
to the PNB thereafter was more than sufficient to liquidate its obligation, thereby rendering the
subsequent foreclosure sale of its chattels unlawful;
2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and the additional
sum of P298.54 as expenses of the foreclosure sale;
3. That the subsequent foreclosure sale of its chattels is null and void, not only because it had
already settled its indebtedness to the PNB at the time the sale was effected, but also for the
reason that the said sale was not conducted in accordance with the provisions of the Chattel
Mortgage Law and the venue agreed upon by the parties in the mortgage contract;
4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its value; and
5. That for the acts of the PNB in proceeding with the sale of the chattels, in utter disregard of
plaintiff's vigorous opposition thereto, and in taking possession thereof after the sale thru force,
intimidation, coercion, and by detaining its "man-in-charge" of said properties, the PNB is liable to
plaintiff for damages and attorney's fees.
The antecedent facts of the case, as found by the trial court, are as follows:
On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga Branch of
defendant PNB and the former offered real estate, machinery, logging and transportation
equipments as collaterals. The application, however, was approved for a loan of P100,000 only. To
secure the payment of the loan, the plaintiff mortgaged to defendant PNB a parcel of land, together
with the buildings and improvements existing thereon, situated in the poblacion of Jose Panganiban
(formerly Mambulao), province of Camarines Norte, and covered by Transfer Certificate of Title No.
381 of the land records of said province, as well as various sawmill equipment, rolling unit and other
fixed assets of the plaintiff, all situated in its compound in the aforementioned municipality.

On August 2, 1956, the PNB released from the approved loan the sum of P27,500, for which the
plaintiff signed a promissory note wherein it promised to pay to the PNB the said sum in five equal
yearly installments at the rate of P6,528.40 beginning July 31, 1957, and every year thereafter, the
last of which would be on July 31, 1961.
On October 19, 1956, the PNB made another release of P15,500 as part of the approved loan
granted to the plaintiff and so on the said date, the latter executed another promissory note
wherein it agreed to pay to the former the said sum in five equal yearly installments at the rate of
P3,679.64 beginning July 31, 1957, and ending on July 31, 1961.
The plaintiff failed to pay the amortization on the amounts released to and received by it. Repeated
demands were made upon the plaintiff to pay its obligation but it failed or otherwise refused to do
so. Upon inspection and verification made by employees of the PNB, it was found that the plaintiff
had already stopped operation about the end of 1957 or early part of 1958.
On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte
requesting him to take possession of the parcel of land, together with the improvements existing
thereon, covered by Transfer Certificate of Title No. 381 of the land records of Camarines Norte, and
to sell it at public auction in accordance with the provisions of Act No. 3135, as amended, for the
satisfaction of the unpaid obligation of the plaintiff, which as of September 22, 1961, amounted to
P57,646.59, excluding attorney's fees. In compliance with the request, on October 16, 1961, the
Provincial Sheriff of Camarines Norte issued the corresponding notice of extra-judicial sale and sent
a copy thereof to the plaintiff. According to the notice, the mortgaged property would be sold at
public auction at 10:00 a.m. on November 21, 1961, at the ground floor of the Court House in Daet,
Camarines Norte.
On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte requesting
him to take possession of the chattels mortgaged to it by the plaintiff and sell them at public
auction also on November 21, 1961, for the satisfaction of the sum of P57,646.59, plus 6% annual
interest therefore from September 23, 1961, attorney's fees equivalent to 10% of the amount due
and the costs and expenses of the sale. On the same day, the PNB sent notice to the plaintiff that
the former was foreclosing extrajudicially the chattels mortgaged by the latter and that the auction
sale thereof would be held on November 21, 1961, between 9:00 and 12:00 a.m., in Mambulao,
Camarines Norte, where the mortgaged chattels were situated.
On November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took possession of the chattels
mortgaged by the plaintiff and made an inventory thereof in the presence of a PC Sergeant and a
policeman of the municipality of Jose Panganiban. On November 9, 1961, the said Deputy Sheriff
issued the corresponding notice of public auction sale of the mortgaged chattels to be held on
November 21, 1961, at 10:00 a.m., at the plaintiff's compound situated in the municipality of Jose
Panganiban, Province of Camarines Norte.
On November 19, 1961, the plaintiff sent separate letters, posted as registered air mail matter, one
to the Naga Branch of the PNB and another to the Provincial Sheriff of Camarines Norte, protesting
against the foreclosure of the real estate and chattel mortgages on the grounds that they could not
be effected unless a Court's order was issued against it (plaintiff) for said purpose and that the
foreclosure proceedings, according to the terms of the mortgage contracts, should be made in
Manila. In said letter to the Naga Branch of the PNB, it was intimated that if the public auction sale
would be suspended and the plaintiff would be given an extension of ninety (90) days, its obligation
would be settled satisfactorily because an important negotiation was then going on for the sale of
its "whole interest" for an amount more than sufficient to liquidate said obligation.
The letter of the plaintiff to the Naga Branch of the PNB was construed by the latter as a request for
extension of the foreclosure sale of the mortgaged chattels and so it advised the Sheriff of
Camarines Norte to defer it to December 21, 1961, at the same time and place. A copy of said
advice was sent to the plaintiff for its information and guidance.
The foreclosure sale of the parcel of land, together with the buildings and improvements thereon,
covered by Transfer Certificate of Title No. 381, was, however, held on November 21, 1961, and the
said property was sold to the PNB for the sum of P56,908.00, subject to the right of the plaintiff to

redeem the same within a period of one year. On the same date, Deputy Provincial Sheriff Heraldo
executed a certificate of sale in favor of the PNB and a copy thereof was sent to the plaintiff.
In a letter dated December 14, 1961 (but apparently posted several days later), the plaintiff sent a
bank draft for P738.59 to the Naga Branch of the PNB, allegedly in full settlement of the balance of
the obligation of the plaintiff after the application thereto of the sum of P56,908.00 representing the
proceeds of the foreclosure sale of parcel of land described in Transfer Certificate of Title No. 381. In
the said letter, the plaintiff reiterated its request that the foreclosure sale of the mortgaged chattels
be discontinued on the grounds that the mortgaged indebtedness had been fully paid and that it
could not be legally effected at a place other than the City of Manila.
In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of Camarines Norte
that it had fully paid its obligation to the PNB, and enclosed therewith a copy of its letter to the
latter dated December 14, 1961.
On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the plaintiff
acknowledging the remittance of P738.59 with the advice, however, that as of that date the
balance of the account of the plaintiff was P9,161.76, to which should be added the expenses of
guarding the mortgaged chattels at the rate of P4.00 a day beginning December 19, 1961. It was
further explained in said letter that the sum of P57,646.59, which was stated in the request for the
foreclosure of the real estate mortgage, did not include the 10% attorney's fees and expenses of
the sale. Accordingly, the plaintiff was advised that the foreclosure sale scheduled on the 21st of
said month would be stopped if a remittance of P9,161.76, plus interest thereon and guarding fees,
would be made.
On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at 10:00 a.m. and
they were awarded to the PNB for the sum of P4,200 and the corresponding bill of sale was issued
in its favor by Deputy Provincial Sheriff Heraldo.
In a letter dated December 26, 1961, the Manager of the Naga Branch of the PNB advised the
plaintiff giving it priority to repurchase the chattels acquired by the former at public auction. This
offer was reiterated in a letter dated January 3, 1962, of the Attorney of the Naga Branch of the PNB
to the plaintiff, with the suggestion that it exercise its right of redemption and that it apply for the
condonation of the attorney's fees. The plaintiff did not follow the advice but on the contrary it
made known of its intention to file appropriate action or actions for the protection of its interests.
On May 24, 1962, several employees of the PNB arrived in the compound of the plaintiff in Jose
Panganiban, Camarines Norte, and they informed Luis Salgado, Chief Security Guard of the
premises, that the properties therein had been auctioned and bought by the PNB, which in turn sold
them to Mariano Bundok. Upon being advised that the purchaser would take delivery of the things
he bought, Salgado was at first reluctant to allow any piece of property to be taken out of the
compound of the plaintiff. The employees of the PNB explained that should Salgado refuse, he
would be exposing himself to a litigation wherein he could be held liable to pay big sum of money
by way of damages. Apprehensive of the risk that he would take, Salgado immediately sent a wire
to the President of the plaintiff in Manila, asking advice as to what he should do. In the meantime,
Mariano Bundok was able to take out from the plaintiff's compound two truckloads of equipment.
In the afternoon of the same day, Salgado received a telegram from plaintiff's President directing
him not to deliver the "chattels" without court order, with the information that the company was
then filing an action for damages against the PNB. On the following day, May 25, 1962, two trucks
and men of Mariano Bundok arrived but Salgado did not permit them to take out any equipment
from inside the compound of the plaintiff. Thru the intervention, however, of the local police and PC
soldiers, the trucks of Mariano Bundok were able finally to haul the properties originally mortgaged
by the plaintiff to the PNB, which were bought by it at the foreclosure sale and subsequently sold to
Mariano Bundok.
Upon the foregoing facts, the trial court rendered the decision appealed from which, as stated in the first
paragraph of this opinion, sentenced the Mambulao Lumber Company to pay to the defendant PNB the
sum of P3,582.52 with interest thereon at the rate of 6% per annum from December 22, 1961 (day

following the date of the questioned foreclosure of plaintiff's chattels) until fully paid, and the costs.
Mambulao Lumber Company interposed the instant appeal.
We shall discuss the various points raised in appellant's brief in seriatim.
The first question Mambulao Lumber Company poses is that which relates to the amount of its
indebtedness to the PNB arising out of the principal loans and the accrued interest thereon. It is contended
that its obligation under the terms of the two promissory notes it had executed in favor of the PNB
amounts only to P56,485.87 as of November 21, 1961, when the sale of real property was effected, and
not P58,213.51 as found by the trial court.
There is merit to this claim. Examining the terms of the promissory note executed by the appellant in favor
of the PNB, we find that the agreed interest on the loan of P43,000.00 P27,500.00 released on August 2,
1956 as per promissory note of even date (Exhibit C-3), and P15,500.00 released on October 19, 1956, as
per promissory note of the same date (Exhibit C-4) was six per cent (6%) per annum from the respective
date of said notes "until paid". In the statement of account of the appellant as of September 22, 1961,
submitted by the PNB, it appears that in arriving at the total indebtedness of P57,646.59 as of that date,
the PNB had compounded the principal of the loan and the accrued 6% interest thereon each time the
yearly amortizations became due, and on the basis of these compounded amounts charged additional
delinquency interest on them up to September 22, 1961; and to this erroneously computed total of
P57,646.59, the trial court added 6% interest per annum from September 23, 1961 to November 21 of the
same year. In effect, the PNB has claimed, and the trial court has adjudicated to it, interest on accrued
interests from the time the various amortizations of the loan became due until the real estate mortgage
executed to secure the loan was extra-judicially foreclosed on November 21, 1961. This is an error. Section
5 of Act No. 2655 expressly provides that in computing the interest on any obligation, promissory note or
other instrument or contract, compound interest shall not be reckoned, except by agreement, or in default
thereof, whenever the debt is judicially claimed. This is also the clear mandate of Article 2212 of the new
Civil Code which provides that interest due shall earn legal interest only from the time it is judicially
demanded, and of Article 1959 of the same code which ordains that interest due and unpaid shall not earn
interest. Of course, the parties may, by stipulation, capitalize the interest due and unpaid, which as added
principal shall earn new interest; but such stipulation is nowhere to be found in the terms of the promissory
notes involved in this case. Clearly therefore, the trial court fell into error when it awarded interest on
accrued interests, without any agreement to that effect and before they had been judicially demanded.
Appellant next assails the award of attorney's fees and the expenses of the foreclosure sale in favor of the
PNB. With respect to the amount of P298.54 allowed as expenses of the extra-judicial sale of the real
property, appellant maintains that the same has no basis, factual or legal, and should not have been
awarded. It likewise decries the award of attorney's fees which, according to the appellant, should not be
deducted from the proceeds of the sale of the real property, not only because there is no express
agreement in the real estate mortgage contract to pay attorney's fees in case the same is extra-judicially
foreclosed, but also for the reason that the PNB neither spent nor incurred any obligation to pay attorney's
fees in connection with the said extra-judicial foreclosure under consideration.
There is reason for the appellant to assail the award of P298.54 as expenses of the sale. In this respect, the
trial court said:
The parcel of land, together with the buildings and improvements existing thereon covered by
Transfer Certificate of Title No. 381, was sold for P56,908. There was, however, no evidence how
much was the expenses of the foreclosure sale although from the pertinent provisions of the Rules
of Court, the Sheriff's fees would be P1 for advertising the sale (par. k, Sec. 7, Rule 130 of the Old
Rules) and P297.54 as his commission for the sale (par. n, Sec. 7, Rule 130 of the Old Rules) or a
total of P298.54.
There is really no evidence of record to support the conclusion that the PNB is entitled to the amount
awarded as expenses of the extra-judicial foreclosure sale. The court below committed error in applying
the provisions of the Rules of Court for purposes of arriving at the amount awarded. It is to be borne in
mind that the fees enumerated under paragraphs k and n, Section 7, of Rule 130 (now Rule 141) are
demandable, only by a sheriff serving processes of the court in connection with judicial foreclosure of
mortgages under Rule 68 of the new Rules, and not in cases of extra-judicial foreclosure of mortgages
under Act 3135. The law applicable is Section 4 of Act 3135 which provides that the officer conducting the

sale is entitled to collect a fee of P5.00 for each day of actual work performed in addition to his expenses in
connection with the foreclosure sale. Admittedly, the PNB failed to prove during the trial of the case, that it
actually spent any amount in connection with the said foreclosure sale. Neither may expenses for
publication of the notice be legally allowed in the absence of evidence on record to support it. 1 It is true, as
pointed out by the appellee bank, that courts should take judicial notice of the fees provided for by law
which need not be proved; but in the absence of evidence to show at least the number of working days the
sheriff concerned actually spent in connection with the extra-judicial foreclosure sale, the most that he
may be entitled to, would be the amount of P10.00 as a reasonable allowance for two day's work one for
the preparation of the necessary notices of sale, and the other for conducting the auction sale and
issuance of the corresponding certificate of sale in favor of the buyer. Obviously, therefore, the award of
P298.54 as expenses of the sale should be set aside.
But the claim of the appellant that the real estate mortgage does not provide for attorney's fees in case
the same is extra-judicially foreclosed, cannot be favorably considered, as would readily be revealed by an
examination of the pertinent provision of the mortgage contract. The parties to the mortgage appear to
have stipulated under paragraph (c) thereof, inter alia:
. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints the Mortgagee his
attorney-in-fact to sell the property mortgaged under Act 3135, as amended, to sign all documents
and to perform all acts requisite and necessary to accomplish said purpose and to appoint its
substitute as such attorney-in-fact with the same powers as above specified. In case of judicial
foreclosure, the Mortgagor hereby consents to the appointment of the Mortgagee or any of its
employees as receiver, without any bond, to take charge of the mortgaged property at once, and to
hold possession of the same and the rents, benefits and profits derived from the mortgaged
property before the sale, less the costs and expenses of the receivership; the Mortgagor hereby
agrees further that in all cases, attorney's fees hereby fixed at Ten Per cent (10%) of the total
indebtedness then unpaid which in no case shall be less than P100.00 exclusive of all fees allowed
by law, and the expenses of collection shall be the obligation of the Mortgagor and shall with
priority, be paid to the Mortgagee out of any sums realized as rents and profits derived from the
mortgaged property or from the proceeds realized from the sale of the said property and this
mortgage shall likewise stand as security therefor. . . .
We find the above stipulation to pay attorney's fees clear enough to cover both cases of foreclosure sale
mentioned thereunder, i.e., judicially or extra-judicially. While the phrase "in all cases" appears to be part
of the second sentence, a reading of the whole context of the stipulation would readily show that it
logically refers to extra-judicial foreclosure found in the first sentence and to judicial foreclosure mentioned
in the next sentence. And the ambiguity in the stipulation suggested and pointed out by the appellant by
reason of the faulty sentence construction should not be made to defeat the otherwise clear intention of
the parties in the agreement.
It is suggested by the appellant, however, that even if the above stipulation to pay attorney's fees were
applicable to the extra-judicial foreclosure sale of its real properties, still, the award of P5,821.35 for
attorney's fees has no legal justification, considering the circumstance that the PNB did not actually spend
anything by way of attorney's fees in connection with the sale. In support of this proposition, appellant
cites authorities to the effect: (1) that when the mortgagee has neither paid nor incurred any obligation to
pay an attorney in connection with the foreclosure sale, the claim for such fees should be denied; 2 and (2)
that attorney's fees will not be allowed when the attorney conducting the foreclosure proceedings is an
officer of the corporation (mortgagee) who receives a salary for all the legal services performed by him for
the corporation. 3 These authorities are indeed enlightening; but they should not be applied in this case.
The very same authority first cited suggests that said principle is not absolute, for there is authority to the
contrary. As to the fact that the foreclosure proceeding's were handled by an attorney of the legal staff of
the PNB, we are reluctant to exonerate herein appellant from the payment of the stipulated attorney's fees
on this ground alone, considering the express agreement between the parties in the mortgage contract
under which appellant became liable to pay the same. At any rate, we find merit in the contention of the
appellant that the award of P5,821.35 in favor of the PNB as attorney's fees is unconscionable and
unreasonable, considering that all that the branch attorney of the said bank did in connection with the
foreclosure sale of the real property was to file a petition with the provincial sheriff of Camarines Norte
requesting the latter to sell the same in accordance with the provisions of Act 3135.

The principle that courts should reduce stipulated attorney's fees whenever it is found under the
circumstances of the case that the same is unreasonable, is now deeply rooted in this jurisdiction to
entertain any serious objection to it. Thus, this Court has explained:
But the principle that it may be lawfully stipulated that the legal expenses involved in the collection
of a debt shall be defrayed by the debtor does not imply that such stipulations must be enforced in
accordance with the terms, no matter how injurious or oppressive they may be. The lawful purpose
to be accomplished by such a stipulation is to permit the creditor to receive the amount due him
under his contract without a deduction of the expenses caused by the delinquency of the debtor. It
should not be permitted for him to convert such a stipulation into a source of speculative profit at
the expense of the debtor.
Contracts for attorney's services in this jurisdiction stands upon an entirely different footing from
contracts for the payment of compensation for any other services. By express provision of section
29 of the Code of Civil Procedure, an attorney is not entitled in the absence of express contract to
recover more than a reasonable compensation for his services; and even when an express contract
is made the court can ignore it and limit the recovery to reasonable compensation if the amount of
the stipulated fee is found by the court to be unreasonable. This is a very different rule from that
announced in section 1091 of the Civil Code with reference to the obligation of contracts in general,
where it is said that such obligation has the force of law between the contracting parties. Had the
plaintiff herein made an express contract to pay his attorney an uncontingent fee of P2,115.25 for
the services to be rendered in reducing the note here in suit to judgment, it would not have been
enforced against him had he seen fit to oppose it, as such a fee is obviously far greater than is
necessary to remunerate the attorney for the work involved and is therefore unreasonable. In order
to enable the court to ignore an express contract for an attorney's fees, it is not necessary to show,
as in other contracts, that it is contrary to morality or public policy (Art. 1255, Civil Code). It is
enough that it is unreasonable or unconscionable. 4
Since then this Court has invariably fixed counsel fees on a quantum meruit basis whenever the fees
stipulated appear excessive, unconscionable, or unreasonable, because a lawyer is primarily a court officer
charged with the duty of assisting the court in administering impartial justice between the parties, and
hence, the fees should be subject to judicial control. Nor should it be ignored that sound public policy
demands that courts disregard stipulations for counsel fees, whenever they appear to be a source of
speculative profit at the expense of the debtor or mortgagor. 5 And it is not material that the present action
is between the debtor and the creditor, and not between attorney and client. As court have power to fix
the fee as between attorney and client, it must necessarily have the right to say whether a stipulation like
this, inserted in a mortgage contract, is valid. 6
In determining the compensation of an attorney, the following circumstances should be considered: the
amount and character of the services rendered; the responsibility imposed; the amount of money or the
value of the property affected by the controversy, or involved in the employment; the skill and experience
called for in the performance of the service; the professional standing of the attorney; the results secured;
and whether or not the fee is contingent or absolute, it being a recognized rule that an attorney may
properly charge a much larger fee when it is to be contingent than when it is not. 7 From the stipulation in
the mortgage contract earlier quoted, it appears that the agreed fee is 10% of the total indebtedness,
irrespective of the manner the foreclosure of the mortgage is to be effected. The agreement is perhaps fair
enough in case the foreclosure proceedings is prosecuted judicially but, surely, it is unreasonable when, as
in this case, the mortgage was foreclosed extra-judicially, and all that the attorney did was to file a petition
for foreclosure with the sheriff concerned. It is to be assumed though, that the said branch attorney of the
PNB made a study of the case before deciding to file the petition for foreclosure; but even with this in
mind, we believe the amount of P5,821.35 is far too excessive a fee for such services. Considering the
above circumstances mentioned, it is our considered opinion that the amount of P1,000.00 would be more
than sufficient to compensate the work aforementioned.
The next issue raised deals with the claim that the proceeds of the sale of the real properties alone
together with the amount it remitted to the PNB later was more than sufficient to liquidate its total
obligation to herein appellee bank. Again, we find merit in this claim. From the foregoing discussion of the
first two errors assigned, and for purposes of determining the total obligation of herein appellant to the
PNB as of November 21, 1961 when the real estate mortgage was foreclosed, we have the following
illustration in support of this conclusion:1wph1.t

A. I.

Principal Loan
(a) Promissory note dated August 2, 1956

P27,500.00

(1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961
(b) Promissory note dated October 19, 1956

P15,500.00

(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 1961
II.

Sheriff's fees [for two (2) day's work]

III.

Attorney's fee

8,751.78
4,734.08
10.00
1,000.00

Total obligation as of Nov. 21, 1961

P57,495.86

B. I.

Proceeds of the foreclosure sale of the real estate mortgage on Nov. 21, 1961

II.

Additional amount remitted to the PNB on Dec. 18, 1961

P56,908.00
738.59

Total amount of Payment made to PNB as of Dec. 18, 1961

P57,646.59

Deduct: Total obligation to the PNB

P57,495.86

Excess Payment to the PNB

P 150.73
========

From the foregoing illustration or computation, it is clear that there was no further necessity to foreclose
the mortgage of herein appellant's chattels on December 21, 1961; and on this ground alone, we may
declare the sale of appellant's chattels on the said date, illegal and void. But we take into consideration the
fact that the PNB must have been led to believe that the stipulated 10% of the unpaid loan for attorney's
fees in the real estate mortgage was legally maintainable, and in accordance with such belief, herein
appellee bank insisted that the proceeds of the sale of appellant's real property was deficient to liquidate
the latter's total indebtedness. Be that as it may, however, we still find the subsequent sale of herein
appellant's chattels illegal and objectionable on other grounds.
That appellant vigorously objected to the foreclosure of its chattel mortgage after the foreclosure of its real
estate mortgage on November 21, 1961, can not be doubted, as shown not only by its letter to the PNB on
November 19, 1961, but also in its letter to the provincial sheriff of Camarines Norte on the same date.
These letters were followed by another letter to the appellee bank on December 14, 1961, wherein herein
appellant, in no uncertain terms, reiterated its objection to the scheduled sale of its chattels on December
21, 1961 at Jose Panganiban, Camarines Norte for the reasons therein stated that: (1) it had settled in full
its total obligation to the PNB by the sale of the real estate and its subsequent remittance of the amount of
P738.59; and (2) that the contemplated sale at Jose Panganiban would violate their agreement embodied
under paragraph (i) in the Chattel Mortgage which provides as follows:
(i) In case of both judicial and extra-judicial foreclosure under Act 1508, as amended, the parties
hereto agree that the corresponding complaint for foreclosure or the petition for sale should be filed
with the courts or the sheriff of the City of Manila, as the case may be; and that the Mortgagor shall
pay attorney's fees hereby fixed at ten per cent (10%) of the total indebtedness then unpaid but in
no case shall it be less than P100.00, exclusive of all costs and fees allowed by law and of other
expenses incurred in connection with the said foreclosure. [Emphasis supplied]
Notwithstanding the abovequoted agreement in the chattel mortgage contract, and in utter disregard of
the objection of herein appellant to the sale of its chattels at Jose Panganiban, Camarines Norte and not in
the City of Manila as agreed upon, the PNB proceeded with the foreclosure sale of said chattels. The trial
court, however, justified said action of the PNB in the decision appealed from in the following rationale:

While it is true that it was stipulated in the chattel mortgage contract that a petition for the extrajudicial foreclosure thereof should be filed with the Sheriff of the City of Manila, nevertheless, the
effect thereof was merely to provide another place where the mortgage chattel could be sold in
addition to those specified in the Chattel Mortgage Law. Indeed, a stipulation in a contract cannot
abrogate much less impliedly repeal a specific provision of the statute. Considering that Section 14
of Act No. 1508 vests in the mortgagee the choice where the foreclosure sale should be held,
hence, in the case under consideration, the PNB had three places from which to select, namely: (1)
the place of residence of the mortgagor; (2) the place of the mortgaged chattels were situated; and
(3) the place stipulated in the contract. The PNB selected the second and, accordingly, the
foreclosure sale held in Jose Panganiban, Camarines Norte, was legal and valid.
To the foregoing conclusion, We disagree. While the law grants power and authority to the mortgagee to
sell the mortgaged property at a public place in the municipality where the mortgagor resides or where the
property is situated, 8 this Court has held that the sale of a mortgaged chattel may be made in a place
other than that where it is found, provided that the owner thereof consents thereto; or that there is an
agreement to this effect between the mortgagor and the mortgagee. 9 But when, as in this case, the parties
agreed to have the sale of the mortgaged chattels in the City of Manila, which, any way, is the residence of
the mortgagor, it cannot be rightly said that mortgagee still retained the power and authority to select
from among the places provided for in the law and the place designated in their agreement over the
objection of the mortgagor. In providing that the mortgaged chattel may be sold at the place of residence
of the mortgagor or the place where it is situated, at the option of the mortgagee, the law clearly
contemplated benefits not only to the mortgagor but to the mortgagee as well. Their right arising
thereunder, however, are personal to them; they do not affect either public policy or the rights of third
persons. They may validly be waived. So, when herein mortgagor and mortgagee agreed in the mortgage
contract that in cases of both judicial and extra-judicial foreclosure under Act 1508, as amended, the
corresponding complaint for foreclosure or the petition for sale should be filed with the courts or the
Sheriff of Manila, as the case may be, they waived their corresponding rights under the law. The correlative
obligation arising from that agreement have the force of law between them and should be complied with in
good faith. 10
By said agreement the parties waived the legal venue, and such waiver is valid and legally
effective, because it, was merely a personal privilege they waived, which is not contrary, to public
policy or to the prejudice of third persons. It is a general principle that a person may renounce any
right which the law gives unless such renunciation is expressly prohibited or the right conferred is of
such nature that its renunciation would be against public policy. 11
On the other hand, if a place of sale is specified in the mortgage and statutory requirements in
regard thereto are complied with, a sale is properly conducted in that place. Indeed, in the absence
of a statute to the contrary, a sale conducted at a place other than that stipulated for in the
mortgage is invalid, unless the mortgagor consents to such sale. 12
Moreover, Section 14 of Act 1508, as amended, provides that the officer making the sale should make a
return of his doings which shall particularly describe the articles sold and the amount received from each
article. From this, it is clear that the law requires that sale be made article by article, otherwise, it would be
impossible for him to state the amount received for each item. This requirement was totally disregarded by
the Deputy Sheriff of Camarines Norte when he sold the chattels in question in bulk, notwithstanding the
fact that the said chattels consisted of no less than twenty different items as shown in the bill of
sale. 13 This makes the sale of the chattels manifestly objectionable. And in the absence of any evidence to
show that the mortgagor had agreed or consented to such sale in gross, the same should be set aside.
It is said that the mortgagee is guilty of conversion when he sells under the mortgage but not in
accordance with its terms, or where the proceedings as to the sale of foreclosure do not comply with the
statute. 14 This rule applies squarely to the facts of this case where, as earlier shown, herein appellee bank
insisted, and the appellee deputy sheriff of Camarines Norte proceeded with the sale of the mortgaged
chattels at Jose Panganiban, Camarines Norte, in utter disregard of the valid objection of the mortgagor
thereto for the reason that it is not the place of sale agreed upon in the mortgage contract; and the said
deputy sheriff sold all the chattels (among which were a skagit with caterpillar engine, three GMC 6 x 6
trucks, a Herring Hall Safe, and Sawmill equipment consisting of a 150 HP Murphy Engine, plainer, large
circular saws etc.) as a single lot in violation of the requirement of the law to sell the same article by
article. The PNB has resold the chattels to another buyer with whom it appears to have actively cooperated

in subsequently taking possession of and removing the chattels from appellant compound by force, as
shown by the circumstance that they had to take along PC soldiers and municipal policemen of Jose
Panganiban who placed the chief security officer of the premises in jail to deprive herein appellant of its
possession thereof. To exonerate itself of any liability for the breach of peace thus committed, the PNB
would want us to believe that it was the subsequent buyer alone, who is not a party to this case, that was
responsible for the forcible taking of the property; but assuming this to be so, still the PNB cannot escape
liability for the conversion of the mortgaged chattels by parting with its interest in the property. Neither
would its claim that it afterwards gave a chance to herein appellant to repurchase or redeem the chattels,
improve its position, for the mortgagor is not under obligation to take affirmative steps to repossess the
chattels that were converted by the mortgagee. 15 As a consequence of the said wrongful acts of the PNB
and the Deputy Sheriff of Camarines Norte, therefore, We have to declare that herein appellant is entitled
to collect from them, jointly and severally, the full value of the chattels in question at the time they were
illegally sold by them. To this effect was the holding of this Court in a similar situation. 16
The effect of this irregularity was, in our opinion to make the plaintiff liable to the defendant for the
full value of the truck at the time the plaintiff thus carried it off to be sold; and of course, the
burden is on the defendant to prove the damage to which he was thus subjected. . . .
This brings us to the problem of determining the value of the mortgaged chattels at the time of their sale
in 1961. The trial court did not make any finding on the value of the chattels in the decision appealed from
and denied altogether the right of the appellant to recover the same. We find enough evidence of record,
however, which may be used as a guide to ascertain their value. The record shows that at the time herein
appellant applied for its loan with the PNB in 1956, for which the chattels in question were mortgaged as
part of the security therefore, herein appellant submitted a list of the chattels together with its application
for the loan with a stated value of P107,115.85. An official of the PNB made an inspection of the chattels in
the same year giving it an appraised value of P42,850.00 and a market value of P85,700.00. 17 The same
chattels with some additional equipment acquired by herein appellant with part of the proceeds of the loan
were reappraised in a re-inspection conducted by the same official in 1958, in the report of which he gave
all the chattels an appraised value of P26,850.00 and a market value of P48,200.00. 18 Another reinspection report in 1959 gave the appraised value as P19,400.00 and the market value at
P25,600.00. 19 The said official of the PNB who made the foregoing reports of inspection and re-inspections
testified in court that in giving the values appearing in the reports, he used a conservative method of
appraisal which, of course, is to be expected of an official of the appellee bank. And it appears that the
values were considerably reduced in all the re-inspection reports for the reason that when he went to
herein appellant's premises at the time, he found the chattels no longer in use with some of the heavier
equipments dismantled with parts thereof kept in the bodega; and finding it difficult to ascertain the value
of the dismantled chattels in such condition, he did not give them anymore any value in his reports.
Noteworthy is the fact, however, that in the last re-inspection report he made of the chattels in 1961, just a
few months before the foreclosure sale, the same inspector of the PNB reported that the heavy equipment
of herein appellant were "lying idle and rusty" but were "with a shed free from rains" 20 showing that
although they were no longer in use at the time, they were kept in a proper place and not exposed to the
elements. The President of the appellant company, on the other hand, testified that its caterpillar (tractor)
alone is worth P35,000.00 in the market, and that the value of its two trucks acquired by it with part of the
proceeds of the loan and included as additional items in the mortgaged chattels were worth no less than
P14,000.00. He likewise appraised the worth of its Murphy engine at P16,000.00 which, according to him,
when taken together with the heavy equipments he mentioned, the sawmill itself and all other equipment
forming part of the chattels under consideration, and bearing in mind the current cost of equipments these
days which he alleged to have increased by about five (5) times, could safely be estimated at P120,000.00.
This testimony, except for the appraised and market values appearing in the inspection and re-inspection
reports of the PNB official earlier mentioned, stand uncontroverted in the record; but We are not inclined to
accept such testimony at its par value, knowing that the equipments of herein appellant had been idle and
unused since it stopped operating its sawmill in 1958 up to the time of the sale of the chattels in 1961. We
have no doubt that the value of chattels was depreciated after all those years of inoperation, although
from the evidence aforementioned, We may also safely conclude that the amount of P4,200.00 for which
the chattels were sold in the foreclosure sale in question was grossly unfair to the mortgagor. Considering,
however, the facts that the appraised value of P42,850.00 and the market value of P85,700.00 originally
given by the PNB official were admittedly conservative; that two 6 x 6 trucks subsequently bought by the
appellant company had thereafter been added to the chattels; and that the real value thereof, although
depreciated after several years of inoperation, was in a way maintained because the depreciation is off-set
by the marked increase in the cost of heavy equipment in the market, it is our opinion that the market
value of the chattels at the time of the sale should be fixed at the original appraised value of P42,850.00.

Herein appellant's claim for moral damages, however, seems to have no legal or factual basis. Obviously,
an artificial person like herein appellant corporation cannot experience physical sufferings, mental anguish,
fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis of moral
damages. 21 A corporation may have a good reputation which, if besmirched, may also be a ground for the
award of moral damages. The same cannot be considered under the facts of this case, however, not only
because it is admitted that herein appellant had already ceased in its business operation at the time of the
foreclosure sale of the chattels, but also for the reason that whatever adverse effects of the foreclosure
sale of the chattels could have upon its reputation or business standing would undoubtedly be the same
whether the sale was conducted at Jose Panganiban, Camarines Norte, or in Manila which is the place
agreed upon by the parties in the mortgage contract.
But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines Norte in proceeding
with the sale in utter disregard of the agreement to have the chattels sold in Manila as provided for in the
mortgage contract, to which their attentions were timely called by herein appellant, and in disposing of the
chattels in gross for the miserable amount of P4,200.00, herein appellant should be awarded exemplary
damages in the sum of P10,000.00. The circumstances of the case also warrant the award of P3,000.00 as
attorney's fees for herein appellant.
WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed from should be, as hereby, it
is set aside. The Philippine National Bank and the Deputy Sheriff of the province of Camarines Norte are
ordered to pay, jointly and severally, to Mambulao Lumber Company the total amount of P56,000.73,
broken as follows: P150.73 overpaid by the latter to the PNB, P42,850.00 the value of the chattels at the
time of the sale with interest at the rate of 6% per annum from December 21, 1961, until fully paid,
P10,000.00 in exemplary damages, and P3,000.00 as attorney's fees. Costs against both appellees.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and Fernando, JJ., concur.
Bengzon, J.P. J., took no part.

G.R. Nos. 86883-85 January 29, 1993


PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
NORBERTO MANERO, JR., EDILBERTO MANERO, ELPIDIO MANERO, SEVERINO LINES, RUDY
LINES, EFREN PLEAGO, ROGER BEDAO, RODRIGO ESPIA, ARSENIO VILLAMOR, JR., JOHN DOE
and PETER DOE, accused.
SEVERINO LINES, RUDY LINES, EFREN PLEAGO and ROGER BENDAO, accused-appellants.
The Solicitor General for plaintiff-appellee.
Romeo P. Jorge for accused-appellants.

BELLOSILLO, J.:
This was gruesome murder in a main thoroughfare an hour before sundown. A hapless foreign religious
minister was riddled with bullets, his head shattered into bits and pieces amidst the revelling of his
executioners as they danced and laughed around their quarry, chanting the tune "Mutya Ka Baleleng", a
popular regional folk song, kicking and scoffing at his prostrate, miserable, spiritless figure that was
gasping its last. Seemingly unsatiated with the ignominy of their manslaughter, their leader picked up
pieces of the splattered brain and mockingly displayed them before horrified spectators. Some accounts
swear that acts of cannibalism ensued, although they were not sufficiently demonstrated. However, for
their outrageous feat, the gangleader already earned the monicker "cannibal priest-killer" But, what is
indubitable is that Fr. Tulio Favali 1 was senselessly killed for no apparent reason than that he was one of
the Italian Catholic missionaries laboring in heir vineyard in the hinterlands of Mindanao. 2
In the aftermath of the murder, police authorities launched a massive manhunt which resulted in the
capture of the perpetrators except Arsenio Villamor, Jr., and two unidentified persons who eluded arrest
and still remain at large.
Informations for Murder, 3 Attempted Murder 4 and Arson 5 were accordingly filed against those responsible
for the frenzied orgy of violence that fateful day of 11 April 1985. As these cases arose from the same
occasion, they were all consolidated in Branch 17 of the Regional Trial Court of Kidapawan, Cotabato. 6
After trial, the court a quo held
WHEREFORE . . . the Court finds the accused Norberto Manero, Jr. alias Commander Bucay,
Edilberto Manero alias Edil, Elpidio Manero, Severino Lines, Rudy Lines, Rodrigo Espia alias
Rudy, Efren Pleago and Roger Bedao GUILTY beyond reasonable doubt of the offense of
Murder, and with the aggravating circumstances of superior strength and treachery, hereby
sentences each of them to a penalty of imprisonment of reclusion perpetua; to pay the
Pontifical Institute of Foreign Mission (PIME) Brothers, the congregation to which Father Tulio
Favali belonged, a civil indemnity of P12,000.00; attorney's fees in the sum of P50,000.00 for
each of the eight (8) accused or a total sum of P400,000.00; court appearance fee of
P10,000.00 for every day the case was set for trial; moral damages in the sum of
P100,000.00; and to pay proportionately the costs.
Further, the Court finds the accused Norberto Manero, Jr. alias Commander Bucay GUILTY
beyond reasonable doubt of the offense of Arson and with the application of the
Indeterminate Sentence Law, hereby sentences him to an indeterminate penalty of

imprisonment of not less than four (4) years, nine (9) months, one (1) day of prision
correccional, as minimum, to six (6) years of prision correccional, as maximum, and to
indemnify the Pontifical Institute of Foreign Mission (PIME) Brothers, the congregation to
which Father Tulio Favali belonged, the sum of P19,000.00 representing the value of the
motorcycle and to pay the costs.
Finally, the Court finds the accused Norberto Manero, Jr., alias Commander Bucay, Edilberto
Manero alias Edil, Elpidio Manero, Severino Lines, Rudy Lines, Rodrigo Espia alias Rudy, Efren
Pleago and Roger Bedao GUILTY beyond reasonable doubt of the offense of Attempted
Murder and with the application of the Indeterminate Sentence Law, hereby sentences each
of them to an indeterminate penalty of imprisonment of not less than two (2) years, four (4)
months and one (1) day of prision correccional, and minimum, to eight (8) years and twenty
(20) days of prision mayor, as maximum, and to pay the complainant Rufino Robles the sum
of P20,000.00 as attorney's fees and P2,000.00 as court appearance fee for every day of
trial and to pay proportionately the costs.
The foregoing penalties shall be served by the said accused successively in the order of their
respective severity in accordance with the provisions of Article 70 of the Revised Penal Code,
as amended. 7
From this judgment of conviction only accused Severino Lines, Rudy Lines, Efren Pleago and Roger
Bedao appealed with respect to the cases for Murder and Attempted Murder. The Manero brothers as well
as Rodrigo Espia did not appeal; neither did Norberto Manero, Jr., in the Arson case. Consequently, the
decision as against them already became final.
Culled from the records, the facts are: On 11 April 1985, around 10:00 o'clock in the morning, the Manero
brothers Norberto Jr., Edilberto and Elpidio, along with Rodrigo Espia, Severino Lines, Rudy Lines, Efren
Pleago and Roger Bedao, were inside the eatery of one Reynaldo Diocades at Km. 125, La Esperanza,
Tulunan, Cotabato. They were conferring with Arsenio Villamor, Jr., private secretary to the Municipal Mayor
of Tulunan, Cotabato, and his two (2) unidentified bodyguards. Plans to liquidate a number of suspected
communist sympathizers were discussed. Arsenio Villamor, Jr. scribbled on a cigarette wrapper the
following "NPA v. NPA, starring Fr. Peter, Domingo Gomez, Bantil, Fred Gapate, Rene alias Tabagac and
Villaning." "Fr. Peter" is Fr. Peter Geremias, an Italian priest suspected of having links with the communist
movement; "Bantil" is Rufino Robles, a Catholic lay leader who is the complaining witness in the Attempted
Murder; Domingo Gomez is another lay leader, while the others are simply "messengers". On the same
occasion, the conspirators agreed to Edilberto Manero's proposal that should they fail to kill Fr. Peter
Geremias, another Italian priest would be killed in his stead. 8
At about 1:00 o'clock that afternoon, Elpidio Manero with two (2) unidentified companions nailed a placard
on a street-post beside the eatery of Deocades. The placard bore the same inscriptions as those found on
the cigarette wrapper except for the additional phrase "versus Bucay, Edil and Palo." Some two (2) hours
later, Elpidio also posted a wooden placard bearing the same message on a street cross-sign close to the
eatery. 9
Later, at 4:00 o'clock, the Manero brothers, together with Espia and the four (4) appellants, all with
assorted firearms, proceeded to the house of "Bantil", their first intended victim, which was also in the
vicinity of Deocades'carinderia. They were met by "Bantil" who confronted them why his name was
included in the placards. Edilberto brushed aside the query; instead, he asked "Bantil" if he had any
qualms about it, and without any provocation, Edilberto drew his revolver and fired at the forehead of
"Bantil". "Bantil" was able to parry the gun, albeit his right finger and the lower portion of his right ear
were hit. Then they grappled for its possession until "Bantil" was extricated by his wife from the fray. But,
as he was running away, he was again fired upon by Edilberto. Only his trousers were hit. "Bantil" however
managed to seek refuge in the house of a certain Domingo Gomez. 10 Norberto, Jr., ordered his men to

surround the house and not to allow any one to get out so that "Bantil" would die of hemorrhage. Then
Edilberto went back to the restaurant of Deocades and pistol-whipped him on the face and accused him of
being a communist coddler, while appellants and their cohorts relished the unfolding drama. 11
Moments later, while Deocades was feeding his swine, Edilberto strewed him with a burst of gunfire from
his M-14 Armalite. Deocades cowered in fear as he knelt with both hands clenched at the back of his head.
This again drew boisterous laughter and ridicule from the dreaded desperados.
At 5:00 o'clock, Fr. Tulio Favali arrived at Km. 125 on board his motorcycle. He entered the house of Gomez.
While inside, Norberto, Jr., and his co-accused Pleago towed the motorcycle outside to the center of the
highway. Norberto, Jr., opened the gasoline tank, spilled some fuel, lit a fire and burned the motorcycle. As
the vehicle was ablaze, the felons raved and rejoiced. 12
Upon seeing his motorcycle on fire, Fr. Favali accosted Norberto, Jr. But the latter simply stepped
backwards and executed a thumbs-down signal. At this point, Edilberto asked the priest: "Ano ang gusto
mo, padre (What is it you want, Father)? Gusto mo, Father, bukon ko ang ulo mo (Do you want me, Father,
to break your head)?" Thereafter, in a flash, Edilberto fired at the head of the priest. As Fr. Favali dropped
to the ground, his hands clasped against his chest, Norberto, Jr., taunted Edilberto if that was the only way
he knew to kill a priest. Slighted over the remark, Edilberto jumped over the prostrate body three (3)
times, kicked it twice, and fired anew. The burst of gunfire virtually shattered the head of Fr. Favali, causing
his brain to scatter on the road. As Norberto, Jr., flaunted the brain to the terrified onlookers, his brothers
danced and sang "Mutya Ka Baleleng" to the delight of their comrades-in-arms who now took guarded
positions to isolate the victim from possible assistance. 13
In seeking exculpation from criminal liability, appellants Severino Lines, Rudy Lines, Efren Pleago and
Roger Bedao contend that the trial court erred in disregarding their respective defenses of alibi which, if
properly appreciated, would tend to establish that there was no prior agreement to kill; that the intended
victim was Fr. Peter Geremias, not Fr. Tulio Favali; that there was only one (1) gunman, Edilberto; and, that
there was absolutely no showing that appellants cooperated in the shooting of the victim despite their
proximity at the time to Edilberto.
But the evidence on record does not agree with the arguments of accused-appellants.
On their defense of alibi, accused brothers Severino and Rudy Lines claim that they were harvesting palay
the whole day of 11 April 1985 some one kilometer away from the crime scene. Accused Roger Bedao
alleges that he was on an errand for the church to buy lumber and nipa in M'lang, Cotabato, that morning
of 11 April 1985, taking along his wife and sick child for medical treatment and arrived in La Esperanza,
Tulunan, past noontime.
Interestingly, all appellants similarly contend that it was only after they heard gunshots that they rushed to
the house of Norberto Manero, Sr., Barangay Captain of La Esperanza, where they were joined by their
fellow CHDF members and co-accused, and that it was only then that they proceeded together to where
the crime took place at Km. 125.
It is axiomatic that the accused interposing the defense of alibi must not only be at some other place but
that it must also be physically impossible for him to be at the scene of the crime at the time of its
commission. 14
Considering the failure of appellants to prove the required physical impossibility of being present at the
crime scene, as can be readily deduced from the proximity between the places where accused-appellants
were allegedly situated at the time of the commission of the offenses and the locus criminis, 15 the defense
of alibi is definitely feeble. 16 After all, it has been the consistent ruling of this Court that no physical
impossibility exists in instances where it would take the accused only fifteen to twenty minutes by jeep or

tricycle, or some one-and-a-half hours by foot, to traverse the distance between the place where he
allegedly was at the time of commission of the offense and the scene of the crime. 17 Recently, we ruled
that there can be no physical impossibility even if the distance between two places is merely two (2) hours
by bus.18 More important, it is well-settled that the defense of alibi cannot prevail over
the positive identification of the authors of the crime by the prosecution witnesses. 19
In the case before Us, two (2) eyewitnesses, Reynaldo Deocades and Manuel Bantolo, testified that they
were both inside the eatery at about 10:00 o'clock in the morning of 11 April 1985 when the Manero
brothers, together with appellants, first discussed their plan to kill some communist sympathizers. The
witnesses also testified that they still saw the appellants in the company of the Manero brothers at 4:00
o'clock in the afternoon when Rufino Robles was shot. Further, at 5:00 o'clock that same afternoon,
appellants were very much at the scene of the crime, along with the Manero brothers, when Fr. Favali was
brutally murdered. 20 Indeed, in the face of such positive declarations that appellants were at the locus
criminis from 10:00 o'clock in the morning up to about 5:00 o'clock in the afternoon, the alibi of appellants
that they were somewhere else, which is negative in nature, cannot prevail. 21 The presence of appellants
in the eatery at Km. 125 having been positively established, all doubts that they were not privy to the plot
to liquidate alleged communist sympathizers are therefore removed. There was direct proof to link them to
the conspiracy.
There is conspiracy when two or more persons come to an agreement to commit a crime and decide to
commit it. 22It is not essential that all the accused commit together each and every act constitutive of the
offense. 23 It is enough that an accused participates in an act or deed where there is singularity of purpose,
and unity in its execution is present. 24
The findings of the court a quo unmistakably show that there was indeed a community of design as
evidenced by the concerted acts of all the accused. Thus
The other six accused, 25 all armed with high powered firearms, were positively identified
with Norberto Manero, Jr. and Edilberto Manero in the carinderia of Reynaldo Deocades in La
Esperanza, Tulunan, Cotabato at 10:00 o'clock in the morning of 11 April 1985 morning . . .
they were outside of the carinderia by the window near the table where Edilberto Manero,
Norberto Manero, Jr., Jun Villamor, Elpidio Manero and unidentified members of the airborne
from Cotabato were grouped together. Later that morning, they all went to the cockhouse
nearby to finish their plan and drink tuba. They were seen again with Edilberto Manero and
Norberto Manero, Jr., at 4:00 o'clock in the afternoon of that day near the house of Rufino
Robles (Bantil) when Edilberto Manero shot Robles. They surrounded the house of Domingo
Gomez where Robles fled and hid, but later left when Edilberto Manero told them to leave as
Robles would die of hemorrhage. They followed Fr. Favali to Domingo Gomez' house,
witnessed and enjoyed the burning of the motorcycle of Fr. Favali and later stood guard with
their firearms ready on the road when Edilberto Manero shot to death Fr. Favali. Finally, they
joined Norberto Manero, Jr. and Edilberto Manero in their enjoyment and merriment on the
death of the priest.26
From the foregoing narration of the trial court, it is clear that appellants were not merely innocent
bystanders but were in fact vital cogs in perpetrating the savage murder of Fr. Favali and the attempted
murder of Rufino Robles by the Manero brothers and their militiamen. For sure, appellants all assumed a
fighting stance to discourage if not prevent any attempt to provide assistance to the fallen priest. They
surrounded the house of Domingo Gomez to stop Robles and the other occupants from leaving so that the
wounded Robles may die of hemorrhage. 27Undoubtedly, these were overt acts to ensure success of the
commission of the crimes and in furtherance of the aims of the conspiracy. The appellants acted in concert
in the murder of Fr. Favali and in the attempted murder of Rufino Robles. While accused-appellants may not
have delivered the fatal shots themselves, their collective action showed a common intent to commit the
criminal acts.

While it may be true that Fr. Favali was not originally the intended victim, as it was Fr. Peter Geremias
whom the group targetted for the kill, nevertheless, Fr. Favali was deemed a good substitute in the murder
as he was an Italian priest. On this, the conspirators expressly agreed. As witness Manuel Bantolo
explained 28
Q Aside from those persons listed in that paper to be killed, were there other
persons who were to be liquidated?
A There were some others.
Q Who were they?
A They said that if they could not kill those persons listed in that paper then
they will (sic) kill anyone so long as he is (sic) an Italian and if they could not
kill the persons they like to kill they will (sic) make Reynaldo Deocades as their
sample.
That appellants and their co-accused reached a common understanding to kill another Italian priest in the
event that Fr. Peter Geremias could not be spotted was elucidated by Bantolo thus 29
Q Who suggested that Fr. Peter be the first to be killed?
A All of them in the group.
Q What was the reaction of Norberto Manero with respect to the plan to kill Fr.
Peter?
A He laughed and even said, "amo ina" meaning "yes, we will kill him ahead."
xxx xxx xxx
Q What about Severino Lines? What was his reaction?
A He also laughed and so conformed and agreed to it.
Q Rudy Lines.
A He also said "yes".
Q What do you mean "yes"?
A He also agreed and he was happy and said "yes" we will kill him.
xxx xxx xxx
Q What about Efren Pleago?
A He also agreed and even commented laughing "go ahead".
Q Roger Bedao, what was his reaction to that suggestion that should they fail
to kill Fr. Peter, they will (sic) kill anybody provided he is an Italian and if not,
they will (sic) make Reynaldo Deocades an example?

A He also agreed laughing.


Conspiracy or action in concert to achieve a criminal design being sufficiently shown, the act of one is the
act of all the other conspirators, and
the precise extent or modality of participation of each of them becomes secondary. 30
The award of moral damages in the amount of P100,000.00 to the congregation, the Pontifical Institute of
Foreign Mission (PIME) Brothers, is not proper. There is nothing on record which indicates that the
deceased effectively severed his civil relations with his family, or that he disinherited any member thereof,
when he joined his religious congregation. As a matter of fact, Fr. Peter Geremias of the same
congregation, who was then a parish priest of Kidapawan, testified that "the religious family belongs to the
natural family of origin." 31 Besides, as We already held,32 a juridical person is not entitled to moral
damages because, not being a natural person, it cannot experience physical suffering or such sentiments
as wounded feelings, serious anxiety, mental anguish or moral shock. It is only when a juridical person has
a good reputation that is debased, resulting in social humiliation, that moral damages may be awarded.
Neither can We award moral damages to the heirs of the deceased who may otherwise be lawfully entitled
thereto pursuant to par. (3), Art. 2206, of the Civil Code, 33 for the reason that the heirs never presented
any evidence showing that they suffered mental anguish; much less did they take the witness stand. It has
been held 34 that moral damages and their causal relation to the defendant's acts should be satisfactorily
proved by the claimant. It is elementary that in order that moral damages may be awarded there must be
proof of moral suffering. 35 However, considering that the brutal slaying of Fr. Tulio Favali was attended with
abuse of superior strength, cruelty and ignominy by deliberately and inhumanly augmenting the pain and
anguish of the victim, outraging or scoffing at his person or corpse, exemplary damages may be awarded
to the lawful heirs, 36 even though not proved nor expressly pleaded in the complaint, 37 and the amount of
P100,000.00 is considered reasonable.
With respect to the civil indemnity of P12,000.00 for the death of Fr. Tulio Favali, the amount is increased to
P50,000.00 in accordance with existing jurisprudence, which should be paid to the lawful heirs, not the
PIME as the trial court ruled.
WHEREFORE, the judgment appealed from being in accord with law and the evidence is AFFIRMED with the
modification that the civil indemnity which is increased from P12,000.00 to P50,000.00 is awarded to the
lawful heirs of the deceased plus exemplary damages of P100,000.00; however, the award of moral
damages is deleted.
Costs against accused-appellants.
SO ORDERED.
Cruz, Padilla and Grio-Aquino, JJ., concur.

G.R. No. L-12719

May 31, 1962

THE COLLECTOR OF INTERNAL REVENUE, petitioner,


vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.
Office of the Solicitor General for petitioner.
V. Jaime and L. E. Petilla for respondent.
PAREDES, J.:
This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the Collector
of Internal Revenue, assessing against and demanding from the "Club Filipino, Inc. de Cebu", the sum of
P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty, allegedly due from it as a
keeper of bar and restaurant.
As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a civic
corporation organized under the laws of the Philippines with an original authorized capital stock of
P22,000.00, which was subsequently increased to P200,000.00, among others, to it "proporcionar, operar,
y mantener un campo de golf, tenis, gimnesio (gymnasiums), juego de bolos (bowling alleys), mesas de
billar y pool, y toda clase de juegos no prohibidos por leyes generales y ordenanzas generales; y desarollar
y cultivar deportes de toda clase y denominacion cualquiera para el recreo y entrenamiento saludable de
sus miembros y accionistas" (sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh. A). Neither in the
articles or by-laws is there a provision relative to dividends and their distribution, although it is covenanted
that upon its dissolution, the Club's remaining assets, after paying debts, shall be donated to a charitable
Philippine Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a.).
The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the
government), and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to
its members and their guests. The bar-restaurant was a necessary incident to the operation of the club and
its golf-course. The club is operated mainly with funds derived from membership fees and dues. Whatever
profits it had, were used to defray its overhead expenses and to improve its golf-course. In 1951. as a
result of a capital surplus, arising from the re-valuation of its real properties, the value or price of which
increased, the Club declared stock dividends; but no actual cash dividends were distributed to the
stockholders. In 1952, a BIR agent discovered that the Club has never paid percentage tax on the gross
receipts of its bar and restaurant, although it secured B-4, B-9(a) and B-7 licenses. In a letter dated
December 22, 1852, the Collector of Internal Revenue assessed against and demanded from the Club, the
following sums:
As percentage tax on its gross receipts
during the tax years 1946 to 1951
Surcharge therein

P9,599.07
2,399.77

As fixed tax for the years 1946 to 1952


Compromise penalty

70.00
500.00

The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been
denied, the Club filed the instant petition for review.
The dominant issues involved in this case are twofold:
1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and percentage
taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax Code, under which the
assessment was made, in connection with the operation of its bar and restaurant, during the periods
mentioned above; and
2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.

Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a business on
which the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos for each calendar year
or fraction thereof in which such person shall engage in said business." Section 183 provides in general
that "the percentage taxes on business shall be payable at the end of each calendar quarter in the amount
lawfully due on the business transacted during each quarter; etc." And section 191, same Tax Code,
provides "Percentage tax . . . Keepers of restaurants, refreshment parlors and other eating places shall pay
a tax three per centum, and keepers of bar and cafes where wines or liquors are served five per centum of
their gross receipts . . .". It has been held that the liability for fixed and percentage taxes, as provided by
these sections, does not ipso facto attach by mere reason of the operation of a bar and restaurant. For the
liability to attach, the operator thereof must be engaged in the business as a barkeeper and restaurateur.
The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose
or livelihood is the motive, and the term business when used without qualification, should be construed in
its plain and ordinary meaning, restricted to activities for profit or livelihood (The Coll. of Int. Rev. v. Manila
Lodge No. 761 of the BPOE [Manila Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959,
giving full definitions of the word "business"; Coll. of Int. Rev. v. Sweeney, et al. [International Club of Iloilo,
Inc.], G.R. No. L-12178, Aug. 21, 1959, the facts of which are similar to the ones at bar; Manila Polo Club v.
B. L. Meer, etc., No. L-10854, Jan. 27, 1960).
Having found as a fact that the Club was organized to develop and cultivate sports of all class and
denomination, for the healthful recreation and entertainment of its stockholders and members; that upon
its dissolution, its remaining assets, after paying debts, shall be donated to a charitable Philippine
Institution in Cebu; that it is operated mainly with funds derived from membership fees and dues; that the
Club's bar and restaurant catered only to its members and their guests; that there was in fact no cash
dividend distribution to its stockholders and that whatever was derived on retail from its bar and
restaurant was used to defray its overall overhead expenses and to improve its golf-course (cost-plusexpenses-basis), it stands to reason that the Club is not engaged in the business of an operator of bar and
restaurant (same authorities, cited above).
It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does
not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary adjuncts of
the Club to foster its purposes and the profits derived therefrom are necessarily incidental to the primary
object of developing and cultivating sports for the healthful recreation and entertainment of the
stockholders and members. That a Club makes some profit, does not make it a profit-making Club. As has
been remarked a club should always strive, whenever possible, to have surplus (Jesus Sacred Heart College
v. Collector of Int. Rev., G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R.
No. L-9276, Oct. 23, 1956).1wph1.t
It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club is a stock
corporation. This is unmeritorious. The facts that the capital stock of the respondent Club is divided into
shares, does not detract from the finding of the trial court that it is not engaged in the business of operator
of bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its
object or purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not
controlled by the corporate form or by the commercial aspect of the business prosecuted, but may be
shown by extrinsic evidence, including the by-laws and the method of operation. From the extrinsic
evidence adduced, the Tax Court concluded that the Club is not engaged in the business as a barkeeper
and restaurateur.
Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock
divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments
of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case at bar, nowhere in
its articles of incorporation or by-laws could be found an authority for the distribution of its dividends or
surplus profits. Strictly speaking, it cannot, therefore, be considered a stock corporation, within the
contemplation of the corporation law.
A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, nonstock
organizations, unless the intent to the contrary is manifest and patent" (Collector v. BPOE Elks Club, et
al., supra), which is not the case in the present appeal.

Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a
bar and restaurant, and therefore, not liable for fixed and percentage taxes, it follows that it is not liable
for any penalty, much less of a compromise penalty.
WHEREFORE, the decision appealed from is affirmed without costs.
Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera and Dizon, JJ., concur.
Bengzon, C.J., is on leave.

G.R. No. 58168 December 19, 1989


CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD MAGSAYSAY-CABRERA, LUISA MAGSAYSAYCORPUZ, assisted be her husband, Dr. Jose Corpuz, FELICIDAD P. MAGSAYSAY, and MERCEDES
MAGSAYSAY-DIAZ, petitioners,
vs.
THE COURT OF APPEALS and ADELAIDA RODRIGUEZ-MAGSAYSAY, Special Administratrix of the
Estate of the late Genaro F. Magsaysay respondents.

FERNAN, C.J.:
In this petition for review on certiorari, petitioners seek to reverse and set aside [1] the decision of the
Court of Appeals dated July l3, 1981, 1 affirming that of the Court of First Instance of Zambales and
Olongapo City which denied petitioners' motion to intervene in an annulment suit filed by herein private
respondent, and [2] its resolution dated September 7, 1981, denying their motion for reconsideration.
Petitioners are raising a purely legal question; whether or not respondent Court of Appeals correctly denied
their motion for intervention.
The facts are not controverted.
On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and special administratix of the estate of the
late Senator Genaro Magsaysay, brought before the then Court of First Instance of Olongapo an action
against Artemio Panganiban, Subic Land Corporation (SUBIC), Filipinas Manufacturer's Bank (FILMANBANK)
and the Register of Deeds of Zambales. In her complaint, she alleged that in 1958, she and her husband
acquired, thru conjugal funds, a parcel of land with improvements, known as "Pequena Island", covered by
TCT No. 3258; that after the death of her husband, she discovered [a] an annotation at the back of TCT No.
3258 that "the land was acquired by her husband from his separate capital;" [b] the registration of a Deed
of Assignment dated June 25, 1976 purportedly executed by the late Senator in favor of SUBIC, as a result
of which TCT No. 3258 was cancelled and TCT No. 22431 issued in the name of SUBIC; and [c] the
registration of Deed of Mortgage dated April 28, 1977 in the amount of P 2,700,000.00 executed by SUBIC
in favor of FILMANBANK; that the foregoing acts were void and done in an attempt to defraud the conjugal
partnership considering that the land is conjugal, her marital consent to the annotation on TCT No. 3258
was not obtained, the change made by the Register of Deeds of the titleholders was effected without the
approval of the Commissioner of Land Registration and that the late Senator did not execute the purported
Deed of Assignment or his consent thereto, if obtained, was secured by mistake, violence and intimidation.
She further alleged that the assignment in favor of SUBIC was without consideration and consequently null
and void. She prayed that the Deed of Assignment and the Deed of Mortgage be annulled and that the
Register of Deeds be ordered to cancel TCT No. 22431 and to issue a new title in her favor.
On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for intervention on the
ground that on June 20, 1978, their brother conveyed to them one-half (1/2 ) of his shareholdings in SUBIC
or a total of 416,566.6 shares and as assignees of around 41 % of the total outstanding shares of such
stocks of SUBIC, they have a substantial and legal interest in the subject matter of litigation and that they
have a legal interest in the success of the suit with respect to SUBIC.
On July 26, 1979, the court denied the motion for intervention, and ruled that petitioners have no legal
interest whatsoever in the matter in litigation and their being alleged assignees or transferees of certain
shares in SUBIC cannot legally entitle them to intervene because SUBIC has a personality separate and
distinct from its stockholders.

On appeal, respondent Court of Appeals found no factual or legal justification to disturb the findings of the
lower court. The appellate court further stated that whatever claims the petitioners have against the late
Senator or against SUBIC for that matter can be ventilated in a separate proceeding, such that with the
denial of the motion for intervention, they are not left without any remedy or judicial relief under existing
law.
Petitioners' motion for reconsideration was denied. Hence, the instant recourse.
Petitioners anchor their right to intervene on the purported assignment made by the late Senator of a
certain portion of his shareholdings to them as evidenced by a Deed of Sale dated June 20, 1978. 2 Such
transfer, petitioners posit, clothes them with an interest, protected by law, in the matter of litigation.
Invoking the principle enunciated in the case of PNB v. Phil. Veg. Oil Co., 49 Phil. 857,862 & 853
(1927), 3petitioners strongly argue that their ownership of 41.66% of the entire outstanding capital stock of
SUBIC entitles them to a significant vote in the corporate affairs; that they are affected by the action of the
widow of their late brother for it concerns the only tangible asset of the corporation and that it appears
that they are more vitally interested in the outcome of the case than SUBIC.
Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the respondent
court's holding that petitioners herein have no legal interest in the subject matter in litigation so as to
entitle them to intervene in the proceedings below. In the case of Batama Farmers' Cooperative Marketing
Association, Inc. v. Rosal, 4 we held: "As clearly stated in Section 2 of Rule 12 of the Rules of Court, to be
permitted to intervene in a pending action, the party must have a legal interest in the matter in litigation,
or in the success of either of the parties or an interest against both, or he must be so situated as to be
adversely affected by a distribution or other disposition of the property in the custody of the court or an
officer thereof ."
To allow intervention, [a] it must be shown that the movant has legal interest in the matter in litigation, or
otherwise qualified; and [b] consideration must be given as to whether the adjudication of the rights of the
original parties may be delayed or prejudiced, or whether the intervenor's rights may be protected in a
separate proceeding or not. Both requirements must concur as the first is not more important than the
second. 5
The interest which entitles a person to intervene in a suit between other parties must be in the matter in
litigation and of such direct and immediate character that the intervenor will either gain or lose by the
direct legal operation and effect of the judgment. Otherwise, if persons not parties of the action could be
allowed to intervene, proceedings will become unnecessarily complicated, expensive and interminable.
And this is not the policy of the law. 6
The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and which
would put the intervenor in a legal position to litigate a fact alleged in the complaint, without the
establishment of which plaintiff could not recover. 7
Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural,
consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a
right in the management of the corporation and to share in the profits thereof and in the properties and
assets thereof on dissolution, after payment of the corporate debts and obligations.
While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it
does not vest the owner thereof with any legal right or title to any of the property, his interest in the
corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of
corporate property, which is owned by the corporation as a distinct legal person. 8

Petitioners further contend that the availability of other remedies, as declared by the Court of appeals, is
totally immaterial to the availability of the remedy of intervention.
We cannot give credit to such averment. As earlier stated, that the movant's interest may be protected in a
separate proceeding is a factor to be considered in allowing or disallowing a motion for intervention. It is
significant to note at this juncture that as per records, there are four pending cases involving the parties
herein, enumerated as follows: [1] Special Proceedings No. 122122 before the CFI of Manila, Branch XXII,
entitled "Concepcion Magsaysay-Labrador, et al. v. Subic Land Corp., et al.", involving the validity of the
transfer by the late Genaro Magsaysay of one-half of his shareholdings in Subic Land Corporation; [2] Civil
Case No. 2577-0 before the CFI of Zambales, Branch III, "Adelaida Rodriguez-Magsaysay v. Panganiban,
etc.; Concepcion Labrador, et al. Intervenors", seeking to annul the purported Deed of Assignment in favor
of SUBIC and its annotation at the back of TCT No. 3258 in the name of respondent's deceased husband;
[3] SEC Case No. 001770, filed by respondent praying, among other things that she be declared in her
capacity as the surviving spouse and administratrix of the estate of Genaro Magsaysay as the sole
subscriber and stockholder of SUBIC. There, petitioners, by motion, sought to intervene. Their motion to
reconsider the denial of their motion to intervene was granted; [4] SP No. Q-26739 before the CFI of Rizal,
Branch IV, petitioners herein filing a contingent claim pursuant to Section 5, Rule 86, Revised Rules of
Court.9 Petitioners' interests are no doubt amply protected in these cases.
Neither do we lend credence to petitioners' argument that they are more interested in the outcome of the
case than the corporation-assignee, owing to the fact that the latter is willing to compromise with widowrespondent and since a compromise involves the giving of reciprocal concessions, the only conceivable
concession the corporation may give is a total or partial relinquishment of the corporate assets. 10
Such claim all the more bolsters the contingent nature of petitioners' interest in the subject of litigation.
The factual findings of the trial court are clear on this point. The petitioners cannot claim the right to
intervene on the strength of the transfer of shares allegedly executed by the late Senator. The corporation
did not keep books and records. 11 Perforce, no transfer was ever recorded, much less effected as to
prejudice third parties. The transfer must be registered in the books of the corporation to affect third
persons. The law on corporations is explicit. Section 63 of the Corporation Code provides, thus: "No
transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books
of the corporation showing the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares transferred."
And even assuming arguendo that there was a valid transfer, petitioners are nonetheless barred from
intervening inasmuch as their rights can be ventilated and amply protected in another proceeding.
WHEREFORE, the instant petition is hereby DENIED. Costs against petitioners.
SO ORDERED.
Gutierrez, Jr., Bidin and Corte's, JJ., concur.
Feliciano, J., is on leave.

G.R. No. L-48627 June 30, 1987


FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners
vs.
THE HONORABLE COURT OF APPEALS and ALBERTO V. ARELLANO, respondents.

CRUZ, J.:
We gave limited due course to this petition on the question of the solidary liability of the petitioners with
their co-defendants in the lower court 1 because of the challenge to the following paragraph in the
dispositive portion of the decision of the respondent court: *
1. Defendants are hereby ordered to jointly and severally pay the plaintiff the amount of
P50,000.00 for the preparation of the project study and his technical services that led to the
organization of the defendant corporation, plus P10,000.00 attorney's fees; 2
The petitioners claim that this order has no support in fact and law because they had no contract
whatsoever with the private respondent regarding the above-mentioned services. Their position is that as
mere subsequent investors in the corporation that was later created, they should not be held solidarily
liable with the Filipinas Orient Airways, a separate juridical entity, and with Barretto and Garcia, their codefendants in the lower court, ** who were the ones who requested the said services from the private
respondent. 3
We are not concerned here with the petitioners' co-defendants, who have not appealed the decision of the
respondent court and may, for this reason, be presumed to have accepted the same. For purposes of
resolving this case before us, it is not necessary to determine whether it is the promoters of the proposed
corporation, or the corporation itself after its organization, that shall be responsible for the expenses
incurred in connection with such organization.
The only question we have to decide now is whether or not the petitioners themselves
are also and personally liable for such expenses and, if so, to what extent.
The reasons for the said order are given by the respondent court in its decision in this wise:
As to the 4th assigned error we hold that as to the remuneration due the plaintiff for the
preparation of the project study and the pre-organizational services in the amount of
P50,000.00, not only the defendant corporation but the other defendants including
defendants Caram should be jointly and severally liable for this amount. As we above related
it was upon the request of defendants Barretto and Garcia that plaintiff handled the
preparation of the project study which project study was presented to defendant Caram so
the latter was convinced to invest in the proposed airlines. The project study was revised for
purposes of presentation to financiers and the banks. It was on the basis of this study that
defendant corporation was actually organized and rendered operational. Defendants Garcia
and Caram, and Barretto became members of the Board and/or officers of defendant
corporation. Thus, not only the defendant corporation but all the other defendants who were
involved in the preparatory stages of the incorporation, who caused the preparation and/or
benefited from the project study and the technical services of plaintiff must be liable. 4
It would appear from the above justification that the petitioners were not really involved in the initial steps
that finally led to the incorporation of the Filipinas Orient Airways. Elsewhere in the decision, Barretto was
described as "the moving spirit." The finding of the respondent court is that the project study was

undertaken by the private respondent at the request of Barretto and Garcia who, upon its completion,
presented it to the petitioners to induce them to invest in the proposed airline. The study could have been
presented to other prospective investors. At any rate, the airline was eventually organized on the basis of
the project study with the petitioners as major stockholders and, together with Barretto and Garcia, as
principal officers.
The following portion of the decision in question is also worth considering:
... Since defendant Barretto was the moving spirit in the pre-organization work of defendant
corporation based on his experience and expertise, hence he was logically compensated in
the amount of P200,000.00 shares of stock not as industrial partner but more for his
technical services that brought to fruition the defendant corporation. By the same token, We
find no reason why the plaintiff should not be similarly compensated not only for having
actively participated in the preparation of the project study for several months and its
subsequent revision but also in his having been involved in the pre-organization of the
defendant corporation, in the preparation of the franchise, in inviting the interest of the
financiers and in the training and screening of personnel. We agree that for these special
services of the plaintiff the amount of P50,000.00 as compensation is reasonable. 5
The above finding bolsters the conclusion that the petitioners were not involved in the initial stages of the
organization of the airline, which were being directed by Barretto as the main promoter. It was he who was
putting all the pieces together, so to speak. The petitioners were merely among the financiers whose
interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in
the proposed airline.
Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation and did not
have a separate juridical personality, to justify making the petitioners, as principal stockholders thereof,
responsible for its obligations. As a bona fide corporation, the Filipinas Orient Airways should alone be
liable for its corporate acts as duly authorized by its officers and directors.
In the light of these circumstances, we hold that the petitioners cannot be held personally liable for the
compensation claimed by the private respondent for the services performed by him in the organization of
the corporation. To repeat, the petitioners did not contract such services. It was only the results of such
services that Barretto and Garcia presented to them and which persuaded them to invest in the proposed
airline. The most that can be said is that they benefited from such services, but that surely is no
justification to hold them personally liable therefor. Otherwise, all the other stockholders of the
corporation, including those who came in later, and regardless of the amount of their share holdings, would
be equally and personally liable also with the petitioners for the claims of the private respondent.
The petition is rather hazy and seems to be flawed by an ambiguous ambivalence. Our impression is that it
is opposed to the imposition of solidary responsibility upon the Carams but seems to be willing, in a vague,
unexpressed offer of compromise, to accept joint liability. While it is true that it does here and there
disclaim total liability, the thrust of the petition seems to be against the imposition of solidary liability only
rather than against any liability at all, which is what it should have categorically argued.
Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly and severally, under
the first paragraph of the dispositive portion of the challenged decision. So holding, we find it unnecessary
to examine at this time the rules on solidary obligations, which the parties-needlessly, as it turns out have
belabored unto death.
WHEREFORE, the petition is granted. The petitioners are declared not liable under the challenged decision,
which is hereby modified accordingly. It is so ordered.

Yap (Chairman), Narvasa, Melencio-Herrera, Feliciano and Sarmiento, JJ., concur.


Gancayco, J., took no part.

G.R. No. L-56076 September 21, 1983


PALAY, INC. and ALBERT ONSTOTT, petitioner,
vs.
JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING AUTHORITY and
NAZARIO DUMPIT respondents.
Santos, Calcetas-Santos & Geronimo Law Office for petitioner.
Wilfredo E. Dizon for private respondent.

MELENCIO-HERRERA, J.:
The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in O.P. Case No.
1459, directing petitioners Palay, Inc. and Alberto Onstott jointly and severally, to refund to private
respondent, Nazario Dumpit, the amount of P13,722.50 with 12% interest per annum, as resolved by the
National Housing Authority in its Resolution of July 10, 1979 in Case No. 2167, as well as the Resolution of
October 28, 1980 denying petitioners' Motion for Reconsideration of said Resolution of May 2, 1980, are
being assailed in this petition.
On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott executed in favor of private
respondent, Nazario Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the Crestview
Heights Subdivision in Antipolo, Rizal, with an area of 1,165 square meters, - covered by TCT No. 90454,
and owned by said corporation. The sale price was P23,300.00 with 9% interest per annum, payable with a
downpayment of P4,660.00 and monthly installments of P246.42 until fully paid. Paragraph 6 of the
contract provided for automatic extrajudicial rescission upon default in payment of any monthly
installment after the lapse of 90 days from the expiration of the grace period of one month, without need
of notice and with forfeiture of all installments paid.
Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The last
payment was made on December 5, 1967 for installments up to September 1967.
On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to update all
his overdue accounts with interest, and seeking its written consent to the assignment of his rights to a
certain Lourdes Dizon. He followed this up with another letter dated June 20, 1973 reiterating the same
request. Replying petitioners informed respondent that his Contract to Sell had long been rescinded
pursuant to paragraph 6 of the contract, and that the lot had already been resold.
Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the
National Housing Authority (NHA) for reconveyance with an altenative prayer for refund (Case No. 2167). In
a Resolution, dated July 10, 1979, the NHA, finding the rescission void in the absence of either judicial or
notarial demand, ordered Palay, Inc. and Alberto Onstott in his capacity as President of the corporation,
jointly and severally, to refund immediately to Nazario Dumpit the amount of P13,722.50 with 12% interest
from the filing of the complaint on November 8, 1974. Petitioners' Motion for Reconsideration of said
Resolution was denied by the NHA in its Order dated October 23, 1979. 1
On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary to law
(O.P. Case No. 1459), respondent Presidential Executive Assistant, on May 2, 1980, affirmed the Resolution
of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus, the present petition
wherein the following issues are raised:

I
Whether notice or demand is not mandatory under the circumstances and, therefore, may
be dispensed with by stipulation in a contract to sell.
II
Whether petitioners may be held liable for the refund of the installment payments made by
respondent Nazario M. Dumpit.
III
Whether the doctrine of piercing the veil of corporate fiction has application to the case at
bar.
IV
Whether respondent Presidential Executive Assistant committed grave abuse of discretion in
upholding the decision of respondent NHA holding petitioners solidarily liable for the refund
of the installment payments made by respondent Nazario M. Dumpit thereby denying
substantial justice to the petitioners, particularly petitioner Onstott
We issued a Temporary Restraining Order on Feb 11, 1981 enjoining the enforcement of the questioned
Resolutions and of the Writ of Execution that had been issued on December 2, 1980. On October 28, 1981,
we dismissed the petition but upon petitioners' motion, reconsidered the dismissal and gave due course to
the petition on March 15, 1982.
On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without prior
notice or demand upon respondent in view of paragraph 6 thereof which provides6. That in case the BUYER falls to satisfy any monthly installment or any other payments
herein agreed upon, the BUYER shall be granted a month of grace within which to make the
payment of the t in arrears together with the one corresponding to the said month of grace.
-It shall be understood, however, that should the month of grace herein granted to the
BUYER expire, without the payment & corresponding to both months having been satisfied,
an interest of ten (10%) per cent per annum shall be charged on the amounts the BUYER
should have paid; it is understood further, that should a period of NINETY (90) DAYS elapse
to begin from the expiration of the month of grace hereinbefore mentioned, and the BUYER
shall not have paid all the amounts that the BUYER should have paid with the corresponding
interest up to the date, the SELLER shall have the right to declare this contract cancelled
and of no effect without notice, and as a consequence thereof, the SELLER may dispose of
the lot/lots covered by this Contract in favor of other persons, as if this contract had never
been entered into. In case of such cancellation of this Contract, all the amounts which may
have been paid by the BUYER in accordance with the agreement, together with all the
improvements made on the premises, shall be considered as rents paid for the use and
occupation of the above mentioned premises and for liquidated damages suffered by virtue
of the failure of the BUYER to fulfill his part of this agreement : and the BUYER hereby
renounces his right to demand or reclaim the return of the same and further obligates
peacefully to vacate the premises and deliver the same to the SELLER.
Well settled is the rule, as held in previous jurisprudence, 2 that judicial action for the rescission of a
contract is not necessary where the contract provides that it may be revoked and cancelled for violation of
any of its terms and conditions. However, even in the cited cases, there was at least a written notice sent

to the defaulter informing him of the rescission. As stressed in University of the Philippines vs. Walfrido de
los Angeles 3 the act of a party in treating a contract as cancelled should be made known to the other. We
quote the pertinent excerpt:
Of course, it must be understood that the act of a party in treating a contract as cancelled or
resolved in account of infractions by the other contracting party must be made known to the
other and is always provisional being ever subject to scrutiny and review by the proper
court. If the other party denies that rescission is justified it is free to resort to judicial action
in its own behalf, and bring the matter to court.Then, should the court, after due hearing,
decide that the resolution of the contract was not warranted, the responsible party will be
sentenced to damages; in the contrary case, the resolution will be affirmed, and the
consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its own
risk. For it is only the final judgment of the corresponding court that will conclusively and
finally settle whether the action taken was or was not correct in law. But the law definitely
does not require that the contracting party who believes itself injured must first file suit and
wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the
party injured by the other's breach will have to passively sit and watch its damages
accumulate during the pendency of the suit until the final judgment of rescission is rendered
when the law itself requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203).
We see no conflict between this ruling and the previous jurisprudence of this Court invoked
by respondent declaring that judicial action is necessary for the resolution of a reciprocal
obligation (Ocejo Perez & Co., vs. International Banking Corp., 37 Phil. 631; Republic vs.
Hospital de San Juan De Dios, et al., 84 Phil 820) since in every case where the extrajudicial
resolution is contested only the final award of the court of competent jurisdiction can
conclusively settle whether the resolution was proper or not. It is in this sense that judicial
action win be necessary, as without it, the extrajudicial resolution will remain contestable
and subject to judicial invalidation unless attack thereon should become barred by
acquiescense, estoppel or prescription.
Fears have been expressed that a stipulation providing for a unilateral rescission in case of
breach of contract may render nugatory the general rule requiring judicial action (v.
Footnote, Padilla Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already
observed, in case of abuse or error by the rescinder the other party is not barred from
questioning in court such abuse or error, the practical effect of the stipulation being merely
to transfer to the defaulter the initiative of instituting suit, instead of the
rescinder (Emphasis supplied).
Of similar import is the ruling in Nera vs. Vacante 4, reading:
A stipulation entitling one party to take possession of the land and building if the other party
violates the contract does not ex propio vigore confer upon the former the right to take
possession thereof if objected to without judicial intervention and determination.
This was reiterated in Zulueta vs. Mariano 5 where we held that extrajudicial rescission has legal effect
where the other party does not oppose it. 6 Where it is objected to, a judicial determination of the issue is
still necessary.

In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully
impugned in Court. If the debtor impugns the declaration, it shall be subject to judicial determination.

In this case, private respondent has denied that rescission is justified and has resorted to judicial action. It
is now for the Court to determine whether resolution of the contract by petitioners was warranted.
We hold that resolution by petitioners of the contract was ineffective and inoperative against private
respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra
Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there was no contract to rescind in
court because from the moment the petitioner defaulted in the timely payment of the installments, the
contract between the parties was deemed ipso facto rescinded." However, it should be noted that even in
that case notice in writing was made to the vendee of the cancellation and annulment of the contract
although the contract entitled the seller to immediate repossessing of the land upon default by the buyer.
The indispensability of notice of cancellation to the buyer was to be later underscored in Republic Act No.
6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment Payments." which took
effect on September 14, 1972, when it specifically provided:
Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days from
receipt by the buyer of the notice of cancellation or the demand for rescission of the
contract by a notarial act and upon full payment of the cash surrender value to the buyer.
(Emphasis supplied).
The contention that private respondent had waived his right to be notified under paragraph 6 of the
contract is neither meritorious because it was a contract of adhesion, a standard form of petitioner
corporation, and private respondent had no freedom to stipulate. A waiver must be certain and
unequivocal, and intelligently made; such waiver follows only where liberty of choice has been fully
accorded. 9 Moreover, it is a matter of public policy to protect buyers of real estate on installment
payments against onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive
condition to buyers of real estate on installment payments.
Regarding the second issue on refund of the installment payments made by private
respondent. Article 1385 of the Civil Code provides:
ART. 1385. Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be
carried out only when he who demands rescission can return whatever he may be obliged to
restore.
Neither sham rescission take place when the things which are the object of the contract are
legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.
As a consequence of the resolution by petitioners, rights to the lot should be restored to private
respondent or the same should be replaced by another acceptable lot. However, considering that the
property had already been sold to a third person and there is no evidence on record that other lots are still
available, private respondent is entitled to the refund of installments paid plus interest at the legal rate of
12% computed from the date of the institution of the action. 10 It would be most inequitable if petitioners
were to be allowed to retain private respondent's payments and at the same time appropriate the
proceeds of the second sale to another.

We come now to the third and fourth issues regarding the personal liability of petitioner Onstott who was
made jointly and severally liable with petitioner corporation for refund to private respondent of the total
amount the latter had paid to petitioner company. It is basic that a corporation is invested by law with a
personality separate and distinct from those of the persons composing it as wen as from that of any other
legal entity to which it may be related. 11 As a general rule, a corporation may not be made to answer for
acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice
versa. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end
subversive of justice 12 ; or for purposes that could not have been intended by the law that created it 13 ; or
to defeat public convenience, justify wrong, protect fraud, or defend crime. 14 ; or to perpetuate fraud or
confuse legitimate issues 15 ; or to circumvent the law or perpetuate deception 16 ; or as an alter ego,
adjunct or business conduit for the sole benefit of the stockholders. 17
We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on paragraph 6
(supra) of its contract with private respondent when it rescinded the contract to sell extrajudicially and had
sold it to a third person.
In this case, petitioner Onstott was made liable because he was then the President of the corporation and
he a to be the controlling stockholder. No sufficient proof exists on record that said petitioner used the
corporation to defraud private respondent. He cannot, therefore, be made personally liable just because he
"appears to be the controlling stockholder". Mere ownership by a single stockholder or by another
corporation is not of itself sufficient ground for disregarding the separate corporate personality. 18 In this
respect then, a modification of the Resolution under review is called for.
WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is hereby
modified. Petitioner Palay, Inc. is directed to refund to respondent Nazario M. Dumpit the amount of
P13,722.50, with interest at twelve (12%) percent per annum from November 8, 1974, the date of the filing
of the Complaint. The temporary Restraining Order heretofore issued is hereby lifted.
No costs.
SO ORDERED.

Plana, Relova and Gutierrez, Jr., JJ., concur.


Teehankee, J., concurs in the result.

G.R. No. 129459 September 29, 1998


SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner,
vs.
COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL
DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents.

PANGANIBAN, J.:
May corporate treasurer, by herself and without any authorization from he board of directors, validly sell a
parcel of land owned by the corporation?. May the veil of corporate fiction be pierced on the mere ground
that almost all of the shares of stock of the corporation are owned by said treasurer and her husband?
The Case
These questions are answered in the negative by this Court in resolving the Petition for Review
on Certiorari before us, assailing the March 18, 1997 Decision 1 of the Court of Appeals 2 in CA GR CV No.
46801 which, in turn, modified the July 18, 1994 Decision of the Regional Trial Court of Makati, Metro
Manila, Branch 63 3 in Civil Case No. 89-3511. The RTC dismissed both the Complaint and the Counterclaim
filed by the parties. On the other hand, the Court of Appeals ruled:
WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH MODIFICATION
ordering defendant-appellee Nenita Lee Gruenberg to REFUND or return to plaintiff-appellant
the downpayment of P100,000.00 which she received from plaintiff-appellant. There is no
pronouncement as to costs. 4
The petition also challenges the June 10, 1997 CA Resolution denying reconsideration.

The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.'s amended complaint
alleged that on 14 February 1989, plaintiff-appellant entered into an agreement with
defendant-appellee Motorich Sales Corporation for the transfer to it of a parcel of land
identified as Lot 30, Block 1 of the Acropolis Greens Subdivision located in the District of
Murphy, Quezon City. Metro Manila, containing an area of Four Hundred Fourteen (414)
square meters, covered by TCT No. (362909) 2876: that as stipulated in the Agreement of 14
February 1989, plaintiff-appellant paid the downpayment in the sum of One Hundred
Thousand (P100,000.00) Pesos, the balance to be paid on or before March 2, 1989; that on
March 1, 1989. Mr. Andres T. Co, president of plaintiff-appellant corporation, wrote a letter to
defendant-appellee Motorich Sales Corporation requesting for a computation of the balance
to be paid: that said letter was coursed through defendant-appellee's broker. Linda Aduca,
who wrote the computation of the balance: that on March 2, 1989, plaintiff-appellant was
ready with the amount corresponding to the balance, covered by Metrobank Cashier's Check
No. 004223, payable to defendant-appellee Motorich Sales Corporation; that plaintiffappellant and defendant-appellee Motorich Sales Corporation were supposed to meet in the
office of plaintiff-appellant but defendant-appellee's treasurer, Nenita Lee Gruenberg, did not
appear; that defendant-appellee Motorich Sales Corporation despite repeated demands and
in utter disregard of its commitments had refused to execute the Transfer of Rights/Deed of
Assignment which is necessary to transfer the certificate of title; that defendant ACL

Development Corp. is impleaded as a necessary party since Transfer Certificate of Title No.
(362909) 2876 is still in the name of said defendant; while defendant JNM Realty &
Development Corp. is likewise impleaded as a necessary party in view of the fact that it is
the transferor of right in favor of defendant-appellee Motorich Sales Corporation: that on
April 6, 1989, defendant ACL Development Corporation and Motorich Sales Corporation
entered into a Deed of Absolute Sale whereby the former transferred to the latter the subject
property; that by reason of said transfer, the Registry of Deeds of Quezon City issued a new
title in the name of Motorich Sales Corporation, represented by defendant-appellee Nenita
Lee Gruenberg and Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571; that
as a result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's
bad faith in refusing to execute a formal Transfer of Rights/Deed of Assignment, plaintiffappellant suffered moral and nominal damages which may be assessed against defendantsappellees in the sum of Five Hundred Thousand (500,000.00) Pesos; that as a result of
defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's unjustified and
unwarranted failure to execute the required Transfer of Rights/Deed of Assignment or formal
deed of sale in favor of plaintiff-appellant, defendants-appellees should be assessed
exemplary damages in the sum of One Hundred Thousand (P100,000.00) Pesos; that by
reason of defendants-appellees' bad faith in refusing to execute a Transfer of Rights/Deed of
Assignment in favor of plaintiff-appellant, the latter lost the opportunity to construct a
residential building in the sum of One Hundred Thousand (P100,000.00) Pesos; and that as a
consequence of defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporation's bad faith in refusing to execute a deed of sale in favor of plaintiff-appellant, it
has been constrained to obtain the services of counsel at an agreed fee of One Hundred
Thousand (P100,000.00) Pesos plus appearance fee for every appearance in court hearings.
In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee Gruenberg
interposed as affirmative defense that the President and Chairman of Motorich did not sign
the agreement adverted to in par. 3 of the amended complaint; that Mrs. Gruenberg's
signature on the agreement (ref: par. 3 of Amended Complaint) is inadequate to bind
Motorich. The other signature, that of Mr. Reynaldo Gruenberg, President and Chairman of
Motorich, is required: that plaintiff knew this from the very beginning as it was presented a
copy of the Transfer of Rights (Annex B of amended complaint) at the time the Agreement
(Annex B of amended complaint) was signed; that plaintiff-appellant itself drafted the
Agreement and insisted that Mrs. Gruenberg accept the P100,000.00 as earnest money; that
granting, without admitting, the enforceability of the agreement, plaintiff-appellant
nonetheless failed to pay in legal tender within the stipulated period (up to March 2, 1989);
that it was the understanding between Mrs. Gruenberg and plaintiff-appellant that the
Transfer of Rights/Deed of Assignment will be signed only upon receipt of cash payment;
thus they agreed that if the payment be in check, they will meet at a bank designated by
plaintiff-appellant where they will encash the check and sign the Transfer of Rights/Deed.
However, plaintiff-appellant informed Mrs. Gruenberg of the alleged availability of the check,
by phone, only after banking hours.
On the basis of the evidence, the court a quo rendered the judgment appealed from[,]
dismissing plaintiff-appellant's complaint, ruling that:
The issue to be resolved is: whether plaintiff had the right to compel
defendants to execute a deed of absolute sale in accordance with the
agreement of February 14, 1989: and if so, whether plaintiff is entitled to
damage.
As to the first question, there is no evidence to show that defendant Nenita
Lee Gruenberg was indeed authorized by defendant corporation. Motorich

Sales, to dispose of that property covered by T.C.T. No. (362909) 2876. Since
the property is clearly owned by the corporation. Motorich Sales, then its
disposition should be governed by the requirement laid down in Sec. 40. of the
Corporation Code of the Philippines, to wit:
Sec. 40, Sale or other disposition of assets. Subject to the
provisions of existing laws on illegal combination and
monopolies, a corporation may by a majority vote of its board of
directors . . . sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its property and
assets including its goodwill . . . when authorized by the vote of
the stockholders representing at least two third (2/3) of the
outstanding capital stock . . .
No such vote was obtained by defendant Nenita Lee Gruenberg for that
proposed sale[;] neither was there evidence to show that the supposed
transaction was ratified by the corporation. Plaintiff should have been on the
look out under these circumstances. More so, plaintiff himself [owns] several
corporations (tsn dated August 16, 1993, p. 3) which makes him
knowledgeable on corporation matters.
Regarding the question of damages, the Court likewise, does not find
substantial evidence to hold defendant Nenita Lee Gruenberg liable
considering that she did not in anyway misrepresent herself to be authorized
by the corporation to sell the property to plaintiff (tsn dated September 27,
1991, p. 8).
In the light of the foregoing, the Court hereby renders judgment DISMISSING
the complaint at instance for lack of merit.
"Defendants" counterclaim is also DISMISSED for lack of basis. (Decision, pp.
7-8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered into by and between:
MOTORICH SALES CORPORATION, a corporation duly organized and existing
under and by virtue of Philippine Laws, with principal office address at 5510
South Super Hi-way cor. Balderama St., Pio del Pilar. Makati, Metro Manila,
represented herein by its Treasurer, NENITA LEE GRUENBERG, hereinafter
referred to as the TRANSFEROR;
and
SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly organized
and existing under and by virtue of the laws of the Philippines, with principal
office address at Sumulong Highway, Barrio Mambungan, Antipolo, Rizal,

represented herein by its President, ANDRES T. CO, hereinafter referred to as


the TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as Lot 30 Block 1 of
the ACROPOLIS GREENS SUBDIVISION located at the District of Murphy, Quezon City, Metro
Manila, containing an area of FOUR HUNDRED FOURTEEN (414) SQUARE METERS, covered by
a TRANSFER OF RIGHTS between JNM Realty & Dev. Corp. as the Transferor and Motorich
Sales Corp. as the Transferee;
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties have
agreed as follows:
1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED PESOS
(P5,200.00) per square meter; subject to the following terms:
a. Earnest money amounting to ONE HUNDRED THOUSAND
PESOS (P100,000.00), will be paid upon the execution of this
agreement and shall form part of the total purchase price;
b. Balance shall be payable on or before March 2, 1989;
2. That the monthly amortization for the month of February 1989 shall be for
the account of the Transferor; and that the monthly amortization starting
March 21, 1989 shall be for the account of the Transferee;
The transferor warrants that he [sic] is the lawful owner of the above-described property and
that there [are] no existing liens and/or encumbrances of whatsoever nature;
In case of failure by the Transferee to pay the balance on the date specified on 1, (b), the
earnest money shall be forfeited in favor of the Transferor.
That upon full payment of the balance, the TRANSFEROR agrees to execute a TRANSFER OF
RIGHTS/DEED OF ASSIGNMENT in favor of the TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th day of February,
1989 at Greenhills, San Juan, Metro Manila, Philippines.
MOTORICH SALES CORPORATION SAN JUAN STRUCTURAL & STEEL FABRICATORS
TRANSFEROR TRANSFEREE
[SGD.] [SGD.]
By. NENITA LEE GRUENBERG By: ANDRES T. CO
Treasurer President
Signed In the presence of:
[SGD.] [SGD.]

6
In its recourse before the Court of Appeals, petitioner insisted:
1. Appellant is entitled to compel the appellees to execute a Deed of Absolute
Sale in accordance with the Agreement of February 14, 1989,
2. Plaintiff is entitled to damages.

As stated earlier, the Court of Appeals debunked petitioner's arguments and affirmed the Decision of the
RTC with the modification that Respondent Nenita Lee Gruenberg was ordered to refund P100,000 to
petitioner, the amount remitted as "downpayment" or "earnest money." Hence, this petition before us. 8
The Issues
Before this Court, petitioner raises the following issues:
I. Whether or not the doctrine of piercing the veil of corporate fiction is
applicable in the instant case
II. Whether or not the appellate court may consider matters which the parties
failed to raise in the lower court
III. Whether or not there is a valid and enforceable contract between the
petitioner and the respondent corporation
IV. Whether or not the Court of Appeals erred in holding that there is a valid
correction/substitution of answer in the transcript of stenographic note[s].
V. Whether or not respondents are liable for damages and attorney's fees

The Court synthesized the foregoing and will thus discuss them seriatim as follows:
1. Was there a valid contract of sale between petitioner and Motorich?
2. May the doctrine of piercing the veil of corporate fiction be applied to
Motorich?
3. Is the alleged alteration of Gruenberg's testimony as recorded in the
transcript of stenographic notes material to the disposition of this case?
4. Are respondents liable for damages and attorney's fees?
The Court's Ruling
The petition is devoid of merit.
First Issue: Validity of Agreement
Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14, 1989, it entered
through its president, Andres Co, into the disputed Agreement with Respondent Motorich Sales
Corporation, which was in turn allegedly represented by its treasurer, Nenita Lee Gruenberg. Petitioner
insists that "[w]hen Gruenberg and Co affixed their signatures on the contract they both consented to be

bound by the terms thereof." Ergo, petitioner contends that the contract is binding on the two
corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the Agreement, according to which a lot owned by
Motorich Sales Corporation was purportedly sold. Such contract, however, cannot bind Motorich, because it
never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the
property of the corporation is not the property of its stockholders or members and may not be sold by the
stockholders or members without express authorization from the corporation's board of
directors. 10 Section 23 of BP 68, otherwise known as the Corporation Code of the Philippines, provides;
Sec. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors
or trustees to be elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year and until their
successors are elected and qualified.
Indubitably, a corporation may act only through its board of directors or, when authorized either by its
bylaws or by its board resolution, through its officers or agents in the normal course of business. The
general principles of agency govern the relation between the corporation and its officers or agents, subject
to the articles of incorporation, bylaws, or relevant provisions of law. 11 Thus, this Court has held that "a
corporate officer or agent may represent and bind the corporation in transactions with third persons to the
extent that the authority to do so has been conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual course of the particular business, are
incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and
usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation
has caused persons dealing with the officer or agent to believe that it has conferred." 12
Furthermore, the Court has also recognized the rule that "persons dealing with an assumed agent, whether
the assumed agency be a general or special one bound at their peril, if they would hold the principal liable,
to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is
controverted, the burden of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil.
19)." 13 Unless duly authorized, a treasurer, whose powers are limited, cannot bind the corporation in a
sale of its assets. 14
In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita Gruenberg, its
treasurer, to sell the subject parcel of land. 15 Consequently, petitioner had the burden of proving that
Nenita Gruenberg was in fact authorized to represent and bind Motorich in the transaction. Petitioner failed
to discharge this burden. Its offer of evidence before the trial court contained no proof of such
authority. 16 It has not shown any provision of said respondent's articles of incorporation, bylaws or board
resolution to prove that Nenita Gruenberg possessed such power.
That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the responsibility of
ascertaining the extent of her authority to represent the corporation. Petitioner cannot assume that she, by
virtue of her position, was authorized to sell the property of the corporation. Selling is obviously foreign to
a corporate treasurer's function, which generally has been described as "to receive and keep the funds of
the corporation, and to disburse them in accordance with the authority given him by the board or the
properly authorized officers." 17
Neither was such real estate sale shown to be a normal business activity of Motorich. The primary purpose
of Motorich is marketing, distribution, export and import in relation to a general merchandising

business. 18 Unmistakably, its treasurer is not cloaked with actual or apparent authority to buy or sell real
property, an activity which falls way beyond the scope of her general authority.
Art. 1874 and 1878 of the Civil Code of the Philippines provides:
Art. 1874. When a sale of a piece of land or any interest therein is through an agent, the
authority of the latter shall be in writing: otherwise, the sale shall be void.
Art. 1878. Special powers of attorney are necessary in the following case:
xxx xxx xxx
(5) To enter any contract by which the ownership of an immovable is transmitted or acquired
either gratuitously or for a valuable consideration;
xxx xxx xxx.
Petitioner further contends that Respondent Motorich has ratified said contract of sale because of its
"acceptance of benefits," as evidenced by the receipt issued by Respondent Gruenberg. 19 Petitioner is
clutching at straws.
As a general rule, the acts of corporate officers within the scope of their authority are binding on the
corporation. But when these officers exceed their authority, their actions "cannot bind the corporation,
unless it has ratified such acts or is estopped from disclaiming them." 20
In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg, or made it
appear to any third person that she had the authority, to sell its land or to receive the earnest money.
Neither was there any proof that Motorich ratified, expressly or impliedly, the contract. Petitioner rests its
argument on the receipt which, however, does not prove the fact of ratification. The document is a handwritten one, not a corporate receipt, and it bears only Nenita Gruenberg's signature. Certainly, this
document alone does not prove that her acts were authorized or ratified by Motorich.
Art. 1318 of the Civil Code lists the requisites of a valid and perfected contract: "(1) consent of the
contracting parties; (2) object certain which is the subject matter of the contract; (3) cause of the
obligation which is established." As found by the trial court 21 and affirmed by the Court of Appeals, 22 there
is no evidence that Gruenberg was authorized to enter into the contract of sale, or that the said contract
was ratified by Motorich. This factual finding of the two courts is binding on this Court. 23 As the consent of
the seller was not obtained, no contract to bind the obligor was perfected. Therefore, there can be no valid
contract of sale between petitioner and Motorich.
Because Motorich had never given a written authorization to Respondent Gruenberg to sell its parcel of
land, we hold that the February 14, 1989 Agreement entered into by the latter with petitioner is void under
Article 1874 of the Civil Code. Being inexistent and void from the beginning, said contract cannot be
ratified. 24
Second Issue:
Piercing the Corporate Veil Not Justified
Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because the latter is
a close corporation. Since "Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all or almost
all or 99.866% to be accurate, of the subscribed capital stock" 25 of Motorich, petitioner argues that
Gruenberg needed no authorization from the board to enter into the subject contract. 26 It adds that, being

solely owned by the Spouses Gruenberg, the company can treated as a close corporation which can be
bound by the acts of its principal stockholder who needs no specific authority. The Court is not persuaded.
First, petitioner itself concedes having raised the issue belatedly, 27 not having done so during the trial, but
only when it filed its sur-rejoinder before the Court of Appeals. 28 Thus, this Court cannot entertain said
issue at this late stage of the proceedings. It is well-settled the points of law, theories and arguments not
brought to the attention of the trial court need not be, and ordinarily will not be, considered by a reviewing
court, as they cannot be raised for the first time on appeal. 29Allowing petitioner to change horses in
midstream, as it were, is to run roughshod over the basic principles of fair play, justice and due process.
Second, even if the above mentioned argument were to be addressed at this time, the Court still finds no
reason to uphold it. True, one of the advantages of a corporate form of business organization is the
limitation of an investor's liability to the amount of the investment. 30 This feature flows from the legal
theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily
granted privilege of a corporate veil may be used only for legitimate purposes. 31 On equitable
considerations, the veil can be disregarded when it is utilized as a shield to commit fraud, illegality or
inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or business
conduit of a person or an instrumentality, agency or adjunct of another corporation. 32
Thus, the Court has consistently ruled that "[w]hen the fiction is used as a means of perpetrating a fraud
or an illegal act or as vehicle for the evasion of an existing obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with
which the law covers and isolates the corporation from the members or stockholders who compose it will
be lifted to allow for its consideration merely as an aggregation of individuals." 33
We stress that the corporate fiction should be set aside when it becomes a shield against liability for fraud,
illegality or inequity committed on third persons. The question of piercing the veil of corporate fiction is
essentially, then, a matter of proof. In the present case, however, the Court finds no reason to pierce the
corporate veil of Respondent Motorich. Petitioner utterly failed to establish that said corporation was
formed, or that it is operated, for the purpose of shielding any alleged fraudulent or illegal activities of its
officers or stockholders; or that the said veil was used to conceal fraud, illegality or inequity at the expense
of third persons like petitioner.
Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the Corporation
Code defines a close corporation as follows:
Sec. 96. Definition and Applicability of Title. A close corporation, within the meaning of
this Code, is one whose articles of incorporation provide that: (1) All of the corporation's
issued stock of all classes, exclusive of treasury shares, shall be held of record by not more
than a specified number of persons, not exceeding twenty (20); (2) All of the issued stock of
all classes shall be subject to one or more specified restrictions on transfer permitted by this
Title; and (3) The corporation shall not list in any stock exchange or make any public offering
of any of its stock of any class. Notwithstanding the foregoing, a corporation shall be
deemed not a close corporation when at least two-thirds (2/3) of its voting stock or voting
rights is owned or controlled by another corporation which is not a close corporation within
the meaning of this Code. . . . .
The articles of incorporation 34 of Motorich Sales Corporation does not contain any provision stating that (1)
the number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted in favor of any
stockholder or of the corporation, or (3) listing its stocks in any stock exchange or making a public offering
of such stocks is prohibited. From its articles, it is clear that Respondent Motorich is not a close
corporation. 35 Motorich does not become one either, just because Spouses Reynaldo and Nenita
Gruenberg owned 99.866% of its subscribed capital stock. The "[m]ere ownership by a single stockholder

or by another corporation of all or capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personalities." 36 So, too, a narrow distribution of ownership does not,
by itself, make a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals 37 wherein the Court ruled that ". . .
petitioner corporation is classified as a close corporation and, consequently, a board resolution authorizing
the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its
president." 38 But the factual milieu in Dulay is not on all fours with the present case. In Dulay, the sale of
real property was contracted by the president of a close corporation with the knowledge and acquiescence
of its board of directors. 39 In the present case, Motorich is not a close corporation, as previously discussed,
and the agreement was entered into by the corporate treasurer without the knowledge of the board of
directors.
The Court is not unaware that there are exceptional cases where "an action by a director, who singly is the
controlling stockholder, may be considered as a binding corporate act and a board action as nothing more
than a mere formality." 40 The present case, however, is not one of them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own "almost 99.866%" of Respondent
Motorich.41 Since Nenita is not the sole controlling stockholder of Motorich, the aforementioned exception
does not apply. Grantingarguendo that the corporate veil of Motorich is to be disregarded, the subject
parcel of land would then be treated as conjugal property of Spouses Gruenberg, because the same was
acquired during their marriage. There being no indication that said spouses, who appear to have been
married before the effectivity of the Family Code, have agreed to a different property regime, their
property relations would be governed by conjugal partnership of gains. 42 As a consequence, Nenita
Gruenberg could not have effected a sale of the subject lot because "[t]here is no co-ownership between
the spouses in the properties of the conjugal partnership of gains. Hence, neither spouse can alienate in
favor of another his or interest in the partnership or in any property belonging to it; neither spouse can ask
for a partition of the properties before the partnership has been legally dissolved." 43
Assuming further, for the sake of argument, that the spouses' property regime is the absolute community
of property, the sale would still be invalid. Under this regime, "alienation of community property must have
the written consent of the other spouse or he authority of the court without which the disposition or
encumbrance is void." 44 Both requirements are manifestly absent in the instant case.
Third Issue: Challenged Portion of TSN Immaterial
Petitioner calls our attention to the following excerpt of the transcript of stenographic notes (TSN):
Q Did you ever represent to Mr. Co that you were authorized by the
corporation to sell the property?
A Yes, sir.

45

Petitioner claims that the answer "Yes" was crossed out, and, in its place was written a "No" with an initial
scribbled above it.46 This, however, is insufficient to prove that Nenita Gruenberg was authorized to
represent Respondent Motorich in the sale of its immovable property. Said excerpt be understood in the
context of her whole testimony. During her cross-examination. Respondent Gruenberg testified:
Q So, you signed in your capacity as the treasurer?
[A] Yes, sir.
Q Even then you kn[e]w all along that you [were] not authorized?

A Yes, sir.
Q You stated on direct examination that you did not represent that you were
authorized to sell the property?
A Yes, sir.
Q But you also did not say that you were not authorized to sell the property,
you did not tell that to Mr. Co, is that correct?
A That was not asked of me.
Q Yes, just answer it.
A I just told them that I was the treasurer of the corporation and it [was] also
the president who [was] also authorized to sign on behalf of the corporation.
Q You did not say that you were not authorized nor did you say that you were
authorized?
A Mr. Co was very interested to purchase the property and he offered to put
up a P100,000.00 earnest money at that time. That was our first meeting. 47
Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its property. On the
other hand, her testimony demonstrates that the president of Petitioner Corporation, in his great desire to
buy the property, threw caution to the wind by offering and paying the earnest money without first
verifying Gruenberg's authority to sell the lot.
Fourth Issue:
Damages and Attorney's Fees
Finally, petitioner prays for damages and attorney's fees, alleging that "[i]n an utter display of malice and
bad faith, respondents attempted and succeeded in impressing on the trial court and [the] Court of
Appeals that Gruenberg did not represent herself as authorized by Respondent Motorich despite the
receipt issued by the former specifically indicating that she was signing on behalf of Motorich Sales
Corporation. Respondent Motorich likewise acted in bad faith when it claimed it did not authorize
Respondent Gruenberg and that the contract [was] not binding, [insofar] as it [was] concerned, despite
receipt and enjoyment of the proceeds of Gruenberg's act." 48 Assuming that Respondent Motorich was not
a party to the alleged fraud, petitioner maintains that Respondent Gruenberg should be held liable
because she "acted fraudulently and in bad faith [in] representing herself as duly authorized by
[R]espondent [C]orporation." 49
As already stated, we sustain the findings of both the trial and the appellate courts that the foregoing
allegations lack factual bases. Hence, an award of damages or attorney's fees cannot be justified. The
amount paid as "earnest money" was not proven to have redounded to the benefit of Respondent
Motorich. Petitioner claims that said amount was deposited to the account of Respondent Motorich,
because "it was deposited with the account of Aren Commercial c/o Motorich Sales
Corporation." 50 Respondent Gruenberg, however, disputes the allegations of petitioner. She testified as
follows:
Q You voluntarily accepted the P100,000.00, as a matter of fact, that was
encashed, the check was encashed.

A Yes. sir, the check was paid in my name and I deposit[ed] it.
Q In your account?
A Yes, sir.

51

In any event, Gruenberg offered to return the amount to petitioner ". . . since the sale did not push
through." 52
Moreover, we note that Andres Co is not a neophyte in the world of corporate business. He has been the
president of Petitioner Corporation for more than ten years and has also served as chief executive of two
other corporate entities. 53 Co cannot feign ignorance of the scope of the authority of a corporate treasurer
such as Gruenberg. Neither can he be oblivious to his duty to ascertain the scope of Gruenberg's
authorization to enter into a contract to sell a parcel of land belonging to Motorich.
Indeed, petitioner's claim of fraud and bad faith is unsubstantiated and fails to persuade the Court.
Indubitably, petitioner appears to be the victim of its own officer's negligence in entering into a contract
with and paying an unauthorized officer of another corporation.
As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be ordered to return to
petitioner the amount she received as earnest money, as "no one shall enrich himself at the expense of
another." 54 a principle embodied in Article 2154 of Civil Code. 55 Although there was no binding relation
between them, petitioner paid Gruenberg on the mistaken belief that she had the authority to sell the
property of Motorich. 56 Article 2155 of Civil Code provides that "[p]ayment by reason of a mistake in the
contruction or application of a difficult question of law may come within the scope of the preceding article."
WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.
SO ORDERED.
Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.

G.R. No. 80043

June 6, 1991

ROBERTO A. JACINTO, petitioner,


vs.
HONORABLE COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents.
Romeo G. Carlos for petitioner.
Jorge, Perez & Associates for private respondents.

DAVIDE, JR., J.:


This is an appeal by certiorari to partially set aside the Decision of the Court of Appeals in C.A-G.R. CV No.
081531.promulgated on 19 August 1987, which affirmed in toto the decision of the Regional Trial Court of
Manila, Branch 11, in Civil Case No. 133164 entitled "Metropolitan Bank and Trust Co. vs. Inland Industries
Inc. and Roberto Jacinto," the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered ordering defendants to pay, jointly and severally, the
plaintiff, the principal obligation of P382,015.80 (Annex J-1 to J-3 of Stipulation), with
interest/charges thereon at the rate of 16 % per annum from January 1, 1979 up to the time the
said amount is fully paid, plus the sum of P20,000.00 as attorney's fees. Said defendants are further
ordered to pay in solidum the costs of this suit.
SO ORDERED.2
Petitioner's co-defendant in the courts below, Inland Industries Inc., just as in the case of petitioner's
motion to reconsider the questioned decision, 3 chose not to join him in this appeal.
In Our resolution of 28 August 1988 We required the respondent to comment on the petition. Respondent
Metropolitan Bank and Trust Co. filed its comment4 on 12 October 1988. We required the petitioner to file a
reply thereto,5 which he comment plied with on 20 December 1988.6
We gave due course to the petition on 8 May 19897 and required the parties to submit their respective
memoranda.
Private respondent filed its memorandum on 29 June 19898 while petitioner asked leave to adopt his
petition and reply as his memorandum,9 which We granted on 14 June 1989.10
Petitioner submits the following issues:
1. Whether or not the respondent Court of Appeals can validly pierce the fiction of corporate
identity of the defendant corporation Inland Industries, Inc. even if there is no allegation in the
complaint regarding the same, nor is there anything in the prayer demanding the piercing of the
corporate veil of the corporation Inland Industries, Inc.;
2. Whether or not the Court of Appeals can validly pierce the fiction of corporate identity of the
defendant Inland Industries, Inc. even if absolutely no proof was presented in court to serve as legal
justification for the same.
We find this petition to be bereft of merit. The issues are basically factual and a careful scrutiny of the
decisions of both courts below reveals that their findings and conclusions on the matter of piercing the veil
of corporate fiction and on the liability of herein petitioner are overwhelmingly supported by the evidence.
Insofar as material and relevant to the issues raised, the trial court found and held: 11

As to [the] liability of [the] defendant Roberto A. Jacinto, it would appear that he is in factetum (sic),
or, in fact, the corporation itself known as Inland Industries, Inc. Aside from the fact that he is
admittedly the President and General Manager of the corporation and a substantial stockholders
(sic) thereof, it was defendant Roberto A. Jacinto who dealt entirely with the plaintiff in those
transactions. In the Trust Receipts that he signed supposedly in behalf of Inland Industries, Inc., it is
not even mentioned that he did so in this official capacity.
xxx

xxx

xxx

In this case, the Court is satisfied that Roberto A. Jacinto was practically the corporation itself, the
Inland industries, Inc.
In a detailed fashion, the respondent Court of Appeals brushed aside the posturing of petitioner as follows:
Defendant Roberto Jacinto, tried to escape liability and shift the entire blame under the trust
receipts solely and exclusively on defendant-appellant corporation. He asserted that he cannot be
held solidarily liable with the latter (defendant corporation) because he just signed said instruments
in his official capacity as president of Inland Industries, Inc. and the latter (defendant corporation)
has a juridical personality distinct and separate from its officers and stockholders. It is likewise
asserted, citing an American case, that the principle of piercing the fiction of corporate entity
should be applied with great caution and not precipitately, because a dual personality by a
corporation and its stockholders would defeat the principal purpose for which a corporation is
formed. Upon the other hand, plaintiff-appellee reiterated its allegation in the complaint that
defendant corporation is just a mere alter ego of defendant Roberto Jacinto who is its President and
General Manager, while the wife of the latter owns a majority of its shares of stock.
Defendants-appellants' assertion is plainly without legal basis. This is shown by the undisputed fact
that Roberto Jacinto even admitted that he and his wife own 52% of the stocks of defendant
corporation (TSN, April 22, 1985, p. 6). We cannot accept as true the assertion of defendant Jacinto
that he only acted in his official capacity as President and General Manager of Inland Industries, Inc.
when he signed the aforesaid trust receipts. To Our mind the same is just a clever ruse and a
convenient ploy to thwart his personal liability therefor by taking refuge under the protective
mantle of the separate corporate personality of defendant corporation.
As could be expected, Roberto Jacinto in his direct testimony presented a different corporate
scenario regarding Inland Industries, Inc. and vehemently declared that it is Bienvenida Catabas
who is its President, while Aurora Heresa is its Chairman of the Board. His assertion on this point,
however, is not convincing in view of his admission in the same breath, that his wife, Hedy U.
Jacinto, own (sic) with him 52% of the shares of stock of said corporation. Indeed, this circumstance
even if standing alone cannot but engender in the most unprejudiced mind doubt and
misgiving why Catabas and Heresa would be defendant corporation's President and Chairman of the
Board, respectively. Pertinent portion of his testimony on this point is quoted hereunder:
Atty. Carlos Do you know the defendant Inland Industries, Inc.?
A Yes, sir. Because I am the General Manager of this corporation.
Q Aside from being the General Manager of the defendant corporation are you in any other
way connected with the same?
A I am also a stockholder.
Q Does your corporation have a Board of Directors?
A Yes, sir.
Q By the way, who are the stockholders of this corporation?

A Bienvenida Catabas, Aurora Heresa, Paz Yulo, Hedy Y. Jacinto and myself.
Q Who is the President of the defendant corporation?
A Bienvenida Catabas.
Q Who is the Chairman of the Board?
A Aurora Heresa.
Q Do you have any relation with Hedy Y. Jacinto?
A She is my wife.
Q If you combine the stockholdings of your wife together with yours and percentage wise,
how much is your equity?
Atty. Dizon raised some objections. However, the Court allowed the same.
A About 52 % (Ibid., pp. 3-6)
Furthermore, a cursory perusal of the Stipulation of facts clearly shows that defendant Roberto
Jacinto acted in his capacity as President and General Manager of Inland Industries, Inc. when he
signed said trust receipts. Pertinent portion of his testimony are quoted below:
(d) All the goods covered by the three (3) Letters of Credit (Annexes "A", "B" & "C") and paid
for under the Bills of Exchange (Annexes "D", "E" & "F") were delivered to and received by
defendant Inland Industries, Inc. through its co-defendant Roberto A. Jacinto, its President
and General Manager, who signed for and in behalf of defendant Inland and agreed to the
terms and conditions of three (3) separate trust receipts covering the same and herein
identified as follows: . . . (p. 3 of Stipulations of Facts and Formulation of Issues [p. 95,
Records]).
The conflicting statements by defendant Jacinto place in extreme doubt his credibility anent his
alleged participation in said transactions and We are thus persuaded to agree with the findings of
the lower court that the latter (Roberto Jacinto) was practically the corporation itself. Indeed, a
painstaking examination of the records show that there is no clear-cut delimitation between the
personality of Roberto Jacinto as an individual and the personality of Inland Industries, Inc. as a
corporation.
The circumstances aforestated lead Us to conclude that the corporate veil that en-shrouds
defendant Inland Industries, Inc. could be validly pierced, and a host of cases decided by our High
Court is supportive of this view. Thus it held that "when the veil of corporate fiction is made as a
shield to perpetuate fraud and/or confuse legitimate issues, the same should be pierced." (Republic
vs. Razon, 20 SCRA 234; A.D. Santos, Inc. vs. Vasquez, 22 SCRA 1156; Emilio Cano Enterprises, Inc.
vs. Court of Appeals, 13 SCRA 290). Almost in the same vein is the dictum enunciated by the same
court in the case of Commissioner of Internal Revenue vs. Norton & Harrison Co., (11 SCRA 714),
that "Where a corporation is merely an adjunct, business conduit or alter ego, the fiction of
separate and distinct corporate entity should be disregarded."
In its resolution of 29 September 1987, the respondent Court of Appeals, on the contention again of
petitioner that the finding that defendant corporation is his mere alter ego is not supported by the
evidence and has no legal justification, ruled that:
The contention . . . is nothing but an empty assertion. A cursory perusal of the decision would at
once readily show on pages 11-13 of the same that said factual findings of the court is well
grounded as the same in fact even include a portion of the very testimony of said defendantappellant admitting that he and his wife own 52% of the stocks of defendant corporation. The

stipulation of facts also show (sic) that appellant Roberto Jacinto acted in his capacity as
President/General Manager of defendant corporation and that "all the goods covered by the three
(3) Letters of Credit (Annexes "A", "B" & "C") and paid for under the Bills of Exchange (Annexes "D",
"E" & "F") were delivered to and received by defendant Inland Industries, Inc. through its codefendant Roberto A. Jacinto, its President and General Manager, who signed for and in behalf of
defendant Inland and agreed to the terms and conditions of three (3) separate trust receipts
covering the same.
Petitioner, however, faults the courts below for piercing the veil of corporate fiction despite the absence of
any allegation in the complaint questioning the separate identity and existence of Inland Industries, Inc.
This is not accurate.1wphi1 While on the face of the complaint there is no specific allegation that the
corporation is a mere alter ego of petitioner, subsequent developments, from the stipulation of facts up to
the presentation of evidence and the examination of witnesses, unequivocally show that respondent
Metropolitan Bank and Trust Company sought to prove that petitioner and the corporation are one or that
he is the corporation. No serious objection was heard from petitioner. Section 5 of Rule 10 of the Rules of
Court provides:
Sec. 5. Amendment to conform to or authorize presentation of evidence. When issues not raised
by the pleadings are tried by express or implied consent of the parties, they shall be treated in all
respects, as if they had been raised in the pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to raise these issues may be made upon
motion of any party at any time, even after judgment; but failure so to amend does not affect the
trial of these issues. If the evidence is objected to at the time of trial on the ground that it is not
within the issues made by the pleadings, the court may allow the pleadings to be amended and
shall do so freely when the presentation of the merits of the action will be subserved thereby and
the objecting party fails to satisfy the court that the admission of such evidence would prejudice
him in maintaining his action or defense upon the merits. The court may grant continuance to
enable the objecting party to meet such evidence.
Pursuant thereto, "when evidence is presented by one party, with the express or implied consent of the
adverse party, as to issues not alleged in the pleadings, judgment may be rendered validly as regards
those issues, which shall be considered as if they have been raised in the pleadings. There is implied
consent to the evidence thus presented when the adverse party fails to object thereto. 12
WHEREFORE, for lack of merit, the Petition is DISMISSED with costs against petitioner.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

G.R. No. 124293

January 31, 2005

J.G. SUMMIT HOLDINGS, INC., petitioner,


vs.
COURT OF APPEALS; COMMITTEE ON PRIVATIZATION, its Chairman and Members; ASSET
PRIVATIZATION TRUST; and PHILYARDS HOLDINGS, INC., respondents.
RESOLUTION
PUNO, J.:
For resolution before this Court are two motions filed by the petitioner, J.G. Summit Holdings, Inc. for
reconsideration of our Resolution dated September 24, 2003 and to elevate this case to the Court En Banc.
The petitioner questions the Resolution which reversed our Decision of November 20, 2000, which in turn
reversed and set aside a Decision of the Court of Appeals promulgated on July 18, 1995.
I. Facts
The undisputed facts of the case, as set forth in our Resolution of September 24, 2003, are as follows:
On January 27, 1997, the National Investment and Development Corporation (NIDC), a government
corporation, entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of Kobe,
Japan (KAWASAKI) for the construction, operation and management of the Subic National Shipyard, Inc.
(SNS) which subsequently became the Philippine Shipyard and Engineering Corporation (PHILSECO). Under
the JVA, the NIDC and KAWASAKI will contribute P330 million for the capitalization of PHILSECO in the
proportion of 60%-40% respectively. One of its salient features is the grant to the parties of the right of
first refusal should either of them decide to sell, assign or transfer its interest in the joint venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part of its interest in SNS [PHILSECO] to any third
party without giving the other under the same terms the right of first refusal. This provision shall not apply
if the transferee is a corporation owned or controlled by the GOVERNMENT or by a KAWASAKI affiliate.
On November 25, 1986, NIDC transferred all its rights, title and interest in PHILSECO to the Philippine
National Bank (PNB). Such interests were subsequently transferred to the National Government pursuant to
Administrative Order No. 14. On December 8, 1986, President Corazon C. Aquino issued Proclamation No.
50 establishing the Committee on Privatization (COP) and the Asset Privatization Trust (APT) to take title to,
and possession of, conserve, manage and dispose of non-performing assets of the National Government.
Thereafter, on February 27, 1987, a trust agreement was entered into between the National Government
and the APT wherein the latter was named the trustee of the National Government's share in PHILSECO. In
1989, as a result of a quasi-reorganization of PHILSECO to settle its huge obligations to PNB, the National
Government's shareholdings in PHILSECO increased to 97.41% thereby reducing KAWASAKI's shareholdings
to 2.59%.
In the interest of the national economy and the government, the COP and the APT deemed it best to sell
the National Government's share in PHILSECO to private entities. After a series of negotiations between the
APT and KAWASAKI, they agreed that the latter's right of first refusal under the JVA be "exchanged" for the
right to top by five percent (5%) the highest bid for the said shares. They further agreed that KAWASAKI
would be entitled to name a company in which it was a stockholder, which could exercise the right to top.
On September 7, 1990, KAWASAKI informed APT that Philyards Holdings, Inc. (PHI) 1 would exercise its right
to top.
At the pre-bidding conference held on September 18, 1993, interested bidders were given copies of the JVA
between NIDC and KAWASAKI, and of the Asset Specific Bidding Rules (ASBR) drafted for the National

Government's 87.6% equity share in PHILSECO. The provisions of the ASBR were explained to the
interested bidders who were notified that the bidding would be held on December 2, 1993. A portion of the
ASBR reads:
1.0 The subject of this Asset Privatization Trust (APT) sale through public bidding is the National
Government's equity in PHILSECO consisting of 896,869,942 shares of stock (representing 87.67% of
PHILSECO's outstanding capital stock), which will be sold as a whole block in accordance with the rules
herein enumerated.
xxx xxx xxx
2.0 The highest bid, as well as the buyer, shall be subject to the final approval of both the APT Board of
Trustees and the Committee on Privatization (COP).
2.1 APT reserves the right in its sole discretion, to reject any or all bids.
3.0 This public bidding shall be on an Indicative Price Bidding basis. The Indicative price set for the
National Government's 87.67% equity in PHILSECO is PESOS: ONE BILLION THREE HUNDRED MILLION
(P1,300,000,000.00).
xxx xxx xxx
6.0 The highest qualified bid will be submitted to the APT Board of Trustees at its regular meeting following
the bidding, for the purpose of determining whether or not it should be endorsed by the APT Board of
Trustees to the COP, and the latter approves the same. The APT shall advise Kawasaki Heavy Industries,
Inc. and/or its nominee, [PHILYARDS] Holdings, Inc., that the highest bid is acceptable to the National
Government. Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. shall then have a period of
thirty (30) calendar days from the date of receipt of such advice from APT within which to exercise their
"Option to Top the Highest Bid" by offering a bid equivalent to the highest bid plus five (5%) percent
thereof.
6.1 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. exercise their "Option to Top
the Highest Bid," they shall so notify the APT about such exercise of their option and deposit with APT the
amount equivalent to ten percent (10%) of the highest bid plus five percent (5%) thereof within the thirty
(30)-day period mentioned in paragraph 6.0 above. APT will then serve notice upon Kawasaki Heavy
Industries, Inc. and/or [PHILYARDS] Holdings, Inc. declaring them as the preferred bidder and they shall
have a period of ninety (90) days from the receipt of the APT's notice within which to pay the balance of
their bid price.
6.2 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. fail to exercise their "Option
to Top the Highest Bid" within the thirty (30)-day period, APT will declare the highest bidder as the winning
bidder.
xxx xxx xxx
12.0 The bidder shall be solely responsible for examining with appropriate care these rules, the official bid
forms, including any addenda or amendments thereto issued during the bidding period. The bidder shall
likewise be responsible for informing itself with respect to any and all conditions concerning the PHILSECO
Shares which may, in any manner, affect the bidder's proposal. Failure on the part of the bidder to so
examine and inform itself shall be its sole risk and no relief for error or omission will be given by APT or
COP. . . .

At the public bidding on the said date, petitioner J.G. Summit Holdings, Inc. 2 submitted a bid of Two Billion
and Thirty Million Pesos (P2,030,000,000.00) with an acknowledgment of KAWASAKI/[PHILYARDS'] right to
top, viz:
4. I/We understand that the Committee on Privatization (COP) has up to thirty (30) days to act on APT's
recommendation based on the result of this bidding. Should the COP approve the highest bid, APT shall
advise Kawasaki Heavy Industries, Inc. and/or its nominee, [PHILYARDS] Holdings, Inc. that the highest bid
is acceptable to the National Government. Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings,
Inc. shall then have a period of thirty (30) calendar days from the date of receipt of such advice from APT
within which to exercise their "Option to Top the Highest Bid" by offering a bid equivalent to the highest bid
plus five (5%) percent thereof.
As petitioner was declared the highest bidder, the COP approved the sale on December 3, 1993 "subject to
the right of Kawasaki Heavy Industries, Inc./[PHILYARDS] Holdings, Inc. to top JGSMI's bid by 5% as
specified in the bidding rules."
On December 29, 1993, petitioner informed APT that it was protesting the offer of PHI to top its bid on the
grounds that: (a) the KAWASAKI/PHI consortium composed of KAWASAKI, [PHILYARDS], Mitsui, Keppel, SM
Group, ICTSI and Insular Life violated the ASBR because the last four (4) companies were the losing bidders
thereby circumventing the law and prejudicing the weak winning bidder; (b) only KAWASAKI could exercise
the right to top; (c) giving the same option to top to PHI constituted unwarranted benefit to a third party;
(d) no right of first refusal can be exercised in a public bidding or auction sale; and (e) the JG Summit
consortium was not estopped from questioning the proceedings.
On February 2, 1994, petitioner was notified that PHI had fully paid the balance of the purchase price of
the subject bidding. On February 7, 1994, the APT notified petitioner that PHI had exercised its option to
top the highest bid and that the COP had approved the same on January 6, 1994. On February 24, 1994,
the APT and PHI executed a Stock Purchase Agreement. Consequently, petitioner filed with this Court a
Petition for Mandamus under G.R. No. 114057. On May 11, 1994, said petition was referred to the Court of
Appeals. On July 18, 1995, the Court of Appeals denied the same for lack of merit. It ruled that the petition
for mandamus was not the proper remedy to question the constitutionality or legality of the right of first
refusal and the right to top that was exercised by KAWASAKI/PHI, and that the matter must be brought "by
the proper party in the proper forum at the proper time and threshed out in a full blown trial." The Court of
Appeals further ruled that the right of first refusal and the right to top are prima facie legal and that the
petitioner, "by participating in the public bidding, with full knowledge of the right to top granted to
KAWASAKI/[PHILYARDS] isestopped from questioning the validity of the award given to [PHILYARDS] after
the latter exercised the right to top and had paid in full the purchase price of the subject shares, pursuant
to the ASBR." Petitioner filed a Motion for Reconsideration of said Decision which was denied on March 15,
1996. Petitioner thus filed a Petition for Certiorari with this Court alleging grave abuse of discretion on the
part of the appellate court.
On November 20, 2000, this Court rendered x x x [a] Decision ruling among others that the Court of
Appeals erred when it dismissed the petition on the sole ground of the impropriety of the special civil
action of mandamus because the petition was also one of certiorari. It further ruled that a shipyard like
PHILSECO is a public utility whose capitalization must be sixty percent (60%) Filipino-owned. Consequently,
the right to top granted to KAWASAKI under the Asset Specific Bidding Rules (ASBR) drafted for the sale of
the 87.67% equity of the National Government in PHILSECO is illegal not only because it violates the
rules on competitive bidding but more so, because it allows foreign corporations to own more than 40%
equity in the shipyard. It also held that "although the petitioner had the opportunity to examine the ASBR
before it participated in the bidding, it cannot be estopped from questioning the unconstitutional, illegal
and inequitable provisions thereof." Thus, this Court voided the transfer of the national government's
87.67% share in PHILSECO to Philyard[s] Holdings, Inc., and upheld the right of JG Summit, as the highest
bidder, to take title to the said shares, viz:

WHEREFORE, the instant petition for review on certiorari is GRANTED. The assailed Decision and Resolution
of the Court of Appeals are REVERSED and SET ASIDE. Petitioner is ordered to pay to APT its bid price of
Two Billion Thirty Million Pesos (P2,030,000,000.00), less its bid deposit plus interests upon the finality of
this Decision. In turn, APT is ordered to:
(a) accept the said amount of P2,030,000,000.00 less bid deposit and interests from petitioner;
(b) execute a Stock Purchase Agreement with petitioner;
(c) cause the issuance in favor of petitioner of the certificates of stocks representing 87.6% of
PHILSECO's total capitalization;
(d) return to private respondent PHGI the amount of Two Billion One Hundred Thirty-One Million Five
Hundred Thousand Pesos (P2,131,500,000.00); and
(e) cause the cancellation of the stock certificates issued to PHI.
SO ORDERED.
In separate Motions for Reconsideration, respondents submit[ted] three basic issues for x x x resolution:
(1) Whether PHILSECO is a public utility; (2) Whether under the 1977 JVA, KAWASAKI can exercise its right
of first refusal only up to 40% of the total capitalization of PHILSECO; and (3) Whether the right to top
granted to KAWASAKI violates the principles of competitive bidding. 3 (citations omitted)
In a Resolution dated September 24, 2003, this Court ruled in favor of the respondents. On the first issue,
we held that Philippine Shipyard and Engineering Corporation (PHILSECO) is not a public utility, as by
nature, a shipyard is not a public utility4 and that no law declares a shipyard to be a public utility. 5 On the
second issue, we found nothing in the 1977 Joint Venture Agreement (JVA) which prevents Kawasaki Heavy
Industries, Ltd. of Kobe, Japan (KAWASAKI) from acquiring more than 40% of PHILSECOs total
capitalization.6 On the final issue, we held that the right to top granted to KAWASAKI in exchange for its
right of first refusal did not violate the principles of competitive bidding. 7
On October 20, 2003, the petitioner filed a Motion for Reconsideration 8 and a Motion to Elevate This Case
to the Court En Banc.9 Public respondents Committee on Privatization (COP) and Asset Privatization Trust
(APT), and private respondent Philyards Holdings, Inc. (PHILYARDS) filed their Comments on J.G. Summit
Holdings, Inc.s (JG Summits) Motion for Reconsideration and Motion to Elevate This Case to the Court En
Banc on January 29, 2004 and February 3, 2004, respectively.
II. Issues
Based on the foregoing, the relevant issues to resolve to end this litigation are the following:
1. Whether there are sufficient bases to elevate the case at bar to the Court en banc.
2. Whether the motion for reconsideration raises any new matter or cogent reason to warrant a
reconsideration of this Courts Resolution of September 24, 2003.
Motion to Elevate this Case to the
Court En Banc
The petitioner prays for the elevation of the case to the Court en banc on the following grounds:

1. The main issue of the propriety of the bidding process involved in the present case has been
confused with the policy issue of the supposed fate of the shipping industry which has never been
an issue that is determinative of this case.10
2. The present case may be considered under the Supreme Court Resolution dated February 23,
1984 which included among en banc cases those involving a novel question of law and those where
a doctrine or principle laid down by the Court en banc or in division may be modified or reversed.11
3. There was clear executive interference in the judicial functions of the Court when the Honorable
Jose Isidro Camacho, Secretary of Finance, forwarded to Chief Justice Davide, a memorandum dated
November 5, 2001, attaching a copy of the Foreign Chambers Report dated October 17, 2001,
which matter was placed in the agenda of the Court and noted by it in a formal resolution dated
November 28, 2001.12
Opposing J.G. Summits motion to elevate the case en banc, PHILYARDS points out the petitioners
inconsistency in previously opposing PHILYARDS Motion to Refer the Case to the Court En
Banc. PHILYARDS contends that J.G. Summit should now be estopped from asking that the case be referred
to the Court en banc. PHILYARDS further contends that the Supreme Court en banc is not an appellate
court to which decisions or resolutions of its divisions may be appealed citing Supreme Court Circular No.
2-89 dated February 7, 1989.13 PHILYARDS also alleges that there is no novel question of law involved in
the present case as the assailed Resolution was based on well-settled jurisprudence. Likewise, PHILYARDS
stresses that the Resolution was merely an outcome of the motions for reconsideration filed by it and the
COP and APT and is "consistent with the inherent power of courts to amend and control its process and
orders so as to make them conformable to law and justice. (Rule 135, sec. 5)" 14Private respondent belittles
the petitioners allegations regarding the change in ponente and the alleged executive interference as
shown by former Secretary of Finance Jose Isidro Camachos memorandum dated November 5, 2001
arguing that these do not justify a referral of the present case to the Court en banc.
In insisting that its Motion to Elevate This Case to the Court En Banc should be granted, J.G. Summit further
argued that: its Opposition to the Office of the Solicitor Generals Motion to Refer is different from its own
Motion to Elevate; different grounds are invoked by the two motions; there was unwarranted "executive
interference"; and the change in ponente is merely noted in asserting that this case should be decided by
the Court en banc.15
We find no merit in petitioners contention that the propriety of the bidding process involved in the present
case has been confused with the policy issue of the fate of the shipping industry which, petitioner
maintains, has never been an issue that is determinative of this case. The Courts Resolution of September
24, 2003 reveals a clear and definitive ruling on the propriety of the bidding process. In discussing whether
the right to top granted to KAWASAKI in exchange for its right of first refusal violates the principles of
competitive bidding, we made an exhaustive discourse on the rules and principles of public bidding and
whether they were complied with in the case at bar. 16This Court categorically ruled on the petitioners
argument that PHILSECO, as a shipyard, is a public utility which should maintain a 60%-40% Filipinoforeign equity ratio, as it was a pivotal issue. In doing so, we recognized the impact of our ruling on the
shipbuilding industry which was beyond avoidance.17
We reject petitioners argument that the present case may be considered under the Supreme Court
Resolution dated February 23, 1984 which included among en banc cases those involving a novel question
of law and those where a doctrine or principle laid down by the court en banc or in division may be
modified or reversed. The case was resolved based on basic principles of the right of first refusal in
commercial law and estoppel in civil law. Contractual obligations arising from rights of first refusal are not
new in this jurisdiction and have been recognized in numerous cases. 18 Estoppel is too known a civil law
concept to require an elongated discussion. Fundamental principles on public bidding were likewise used to
resolve the issues raised by the petitioner. To be sure, petitioner leans on the right to top in a public

bidding in arguing that the case at bar involves a novel issue. We are not swayed. The right to top was
merely a condition or a reservation made in the bidding rules which was fully disclosed to all bidding
parties. In Bureau Veritas, represented by Theodor H. Hunermann v. Office of the President, et
al., 19 we dealt with this conditionality, viz:
x x x It must be stressed, as held in the case of A.C. Esguerra & Sons v. Aytona, et al., (L-18751, 28 April
1962, 4 SCRA 1245), that in an "invitation to bid, there is a condition imposed upon the bidders to
the effect that the bidding shall be subject to the right of the government to reject any and all
bids subject to its discretion. In the case at bar, the government has made its choice and
unless an unfairness or injustice is shown, the losing bidders have no cause to complain nor
right to dispute that choice. This is a well-settled doctrine in this jurisdiction and elsewhere."
The discretion to accept or reject a bid and award contracts is vested in the Government agencies
entrusted with that function. The discretion given to the authorities on this matter is of such wide latitude
that the Courts will not interfere therewith, unless it is apparent that it is used as a shield to a fraudulent
award (Jalandoni v. NARRA, 108 Phil. 486 [1960]). x x x The exercise of this discretion is a policy decision
that necessitates prior inquiry, investigation, comparison, evaluation, and deliberation. This task can best
be discharged by the Government agencies concerned, not by the Courts. The role of the Courts is to
ascertain whether a branch or instrumentality of the Government has transgressed its constitutional
boundaries. But the Courts will not interfere with executive or legislative discretion exercised within those
boundaries. Otherwise, it strays into the realm of policy decision-making.
It is only upon a clear showing of grave abuse of discretion that the Courts will set aside the award of a
contract made by a government entity. Grave abuse of discretion implies a capricious, arbitrary and
whimsical exercise of power (Filinvest Credit Corp. v. Intermediate Appellate Court, No. 65935, 30
September 1988, 166 SCRA 155). The abuse of discretion must be so patent and gross as to amount to an
evasion of positive duty or to a virtual refusal to perform a duty enjoined by law, as to act at all in
contemplation of law, where the power is exercised in an arbitrary and despotic manner by reason of
passion or hostility (Litton Mills, Inc. v. Galleon Trader, Inc., et al[.], L-40867, 26 July 1988, 163 SCRA 489).
The facts in this case do not indicate any such grave abuse of discretion on the part of public respondents
when they awarded the CISS contract to Respondent SGS. In the "Invitation to Prequalify and Bid" (Annex
"C," supra), the CISS Committee made an express reservation of the right of the Government to
"reject any or all bids or any part thereof or waive any defects contained thereon and accept
an offer most advantageous to the Government." It is a well-settled rule that where such
reservation is made in an Invitation to Bid, the highest or lowest bidder, as the case may be, is
not entitled to an award as a matter of right (C & C Commercial Corp. v. Menor, L-28360, 27 January
1983, 120 SCRA 112). Even the lowest Bid or any Bid may be rejected or, in the exercise of sound
discretion, the award may be made to another than the lowest bidder (A.C. Esguerra & Sons v. Aytona,
supra, citing 43 Am. Jur., 788). (emphases supplied)1awphi1.nt
Like the condition in the Bureau Veritas case, the right to top was a condition imposed by the
government in the bidding rules which was made known to all parties. It was a condition imposed on
all bidders equally, based on the APTs exercise of its discretion in deciding on how best to
privatize the governments shares in PHILSECO. It was not a whimsical or arbitrary condition plucked
from the ether and inserted in the bidding rules but a condition which the APT approved as the best way
the government could comply with its contractual obligations to KAWASAKI under the JVA and its mandate
of getting the most advantageous deal for the government. The right to top had its history in the mutual
right of first refusal in the JVA and was reached by agreement of the government and KAWASAKI.
Further, there is no "executive interference" in the functions of this Court by the mere filing of a
memorandum by Secretary of Finance Jose Isidro Camacho. The memorandum was merely "noted" to
acknowledge its filing. It had no further legal significance. Notably too, the assailed Resolution dated

September 24, 2003 was decided unanimously by the Special First Division in favor of the
respondents.
Again, we emphasize that a decision or resolution of a Division is that of the Supreme Court 20 and the
Court en banc is not an appellate court to which decisions or resolutions of a Division may be appealed. 21
For all the foregoing reasons, we find no basis to elevate this case to the Court en banc.
Motion for Reconsideration
Three principal arguments were raised in the petitioners Motion for Reconsideration. First, that a fair
resolution of the case should be based on contract law, not on policy considerations; the contracts do not
authorize the right to top to be derived from the right of first refusal. 22 Second, that neither the right of first
refusal nor the right to top can be legally exercised by the consortium which is not the proper party
granted such right under either the JVA or the Asset Specific Bidding Rules (ASBR). 23 Third, that the
maintenance of the 60%-40% relationship between the National Investment and Development Corporation
(NIDC) and KAWASAKI arises from contract and from the Constitution because PHILSECO is a landholding
corporation and need not be a public utility to be bound by the 60%-40% constitutional limitation. 24
On the other hand, private respondent PHILYARDS asserts that J.G. Summit has not been able to show
compelling reasons to warrant a reconsideration of the Decision of the Court. 25 PHILYARDS denies that the
Decision is based mainly on policy considerations and points out that it is premised on principles governing
obligations and contracts and corporate law such as the rule requiring respect for contractual stipulations,
upholding rights of first refusal, and recognizing the assignable nature of contracts rights. 26 Also, the ruling
that shipyards are not public utilities relies on established case law and fundamental rules of statutory
construction. PHILYARDS stresses that KAWASAKIs right of first refusal or even the right to top is not
limited to the 40% equity of the latter.27 On the landholding issue raised by J.G. Summit, PHILYARDS
emphasizes that this is a non-issue and even involves a question of fact. Even assuming that this Court can
take cognizance of such question of fact even without the benefit of a trial, PHILYARDS opines that
landholding by PHILSECO at the time of the bidding is irrelevant because what is essential is that
ultimately a qualified entity would eventually hold PHILSECOs real estate properties. 28 Further, given the
assignable nature of the right of first refusal, any applicable nationality restrictions, including landholding
limitations, would not affect the right of first refusal itself, but only the manner of its exercise. 29 Also,
PHILYARDS argues that if this Court takes cognizance of J.G. Summits allegations of fact regarding
PHILSECOs landholding, it must also recognize PHILYARDS assertions that PHILSECOs landholdings were
sold to another corporation.30 As regards the right of first refusal, private respondent explains that
KAWASAKIs reduced shareholdings (from 40% to 2.59%) did not translate to a deprivation or loss of its
contractually granted right of first refusal.31 Also, the bidding was valid because PHILYARDS exercised the
right to top and it was of no moment that losing bidders later joined PHILYARDS in raising the purchase
price.32
In cadence with the private respondent PHILYARDS, public respondents COP and APT contend:
1. The conversion of the right of first refusal into a right to top by 5% does not violate any provision
in the JVA between NIDC and KAWASAKI.
2. PHILSECO is not a public utility and therefore not governed by the constitutional restriction on
foreign ownership.
3. The petitioner is legally estopped from assailing the validity of the proceedings of the public
bidding as it voluntarily submitted itself to the terms of the ASBR which included the provision on
the right to top.

4. The right to top was exercised by PHILYARDS as the nominee of KAWASAKI and the fact that
PHILYARDS formed a consortium to raise the required amount to exercise the right to top the
highest bid by 5% does not violate the JVA or the ASBR.
5. The 60%-40% Filipino-foreign constitutional requirement for the acquisition of lands does not
apply to PHILSECO because as admitted by petitioner itself, PHILSECO no longer owns real property.
6. Petitioners motion to elevate the case to the Court en banc is baseless and would only delay the
termination of this case.33
In a Consolidated Comment dated March 8, 2004, J.G. Summit countered the arguments of the public and
private respondents in this wise:
1. The award by the APT of 87.67% shares of PHILSECO to PHILYARDS with losing bidders through
the exercise of a right to top, which is contrary to law and the constitution is null and void for being
violative of substantive due process and the abuse of right provision in the Civil Code.
a. The bidders[] right to top was actually exercised by losing bidders.
b. The right to top or the right of first refusal cannot co-exist with a genuine competitive
bidding.
c. The benefits derived from the right to top were unwarranted.
2. The landholding issue has been a legitimate issue since the start of this case but is shamelessly
ignored by the respondents.
a. The landholding issue is not a non-issue.
b. The landholding issue does not pose questions of fact.
c. That PHILSECO owned land at the time that the right of first refusal was agreed upon and
at the time of the bidding are most relevant.
d. Whether a shipyard is a public utility is not the core issue in this case.
3. Fraud and bad faith attend the alleged conversion of an inexistent right of first refusal to the right
to top.
a. The history behind the birth of the right to top shows fraud and bad faith.
b. The right of first refusal was, indeed, "effectively useless."
4. Petitioner is not legally estopped to challenge the right to top in this case.
a. Estoppel is unavailing as it would stamp validity to an act that is prohibited by law or
against public policy.
b. Deception was patent; the right to top was an attractive nuisance.
c. The 10% bid deposit was placed in escrow.

J.G. Summits insistence that the right to top cannot be sourced from the right of first refusal is not new
and we have already ruled on the issue in our Resolution of September 24, 2003. We upheld the mutual
right of first refusal in the JVA.34 We also ruled that nothing in the JVA prevents KAWASAKI from acquiring
more than 40% of PHILSECOs total capitalization. 35 Likewise, nothing in the JVA or ASBR bars the
conversion of the right of first refusal to the right to top. In sum, nothing new and of significance in the
petitioners pleading warrants a reconsideration of our ruling.
Likewise, we already disposed of the argument that neither the right of first refusal nor the right to top can
legally be exercised by the consortium which is not the proper party granted such right under either the
JVA or the ASBR. Thus, we held:
The fact that the losing bidder, Keppel Consortium (composed of Keppel, SM Group, Insular Life Assurance,
Mitsui and ICTSI), has joined PHILYARDS in the latter's effort to raise P2.131 billion necessary in exercising
the right to top is not contrary to law, public policy or public morals. There is nothing in the ASBR that bars
the losing bidders from joining either the winning bidder (should the right to top is not exercised) or
KAWASAKI/PHI (should it exercise its right to top as it did), to raise the purchase price. The petitioner did
not allege, nor was it shown by competent evidence, that the participation of the losing bidders in the
public bidding was done with fraudulent intent. Absent any proof of fraud, the formation by [PHILYARDS] of
a consortium is legitimate in a free enterprise system. The appellate court is thus correct in holding the
petitioner estopped from questioning the validity of the transfer of the National Government's shares in
PHILSECO to respondent.36
Further, we see no inherent illegality on PHILYARDS act in seeking funding from parties who were losing
bidders. This is a purely commercial decision over which the State should not interfere absent any legal
infirmity. It is emphasized that the case at bar involves the disposition of shares in a corporation which the
government sought to privatize. As such, the persons with whom PHILYARDS desired to enter into business
with in order to raise funds to purchase the shares are basically its business. This is in contrast to a case
involving a contract for the operation of or construction of a government infrastructure where the identity
of the buyer/bidder or financier constitutes an important consideration. In such cases, the government
would have to take utmost precaution to protect public interest by ensuring that the parties with which it is
contracting have the ability to satisfactorily construct or operate the infrastructure.
On the landholding issue, J.G. Summit submits that since PHILSECO is a landholding company, KAWASAKI
could exercise its right of first refusal only up to 40% of the shares of PHILSECO due to the constitutional
prohibition on landholding by corporations with more than 40% foreign-owned equity. It further argues that
since KAWASAKI already held at least 40% equity in PHILSECO, the right of first refusal was inutile and as
such, could not subsequently be converted into the right to top. 37 Petitioner also asserts that, at present,
PHILSECO continues to violate the constitutional provision on landholdings as its shares are more than 40%
foreign-owned.38 PHILYARDS admits that it may have previously held land but had already divested such
landholdings.39 It contends, however, that even if PHILSECO owned land, this would not affect the right of
first refusal but only the exercise thereof. If the land is retained, the right of first refusal, being a property
right, could be assigned to a qualified party. In the alternative, the land could be divested before the
exercise of the right of first refusal. In the case at bar, respondents assert that since the right of first
refusal was validly converted into a right to top, which was exercised not by KAWASAKI, but by PHILYARDS
which is a Filipino corporation (i.e., 60% of its shares are owned by Filipinos), then there is no violation of
the Constitution.40 At first, it would seem that questions of fact beyond cognizance by this Court were
involved in the issue. However, the records show that PHILYARDS admits it had owned land up until
the time of the bidding.41 Hence, the only issue is whether KAWASAKI had a valid right of first
refusal over PHILSECO shares under the JVA considering that PHILSECO owned land until the
time of the bidding and KAWASAKI already held 40% of PHILSECOs equity.
We uphold the validity of the mutual rights of first refusal under the JVA between KAWASAKI and NIDC. First
of all, the right of first refusal is a property right of PHILSECO shareholders, KAWASAKI and NIDC, under the

terms of their JVA. This right allows them to purchase the shares of their co-shareholder before they are
offered to a third party. The agreement of co-shareholders to mutually grant this right to each
other, by itself, does not constitute a violation of the provisions of the Constitution limiting
land ownership to Filipinos and Filipino corporations. As PHILYARDS correctly puts it, if PHILSECO
still owns land, the right of first refusal can be validly assigned to a qualified Filipino entity in order to
maintain the 60%-40% ratio. This transfer, by itself, does not amount to a violation of the Anti-Dummy
Laws, absent proof of any fraudulent intent. The transfer could be made either to a nominee or such other
party which the holder of the right of first refusal feels it can comfortably do business with. Alternatively,
PHILSECO may divest of its landholdings, in which case KAWASAKI, in exercising its right of first refusal, can
exceed 40% of PHILSECOs equity. In fact, it can even be said that if the foreign shareholdings of a
landholding corporation exceeds 40%, it is not the foreign stockholders ownership of the
shares which is adversely affected but the capacity of the corporation to own land that is, the
corporation becomes disqualified to own land. This finds support under the basic corporate law principle
that the corporation and its stockholders are separate juridical entities. In this vein, the right of first refusal
over shares pertains to the shareholders whereas the capacity to own land pertains to the corporation.
Hence, the fact that PHILSECO owns land cannot deprive stockholders of their right of first refusal. No law
disqualifies a person from purchasing shares in a landholding corporation even if the latter will
exceed the allowed foreign equity, what the law disqualifies is the corporation from owning
land. This is the clear import of the following provisions in the Constitution:
Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all
forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources
are owned by the State. With the exception of agricultural lands, all other natural resources shall not be
alienated. The exploration, development, and utilization of natural resources shall be under the full control
and supervision of the State. The State may directly undertake such activities, or it may enter into coproduction, joint venture, or production-sharing agreements with Filipino citizens, or corporations or
associations at least sixty per centum of whose capital is owned by such citizens. Such
agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five
years, and under such terms and conditions as may be provided by law. In cases of water rights for
irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial
use may be the measure and limit of the grant.
xxx xxx xxx
Section 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed
except to individuals, corporations, or associations qualified to acquire or hold lands of the
public domain.42(emphases supplied)
The petitioner further argues that "an option to buy land is void in itself (Philippine Banking Corporation v.
Lui She, 21 SCRA 52 [1967]). The right of first refusal granted to KAWASAKI, a Japanese corporation, is
similarly void. Hence, the right to top, sourced from the right of first refusal, is also void." 43 Contrary to the
contention of petitioner, the case of Lui She did not that say "an option to buy land is void in itself," for we
ruled as follows:
x x x To be sure, a lease to an alien for a reasonable period is valid. So is an option giving an
alien the right to buy real property on condition that he is granted Philippine citizenship. As
this Court said in Krivenko vs. Register of Deeds:
[A]liens are not completely excluded by the Constitution from the use of lands for residential purposes.
Since their residence in the Philippines is temporary, they may be granted temporary rights such as a
lease contract which is not forbidden by the Constitution. Should they desire to remain here forever and
share our fortunes and misfortunes, Filipino citizenship is not impossible to acquire.

But if an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue
of which the Filipino owner cannot sell or otherwise dispose of his property, this to last for 50
years, then it becomes clear that the arrangement is a virtual transfer of ownership whereby
the owner divests himself in stages not only of the right to enjoy the land (jus possidendi, jus
utendi, jus fruendi and jus abutendi) but also of the right to dispose of it (jus disponendi)
rights the sum total of which make up ownership. It is just as if today the possession is
transferred, tomorrow, the use, the next day, the disposition, and so on, until ultimately all the
rights of which ownership is made up are consolidated in an alien. And yet this is just exactly what the
parties in this case did within this pace of one year, with the result that Justina Santos'[s] ownership of her
property was reduced to a hollow concept. If this can be done, then the Constitutional ban against alien
landholding in the Philippines, as announced in Krivenko vs. Register of Deeds, is indeed in grave
peril.44 (emphases supplied; Citations omitted)
In Lui She, the option to buy was invalidated because it amounted to a virtual transfer of ownership as the
owner could not sell or dispose of his properties. The contract in Lui She prohibited the owner of the land
from selling, donating, mortgaging, or encumbering the property during the 50-year period of the option to
buy. This is not so in the case at bar where the mutual right of first refusal in favor of NIDC and KAWASAKI
does not amount to a virtual transfer of land to a non-Filipino. In fact, the case at bar involves a right of
first refusal over shares of stock while the Lui She case involves an option to buy the land itself.
As discussed earlier, there is a distinction between the shareholders ownership of shares and the
corporations ownership of land arising from the separate juridical personalities of the corporation and its
shareholders.
We note that in its Motion for Reconsideration, J.G. Summit alleges that PHILSECO continues to violate the
Constitution as its foreign equity is above 40% and yet owns long-term leasehold rights which are
real rights.45It cites Article 415 of the Civil Code which includes in the definition of immovable property,
"contracts for public works, and servitudes and other real rights over immovable property." 46 Any existing
landholding, however, is denied by PHILYARDS citing its recent financial statements. 47 First, these are
questions of fact, the veracity of which would require introduction of evidence. The Court needs to validate
these factual allegations based on competent and reliable evidence. As such, the Court cannot resolve the
questions they pose. Second, J.G. Summit misreads the provisions of the Constitution cited in its own
pleadings, to wit:
29.2 Petitioner has consistently pointed out in the past that private respondent is not a 60%-40%
corporation, and this violates the Constitution x x x The violation continues to this day because under the
law, it continues to own real property
xxx xxx xxx
32. To review the constitutional provisions involved, Section 14, Article XIV of the 1973 Constitution (the
JVA was signed in 1977), provided:
"Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to
individuals, corporations, or associations qualified to acquire or hold lands of the public domain."
32.1 This provision is the same as Section 7, Article XII of the 1987 Constitution.
32.2 Under the Public Land Act, corporations qualified to acquire or hold lands of the public domain are
corporations at least 60% of which is owned by Filipino citizens (Sec. 22, Commonwealth Act 141, as
amended). (emphases supplied)
As correctly observed by the public respondents, the prohibition in the Constitution applies only to
ownership of land.48 It does not extend to immovable or real property as defined under Article

415 of the Civil Code.Otherwise, we would have a strange situation where the ownership of immovable
property such as trees, plants and growing fruit attached to the land 49 would be limited to Filipinos and
Filipino corporations only.
III.
WHEREFORE, in view of the foregoing, the petitioners Motion for Reconsideration is DENIED WITH
FINALITY and the decision appealed from is AFFIRMED. The Motion to Elevate This Case to the Court En
Banc is likewise DENIED for lack of merit.
SO ORDERED.

G.R. No. L-23893

October 29, 1968

VILLA REY TRANSIT, INC., plaintiff-appellant,


vs.
EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC SERVICE
COMMISSION,defendants.
EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC., defendants-appellants.
PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant,
vs.
JOSE M. VILLARAMA, third-party defendant-appellee.
Chuidian Law Office for plaintiff-appellant.
Bengzon, Zarraga & Villegas for defendant-appellant / third-party plaintiff-appellant.
Laurea & Pison for third-party defendant-appellee.
ANGELES, J.:
This is a tri-party appeal from the decision of the Court of First Instance of Manila, Civil Case No. 41845,
declaring null and void the sheriff's sale of two certificates of public convenience in favor of defendant
Eusebio E. Ferrer and the subsequent sale thereof by the latter to defendant Pangasinan Transportation
Co., Inc.; declaring the plaintiff Villa Rey Transit, Inc., to be the lawful owner of the said certificates of
public convenience; and ordering the private defendants, jointly and severally, to pay to the plaintiff, the
sum of P5,000.00 as and for attorney's fees. The case against the PSC was dismissed.
The rather ramified circumstances of the instant case can best be understood by a chronological narration
of the essential facts, to wit:
Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under the business name of Villa
Rey Transit, pursuant to certificates of public convenience granted him by the Public Service Commission
(PSC, for short) in Cases Nos. 44213 and 104651, which authorized him to operate a total of thirty-two (32)
units on various routes or lines from Pangasinan to Manila, and vice-versa. On January 8, 1959, he sold the
aforementioned two certificates of public convenience to the Pangasinan Transportation Company, Inc.
(otherwise known as Pantranco), for P350,000.00 with the condition, among others, that the seller
(Villarama) "shall not for a period of 10 years from the date of this sale, apply for any TPU service identical
or competing with the buyer."
Barely three months thereafter, or on March 6, 1959: a corporation called Villa Rey Transit, Inc. (which shall
be referred to hereafter as the Corporation) was organized with a capital stock of P500,000.00 divided into
5,000 shares of the par value of P100.00 each; P200,000.00 was the subscribed stock; Natividad R.
Villarama (wife of Jose M. Villarama) was one of the incorporators, and she subscribed for P1,000.00; the
balance of P199,000.00 was subscribed by the brother and sister-in-law of Jose M. Villarama; of the
subscribed capital stock, P105,000.00 was paid to the treasurer of the corporation, who was Natividad R.
Villarama.
In less than a month after its registration with the Securities and Exchange Commission (March 10, 1959),
the Corporation, on April 7, 1959, bought five certificates of public convenience, forty-nine buses, tools and
equipment from one Valentin Fernando, for the sum of P249,000.00, of which P100,000.00 was paid upon
the signing of the contract; P50,000.00 was payable upon the final approval of the sale by the PSC;
P49,500.00 one year after the final approval of the sale; and the balance of P50,000.00 "shall be paid by
the BUYER to the different suppliers of the SELLER."
The very same day that the aforementioned contract of sale was executed, the parties thereto
immediately applied with the PSC for its approval, with a prayer for the issuance of a provisional authority

in favor of the vendee Corporation to operate the service therein involved. 1 On May 19, 1959, the PSC
granted the provisional permit prayed for, upon the condition that "it may be modified or revoked by the
Commission at any time, shall be subject to whatever action that may be taken on the basic application
and shall be valid only during the pendency of said application." Before the PSC could take final action on
said application for approval of sale, however, the Sheriff of Manila, on July 7, 1959, levied on two of the
five certificates of public convenience involved therein, namely, those issued under PSC cases Nos. 59494
and 63780, pursuant to a writ of execution issued by the Court of First Instance of Pangasinan in Civil Case
No. 13798, in favor of Eusebio Ferrer, plaintiff, judgment creditor, against Valentin Fernando, defendant,
judgment debtor. The Sheriff made and entered the levy in the records of the PSC. On July 16, 1959, a
public sale was conducted by the Sheriff of the said two certificates of public convenience. Ferrer was the
highest bidder, and a certificate of sale was issued in his name.
Thereafter, Ferrer sold the two certificates of public convenience to Pantranco, and jointly submitted for
approval their corresponding contract of sale to the PSC.2 Pantranco therein prayed that it be authorized
provisionally to operate the service involved in the said two certificates.
The applications for approval of sale, filed before the PSC, by Fernando and the Corporation, Case No.
124057, and that of Ferrer and Pantranco, Case No. 126278, were scheduled for a joint hearing. In the
meantime, to wit, on July 22, 1959, the PSC issued an order disposing that during the pendency of the
cases and before a final resolution on the aforesaid applications, the Pantranco shall be the one to operate
provisionally the service under the twocertificates embraced in the contract between Ferrer and Pantranco.
The Corporation took issue with this particular ruling of the PSC and elevated the matter to the Supreme
Court,3 which decreed, after deliberation, that until the issue on the ownership of the disputed certificates
shall have been finally settled by the proper court, the Corporation should be the one to operate the lines
provisionally.
On November 4, 1959, the Corporation filed in the Court of First Instance of Manila, a complaint for the
annulment of the sheriff's sale of the aforesaid two certificates of public convenience (PSC Cases Nos.
59494 and 63780) in favor of the defendant Ferrer, and the subsequent sale thereof by the latter to
Pantranco, against Ferrer, Pantranco and the PSC. The plaintiff Corporation prayed therein that all the
orders of the PSC relative to the parties' dispute over the said certificates be annulled.
In separate answers, the defendants Ferrer and Pantranco averred that the plaintiff Corporation had no
valid title to the certificates in question because the contract pursuant to which it acquired them from
Fernando was subject to a suspensive condition the approval of the PSC which has not yet been
fulfilled, and, therefore, the Sheriff's levy and the consequent sale at public auction of the certificates
referred to, as well as the sale of the same by Ferrer to Pantranco, were valid and regular, and vested unto
Pantranco, a superior right thereto.
Pantranco, on its part, filed a third-party complaint against Jose M. Villarama, alleging that Villarama and
the Corporation, are one and the same; that Villarama and/or the Corporation was disqualified from
operating the two certificates in question by virtue of the aforementioned agreement between said
Villarama and Pantranco, which stipulated that Villarama "shall not for a period of 10 years from the date
of this sale, apply for any TPU service identical or competing with the buyer."
Upon the joinder of the issues in both the complaint and third-party complaint, the case was tried, and
thereafter decision was rendered in the terms, as above stated.
As stated at the beginning, all the parties involved have appealed from the decision. They submitted a
joint record on appeal.
Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey Transit, Inc.
(Corporation) is a distinct and separate entity from Jose M. Villarama; that the restriction clause in the

contract of January 8, 1959 between Pantranco and Villarama is null and void; that the Sheriff's sale of July
16, 1959, is likewise null and void; and the failure to award damages in its favor and against Villarama.
Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's sale is null and void; and the
sale of the two certificates in question by Valentin Fernando to the Corporation, is valid. He also assails the
award of P5,000.00 as attorney's fees in favor of the Corporation, and the failure to award moral damages
to him as prayed for in his counterclaim.
The Corporation, on the other hand, prays for a review of that portion of the decision awarding only
P5,000.00 as attorney's fees, and insisting that it is entitled to an award of P100,000.00 by way of
exemplary damages.
After a careful study of the facts obtaining in the case, the vital issues to be resolved are: (1) Does the
stipulation between Villarama and Pantranco, as contained in the deed of sale, that the former "SHALL NOT
FOR A PERIOD OF 10 YEARS FROM THE DATE OF THIS SALE, APPLY FOR ANY TPU SERVICE IDENTICAL OR
COMPETING WITH THE BUYER," apply to new lines only or does it include existing lines?; (2) Assuming that
said stipulation covers all kinds of lines, is such stipulation valid and enforceable?; (3) In the affirmative,
that said stipulation is valid, did it bind the Corporation?
For convenience, We propose to discuss the foregoing issues by starting with the last proposition.
The evidence has disclosed that Villarama, albeit was not an incorporator or stockholder of the
Corporation, alleging that he did not become such, because he did not have sufficient funds to invest, his
wife, however, was an incorporator with the least subscribed number of shares, and was elected treasurer
of the Corporation. The finances of the Corporation which, under all concepts in the law, are supposed to
be under the control and administration of the treasurer keeping them as trust fund for the Corporation,
were, nonetheless, manipulated and disbursed as if they were the private funds of Villarama, in such a way
and extent that Villarama appeared to be the actual owner-treasurer of the business without regard to the
rights of the stockholders. The following testimony of Villarama, 4together with the other evidence on
record, attests to that effect:
Q.
Doctor, I want to go back again to the incorporation of the Villa Rey Transit, Inc. You heard
the testimony presented here by the bank regarding the initial opening deposit of ONE HUNDRED
FIVE THOUSAND PESOS, of which amount Eighty-Five Thousand Pesos was a check drawn by
yourself personally. In the direct examination you told the Court that the reason you drew a check
for Eighty-Five Thousand Pesos was because you and your wife, or your wife, had spent the money
of the stockholders given to her for incorporation. Will you please tell the Honorable Court if you
knew at the time your wife was spending the money to pay debts, you personally knew she was
spending the money of the incorporators?
A.

You know my money and my wife's money are one. We never talk about those things.

Q.
Doctor, your answer then is that since your money and your wife's money are one money
and you did not know when your wife was paying debts with the incorporator's money?
A.
Because sometimes she uses my money, and sometimes the money given to her she gives to
me and I deposit the money.
Q.
Actually, aside from your wife, you were also the custodian of some of the incorporators here,
in the beginning?
A.
Not necessarily, they give to my wife and when my wife hands to me I did not know it
belonged to the incorporators.

Q.
It supposes then your wife gives you some of the money received by her in her capacity as
treasurer of the corporation?
A.

Maybe.

Q.

What did you do with the money, deposit in a regular account?

A.

Deposit in my account.

Q.

Of all the money given to your wife, she did not receive any check?

A.

I do not remember.

Q.

Is it usual for you, Doctor, to be given Fifty Thousand Pesos without even asking what is this?
xxx

JUDGE:

xxx

xxx

Reform the question.

Q.
The subscription of your brother-in-law, Mr. Reyes, is Fifty-Two Thousand Pesos, did your wife
give you Fifty-two Thousand Pesos?
A.
I have testified before that sometimes my wife gives me money and I do not know exactly for
what.
The evidence further shows that the initial cash capitalization of the corporation of P105,000.00 was
mostly financed by Villarama. Of the P105,000.00 deposited in the First National City Bank of New York,
representing the initial paid-up capital of the Corporation, P85,000.00 was covered by Villarama's personal
check. The deposit slip for the said amount of P105,000.00 was admitted in evidence as Exh. 23, which
shows on its face that P20,000.00 was paid in cash and P85,000.00 thereof was covered by Check No. F50271 of the First National City Bank of New York. The testimonies of Alfonso Sancho 5 and Joaquin
Amansec,6 both employees of said bank, have proved that the drawer of the check was Jose Villarama
himself.
Another witness, Celso Rivera, accountant of the Corporation, testified that while in the books of the
corporation there appears an entry that the treasurer received P95,000.00 as second installment of the
paid-in subscriptions, and, subsequently, also P100,000.00 as the first installment of the offer for second
subscriptions worth P200,000.00 from the original subscribers, yet Villarama directed him (Rivera) to make
vouchers liquidating the sums.7 Thus, it was made to appear that the P95,000.00 was delivered to
Villarama in payment for equipment purchased from him, and the P100,000.00 was loaned as advances to
the stockholders. The said accountant, however, testified that he was not aware of any amount of money
that had actually passed hands among the parties involved, 8 and actually the only money of the
corporation was the P105,000.00 covered by the deposit slip Exh. 23, of which as mentioned above,
P85,000.00 was paid by Villarama's personal check.
Further, the evidence shows that when the Corporation was in its initial months of operation, Villarama
purchased and paid with his personal checks Ford trucks for the Corporation. Exhibits 20 and 21 disclose
that the said purchases were paid by Philippine Bank of Commerce Checks Nos. 992618-B and 993621-B,
respectively. These checks have been sufficiently established by Fausto Abad, Assistant Accountant of
Manila Trading & Supply Co., from which the trucks were purchased 9 and Aristedes Solano, an employee of
the Philippine Bank of Commerce,10as having been drawn by Villarama.

Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger entries and vouchers showing that
Villarama had co-mingled his personal funds and transactions with those made in the name of the
Corporation, are very illuminating evidence. Villarama has assailed the admissibility of these exhibits,
contending that no evidentiary value whatsoever should be given to them since "they were merely
photostatic copies of the originals, the best evidence being the originals themselves." According to him, at
the time Pantranco offered the said exhibits, it was the most likely possessor of the originals thereof
because they were stolen from the files of the Corporation and only Pantranco was able to produce the
alleged photostat copies thereof.
Section 5 of Rule 130 of the Rules of Court provides for the requisites for the admissibility of secondary
evidence when the original is in the custody of the adverse party, thus: (1) opponent's possession of the
original; (2) reasonable notice to opponent to produce the original; (3) satisfactory proof of its existence;
and (4) failure or refusal of opponent to produce the original in court. 11 Villarama has practically admitted
the second and fourth requisites.12As to the third, he admitted their previous existence in the files of the
Corporation and also that he had seen some of them.13 Regarding the first element, Villarama's theory is
that since even at the time of the issuance of thesubpoena duces tecum, the originals were already
missing, therefore, the Corporation was no longer in possession of the same. However, it is not necessary
for a party seeking to introduce secondary evidence to show that the original is in the actual possession of
his adversary. It is enough that the circumstances are such as to indicate that the writing is in his
possession or under his control. Neither is it required that the party entitled to the custody of the
instrument should, on being notified to produce it, admit having it in his possession. 14 Hence, secondary
evidence is admissible where he denies having it in his possession. The party calling for such evidence
may introduce a copy thereof as in the case of loss. For, among the exceptions to the best evidence rule is
"when the original has been lost, destroyed, or cannot be produced in court." 15 The originals of the
vouchers in question must be deemed to have been lost, as even the Corporation admits such loss. Viewed
upon this light, there can be no doubt as to the admissibility in evidence of Exhibits 6 to 19 and 22.
Taking account of the foregoing evidence, together with Celso Rivera's testimony, 16 it would appear that:
Villarama supplied the organization expenses and the assets of the Corporation, such as trucks and
equipment;17 there was no actual payment by the original subscribers of the amounts of P95,000.00 and
P100,000.00 as appearing in the books;18 Villarama made use of the money of the Corporation and
deposited them to his private accounts;19 and the Corporation paid his personal accounts.20
Villarama himself admitted that he mingled the corporate funds with his own money. 21 He also admitted
that gasoline purchases of the Corporation were made in his name 22 because "he had existing account with
Stanvac which was properly secured and he wanted the Corporation to benefit from the rebates that he
received."23
The foregoing circumstances are strong persuasive evidence showing that Villarama has been too much
involved in the affairs of the Corporation to altogether negative the claim that he was only a part-time
general manager. They show beyond doubt that the Corporation is his alter ego.
It is significant that not a single one of the acts enumerated above as proof of Villarama's oneness with the
Corporation has been denied by him. On the contrary, he has admitted them with offered excuses.
Villarama has admitted, for instance, having paid P85,000.00 of the initial capital of the Corporation with
the lame excuse that "his wife had requested him to reimburse the amount entrusted to her by the
incorporators and which she had used to pay the obligations of Dr. Villarama (her husband) incurred while
he was still the owner of Villa Rey Transit, a single proprietorship." But with his admission that he had
received P350,000.00 from Pantranco for the sale of the two certificates and one unit,24 it becomes difficult
to accept Villarama's explanation that he and his wife, after consultation, 25 spent the money of their
relatives (the stockholders) when they were supposed to have their own money. Even if Pantranco paid the
P350,000.00 in check to him, as claimed, it could have been easy for Villarama to have deposited said

check in his account and issued his own check to pay his obligations. And there is no evidence adduced
that the said amount of P350,000.00 was all spent or was insufficient to settle his prior obligations in his
business, and in the light of the stipulation in the deed of sale between Villarama and Pantranco that
P50,000.00 of the selling price was earmarked for the payments of accounts due to his creditors, the
excuse appears unbelievable.
On his having paid for purchases by the Corporation of trucks from the Manila Trading & Supply Co. with
his personal checks, his reason was that he was only sharing with the Corporation his credit with some
companies. And his main reason for mingling his funds with that of the Corporation and for the latter's
paying his private bills is that it would be more convenient that he kept the money to be used in paying
the registration fees on time, and since he had loaned money to the Corporation, this would be set off by
the latter's paying his bills. Villarama admitted, however, that the corporate funds in his possession were
not only for registration fees but for other important obligations which were not specified. 26
Indeed, while Villarama was not the Treasurer of the Corporation but was, allegedly, only a part-time
manager,27 he admitted not only having held the corporate money but that he advanced and lent funds for
the Corporation, and yet there was no Board Resolution allowing it. 28
Villarama's explanation on the matter of his involvement with the corporate affairs of the Corporation only
renders more credible Pantranco's claim that his control over the corporation, especially in the
management and disposition of its funds, was so extensive and intimate that it is impossible to segregate
and identify which money belonged to whom. The interference of Villarama in the complex affairs of the
corporation, and particularly its finances, are much too inconsistent with the ends and purposes of the
Corporation law, which, precisely, seeks to separate personal responsibilities from corporate undertakings.
It is the very essence of incorporation that the acts and conduct of the corporation be carried out in its own
corporate name because it has its own personality.
The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders
who compose it is recognized and respected in all cases which are within reason and the law. 29 When the
fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or
generally the perpetration of knavery or crime,30 the veil with which the law covers and isolates the
corporation from the members or stockholders who compose it will be lifted to allow for its consideration
merely as an aggregation of individuals.
Upon the foregoing considerations, We are of the opinion, and so hold, that the preponderance of evidence
have shown that the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that the restrictive
clause in the contract entered into by the latter and Pantranco is also enforceable and binding against the
said Corporation. For the rule is that a seller or promisor may not make use of a corporate entity as a
means of evading the obligation of his covenant.31 Where the Corporation is substantially the alter ego of
the covenantor to the restrictive agreement, it can be enjoined from competing with the covenantee. 32
The Corporation contends that even on the supposition that Villa Rey Transit, Inc. and Villarama are one
and the same, the restrictive clause in the contract between Villarama and Pantranco does not include the
purchase of existing lines but it only applies to application for the new lines. The clause in dispute reads
thus:
(4) The SELLER shall not, for a period of ten (10) years from the date of this sale apply for any TPU
service identical or competing with the BUYER. (Emphasis supplied)
As We read the disputed clause, it is evident from the context thereof that the intention of the parties was
to eliminate the seller as a competitor of the buyer for ten years along the lines of operation covered by
the certificates of public convenience subject of their transaction. The word "apply" as broadly used has for

frame of reference, a service by the seller on lines or routes that would compete with the buyer along the
routes acquired by the latter. In this jurisdiction, prior authorization is needed before anyone can operate a
TPU service,33whether the service consists in a new line or an old one acquired from a previous operator.
The clear intention of the parties was to prevent the seller from conducting any competitive line for 10
years since, anyway, he has bound himself not to apply for authorization to operate along such lines for
the duration of such period.34
If the prohibition is to be applied only to the acquisition of new certificates of public convenience thru an
application with the Public Service Commission, this would, in effect, allow the seller just the same to
compete with the buyer as long as his authority to operate is only acquired thru transfer or sale from a
previous operator, thus defeating the intention of the parties. For what would prevent the seller, under the
circumstances, from having a representative or dummy apply in the latter's name and then later on
transferring the same by sale to the seller? Since stipulations in a contract is the law between the
contracting parties,
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. (Art. 19, New Civil Code.)
We are not impressed of Villarama's contention that the re-wording of the two previous drafts of the
contract of sale between Villarama and Pantranco is significant in that as it now appears, the parties
intended to effect the least restriction. We are persuaded, after an examination of the supposed drafts,
that the scope of the final stipulation, while not as long and prolix as those in the drafts, is just as broad
and comprehensive. At most, it can be said that the re-wording was done merely for brevity and simplicity.
The evident intention behind the restriction was to eliminate the sellers as a competitor, and this must be,
considering such factors as the good will35 that the seller had already gained from the riding public and his
adeptness and proficiency in the trade. On this matter, Corbin, an authority on Contracts has this to say. 36
When one buys the business of another as a going concern, he usually wishes to keep it going; he
wishes to get the location, the building, the stock in trade, and the customers. He wishes to step
into the seller's shoes and to enjoy the same business relations with other men. He is willing to pay
much more if he can get the "good will" of the business, meaning by this the good will of the
customers, that they may continue to tread the old footpath to his door and maintain with him the
business relations enjoyed by the seller.
... In order to be well assured of this, he obtains and pays for the seller's promise not to reopen
business in competition with the business sold.
As to whether or not such a stipulation in restraint of trade is valid, our jurisprudence on the matter 37says:
The law concerning contracts which tend to restrain business or trade has gone through a long
series of changes from time to time with the changing condition of trade and commerce. With
trifling exceptions, said changes have been a continuous development of a general rule. The early
cases show plainly a disposition to avoid and annul all contract which prohibited or restrained any
one from using a lawful trade "at any time or at any place," as being against the benefit of the
state. Later, however, the rule became well established that if the restraint was limited to "a certain
time" and within "a certain place," such contracts were valid and not "against the benefit of the
state." Later cases, and we think the rule is now well established, have held that a contract in
restraint of trade is valid providing there is a limitation upon either time or place. A contract,
however, which restrains a man from entering into business or trade without either a limitation as
to time or place, will be held invalid.

The public welfare of course must always be considered and if it be not involved and the restraint
upon one party is not greater than protection to the other requires, contracts like the one we are
discussing will be sustained. The general tendency, we believe, of modern authority, is to make the
test whether the restraint is reasonably necessary for the protection of the contracting parties. If
the contract is reasonably necessary to protect the interest of the parties, it will be upheld.
(Emphasis supplied.)
Analyzing the characteristics of the questioned stipulation, We find that although it is in the nature of an
agreement suppressing competition, it is, however, merely ancillary or incidental to the main agreement
which is that of sale. The suppression or restraint is only partial or limited: first, in scope, it refers only to
application for TPU by the seller in competition with the lines sold to the buyer; second, in duration, it is
only for ten (10) years; and third, with respect to situs or territory, the restraint is only along the lines
covered by the certificates sold. In view of these limitations, coupled with the consideration of P350,000.00
for just two certificates of public convenience, and considering, furthermore, that the disputed stipulation
is only incidental to a main agreement, the same is reasonable and it is not harmful nor obnoxious to
public service.38 It does not appear that the ultimate result of the clause or stipulation would be to leave
solely to Pantranco the right to operate along the lines in question, thereby establishing monopoly or
predominance approximating thereto. We believe the main purpose of the restraint was to protect for a
limited time the business of the buyer.
Indeed, the evils of monopoly are farfetched here. There can be no danger of price controls or deterioration
of the service because of the close supervision of the Public Service Commission. 39 This Court had stated
long ago,40that "when one devotes his property to a use in which the public has an interest, he virtually
grants to the public an interest in that use and submits it to such public use under reasonable rules and
regulations to be fixed by the Public Utility Commission."
Regarding that aspect of the clause that it is merely ancillary or incidental to a lawful agreement, the
underlying reason sustaining its validity is well explained in 36 Am. Jur. 537-539, to wit:
... Numerous authorities hold that a covenant which is incidental to the sale and transfer of a trade
or business, and which purports to bind the seller not to engage in the same business in
competition with the purchaser, is lawful and enforceable. While such covenants are designed to
prevent competition on the part of the seller, it is ordinarily neither their purpose nor effect to stifle
competition generally in the locality, nor to prevent it at all in a way or to an extent injurious to the
public. The business in the hands of the purchaser is carried on just as it was in the hands of the
seller; the former merely takes the place of the latter; the commodities of the trade are as open to
the public as they were before; the same competition exists as existed before; there is the same
employment furnished to others after as before; the profits of the business go as they did before to
swell the sum of public wealth; the public has the same opportunities of purchasing, if it is a
mercantile business; and production is not lessened if it is a manufacturing plant.
The reliance by the lower court on tile case of Red Line Transportation Co. v. Bachrach41 and finding that
the stipulation is illegal and void seems misplaced. In the said Red Line case, the agreement therein
sought to be enforced was virtually a division of territory between two operators, each company imposing
upon itself an obligation not to operate in any territory covered by the routes of the other. Restraints of this
type, among common carriers have always been covered by the general rule invalidating agreements in
restraint of trade. 42
Neither are the other cases relied upon by the plaintiff-appellee applicable to the instant case.
In Pampanga Bus Co., Inc. v. Enriquez,43the undertaking of the applicant therein not to apply for the lifting
of restrictions imposed on his certificates of public convenience was not an ancillary or incidental
agreement. The restraint was the principal objective. On the other hand, in Red Line Transportation Co.,
Inc. v. Gonzaga,44 the restraint there in question not to ask for extension of the line, or trips, or increase of

equipment was not an agreement between the parties but a condition imposed in the certificate of
public convenience itself.
Upon the foregoing considerations, Our conclusion is that the stipulation prohibiting Villarama for a period
of 10 years to "apply" for TPU service along the lines covered by the certificates of public convenience sold
by him to Pantranco is valid and reasonable. Having arrived at this conclusion, and considering that the
preponderance of the evidence have shown that Villa Rey Transit, Inc. is itself the alter ego of Villarama,
We hold, as prayed for in Pantranco's third party complaint, that the said Corporation should, until the
expiration of the 1-year period abovementioned, be enjoined from operating the line subject of the
prohibition.
To avoid any misunderstanding, it is here to be emphasized that the 10-year prohibition upon Villarama is
not against his application for, or purchase of, certificates of public convenience, but merely the operation
of TPU along the lines covered by the certificates sold by him to Pantranco. Consequently, the sale
between Fernando and the Corporation is valid, such that the rightful ownership of the disputed certificates
still belongs to the plaintiff being the prior purchaser in good faith and for value thereof. In view of the
ancient rule of caveat emptor prevailing in this jurisdiction, what was acquired by Ferrer in the sheriff's sale
was only the right which Fernando, judgment debtor, had in the certificates of public convenience on the
day of the sale.45
Accordingly, by the "Notice of Levy Upon Personalty" the Commissioner of Public Service was notified that
"by virtue of an Order of Execution issued by the Court of First Instance of Pangasinan, the rights, interests,
or participation which the defendant, VALENTIN A. FERNANDO in the above entitled case may have in
the following realty/personalty is attached or levied upon, to wit: The rights, interests and participation on
the Certificates of Public Convenience issued to Valentin A. Fernando, in Cases Nos. 59494, etc. ... Lines
Manila to Lingayen, Dagupan, etc. vice versa." Such notice of levy only shows that Ferrer, the vendee at
auction of said certificates, merely stepped into the shoes of the judgment debtor. Of the same principle is
the provision of Article 1544 of the Civil Code, that "If the same thing should have been sold to different
vendees, the ownership shall be transferred to the person who may have first taken possession thereof in
good faith, if it should be movable property."
There is no merit in Pantranco and Ferrer's theory that the sale of the certificates of public convenience in
question, between the Corporation and Fernando, was not consummated, it being only a conditional sale
subject to the suspensive condition of its approval by the Public Service Commission. While section 20(g)
of the Public Service Act provides that "subject to established limitation and exceptions and saving
provisions to the contrary, it shall be unlawful for any public service or for the owner, lessee or operator
thereof, without the approval and authorization of the Commission previously had ... to sell, alienate,
mortgage, encumber or lease its property, franchise, certificates, privileges, or rights or any part
thereof, ...," the same section also provides:
... Provided, however, That nothing herein contained shall be construed to prevent the transaction
from being negotiated or completed before its approval or to prevent the sale, alienation, or lease
by any public service of any of its property in the ordinary course of its business.
It is clear, therefore, that the requisite approval of the PSC is not a condition precedent for the validity and
consummation of the sale.
Anent the question of damages allegedly suffered by the parties, each of the appellants has its or his own
version to allege.
Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of defendants (Pantranco and Ferrer) in
acquiring the certificates of public convenience in question, despite constructive and actual knowledge on
their part of a prior sale executed by Fernando in favor of the said corporation, which necessitated the

latter to file the action to annul the sheriff's sale to Ferrer and the subsequent transfer to Pantranco, it is
entitled to collect actual and compensatory damages, and attorney's fees in the amount of P25,000.00.
The evidence on record, however, does not clearly show that said defendants acted in bad faith in their
acquisition of the certificates in question. They believed that because the bill of sale has yet to be
approved by the Public Service Commission, the transaction was not a consummated sale, and, therefore,
the title to or ownership of the certificates was still with the seller. The award by the lower court of
attorney's fees of P5,000.00 in favor of Villa Rey Transit, Inc. is, therefore, without basis and should be set
aside.
Eusebio Ferrer's charge that by reason of the filing of the action to annul the sheriff's sale, he had suffered
and should be awarded moral, exemplary damages and attorney's fees, cannot be entertained, in view of
the conclusion herein reached that the sale by Fernando to the Corporation was valid.
Pantranco, on the other hand, justifies its claim for damages with the allegation that when it purchased
ViIlarama's business for P350,000.00, it intended to build up the traffic along the lines covered by the
certificates but it was rot afforded an opportunity to do so since barely three months had elapsed when the
contract was violated by Villarama operating along the same lines in the name of Villa Rey Transit, Inc. It is
further claimed by Pantranco that the underhanded manner in which Villarama violated the contract is
pertinent in establishing punitive or moral damages. Its contention as to the proper measure of damages is
that it should be the purchase price of P350,000.00 that it paid to Villarama. While We are fully in accord
with Pantranco's claim of entitlement to damages it suffered as a result of Villarama's breach of his
contract with it, the record does not sufficiently supply the necessary evidentiary materials upon which to
base the award and there is need for further proceedings in the lower court to ascertain the proper
amount.
PREMISES CONSIDERED, the judgment appealed from is hereby modified as follows:
1. The sale of the two certificates of public convenience in question by Valentin Fernando to Villa Rey
Transit, Inc. is declared preferred over that made by the Sheriff at public auction of the aforesaid certificate
of public convenience in favor of Eusebio Ferrer;
2. Reversed, insofar as it dismisses the third-party complaint filed by Pangasinan Transportation Co.
against Jose M. Villarama, holding that Villa Rey Transit, Inc. is an entity distinct and separate from the
personality of Jose M. Villarama, and insofar as it awards the sum of P5,000.00 as attorney's fees in favor
of Villa Rey Transit, Inc.;
3. The case is remanded to the trial court for the reception of evidence in consonance with the above
findings as regards the amount of damages suffered by Pantranco; and
4. On equitable considerations, without costs. So ordered.
Concepcion, C. J., Reyes, J.B.L., Dizon, Makalintal, Castro and Fernando, JJ., concur.
Sanchez and Capistrano, JJ., took no part.
Zaldivar, J., is on leave.

G.R. No. L-5081

February 24, 1954

MARVEL BUILDING CORPORATION, ET AL., plaintiffs-appellees,


vs.
SATURNINO DAVID, in his capacity as Collector, Bureau of Internal Revenue, defendant-appellant.
Assistant Solicitor General Francisco Carreon for appellant.
Antonio Quirino and Rosendo J. Tansinsin for appellees.
LABRADOR, J.:
This action was brought by plaintiffs as stockholders of the Marvel Building Corporation to enjoin the
defendant Collector of Internal Revenue from selling at public auction various properties described in the
complaint, including three parcels of land, with the buildings situated thereon, known as the Aguinaldo
Building, the Wise Building, and the Dewey Boulevard-Padre Faura Mansion, all registered in the name of
the said corporation. Said properties were seized and distrained by defendant to collect war profits taxes
assessed against plaintiff Maria B. Castro (Exhibit B). Plaintiffs allege that the said three properties (lands
and buildings) belong to Marvel Building Corporation and not to Maria B. Castro, while the defendant
claims that Maria B. Castro is the true and sole owner of all the subscribed stock of the Marvel Building
Corporation, including those appearing to have been subscribed and paid for by the other members, and
consequently said Maria B. Castro is also the true and exclusive owner of the properties seized. The trial
court held that the evidence, which is mostly circumstantial, fails to show to its satisfaction that Maria B.
Castro is the true owner of all the stock certificates of the corporation, because the evidence is susceptible
of two interpretations and an interpretation may not be made which would deprive one of the property
without due process of law.
It appears that on September 15, 1950, the Secretary of Finance, upon consideration of the report of a
special committee assigned to study the war profits tax case of Mrs. Maria B. Castro, recommended the
collection of P3,593,950.78 as war profits taxes for the latter, and on September 22, 1953 the President
instructed the Collector that steps be taken to collect the same (Exhibits 114, 114-A to 114-D). Pursuant
thereto various properties, including the three above mentioned, were seized by the Collector of Internal
Revenue on October 31, 1950. On November 13, 1950, the original complaint in this case was filed. After
trial, the Court of First Instance of Manila rendered judgment ordering the release of the properties
mentioned, and enjoined the Collector of Internal Revenue from selling the same. The Collector of Internal
Revenue has appealed to this Court against the judgment.
The following facts are not disputed, or are satisfactorily proved by the evidence:
The Articles of Incorporation of the Marvel Building Corporation is dated February 12, 1947 and according
to it the capital stock is P2,000,000, of which P1,025,000 was (at the time of incorporation) subscribed and
paid for by the following incorporators:

Maria B.
Castro

250
shares

P
250,000.00

Amado A.
Yatco

100

" 100,000.00

Santiago Tan

100

" 100,000.00

Jose T. Lopez

90

"

90,000.00

Benita
Lamagna

90

"

90,000.00

C.S. Gonzales

80

"

80,000.00

Maria
Cristobal

70

"

70,000.00

Segundo
Esguerra, Sr.

75

"

75,000.00

Ramon
Sangalang

70

"

70,000.00

Maximo
Cristobal

55

"

55,000.00

Antonio
Cristobal

45

"

45,000.00

P1,025,000
.00

Maria B Castro was elected President and Maximo Cristobal, Secretary-Treasurer (Exhibit A).
The Wise Building was purchased on September 4, 1946, the purchase being made in the name of Dolores
Trinidad, wife of Amado A. Yatco (Exhibit V), and the Aguinaldo Building, on January 17, 1947, in the name
of Segundo Esguerra, Sr. (Exhibit M). Both building were purchased for P1,800,000, but as the corporation
had only P1,025,000, the balance of the purchase price was obtained as loans from the Insular Life
Assurance Co., Ltd. and the Philippine Guaranty Co., Inc. (Exhibit C).
Of the incorporators of the Marvel Building Corporation, Maximo Cristobal and Antonio Cristobal are halfbrothers of Maria B. Castro, Maria Cristobal is a half-sister, and Segundo Esguerra, Sr. a brother-in-law,
husband of Maria Cristobal, Maria B. Castro's half-sister. Maximo B. Cristobal did not file any income tax
returns before the year 1946, except for three years 1939 and 1940, but in these years he was exempted
from the tax. He has not filed any war profits tax return (Exhibit 54). Antonio Cristobal, Segundo Esguerra,
Sr. and Jose T. Lopez did not file any income tax returns for the years prior to 1946, and neither did they
file any war profits tax returns (Exhibit 52). Maria Cristobal filed income tax returns for the year 1929 to
1942, but they were exempt from the tax (Exhibit 53). Benita A. Lamagna did not file any income tax
returns prior to 1945, except for 1942 which was exempt. She did not file any was profits tax (Exhibit 55).
Ramon M. Sangalang did not file income tax returns up to 1945 except for the years 1936, 1937, 1938,
1939 and 1940. He has not filed any war profits tax return (Exhibit 57). Amada A. Yatco did not file income
tax returns prior to 1945, except for the years 1937, 1938, 1939, 1941 and 1942, but these were exempt.
He did not file any war profits tax return (Exhibit 58).

Antonio Cristobal's income in 1946 is P15,630, and in 1947, P4,550 (Exhibits 59-60); Maximo B. Cristobal's
income in 1946 is P19,759.10, in 1947, P9,773.47 (Exhibits 61-62); Segundo Esquerra's income in 1946 is
P5,500, in 1947, P7,754.32 (Exhibits 63-64); Jose T. Lopez's income in 1946 is P20,785, in 1947,
P14,302.77 (Exhibits 69-70); Benita A. Lamagna's income in 1945 is P1,559, in 1946, P6,463.36, in 1947,
P6,189.79 and her husband's income in 1947 is P10,825.53 (Exhibits 65-68); Ramon M. Sangalang's
income in 1945 is P5,500, in 1946, P18,300.00 (Exhibits 71-72); Santiago Tan's income in 1945 is P456, in
1947 is P9,167.95, and in 1947, P7,620.11 (Exhibits 73-75); and Amado Yatco's income in 1945 is P12,600,
in 1946, P23,960, and in 1947, P11,160 (Exhibits 76-78).
In October, 1945 Maria B. Castro, Nicasio Yatco, Maxima Cristobal de Esquerra, Maria Cristobal Lopez and
Maximo Cristobal organized the Maria B. Castro, Inc. with capital stock of P100,000, of which Maria B.
Castro subscribed for P99,600 and all others for P100 each. This was increased in 1950 to P500,000 and
Maria B. Castro subscribed P76,000 and the others P1,000 each (Exhibit 126).
It does not appear that the stockholders or the board of directors of the Marvel Building Corporation have
ever held a business meeting, for no books thereof or minutes meeting were ever mentioned by the
officers thereof or presented by them at the trial. The by-laws of the corporation, if any had ever been
approved, has not been presented. Neither does it appear that any report of the affairs of the corporation
has been made, either of its transactions or accounts.
From the book of accounts of the corporation, advances to the Marvel Building Corporation of P125,000
were made by Maria B. Castro in 1947, P102,916.05 in 1948 and P102,916.05 in 1948, and P160,910.96 in
1949 (Exhibit 118).
The main issue involved in these proceedings is: Is Maria B. Castro the owner of all the shares of stocks of
Marvel Building Corporation and the other stockholders mere dummies of hers?
The most important evidence presented by the Collector of Internal Revenue to prove his claim that Maria
B. Castro is the sole and exclusive owner of the shares of stock of the Marvel Building Corporation is
supposed endorsement in blank of the shares of stock issued in the name of the other incorporators, and
the possession thereof by Maria B. Castro. The existence of said endorsed certificates was testified to by
witnesses Felipe Aquino, internal revenue examiner, Antonio Mariano, examiner, and Crispin Llamado,
Under Secretary of Finance, who declared as follows: Towards the end of the year 1948 and about the
beginning of the year 1949, while Aquino and Mariano were examining the books and papers were
furnished by its secretary, Maximo Cristobal, they came across an envelope containing eleven stock
certificates, bound together by an Acco fastener, which (certificates) corresponded in number and in
amount on their face to the subscriptions of the stockholders that all the certificates, except that in the
name of Maria B. Castro, were endorsed in the bank by the subscribers; that as the two revenue agents
could not agree what to do with the certificates, Aquino brought them to Under-Secretary of Finance
Llamado, who thereupon suggested that photostatic copies thereof be taken; that this was done, and the
photostatic copies taken are (Exhibits 4, 5, 6, 7, 8, 9, 10, 11, 12 and 13; and in that July, 1950, copy-cat
copies of the above photostats were taken, and said copy-cat copies are Exhibits 40-49.
Julio Llamado, bookkeeper of the Marvel Building Corporation from 1947 to May, 1948, also testified that
he was the one who had prepared the original certificates, putting therein the number of shares in words in
handprint; that the originals were given to him by Maria B. Castro for comparison with the articles of
incorporation; that they were not yet signed by the President and by the Secretary-Treasurer when he had
the certificates; and that after the checking he returned all of them to Mrs. Castro. He recognized the
photostats, Exhibit 4 to 13 as photostats of the said originals. He also declared that he also prepared a set
of stock certificates, similar to the certificates which were copied in the photostats, the number of shares,
and the date issue, and that the certificates he had prepared are Exhibits H, H-1 to H-7 and J (Exhibits 3038). This set of certificates was made by him first and the set of which photostats were taken, a few days
later.
The plaintiffs offered a half-hearted denial of the existence of the endorsed blank certificates, Maximo
Cristobal, secretary of the corporation, saying that no investigation was ever made by Aquino and Mariano
in which said certificates were discovered by the latter. They, however, vigorously attack the credibility of
the witnesses for the defendant, imputing to the Llamados, enmity against Maria B. Castro, and to Aquino
and Mariano, a very doubtful conduct in not divulging the existence of the certificates either Lobrin, Chief
Income Tax Examiner, or to the Collector of Internal Revenue, both their immediate chiefs. Reliance is also

placed on a certificate, Exhibit W, wherein Aquino and others declare that the certificates (Exhibits 30 to
38, or H, H-1 to H-7 and J) were regular and were not endorsed when the same were examined. In
connection with this certificate, Exhibit W, we note that it states that the certificates examined were
Exhibits 30 to 38, the existence or character of which are not disputed. But the statement contains nothing
to the effect that the above certificates were the only one existence, according to their knowledge. Again
the certificate was issued for an examination on September 1949, not by Aquino and Mariano at the end of
1948 or the beginning of 1949. The certificate, therefore, neither denies the existence of the endorsed
certificates, nor that Aquino and Mariano had made an examination of the papers of the corporation at the
end of the year 1948. It ca not, therefore, discredit the testimonies of the defendant's witnesses.
As to the supposed enmity of the Llamados towards the plaintiff Maria B. Castro, we note that, supposing
that there really was such enmity, it does not appear that it was of such magnitude or force as could have
induced the Llamados and Maria B. Castro were close friends way back in 1947 and up to 1949; but that at
the time of the trial the friendship had been marred by misunderstandings. We believe that in 1948 and
1949 the Llamados were trusted friends of Maria B. Castro, and this explains why they had knowledge of
her secret transactions. The younger Llamado even made advances for the hand of Maria B. Castro's
daughter, and this at the time when as a bookkeeper he was entrusted with checking up the certificates of
stock. When the older Llamado kept secret the existence of the endorsed certificates, the friendship
between the two families was yet intact; hence, the existence of the endorsed certificates must have been
kept to himself by the older Llamado. All the above circumstances reinforce our belief that the Llamados
had personal knowledge of the facts they testify to, and the existence of this knowledge in turn renders
improbable plaintiffs' claim that their testimonies were biased.
Attempt was also made by the plaintiffs to show by expert evidence that the endorsement could have
been superimposed, i.e., that the signatures made on other papers and these were pasted and thereafter
the documents photographed. Judicial experience is to the effect that the expert witnesses can always be
obtained for both sides of an issue, most likely because expert witnesses are no longer impermeable to the
influence of fees (II Wigmore, Sec. 563(2), p. 646). And if parties are capable of paying fees, expert opinion
should be received with caution. In the case at bar, the opinion on the supposed superimposition was
merely a possibility, and we note various circumstances which proved that the signatures were not
superimposed and corroborate defendant's claim that they were genuine. In the first place,, the printed
endorsement contains a very heavy line at the bottom for the signature of the endorsee. This line in almost
all the endorsements is as clear as the printed letters above it, and at the points where the letters of the
signature extend down and transversed it (the line), there is no indication that the line is covered by a
superimposed paper. Again in these places both the signatures and the lines are clear and distinct where
they cross one another. Had there been superimpositions the above features could not have been possible.
In the second place, Maria B. Castro admitted having signed 25 stock certificates, but only eleven were
issued (t. s. n., p. 662). No explanation is given by her why she had to sign as many as 25 forms when
there were only eleven subscribers and eleven forms to be filed. This circumstances corroborate the young
Llamado's declaration that two sets of certificates had been prepared. The nineteen issue must be Exhibits
H, H-1 to H-7 and J, or Nos. 30 to 38, and the stock certificates endorsed whose photostatic copies are
Exhibits 4 to 13. It is to be remembered also, that it is a common practice among unscrupulous merchants
to carry two sets of books, one set for themselves and another to be shown to tax collectors. This practice
could not have been unknown to Maria B. Castro, who apparently had been able to evade the payment of
her war profits taxes. These circumstances, coupled with the testimony of Julio Llamado that two sets of
certificates were given to him for checking, show to an impartial mind the existence of the set of
certificates endorsed in blank, thus confirming the testimonies of the defendant's witnesses, Aquino,
Mariano and Crispin Llamado, and thus discrediting the obviously partial testimony of the expert presented
by plaintiffs. The genuineness of the signatures on the endorsements is not disputed. How could the
defendant have secured these genuine signatures? Plaintiffs offer no explanation for this, although they do
not question them. It follows that the genuine signatures must have been made on the stock certificates
themselves.
Next in importance among the evidence submitted by the defendant collector to prove his contention that
Maria B. Castro is the sole owner of the shares of stock of the Marvel Building Corporation, is the fact that
the other stockholders did not have incomes in such amounts, during the time of the organization of the
corporation in 1947, or immediately thereto, as to enable them to pay in full for their supposed
subscriptions. This fact is proved by their income tax returns, or the absence thereof. Let us take Amado A.
Yatco as an example. Before 1945 his returns were exempt from the tax, in 1945 he had P12,600 and in
1946, P23,000. He has four children. How could he have paid P100,000 in 1945 and 1946? Santiago Tan
who also contributed P100,000 had no appreciable income before 1946, and this year an income of only

P9,167.95. Jose T. Lopez also did not file any income tax returns before 1940 and 1946 he had an income
of only P20,785, whereas he is supposed to have subscribed P90,000 worth of stock early in 1947. Benita
Lamagna had no returns either up to 1945, except in 1942, which was exempt and in 1945 she had an
income of P1,550 and in 1946, P6,463.36. In the same situation are all the others, and besides, brothers
and sisters and brother-in-law of Maria B. Castro. On the other hand, Maria B. Castro had been found to
have made enormous gains or profits in her business such that the taxes thereon were assessed at around
P3,000,000. There was, therefore, a prima facie case out by the defendant collector that Maria B. Castro
had furnished (& all the money that the Marvel Building Corporation had.
In order the meet the above evidence only three of the plaintiffs testified, namely, Maximo Cristobal, the
corporation's secretary, who made the general assertion on the witness stand that the other stockholders
paid for their shares in full, Maria B. Castro, who stated that payments for the subscription were made to
her, and C.S. Gonzales, who admitted that Maria B. Castro, paid for his subscription. After a careful study of
the above testimonies, however, we find them subject to various objections. Maximo Cristobal declared
that he issued provincial receipts for the subscriptions supposedly paid to him in 1946; but none of the
supposed receipts were presented. If the subscriptions were really received by him, big as the amounts
were, he would have been able to tell specifically, by dates and in fix amounts, when and how the
payments were made. The general assertion of alleged payments, without the concrete days and amounts
of payments, are, according to our experience, positive identifications of untruthfulness, for when a
witness testified to a fact that actually occurs, the act is concretely stated and no generalization is made.
With respect to Maria B. Castro's testimony, we find it to be as untruthful as that of Cristobal. She declared
that payments of the subscriptions took place between July and December, 1946, and that first payments
were first deposited by her in the National City Bank of New York. A study of her account in said bank
(Exhibit 82), however, fails to show the alleged deposit of the subscriptions during the year 1946 (See
Exhibits 83-112). This fact completely belies her assertion. As to the testimony of C.S. Gonzales that Maria
B. Castro advanced his subscription, there is nothing in the evidence to corroborate it, and the
circumstances show otherwise. If he had really been a stockholder and Maria B. Castro advanced his
subscription, the agreement between him and Castro should have been put in writing, the amount
advanced being quite considerable (P80,000), and it appearing further that Gonzales is no close relative or
confidant of Castro.
Lastly, it is significant that the plaintiffs, the supposed subscribers, who should have come to court to
assert that they actually paid for their subscriptions, and are not mere dummies, did not do so. They could
not have afforded such a costly indifference, valued at from P70,000 to P100,000 each, if they were not
actual dummies. This failure on their part to take the witness stand to deny or refute the charge that they
were mere dummies is to us of utmost significance. What could have been easier to disprove the charge
that they were dummies, than for them to come to court and show their receipts and testify on the
payments they have paid on their subscriptions? This they, however refused to do so. They had it in their
power to rebut the charges, but they chose to keep silent. The non-production of evidence that would
naturally have been produced by an honest and therefore fearless claimant permits the inference that its
tenor is unfavorable to the party's cause (II Wigmore, Sec. 285, p.162). A party's silence to adverse
testimony is equivalent to an admission of its truth (Ibid, Sec. 289, p. 175).
Our consideration of the evidence submitted on both sides leads us to a conclusion exactly opposite that
arrived at by the trial court. In general the evidence offered by the plaintiffs is testimonial and direct
evidence, easy of fabrication; that offered by defendant, documentary and circumstantial, not only difficult
of fabrication but in most cases found in the possession of plaintiffs. There is very little room for choice as
between the two. The circumstantial evidence is not only convincing; it is conclusive. The existence of
endorsed certificates, discovered by the internal revenue agents between 1948 and 1949 in the possession
of the Secretary-Treasurer, the fact that twenty-five certificates were signed by the president of the
corporation, for no justifiable reason, the fact that two sets of certificates were issued, the undisputed fact
that Maria B. Castro had made enormous profits and, therefore, had a motive to hide them to evade the
payment of taxes, the fact that the other subscribers had no incomes of sufficient magnitude to justify
their big subscriptions, the fact that the subscriptions were not receipted for and deposited by the
treasurer in the name of the corporation but were kept by Maria B. Castro herself, the fact that the
stockholders or the directors never appeared to have ever met to discuss the business of the corporation,
the fact that Maria B. Castro advanced big sums of money to the corporation without any previous
arrangement or accounting, and the fact that the books of accounts were kept as if they belonged to Maria
B. Castro alone these facts are of patent and potent significance. What are their necessary implications?

Maria B. Castro would not have asked them to endorse their stock certificates, or be keeping these in her
possession, if they were really the owners. They never would have consented that Maria B. Castro keep the
funds without receipts or accounting, nor that she manages the business without their knowledge or
concurrence, were they owners of the stocks in their own rights. Each and every one of the facts all set
forth above, in the same manner, is inconsistent with the claim that the stockholders, other than Maria B.
Castro, own their shares in their own right. On the other hand, each and every one of them, and all of
them, can point to no other conclusion than that Maria B. Castro was the sole and exclusive owner of the
shares and that they were only her dummies.
In our opinion, the facts and circumstances duly set forth above, all of which have been proved to our
satisfaction, prove conclusively and beyond reasonable doubt (section 89, Rule 123 of the Rules of Court
and section 42 of the Provisional law for the application of the Penal Code) that Maria B. Castro is the sole
and exclusive owner of all the shares of stock of the Marvel Building Corporation and that the other
partners are her dummies.
Wherefore, the judgment appealed from should be, as it hereby is, reversed and the action filed by
plaintiffs-appellees, dismissed, with costs against plaintiffs-appellees. So ordered.
Paras, C.J., Pablo, Bengzon, Padilla, Montemayor, Jugo and Bautista Angelo, JJ., concur.

CONCEPT BUILDERS, INC., petitioner, vs. THE NATIONAL LABOR RELATIONS COMMISSION, (First
Division); and Norberto Marabe, Rodolfo Raquel, Cristobal Riego, Manuel Gillego,
Palcronio Giducos, Pedro Aboigar, Norberto Comendador, Rogello Salut, Emilio Garcia, Jr.,
Mariano Rio, Paulina Basea, Aifredo Albera, Paquito Salut, Domingo Guarino, Romeo
Galve, Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares, Ferdinand
Torres, Felipe Basilan, and Ruben Robalos, respondents.
DECISION
HERMOSISIMA, JR., J.:
The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but
the alter ego of a person or of another corporation. Where badges of fraud exist; where public convenience
is defeated; where a wrong is sought to be justified thereby, the corporate fiction or the notion of legal
entity should come to naught. The law in these instances will regard the corporation as a mere association
of persons and, in case of two corporations, merge them into one.
Thus, where a sister corporation is used as a shield to evade a corporations subsidiary liability for
damages, the corporation may not be heard to say that it has a personality separate and distinct from the
other corporation. The piercing of the corporate veil comes into play.
This special civil action ostensibly raises the question of whether the National Labor Relations
Commission committed grave abuse of discretion when it issued a break-open order to the sheriff to be
enforced against personal property found in the premises of petitioners sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road,
Valenzuela, Metro Manila, is engaged in the construction business. Private respondents were employed by
said company as laborers, carpenters and riggers.
On November, 1981, private respondents were served individual written notices of termination of
employment by petitioner, effective on November 30, 1981. It was stated in the individual notices that
their contracts of employment had expired and the project in which they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time of the termination of private
respondents employment, the project in which they were hired had not yet been finished and
completed. Petitioner had to engage the services of sub-contractors whose workers performed the
functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and nonpayment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to reinstate private
respondents and to pay them back wages equivalent to one year or three hundred working days.
On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion for
reconsideration filed by petitioner on the ground that the said decision had already become final and
executory.2
On October 16, 1986, the NLRC Research and Information Department made the finding that private
respondents backwages amounted to P199,800.00.3

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the
Decision, dated December 19, 1984. The writ was partially satisfied through garnishment of sums from
petitioners debtor, the Metropolitan Waterworks and Sewerage Authority, in the amount of
P81,385.34. Said amount was turned over to the cashier of the NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff to
collect from herein petitioner the sum of P117,414.76, representing the balance of the judgment award,
and to reinstate private respondents to their former positions.
On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution on
petitioner through the security guard on duty but the service was refused on the ground that petitioner no
longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second alias
writ of execution.
The said writ had not been enforced by the special sheriff because, as stated in his progress report,
dated November 2, 1989:
1. All the employees inside petitioners premises at 355 Maysan Road, Valenzuela, Metro Manila, claimed
that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from removing the properties he had levied
upon.4
The said special sheriff recommended that a break-open order be issued to enable him to enter
petitioners premises so that he could proceed with the public auction sale of the aforesaid personal
properties on November 7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter
alleging that the properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc.
(HPPI) of which he is the Vice-President.
On November 23, 1989, private respondents filed a Motion for Issuance of a Break-Open Order,
alleging that HPPI and petitioner corporation were owned by the same incorporator! stockholders. They
also alleged that petitioner temporarily suspended its business operations in order to evade its legal
obligations to them and that private respondents were willing to post an indemnity bond to answer for any
damages which petitioner and HPPI may suffer because of the issuance of the break-open order.
In support of their claim against HPPI, private respondents presented duly certified copies of the
General Informations Sheet, dated May 15, 1987, submitted by petitioner to the Securities and Exchange
Commission (SEC) and the General Information Sheet, dated May 15, 1987, submitted by HPPI to the
Securities and Exchange Commission.
The General Information Sheet submitted by the petitioner1 revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
HPPI P6,999,500.00

Antonio W. Lim 2,900,000.00


Dennis S. Cuyegkeng 300.00
Elisa C. Lim 100,000.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
Dennis S. Cuyegkeng Member
Elisa C. Lim Member
Teodulo R. Dino Member
Virgilio O. Casino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa 0. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road
Valenzuela, Metro Manila.5
On the other hand, the General Information Sheet of HPPI revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
Antonio W. Lim P400,000.00
Elisa C. Lim 57,700.00
AWL Trading 455,000.00
Dennis S. Cuyegkeng 40,100.00

Teodulo R. Dino 100.00


Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
Elisa C. Lim Member
Dennis S. Cuyegkeng Member
Virgilio O. Casino Member
Teodulo R. Dino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa O. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila.6
On February 1, 1990, HPPI filed an Opposition to private respondents motion for issuance of a breakopen order, contending that HPPI is a corporation which is separate and distinct from petitioner. HPPI also
alleged that the two corporations are engaged in two different kinds of businesses, i.e., HPPI is a
manufacturing firm while petitioner was then engaged in construction.
On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents motion for
break-open order.
Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the order of the
Labor Arbiter, issued a break-open order and directed private respondents to file a bond. Thereafter, it
directed the sheriff to proceed with the auction sale of the properties already levied upon. It dismissed the
third-party claim for lack of merit.
Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution,
dated December 3, 1992.
Hence, the resort to the present petition.
Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution of
its decision despite a third-party claim on the levied property. Petitioner further contends, that the doctrine
of piercing the corporate veil should not have been applied, in this case, in the absence of any showing
that it created HPPI in order to evade its liability to private respondents. It also contends that HPPI is
engaged in the manufacture and sale of steel, concrete and iron pipes, a business which is distinct and

separate from petitioners construction business. Hence, it is of no consequence that petitioner and HPPI
shared the same premises, the same President and the same set of officers and subscribers. 7
We find petitioners contention to be unmeritorious.
It is a fundamental principle of corporation law that a corporation is an entity separate and distinct
from its stockholders and from other corporations to which it may be connected. 8 But, this separate and
distinct personality of a corporation is merely a fiction created by law for convenience and to promote
justice.9 So, when the notion of separate juridical personality is used to defeat public convenience, justify
wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, 10 this separate
personality of the corporation may be disregarded or the veil of corporate fiction pierced. 11 This is true
likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another
corporation.12
The conditions under which the juridical entity may be disregarded vary according to the peculiar facts
and circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are
some probative factors of identity that will justify the application of the doctrine of piercing the corporate
veil, to wit:
1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business.13
The SEC en banc explained the instrumentality rule which the courts have applied in disregarding the
separate juridical personality of corporations as follows:
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a
mere instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may
be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but
such domination of finances, policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind
that the control must be shown to have been exercised at the time the acts complained of took
place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which
the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:
1. Control, not mere majority or complete stock control, but complete domination, not only of finances but
of policy and business practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained
of.

The absence of any one of these elements prevents piercing the corporate veil. in applying the
instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendants relationship to that operation. 14
Thus, the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a
sham or a subterfuge is purely one of fact.15
In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations
on April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission on May 15,
1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand,
HPPI, the third-party claimant, submitted on the same day, a similar information sheet stating that its
office address is at 355 Maysan Road, Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casino as the corporate secretary of both
corporations. It would also not be amiss to note that both corporations had the same president, the same
board of directors, the same corporate officers, and substantially the same subscribers.
From the foregoing, it appears that, among other things, the respondent (herein petitioner) and the thirdparty claimant shared the same address and/or premises. Under this circumstances, (sic) it cannot be said
that the property levied upon by the sheriff were not of respondents. 16
Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of backwages and to bar their reinstatement to their former positions. HPPI is obviously a
business conduit of petitioner corporation and its emergence was skillfully orchestrated to avoid the
financial liability that already attached to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of Industrial Relations17 where we had the
occasion to rule:
Respondent courts findings that indeed the Claparols Steel and Nail Plant, which ceased operation of June
30, 1957, was SUCCEEDED by the Claparols Steel Corporation effective the next day, July 1, 1957, up to
December 7, 1962, when the latter finally ceased to operate, were not disputed by petitioner. it is very
clear that the latter corporation was a continuation and successor of the first entity x x x. Both
predecessors and successor were owned and controlled by petitioner Eduardo Claparols and there was no
break in the succession and continuity of the same business. This avoiding-the-liability scheme is very
patent, considering that 90% of the subscribed shares of stock of the Claparols Steel Corporation (the
second corporation) was owned by respondent x x x Claparols himself, and all the assets of the dissolved
Claparols Steel and Nail Plant were turned over to the emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose
veil in the present case could, and should, be pierced as it was deliberately and maliciously designed to
evade its financial obligation to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the
execution, private respondents had no other recourse but to apply for a break-open order after the thirdparty claim of HPPI was dismissed for lack of merit by the NLRC. This is in consonance with Section 3, Rule
VII of the NLRC Manual of Execution of Judgment which provides that:
Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his representative
entry to the place where the property subject of execution is located or kept, the judgment creditor may
apply to the Commission or Labor Arbiter concerned for a break-open order.

Furthermore, our perusal of the records shows that the twin requirements of due notice and hearing
were complied with. Petitioner and the third-party claimant were given the opportunity to submit evidence
in support of their claim.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open order
issued by the Labor Arbiter.
Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial agencies
supported by substantial evidence are binding on this Court and are entitled to great respect, in the
absence of showing of grave abuse of a discretion.18
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23,
1992 and December 3, 1992, are AFFIRMED.
SO ORDERED

G.R. No. L-30822 July 31, 1975


EDUARDO CLAPAROLS, ROMULO AGSAM and/or CLAPAROLS STEEL AND NAIL PLANT, petitioners,
vs.
COURT OF INDUSTRIAL RELATIONS, ALLIED WORKERS' ASSOCIATION and/or DEMETRIO
GARLITOS, ALFREDO ONGSUCO, JORGE SEMILLANO, SALVADOR DOROTEO, ROSENDO ESPINOSA,
LUDOVICO BALOPENOS, ASER AMANCIO, MAXIMO QUIOYO, GAUDENCIO QUIOYO, and IGNACIO
QUIOYO,respondents.
Ruben G. Bala for petitioners.
Rolando N. Medalla for private respondents.

MAKASIAR, J.:
A petition for certiorari to set aside the order of respondent Court of Industrial Relations dated May 30,
1969 directing petitioners to pay back wages and bonuses to private respondents as well as its resolution
of July 5, 1969 denying the motion for reconsideration of said order in Case No. 32-ULP-Iloilo entitled "Allied
Workers' Association, et. al., versus Eduardo Claparols, et. al.."
It appears that on August 6, 1957, a complaint for unfair labor practice was filed by herein private
respondent Allied Workers' Association, respondent Demetrio Garlitos and ten (10) respondent workers
against herein petitioners on account of the dismissal of respondent workers from petitioner Claparols
Steel and Nail Plant.
On September 16, 1963, respondent Court rendered its decision finding "Mr. Claparols guilty of union
busting and" of having "dismissed said complainants because of their union activities," and ordering
respondents "(1) To cease and desist from committing unfair labor practices against their employees and
laborers; (2) To reinstate said complainants to their former or equivalent jobs, as soon as possible, with
back wages from the date of their dismissal up to their actual reinstatement" (p. 12, Decision; p. 27, rec.).
A motion to reconsider the above decision was filed by herein petitioners, which respondent Court,
sitting en banc, denied in a resolution dated January 27, 1964.
On March 30, 1964, counsel for herein respondent workers (complainants in the ULP case) filed a motion
for execution of respondent Court's September 16, 1963 decision.
On May 14, 1964, respondent Court, in its order of September 16, 1963, granted execution and directed
herein petitioners
to reinstate the above complainants to their former or equivalent jobs within five (5) days
after receipt of a copy of this order. In order to implement the award of back wages, the
Chief of the Examining Division or any of his assistants is hereby directed to proceed to the
office of the respondents at Matab-ang, Talisay, Negros Occidental, and examine its payrolls
and other pertinent records and compute the back wages of the complainants in accordance
with the decision dated September 16, 1963, and, upon termination, to submit his report as
soon as possible for further disposition (p. 7, Brief for Respondents, p. 113, rec.).
which was reiterated by respondent Court in a subsequent order dated November 10, 1964 (pp. 7-8, Brief
for Respondents, p. 113, rec.).

On December 14, 1964, respondent workers were accompanied by the Chief of Police of Talisay, Negros
Occidental to the compound of herein petitioner company to report for reinstatement per order of the
court. Respondent workers were, however, refused reinstatement by company accountant Francisco Cusi
for he had no order from plant owner Eduardo Claparols nor from his lawyer Atty. Plaridel Katalbas, to
reinstate respondent workers.
Again, on December 15, 1964, respondent workers were accompanied by a police officer to the company
compound, but then, they were again refused reinstatement by Cusi on the same ground.
On January 15, 1965, the CIR Chief Examiner Submitted his report containing three computations, to wit:
The first computation covers the period February 1, 1957 to October 31, 1964. The second is
up to and including December 7, 1962, when the corporation stopped operations, while the
third is only up to June 30, 1957 when the Claparols Steel and Nail Plant ceased to operate
(Annex B, Petition for Review on Certiorari, p. 14, Brief for appellees, p. 113, rec.).
with the explanation that:
6. Since the records of the Claparols Steel Corporation show that it was established on July 1,
1957 succeeding the Claparols Steel and Nail Plant which ceased operations on June 30,
1957, and that the Claparols Steel Corporation stopped operations on December 7, 1962,
three (3) computations are presented herein for the consideration of this Honorable Court (p.
2, Report of Examiner, p. 29, rec.).
On January 23, 1965, petitioners filed an opposition alleging that under the circumstances presently
engulfing the company, petitioner Claparols could not personally reinstate respondent workers; that
assuming the workers are entitled to back wages, the same should only be limited to three months
pursuant to the court ruling in the case of Sta. Cecilia Sawmills vs. CIR (L-19273-74, February 20, 1964);
and that since Claparols Steel Corporation ceased to operate on December 7, 1962, re-employment of
respondent workers cannot go beyond December 7, 1962.
A reply to petitioner's opposition was filed by respondent workers, alleging among others, that Claparols
Steel and Nail Plant and Claparols Steel and Nail Corporation are one and the same corporation controlled
by petitioner Claparols, with the latter corporation succeeding the former.
On November 28, 1966, after conducting a series of hearings on the report of the examiner, respondent
Court issued an order, the dispositive portion of which reads:
WHEREFORE, the Report of the. Examiner filed on January 15, 1965, is hereby approved
subject to the foregoing findings and dispositions. Consequently, the Corporation Auditing
Examiner is directed to recompute the back wages of complainants Demetrio Garlitos and
Alfredo Ongsuco on the basis of P200.00 and P270.00 a month, respectively; to compute
those of complainant Ignacio Quioyo as aforesaid; to compute the deductible earnings of
complainants Ongsuco, Jorge Semillano and Garlitos, as found in the body of this order; and
to compute the bonuses of each and every complainant, except Honorato Quioyo.
Thereafter, as soon as possible, the Examiner should submit a report in compliance herewith
of the Court's further disposition (p. 24, Brief for Respondents, p. 113, rec.).
On December 7, 1966, a motion for reconsideration was filed by petitioner, assailing respondent Court's
ruling that (1) the ruling in the case of Sta. Cecilia Sawmills Inc. CIR, et. al, does not apply in the case at
bar; and (2) that bonus should be included in the recoverable wages.

On December 14, 1966, a counter-opposition was filed by private respondents alleging that petitioners'
motion for reconsideration was pro forma, it not making express reference to the testimony or
documentary evidence or to the provision of law alleged to be contrary to such findings or conclusions of
respondent Court.
On February 8, 1967, respondent Court of Industrial Relations dismissed petitioners' motion for
reconsideration for being pro forma.
Whereupon, petitioners filed a petition for certiorari with this COURT in G.R. No. L-27272 to set aside the
November 28, 1966 order of respondent Court, as well as its February 8, 1967 resolution. Petitioners
assigned therein as errors of law the very same assignment of errors it raises in the present case, to wit:
I
THE RESPONDENT COURT ERRED AND/OR ACTED WITH GRAVE ABUSE OF DISCRETION,
AMOUNTING TO LACK OF JURISDICTION, IN HOLDING IN THE ORDER UNDER REVIEW THAT
BONUSES SHOULD BE PAID TO THE RESPONDENT WORKERS DESPITE THE FACT THAT THE
SAME WAS NOT ADJUDICATED IN ITS ORIGINAL DECISION.
II
THE RESPONDENT COURT ERRED AND/OR ACTED WITH GRAVE ABUSE OF DISCRETION,
AMOUNTING TO LACK OF JURISDICTION, IN NOT APPLYING THE DOCTRINE LAID DOWN BY
THIS HONORABLE TRIBUNAL IN THE CASE OF "STA. CECILIA SAWMILLS, INC. VS. C.I.R., ET.
AL.," G.R. No.
L-19273-74, PROMULGATED ON FEBRUARY 29, 1964 (pp. 10-11, rec.).
On April 27, 1967, the Supreme Court denied petitioners' petition for certiorari (p. 77, rec. of L-27272),
which was reiterated on May 19, 1967 (p. 27, Respondent's Brief, p. 113, rec.; p. 81, rec. of L-27272).
On May 3, 1967, private respondents moved to have the workers' back wages properly recomputed. A
motion to the same end was reiterated by private respondents on June 14, 1967.
On July 13, 1967, respondent Court directed a recomputation of the back wages of respondent workers in
accordance with its order dated November 28, 1966. The said order in part reads:
WHEREFORE, the Chief Auditing Examiner of the Court or any of his assistants, is hereby
directed to recompute the back wages of the workers involved in this case in accordance
with the Order of November 28, 1966 within 20 days from receipt of a copy of this Order (p.
28, Brief for Respondents, p. 113, rec.).
Then on March 21, 1968, the Chief Examiner came out with his report, the disputed portion of which
(regarding bonuses) reads:
xxx xxx xxx
4. The yearly bonuses of the employees and laborers of respondent corporation are given on
the following basis:
Basic Additional:
a. For every dependent 1% of monthly salary

b. For every dependent in elementary grade 2% of monthly salary


c. For every dependent in high school 3% of monthly salary
d. For every dependent in college 5% of monthly salary
xxx xxx xxx
7. The computed ... bonuses after deducting the earnings elsewhere of Messrs. Ongsuco,
Garlitos and Semillano are as follows:
Name x x x Bonuses x x x
1. Alfredo Ongsuco P1,620.00
2. Demetrio Garlitos 1,200.00
3. Ignacio Quioyo 455.23
4. Aser Abancio 461.00
5. Ludovico Belopeos 752.05
6. Salvador Doroteo 714.70
7. Rosendo Espinosa 1,075.40
8. Gaudencio Quioyo 1,167.92
9. Jorge Semillano 1,212.08
10. Maximo Quioyo 449.41
Total P9,107.79
(Pp. 30-31, Respondent's Brief, p. 113, rec.)
On April 16, 1968, petitioners filed their opposition to the report of the Examiner dated March 21, 1968 on
grounds already rejected by respondent Court in its order dated November 28, 1966, and by the Supreme
Court also in its ruling in G.R. No. L-27272.
On May 4, 1968, a rejoinder to petitioners' opposition was filed by private respondents, alleging among
others "that the grounds of petitioners' opposition were the same grounds raised by them before and
passed upon by respondent Court and this Honorable Tribunal; that this order of November 28, 1966 which
passed upon these issues became final and executory on June 3, 1967 from the Honorable Supreme Court.
(Order of respondent Court dated July 13, 1967). [p. 32, Brief for Respondents, p. 113, rec.].
On July 26, 1968, private respondents filed their motion for approval of the Report of the Examiner
submitted on March 21, 1968, alleging, among others, that petitioners, in their opposition, did not actually
dispute the data elicited by the Chief Examiner but rather harped on grounds which, as already stated, had
already been turned down by the Supreme Court.
On October 19, 1968, herein private respondents filed their "Constancia", submitting the case for
resolution of respondent Court of Industrial Relations.
On May 30, 1969, respondent Court issued an order, subject of the present appeal, the dispositive portion
of which reads:
WHEREFORE, there being no proof offered to substantiate respondent Eduardo Claparols'
opposition, the Examiner's Report should be, and it is hereby, APPROVED. Consequently,
pursuant to the decision dated September 16, 1963, respondent ... (petitioners herein) are
hereby directed to pay the respective back wages and bonuses of the

complainants (respondents herein) ... (p. 35, Brief for Respondents; p. 113, rec.; emphasis
supplied).1wph1.t
On June 7, 1969, petitioners filed a motion for reconsideration on practically the same grounds previously
raised by them.
On June 30, 1969, respondents filed an opposition to petitioners' motion for reconsideration, with the
following allegations:
1. The issues raised, namely, whether bonuses should be included in the award for back
wages had already been resolved by respondent court in its orders dated November 28,
1966, and December 7, 1966, and in the Resolution of the Honorable Supreme Court in G.R.
No. L-27272 dated April 26, 1967 and May 19, 1967, and the same is already a settled and
final issue.
2. Petitioners' motion for reconsideration is merely a rehash of previous arguments, effete
and unrejuvenated, pro forma, and intended merely to delay the proceedings.
As correctly contended by private respondents, the present petition is barred by Our resolutions of April 26,
1967 and May 19, 1967 in G.R. No. L-27272 (Eduardo Claparols, et. al. vs. CIR, et. al.) [pp. 77-83, rec. of L27272], dismissing said case, wherein said petitioners invoked the applicability of the doctrine in Sta.
Cecilia Sawmills, Inc. vs. CIR, et. al. (L-19273-74, Feb. 29, 1964, 10 SCRA 433) and impugned the illegality
of the order of respondent Court dated November 28, 1966 directing the computation and payment of the
bonuses, aside from back wages on the ground that these bonuses were not included in the decision of
September 16, 1963, which had long become final.
The aforesaid resolutions in G.R. No. L-27272 constitute the law of the instant case, wherein herein
petitioners raised again practically the same issues invoked in the abovementioned case. The denial of the
petition in G.R. No. L-27272 suffices to warrant the denial of the present petition; and We need not go any
further.
However, without lending a sympathetic ear to the obvious desire of herein petitioners of this Court to reexamine which would be an exercise in futility the final ruling in G.R. No. L-27272, which as abovestated is the law of the instant case, but solely to remind herein petitioners, We reiterate the governing
principles.
WE uniformly held that "a bonus is not a demandable and enforceable obligation, except when it is a part
of the wage or salary compensation" (Philippine Education Co. vs. CIR and the Union of Philippine Co.
Employees [NLU], 92 Phil. 381; Ansay, et. al. vs. National Development Co., et. al., 107 Phil. 998, 999;
Emphasis supplied).
In Atok Big Wedge Mining Co. vs. Atok Big Wedge Mutual Benefit Association (92 Phil. 754), this Court, thru
Justice Labrador, held:
Whether or not bonus forms part of wages depends upon the condition or circumstance for
its payment.If it is an additional compensation WHICH THE EMPLOYER PROMISED AND
AGREED to give without any condition imposed for its payment ... then it is part of the wage.
(Emphasis supplied).1wph1.t
In Altomonte vs. Philippine American Drug Co. (106 Phil. 137), the Supreme Court held that an employee is
not entitled to bonus where there is no showing that it had been granted by the employer to its employees
periodically or regularly as to become part of their wages or salaries. The clear implication is that bonus is

recoverable as part of the wage or salary where the employer regularly or periodically gives it to
employees.
American jurisprudence equally regards bonuses as part of compensation or recoverable wages.
Thus, it was held that "... it follows that in determining the regular rate of pay, a bonus which in fact
constitutes PART OF AN EMPLOYEE'S compensation, rather than a true gift or gratuity, has to be taken into
consideration." (48 Am. Jur. 2d, Labor and Labor Relations, No. 1555, citing the cases of Triple "AAA" Co. vs.
Wirtz and Haber vs. Americana Corporation; Emphasis supplied). It was further held that "... the regular
rate includes incentive bonuses paid to the employees in addition to the guaranteed base rates regardless
of any contract provision to the contrary and even though such bonuses could not be determined or paid
until such time after the pay day" (48 Am. Jur. 2d, Labor and Labor Relations, No. 1555, citing the case of
Walling vs. Harnischfeger Corp., 325 US 427, 89 L Ed 1711, 65 S Ct. 1246; Emphasis supplied).1wph1.t
Petitioners in the present case do not dispute that as a matter of tradition, the company has been doling
out bonuses to employees. In fact, the company balance sheets for the years 1956 to 1962 contained
bonus and pension computations which were never repudiated or questioned by petitioners. As such,
bonus for a given year earmarked as a matter of tradition for distribution to employees has formed part of
their recoverable wages from the company. Moreover, with greater reason, should recovery of bonuses as
part of back wages be observed in the present case since the company, in the light of the very admission
of company accountant Francisco Cusi, distributes bonuses to its employees even if the company has
suffered losses. Specifically, petitioner company has done this in 1962 (t.s.n., p. 149, Sept. 20, 1965).
Since bonuses are part of back wages of private respondents, the order of May 30, 1969, directing the
payment of their bonuses, did not amend the decision of September 16, 1963 of respondent Court
directing payment of their wages, which has long become final and executory, in the same way that the
previous order of May 14, 1964 granting execution of said decision of September 16, 1963 also directed
the computation of the wages to be paid to private respondents as decreed by the decision of September
16, 1963. All the orders of May 30, 1969, November 28, 1966 and May 14, 1964 merely implement the
already final and executory decision of September 16, 1963.
Petitioners insist that We adopt the ruling in the Sta. Cecilia Sawmills case wherein the recoverable back
wages were limited to only three (3) months; because as in the Sta. Cecilia Sawmills case, the Claparols
Steel and Nail Plant ceased operations due to enormous business reverses.
Respondent Court's findings that indeed the Claparols Steel and Nail Plant, which ceased operation of June
30, 1957, was SUCCEEDED by the Claparols Steel Corporation effective the next day, July 1, 1957 up to
December 7, 1962, when the latter finally ceased to operate, were not disputed by petitioners. It is very
clear that the latter corporation was a continuation and successor of the first entity, and its emergence
was skillfully timed to avoid the financial liability that already attached to its predecessor, the Claparols
Steel and Nail Plant. Both predecessors and successor were owned and controlled by the petitioner
Eduardo Claparols and there was no break in the succession and continuity of the same business. This
"avoiding-the-liability" scheme is very patent, considering that 90% of the subscribed shares of stocks of
the Claparols Steel Corporation (the second corporation) was owned by respondent (herein petitioner)
Claparols himself, and all the assets of the dissolved Claparols Steel and Nail Plant were turned over to the
emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil
in the present case could, and should, be pierced as it was deliberately and maliciously designed to evade
its financial obligation to its employees.
It is well remembering that in Yutivo & Sons Hardware Company vs. Court of Tax Appeals (L-13203, Jan. 28,
1961, 1 SCRA 160), We held that when the notion of legal entity is used to defeat public convenience,

justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association or
persons, or, in the case of two corporations, will merge them into one.
In Liddel & Company, Inc. vs. Collector of Internal Revenue (L-9687, June 30, 1961, 2 SCRA 632), this Court
likewise held that where a corporation is a dummy and serves no business purpose and is intended only as
a blind, the corporate fiction may be ignored.
In Commissioner of Internal Revenue vs. Norton and Harrison Company (L-17618, Aug. 31, 1964, 11 SCRA
714), We ruled that where a corporation is merely an adjunct, business conduit or alter ego of another
corporation, the fiction of separate and distinct corporate entities should be disregarded.
To the same uniform effect are the decisions in the cases of Republic vs. Razon (L-17462, May 29, 1967, 20
SCRA 234) and A.D. Santos, Inc. vs. Vasquez (L-23586, March 20, 1968, 22 SCRA 1156).
WE agree with respondent Court of Industrial Relations, therefore, that the amount of back wages
recoverable by respondent workers from petitioners should be the amount accruing up to December 7,
1962 when the Claparols Steel Corporation ceased operations.
WHEREFORE, PETITION IS HEREBY DENIED WITH TREBLE COSTS AGAINST PETITIONERS TO BE PAID BY
THEIR COUNSEL.
Castro (Chairman), Esguerra, Muoz Palma and Martin, JJ., concur.
Teehankee, J., is on leave.
THIRD DIVISION
[G.R. No. 159121. February 3, 2005]
PAMPLONA PLANTATION COMPANY, INC. and/or JOSE LUIS BONDOC, petitioners, vs. RODEL
TINGHIL, MARYGLENN SABIHON, ESTANISLAO BOBON, CARLITO TINGHIL, BONIFACIO
TINGHIL, NOLI TINGHIL, EDGAR TINGHIL, ERNESTO ESTOMANTE, SALLY TOROY, BENIGNO
TINGHIL JR., ROSE ANN NAPAO, DIOSDADO TINGHIL, ALBERTO TINGHIL, ANALIE TINGHIL,
and ANTONIO ESTOMANTE, respondents.
DECISION
PANGANIBAN, J.:
To protect the rights of labor, two corporations with identical directors, management, office and payroll
should be treated as one entity only. A suit by the employees against one corporation should be deemed
as a suit against the other. Also, the rights and claims of workers should not be prejudiced by the acts of
the employer that tend to confuse them about its corporate identity. The corporate fiction must yield to
truth and justice.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to annul the January
31, 2003 Decision[2] and the June 17, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR SP No.
62813. The assailed Decision disposed as follows:
WHEREFORE, in view of the foregoing, the petition is GRANTED. The assailed decision of public
respondent NLRC dated 19 July 2000 [is] REVERSED and SET ASIDE and a new one

entered DIRECTINGprivate respondents to reinstate petitioners, except Rufino Bacubac, Felix Torres and
Antonio Canolas, to their former positions without loss of seniority rights plus payment of full backwages.
However, if reinstatement is no longer feasible, a one-month salary for every year of service shall be paid
the petitioners as ordered by the Labor Arbiter in his decision dated 31 August 1998 plus payment of full
backwages computed from date of illegal dismissal to the finality of this decision. [4]
The Decision[5] of the National Labor Relations Commission (NLRC), [6] reversed by the CA, disposed as
follows:
WHEREFORE, premises considered, the decision appealed from is hereby REVERSED, and another one
entered DISMISSING the complaint.[7]
The June 17, 2003 Resolution denied petitioners Motion for Reconsideration.
The Facts
The CA summarized the antecedents as follows:
Sometime in 1993, [Petitioner] Pamplona Plantations Company, Inc. (company for brevity) was organized
for the purpose of taking over the operations of the coconut and sugar plantation of Hacienda Pamplona
located in Pamplona, Negros Oriental. It appears that Hacienda Pamplona was formerly owned by a certain
Mr. Bower who had in his employ several agricultural workers.
When the company took over the operation of Hacienda Pamplona in 1993, it did not absorb all the
workers of Hacienda Pamplona. Some, however, were hired by the company during harvest season as
coconut hookers or sakador, coconut filers, coconut haulers, coconut scoopers or lugiteros, and charcoal
makers.
Sometime in 1995, Pamplona Plantation Leisure Corporation was established for the purpose of engaging
in the business of operating tourist resorts, hotels, and inns, with complementary facilities, such as
restaurants, bars, boutiques, service shops, entertainment, golf courses, tennis courts, and other land and
aquatic sports and leisure facilities.
On 15 December 1996, the Pamplona Plantation Labor Independent Union (PAPLIU) conducted an
organizational meeting wherein several [respondents] who are either union members or officers
participated in said meeting.
Upon learning that some of the [respondents] attended the said meeting, [Petitioner] Jose Luis Bondoc,
manager of the company, did not allow [respondents] to work anymore in the plantation.
Thereafter, on various dates, [respondents] filed their respective complaints with the NLRC, Sub-Regional
Arbitration Branch No. VII, Dumaguete City against [petitioners] for unfair labor practice, illegal dismissal,
underpayment, overtime pay, premium pay for rest day and holidays, service incentive leave pay,
damages, attorneys fees and 13th month pay.
On 09 October 1997, [respondent] Carlito Tinghil amended his complaint to implead Pamplona Plantation
Leisure Corporation x x x.
On 31 August 1998, Labor Arbiter Jose G. Gutierrez rendered a decision finding [respondents], except
Rufino Bacubac, Antonio Caolas and Felix Torres who were complainants in another case, to be entitled to
separation pay.
xxxxxxxxx

[Petitioners] appealed the Labor Arbiters decision to [the] NLRC. In the assailed decision dated 19 July
2000, the NLRCs Fourth Division reversed the Labor Arbiter, ruling that [respondents], except Carlito
Tinghil, failed to implead Pamplona Plantation Leisure Corporation, an indispensable party and that there
exist no employer-employee relation between the parties.
xxxxxxxxx
[Respondents] filed a motion for reconsideration which was denied by [the] NLRC in a Resolution dated 06
December 2000.[8]
Respondents elevated the case to the CA via a Petition for Certiorari under Rule 65 of the Rules of
Court.
Ruling of the Court of Appeals
Guided by the fourfold test for determining the existence of an employer-employee relationship, the
CA held that respondents were employees of petitioner-company. Finding there was a power to hire, the
appellate court considered the admission of petitioners in their Comment that they had hired respondents
as coconut filers, coconut scoopers, charcoal makers, or as pieceworkers. The fact that respondents were
paid by piecework did not mean that they were not employees of the company. Further, the CA ruled that
petitioners necessarily exercised control over the work they performed, since the latter were working
within the premises of the plantation. According to the CA, the mere existence -- not necessarily the actual
exercise -- of the right to control the manner of doing work sufficed to meet the fourth element of an
employer-employee relation.
The appellate court also held that respondents were regular employees, because the tasks they
performed were necessary and indispensable to the operation of the company. Since there was no
compliance with the twin requirements of a valid and/or authorized cause and of procedural due process,
their dismissal was illegal.
Hence, this Petition.[9]
Issues
In their Memorandum, petitioners submit the following issues for our consideration:
1. Whether or not the finding of the Court of Appeals that herein respondents are employees of
Petitioner Pamplona Plantation Company, Inc. is contrary to the admissions of the respondents
themselves.
2. Whether or not the Court of Appeals has decided in a way not in accord with law and jurisprudence,
and with grave abuse of discretion, in not dismissing the respondents complaint for failure to
implead Pamplona Plantation Leisure Corp., which is an indispensable party to this case.
3. Whether or not the Court of Appeals has decided in a way not in accord with law and jurisprudence,
and with grave abuse of discretion in ordering reinstatement or payment of separation pay and
backwages to the respondents, considering the lack of employer-employee relationship between
petitioner and respondents.[10]
The main issue raised is whether the case should be dismissed for the non-joinder of the Pamplona
Plantation Leisure Corporation. The other issues will be taken up in the discussion of the main question.
The Courts Ruling

The Petition lacks merit.


Preliminary Issue:
Factual Matters
Section 1 of Rule 45 of the Rules of Court states that only questions of law are entertained in appeals
by certiorari to the Supreme Court. However, jurisprudence has recognized several exceptions in which
factual issues may be resolved by this Court:[11] (1) the legal conclusions made by the lower tribunal are
speculative;[12] (2) its inferences are manifestly mistaken, [13] absurd, or impossible; (3) the lower court
committed grave abuse of discretion; (4) the judgment is based on a misapprehension of facts;[14] (5) the findings
of fact of the lower tribunals are conflicting; [15] (6) the CA went beyond the issues; (7) the CAs findings are
contrary to the admissions of the parties;[16] (8) the CA manifestly overlooked facts not disputed which, if
considered, would justify a different conclusion; (9) the findings of fact are conclusions without citation of the
specific evidence on which they are based; and (10) when the findings of fact of the CA are premised on the
absence of evidence but such findings are contradicted by the evidence on record.[17]
The very same reason that constrained the appellate court to review the factual findings of the NLRC
impels this Court to take its own look at the facts. Normally, the Supreme Court is not a trier of facts.
[18]
However, since the findings of the CA and the NLRC on this point were conflicting, we waded through
the records to find out if there was basis for the formers reversal of the NLRCs Decision. We shall discuss
our factual findings together with our review of the main issue.
Main Issue:
Piercing the Corporate Veil
Petitioners contend that the CA should have dismissed the case for the failure of respondents (except
Carlito Tinghil) to implead the Pamplona Plantation Leisure Corporation, an indispensable party, for being
the true and real employer. Allegedly, respondents admitted in their Affidavits dated February 3, 1998,
[19]
that they had been employed by the leisure corporation and/or engaged to perform activities that
pertained to its business.
Further, as the NLRC allegedly noted in their individual Complaints, respondents specifically averred
that they had worked in the golf course and performed related jobs in the recreational facilities of the
leisure corporation. Hence, petitioners claim that, as a sugar and coconut plantation company separate
and distinct from the Pamplona Plantation Leisure Corporation, the petitioner-company is not the real party
in interest.
We are not persuaded.
An examination of the facts reveals that, for both the coconut plantation and the golf course, there is
only one management which the laborers deal with regarding their work. [20] A portion of the plantation
(also called Hacienda Pamplona) had actually been converted into a golf course and other recreational
facilities. The weekly payrolls issued by petitioner-company bore the name Pamplona Plantation Co., Inc.
[21]
It is also a fact that respondents all received their pay from the same person, Petitioner Bondoc -- the
managing director of the company. Since the workers were working for a firm known as Pamplona
Plantation Co., Inc., the reason they sued their employer through that name was natural and
understandable.
True, the Petitioner Pamplona Plantation Co., Inc., and the Pamplona Plantation Leisure Corporation
appear to be separate corporate entities. But it is settled that this fiction of law cannot be invoked to
further an end subversive of justice.[22]

The principle requiring the piercing of the corporate veil mandates courts to see through the protective
shroud that distinguishes one corporation from a seemingly separate one. [23] The corporate mask may be
removed and the corporate veil pierced when a corporation is the mere alter ego of another. [24] Where
badges of fraud exist, where public convenience is defeated, where a wrong is sought to be justified
thereby, or where a separate corporate identity is used to evade financial obligations to employees or to
third parties,[25] the notion of separate legal entity should be set aside [26] and the factual truth upheld.
When that happens, the corporate character is not necessarily abrogated. [27] It continues for other
legitimate objectives. However, it may be pierced in any of the instances cited in order to promote
substantial justice.
In the present case, the corporations have basically the same incorporators and directors and are
headed by the same official. Both use only one office and one payroll and are under one management. In
their individual Affidavits, respondents allege that they worked under the supervision and control of
Petitioner Bondoc -- the common managing director of both the petitioner-company and the leisure
corporation. Some of the laborers of the plantation also work in the golf course. [28] Thus, the attempt to
make the two corporations appear as two separate entities, insofar as the workers are concerned, should
be viewed as a devious but obvious means to defeat the ends of the law. Such a ploy should not be
permitted to cloud the truth and perpetrate an injustice.
We note that this defense of separate corporate identity was not raised during the proceedings before
the labor arbiter. The main argument therein raised by petitioners was their alleged lack of employeremployee relationship with, and power of control over, the means and methods of work of respondents
because of the seasonal nature of the latters work.[29]
Neither was the issue of non-joinder of indispensable parties raised in petitioners appeal before the
NLRC.[30] Nevertheless, in its Decision[31] dated July 19, 2000, the Commission concluded that the plantation
company and the leisure corporation were two separate and distinct corporations, and that the latter was
an indispensable party that should have been impleaded. We quote below pertinent portions of that
Decision:
Respondent posits that it is engaged in operating and maintaining sugar and coconut plantation. The
positions of complainants could only be determined through their individual complaints. Yet all
complainants alleged in their affidavits x x x that they were working at the golf course. Worthy to note that
only Carlito Tinghil amended his complaint to include Pamplona Leisure Corporation, which respondents
maintain is a separate corporation established in 1995. Thus, xxx Pamplona Plantation Co., Inc. and
Pamplona Leisure Corporation are two separate and distinct corporations. Except for Carlito Tinghil the
complainants have the wrong party respondent. Pamplona Leisure Corporation is an indispensable party
without which there could be no final determination of the case. [32]
Indeed, it was only after this NLRC Decision was issued that the petitioners harped on the separate
personality of the Pamplona Plantation Co., Inc., vis--vis the Pamplona Plantation Leisure Corporation.
As cited above, the NLRC dismissed the Complaints because of the alleged admission of respondents
in their Affidavits that they had been working at the golf course. However, it failed to appreciate the rest of
their averments. Just because they worked at the golf course did not necessarily mean that they were not
employed to do other tasks, especially since the golf course was merely a portion of the coconut
plantation. Even petitioners admitted that respondents had been hired as coconut filers, coconut scoopers
or charcoal makers.[33] Consequently, NLRCs conclusion derived from the Affidavits of respondents stating
that they were employees of the Pamplona Plantation Leisure Corporation alone was the result of an
improper selective appreciation of the entire evidence.
Furthermore, we note that, contrary to the NLRCs findings, some respondents indicated that their
employer was the Pamplona Plantation Leisure Corporation, while others said that it was the Pamplona

Plantation Co., Inc. But in all these Affidavits, both the leisure corporation and petitioner-company were
identified or described as entities engaged in the development and operation of sugar and coconut
plantations, as well as recreational facilities such as a golf course. These allegations reveal that petitioner
successfully confused the workers as to who their true and real employer was. All things considered, their
faulty belief that the plantation company and the leisure corporation were one and the same can be
attributed solely to petitioners. It would certainly be unjust to prejudice the claims of the workers because
of the misleading actions of their employer.
Non-Joinder of Parties
Granting for the sake of argument that the Pamplona Plantation Leisure Corporation is an
indispensable party that should be impleaded, NLRCs outright dismissal of the Complaints was still
erroneous.
The non-joinder of indispensable parties is not a ground for the dismissal of an action. [34] At any stage
of a judicial proceeding and/or at such times as are just, parties may be added on the motion of a party or
on the initiative of the tribunal concerned.[35] If the plaintiff refuses to implead an indispensable party
despite the order of the court, that court may dismiss the complaint for the plaintiffs failure to comply with
the order. The remedy is to implead the non-party claimed to be indispensable. [36] In this case, the NLRC
did not require respondents to implead the Pamplona Plantation Leisure Corporation as respondent;
instead, the Commission summarily dismissed the Complaints.
In any event, there is no need to implead the leisure corporation because, insofar as respondents are
concerned, the leisure corporation and petitioner-company are one and the same entity.Salvador v. Court
of Appeals[37] has held that this Court has full powers, apart from that power and authority which is
inherent, to amend the processes, pleadings, proceedings and decisions by substituting as party-plaintiff
the real party-in-interest.
In Alonso v. Villamor,[38] we had the occasion to state thus:
There is nothing sacred about processes or pleadings, their forms or contents. Their sole purpose is to
facilitate the application of justice to the rival claims of contending parties. They were created, not to
hinder and delay, but to facilitate and promote, the administration of justice. They do not constitute the
thing itself, which courts are always striving to secure to litigants. They are designed as the means best
adapted to obtain that thing. In other words, they are a means to an end. When they lose the character of
the one and become the other, the administration of justice is at fault and courts are correspondingly
remiss in the performance of their obvious duty.
The controlling principle in the interpretation of procedural rules is liberality, so that they may promote
their object and assist the parties in obtaining just, speedy and inexpensive determination of every action
and proceeding.[39] When the rules are applied to labor cases, this liberal interpretation must be upheld
with even greater vigor.[40] Without in any way depriving the employer of its legal rights, the thrust of
statutes and rules governing labor cases has been to benefit workers and avoid subjecting them to great
delays and hardships. This intent holds especially in this case, in which the plaintiffs are poor laborers.
Employer-Employee Relationship
Petitioners insist that respondents are not their employees, because the former exercised no control
over the latters work hours and method of performing tasks. Thus, petitioners contend that under the
control test, the workers were independent contractors.
We disagree. As shown by the evidence on record, petitioners hired respondents, who performed tasks
assigned by their respective officers-in-charge, who in turn were all under the direct supervision and

control of Petitioner Bondoc. These allegations are contained in the workers Affidavits, which were never
disputed by petitioners. Also uncontroverted are the payrolls bearing the name of the plantation company
and signed by Petitioner Bondoc. Some of these payrolls include the time records of the employees. These
documents prove that petitioner-company exercised control and supervision over them.
To operate against the employer, the power of control need not have been actually exercised. Proof of
the existence of such power is enough. [41] Certainly, petitioners wielded that power to hire or dismiss, as
well as to check on the progress and the quality of work of the laborers.
Jurisprudence provides other equally important considerations [42] that support the conclusion that
respondents were not independent contractors. First, they cannot be said to have carried on an
independent business or occupation. [43] They are not engaged in the business of filing, scooping and
hauling coconuts and/or operating and maintaining a plantation and a golf course. Second, they do not
have substantial capital or investment in the form of tools, equipment, machinery, work premises, and
other implements needed to perform the job, work or service under their own account or responsibility.
[44]
Third, they have been working exclusively for petitioners for several years. Fourth, there is no dispute
that petitioners are in the business of growing coconut trees for commercial purposes. There is no
question, either, that a portion of the plantation was converted into a golf course and other recreational
facilities. Clearly, respondents performed usual, regular and necessary services for petitioners business.
WHEREFORE, the Petition is DENIED, and the assailed Decision AFFIRMED. Costs against the
petitioners.
SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ., concur.

JAMES YU and WILSON YOUNG, petitioners,


vs.
THE NATIONAL LABOR RELATIONS COMMISSION, LABOR ARBITER DANIEL C. CUETO, TANDUAY
DISTILLERY INC., FERNANDO DURAN, EDUARDO PALIWAN, ROQUE ESTOCE AND RODRIGO
SANTOS,respondents.

MELO, J.:
Before us is a petition for certiorari assailing the decision of public respondent National Labor Relations
Commission (NLRC) promulgated on August 25, 1993 in the cases of Fernando Duran, et al. vs. Tanduay
Distillery, Inc.,docketed as NLRC NCR Case No. 00-04-01737-88, and Rodrigo Santos vs. Tanduay Distillery,
Inc., docketed as NLRC NCR Case No. 00-06-02546-88.
The relevant antecedent facts as gathered from the record are as follows:
Private respondents-employees Fernando Duran, Eduardo Paliwan, Roque Estoce, and Rodrigo Santos were
employees of respondent corporation Tanduay Distillery, Inc, (TDI).
On March 29, 1988, 22 employees of TDI, including private respondents employees, received a
memorandum from TDI terminating their services. for reasons of retrenchment, effective 30 days from
receipt thereof or not later than the close of business hours on April 28, 1988.
On April 26, 1988, all 22 employees of TDI filed an application for the issuance of a temporary restraining
order against their retrenchment. The labor arbiter issued the restraining order the following day. However,
due to the 20-day lifetime of the temporary restraining order, and because of the on-going negotiations for
the sale of TDI the retrenchment pushed through. Parenthetically, it should be mentioned that although all
22 employees were retrenched, the instant petition involves only the 4 individual respondents herein,
namely, Fernando Duran, Eduardo Paliwan, Roque Estoce, and Rodrigo Santos.
On June 14, 1988, the First Pacific Metro Corporation moved that it be dropped as a party to the case on
the ground that its projected purchase of the assets of TDI was not consummated. The participation of First
Pacific was later in effect held to be irrelevant (decision dated May 24, 1989; Annex G, pp. 50-58, Rollo).
On June 1, 1988, or after respondents-employees had ceased as such employees, a new buyer of TDI's
assets, Twin Ace Holdings, Inc. took over the business. Twin Ace assumed the business name Tanduay
Distillers.
On August 8, 1988, the employees filed a motion to implead herein petitioners James Yu and Wilson Young,
doing business under the name and style of Tanduay Distillers, as party respondents in said cases.
Petitioners filed an opposition thereto, asserting that they are representatives of Tanduay Distillers an
entity distinct and separate from TDI, the previous owner, and that there is no employer-employee
relationship between Tanduay Distillers and private respondents. Respondents-employees filed a reply to
the opposition stating that petitioner James Yu as officer-in-charge of Tanduay Distillers had informed the
president of TDI labor union of Tanduay Distillers' decision to hire everybody with a clean slate on a
probation basis.
On November 16, 1988, private respondents filed a motion for leave to file an amended complaint
impleading petitioners as respondents. Petitioners filed an opposition thereto reiterating the grounds they
relied upon in their opposition to private respondents' motion to implead. A reply was filed by private
respondents, and a rejoinder was then filed by petitioners. In turn, private respondents filed a subrejoinder.
Subsequently, an amended complaint was filed by private respondents against TDI and petitioners Yu and
Young "doing business under the name and style of Tanduay Distillers".
In her decision dated May 24, 1989, Labor Arbiter Daisy Cauton-Barcelona held:

In treating the motion to implead a motion to admit amended complaint with leave, the
same [is] hereby given due course and all pleadings filed by respondents James Yu and
Wilson Young are hereby treated as their responsive pleadings in the light of speedy
disposition of justice and the basic rule that administrative fora, such as this office, are not
governed by technical rules of proceedings.
(p. 52, Rollo).
In the same decision, it was disposed:
WHEREFORE, judgment is hereby rendered and declaring that the retrenchment is illegal
thereby ordering respondent Tanduay Distillery, Inc., to reinstate the complainants to their
former position with backwages up to the time of change of ownership, if one has taken
place.
That in the event of change in management it (Tanduay Distillery, Inc.,) is hereby ordered to
pay the complainants their respective separation benefits computed at the rate of one (1)
month for every year of service. This is without prejudice to the letter of Mr. James Yu as
officer-in-charge of Tanduay Distillers dated June 17, 1988 to the President of the Tanduay
Distillery, Inc., Labor Union.
(pp. 57-58, Rollo.)
Only TDI appealed said decision to the National Labor Relations Commission, but on June 18, 1991, said
commission promulgated an affirmance decision (p. 102, Rollo). TDI filed a motion for reconsideration, but
the same was denied on August 15, 1991.
Thereupon, private respondents-employees on September 16, 1991 filed a motion for execution (Annex Q,
pp. 103-106, Rollo) praying that NLRC through the labor arbiter, "[i]ssue the necessary writ for the
execution of the entire decision dated May 24, 1989, including the actual reinstatement of the
complainants to their former position without loss of seniority and benefits against Tanduay Distillery, Inc.,
and/or Tanduay Distillers, James Yu and Wilson Young."
On September 24, 1993, petitioners filed an opposition (Annex R, pp. 108-110, Rollo) to the motion for
execution on the ground that "the Motion for Execution is without any basis in so far as it prays for the
issuance of a writ of execution against respondent Tanduay Distillers, which is an entity separate and
distinct from respondent Tanduay Distillery, Inc., and respondents James Yu and Wilson Young."
Respondents-employees filed their reply thereto (Annex S, pp. 111-115, Rollo), and in turn petitioners filed
their rejoinder (Annex T, pp. 116-118, Rollo), to which private respondents filed their sur-rejoinder (Annex
U, pp. 119-122, Rollo). On December 18, 1991, respondent TDI filed its comment on the motion for
execution (Annex V, pp. 124-129, Rollo), while petitioners on January 10, 1992, filed a joint comment
(Annex W, pp. 130-132, Rollo) to private respondents' sur-rejoinder as well to the comment filed by
respondent TDI.
Subsequently, TDI filed a manifestation dated April 24, 1992 (Annex X, pp. 133-135, Rollo), stating
2. At the hearing held on March 23, 1992, individual complainants, assisted by their counsel,
Atty. Noel Cruz, agreed to be paid the total amount of P86,049.83, in full satisfaction of the
Company's liability as stated in the dispositive portion of Labor Arbiter Barcelona's decision
promulgated on May 24, 1989 and affirmed by the Second Division of the NLRC on June 18,
1991, which reads as follows:
WHEREFORE, judgment is hereby rendered declaring that the retrenchment is
illegal thereby ordering respondent Tanduay Distillery, Inc. to reinstate the
complainants to their former position with backwages up to the time of the
change of ownership, if one has taken place.
That in the event of change in management it (Tanduay Distillery, Inc.( is
hereby ordered to pay the complainants their respective separation benefits

computed at the rate of one (1) month of every year of service. This is without
prejudice to the letter of Mr. James Yu as officer-in-charge of Tanduay Distillers
dated June 17, 1988 to the President of the Tanduay Distillery, Inc., Labor
Union.
No Costs.
SO ORDERED.
1. In accordance with the aforequoted decision, complainants shall be paid the amounts
appearing opposite their respective names:

Rodrigo F.
Santos

P20,282.
03

Roque
Estoce

20,092.5
0

Eduardo
Daliwan

19,973.4
0

Fernando A. 25,702.0
Duran
0

Total P86,049.
83

=====
====

4. The foregoing amounts shall be satisfied out of the cash bond deposited by the Company
with the Cashier of the NLRC. The excess amounting to P7,076.44 must revert to the
Company.
(pp. 134-135, Rollo.)
On November 17, 1992, respondent NLRC, through Labor Arbiter Daniel C. Cueto, issued an order (Annex
Z, pp. 139-145, Rollo), resolving the motion for execution as follows:
Based on the foregoing considerations, this Branch finds the Motion for Writ of Execution
filed by the complainants meritorious and in order. Accordingly, let a Writ of Execution be
issued against Tanduay Distiller, Inc., Wilson Young and James Yu to immediately reinstate
complainants Fernando Duran, Rodrigo Santos, Roque Estoce and Eduardo Daliwan to their
respective positions.

(p 145, Rollo.)
Consequently, a writ of execution was issued by Labor Arbiter Cueto on December 16, 1992.
To stop the implementation of the writ of execution, petitioners filed a petition for certiorari (Annex AA, pp.
146-158,Rollo before respondent NLRC, praying that
1. Immediately upon filing of the instant case, a temporary restraining order he issued, to
wit.
a) Enjoining and restraining the respondents from implementing the Order
dated November 17, 1992;
b.) Commanding the public respondent to desist from acting on the Order,
c.) Commanding the respondents to desist from committing any other act
judicial to the petitioners/appellants.
2. After the appropriate proceedings, a writ of preliminary injunction be issued so enjoining
the respondents;
3. After hearing on the merits, the Order dated November 17, 1992 be set aside and an
injunction be issued permanently enjoining the respondents from committing the aforesaid
acts and to comply strictly with terms of the Decision and the NLRC;
4. Ordering the respondents, jointly and severally, to pay petitioner's fees in the amount of
P100,000.00 and to pay the cost of suit.
On August 25, 1993, respondent NLRC promulgated its decision, the dispositive portion of which reads:
In view of the foregoing premises, the petition/appeal with prayer for preliminary injunction
is hereby dismissed for lack of merit.
The petitioners respondents are hereby directed to re re-employ/re-hire respondentscomplainants immediately upon receipt of this decision.
(p. 36, Rollo.)
Thus, the present petition where petitioners pray that
1. Immediately upon filing of the instant case, a temporary restraining order be issued, to
wit:
a) Restraining and prohibiting the respondents form implementing the ORDER
dated November 17, 1992 and the NLRC Certiorari Decision.
b) Commanding the respondents to desist from committing any other act
prejudicial to the petitioners.
2. After the appropriate proceedings, a writ of preliminary injunction be issued so enjoining
the respondents;
3. After appropriate proceedings, the ORDER dated November 17, 1992 and the
NLRC CertiorariDecision be set aside and a injunction be issued permanently enjoining the
respondents from committing the aforesaid acts and to comply strictly with the terms of the
Arbiter Decision and the NLRC Decision;

4. Ordering the respondents, jointly and severally, to pay petitioners' attorney's fees in the
amount of P100,000.00 and to pay the costs of suit.
(pp. 26-27, Rollo.)
The issue posed by the present petition is whether respondent NLRC committed grave abuse of discretion
in holding petitioners Yu and Young liable under the decision dated May 24, 1989 which decreed that:
WHEREFORE, judgment is hereby rendered declaring that the retrenchment is illegal thereby
ordering respondent Tanduay Distillery Inc., to reinstate the complainants to their former
position with backwages up to the time of the change ownership, if one has taken place.
That in the event of change in management it (Tanduay Distillery, Inc.) is hereby ordered to
pay the complainants their respective separation benefits corrupted at the rate of one (1)
month for every year of service. This is without prejudice to the letter of Mr. James Yu as
officer-in-charge of Tanduay Distillers dated June 17, 1988 to the President of the Tanduay
Distillery, Inc., Labor Union.
(pp. 57-58, Rollo.)
We hold that petitioners, for a number of reasons which we shall discuss below, may not be held
answerable and liable under the final judgment of Labor Arbiter Cauton-Barcelona.
1. Admittedly, the decision dated May 24, 1989 is now final and executory, as only respondent TDI
appealed said decision and its appeal was later dismissed by respondent NLRC. It is fundamental that a
final and executory decision cannot be amended or corrected (First Integrated Bonding and Insurance
Company, Inc, vs. Hernando, 199 SCRA 796 [1991]) except for clerical errors or mistakes (Maramba vs.
Lozano, 20 SCRA 474 [1967]); Reyes vs. Court of Appeals, 189 SCRA 46 [1990]). A definitive judgment is no
longer subject to change, revision, amendment, or reversal (Miranda vs. Court of Appeals, 71 SCRA 295
[1976], and the court loses jurisdiction over it, except to order its execution (PY Eng Chong vs. Herrera, 70
SCRA 130 (1976]).
An examination of the aforequoted dispositive portion of the decision shows that the same does not in any
manner obligate Tanduay Distillers, or even petitioners Yu and Young for that matter, to reinstate
respondents. Only TDI was held liable to reinstate respondents up to the time of change of ownership, and
for separation benefits.
However, Labor Arbiter Cueto went beyond what was disposed by the decision and issued an order dated
November 17, 1992 (Annex Z, Petition, pp. 139-145, Rollo) which required
. . . Tanduay Distillers, Inc., Wilson Young and James Yu to immediately reinstate
complainants Fernando Duran, Rodrigo Santos, Roque Estoce and Eduardo Daliwan to heir
respective positions.
(p. 145, Rollo.)
Subsequently, a writ of execution was issued on December 16, 1992 pursuant to the order of November
17, 1992.
The order of execution dated November 17, 1992 in effect amended the decision dated May 24, 1989 for
the former orders petitioners and Tanduay Distillers to reinstate private respondents employees whereas
the decision dated May 24, 1989, as we have discussed above, does not so decree, This cannot be done. It
is beyond the power and competence of Labor Arbiter Cueto to amend a final decision, The writ of
execution must not go beyond the scope of the judgment.
As Chief Justice Moran opined: "The writ of execution must conform to the judgment which is
to be executed as it may not vary the terms of the judgment it seeks to enforce. Nor may it
go beyond the terms of the judgment, sought to be executed. Where the execution is not in

harmony with the judgment which gives it life and exceeds it, it has pro tanto no validity. To
maintain otherwise would be to ignore the constitutional provision against depriving a
person of his property without due process of law" (Moran, Comments on the Rules of Court,
Vol. I 1952 Ed., p. 809; cited in Villoria vs. Piccio,supra).
(Gamboa's Incorporated vs. Court of
Appeals, 72 SCRA 131, 137-138 [1976])
The order of execution and the writ of execution ordering petitioners and Tanduay Distillers to reinstate
private respondents employees are, therefore, null and void.
2. Neither may be said that petitioners and Tanduay Distillers are one and the same as TDI, as seems to be
the impression of respondents when they impleaded petitioners as party respondents in their compliant for
unfair labor practice, illegal lay off, and separation benefits.
Such a stance is not supported by the facts. The name of the company for whom the petitioners are
working is Twin Ace Holdings Corporation, As stated by the Solicitor General, Twin Ace is part of the Allied
Bank Group although it conducts the rum business under the name of Tanduay Distillers. The use of a
similar sounding or almost identical name is an obvious device to capitalize on the goodwill which Tanduay
Rum has built over the years. Twin Ace or Tanduay Distillers, on one hand, and Tanduay Distillery Inc. (TDI),
on the other, are distinct and separate corporations. There is nothing to suggest that the owners of TDI,
have any common relationship as to identify it with Allied Bank Group which runs Tanduay Distillers. The
dissertation of the Court in Diatagon Labor Federation Local 110 of the ULGWP vs. Ople, et al. (101 SCRA
534 [1980]) is worthy of restatement, thusly:
We hold that the director of labor Relations acted with grave abuse of discretion in treating
the two companies as a single bargaining unit. The ruling is arbitrary and untenable because
the two companies are indubitably distinct entities with separate juridical personalities.
The fact that their businesses are related and that the 236 employees of Georgia Pacific
International Corporation were originally employees of Lianga Bay Logging Co., Inc, is not a
justification for disregarding their separate personalities. Hence, the 236 employees, who
are now attached to Georgia Pacific International should not be allowed to vote in the
certification election at the Lianga Bay Logging Co., Inc. They should vote at a separate
certification election to determine the collective bargaining representative of the employees
of Georgia Pacific International Corporation.
(at pp. 540-541.)
It is basic that a corporation is invested by law with a personality separate and distinct from those of the
persons composing it as well as from that of any other legal entity to which it may be related (Palay, Inc. et
al. vs. Clave, et al., 124 SCRA 641 [1983]).
The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin Ace was only a subsequent
interested buyer. At the time when termination notices were sent to its employees, TDI was negotiating
with the First Pacific Metro Corporation for the sale of its assets. Only after First Pacific gave up its efforts to
acquire the assets did Twin Ace or Tanduay Distillers come into the picture. Respondents-employees have
not presented any proof as to communality of ownership and management to support their contention that
the two companies are one firm or closely related. The doctrine of piercing the veil of corporate entity
applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or
defend crime or where a corporation is the mere alter ego or business conduit of a person (Indophil Textile
Mill Workers Union vs. Calica, 205 SCRA 697, 703 (1992]). To disregard the separate juridical personality of
a corporation, the wrong-doing must be clearly and convincingly established. It cannot be presumed (Del
Rosario vs. NLRC, 187 SCRA 777, 7809 [1990]).
The complaint for unfair labor practice, illegal lay off, and separation benefits was filed against TDI. Only
later when the manufacture and sale of Tanduay products was taken over by Twin Ace or Tanduay Distillers
were James Yu and Wilson Young impleaded.

The corporation itself Twin Ace or Tanduay Distillers was never made a party to the case.
Another factor to consider is that TDI as a corporation or its shares of stock were not purchased by Twin
Ace. The buyer limited itself to purchasing most of the assets, equipment, and machinery of TDI. Thus,
Twin Ace or Tanduay Distillers did not take over the corporate personality of DTI although they manufacture
the same product at the same plant with the same equipment and machinery. Obviously, the trade name
"Tanduay" went with the sale because the new firm does business as Tanduay Distillers and its main
product of rum is sold as Tanduay Rum. There is no showing, however, that TDI itself was absorbed by Twin
Ace or that it ceased to exist as a separate corporation, In point of fact TDI is now herein a party
respondent represented by its own counsel.
Significantly, TDI in the petition at hand has taken the side of its former employees and argues against
Tanduay Distillers. In its memorandum filed on January 9, 1995, TDI argues that it was not alone its liability
which arbiter recognized "but also of James Yu and Wilson Young representatives of Twin Ace and/or the
Allied Bank Group doing business under the name "TANDUAY DISTILLERS," to whom the business and
assets of TDI were sold." If TDI and Tanduay, Distillers are one and the same group or one is a continuation
of the other, the two would not be fighting each other in this case. TDI would not argue strongly "that the
petition for certiorari filed by James Yu and Wilson Young be dismissed for lack of merit." It is obvious that
the second corporation, Twin Ace or Tanduay Distillers, is an entity separate and distinct, from the first
corporation, TDI. The circumstances of this case are different from the earlier decisions of the Court in
labor cases where the veil of corporate fiction was pierced.
In La Campana Coffee Factory. Inc. vs. Kaisahan ng Mangagawa sa La Campana (KKM), (93 Phil, 160
[1953]), La Campana Coffee Factory, Inc. and La Campana Gaugau Packing were substantially owned by
the same person. They had one office, one management, and a single payroll for both businesses. The
laborers of the gaugau factory and the coffee factory were also interchangeable, the workers in one factory
worked also in the other factory.
In Claparols vs. Court of Industrial Relations (65 SCRA 613 (1975]), the Claparols Steel and Nail Plant,
which was ordered to pay its workers backwages, ceased operations on June 30, 1956 and was
succeeded on the very next day, July 1, 1957, by the Claparols Steel Corporation. Both corporations were
substantially owned and controlled by the same person and there was no break or cessation in operations.
Moreover, all the assets of the steel and nail plant were transferred to the new corporation.
In fine, the fiction of separate and distinct corporate entities cannot, in the instant case, be disregarded
and brushed aside, there being not the least indication that the second corporation is a dummy or serves
as a client of the first corporate entity.
In the case at bench, since TDI and Twin Ace or Tanduay Distillers are two separate and distinct entities,
the order for Tanduay Distillers (and petitioners) to reinstate respondents-employees is obviously without
legal and factual basis.
3. Nor could the order and writ to reinstate be anchored on the vague and seemingly uncalled for
alternative disposition in the Barcelona decision that
. . . This is without prejudice to the letter of Mr. James Yu as officer-in-charge of Tanduay
Distillers dated June 16, 1988 to the President of the Tanduay Distillery, Inc. labor Union.
The June 11, 1988 letter referred to was addressed to Benjamin C. Agaloos, president of the Tanduay
Distillery Labor Union by James Yu in his capacity as officer-in-charge of Tanduay Distillers.
It pertinently reads:
Please be informed that our company stands firm on its decision to hire everybody with a
clean slate effective June 1, 1988 on a probationary basis while those currently casual or
contractual employees shall retain the same employment status. In the same manner that
the new company stood firm on its decision to grant a 10% across-the-board increase to all
employees, which in fact has been received by employees concerned.

(p. 88, Rollo.)


We do not find in the decision of Labor Arbiter Cauton Barcelona or in the letter of James Yu what the
respondents are trying to read into it. Labor Arbiter Cauton-Barcelona found the retrenchment effected by
TDI illegal and ordered TDI to reinstate the complainants and that if there is a change of management,
then separation benefits would be paid. There is, however, no order in the decision directing Twin Ace or
Tanduay Distillers to hire or reinstate herein four individual respondents.
The letter of James Yu does not mention any reinstatement. It assures the president of the labor union that
Tanduay Distillers stood firm on its decision to hire employees with a clean slate on a probationary basis.
The fact that the employees of the former employer (TDI) would be hired on a probationary basis shows
that there was no employer-employee relationship between individual respondents and Twin Ace. Any one
who joins the buyer corporation comes in as an outsider who is newly hired and who starts on a
probationary basis until he proves he deserves to be on a permanent status. His application can be
rejected in the exercise of the hiring authority's discretion.
There is thus no legal basis for Labor Arbiter Cueto or the NLRC to compel Twin Ace or Tanduay Distillers, or
petitioners to "reinstate" the four individual respondents. The letter of James Yu to the union president was
a unilateral and gratuitous offer with no consideration. It refers to people who still have to be hired. New
hires had to be investigated or evaluated if they have "clean slates." Twin Ace or Tanduay Distillers and
petitioners are being compelled by public respondents to reinstate workers who were never their
employees. There is no showing that the sale of assets by TDI to Tanduay Distillers included a condition
that employees of the former would be absorbed by the latter.
Employees of TDI had been terminated in their employment as of April 28, 1988. Petitioners state that Twin
Ace bought the assets of TDI after the employment of the individual respondents had been terminated.
True, Labor Arbiter Cauton-Barcelona declared the retrenchment program of TDI as illegal. This decision,
however, did not convert the individual respondents into employees of the firm which purchased the assets
of the former employer. It merely held TDI liable for the consequences of the illegal retrenchment.
Labor Arbiter Cueto and the NLRC, therefore, committed grave abuse of discretion when they read into the
decision of Labor Arbiter Cauton- Barcelona something which did not appear therein. And even assuming
that Labor Arbiter Cauton-Barcelona formally included an order for the petitioners to hire the individual
respondents, there would be no factual or legal basis for such an order. An employer-employee relation is
created by contract, and can not be forced upon either party simply upon order of a labor arbiter. The
hiring of employees is one of the recognized prerogatives of management.
4. Another factor which militates against the claim for reinstatement of the individual respondents is their
having received separation pay as part of a compromise agreement in the course of their litigation with
TDI. Rodrigo F. Santos received P20,282.03; Roque Estoce, P20,092.50; Eduardo Daliwan, P19,973.40; and
Fernando A. Duran, P25,702.00. These amounts correspond to their entitlement to separation benefits.
Having received separation pay from a former employer, how can they compel, as a matter of right,
another company to hire them on a supposed "reinstatement" basis? The orders executing the earlier
decision of Labor Arbiter Cauton-Barcelona and directing petitioners to immediately reinstate the four
individual respondents to their former positions are, thus, characterized by grave abuse of discretion.
There are no "former positions" to which individual respondents may be reinstated because they never
hired by Twin Ace/Tanduay Distillers and had never worked for it.
WHEREFORE, the petition is hereby GRANTED, The questioned Order of the Labor Arbiter Daniel C. Cueto
dated November 17, 1992 and the decision of the National Labor Relations Commission upholding said
order are set aside as null and void. No special pronouncement is made as to costs.
SO ORDERED.
Romero, Vitug and Francisco, JJ., concur.
Feliciano, J., took no part.

INDOPHIL TEXTILE MILL WORKERS UNION-PTGWO, petitioner,


vs.
VOLUNTARY ARBITRATOR TEODORICO P. CALICA and INDOPHIL TEXTILE MILLS, INC., respondents.
Romeo C. Lagman for petitioner.
Borreta, Gutierrez & Leogardo for respondent Indophil Textile Mills, Inc.

MEDIALDEA, J.:
This is a petition for certiorari seeking the nullification of the award issued by the respondent Voluntary
Arbitrator Teodorico P. Calica dated December 8, 1990 finding that Section 1 (c), Article I of the Collective
Bargaining Agreement between Indophil Textile Mills, Inc. and Indophil Textile Mill Workers Union-PTGWO
does not extend to the employees of Indophil Acrylic Manufacturing Corporation as an extension or
expansion of Indophil Textile Mills, Incorporated.
The antecedent facts are as follows:
Petitioner Indophil Textile Mill Workers Union-PTGWO is a legitimate labor organization duly registered with
the Department of Labor and Employment and the exclusive bargaining agent of all the rank-and-file
employees of Indophil Textile Mills, Incorporated. Respondent Teodorico P. Calica is impleaded in his official
capacity as the Voluntary Arbitrator of the National Conciliation and Mediation Board of the Department of
Labor and Employment, while private respondent Indophil Textile Mills, Inc. is a corporation engaged in the
manufacture, sale and export of yarns of various counts and kinds and of materials of kindred character
and has its plants at Barrio Lambakin. Marilao, Bulacan.
In April, 1987, petitioner Indophil Textile Mill Workers Union-PTGWO and private respondent Indophil Textile
Mills, Inc. executed a collective bargaining agreement effective from April 1, 1987 to March 31, 1990.
On November 3, 1967 Indophil Acrylic Manufacturing Corporation was formed and registered with the
Securities and Exchange Commission. Subsequently, Acrylic applied for registration with the Board of
Investments for incentives under the 1987 Omnibus Investments Code. The application was approved on a
preferred non-pioneer status.
In 1988, Acrylic became operational and hired workers according to its own criteria and standards.
Sometime in July, 1989, the workers of Acrylic unionized and a duly certified collective bargaining
agreement was executed.
In 1990 or a year after the workers of Acrylic have been unionized and a CBA executed, the petitioner
union claimed that the plant facilities built and set up by Acrylic should be considered as an extension or
expansion of the facilities of private respondent Company pursuant to Section 1(c), Article I of the CBA, to
wit,.
c) This Agreement shall apply to the Company's plant facilities and
installations and to any extension and expansion thereat. (Rollo, p.4)
In other words, it is the petitioner's contention that Acrylic is part of the Indophil bargaining unit.
The petitioner's contention was opposed by private respondent which submits that it is a juridical entity
separate and distinct from Acrylic.
The existing impasse led the petitioner and private respondent to enter into a submission agreement on
September 6, 1990. The parties jointly requested the public respondent to act as voluntary arbitrator in the
resolution of the pending labor dispute pertaining to the proper interpretation of the CBA provision.

After the parties submitted their respective position papers and replies, the public respondent Voluntary
Arbitrator rendered its award on December 8, 1990, the dispositive portion of which provides as follows:
PREMISES CONSIDERED, it would be a strained interpretation and application of the
questioned CBA provision if we would extend to the employees of Acrylic the coverage
clause of Indophil Textile Mills CBA. Wherefore, an award is made to the effect that the
proper interpretation and application of Sec. l, (c), Art. I, of the 1987 CBA do (sic) not extend
to the employees of Acrylic as an extension or expansion of Indophil Textile Mills, Inc. (Rollo,
p.21)
Hence, this petition raising four (4) issues, to wit:
1. WHETHER OR NOT THE RESPONDENT ARBITRATOR ERRED IN INTERPRETING
SECTION 1(c), ART I OF THE CBA BETWEEN PETITIONER UNION AND
RESPONDENT COMPANY.
2. WHETHER OR NOT INDOPHIL ACRYLIC IS A SEPARATE AND DISTINCT ENTITY
FROM RESPONDENT COMPANY FOR PURPOSES OF UNION REPRESENTATION.
3. WHETHER OR NOT THE RESPONDENT ARBITRATOR GRAVELY ABUSED HIS
DISCRETION AMOUNTING TO LACK OR IN EXCESS OF HIS JURISDICTION.
4. WHETHER OR NOT THE RESPONDENT ARBITRATOR VIOLATED PETITIONER
UNION'S CARDINAL PRIMARY RIGHT TO DUE PROCESS. (Rollo, pp. 6-7)
The central issue submitted for arbitration is whether or not the operations in Indophil Acrylic Corporation
are an extension or expansion of private respondent Company. Corollary to the aforementioned issue is the
question of whether or not the rank-and-file employees working at Indophil Acrylic should be recognized as
part of, and/or within the scope of the bargaining unit.
Petitioner maintains that public respondent Arbitrator gravely erred in interpreting Section l(c), Article I of
the CBA in its literal meaning without taking cognizance of the facts adduced that the creation of the
aforesaid Indophil Acrylic is but a devise of respondent Company to evade the application of the CBA
between petitioner Union and respondent Company.
Petitioner stresses that the articles of incorporation of the two corporations establish that the two entities
are engaged in the same kind of business, which is the manufacture and sale of yarns of various counts
and kinds and of other materials of kindred character or nature.
Contrary to petitioner's assertion, the public respondent through the Solicitor General argues that the
Indophil Acrylic Manufacturing Corporation is not an alter ego or an adjunct or business conduit of private
respondent because it has a separate legitimate business purpose. In addition, the Solicitor General
alleges that the primary purpose of private respondent is to engage in the business of manufacturing yarns
of various counts and kinds and textiles. On the other hand, the primary purpose of Indophil Acrylic is to
manufacture, buy, sell at wholesale basis, barter, import, export and otherwise deal in yarns of various
counts and kinds. Hence, unlike private respondent, Indophil Acrylic cannot manufacture textiles while
private respondent cannot buy or import yarns.
Furthermore, petitioner emphasizes that the two corporations have practically the same incorporators,
directors and officers. In fact, of the total stock subscription of Indophil Acrylic, P1,749,970.00 which
represents seventy percent (70%) of the total subscription of P2,500,000.00 was subscribed to by
respondent Company.
On this point, private respondent cited the case of Diatagon Labor Federation v. Ople, G.R. No. L-44493-94,
December 3, 1980, 10l SCRA 534, which ruled that two corporations cannot be treated as a single
bargaining unit even if their businesses are related. It submits that the fact that there are as many
bargaining units as there are companies in a conglomeration of companies is a positive proof that a
corporation is endowed with a legal personality distinctly its own, independent and separate from other
corporations (see Rollo, pp. 160-161).

Petitioner notes that the foregoing evidence sufficiently establish that Acrylic is but an extension or
expansion of private respondent, to wit:
(a) the two corporations have their physical plants, offices and facilities
situated in the same compound, at Barrio Lambakin, Marilao, Bulacan;
(b) many of private respondent's own machineries, such as dyeing machines,
reeling, boiler, Kamitsus among others, were transferred to and are now
installed and being used in the Acrylic plant;
(c) the services of a number of units, departments or sections of private
respondent are provided to Acrylic; and
(d) the employees of private respondent are the same persons manning and
servicing the units of Acrylic. (see Rollo, pp. 12-13)
Private respondent insists that the existence of a bonafide business relationship between Acrylic and
private respondent is not a proof of being a single corporate entity because the services which are
supposedly provided by it to Acrylic are auxiliary services or activities which are not really essential in the
actual production of Acrylic. It also pointed out that the essential services are discharged exclusively by
Acrylic personnel under the control and supervision of Acrylic managers and supervisors.
In sum, petitioner insists that the public respondent committed grave abuse of discretion amounting to
lack or in excess of jurisdiction in erroneously interpreting the CBA provision and in failing to disregard the
corporate entity of Acrylic.
We find the petition devoid of merit.
Time and again, We stress that the decisions of voluntary arbitrators are to be given the highest respect
and a certain measure of finality, but this is not a hard and fast rule, it does not preclude judicial review
thereof where want of jurisdiction, grave abuse of discretion, violation of due process, denial of substantial
justice, or erroneous interpretation of the law were brought to our attention. (see Ocampo, et al. v. National
Labor Relations Commission, G.R. No. 81677, 25 July 1990, First Division Minute Resolution citing Oceanic
Bic Division (FFW) v. Romero, G.R. No. L-43890, July 16, 1984, 130 SCRA 392)
It should be emphasized that in rendering the subject arbitral award, the voluntary arbitrator Teodorico
Calica, a professor of the U.P. Asian Labor Education Center, now the Institute for Industrial Relations,
found that the existing law and jurisprudence on the matter, supported the private respondent's
contentions. Contrary to petitioner's assertion, public respondent cited facts and the law upon which he
based the award. Hence, public respondent did not abuse his discretion.
Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal
fiction that a corporation is an entity with a juridical personality separate and distinct from its members or
stockholders may be disregarded. In such cases, the corporation will be considered as a mere association
of persons. The members or stockholders of the corporation will be considered as the corporation, that is
liability will attach directly to the officers and stockholders. The doctrine applies when the corporate fiction
is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a
shield to confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of
a person, or where the corporation is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of another corporation. (Umali et al. v. Court
of Appeals, G.R. No. 89561, September 13, 1990, 189 SCRA 529, 542)
In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that the
creation of the corporation is a devise to evade the application of the CBA between petitioner Union and
private respondent Company. While we do not discount the possibility of the similarities of the businesses
of private respondent and Acrylic, neither are we inclined to apply the doctrine invoked by petitioner in
granting the relief sought. The fact that the businesses of private respondent and Acrylic are related, that
some of the employees of the private respondent are the same persons manning and providing for
auxilliary services to the units of Acrylic, and that the physical plants, offices and facilities are situated in

the same compound, it is our considered opinion that these facts are not sufficient to justify the piercing of
the corporate veil of Acrylic.
In the same case of Umali, et al. v. Court of Appeals (supra), We already emphasized that "the legal
corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a
corporate debt or obligation." In the instant case, petitioner does not seek to impose a claim against the
members of the Acrylic.
Furthermore, We already ruled in the case of Diatagon Labor Federation Local 110 of the ULGWP
v. Ople (supra) that it is grave abuse of discretion to treat two companies as a single bargaining unit when
these companies are indubitably distinct entities with separate juridical personalities.
Hence, the Acrylic not being an extension or expansion of private respondent, the rank-and-file employees
working at Acrylic should not be recognized as part of, and/or within the scope of the petitioner, as the
bargaining representative of private respondent.
All premises considered, the Court is convinced that the public respondent Voluntary Arbitrator did not
commit grave abuse of discretion in its interpretation of Section l(c), Article I of the CBA that the Acrylic is
not an extension or expansion of private respondent.
ACCORDINGLY, the petition is DENIED and the award of the respondent Voluntary Arbitrator are hereby
AFFIRMED.
SO ORDERED.
Narvasa, C.J., Cruz and Grino-Aquino, JJ., concur.

BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. CASTILLO, BERTILLA C.


RADA, MARIETTA C. ABAEZ, LEOVINA C. JALBUENA and SANTIAGO M. RIVERA, petitioners,
vs.
COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS MANUFACTURING
CO., INC., respondents.
Edmundo T. Zepeda for petitioners.
Martin M. De Guzman for respondent BORMAHECO, Inc.
Renato J. Robles for P.M. Parts Manufacturing Co., Inc.

REGALADO, J.:
This is a petition to review the decision of respondent Court of Appeals, dated August 3, 1989, in CA-GR CV
No. 15412, entitled "Buenaflor M. Castillo Umali, et al. vs. Philippine Machinery Parts Manufacturing Co.,
Inc., et al.," 1the dispositive portion whereof provides:
WHEREFORE, viewed in the light of the entire record, the judgment appealed from must be,
as it is hereby REVERSED. In lieu thereof, a judgment is hereby rendered1) Dismissing the complaint, with cost against plaintiffs;
2) Ordering plaintiffs-appellees to vacate the subject properties; and
3) Ordering plaintiffs-appellees to pay upon defendants' counterclaims:
a) To defendant-appellant PM Parts: (i) damages consisting of the value of the
fruits in the subject parcels of land of which they were deprived in the sum of
P26,000.00 and (ii) attorney's fees of P15,000.00
b) To defendant-appellant Bormaheco: (i) expenses of litigation in the amount
of P5,000.00 and (ii) attorney's fees of P15,000.00.
SO ORDERED.
The original complaint for annulment of title filed in the court a quo by herein petitioners included as party
defendants the Philippine Machinery Parts Manufacturing Co., Inc. (PM Parts), Insurance Corporation of the
Philippines (ICP), Bormaheco, Inc., (Bormaheco) and Santiago M. Rivera (Rivera). A Second Amended
Complaint was filed, this time impleading Santiago M. Rivera as party plaintiff.
During the pre-trial conference, the parties entered into the following stipulation of facts:
As between all parties: Plaintiff Buenaflor M. Castillo is the judicial
administratrix of the estate of Felipe Castillo in Special Proceeding No. 4053,
pending before Branch IX, CFI of Quezon (per Exhibit A) which intestate
proceedings was instituted by Mauricia Meer Vda. de Castillo, the previous
administratrix of the said proceedings prior to 1970 (per exhibits A-1 and A-2)
which case was filed in Court way back in 1964;
b) The four (4) parcels of land described in paragraph 3 of the Complaint were
originally covered by TCT No. T-42104 and Tax Dec. No. 14134 with assessed
value of P3,100.00; TCT No. T 32227 and Tax Dec. No. 14132, with assessed
value of P5,130,00; TCT No. T-31762 and Tax Dec. No. 14135, with assessed

value of P6,150.00; and TCT No. T-42103 with Tax Dec. No. 14133, with
assessed value of P3,580.00 (per Exhibits A-2 and B, B-1 to B-3 C, C-1 -to C3
c) That the above-enumerated four (4) parcels of land were the subject of the
Deed of Extra-Judicial Partition executed by the heirs of Felipe Castillo (per
Exhibit D) and by virtue thereof the titles thereto has (sic) been cancelled and
in lieu thereof, new titles in the name of Mauricia Meer Vda. de Castillo and of
her children, namely: Buenaflor, Bertilla, Victoria, Marietta and Leovina, all
surnamed Castillo has (sic) been issued, namely: TCT No. T-12113 (Exhibit E );
TCT No. T-13113 (Exhibit F); TCT No. T-13116 (Exhibit G ) and TCT No. T13117
(Exhibit H )
d) That mentioned parcels of land were submitted as guaranty in the
Agreement of Counter-Guaranty with Chattel-Real Estate Mortgage executed
on 24 October 1970 between Insurance Corporation of the Philippines and
Slobec Realty Corporation represented by Santiago Rivera (Exhibit 1);
e) That based on the Certificate of Sale issued by the Sheriff of the Province of
Quezon in favor of Insurance Corporation of the Philippines it was able to
transfer to itself the titles over the lots in question, namely: TCT No. T-23705
(Exhibit M), TCT No. T 23706 (Exhibit N ), TCT No. T-23707 (Exhibit 0) and TCT
No. T 23708 (Exhibit P);
f) That on 10 April 1975, the Insurance Corporation of the Philippines sold to
PM Parts the immovables in question (per Exhibit 6 for PM Parts) and by
reason thereof, succeeded in transferring unto itself the titles over the lots in
dispute, namely: per TCT No. T-24846 (Exhibit Q ), per TCT No. T-24847
(Exhibit R ), TCT No. T-24848 (Exhibit), TCT No. T-24849 (Exhibit T );
g) On 26 August l976, Mauricia Meer Vda. de Castillo' genther letter to
Modesto N. Cervantes stating that she and her children refused to comply with
his demands (Exhibit V-2);
h) That from at least the months of October, November and December 1970
and January 1971, Modesto N. Cervantes was the Vice-President of
Bormaheco, Inc. later President thereof, and also he is one of the Board of
Directors of PM Parts; on the other hand, Atty. Martin M. De Guzman was the
legal counsel of Bormaheco, Inc., later Executive Vice-President thereof, and
who also is the legal counsel of Insurance Corporation of the Philippines and
PM Parts; that Modesto N. Cervantes served later on as President of PM Parts,
and that Atty. de Guzman was retained by Insurance Corporation of the
Philippines specifically for foreclosure purposes only;
i) Defendant Bormaheco, Inc. on November 25, 1970 sold to Slobec Realty and
Development, Inc., represented by Santiago Rivera, President, one (1) unit
Caterpillar Tractor D-7 with Serial No. 281114 evidenced by a contract marked
Exhibit J and Exhibit I for Bormaheco, Inc.;
j) That the Surety Bond No. 14010 issued by co-defendant ICP was likewise
secured by an Agreement with Counter-Guaranty with Real Estate Mortgage
executed by Slobec Realty & Development, Inc., Mauricia Castillo Meer,
Buenaflor Castillo, Bertilla Castillo, Victoria Castillo, Marietta Castillo and
Leovina Castillo, as mortgagors in favor of ICP which document was executed
and ratified before notary public Alberto R. Navoa of the City of Manila on
October 24,1970;
k) That the property mortgaged consisted of four (4) parcels of land situated
in Lucena City and covered by TCT Nos. T-13114, T13115,
T-13116 and T-13117 of the Register of Deeds of Lucena City;

l) That the tractor sold by defendant Bormaheco, Inc. to Slobec Realty &
Development, Inc. was delivered to Bormaheco, Inc. on or about October
2,1973, by Mr. Menandro Umali for purposes of repair;
m) That in August 1976, PM Parts notified Mrs. Mauricia Meer about its
ownership and the assignment of Mr. Petronilo Roque as caretaker of the
subject property;
n) That plaintiff and other heirs are harvest fruits of the property (daranghita)
which is worth no less than Pl,000.00 per harvest.
As between plaintiffs and
defendant Bormaheco, Inc
o) That on 25 November 1970, at Makati, Rizal, Same Rivera, in representation
of the Slobec Realty & Development Corporation executed in favor of
Bormaheco, Inc., represented by its Vice-President Modesto N. Cervantes a
Chattel Mortgage concerning one unit model CAT D7 Caterpillar Crawler
Tractor as described therein as security for the payment in favor of the
mortgagee of the amount of P180,000.00 (per Exhibit K) that Id document was
superseded by another chattel mortgage dated January 23, 1971 (Exhibit 15);
p) On 18 December 1970, at Makati, Rizal, the Bormaheco, Inc., represented
by its Vice-President Modesto Cervantes and Slobec Realty Corporation
represented by Santiago Rivera executed the sales agreement concerning the
sale of one (1) unit Model CAT D7 Caterpillar Crawler Tractor as described
therein for the amount of P230,000.00 (per Exhibit J) which document was
superseded by the Sales Agreement dated January 23,1971 (Exhibit 16);
q) Although it appears on the document entitled Chattel Mortgage (per Exhibit
K) that it was executed on 25 November 1970, and in the document entitled
Sales Agreement (per Exhibit J) that it was executed on 18 December 1970, it
appears in the notarial register of the notary public who notarized them that
those two documents were executed on 11 December 1970. The certified
xerox copy of the notarial register of Notary Public Guillermo Aragones issued
by the Bureau of Records Management is hereto submitted as Exhibit BB That
said chattel mortgage was superseded by another document dated January
23, 1971;
r) That on 23 January 1971, Slobec Realty Development Corporation,
represented by Santiago Rivera, received from Bormaheco, Inc. one (1) tractor
Caterpillar Model D-7 pursuant to Invoice No. 33234 (Exhibits 9 and 9-A,
Bormaheco, Inc.) and delivery receipt No. 10368 (per Exhibits 10 and 10-A for
Bormaheco, Inc
s) That on 28 September 1973, Atty. Martin M. de Guzman, as counsel of
Insurance Corporation of the Philippines purchased at public auction for said
corporation the four (4) parcels of land subject of tills case (per Exhibit L), and
which document was presented to the Register of Deeds on 1 October 1973;
t) Although it appears that the realties in issue has (sic) been sold by
Insurance Corporation of the Philippines in favor of PM Parts on 1 0 April 1975,
Modesto N. Cervantes, formerly Vice- President and now President of
Bormaheco, Inc., sent his letter dated 9 August 1976 to Mauricia Meer Vda. de
Castillo (Exhibit V), demanding that she and her children should vacate the
premises;

u) That the Caterpillar Crawler Tractor Model CAT D-7 which was received by
Slobec Realty Development Corporation was actually reconditioned and
repainted. " 2
We cull the following antecedents from the decision of respondent Court of Appeals:
Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de Castillo. The Castillo
family are the owners of a parcel of land located in Lucena City which was given as security
for a loan from the Development Bank of the Philippines. For their failure to pay the
amortization, foreclosure of the said property was about to be initiated. This problem was
made known to Santiago Rivera, who proposed to them the conversion into subdivision of
the four (4) parcels of land adjacent to the mortgaged property to raise the necessary fund.
The Idea was accepted by the Castillo family and to carry out the project, a Memorandum of
Agreement (Exh. U p. 127, Record) was executed by and between Slobec Realty and
Development, Inc., represented by its President Santiago Rivera and the Castillo family. In
this agreement, Santiago Rivera obliged himself to pay the Castillo family the sum of
P70,000.00 immediately after the execution of the agreement and to pay the additional
amount of P400,000.00 after the property has been converted into a subdivision. Rivera,
armed with the agreement, Exhibit U , approached Mr. Modesto Cervantes, President of
defendant Bormaheco, and proposed to purchase from Bormaheco two (2) tractors Model D7 and D-8 Subsequently, a Sales Agreement was executed on December 28,1970 (Exh. J, p.
22, Record).
On January 23, 1971, Bormaheco, Inc. and Slobec Realty and Development, Inc., represented
by its President, Santiago Rivera, executed a Sales Agreement over one unit of Caterpillar
Tractor D-7 with Serial No. 281114, as evidenced by the contract marked Exhibit '16'. As
shown by the contract, the price was P230,000.00 of which P50,000.00 was to constitute a
down payment, and the balance of P180,000.00 payable in eighteen monthly installments.
On the same date, Slobec, through Rivera, executed in favor of Bormaheco a Chattel
Mortgage (Exh. K, p. 29, Record) over the said equipment as security for the payment of the
aforesaid balance of P180,000.00. As further security of the aforementioned unpaid balance,
Slobec obtained from Insurance Corporation of the Phil. a Surety Bond, with ICP (Insurance
Corporation of the Phil.) as surety and Slobec as principal, in favor of Bormaheco, as borne
out by Exhibit '8' (p. 111, Record). The aforesaid surety bond was in turn secured by an
Agreement of Counter-Guaranty with Real Estate Mortgage (Exhibit I, p. 24, Record)
executed by Rivera as president of Slobec and Mauricia Meer Vda. de Castillo, Buenaflor
Castillo Umali, Bertilla Castillo-Rada, Victoria Castillo, Marietta Castillo and Leovina Castillo
Jalbuena, as mortgagors and Insurance Corporation of the Philippines (ICP) as mortgagee. In
this agreement, ICP guaranteed the obligation of Slobec with Bormaheco in the amount of
P180,000.00. In giving the bond, ICP required that the Castillos mortgage to them the
properties in question, namely, four parcels of land covered by TCTs in the name of the
aforementioned mortgagors, namely TCT Nos. 13114, 13115, 13116 and 13117 all of the
Register of Deeds for Lucena City.
On the occasion of the execution on January 23, 1971, of the Sales Agreement Exhibit '16',
Slobec, represented by Rivera received from Bormaheco the subject matter of the said Sales
Agreement, namely, the aforementioned tractor Caterpillar Model D-7 as evidenced by
Invoice No. 33234 (Exhs. 9 and 9-A, p. 112, Record) and Delivery Receipt No. 10368 (Exhs.
10 and 10-A, p. 113). This tractor was known by Rivera to be a reconditioned and repainted
one [Stipulation of Facts, Pre-trial Order, par. (u)].
Meanwhile, for violation of the terms and conditions of the Counter-Guaranty Agreement
(Exh. 1), the properties of the Castillos were foreclosed by ICP As the highest bidder with a
bid of P285,212.00, a Certificate of Sale was issued by the Provincial Sheriff of Lucena City
and Transfer Certificates of Title over the subject parcels of land were issued by the Register
of Deeds of Lucena City in favor of ICP namely, TCT Nos. T-23705, T 23706, T-23707 and T23708 (Exhs. M to P, pp. 38-45). The mortgagors had one (1) year from the date of the
registration of the certificate of sale, that is, until October 1, 1974, to redeem the property,
but they failed to do so. Consequently, ICP consolidated its ownership over the subject
parcels of land through the requisite affidavit of consolidation of ownership dated October

29, 1974, as shown in Exh. '22'(p. 138, Rec.). Pursuant thereto, a Deed of Sale of Real Estate
covering the subject properties was issued in favor of ICP (Exh. 23, p. 139, Rec.).
On April 10, 1975, Insurance Corporation of the Phil. ICP sold to Phil. Machinery Parts
Manufacturing Co. (PM Parts) the four (4) parcels of land and by virtue of said conveyance,
PM Parts transferred unto itself the titles over the lots in dispute so that said parcels of land
are now covered by TCT Nos. T-24846, T-24847, T-24848 and T-24849 (Exhs. Q-T, pp. 46-49,
Rec.).
Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a letter dated
August 9,1976 addressed to plaintiff Mrs. Mauricia Meer Castillo requesting her and her
children to vacate the subject property, who (Mrs. Castillo) in turn sent her reply expressing
her refusal to comply with his demands.
On September 29, 1976, the heirs of the late Felipe Castillo, particularly plaintiff Buenaflor
M. Castillo Umali as the appointed administratrix of the properties in question filed an action
for annulment of title before the then Court of First Instance of Quezon and docketed thereat
as Civil Case No. 8085. Thereafter, they filed an Amended Complaint on January 10, 1980 (p.
444, Record). On July 20, 1983, plaintiffs filed their Second Amended Complaint, impleading
Santiago M. Rivera as a party plaintiff (p. 706, Record). They contended that all the
aforementioned transactions starting with the Agreement of Counter-Guaranty with Real
Estate Mortgage (Exh. I), Certificate of Sale (Exh. L) and the Deeds of Authority to Sell, Sale
and the Affidavit of Consolidation of Ownership (Annexes F, G, H, I) as well as the Deed of
Sale (Annexes J, K, L and M) are void for being entered into in fraud and without the consent
and approval of the Court of First Instance of Quezon, (Branch IX) before whom the
administration proceedings has been pending. Plaintiffs pray that the four (4) parcels of land
subject hereof be declared as owned by the estate of the late Felipe Castillo and that all
Transfer Certificates of Title Nos. 13114,13115,13116,13117, 23705, 23706, 23707, 23708,
24846, 24847, 24848 and 24849 as well as those appearing as encumbrances at the back of
the certificates of title mentioned be declared as a nullity and defendants to pay damages
and attorney's fees (pp. 71071 1, Record).
In their amended answer, the defendants controverted the complaint and alleged, by way of
affirmative and special defenses that the complaint did not state facts sufficient to state a
cause of action against defendants; that plaintiffs are not entitled to the reliefs demanded;
that plaintiffs are estopped or precluded from asserting the matters set forth in the
Complaint; that plaintiffs are guilty of laches in not asserting their alleged right in due time;
that defendant PM Parts is an innocent purchaser for value and relied on the face of the title
before it bought the subject property (p. 744, Record). 3
After trial, the court a quo rendered judgment, with the following decretal portion:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the
defendants, declaring the following documents:
Agreement of Counter-Guaranty with Chattel-Real Estate Mortgage dated
October 24,1970 (Exhibit 1);
Sales Agreement dated December 28, 1970 (Exhibit J)
Chattel Mortgage dated November 25, 1970 (Exhibit K)
Sales Agreement dated January 23, 1971 (Exhibit 16);
Chattel Mortgage dated January 23, 1971 (Exhibit 17);
Certificate of Sale dated September 28, 1973 executed by the Provincial
Sheriff of Quezon in favor of Insurance Corporation of the Philippines (Exhibit
L);

null and void for being fictitious, spurious and without consideration. Consequently, Transfer
Certificates of Title Nos. T 23705, T-23706, T23707 and T-23708 (Exhibits M, N, O and P)
issued in the name of Insurance Corporation of the Philippines, are likewise null and void.
The sale by Insurance Corporation of the- Philippines in favor of defendant Philippine
Machinery Parts Manufacturing Co., Inc., over Id four (4) parcels of land and Transfer
Certificates of Title Nos. T 24846, T-24847, T-24848 and T-24849 subsequently issued by
virtue of said sale in the name of Philippine Machinery Parts Manufacturing Co., Inc., are
similarly declared null and void, and the Register of Deeds of Lucena City is hereby directed
to issue, in lieu thereof, transfer certificates of title in the names of the plaintiffs, except
Santiago Rivera.
Orders the defendants jointly and severally to pay the plaintiffs moral damages in the sum
of P10,000.00, exemplary damages in the amount of P5,000.00, and actual litigation
expenses in the sum of P6,500.00.
Defendants are likewise ordered to pay the plaintiffs, jointly and severally, the sum of
P10,000.00 for and as attomey's fees. With costs against the defendants.
SO ORDERED.

As earlier stated, respondent court reversed the aforequoted decision of the trial court and rendered the
judgment subject of this petitionPetitioners contend that respondent Court of Appeals erred:
1. In holding and finding that the actions entered into between petitioner Rivera with
Cervantes are all fair and regular and therefore binding between the parties thereto;
2. In reversing the decision of the lower court, not only based on erroneous conclusions of
facts, erroneous presumptions not supported by the evidence on record but also, holding
valid and binding the supposed payment by ICP of its obligation to Bormaheco, despite the
fact that the surety bond issued it had already expired when it opted to foreclose
extrajudically the mortgage executed by the petitioners;
3. In aside the finding of the lower court that there was necessity to pierce the veil of
corporate existence; and
4. In reversing the decision of the lower court of affirming the same

I. Petitioners aver that the transactions entered into between Santiago M. Rivera, as President of Slobec
Realty and Development Company (Slobec) and Mode Cervantes, as Vice-President of Bormaheco, such as
the Sales Agreement, 6 Chattel Mortgage 7 and the Agreement of Counter-Guaranty with Chattel/Real
Estate Mortgage, 8 are all fraudulent and simulated and should, therefore, be declared nun and void. Such
allegation is premised primarily on the fact that contrary to the stipulations agreed upon in the Sales
Agreement (Exhibit J), Rivera never made any advance payment, in the alleged amount of P50,000.00, to
Bormaheco; that the tractor was received by Rivera only on January 23, 1971 and not in 1970 as stated in
the Chattel Mortgage (Exhibit K); and that when the Agreement of Counter-Guaranty with Chattel/Real
Estate Mortgage was executed on October 24, 1970, to secure the obligation of ICP under its surety bond,
the Sales Agreement and Chattel Mortgage had not as yet been executed, aside from the fact that it was
Bormaheco, and not Rivera, which paid the premium for the surety bond issued by ICP
At the outset, it will be noted that petitioners submission under the first assigned error hinges purely on
questions of fact. Respondent Court of Appeals made several findings to the effect that the questioned
documents are valid and binding upon the parties, that there was no fraud employed by private
respondents in the execution thereof, and that, contrary to petitioners' allegation, the evidence on record
reveals that petitioners had every intention to be bound by their undertakings in the various transactions
had with private respondents. It is a general rule in this jurisdiction that findings of fact of said appellate
court are final and conclusive and, thus, binding on this Court in the absence of sufficient and convincing

proof, inter alia, that the former acted with grave abuse of discretion. Under the circumstances, we find no
compelling reason to deviate from this long-standing jurisprudential pronouncement.
In addition, the alleged failure of Rivera to pay the consideration agreed upon in the Sales Agreement,
which clearly constitutes a breach of the contract, cannot be availed of by the guilty party to justify and
support an action for the declaration of nullity of the contract. Equity and fair play dictates that one who
commits a breach of his contract may not seek refuge under the protective mantle of the law.
The evidence of record, on an overall calibration, does not convince us of the validity of petitioners'
contention that the contracts entered into by the parties are either absolutely simulated or downright
fraudulent.
There is absolute simulation, which renders the contract null and void, when the parties do not intend to
be bound at all by the same. 9 The basic characteristic of this type of simulation of contract is the fact that
the apparent contract is not really desired or intended to either produce legal effects or in any way alter
the juridical situation of the parties. The subsequent act of Rivera in receiving and making use of the
tractor subject matter of the Sales Agreement and Chattel Mortgage, and the simultaneous issuance of a
surety bond in favor of Bormaheco, concomitant with the execution of the Agreement of Counter-Guaranty
with Chattel/Real Estate Mortgage, conduce to the conclusion that petitioners had every intention to be
bound by these contracts. The occurrence of these series of transactions between petitioners and private
respondents is a strong indication that the parties actually intended, or at least expected, to exact
fulfillment of their respective obligations from one another.
Neither will an allegation of fraud prosper in this case where petitioners failed to show that they were
induced to enter into a contract through the insidious words and machinations of private respondents
without which the former would not have executed such contract. To set aside a document solemnly
executed and voluntarily delivered, the proof of fraud must be clear and convincing. 10 We are not
persuaded that such quantum of proof exists in the case at bar.
The fact that it was Bormaheco which paid the premium for the surety bond issued by ICP does not per
se affect the validity of the bond. Petitioners themselves admit in their present petition that Rivera
executed a Deed of Sale with Right of Repurchase of his car in favor of Bormaheco and agreed that a part
of the proceeds thereof shall be used to pay the premium for the bond. 11 In effect, Bormaheco accepted
the payment of the premium as an agent of ICP The execution of the deed of sale with a right of
repurchase in favor of Bormaheco under such circumstances sufficiently establishes the fact that Rivera
recognized Bormaheco as an agent of ICP Such payment to the agent of ICP is, therefore, binding on
Rivera. He is now estopped from questioning the validity of the suretyship contract.
II. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal
fiction that a corporation is an entity with a juridical personality separate and distinct from its members or
stockholders may be disregarded. In such cases, the corporation will be considered as a mere association
of persons. The members or stockholders of the corporation will be considered as the corporation, that is,
liability will attach directly to the officers and stockholders. 12 The doctrine applies when the corporate
fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, 13 or when it is
made as a shield to confuse the legitimate issues 14 or where a corporation is the mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. 15
In the case at bar, petitioners seek to pierce the V621 Of corporate entity of Bormaheco, ICP and PM Parts,
alleging that these corporations employed fraud in causing the foreclosure and subsequent sale of the real
properties belonging to petitioners While we do not discount the possibility of the existence of fraud in the
foreclosure proceeding, neither are we inclined to apply the doctrine invoked by petitioners in granting the
relief sought. It is our considered opinion that piercing the veil of corporate entity is not the proper remedy
in order that the foreclosure proceeding may be declared a nullity under the circumstances obtaining in the
legal case at bar.
In the first place, the legal corporate entity is disregarded only if it is sought to hold the officers and
stockholders directly liable for a corporate debt or obligation. In the instant case, petitioners do not seek to
impose a claim against the individual members of the three corporations involved; on the contrary, it is
these corporations which desire to enforce an alleged right against petitioners. Assuming that petitioners

were indeed defrauded by private respondents in the foreclosure of the mortgaged properties, this fact
alone is not, under the circumstances, sufficient to justify the piercing of the corporate fiction, since
petitioners do not intend to hold the officers and/or members of respondent corporations personally liable
therefor. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which relief
may be obtained without having to disregard the aforesaid corporate fiction attaching to respondent
corporations. Secondly, petitioners failed to establish by clear and convincing evidence that private
respondents were purposely formed and operated, and thereafter transacted with petitioners, with the sole
intention of defrauding the latter.
The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a
justification for disregarding their separate personalities, 16 absent sufficient showing that the corporate
entity was purposely used as a shield to defraud creditors and third persons of their rights.
III. The main issue for resolution is whether there was a valid foreclosure of the mortgaged properties by
ICP Petitioners argue that the foreclosure proceedings should be declared null and void for two reasons,
viz.: (1) no written notice was furnished by Bormaheco to ICP anent the failure of Slobec in paying its
obligation with the former, plus the fact that no receipt was presented to show the amount allegedly paid
by ICP to Bormaheco; and (b) at the time of the foreclosure of the mortgage, the liability of ICP under the
surety bond had already expired.
Respondent court, in finding for the validity of the foreclosure sale, declared:
Now to the question of whether or not the foreclosure by the ICP of the real estate mortgage
was in the exercise of a legal right, We agree with the appellants that the foreclosure
proceedings instituted by the ICP was in the exercise of a legal right. First, ICP has in its
favor the legal presumption that it had indemnified Bormaheco by reason of Slobec's default
in the payment of its obligation under the Sales Agreement, especially because Bormaheco
consented to ICPs foreclosure of the mortgage. This presumption is in consonance with pars.
R and Q Section 5, Rule 5, * New Rules of Court which provides that it is disputably
presumed that private transactions have been fair and regular. likewise, it is disputably
presumed that the ordinary course of business has been followed: Second, ICP had the right
to proceed at once to the foreclosure of the mortgage as mandated by the provisions of Art.
2071 Civil Code for these further reasons: Slobec, the principal debtor, was admittedly
insolvent; Slobec's obligation becomes demandable by reason of the expiration of the period
of payment; and its authorization to foreclose the mortgage upon Slobec's default, which
resulted in the accrual of ICPS liability to Bormaheco. Third, the Agreement of CounterGuaranty with Real Estate Mortgage (Exh. 1) expressly grants to ICP the right to foreclose
the real estate mortgage in the event of 'non-payment or non-liquidation of the entire
indebtedness or fraction thereof upon maturity as stipulated in the contract'. This is a valid
and binding stipulation in the absence of showing that it is contrary to law, morals, good
customs, public order or public policy. (Art. 1306, New Civil Code). 17
1. Petitioners asseverate that there was no notice of default issued by Bormaheco to ICP which would have
entitled Bormaheco to demand payment from ICP under the suretyship contract.
Surety Bond No. B-1401 0 which was issued by ICP in favor of Bormaheco, wherein ICP and Slobec
undertook to guarantee the payment of the balance of P180,000.00 payable in eighteen (18) monthly
installments on one unit of Model CAT D-7 Caterpillar Crawler Tractor, pertinently provides in part as
follows:
1. The liability of INSURANCE CORPORATION OF THE PHILIPPINES, under this BOND will expire
Twelve (I 2) months from date hereof. Furthermore, it is hereby agreed and understood that
the INSURANCE CORPORATION OF THE PHILIPPINES will not be liable for any claim not
presented in writing to the Corporation within THIRTY (30) DAYS from the expiration of this
BOND, and that the obligee hereby waives his right to bring claim or file any action against
Surety and after the termination of one (1) year from the time his cause of action accrues. 18
The surety bond was dated October 24, 1970. However, an annotation on the upper part thereof
states: "NOTE: EFFECTIVITY DATE OF THIS BOND SHALL BE ON JANUARY 22, 1971." 19

On the other hand, the Sales Agreement dated January 23, 1971 provides that the balance of P180,000.00
shall be payable in eighteen (18) monthly installments. 20 The Promissory Note executed by Slobec on even
date in favor of Bormaheco further provides that the obligation shall be payable on or before February 23,
1971 up to July 23, 1972, and that non-payment of any of the installments when due shall make the entire
obligation immediately due and demandable. 21
It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the obligation
expressly assumed therein. We have repeatedly held that the extent of a surety's liability is determined
only by the clause of the contract of suretyship as well as the conditions stated in the bond. It cannot be
extended by implication beyond the terms the contract. 22
Fundamental likewise is the rule that, except where required by the provisions of the contract, a demand or
notice of default is not required to fix the surety's liability. 23 Hence, where the contract of suretyship
stipulates that notice of the principal's default be given to the surety, generally the failure to comply with
the condition will prevent recovery from the surety. There are certain instances, however, when failure to
comply with the condition will not extinguish the surety's liability, such as a failure to give notice of slight
defaults, which are waived by the obligee; or on mere suspicion of possible default; or where, if a default
exists, there is excuse or provision in the suretyship contract exempting the surety for liability therefor, or
where the surety already has knowledge or is chargeable with knowledge of the default. 24
In the case at bar, the suretyship contract expressly provides that ICP shag not be liable for any claim not
filed in writing within thirty (30) days from the expiration of the bond. In its decision dated May 25 1987,
the court a quocategorically stated that '(n)o evidence was presented to show that Bormaheco demanded
payment from ICP nor was there any action taken by Bormaheco on the bond posted by ICP to guarantee
the payment of plaintiffs obligation. There is nothing in the records of the proceedings to show that ICP
indemnified Bormaheco for the failure of the plaintiffs to pay their obligation. " 25 The failure, therefore, of
Bormaheco to notify ICP in writing about Slobec's supposed default released ICP from liability under its
surety bond. Consequently, ICP could not validly foreclose that real estate mortgage executed by
petitioners in its favor since it never incurred any liability under the surety bond. It cannot claim exemption
from the required written notice since its case does not fall under any of the exceptions hereinbefore
enumerated.
Furthermore, the allegation of ICP that it has paid Bormaheco is not supported by any documentary
evidence. Section 1, Rule 131 of the Rules of Court provides that the burden of evidence lies with the party
who asserts an affirmative allegation. Since ICP failed to duly prove the fact of payment, the disputable
presumption that private transactions have been fair and regular, as erroneously relied upon by
respondent Court of Appeals, finds no application to the case at bar.
2. The liability of a surety is measured by the terms of his contract, and, while he is liable to the full extent
thereof, such liability is strictly limited to that assumed by its terms. 26 While ordinarily the termination of a
surety's liability is governed by the provisions of the contract of suretyship, where the obligation of a
surety is, under the terms of the bond, to terminate at a specified time, his obligation cannot be enlarged
by an unauthorized extension thereof. 27 This is an exception to the general rule that the obligation of the
surety continues for the same period as that of the principal debtor. 28
It is possible that the period of suretyship may be shorter than that of the principal obligation, as where
the principal debtor is required to make payment by installments. 29 In the case at bar, the surety bond
issued by ICP was to expire on January 22, 1972, twelve (1 2) months from its effectivity date, whereas
Slobec's installment payment was to end on July 23, 1972. Therefore, while ICP guaranteed the payment
by Slobec of the balance of P180,000.00, such guaranty was valid only for and within twelve (1 2) months
from the date of effectivity of the surety bond, or until January 22, 1972. Thereafter, from January 23, 1972
up to July 23, 1972, the liability of Slobec became an unsecured obligation. The default of Slobec during
this period cannot be a valid basis for the exercise of the right to foreclose by ICP since its surety contract
had already been terminated. Besides, the liability of ICP was extinguished when Bormaheco failed to file a
written claim against it within thirty (30) days from the expiration of the surety bond. Consequently, the
foreclosure of the mortgage, after the expiration of the surety bond under which ICP as surety has not
incurred any liability, should be declared null and void.

3. Lastly, it has been held that where The guarantor holds property of the principal as collateral surety for
his personal indemnity, to which he may resort only after payment by himself, until he has paid something
as such guarantor neither he nor the creditor can resort to such collaterals. 30
The Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage states that it is being issued for
and in consideration of the obligations assumed by the Mortgagee-Surety Company under the terms and
conditions of ICP Bond No. 14010 in behalf of Slobec Realty Development Corporation and in favor of
Bormaheco, Inc. 31 There is no doubt that said Agreement of Counter-Guaranty is issued for the personal
indemnity of ICP Considering that the fact of payment by ICP has never been established, it follows,
pursuant to the doctrine above adverted to, that ICP cannot foreclose on the subject properties,
IV. Private respondent PM Parts posits that it is a buyer in good faith and, therefore, it acquired a valid title
over the subject properties. The submission is without merit and the conclusion is specious
We have stated earlier that the doctrine of piercing the veil of corporate fiction is not applicable in this
case. However, its inapplicability has no bearing on the good faith or bad faith of private respondent PM
Parts. It must be noted that Modesto N. Cervantes served as Vice-President of Bormaheco and, later, as
President of PM Parts. On this fact alone, it cannot be said that PM Parts had no knowledge of the aforesaid
several transactions executed between Bormaheco and petitioners. In addition, Atty. Martin de Guzman,
who is the Executive Vice-President of Bormaheco, was also the legal counsel of ICP and PM Parts. These
facts were admitted without qualification in the stipulation of facts submitted by the parties before the trial
court. Hence, the defense of good faith may not be resorted to by private respondent PM Parts which is
charged with knowledge of the true relations existing between Bormaheco, ICP and herein petitioners.
Accordingly, the transfer certificates of title issued in its name, as well as the certificate of sale, must be
declared null and void since they cannot be considered altogether free of the taint of bad faith.
WHEREFORE, the decision of respondent Court of Appeals is hereby REVERSED and SET ASIDE, and
judgment is hereby rendered declaring the following as null and void: (1) Certificate of Sale, dated
September 28,1973, executed by the Provincial Sheriff of Quezon in favor of the Insurance Corporation of
the Philippines; (2) Transfer Certificates of Title Nos. T-23705, T-23706, T-23707 and T-23708 issued in the
name of the Insurance Corporation of the Philippines; (3) the sale by Insurance Corporation of the
Philippines in favor of Philippine Machinery Parts Manufacturing Co., Inc. of the four (4) parcels of land
covered by the aforesaid certificates of title; and (4) Transfer Certificates of Title Nos. T-24846, T-24847, T24848 and T24849 subsequently issued by virtue of said sale in the name of the latter corporation.
The Register of Deeds of Lucena City is hereby directed to cancel Transfer Certificates of Title Nos. T24846, T-24847, T24848 and T-24849 in the name of Philippine Machinery Parts Manufacturing Co., Inc.
and to issue in lieu thereof the corresponding transfer certificates of title in the name of herein petitioners,
except Santiago Rivera.
The foregoing dispositions are without prejudice to such other and proper legal remedies as may be
available to respondent Bormaheco, Inc. against herein petitioners.
SO ORDERED.
Melencio-Herrera (Chairman), Paras and Padilla, JJ., concur.
Sarmiento, J., is on leave.

Republic of the Philippines


SUPREME COURT
Manila
YUTIVO SONS HARDWARE COMPANY, petitioner,
vs.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.

Sycip, Quisumbing, Salazar & Associates for petitioner.


Office of the Solicitor General for respondents.
GUTIERREZ DAVID, J.:
This is a petition for review of a decision of the Court of Tax Appeals ordering petitioner to pay to
respondent Collector of Internal Revenue the sum of P1,266,176.73 as sales tax deficiency for the third
quarter of 1947 to the fourth quarter of 1950; inclusive, plus 75% surcharge thereon, equivalent to
P349,632.54, or a sum total of P2,215,809.27, plus costs of the suit.
From the stipulation of facts and the evidence adduced by both parties, it appears that petitioner Yutivo
Sons Hardware Co. (hereafter referred to as Yutivo) is a domestic corporation, organized under the laws of
the Philippines, with principal office at 404 Dasmarias St., Manila. Incorporated in 1916, it was engaged,
prior to the last world war, in the importation and sale of hardware supplies and equipment. After the
liberation, it resumed its business and until June of 1946 bought a number of cars and trucks from General
Motors Overseas Corporation (hereafter referred to as GM for short), an American corporation licensed to
do business in the Philippines. As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of
the Tax Code on the basis of its selling price to Yutivo. Said tax being collected only once on original sales,
Yutivo paid no further sales tax on its sales to the public.
On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was organized to engage in the
business of selling cars, trucks and spare parts. Its original authorized capital stock was P1,000,000 divided
into 10,000 shares with a par value of P100 each.
At the time of its incorporation 2,500 shares worth P250,000 appear to have been subscribed into equal
proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington Sycip. The first three
named subscribers are brothers, being sons of Yu Tiong Yee, one of Yutivo's founders. The latter two are
respectively sons of Yu Tiong Sin and Albino Sycip, who are among the founders of Yutivo.
After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the
cars and tracks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the
public in the Visayas and Mindanao.
When GM decided to withdraw from the Philippines in the middle of 1947, the U.S. manufacturer of GM
cars and trucks appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its
previous arrangement of selling exclusively to SM. In the same way that GM used to pay sales taxes based
on its sales to Yutivo, the latter, as importer, paid sales tax prescribed on the basis of its selling price to
SM, and since such sales tax, as already stated, is collected only once on original sales, SM paid no sales
tax on its sales to the public.
On November 7, 1950, after several months of investigation by revenue officers started in July, 1948, the
Collector of Internal Revenue made an assessment upon Yutivo and demanded from the latter
P1,804,769.85 as deficiency sales tax plus surcharge covering the period from the third quarter of 1947 to
the fourth quarter of 1949; or from July 1, 1947 to December 31, 1949, claiming that the taxable sales
were the retail sales by SM to the public and not the sales at wholesale made by, Yutivo to the latter
inasmuch as SM and Yutivo were one and the same corporation, the former being the subsidiary of the
latter.
The assessment was disputed by the petitioner, and a reinvestigation of the case having been made by the
agents of the Bureau of Internal Revenue, the respondent Collector in his letter dated November 15, 1952
countermanded his demand for sales tax deficiency on the ground that "after several investigations
conducted into the matter no sufficient evidence could be gathered to sustain the assessment of this
Office based on the theory that Southern Motors is a mere instrumentality or subsidiary of Yutivo." The
withdrawal was subject, however, to the general power of review by the now defunct Board of Tax Appeals.
The Secretary of Finance to whom the papers relative to the case were endorsed, apparently not agreeing
with the withdrawal of the assessment, returned them to the respondent Collector for reinvestigation.
After another investigation, the respondent Collector, in a letter to petitioner dated December 16, 1954,
redetermined that the aforementioned tax assessment was lawfully due the government and in addition

assessed deficiency sales tax due from petitioner for the four quarters of 1950; the respondents' last
demand was in the total sum of P2,215,809.27 detailed as follows:

75%
Deficiency Surcharg
Sales Tax
e

Total
Amount
Due

Assessment
(First) of
November 7,
1950 for
deficiency
sales Tax for
the period from
3rd Qrtr 1947
to 4th Qrtr
P1,031,296 P773,473. P1,804,769
1949 inclusive
.60
45
.05

Additional
Assessment for
period from 1st
to 4th Qrtr
176,160.
1950, inclusive 234,880.13
09 411,040.22

Total amount
demanded per
letter of
December 16, P1,266,176 P949,632. P2,215,809
1954
.73
54
.27

This second assessment was contested by the petitioner Yutivo before the Court of Tax Appeals, alleging
that there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct
of petitioner Yutivo; (2) that assuming the separate personality of SM may be disregarded, the sales tax
already paid by Yutivo should first be deducted from the selling price of SM in computing the sales tax due
on each vehicle; and (3) that the surcharge has been erroneously imposed by respondent. Finding against
Yutivo and sustaining the respondent Collector's theory that there was no legitimate or bona fide purpose
in the organization of SM the apparent objective of its organization being to evade the payment of taxes
and that it was owned (or the majority of the stocks thereof are owned) and controlled by Yutivo and is a
mere subsidiary, branch, adjunct, conduit, instrumentality or alter ego of the latter, the Court of Tax
Appeals with Judge Roman Umali not taking part disregarded its separate corporate existence and on
April 27, 1957, rendered the decision now complained of. Of the two Judges who signed the decision, one
voted for the modification of the computation of the sales tax as determined by the respondent Collector in
his decision so as to give allowance for the reduction of the tax already paid (resulting in the reduction of
the assessment to P820,509.91 exclusive of surcharges), while the other voted for affirmance. The
dispositive part of the decision, however, affirmed the assessment made by the Collector. Reconsideration
of this decision having been denied, Yutivo brought the case to this Court thru the present petition for
review.
It is an elementary and fundamental principle of corporation law that a corporation is an entity separate
and distinct from its stockholders and from other corporation petitions to which it may be connected.
However, "when the notion of legal entity is used to defeat public convenience, justify wrong, protect
fraud, or defend crime," the law will regard the corporation as an association of persons, or in the case of
two corporations merge them into one. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 496, citing I Fletcher

Cyclopedia of Corporation, Perm Ed., pp. 135 136; United States vs. Milwaukee Refrigeration Transit Co.,
142 Fed., 247, 255 per Sanborn, J.) Another rule is that, when the corporation is the "mere alter ego or
business conduit of a person, it may be disregarded." (Koppel [Phil.], Inc. vs. Yatco, supra.)
After going over the voluminous record of the present case, we are inclined to rule that the Court of Tax
Appeals was not justified in finding that SM was organized for no other purpose than to defraud the
Government of its lawful revenues. In the first place, this corporation was organized in June, 1946 when it
could not have caused Yutivo any tax savings. From that date up to June 30, 1947, or a period of more than
one year, GM was the importer of the cars and trucks sold to Yutivo, which, in turn resold them to SM.
During that period, it is not disputed that GM as importer, was the one solely liable for sales taxes. Neither
Yutivo or SM was subject to the sales taxes on their sales of cars and trucks. The sales tax liability of Yutivo
did not arise until July 1, 1947 when it became the importer and simply continued its practice of selling to
SM. The decision, therefore, of the Tax Court that SM was organized purposely as a tax evasion device runs
counter to the fact that there was no tax to evade.
Making the observation from a newspaper clipping (Exh. "T") that "as early as 1945 it was known that GM
was preparing to leave the Philippines and terminate its business of importing vehicles," the court below
speculated that Yutivo anticipated the withdrawal of GM from business in the Philippines in June, 1947. This
observation, which was made only in the resolution on the motion for reconsideration, however, finds no
basis in the record. On the other hand, GM had been an importer of cars in the Philippines even before the
war and had but recently resumed its operation in the Philippines in 1946 under an ambitious plan to
expand its operation by establishing an assembly plant here, so that it could not have been expected to
make so drastic a turnabout of not merely abandoning the assembly plant project but also totally ceasing
to do business as an importer. Moreover, the newspaper clipping, Exh. "T", was published on March 24,
1947, and clipping, merely reported a rumored plan that GM would abandon the assembly plant project in
the Philippines. There was no mention of the cessation of business by GM which must not be confused with
the abandonment of the assembly plant project. Even as respect the assembly plant, the newspaper
clipping was quite explicit in saying that the Acting Manager refused to confirm that rumor as late as March
24, 1947, almost a year after SM was organized.
At this juncture, it should be stated that the intention to minimize taxes, when used in the context of fraud,
must be proved to exist by clear and convincing evidence amounting to more than mere preponderance,
and cannot be justified by a mere speculation. This is because fraud is never lightly to be presumed. (Vitelli
& Sons vs. U.S 250 U.S. 355; Duffin vs. Lucas, 55 F (2d) 786; Budd vs. Commr., 43 F (2d) 509; Maryland
Casualty Co. vs. Palmette Coal Co., 40 F (2d) 374; Schoonfield Bros., Inc. vs. Commr., 38 BTA 943; Charles
Heiss vs. Commr 36 BTA 833; Kerbaugh vs. Commr 74 F (2d) 749; Maddas vs. Commr., 114 F. (2d) 548;
Moore vs. Commr., 37 BTA 378; National City Bank of New York vs. Commr., 98 (2d) 93; Richard vs.
Commr., 15 BTA 316; Rea Gane vs. Commr., 19 BTA 518). (See also Balter, Fraud Under Federal Law, pp.
301-302, citing numerous authorities: Arroyo vs. Granada, et al., 18 Phil. 484.) Fraud is never imputed and
the courts never sustain findings of fraud upon circumstances which, at the most, create only suspicion.
(Haygood Lumber & Mining Co. vs. Commr., 178 F (2d) 769; Dalone vs. Commr., 100 F (2d) 507).
In the second place, SM was organized and it operated, under circumstance that belied any intention to
evade sales taxes. "Tax evasion" is a term that connotes fraud thru the use of pretenses and forbidden
devices to lessen or defeat taxes. The transactions between Yutivo and SM, however, have always been in
the open, embodied in private and public documents, constantly subject to inspection by the tax
authorities. As a matter of fact, after Yutivo became the importer of GM cars and trucks for Visayas and
Mindanao, it merely continued the method of distribution that it had initiated long before GM withdrew
from the Philippines.
On the other hand, if tax saving was the only justification for the organization of SM, such justification
certainly ceased with the passage of Republic Act No. 594 on February 16, 1951, governing payment of
advance sales tax by the importer based on the landed cost of the imported article, increased by mark-ups
of 25%, 50%, and 100%, depending on whether the imported article is taxed under sections 186, 185 and
184, respectively, of the Tax Code. Under Republic Act No. 594, the amount at which the article is sold is
immaterial to the amount of the sales tax. And yet after the passage of that Act, SM continued to exist up
to the present and operates as it did many years past in the promotion and pursuit of the business
purposes for which it was organized.

In the third place, sections 184 to 186 of the said Code provides that the sales tax shall be collected "once
only on every original sale, barter, exchange . . , to be paid by the manufacturer, producer or importer."
The use of the word "original" and the express provision that the tax was collectible "once only" evidently
has made the provisions susceptible of different interpretations. In this connection, it should be stated that
a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether
avoid them by means which the law permits. (U.S. vs. Isham 17 Wall. 496, 506; Gregory vs. Helvering 293
U.S. 465, 469; Commr. vs. Tower, 327 U.S. 280; Lawton vs. Commr 194 F (2d) 380). Any legal means by the
taxpayer to reduce taxes are all right Benry vs. Commr. 25 T. Cl. 78). A man may, therefore, perform an act
that he honestly believes to be sufficient to exempt him from taxes. He does not incur fraud thereby even
if the act is thereafter found to be insufficient. Thus in the case ofCourt Holding Co. vs. Commr. 2 T. Cl.
531, it was held that though an incorrect position in law had been taken by the corporation there was no
suppression of the facts, and a fraud penalty was not justified.
The evidence for the Collector, in our opinion, falls short of the standard of clear and convincing proof of
fraud. As a matter of fact, the respondent Collector himself showed a great deal of doubt or hesitancy as to
the existence of fraud. He even doubted the validity of his first assessment dated November 7, 1959. It
must be remembered that the fraud which respondent Collector imputed to Yutivo must be related to its
filing of sales tax returns of less taxes than were legally due. The allegation of fraud, however, cannot be
sustained without the showing that Yutivo, in filing said returns, did so fully knowing that the taxes called
for therein called for therein were less than what were legally due. Considering that respondent Collector
himself with the aid of his legal staff, and after some two years of investigation and duty of investigation
and study concluded in 1952 that Yutivo's sales tax returns were correct only to reverse himself after
another two years it would seem harsh and unfair for him to say in 1954 that Yutivo fully knew in
October 1947 that its sales tax returns were inaccurate.
On this point, one other consideration would show that the intent to save taxes could not have existed in
the minds of the organizers of SM. The sales tax imposed, in theory and in practice, is passed on to the
vendee, and is usually billed separately as such in the sales invoice. As pointed out by petitioner Yutivo,
had not SM handled the retail, the additional tax that would have been payable by it, could have been
easily passed off to the consumer, especially since the period covered by the assessment was a "seller's
market" due to the post-war scarcity up to late 1948, and the imposition of controls in the late 1949.
It is true that the arrastre charges constitute expenses of Yutivo and its non-inclusion in the selling price by
Yutivo cost the Government P4.00 per vehicle, but said non-inclusion was explained to have been due to
an inadvertent accounting omission, and could hardly be considered as proof of willful channelling and
fraudulent evasion of sales tax. Mere understatement of tax in itself does not prove fraud. (James
Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in Merten's Sec. 55.11 p. 21) The amount involved,
moreover, is extremely small inducement for Yutivo to go thru all the trouble of organizing SM. Besides, the
non-inclusion of these small arrastre charges in the sales tax returns of Yutivo is clearly shown in the
records of Yutivo, which is uncharacteristic of fraud (See Insular Lumber Co. vs. Collector, G.R. No. L-719,
April 28, 1956.)
We are, however, inclined to agree with the court below that SM was actually owned and controlled by
petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the
vehicles at retail and maintaining stores for spare parts as well as service repair shops. It is not disputed
that the petitioner, which is engaged principally in hardware supplies and equipment, is completely
controlled by the Yutivo, Young or Yu family. The founders of the corporation are closely related to each
other either by blood or affinity, and most of its stockholders are members of the Yu (Yutivo or Young)
family. It is, likewise, admitted that SM was organized by the leading stockholders of Yutivo headed by Yu
Khe Thai. At the time of its incorporation 2,500 shares worth P250,000.00 appear to have been subscribed
in five equal proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng Poh and Washington Sycip. The
first three named subscribers are brothers, being the sons of Yu Tien Yee, one of Yutivo's founders. Yu Eng
Poh and Washington Sycip are respectively sons of Yu Tiong Sing and Alberto Sycip who are co-founders of
Yutivo. According to the Articles of Incorporation of the said subscriptions, the amount of P62,500 was paid
by the aforenamed subscribers, but actually the said sum was advanced by Yutivo. The additional
subscriptions to the capital stock of SM and subsequent transfers thereof were paid by Yutivo itself. The
payments were made, however, without any transfer of funds from Yutivo to SM. Yutivo simply charged the
accounts of the subscribers for the amount allegedly advanced by Yutivo in payment of the shares.
Whether a charge was to be made against the accounts of the subscribers or said subscribers were to

subscribe shares appears to constitute a unilateral act on the part of Yutivo, there being no showing that
the former initiated the subscription.
The transactions were made solely by and between SM and Yutivo. In effect, it was Yutivo who undertook
the subscription of shares, employing the persons named or "charged" with corresponding account as
nominal stockholders. Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were manifestly
aware of these subscriptions, but considering that they were the principal officers and constituted the
majority of the Board of Directors of both Yutivo and SM, their subscriptions could readily or easily be that
of Yutivo's Moreover, these persons were related to death other as brothers or first cousins. There was
every reason for them to agree in order to protect their common interest in Yutivo and SM.
The issued capital stock of SM was increased by additional subscriptions made by various person's but
except Ng Sam Bak and David Sycip, "payments" thereof were effected by merely debiting 'or charging the
accounts of said stockholders and crediting the corresponding amounts in favor of SM, without actually
transferring cash from Yutivo. Again, in this instance, the "payments" were Yutivo, by effected by the mere
unilateral act of Yutivo a accounts of the virtue of its control over the individual persons charged, would
necessarily exercise preferential rights and control directly or indirectly, over the shares, it being the party
which really undertook to pay or underwrite payment thereof.
The shareholders in SM are mere nominal stockholders holding the shares for and in behalf of Yutivo, so
even conceding that the original subscribers were stockholders bona fide Yutivo was at all times in control
of the majority of the stock of SM and that the latter was a mere subsidiary of the former.
True, petitioner and other recorded stockholders transferred their shareholdings, but the transfers were
made to their immediate relatives, either to their respective spouses and children or sometimes brothers
or sisters. Yutivo's shares in SM were transferred to immediate relatives of persons who constituted its
controlling stockholders, directors and officers. Despite these purported changes in stock ownership in
both corporations, the Board of Directors and officers of both corporations remained unchanged and
Messrs. Yu Khe Thai, Yu Khe Siong Hu Khe Jin and Yu Eng Poll (all of the Yu or Young family) continued to
constitute the majority in both boards. All these, as observed by the Court of Tax Appeals, merely serve to
corroborate the fact that there was a common ownership and interest in the two corporations.
SM is under the management and control of Yutivo by virtue of a management contract entered into
between the two parties. In fact, the controlling majority of the Board of Directors of Yutivo is also the
controlling majority of the Board of Directors of SM. At the same time the principal officers of both
corporations are identical. In addition both corporations have a common comptroller in the person of
Simeon Sy, who is a brother-in-law of Yutivo's president, Yu Khe Thai. There is therefore no doubt that by
virtue of such control, the business, financial and management policies of both corporations could be
directed towards common ends.
Another aspect relative to Yutivo's control over SM operations relates to its cash transactions. All cash
assets of SM were handled by Yutivo and all cash transactions of SM were actually maintained thru Yutivo.
Any and all receipts of cash by SM including its branches were transmitted or transferred immediately and
directly to Yutivo in Manila upon receipt thereof. Likewise, all expenses, purchases or other obligations
incurred by SM are referred to Yutivo which in turn prepares the corresponding disbursement vouchers and
payments in relation there, the payment being made out of the cash deposits of SM with Yutivo, if any, or
in the absence thereof which occurs generally, a corresponding charge is made against the account of SM
in Yutivo's books. The payments for and charges against SM are made by Yutivo as a matter of course and
without need of any further request, the latter would advance all such cash requirements for the benefit of
SM. Any and all payments and cash vouchers are made on Yutivo stationery and made under authority of
Yutivo's corporate officers, without any copy thereof being furnished to SM. All detailed records such as
cash disbursements, such as expenses, purchases, etc. for the account of SM, are kept by Yutivo and SM
merely keeps a summary record thereof on the basis of information received from Yutivo.
All the above plainly show that cash or funds of SM, including those of its branches which are directly
remitted to Yutivo, are placed in the custody and control of Yutivo, resources and subject to withdrawal
only by Yutivo. SM's being under Yutivo's control, the former's operations and existence became dependent
upon the latter.

Consideration of various other circumstances, especially when taken together, indicates that Yutivo treated
SM merely as its department or adjunct. For one thing, the accounting system maintained by Yutivo shows
that it maintained a high degree of control over SM accounts. All transactions between Yutivo and SM are
recorded and effected by mere debit or credit entries against the reciprocal account maintained in their
respective books of accounts and indicate the dependency of SM as branch upon Yutivo.
Apart from the accounting system, other facts corroborate or independently show that SM is a branch or
department of Yutivo. Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat Yutivo Manila as
their "Head Office" or "Home Office" as shown by their letters of remittances or other correspondences.
These correspondences were actually received by Yutivo and the reference to Yutivo as the head or home
office is obvious from the fact that all cash collections of the SM's branches are remitted directly to Yutivo.
Added to this fact, is that SM may freely use forms or stationery of Yutivo
The fact that SM is a mere department or adjunct of Yutivo is made more patent by the fact that arrastre
conveying, and charges paid for the "operation of receiving, loading or unloading" of imported cars and
trucks on piers and wharves, were charged against SM. Overtime charges for the unloading of cars and
trucks as requested by Yutivo and incurred as part of its acquisition cost thereof, were likewise charged
against and treated as expenses of SM. If Yutivo were the importer, these arrastre and overtime charges
were Yutivo's expenses in importing goods and not SM's. But since those charges were made against SM, it
plainly appears that Yutivo had sole authority to allocate its expenses even as against SM in the sense that
the latter is a mere adjunct, branch or department of the former.
Proceeding to another aspect of the relation of the parties, the management fees due from SM to Yutivo
were taken up as expenses of SM and credited to the account of Yutivo. If it were to be assumed that the
two organizations are separate juridical entities, the corresponding receipts or receivables should have
been treated as income on the part of Yutivo. But such management fees were recorded as "Reserve for
Bonus" and were therefore a liability reserve and not an income account. This reserve for bonus were
subsequently distributed directly to and credited in favor of the employees and directors of Yutivo, thereby
clearly showing that the management fees were paid directly to Yutivo officers and employees.
Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all the
credit to the latter not only in the form of starting capital but also in the form of credits extended for the
cars and vehicles allegedly sold by Yutivo to SM as well as advances or loans for the expenses of the latter
when the capital had been exhausted. Thus, the increases in the capital stock were made in advances or
"Guarantee" payments by Yutivo and credited in favor of SM. The funds of SM were all merged in the cash
fund of Yutivo. At all times Yutivo thru officers and directors common to it and SM, exercised full control
over the cash funds, policies, expenditures and obligations of the latter.
Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax Appeals correctly
disregarded the technical defense of separate corporate entity in order to arrive at the true tax liability of
Yutivo.
Petitioner contends that the respondent Collector had lost his right or authority to issue the disputed
assessment by reason of prescription. The contention, in our opinion, cannot be sustained. It will be noted
that the first assessment was made on November 7, 1950 for deficiency sales tax from 1947 to 1949. The
corresponding returns filed by petitioner covering the said period was made at the earliest on October 1,
as regards the third quarter of 1947, so that it cannot be claimed that the assessment was not made within
the five-year period prescribed in section 331 of the Tax Code invoked by petitioner. The assessment, it is
admitted, was withdrawn by the Collector on insufficiency of evidence, but November 15, 1952 due to
insufficiency of evidence, but the withdrawal was made subject to the approval of the Secretary of Finance
and the Board of Tax Appeals, pursuant to the provisions of section 9 of Executive Order No. 401-A, series
of 1951. The decision of the previous assessment of November 7, Collector countermanding the as 1950
was forwarded to the Board of Tax Appeals through the Secretary of Finance but that official, apparently
disagreeing with the decision, sent it back for re-investigation. Consequently, the assessment of November
7, 1950 cannot be considered to have been finally withdrawn. That the assessment was subsequently
reiterated in the decision of respondent Collector on December 16, 1954 did not alter the fact that it was
made seasonably. In this connection, it would appear that a warrant of distraint and levy had been issued
on March 28, 1951 in relation with this case and by virtue thereof the properties of Yutivo were placed
under constructive distraint. Said warrant and constructive distraint have not been lifted up to the present,
which shows that the assessment of November 7, 1950 has always been valid and subsisting.

Anent the deficiency sale tax for 1950, considering that the assessment thereof was made on December
16, 1954, the same was assessed well within the prescribed five-year period.
Petitioner argues that the original assessment of November 7, 1950 did not extend the prescriptive period
on assessment. The argument is untenable, for, as already seen, the assessment was never finally
withdrawn, since it was not approved by the Secretary of Finance or of the Board of Tax Appeals. The
authority of the Secretary to act upon the assessment cannot be questioned, for he is expressly granted
such authority under section 9 of Executive Order No. 401-And under section 79 (c) of the Revised
Administrative Code, he has "direct control, direction and supervision over all bureaus and offices under his
jurisdiction and may, any provision of existing law to the contrary not withstanding, repeal or modify the
decision of the chief of said Bureaus or offices when advisable in public interest."
It should here also be stated that the assessment in question was consistently protested by petitioner,
making several requests for reinvestigation thereof. Under the circumstances, petitioner may be
considered to have waived the defense of prescription.
"Estoppel has been employed to prevent the application of the statute of limitations against the
government in certain instances in which the taxpayer has taken some affirmative action to prevent
the collection of the tax within the statutory period. It is generally held that a taxpayer is estopped
to repudiate waivers of the statute of limitations upon which the government relied. The cases
frequently involve dissolved corporations. If no waiver has been given, the cases usually show come
conduct directed to a postponement of collection, such, for example, as some variety of request to
apply an overassessment. The taxpayer has 'benefited' and 'is not in a position to contest' his tax
liability. A definite representation of implied authority may be involved, and in many cases the
taxpayer has received the 'benefit' of being saved from the inconvenience, if not hardship of
immediate collection. "
Conceivably even in these cases a fully informed Commissioner may err to the sorrow of the
revenues, but generally speaking, the cases present a strong combination of equities against the
taxpayer, and few will seriously quarrel with their application of the doctrine of estoppel." (Mertens
Law of Federal Income Taxation, Vol. 10-A, pp. 159-160.)
It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 es involving an original
assessment of more than P5,000 refers only to compromises and refunds of taxes, but not to total
withdrawal of the assessment. The contention is without merit. A careful examination of the provisions of
both sections 8 and 9 of Executive Order No. 401-A, series of 1951, reveals the procedure prescribed
therein is intended as a check or control upon the powers of the Collector of Internal Revenue in respect to
assessment and refunds of taxes. If it be conceded that a decision of the Collector of Internal Revenue on
partial remission of taxes is subject to review by the Secretary of Finance and the Board of Tax Appeals,
then with more reason should the power of the Collector to withdraw totally an assessment be subject to
such review.
We find merit, however, in petitioner's contention that the Court of Tax Appeals erred in the imposition of
the 5% fraud surcharge. As already shown in the early part of this decision, no element of fraud is present.
Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should be added to the
deficiency sales tax "in case a false or fraudulent return is willfully made." Although the sales made by SM
are in substance by Yutivo this does not necessarily establish fraud nor the willful filing of a false or
fraudulent return.
The case of Court Holding Co. v. Commissioner of Internal Revenue (August 9, 1943, 2 TC 531, 541-549) is
in point. The petitioner Court Holding Co. was a corporation consisting of only two stockholders, to wit:
Minnie Miller and her husband Louis Miller. The only assets of third husband and wife corporation consisted
of an apartment building which had been acquired for a very low price at a judicial sale. Louis Miller, the
husband, who directed the company's business, verbally agreed to sell this property to Abe C. Fine and
Margaret Fine, husband and wife, for the sum of $54,000.00, payable in various installments. He received
$1,000.00 as down payment. The sale of this property for the price mentioned would have netted the
corporation a handsome profit on which a large corporate income tax would have to be paid. On the
afternoon of February 23, 1940, when the Millers and the Fines got together for the execution of the
document of sale, the Millers announced that their attorney had called their attention to the large

corporate tax which would have to be paid if the sale was made by the corporation itself. So instead of
proceeding with the sale as planned, the Millers approved a resolution to declare a dividend to themselves
"payable in the assets of the corporation, in complete liquidation and surrender of all the outstanding
corporate stock." The building, which as above stated was the only property of the corporation, was then
transferred to Mr. and Mrs. Miller who in turn sold it to Mr. and Mrs. Fine for exactly the same price and
under the same terms as had been previously agreed upon between the corporation and the Fines.
The return filed by the Court Holding Co. with the respondent Commissioner of Internal Revenue reported
no taxable gain as having been received from the sale of its assets. The Millers, of course, reported a long
term capital gain on the exchange of their corporate stock with the corporate property. The Commissioner
of Internal Revenue contended that the liquidating dividend to stockholders had no purpose other than
that of tax avoidance and that, therefore, the sale by the Millers to the Fines of the corporation's property
was in substance a sale by the corporation itself, for which the corporation is subject to the taxable profit
thereon. In requiring the corporation to pay the taxable profit on account of the sale, the Commissioner of
Internal Revenue, imposed a surcharge of 25% for delinquency, plus an additional surcharge as fraud
penalties.
The U. S. Court of Tax Appeals held that the sale by the Millers was for no other purpose than to avoid the
tax and was, in substance, a sale by the Court Holding Co., and that, therefore, the said corporation should
be liable for the assessed taxable profit thereon. The Court of Tax Appeals also sustained the
Commissioner of Internal Revenue on the delinquency penalty of 25%. However, the Court of Tax Appeals
disapproved the fraud penalties, holding that an attempt to avoid a tax does not necessarily establish
fraud; that it is a settled principle that a taxpayer may diminish his tax liability by means which the law
permits; that if the petitioner, the Court Holding Co., was of the opinion that the method by which it
attempted to effect the sale in question was legally sufficient to avoid the imposition of a tax upon it, its
adoption of that methods not subject to censure; and that in taking a position with respect to a question of
law, the substance of which was disclosed by the statement indorsed on it return, it may not be said that
that position was taken fraudulently. We quote in full the pertinent portion of the decision of the Court of
Tax Appeals: .
". . . The respondent's answer alleges that the petitioner's failure to report as income the taxable
profit on the real estate sale was fraudulent and with intent to evade the tax. The petitioner filed a
reply denying fraud and averring that the loss reported on its return was correct to the best of its
knowledge and belief. We think the respondent has not sustained the burden of proving a
fraudulent intent. We have concluded that the sale of the petitioner's property was in substance a
sale by the petitioner, and that the liquidating dividend to stockholders had no purpose other than
that of tax avoidance. But the attempt to avoid tax does not necessarily establish fraud. It is a
settled principle that a taxpayer may diminish his liability by any means which the law
permits. United States v. Isham, 17 Wall. 496; Gregory v. Helvering, supra; Chrisholm v.
Commissioner, 79 Fed. (2d) 14. If the petitioner here was of the opinion that the method by which it
attempted to effect the sale in question was legally sufficient to avoid the imposition of tax upon it,
its adoption of that method is not subject to censure. Petitioner took a position with respect to a
question of law, the substance of which was disclosed by the statement endorsed on its return. We
can not say, under the record before us, that that position was taken fraudulently. The
determination of the fraud penalties is reversed."
When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the sales tax was paid only
once and on the original sales by the former and neither the latter nor SM paid taxes on their subsequent
sales. Yutivo might have, therefore, honestly believed that the payment by it, as importer, of the sales tax
was enough as in the case of GM Consequently, in filing its return on the basis of its sales to SM and not on
those by the latter to the public, it cannot be said that Yutivo deliberately made a false return for the
purpose of defrauding the government of its revenues which will justify the imposition of the surcharge
penalty.
We likewise find meritorious the contention that the Tax Court erred in computing the alleged deficiency
sales tax on the selling price of SM without previously deducting therefrom the sales tax due thereon. The
sales tax provisions (sees. 184.186, Tax Code) impose a tax on original sales measured by "gross selling
price" or "gross value in money". These terms, as interpreted by the respondent Collector, do not include
the amount of the sales tax, if invoiced separately. Thus, General Circular No. 431 of the Bureau of Internal
Revenue dated July 29, 1939, which implements sections 184.186 of the Tax Code provides: "

. . .'Gross selling price' or gross value in money' of the articles sold, bartered, exchanged,
transferred as the term is used in the aforecited sections (sections 184, 185 and 186) of the
National Internal Revenue Code, is the total amount of money or its equivalent which the purchaser
pays to the vendor to receive or get the goods. However, if a manufacturer, producer, or importer,
in fixing the gross selling price of an article sold by him has included an amount intended to cover
the sales tax in the gross selling price of the articles, the sales tax shall be based on the gross
selling price less the amount intended to cover the tax, if the same is billed to the purchaser as a
separate item.
General Circular No. 440 of the same Bureau reads:
Amount intended to cover the tax must be billed as a separate em so as not to pay a tax on the tax.
On sales made after he third quarter of 1939, the amount intended to cover the sales tax must
be billed to the purchaser as separate items in the, invoices in order that the reduction thereof from
the gross ailing price may be allowed in the computation of the merchants' percentage tax on the
sales. Unless billed to the purchaser as a separate item in the invoice, the amounts intended to
cover the sales tax shall be considered as part of the gross selling price of the articles sold, and
deductions thereof will not be allowed, (Cited in Dalupan, Nat. Int. Rev. Code, Annotated, Vol. II, pp.
52-53.)
Yutivo complied with the above circulars on its sales to SM, and as separately billed, the sales taxes did not
form part of the "gross selling price" as the measure of the tax. Since Yutivo had previously billed the sales
tax separately in its sales invoices to SM General Circulars Nos. 431 and 440 should be deemed to have
been complied. Respondent Collector's method of computation, as opined by Judge Nable in the decision
complained of
. . . is unfair, because . . .(it is) practically imposing tax on a tax already paid. Besides, the adoption
of the procedure would in certain cases elevate the bracket under which the tax is based. The late
payment is already penalized, thru the imposition of surcharges, by adopting the theory of the
Collector, we will be creating an additional penalty not contemplated by law."
If the taxes based on the sales of SM are computed in accordance with Gen. Circulars Nos. 431 and 440 the
total deficiency sales taxes, exclusive of the 25% and 50% surcharges for late payment and for fraud,
would amount only to P820,549.91 as shown in the following computation:

Rate
s of
Sale
s Tax

5%

Sales
Taxes Due
Gross Sales and
of Vehicles Computed
Exclusive of under
Sales Tax
Gen. Cir
Nos. 431 &
400

Total Gross
Selling
Price
Charged to
the Public

P11,912,21 P595,610. P12,507,83


9.57
98
055

7% 909,559.50 63,669.16 973,228.66

10%

2,618,695. 261,869.5 2,880,564.


28
3
81

15%

3,602,397. 540,359.6 4,142,757.


65
5
30

20% 267,150.50 53,430.10 320,580.60

30% 837,146.97

50%

75%

251,114.0 1,088,291.
9
06

74,244.30 37,122.16 111,366.46

8,000.00

6,000.00

14,000.00

TOT P20,220,41 P1,809,20 P22,038,61


AL
3.77
5.67
9.44

Less Taxes
Paid by
Yutivo

988,655.
76

Deficiency P820,549.
Tax still due
91

This is the exact amount which, according to Presiding Judge Nable of the Court of Tax Appeals, Yutivo
would pay, exclusive of the surcharges.
Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of its jurisdiction in
promulgating judgment for the affirmance of the decision of respondent Collector by less than the
statutory requirement of at least two votes of its judges. Anent this contention, section 2 of Republic Act
No. 1125, creating the Court of Tax Appeals, provides that "Any two judges of the Court of Tax Appeals
shall constitute a quorum, and the concurrence of two judges shall be necessary to promulgate decision
thereof. . . . " It is on record that the present case was heard by two judges of the lower court. And while
Judge Nable expressed his opinion on the issue of whether or not the amount of the sales tax should be
excluded from the gross selling price in computing the deficiency sales tax due from the petitioner, the
opinion, apparently, is merely an expression of his general or "private sentiment" on the particular issue,
for he concurred the dispositive part of the decision. At any rate, assuming that there is no valid decision
for lack of concurrence of two judges, the case was submitted for decision of the court below on March 28,
1957 and under section 13 of Republic Act 1125, cases brought before said court hall be decided within 30
days after submission thereof. "If no decision is rendered by the Court within thirty days from the date a
case is submitted for decision, the party adversely affected by said ruling, order or decision, may file with
said Court a notice of his intention to appeal to the Supreme Court, and if no decision has as yet been
rendered by the Court, the aggrieved party may file directly with the Supreme Court an appeal from said
ruling, order or decision, notwithstanding the foregoing provisions of this section." The case having been
brought before us on appeal, the question raised by petitioner as become purely academic.

IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under review is hereby modified in
that petitioner shall be ordered to pay to respondent the sum of P820,549.91, plus 25% surcharge thereon
for late payment.
So ordered without costs.
Bengzon, Labrador, Concepcion, Reyes, J.B.L., Barrera and Paredes, JJ., concur.
Padilla, J., took no part.

KOPPEL (PHILIPPINES), INC., plaintiff-appellant,


vs.
ALFREDO L. YATCO, Collector of Internal Revenue, defendant-appellee.
Padilla, Carlos and Fernando for appellant.
Office of the Solicitor General Ozaeta, First Assistant Solicitor General Reyes and.
Office of the Solicitor General Reyes and Solicitor Caizanes for appellee.

HILADO, J.:
This is an appeal by Koppel (Philippines), Inc., from the judgment of the Court of First Instance of Manila in
civil case No. 51218 of said court dismissing said corporation's complaint for the recovery of the sum of
P64,122.51 which it had paid under protest to the Collector of Internal Revenue on October 30, 1936, as
merchant sales tax. The main facts of the case were stipulated in the court below as follows:
AGREED STATEMENT OF FACTS
Now come the plaintiff by attorney Eulogio P. Revilla and the defendant by the Solicitor General and
undersigned Assistant Attorney of the Bureau of Justice and, with leave of this Honorable Court,
hereby respectfully stipulated and agree to the following facts, to wit:
I. That plaintiff is a corporation duly organized and existing under and by virtue of the laws of the
Philippines, with principal office therein at the City of Manila, the capital stock of which is divided
into thousand (1,000) shares of P100 each. The Koppel Industrial Car and Equipment company, a
corporation organized and existing under the laws of the State of Pennsylvania, United States of
America, and not licensed to do business in the Philippines, owned nine hundred and ninety-five
(995) shares out of the total capital stock of the plaintiff from the year 1928 up to and including the
year 1936, and the remaining five (5) shares only were and are owned one each by officers of the
plaintiff corporation.
II. That plaintiff, at all times material to this case, was and now is duly licensed to engage in
business as a merchant and commercial broker in the Philippines; and was and is the holder of the
corresponding merchant's and commercial broker's privilege tax receipts.
III. That the defendant Collector of Internal revenue is now Mr. Bibiano L. Meer in lieu of Mr. Alfredo
L. Yatco.
IV. That during the period from January 1, 1929, up to and including December 31, 1932, plaintiff
transacted business in the Philippines in the following manner, with the exception of the
transactions which are described in paragraphs V and VI of this stipulation:
When a local buyer was interested in the purchase of railway materials, machinery, and supplies, it
asked for price quotations from plaintiff. Atypical form of such request is attached hereto and made
a part hereof as Exhibit A. (Exhibit A represents typical transactions arising from written requests
for quotations, while Exhibits B to G, inclusive, are typical transactions arising from verbal requests
for quotation.) Plaintiff then cabled for the quotation desired for Koppel Industrial Car and
Equipment Company. A sample of the pertinent cable is hereto attached and made a part hereof as
Exhibit B. Koppel Industrial Car and Equipment Company answered by cable quoting its cost price,
usually A. C. I. F. Manila cost price, which was later followed by a letter of confirmation. A sample of
the said cable quotation and of the letter of confirmation are hereto attached and made a part
hereof as Exhibits C and C-1. Plaintiff, however, quoted by Koppel Industrial Car and Equipment
Company. Copy of the plaintiff's letter to purchaser is hereto attached and made a part hereof as
Exhibit D. On the basis of these quotations, orders were placed by the local purchasers, copies of
which orders are hereto attached as Exhibits E and E-1.

A cable was then sent to Koppel Industrial Car and Equipment company giving instructions to ship
the merchandise to Manila forwarding the customer's order. Sample of said cable is hereto attached
as Exhibit F. The bills of lading were usually made to "order" and indorsed in blank with notation to
the effect that the buyer be notified of the shipment of the goods covered in the bills of lading;
commercial invoices were issued by Koppel Industrial Car and Equipment Company in the names of
the purchasers and certificates of insurance were likewise issued in their names, or in the name of
Koppel Industrial Car and Equipment Company but indorsed in blank and attached to drafts drawn
by Koppel Industrial Car and Equipment Company on the purchasers, which were forwarded through
foreign banks to local banks. Samples of the bills of lading are hereto attached as Exhibits F-1, I-1, I2 and I-3. Bills of ladings, Exhibits I-1, I-2 and I-3, may equally have been employed, but said
Exhibits I-1, I-2 and I-3 have no connection with the transaction covered by Exhibits B to G,
inclusive. The purchasers secured the shipping papers by arrangement with the banks, and
thereupon received and cleared the shipments. If the merchandise were of European origin, and if
there was not sufficient time to forward the documents necessary for clearance, through foreign
banks to local banks, to the purchasers, the Koppel Industrial Car and Equipment company did, in
many cases, send the documents directly from Europe to plaintiff with instructions to turn these
documents over to the purchasers. In many cases, where sales was effected on the basis of C. I. F.
Manila, duty paid, plaintiff advanced the sums required for the payment of the duty, and these
sums, so advanced, were in every case reimbursed to plaintiff by Koppel Industrial Car and
Equipment Company. The price were payable by drafts agreed upon in each case and drawn by
Koppel Industrial Car and Equipment Company on respective purchasers through local banks, and
payments were made to the banks by the purchasers on presentation and delivery to them of the
above-mentioned shipping documents or copies thereof. A sample of said drafts is hereto attached
as Exhibit G. Plaintiff received by way of compensation a percentage of the profits realized on the
above transactions as fixed in paragraph 6 of the plaintiff's contract with Koppel Industrial Car and
Equipment Company, which contract is hereto attached as Exhibit H, and suffered its corresponding
share in the losses resulting from some of the transactions.
That the total gross sales from January 1, 1929, up to and including December 31, 1932, effected in
the foregoing manner and under the above specified conditions, amount to P3, 596,438.84.
V. That when a local sugar central was interested in the purchase of railway materials, machinery
and supplies, it secured quotations from, and placed the corresponding orders with, the plaintiff in
substantially the same manner as outlined in paragraph IV of this stipulation, with the only
difference that the purchase orders which were agreed to by the central and the plaintiff are similar
to the sample hereto attached and made a part hereof as Exhibit I. Typical samples of the bills of
lading covering the herein transaction are hereto attached and made a part hereto as Exhibits I-1, I2 and I-3. The value of the sales carried out in the manner mentioned in this paragraph is
P133,964.98.
VI. That sometime in February, 1929, Miguel J. Ossorio, of Manila, Philippines, placed an option with
Koppel Industrial Car and Equipment Company, through plaintiff, to purchase within three months a
pair of Atlas-Diesel Marine Engines. Koppel Industrial Car and Equipment Company purchased said
Diesel Engines in Stockholm, Sweden, for $16,508.32. The suppliers drew a draft for the amount of
$16,508.32 on the Koppel Industrial Car and Equipment Company, which paid the amount covered
by the draft. Later, Miguel J. Ossorio definitely called the deal off, and as Koppel Industrial Car and
Equipment Company could not ship to or draw on said Mr. Miguel J. Ossorio, it in turn drew another
draft on plaintiff for the same amount at six months sight, with the understanding that Koppel
Industrial Car and Equipment Company would reimburse plaintiff when said engines were disposed
of. Plaintiff honored the draft and debited the said sum of $16,508.32 to merchandise account. The
engines were left stored at Stockholm, Sweden. On April 1, 1930, a new local buyer, Mr. Cesar
Barrios, of Iloilo, Philippines, was found and the same engines were sold to him for $21,000
(P42,000) C. I. F. Hongkong. The engines were shipped to Hongkong and a draft for $21,000 was
drawn by Koppel Industrial Car and Equipment Company on Mr. Cesar Barrios. After the draft was
fully paid by Mr. Barrios, Koppel Industrial Car and Equipment Company reimbursed plaintiff with
cost price of $16,508.32 and credited it with $1,152.95 as its share of the profit on the transaction.
Exhibits J and J-1 are herewith attached and made integral parts of this stipulation with particular
reference to paragraph VI hereof.

VII. That plaintiff's share in the profits realized out of these transactions described in paragraphs IV,
V and VI hereof totaling P3,772,403.82, amounts to P132,201.30; and that plaintiff within the time
provided by law returned the aforesaid amount P132,201.30 for the purpose of the commercial
broker's 4 per cent tax and paid thereon the sum P5,288.05 as such tax.
VIII. That defendant demanded of the plaintiff the sum of P64,122.51 as the merchants' sales tax of
1% per cent on the amount of P3,772,403.82, representing the total gross value of the sales
mentioned in paragraphs IV, V and VI hereof, including the 25 per cent surcharge for the late
payment of the said tax, which tax and surcharge were determined after the amount of P5,288.05
mentioned in paragraph VI hereof was deducted.
IX. That plaintiff, on October 30, 1936, paid under protest said sum of P64,122.51 in order to avoid
further penalties, levy and distraint proceedings.
X. That defendant, on November 10, 1936, overruled plaintiff's protest, and defendant has failed
and refused and still fails and refuses, notwithstanding demands by plaintiff, to return to the
plaintiff said sum of P64,122.51 or any part thereof.
xxx

xxx

xxx

That the parties hereby reserve the right to present additional evidence in support of
their respective contentions.
Manila, Philippines, December 26, 1939
(Sgd.) ROMAN OZAETA
Solicitor General
(Sgd.) ANTONIO CAIZARES
Assistant Attorney
(Sgd.) E. P. REVILLA
Attorney for the Plaintiff
3rd Floor, Perez Samanillo Bldg., Manila
Both parties adduced some oral evidence in clarification of or addition to their agreed statement of
facts. A preponderance of evidence has established, besides the facts thus stipulated, the following:
(a) The shares of stock of plaintiff corporation were and are all owned by Koppel Industries
Car and Equipment Company of Pennsylvania, U. S. A., exceptive which were necessary to
qualify the Board of Directors of said plaintiff corporation;
(b) In the transactions involved herein the plaintiff corporation acted as the representative of
Koppel Industrial Car and Equipment Company only, and not as the agent of both the latter
company and the respective local purchasers plaintiff's principal witness, A.H. Bishop, its
resident Vice-President, in his testimony invariably referred to Koppel Industrial Car and
Equipment Co. as "our principal" 9 t. s. n., pp. 10, 11, 12, 19, 75), except that at the bottom
of page 10 to the top of page 11, the witness stated that they had "several principal" abroad
but that "our principal abroad was, for the years in question, Koppel Industrial Car and
Equipment Company," and on page 68, he testified that what he actually said was ". . . but
our principal abroad" and not "our principal abroad" as to which it is very significant that
neither this witness nor any other gave the name of even a single other principal abroad of
the plaintiff corporation;
(c) The plaintiff corporation bore alone incidental expenses as, for instance, cable
expenses-not only those of its own cables but also those of its "principal" (t.s.n., pp. 52, 53);

(d) the plaintiff's "share in the profits" realized from the transactions in which it intervened
was left virtually in the hands of Koppel Industrial Car and Equipment Company (t.s.n., p.
51);
(e) Where drafts were not paid by the purchasers, the local banks were instructed not to
protest them but to refer them to plaintiff which was fully empowered by Koppel Industrial
Car and Equipment company to instruct the banks with regards to disposition of the drafts
and documents (t.s.n., p. 50; Exhibit G);lawphil.net
(f) Where the goods were European origin, consular invoices, bill of lading, and, in general,
the documents necessary for clearance were sent directly to plaintiff (t.s.n., p. 14);
(g) If the plaintiff had in stock the merchandise desired by local buyers, it immediately filled
the orders of such local buyers and made delivery in the Philippines without the necessity of
cabling its principal in America either for price quotations or confirmation or rejection of that
agreed upon between it and the buyer (t.s.n., pp. 39-43);
(h) Whenever the deliveries made by Koppel Industrial Car and Equipment Company were
incomplete or insufficient to fill the local buyer's orders, plaintiff used to make good the
deficiencies by deliveries from its own local stock, but in such cases it charged its principal
only the actual cost of the merchandise thus delivered by it from its stock and in such
transactions plaintiff did not realize any profit (t.s.n., pp. 53-54);
(i) The contract of sale involved herein were all perfected in the Philippines.
Those described in paragraph IV of the agreed statement of facts went through the following
process: (1) "When a local buyer was interested in the purchase of railway materials, machinery,
and supplies, it asked for price quotations from plaintiff"; (2) "Plaintiff then cabled for the quotation
desired from Koppel Industrial Car and Equipment Company"; (3) "Plaintiff, however, quoted to the
purchaser a selling price above the figures quoted by Koppel Industrial Car and Equipment
Company"; (4) "On the basis of these quotations, orders were placed by the local purchasers . . ."
Those described in paragraph V of said agreed statement of facts were transacted "in substantially
the same manner as outlined in paragraph IV."
As to the single transaction described in paragraph VI of the same agreed statement of facts,
discarding the Ossorio option which anyway was called off, "On April 1, 1930, a new local buyer, Mr.
Cesar Barrios, of Iloilo, Philippines, was found and the same engines were sold to him for
$21,000(P42,000) C.I.F. Hongkong." (Emphasis supplied.).
(j) Exhibit H contains the following paragraph:
It is clearly understood that the intent of this contract is that the broker shall perform only the
functions of a broker as set forth above, and shall not take possession of any of the materials or
equipment applying to said orders or perform any acts or duties outside the scope of a broker; and
in no sense shall this contract be construed as granting to the broker the power to represent the
principal as its agent or to make commitments on its behalf.
The Court of First Instance held for the defendant and dismissed plaintiff's complaint with costs to it.
Upon this appeal, seven errors are assigned to said judgment as follows:.
1. That the court a quo erred in not holding that appellant is a domestic corporation distinct and
separate from, and not a mere branch of Koppel Industrial Car and Equipment Co.;
2. the court a quo erred in ignoring the ruling of the Secretary of Finance, dated January 31, 1931,
Exhibit M;

3. the court a quo erred in not holding that a character of a broker is determined by the nature of
the transaction and not by the basis or measure of his compensation;
4. The court a quo erred in not holding that appellant acted as a commercial broker in the
transactions covered under paragraph VI of the agreed statement of facts;
5. The court a quo erred in not holding that appellant acted as a commercial broker in the
transactions covered under paragraph v of the agreed statement of facts;
6. The court a quo erred in not holding that appellant acted as a commercial broker in the sole
transaction covered under paragraph VI of the agreed statement of facts;
7. the court a quo erred in dismissing appellant's complaint.
The lower court found and held that Koppel (Philippines), Inc. is a mere dummy or brach ("hechura") of
Koppel industrial Car and Equipment Company. The lower court did not deny legal personality to Koppel
(Philippines), Inc. for any and all purposes, but in effect its conclusion was that, in the transactions
involved herein, the public interest and convenience would be defeated and what would amount to a tax
evasion perpetrated, unless resort is had to the doctrine of "disregard of the corporate fiction."
I. In its first assignment of error appellant submits that the trial court erred in not holding that it is a
domestic corporation distinct and separate from and not a mere branch of Koppel Industrial Car and
Equipment Company. It contends that its corporate existence as Philippine corporation can not be
collaterally attacked and that the Government is estopped from so doing. As stated above, the lower court
did not deny legal personality to appellant for any and all purposes, but held in effect that in the
transaction involved in this case the public interest and convenience would be defeated and what would
amount to a tax evasion perpetrated, unless resort is had to the doctrine of "disregard of the corporate
fiction." In other words, in looking through the corporate form to the ultimate person or corporation behind
that form, in the particular transactions which were involved in the case submitted to its determination and
judgment, the court did so in order to prevent the contravention of the local internal revenue laws, and the
perpetration of what would amount to a tax evasion, inasmuch as it considered and in our opinion,
correctly that appellant Koppel (Philippines), Inc. was a mere branch or agency or dummy ("hechura") of
Koppel Industrial Car and Equipment Co. The court did not hold that the corporate personality of Koppel
(Philippines), Inc., would also be disregarded in other cases or for other purposes. It would have had no
power to so hold. The courts' action in this regard must be confined to the transactions involved in the
case at bar "for the purpose of adjudging the rights and liabilities of the parties in the case. They have no
jurisdiction to do more." (1 Flethcer, Cyclopedia of Corporation, Permanent ed., p. 124, section 41.)
A leading and much cited case puts it as follows:
If any general rule can be laid down, in the present state of authority, it is that a corporation will be
looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears;
but, when the notion of legal entity is used to defeat public convinience, justify wrong, protect
fraud, or defend crime, the law will regard the corporation as an association of persons. (1 Fletcher
Cyclopedia of Corporation [Permanent Edition], pp. 135, 136; United States vs. Milwaukee
Refrigeration Transit Co., 142 Fed., 247, 255, per Sanborn, J.)
In his second special defense appellee alleges "that the plaintiff was and is in fact a branch or subsidiary of
Koppel Industrial Car and Equipment Co., a Pennsylvania corporation not licensed to do business in the
Philippines but actually doing business here through the plaintiff; that the said foreign corporation holds
995 of the 1,000 shares of the plaintiff's capital stock, the remaining five shares being held by the officers
of the plaintiff herein in order to permit the incorporation thereof and to enable its aforesaid officers to act
as directors of the plaintiff corporation; and that plaintiff was organized as a Philippine corporation for the
purpose of evading the payment by its parent foreign corporation of merchants' sales tax on the
transactions involved in this case and others of similar nature."
By most courts the entity is normally regarded but is disregarded to prevent injustice, or the
distortion or hiding of the truth, or to let in a just defense. (1 Fletcher, Cyclopedia of Corporation,
Permanent Edition, pp. 139,140; emphasis supplied.)

Another rule is that, when the corporation is the mere alter ego, or business conduit of a person, it
may de disregarded." (1 Fletcher, Cyclopedia of Corporation, Permanent Edition, p. 136.)
Manifestly, the principle is the same whether the "person" be natural or artificial.
A very numerous and growing class of cases wherein the corporate entity is disregarded is that (it is
so organized and controlled, and its affairs are so conducted, as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation)." (1 Fletcher, Cyclopedia of
Corporation, Permanent ed., pp. 154, 155.)
While we recognize the legal principle that a corporation does not lose its entity by the ownership of
the bulk or even the whole of its stock, by another corporation (Monongahela Co. vs. Pittsburg Co.,
196 Pa., 25; 46 Atl., 99; 79 Am. St. Rep., 685) yet it is equally well settled and ignore corporate
forms." (Colonial Trust Co. vs. Montello Brick Works, 172 Fed., 310.)
Where it appears that two business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third persons, disregard
the legal fiction that two corporations are distinct entities, and treat them as identical. (Abney vs.
Belmont Country Club Properties, Inc., 279 Pac., 829.)
. . . the legal fiction of distinct corporate existence will be disregarded in a case where a corporation
is so organized and controlled and its affairs are so conducted, as to make it merely an
instrumentality or adjunct of another corporation. (Hanter vs. Baker Motor Vehicle Co., 190 Fed.,
665.)
In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55 Law. ed., 458, 464), the Supreme Court of the
United States disregarded the artificial personality of the subsidiary coal company in order to avoid that
the parent corporation, the Lehigh Valley R. Co., should be able, through the fiction of that personality, to
evade the prohibition of the Hepburn Act against the transportation by railroad companies of the articles
and commodities described therein.
Chief Justice White, speaking for the court, said:
. . . Coming to discharge this duty it follows, in view of the express prohibitions of the commodities
clause, it must be held that while the right of a railroad company as a stockholder to use its stock
ownership for the purpose of a bona fide separate administration of the affairs of a corporation in
which it has a stock interest may not be denied, the use of such stock ownership in substance for
the purpose of destroying the entity of a producing, etc., corporation, and commingling its affairs in
administration with the affairs of the railroad company, so as to make the two corporations virtually
one, brings the railroad company so voluntarily acting as to such producing, etc., corporation within
the prohibitions of the commodities clause. In other words, that by operation and effect of the
commodities clause there is duty cast upon a railroad company proposing to carry in interstate
commerce the product of a producing, etc., corporation in which it has a stock interest, not to abuse
such power so as virtually to do by indirection that which the commodities clause prohibits, a
duty which plainly would be violated by the unnecessary commingling of the affairs of the
producing company with its own, so as to cause them to be one and inseparable.
Corrobarative authorities can be cited in support of the same proposition, which we deem unnecessary to
mention here.
From the facts hereinabove stated, as established by a preponderance of the evidence , particularly those
narrated in paragraph (a), (b), (c), (d), (e),(f), (h), (i), and (j) after the agreed statement of facts, we find
that, in so far as the sales involved herein are concerned, Koppel (Philippines), Inc., and Koppel Industrial
Car and Equipment company are to all intents and purposes one and the same; or, to use another mode of
expression, that, as regards those transactions, the former corporation is a mere branch, subsidiary or
agency of the latter. To our mind, this is conclusively borne out by the fact, among others, that the amount
of he so-called "share in the profits" of Koppel (Philippines), Inc., was ultimately left to the sole, unbridled
control of Koppel Industrial Car and Equipment Company. If, in their relations with each other, Koppel
(Philippines), Inc., was considered and intended to function as a bona fide separate corporation, we can

not conceive how this arrangement could have been adopted, for if there was any factor in its business as
to which it would in that case naturally have been opposed to being thus controlled, it must have been
precisely the amount of profit which it could endeavor and hope to earn. No group of businessmen could
be expected to organize a mercantile corporation the ultimate end of which could only be profit if the
amount of that profit were to be subjected to such a unilateral control of another corporation, unless
indeed the former has previously been designed by the incorporators to serve as a mere subsidiary,
branch or agency of the latter. Evidently, Koppel Industrial Car and Equipment Company made us of its
ownership of the overwhelming majority 99.5% of the capital stock of the local corporation to control
the operations of the latter to such an extent that it had the final say even as to how much should be
allotted to said local entity in the so-called sharing in the profits. We can not overlook the fact that in the
practical working of corporate organizations of the class to which these two entities belong, the holder or
holders of the controlling part of the capital stock of the corporation, particularly where the control is
determined by the virtual ownership of the totality of the shares, dominate not only the selection of the
Board of Directors but, more often than not, also the action of that Board. Applying this to the instant case,
we can not conceive how the Philippine corporation could effectively go against the policies, decisions, and
desires of the American corporation with regards to the scheme which was devised through the
instrumentality of the contract Exhibit H, as well as all the other details of the system which was adopted
in order to avoid paying the 1 per cent merchants sales tax. Neither can we conceive how the Philippine
corporation could avoid following the directions of the American corporation held 99.5 per cent of the
capital stock of the Philippine corporation. In the present instance, we note that Koppel (Philippines), Inc.,
was represented in the Philippines by its "resident Vice-President." This fact necessarily leads to the
inference that the corporation had at least a Vice-President, and presumably also a President, who were
not resident in the Philippines but in America, where the parent corporation is domiciled. If Koppel
(Philippines), Inc., had been intended to operate as a regular domestic corporation in the Philippines,
where it was formed, the record and the evidence do not disclose any reason why all its officers should not
reside and perform their functions in the Philippines.
Other facts appearing from the evidence, and presently to be stated, strengthen our conclusion, because
they can only be explained if the local entity is considered as a mere subsidiary, branch or agency of the
parent organization. Plaintiff charged the parent corporation no more than actual cost without profit
whatsoever for merchandise allegedly of its own to complete deficiencies of shipments made by said
parent corporation (t.s.n., pp. 53, 54) a fact which could not conceivably have been the case if plaintiff
had acted in such transactions as an entirely independent entity doing business for profit, of course
with the American concern. There has been no attempt even to explain, if the latter situation really
obtained, why these two corporations should have thus departed from the ordinary course of business.
Plaintiff was charged by the American corporation with the cost even of the latter's cable quotations
from ought that appears from the evidence, this can only be comprehended by considering plaintiff as
such a subsidiary, branch or agency of the parent entity, in which case it would be perfectly
understandable that for convenient accounting purposes and the easy determination of the profits or
losses of the parent corporation's Philippines should be charged against the Philippine office and set off
against its receipts, thus separating the accounts of said branch from those which the central organization
might have in other countries. The reference to plaintiff by local banks, under a standing instruction of the
parent corporation, of unpaid drafts drawn on Philippine customers by said parent corporation, whenever
said customers dishonored the drafts, and the fact that the American corporation had previously advised
said banks that plaintiff in those cases was "fully empowered to instruct (the banks) with regard to the
disposition of the drafts and documents" (t.s.n., p. 50), in the absence of any other satisfactory explanation
naturally give rise to the inference that plaintiff was a subsidiary, branch or agency of the American
concern, rather than an independent corporation acting as a broker. For, without such positive explanation,
this delegation of power is indicative of the relations between central and branch offices of the same
business enterprise, with the latter acting under instructions already given by the former. Far from
disclosing a real separation between the two entities, particularly in regard to the transactions in question,
the evidence reveals such commongling and interlacing of their activities as to render even
incomprehensible certain accounting operations between them, except upon the basis that the Philippine
corporation was to all intents and purposes a mere subsidiary, branch, or agency of the American parent
entity. Only upon this basis can it be comprehended why it seems not to matter at all how much profit
would be allocated to plaintiff, or even that no profit at all be so allocated to it, at any given time or after
any given period.
As already stated above, under the evidence the sales in the Philippines of the railway materials,
machinery and supplies imported here by Koppel Industrial Car and Equipment Company could have been
as conviniently and efficiently transacted and handled if not more so had said corporation merely

established a branch or agency in the Philippines and obtained license to do business locally; and if it had
done so and said sales had been effected by such branch or agency, there seems to be no dispute that the
1 per cent merchants' sales tax then in force would have been collectible. So far as we can discover,
there would be only one, but very important, difference between the two schemes a difference in tax
liability on the ground that the sales were made through another and distinct corporation, as alleged
broker, when we have seen that this latter corporation is virtually owned by the former, or that they
practically one and the same, is to sanction a circumvention of our tax laws, and permit a tax evasion of no
mean proportions and the consequent commission of a grave injustice to the Government. Not only this; it
would allow the taxpayer to do by indirection what the tax laws prohibited to be done directly (nonpayment of legitimate taxes), paraphrasing the United States Supreme Court in United States vs. Lehigh
Valley R. Co., supra.
The act of one corporation crediting or debiting the other for certain items, expenses or even merchandise
sold or disposed of, is perfectly compatible with the idea of the domestic entity being or acting as a mere
branch, agency or subsidiary of the parent organization. Such operations were called for any way by the
exigencies or convenience of the entire business. Indeed, accounting operation such as these are invitable,
and have to be effected in the ordinary course of business enterprise extends its trade to another land
through a branch office, or through another scheme amounting to the same thing.
If plaintiff were to act as broker in the Philippines for any other corporation, entity or person, distinct from
Koppel Industrial Car and Equipment company, an entirely different question will arise, which, however, we
are not called upon, nor in a position, to decide.
As stated above, Exhibit H contains to the following paragraph:
It is clearly understood that the intent of this contract is that the broker shall perform only the
functions of a broker as set forth above, and shall not take possession of any of the materials or
equipment applying to said orders or perform any acts or duties outside the scope of a broker; and
in no sense shall this contract be construed as granting to the broker the power to represent the
principal as its agent or to make commitments on its behalf.
The foregoing paragraph, construed in the light of other facts noted elsewhere in this decision, betrays, we
think a deliberate intent, through the medium of a scheme devised with great care, to avoid the payment
of precisely the 1 per cent merchants' sales tax in force in the Philippines before, at the time of, and
after, the making of the said contract Exhibit H. If this were to be allowed, the payment of a tax, which
directly could not have been avoided, could be evaded by indirection, consideration being had of the
aforementioned peculiar relations between the said American and local corporations. Such evasion,
involving as it would, a violation of the former Internal Revenue Law, would even fall within the penal
sanction of section 2741 of the Revised Administrative Code. Which only goes to show the illegality of the
whole scheme. We are not here concerned with the impossibility of collecting the merchants' sales tax, as
a mere incidental consequence of transactions legal in themselves and innocent in their purpose. We are
dealing with a scheme the primary, not to say the sole, object of which the evasion of the payment of such
tax. It is this aim of the scheme that makes it illegal.
We have said above that the contracts of sale involved herein were all perfected in the Philippines. From
the facts stipulated in paragraph IV of the agreed statement of facts, it clearly appears that the Philippine
purchasers had to wait for Koppel Industrial Car and Equipment Company to communicate its cost prices to
Koppel (Philippines), Inc., were perfected in the Philippines. In those cases where no such price quotations
from the American corporation were needed, of course, the sales effected in those cases described in
paragraph V of the agreed statement of facts were, as expressed therein, transacted "in substantially the
same manner as outlined in paragraph VI." Even the single transaction described in paragraph VI of the
agreed statement of facts was also perfected in the Philippines, because the contracting parties were here
and the consent of each was given here. While it is true that when the contract was thus perfected in the
Philippines the pair of Atlas-Diesel Marine Engines were in Sweden and the agreement was to deliver them
C.I.F. Hongkong, the contract of sale being consensual perfected by mere consent (Civil Code, article
1445; 10 Manresa, 4th ed., p. 11), the location of the property and the place of delivery did not matter in
the question of where the agreement was perfected.

In said paragraph VI, we read the following, as indicating where the contract was perfected, considering
beforehand that one party, Koppel (Philippines),Inc., which in contemplation of law, as to that transaction,
was the same Koppel Industrial Car Equipment Co., was in the Philippines:
. . . on April 1, 1930, a new local buyer Mr. Cesar Barrios, of Iloilo, Philippines, was found and the
same engines were sold to him for $21,000 (P42,000) C.I.F. Hongkong . . . (Emphasis supplied.)
Under the revenue law in force when the sales in question took place, the merchants' sales tax attached
upon the happening of the respective sales of the "commodities, goods, wares, and merchandise"
involved, and we are clearly of opinion that such "sales" took place upon the perfection of the
corresponding contracts. If such perfection took place in the Philippines, the merchants' sales tax then in
force here attached to the transactions.
Even if we should consider that the Philippine buyers in the cases covered by paragraph IV and V of the
agreed statement of facts, contracted with Koppel Industrial Car and Equipment company, we will arrive at
the same final result. It can not be denied in that case that said American corporation contracted through
Koppel (Philippines), Inc., which was in the Philippines. The real transaction in each case of sale, in final
effect, began with an offer of sale from the seller, said American corporation, through its agent, the local
corporation, of the railway materials, machinery, and supplies at the prices quoted, and perfected or
completed by the acceptance of that offer by the local buyers when the latter, accepting those prices,
placed their orders. The offer could not correctly be said to have been made by the local buyers when they
asked for price quotations, for they could not rationally be taken to have bound themselves to buy before
knowing the prices. And even if we should take into consideration the fact that the american corporation
contracted, at least partly, through correspondence, according to article 54 of the Code of Commerce, the
respective contracts were completed from the time of the acceptance by the local buyers, which happened
in the Philippines.
Contracts executed through correspondence shall be completed from the time an answer is
made accepting the proposition or the conditions by which the latter may be modified." (Code of
Commerce, article 54; emphasis supplied.)
A contract is as a rule considered as entered into at the place where the place it is performed. So
where delivery is regarded as made at the place of delivery." (13 C. J., 580-81, section 581.)
(In the consensual contract of sale delivery is not needed for its perfection.)
II. Appellant's second assignment of error can be summarily disposed of. It is clear that the ruling of the
Secretary of Finance, Exhibit M, was not binding upon the trial court, much less upon this tribunal, since
the duty and power of interpreting the laws is primarily a function of the judiciary. (Ortua vs. Singson
Encarnacion, 59 Phil., 440, 444.) Plaintiff cannot be excused from abiding by this legal principle, nor can it
properly be heard to say that it relied on the Secretary's ruling and that, therefore, the courts should not
now apply an interpretation at variance therewith. The rule of stare decisis is undoubtedly entitled to more
respect in the construction of statutes than the interpretations given by officers of the administrative
branches of the government, even those entrusted with the administration of particular laws. But this
court, in Philippine Trust Company and Smith, Bell and Co. vs. Mitchell(59 Phil., 30, 36), said:
. . . The rule of stare decisis is entitled to respect. Stability in the law, particularly in the business
field, is desirable. But idolatrous reverence for precedent, simply as precedent, no longer rules.
More important than anything else is that court should be right. . . .
III. In the view we take of the case, and after the disposition made above of the first assignment of error, it
becomes unnecessary to make any specific ruling on the third, fourth, fifth, sixth, and seventh
assignments of error, all of which are necessarily disposed of adversely to appellant's contention.
Wherefore, he judgment appealed from is affirmed, with costs of both instances against appellant. So
ordered.
Moran, C.J., Paras, Feria, Pablo, Bengzon, Briones, and Tuason, JJ., concur.

LIDDELL & CO., INC., petitioner-appellant,


vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee.
Ozaeta, Lichauco and Picazo for petitioner-appellant.
Office of the Solicitor General for respondent-appellee.
BENGZON, C.J.:
Statement. This is an appeal from the decision of the Court of Tax Appeals imposing a tax deficiency
liability of P1,317,629.61 on Liddell & Co., Inc.
Said Company lists down several issues which may be boiled to the following:
(a) Whether or not Judge Umali of the Tax Court below could validly participate in the making of the
decision;
(b) Whether or not Liddell & Co. Inc., and the Liddell Motors, Inc. are (practically) identical
corporations, the latter being merely .the alter ego of the former;
(c) Whether or not, granting the identical nature of the corporations, the assessment of tax liability,
including the surcharge thereon by the Court of Tax Appeals, is correct.
Undisputed Facts. The parties submitted a partial stipulation of facts, each reserving the right to present
additional evidence.
Said undisputed facts are substantially as follows:
The petitioner, Liddell & Co. Inc., (Liddell & Co. for short) is a domestic corporation establish in the
Philippines on February 1, 1946, with an authorized capital of P100,000 divided into 1000 share at
P100 each. Of this authorized capital, 196 shares valued at P19,600 were subscribed and paid by
Frank Liddell while the other four shares were in the name of Charles Kurz, E.J. Darras, Angel
Manzano and Julian Serrano at one shares each. Its purpose was to engage in the business of
importing and retailing Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet trucks..
On January 31, 1947, with the limited paid-in capital of P20,000, Liddell & Co. was able to declare a
90% stock dividend after which declaration on, Frank Liddells holding in the Company increased to
1,960 shares and the employees, Charles Kurz E.J. Darras, Angel Manzano and Julian Serrano at 10
share each. The declaration of stock dividend was followed by a resolution increasing the
authorized capital of the company to P1,000.000 which the Securities & Exchange Commission
approved on March 3, 1947. Upon such approval, Frank Liddell subscribed to 3,000 additional
shares, for which he paid into the corporation P300,000 so that he had in his own name 4,960
shares.
On May 24, 1957, Frank Liddell, on one hand and Messrs. Kurz, Darras, Manzano and Serrano on the
other, executed an agreement (Exhibit A) which was further supplemented by two other
agreements (Exhibits B and C) dated May 24, 1947 and June 3, 1948, wherein Frank Liddell
transferred (On June 7, 1948) to various employees of Liddell & Co. shares of stock.
At the annual meeting of stockholders of Liddell & Co. held on March 9, 1948, a 100% stock
dividend was declared, thereby increasing the issued capital stock of aid corporation from
P1,000.000 to P 3,000,000 which increase was duly approved by the Securities and Exchange
Commission on June 7, 1948. Frank Liddell subscribed to and paid 20% of the increase of P400,000.
He paid 25% thereof in the amount of P100,000 and the balance of P3,000,000 was merely debited
to Frank Liddell-Drawing Account and credited to Subscribed Capital Stock on December 11, 1948.

On March 8, 1949, stock dividends were again issued by Liddell & Co. and in accordance with the
agreements, Exhibits A, B, and C, the stocks of said company stood as follows:

Name

Frank
Liddell

No. of
Share Amount
s

Per
Cent

13,68 P1,368,8 72.00


8
00
%

Irene
Liddell

100

.01%

Mercedes
Vecin

100

.01%

Charles
Kurz

1,225 122,500 6.45%

E.J.
Darras

1,225 122,500 6.45%

Angel
Manzano

1,150 115,000 6.06%

Julian
Serrano

710

71,000 3.74%

E. Hasim

500

50,000 2.64%

G. W.
Kernot

500

50,000 2.64%

19,00 P1,900,0 100.00


0
00
%

On November 15, 1948, in accordance with a resolution of a special meeting of the Board of Directors of
Liddell & Co., stock dividends were again declared. As a result of said declaration and in accordance with
the agreements, Exhibits, A, B, and C, the stockholdings in the company appeared to be:

Name

No. of
Amount
Shares

Per
Cent

Frank
Liddell

19,738

P1,973,8 65.791
00
%

Irene
Liddell

100

.003%

Merced
es
Vecin

100

.003%

Charles
Kurz

2,215 221,500 7.381%

E.J.
Darras

2,215 221,500 7.381%

Angel
Manzan
o

1,810 181,000 6.031%

Julian
Serrano

1,700 170,000 5.670%

E.
Hasim

G. W.
Kernot

830

83,000 2.770%

1,490 149,000 4.970%

30,000

P3,000,0 100.00
00
0%

On the basis of the agreement Exhibit A, (May, 1947) "40%" of the earnings available for dividends
accrued to Frank Liddell although at the time of the execution of aid instrument, Frank Liddell owned all of
the shares in said corporation. 45% accrued to the employees, parties thereto; Kurz 12-1/2%; Darras 121/2%; A. Manzano 12-1/2% and Julian Serrano 7-1/2%. The agreement Exhibit A was also made retroactive
to 1946. Frank Liddell reserved the right to reapportion the 45% dividends pertaining to the employees in
the future for the purpose of including such other faithful and efficient employees as he may subsequently
designate. (As a matter of fact, Frank Liddell did so designate two additional employees namely: E. Hasim

and G. W. Kernot). It was for such inclusion of future faithful employees that Exhibits B-1 and C were
executed. As per Exhibit C, dated May 13, 1948, the 45% given by Frank Liddell to his employees was
reapportioned as follows: C. Kurz 12,%; E. J. Darras 12%; A. Manzano l2%; J. Serrano 3-1/2%; G.
W. Kernot 2%.
Exhibit B contains the employees' definition in detail of the manner by which they sought to prevent their
share-holdings from being transferred to others who may be complete strangers to the business on Liddell
& Co.
From 1946 until November 22, 1948 when the purpose clause of the Articles of Incorporation of Liddell &
Co. Inc., was amended so as to limit its business activities to importations of automobiles and trucks,
Liddell & Co. was engaged in business as an importer and at the same time retailer of Oldsmobile and
Chevrolet passenger cars and GMC and Chevrolet trucks.
On December 20, 1948, the Liddell Motors, Inc. was organized and registered with the Securities and
Exchange Commission with an authorized capital stock of P100,000 of which P20,000 was subscribed and
paid for as follows: Irene Liddell wife of Frank Liddell 19,996 shares and Messrs. Marcial P. Lichauco, E. K.
Bromwell, V. E. del Rosario and Esmenia Silva, 1 share each.
At about the end of the year 1948, Messrs. Manzano, Kurz and Kernot resigned from their respective
positions in the Retail Dept. of Liddell & Co. and they were taken in and employed by Liddell Motors, Inc.:
Kurz as Manager-Treasurer, Manzano as General Sales Manager for cars and Kernot as General Sales
Manager for trucks.
Beginning January, 1949, Liddell & Co. stopped retailing cars and trucks; it conveyed them instead to
Liddell Motors, Inc. which in turn sold the vehicles to the public with a steep mark-up. Since then, Liddell &
Co. paid sales taxes on the basis of its sales to Liddell Motors Inc. considering said sales as its original
sales.
Upon review of the transactions between Liddell & Co. and Liddell Motors, Inc. the Collector of Internal
Revenue determined that the latter was but an alter ego of Liddell & Co. Wherefore, he concluded, that for
sales tax purposes, those sales made by Liddell Motors, Inc. to the public were considered as the original
sales of Liddell & Co. Accordingly, the Collector of Internal Revenue assessed against Liddell & Co. a sales
tax deficiency, including surcharges, in the amount of P1,317,629.61. In the computation, the gross selling
price of Liddell Motors, Inc. to the general public from January 1, 1949 to September 15, 1950, was made
the basis without deducting from the selling price, the taxes already paid by Liddell & Co. in its sales to the
Liddell Motors Inc.
The Court of Tax Appeals upheld the position taken by the Collector of Internal Revenue.
A. Judge Umali: Appellant urges the disqualification on of Judge Roman M. Umali to participate in the
decision of the instant case because he was Chief of the Law Division, then Acting Deputy Collector and
later Chief Counsel of the Bureau of Internal Revenue during the time when the assessment in question
was made.1 In refusing to disqualify himself despite admission that had held the aforementioned offices,
Judge Umali stated that he had not in any way participated, nor expressed any definite opinion, on any
question raised by the parties when this case was presented for resolution before the said bureau.
Furthermore, after careful inspection of the records of the Bureau, he (Judge Umali as well as the other
members of the court below), had not found any indication that he had expressed any opinion or made any
decision that would tend to disqualify him from participating in the consideration of the case in the Tax
Court.
At this juncture, it is well to consider that petitioner did not question the truth of Judge Umali's statements.
In view thereof, this Tribunal is not inclined to disqualify said judge. Moreover, in furtherance of the
presumption of the judge's moral sense of responsibility this Court has adopted, and now here repeats, the
ruling that the mere participation of a judge in prior proceedings relating to the subject in the capacity of
an administrative official does not necessarily disqualify him from acting as judge. 2
Appellant also contends that Judge Umali signed the said decision contrary to the provision of Section 13,
Republic Act No. 1125;3 that whereas the case was submitted for decision of the Court of Tax Appeals on

July 12, 1955, and the decision of Associate Judge Luciano and Judge Nable were both signed on August 11,
1955 (that is, on the last day of the 30-day period provided for in Section 13, Republic Act No. 1125), Judge
Umali signed the decision August 31, 1955 or 20 days after the lapse of the 30-day period allotted by law.
By analogy it may be said that inasmuch as in Republic Act No. 1125 (law creating the Court of Tax
Appeals) like the law governing the procedure in the court of Industrial Relations, there is no provision
invalidating decisions rendered after the lapse of 30 days, the requirement of Section 13, Republic Act No.
1125 should be construed as directory.4
Besides as pointed out by appellee, the third paragraph of Section 13 of Republic Act No. 1125 (quoted in
the margin)5 confirms this view; because in providing for two thirty-day periods, the law means that
decision may still be rendered within the second period of thirty days (Judge Umali signed his decision
within that period).
B. Identity of the two corporations: On the question whether or not Liddell Motors, Inc. is the alter ego of
Liddell & Co. Inc., we are fully convinced that Liddell & Co. is wholly owned by Frank Liddell. As of the time
of its organization, 98% of the capital stock belonged to Frank Liddell. The 20% paid-up subscription with
which the company began its business was paid by him. The subsequent subscriptions to the capital stock
were made by him and paid with his own money.
These stipulations and conditions appear in Exhibit A: (1) that Frank Liddell had the authority to designate
in the future the employee who could receive earnings of the corporation; to apportion among the stock
holders the share in the profits; (2) that all certificates of stock in the names of the employees should be
deposited with Frank Liddell duly indorsed in blank by the employees concerned; (3) that each employee
was required to sign an agreement with the corporation to the effect that, upon his death or upon his
retirement or separation for any cause whatsoever from the corporation, the said corporation should,
within a period of sixty days therefor, have the absolute and exclusive option to purchase and acquire the
whole of the stock interest of the employees so dying, resigning, retiring or separating.
These stipulations in our opinion attest to the fact that Frank Liddell also owned it. He supplied the original
his complete control over the corporation.
As to Liddell Motors, Inc. we are fully persuaded that Frank Liddell also owned it. He supplied the original
capital funds.6 It is not proven that his wife Irene, ostensibly the sole incorporator of Liddell Motors, Inc.
had money of her own to pay for her P20,000 initial subscription. 7 Her income in the United States in the
years 1943 and 1944 and the savings therefrom could not be enough to cover the amount of subscription,
much less to operate an expensive trade like the retail of motor vehicles. The alleged sale of her property
in Oregon might have been true, but the money received therefrom was never shown to have been saved
or deposited so as to be still available at the time of the organization of the Liddell Motors, Inc.
The evidence at hand also shows that Irene Liddell had scant participation in the affairs of Liddell Motors,
Inc. She could hardly be said to possess business experience. The income tax forms record no independent
income of her own. As a matter of fact, the checks that represented her salary and bonus from Liddell
Motors, Inc. found their way into the personal account of Frank Liddell. Her frequent absences from the
country negate any active participation in the affairs of the Motors company.
There are quite a series of conspicuous circumstances that militate against the separate and distinct
personality of Liddell Motors, Inc. from Liddell & Co. 8 We notice that the bulk of the business of Liddell &
Co. was channeled through Liddell Motors, Inc. On the other hand, Liddell Motors, Inc. pursued no activities
except to secure cars, trucks, and spare parts from Liddell & Co. Inc. and then sell them to the general
public. These sales of vehicles by Liddell & Co. to Liddell Motors, Inc. for the most part were shown to have
taken place on the same day that Liddell Motors, Inc. sold such vehicles to the public. We may even say
that the cars and trucks merely touched the hands of Liddell Motors, Inc. as a matter of formality.
During the first six months of 1949, Liddell & Co. issued ten (10) checks payable to Frank Liddell which
were deposited by Frank Liddell in his personal account with the Philippine National Bank. During this time
also, he issued in favor of Liddell Motors, Inc. six (6) checks drawn against his personal account with the
same bank. The checks issued by Frank Liddell to the Liddell Motors, Inc. were significantly for the most

part issued on the same day when Liddell & Co. Inc. issued the checks for Frank Liddell 9 and for the same
amounts.
It is of course accepted that the mere fact that one or more corporations are owned and controlled by a
single stockholder is not of itself sufficient ground for disregarding separate corporate entities.
Authorities10 support the rule that it is lawful to obtain a corporation charter, even with a single substantial
stockholder, to engage in a specific activity, and such activity may co-exist with other private activities of
the stockholder. If the corporation is a substantial one, conducted lawfully and without fraud on another, its
separate identity is to be respected.
Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned and controlled
by Frank Liddell directly or indirectly is not by itself sufficient to justify the disregard of the separate
corporate identity of one from the other. There is, however, in this instant case, a peculiar consequence of
the organization and activities of Liddell Motors, Inc.
Under the law in force at the time of its incorporation the sales tax on original sales of cars (sections 184,
185 and 186 of the National Internal Revenue Code), was progressive, i.e. 10% of the selling price of the
car if it did not exceed P5000, and 15% of the price if more than P5000 but not more than P7000, etc. This
progressive rate of the sales tax naturally would tempt the taxpayer to employ a way of reducing the price
of the first sale. And Liddell Motors, Inc. was the medium created by Liddell & Co. to reduce the price and
the tax liability.
Let us illustrate: a car with engine motor No. 212381 was sold by Liddell & Co. Inc. to Liddell Motors, Inc.
on January 17, 1948 for P4,546,000.00 including tax; the price of the car was P4,133,000.23, the tax paid
being P413.22, at 10%. And when this car was later sold (on the same day) by Liddell Motors, Inc. to P.V.
Luistro for P5500, no more sales tax was paid.11 In this price of P5500 was included the P413.32
representing taxes paid by Liddell & Co. Inc. in the sale to Liddell Motors, Inc. Deducting P413.32
representing taxes paid by Liddell & Co., Inc. the price of P5500, the balance of P5,087.68 would have
been the net selling price of Liddell & Co., Inc. to the general public (had Liddell Motors, Inc. not
participated and intervened in the sale), and 15% sales tax would have been due. In this transaction,
P349.68 in the form of taxes was evaded. All the other transactions (numerous) examined in this light will
inevitably reveal that the Government coffers had been deprived of a sizeable amount of taxes.
As opined in the case of Gregory v. Helvering, 12 "the legal right of a taxpayer to decrease the amount of
what otherwise would be his taxes, or altogether avoid them by means which the law permits, cannot be
doubted." But, as held in another case,13 "where a corporation is a dummy, is unreal or a sham and serves
no business purpose and is intended only as a blind, the corporate form may be ignored for the law cannot
countenance a form that is bald and a mischievous fiction."
Consistently with this view, the United States Supreme Court 14 held that "a taxpayer may gain advantage
of doing business thru a corporation if he pleases, but the revenue officers in proper cases, may disregard
the separate corporate entity where it serves but as a shield for tax evasion and treat the person who
actually may take the benefits of the transactions as the person accordingly taxable."
Thus, we repeat: to allow a taxpayer to deny tax liability on the ground that the sales were made through
an other and distinct corporation when it is proved that the latter is virtually owned by the former or that
they are practically one and the same is to sanction a circumvention of our tax laws. 15
C. Tax liability computation: In the Yutivo case16 the same question involving the computation of the
alleged deficiency sales tax has been raised. In accordance with our ruling in said case we hold as correctly
stated by Judge Nable in his concurring and dissenting opinion on this case, that the deficiency sales tax
should be based on the selling price obtained by Liddell Motors, Inc. to the public AFTER DEDUCTING THE
TAX ALREADY PAID BY LIDDELL & CO., INC. in its sales to Liddell Motors, Inc.
On the imposition of the 50% surcharge by reason of fraud, we see that the transactions between Liddell
Motors Inc. and Liddell & Co., Inc. have always been embodied in proper documents, constantly subject to
inspection by the tax authorities. Liddell & Co., Inc. have always made a full report of its income and
receipts in its income tax returns.

Paraphrasing our decision in the Yutivo case, we may now say, in filing its return on the basis of its sales to
Liddell Motors, Inc. and not on those by the latter to the public, it cannot be held that the Liddell & Co., Inc.
deliberately made a false return for the purpose of defrauding the government of its revenue, and should
suffer a 50% surcharge. But penalty for late payment (25%) should be imposed.
In view of the foregoing, the decision appealed from is hereby modified: Liddell & Co., Inc. is declared liable
only for the amount of P426,811.67 with 25% surcharge for late payment and 6% interest thereon from the
time the judgment becomes final.
As it appears that, during the pendency of this litigation appellant paid under protest to the Government
the total amount assessed by the Collector, the latter is hereby required to return the excess to the
petitioner. No costs.
Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, De Leon and Natividad, JJ., concur.

SECOND DIVISION

JARDINE DAVIES, INC., G.R. No. 151438


Petitioner,
Present:

PUNO, J., Chairman,


AUSTRIA-MARTINEZ,
versus CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.
JRB REALTY, INC.,
Respondent. Promulgated:
July 15, 2005
x----------------------------------------------x

DECISION

CALLEJO, SR., J.:

Before us is a petition for review of the Decision [1] of the Court of Appeals (CA) in CA-G.R. CV No.
54201 affirming in toto that of the Regional Trial Court (RTC) in Civil Case No. 90-237 for specific
performance; and the Resolution dated January 11, 2002 denying the motion for reconsideration thereof.

The facts are as follows:

In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named Blanco Center, on its
parcel of land located at 119 Alfaro St., Salcedo Village, Makati City. An air conditioning system was needed
for the Blanco Law Firm housed at the second floor of the building. On March 13, 1980, the respondents
Executive Vice-President, Jose R. Blanco, accepted the contract quotation of Mr. A.G. Morrison, President of
Aircon and Refrigeration Industries, Inc. (Aircon), for two (2) sets of Fedders Adaptomatic 30,000 kcal
(Code: 10-TR) air conditioning equipment with a net total selling price of P99,586.00.[2] Thereafter, two (2)
brand new packaged air conditioners of 10 tons capacity each to deliver 30,000 kcal or 120,000
BTUH[3] were installed by Aircon. When the units with rotary compressors were installed, they could not
deliver the desired cooling temperature. Despite several adjustments and corrective measures, the
respondent conceded that Fedders Air Conditioning USAs technology for rotary compressors for big
capacity conditioners like those installed at the Blanco Center had not yet been perfected. The parties
thereby agreed to replace the units with reciprocating/semi-hermetic compressors instead. In a Letter
dated March 26, 1981,[4] Aircon stated that it would be replacing the units currently installed with new ones
using rotary compressors, at the earliest possible time. Regrettably, however, it could not specify a date
when delivery could be effected.
TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the maintenance of the
units, inclusive of parts and services. In October 1987, the respondent learned, through newspaper ads,
[5]
that Maxim Industrial and Merchandising Corporation (Maxim, for short) was the new and exclusive
licensee of Fedders Air Conditioning USA in the Philippines for the manufacture, distribution, sale,
installation and maintenance of Fedders air conditioners. The respondent requested that Maxim honor the
obligation of Aircon, but the latter refused. Considering that the ten-year period of prescription was fast
approaching, to expire on March 13, 1990, the respondent then instituted, on January 29, 1990, an action
for specific performance with damages against Aircon & Refrigeration Industries, Inc., Fedders Air
Conditioning USA, Inc., Maxim Industrial & Merchandising Corporation and petitioner Jardine Davies, Inc.
[6]
The latter was impleaded as defendant, considering that Aircon was a subsidiary of the petitioner. The
respondent prayed that judgment be rendered, as follows:

1. Ordering the defendants to jointly and severally at their account and expense
deliver, install and place in operation two brand new units of each 10-tons capacity
Fedders unitary packaged air conditioners with Fedders USAs technology perfected rotary
compressors to always deliver 30,000 kcal or 120,000 BTUH to the second floor of the
Blanco Center building at 119 Alfaro St., Salcedo Village, Makati, Metro Manila;

2. Ordering defendants to jointly and severally reimburse plaintiff not only the sums
of P415,118.95 for unsaved electricity from 21 st October 1981 to 7th January 1990
and P99,287.77 for repair costs of the two service units from 7 th March 1987 to 11th January
1990, with legal interest thereon from the filing of this Complaint until fully reimbursed,
but also like unsaved electricity costs and like repair costs therefrom until Prayer No. 1
above shall have been complied with;

3. Ordering defendants to jointly and severally pay plaintiffs P150,000.00 attorneys


fees and other costs of litigation, as well as exemplary damages in an amount not less
than or equal to Prayer 2 above; and

4. Granting plaintiff such other and further relief as shall be just and equitable in
the premises.[7]

Of the four defendants, only the petitioner filed its Answer. The court did not acquire jurisdiction
over Aircon because the latter ceased operations, as its corporate life ended on December 31, 1986.
[8]
Upon motion, defendants Fedders Air Conditioning USA and Maxim were declared in default. [9]
On May 17, 1996, the RTC rendered its Decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered ordering defendants Jardine Davies, Inc.,


Fedders Air Conditioning USA, Inc. and Maxim Industrial and Merchandising Corporation,
jointly and severally:

1.

To deliver, install and place into operation the two (2) brand new units
of Fedders unitary packaged airconditioning units each of 10 tons capacity
with rotary compressors to deliver 30,000 kcal or 120,000 BTUH to the
second floor of the Blanco Center building, or to pay plaintiff the current
price for two such units;

2.

To reimburse plaintiff the amount of P556,551.55 as and for the


unsaved electricity bills from October 21, 1981 up to April 30, 1995; and
another amount of P185,951.67 as and for repair costs;

3.

To pay plaintiff P50,000.00 as and for attorneys fees; and

4.

Cost of suit.[10]

The petitioner filed its notice of appeal with the CA, alleging that the trial court erred in holding it
liable because it was not a party to the contract between JRB Realty, Inc. and Aircon, and that it had a
personality separate and distinct from that of Aircon.
On March 23, 2000, the CA affirmed the trial courts ruling in toto; hence, this petition.

The petitioner raises the following assignment of errors:


I.
THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE FOR THE ALLEGED
CONTRACTUAL BREACH OF AIRCON SOLELY BECAUSE THE LATTER WAS FORMERLY
JARDINES SUBSIDIARY.

II.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER EGO,
THE COURT OF APPEALS ERRED IN NOT DECLARING AIRCONS OBLIGATION TO DELIVER THE
TWO (2) AIRCONDITIONING UNITS TO JRB AS HAVING BEEN SUBSTANTIALLY COMPLIED
WITH IN GOOD FAITH.

III.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER EGO,
THE COURT OF APPEALS ERRED IN NOT DECLARING JRBS CAUSES OF ACTION AS HAVING
BEEN BARRED BY LACHES.
IV.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER EGO,
THE COURT OF APPEALS ERRED IN FINDING JRB ENTITLED TO RECOVER ALLEGED UNSAVED
ELECTRICITY EXPENSES.

V.
THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO PAY ATTORNEYS FEES.
VI.
THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO JARDINE FOR DAMAGES. [11]

It is the well-settled rule that factual findings of the trial court, as affirmed by the CA, are accorded
high respect, even finality at times. However, considering that the factual findings of the CA and the RTC
were based on speculation and conjectures, unsupported by substantial evidence, the Court finds that the
instant case falls under one of the excepted instances. There is, thus, a need to correct the error.

The trial court ruled that Aircon was a subsidiary of the petitioner, and concluded, thus:

Plaintiffs documentary evidence shows that at the time it contracted with Aircon on
March 13, 1980 (Exhibit D) and on the date the revised agreement was reached on March
26, 1981, Aircon was a subsidiary of Jardine. The phrase A subsidiary of Jardine Davies, Inc.
was printed on Aircons letterhead of its March 13, 1980 contract with plaintiff (Exhibit D-1),
as well as the Aircons letterhead of Jardines Director and Senior Vice-President A.G.
Morrison and Aircons President in his March 26, 1981 letter to plaintiff (Exhibit J-2)
confirming the revised agreement. Aircons newspaper ads of April 12 and 26, 1981 and a
press release on August 30, 1982 (Exhibits E, F and L) also show that defendant Jardine
publicly represented Aircon to be its subsidiary.

Records from the Securities and Exchange Commission (SEC) also reveal that as per
Jardines December 31, 1986 and 1985 Financial Statements that The company acts as
general manager of its subsidiaries (Exhibit P). Jardines Consolidated Balance Sheet as of
December 31, 1979 filed with the SEC listed Aircon as its subsidiary by owning 94.35% of
Aircon (Exhibit P-1). Also, Aircons reportorial General Information Sheet as of April 1980
and April 1981 filed with the SEC show that Jardine was 94.34% owner of Aircon (Exhibits Q
and R) and that out of seven members of the Board of Directors of Aircon, four (4) are also
of Jardine.

Defendant Jardines witness, Atty. Fe delos Santos-Quiaoit admitted that defendant


Aircon, renamed Aircon & Refrigeration Industries, Inc. is one of the subsidiaries of Jardine
Davies (TSN, September 22, 1995, p. 12). She also testified that Jardine nominated,
elected, and appointed the controlling majority of the Board of Directors and the highest
officers of Aircon (Ibid, pp. 10,13-14).

The foregoing circumstances provide justifiable basis for this Court to disregard the
fiction of corporate entity and treat defendant Aircon as part of the instrumentality of codefendant Jardine.[12]

The respondent court arrived at the same conclusion basing its ruling on the following documents,
to wit:

(a)

Contract/Quotation #78-No. 80-1639 dated March 03, 1980 (Exh. D-1);

(b) Newspaper Advertisements (Exhs. E-1 and F-1);

(c) Letter dated March 26, 1981 of A.G. Morrison, President of Aircon, to Atty. J.R.
Blanco (Exh. J);

(d) News items of Bulletin Today dated August 30, 1982 (Exh. L);

(e) Balance Sheet of Jardine Davies, Inc. as of December 31, 1979 listing Aircon as
one of its subsidiaries (Exh. P);
(f) Financial Statement of Aircon as of December 31, 1982 and 1981 (Exh. S);

(g) Financial Statement of Aircon as of December 31, 1981 (Exh. S-1). [13]

Applying the doctrine of piercing the veil of corporate fiction, both the respondent and trial courts
conveniently held the petitioner liable for the alleged omissions of Aircon, considering that the latter was
its instrumentality or corporate alter ego. The petitioner is now before us, reiterating its defense of
separateness, and the fact that it is not a party to the contract.

We find merit in the petition.

It is an elementary and fundamental principle of corporation law that a corporation is an artificial


being invested by law with a personality separate and distinct from its stockholders and from other
corporations to which it may be connected. While a corporation is allowed to exist solely for a lawful
purpose, the law will regard it as an association of persons or in case of two corporations, merge them into
one, when this corporate legal entity is used as a cloak for fraud or illegality. [14] This is the doctrine of
piercing the veil of corporate fiction which applies only when such corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime. [15] The rationale behind piercing a corporations
identity is to remove the barrier between the corporation from the persons comprising it to thwart the
fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking
certain proscribed activities.[16]

While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that
Aircons corporate legal existence can just be disregarded. In Velarde v. Lopez, Inc.,[17] the Court
categorically held that a subsidiary has an independent and separate juridical personality, distinct from
that of its parent company; hence, any claim or suit against the latter does not bind the former, and vice
versa. In applying the doctrine, the following requisites must be established: (1) control, not merely
majority or complete stock control; (2) such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest acts in
contravention of plaintiffs legal rights; and (3) the aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of.[18]

The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired
Aircons majority of capital stock. It, however, does not exercise complete control over Aircon; nowhere can
it be gathered that the petitioner manages the business affairs of Aircon. Indeed, no management
agreement exists between the petitioner and Aircon, and the latter is an entirely different entity from the
petitioner.[19]

Jardine Davies, Inc., incorporated as early as June 28, 1946, [20] is primarily a financial and trading
company. Its Articles of Incorporation states among many others that the purposes for which the said
corporation was formed, are as follows:

(a) To carry on the business of merchants, commission merchants, brokers, factors,


manufacturers, and agents;

(b) Upon complying with the requirements of law applicable thereto, to act as agents
of companies and underwriters doing and engaging in any and all kinds of insurance
business.[21]

On the other hand, Aircon, incorporated on December 27, 1952, [22] is a manufacturing firm. Its
Articles of Incorporation states that its purpose is mainly -

To carry on the business of manufacturers of commercial and household appliances and


accessories of any form, particularly to manufacture, purchase, sell or deal in air
conditioning and refrigeration products of every class and description as well as
accessories and parts thereof, or other kindred articles; and to erect, or buy, lease,
manage, or otherwise acquire manufactories, warehouses, and depots for manufacturing,
assemblage, repair and storing, buying, selling, and dealing in the aforesaid appliances,
accessories and products. [23]

The existence of interlocking directors, corporate officers and shareholders, which the respondent
court considered, is not enough justification to pierce the veil of corporate fiction, in the absence of fraud
or other public policy considerations.[24] But even when there is dominance over the affairs of the
subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such fiction is used to
defeat public convenience, justify wrong, protect fraud or defend crime. [25] To warrant resort to this
extraordinary remedy, there must be proof that the corporation is being used as a cloak or cover for fraud
or illegality, or to work injustice. [26] Any piercing of the corporate veil has to be done with caution. [27] The
wrongdoing must be clearly and convincingly established. It cannot just be presumed. [28]

In the instant case, there is no evidence that Aircon was formed or utilized with the intention of
defrauding its creditors or evading its contracts and obligations. There was nothing fraudulent in the acts
of Aircon in this case. Aircon, as a manufacturing firm of air conditioners, complied with its obligation of
providing two air conditioning units for the second floor of the Blanco Center in good faith, pursuant to its
contract with the respondent. Unfortunately, the performance of the air conditioning units did not satisfy
the respondent despite several adjustments and corrective measures. In a Letter [29] dated October 22,
1980, the respondent even conceded that Fedders Air Conditioning USA has not yet perhaps perfected its
technology of rotary compressors, and agreed to change the compressors with the semi-hermetic type.
Thus, Aircon substituted the units with serviceable ones which delivered the cooling temperature needed
for the law office. After enjoying ten (10) years of its cooling power, respondent cannot now complain
about the performance of these units, nor can it demand a replacement thereof.

Moreover, it was reversible error to award the respondent the amount of P556,551.55 representing
the alleged 30% unsaved electricity costs and P185,951.67 as maintenance cost without showing any
basis for such award. To justify a grant of actual or compensatory damages, it is necessary to prove with a
reasonable degree of certainty, premised upon competent proof and on the best evidence obtainable by
the injured party, the actual amount of loss. [30] The respondent merely based its cause of action on Aircons
alleged representation that Fedders air conditioners with rotary compressors can save as much as 30% on
electricity compared to other brands. Offered in evidence were newspaper advertisements published on
April 12 and 26, 1981. The respondent then recorded its electricity consumption from October 21, 1981 up
to April 3, 1995 and computed 30% thereof, which amounted to P556,551.55. The Court rules that this
amount is highly speculative and merely hypothetical, and for which the petitioner can not be held
accountable.

First. The respondent merely relied on the newspaper advertisements showing the Fedders windowtype air conditioners, which are far different from the big capacity air conditioning units installed at Blanco
Center.

Second. After such print advertisements, the respondent informed Aircon that it was going to install
an electric meter to register its electric consumption so as to determine the electric costs not saved by the
presently installed units with semi-hermetic compressors. Contrary to the allegations of the respondent
that this was in pursuance to their Revised Agreement, no proof was adduced that Aircon agreed to the
respondents proposition. It was a unilateral act on the part of the respondent, which Aircon did not oblige
or commit itself to pay.

Third. Needless to state, the amounts computed are mere estimates representing the respondents
self-serving claim of unsaved electricity cost, which is too speculative and conjectural to merit
consideration. No other proofs, reports or bases of comparison showing that Fedders Air Conditioning USA
could indeed cut down electricity cost by 30% were adduced.

Likewise, there is no basis for the award of P185,951.67 representing maintenance cost. The
respondent merely submitted a schedule[31] prepared by the respondents accountant, listing the alleged
repair costs from March 1987 up to June 1994. Such evidence is self-serving and can not also be given

probative weight, considering that there are no proofs of receipts, vouchers, etc., which would substantiate
the amounts paid for such services. Absent any more convincing proof, the Court finds that the
respondents claims are without basis, and cannot, therefore, be awarded.

We sustain the petitioners separateness from that of Aircon in this case. It bears stressing that the
petitioner was never a party to the contract. Privity of contracts take effect only between parties, their
successors-in-interest, heirs and assigns.[32] The petitioner, which has a separate and distinct legal
personality from that of Aircon, cannot, therefore, be held liable.

IN VIEW OF THE FOREGOING, the petition is GRANTED. The assailed decision of the Court of
Appeals, affirming the decision of the Regional Trial Court is REVERSEDand SET ASIDE. The complaint of
the respondent is DISMISSED. Costs against the respondent.

SO ORDERED.

G.R. No. 142616

July 31, 2001

PHILIPPINE NATIONAL BANK, petitioner,


vs.
RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN GENERAL
MERCHANDISE,respondents.
KAPUNAN, J.:
In a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner seeks to annul
and set aside the Court of Appeals' decision in C.A. CV G.R. S.P. No. 55374 dated March 27, 2000, affirming
the Order issuing a writ of preliminary injunction of the Regional Trial Court of Makati, Branch 147 dated
June 30, 1999, and its Order dated October 4, 1999, which denied petitioner's motion to dismiss.
The antecedents of this case are as follows:
Petitioner Philippine National Bank is a domestic corporation organized and existing under Philippine law.
Meanwhile, respondents Ritratto Group, Inc., Riatto International, Inc. and Dadasan General Merchandise
are domestic corporations, likewise, organized and existing under Philippine law.
On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB, organized and
doing business in Hong Kong, extended a letter of credit in favor of the respondents in the amount of
US$300,000.00 secured by real estate mortgages constituted over four (4) parcels of land in Makati City.
This credit facility was later increased successively to US$1,140,000.00 in September 1996; to
US$1,290,000.00 in November 1996; to US$1,425,000.00 in February 1997; and decreased to
US$1,421,316.18 in April 1998. Respondents made repayments of the loan incurred by remitting those
amounts to their loan account with PNB-IFL in Hong Kong.
However, as of April 30, 1998, their outstanding obligations stood at US$1,497,274.70. Pursuant to the
terms of the real estate mortgages, PNB-IFL, through its attorney-in-fact PNB, notified the respondents of
the foreclosure of all the real estate mortgages and that the properties subject thereof were to be sold at a
public auction on May 27, 1999 at the Makati City Hall.
On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of a writ of
preliminary injunction and/or temporary restraining order before the Regional Trial Court of Makati. The
Executive Judge of the Regional Trial Court of Makati issued a 72-hour temporary restraining order. On May
28, 1999, the case was raffled to Branch 147 of the Regional Trial Court of Makati. The trial judge then set
a hearing on June 8, 1999. At the hearing of the application for preliminary injunction, petitioner was given
a period of seven days to file its written opposition to the application. On June 15, 1999, petitioner filed an
opposition to the application for a writ of preliminary injunction to which the respondents filed a reply. On
June 25, 1999, petitioner filed a motion to dismiss on the grounds of failure to state a cause of action and
the absence of any privity between the petitioner and respondents. On June 30, 1999, the trial court judge
issued an Order for the issuance of a writ of preliminary injunction, which writ was correspondingly issued
on July 14, 1999. On October 4, 1999, the motion to dismiss was denied by the trial court judge for lack of
merit.
Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance of the writ of
preliminary injunction before the Court of Appeals. In the impugned decision, 1 the appellate court
dismissed the petition. Petitioner thus seeks recourse to this Court and raises the following errors:
1.
THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE COMPLAINT A QUO,
CONSIDERING THAT BY THE ALLEGATIONS OF THE COMPLAINT, NO CAUSE OF ACTION EXISTS
AGAINST PETITIONER, WHICH IS NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEY-IN-FACT
AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.
2.

THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT TO ISSUE IN EXCESS OR
LACK OF JURISDICTION A WRIT OF PRELIMINARY INJUNCTION OVER AND BEYOND WHAT WAS
PRAYED FOR IN THE COMPLAINT A QUO CONTRARY TO CHIEF OF STAFF, AFP VS. GUADIZ JR., 101
SCRA 827.2
Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000 and the trial court's
Orders dated June 30, 1999 and October 4, 1999 be set aside and the dismissal of the complaint in the
instant case.3
In their Comment, respondents argue that even assuming arguendo that petitioner and PNB-IFL are two
separate entities, petitioner is still the party-in-interest in the application for preliminary injunction because
it is tasked to commit acts of foreclosing respondents' properties. 4 Respondents maintain that the entire
credit facility is void as it contains stipulations in violation of the principle of mutuality of contracts. 5 In
addition, respondents justified the act of the court a quo in applying the doctrine of "Piercing the Veil of
Corporate Identity" by stating that petitioner is merely an alter ego or a business conduit of PNB-IFL.6
The petition is impressed with merit.
Respondents, in their complaint, anchor their prayer for injunction on alleged invalid provisions of the
contract:
GROUNDS
I
THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE DISCRETION OF THE
DEFENDANT PNB CONTRAVENES THE PRINCIPAL OF MUTUALITY OF CONTRACTS.
II
THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF INTEREST AGREED
UPON MAY BE UNILATERALLY MODIFIED BY DEFENDANT, THERE WAS NO STIPULATION THAT THE
RATE OF INTEREST SHALL BE REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM RATE OF
INTEREST IS REDUCED BY LAW OR BY THE MONETARY BOARD. 7
Based on the aforementioned grounds, respondents sought to enjoin and restrain PNB from the foreclosure
and eventual sale of the property in order to protect their rights to said property by reason of void credit
facilities as bases for the real estate mortgage over the said property. 8
The contract questioned is one entered into between respondent and PNB-IFL, not PNB. In their complaint,
respondents admit that petitioner is a mere attorney-in-fact for the PNB-IFL with full power and authority
to, inter alia, foreclose on the properties mortgaged to secure their loan obligations with PNB-IFL. In other
words, herein petitioner is an agent with limited authority and specific duties under a special power of
attorney incorporated in the real estate mortgage. It is not privy to the loan contracts entered into by
respondents and PNB-IFL.
The issue of the validity of the loan contracts is a matter between PNB-IFL, the petitioner's principal and
the party to the loan contracts, and the respondents. Yet, despite the recognition that petitioner is a mere
agent, the respondents in their complaint prayed that the petitioner PNB be ordered to re-compute the
rescheduling of the interest to be paid by them in accordance with the terms and conditions in the
documents evidencing the credit facilities, and crediting the amount previously paid to PNB by herein
respondents.9
Clearly, petitioner not being a part to the contract has no power to re-compute the interest rates set forth
in the contract. Respondents, therefore, do not have any cause of action against petitioner.
The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL, is a wholly owned
subsidiary of defendant Philippine National Bank, the suit against the defendant PNB is a suit against PNB-

IFL.10 In justifying its ruling, the trial court, citing the case of Koppel Phil. Inc. vs. Yatco,11 reasoned that the
corporate entity may be disregarded where a corporation is the mere alter ego, or business conduit of a
person or where the corporation is so organized and controlled and its affairs are so conducted, as to make
it merely an instrumentality, agency, conduit or adjunct of another corporation. 12
We disagree.
The general rule is that as a legal entity, a corporation has a personality distinct and separate from its
individual stockholders or members, and is not affected by the personal rights, obligations and
transactions of the latter.13 The mere fact that a corporation owns all of the stocks of another corporation,
taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate
functions, a subsidiary's separate existence may be respected, and the liability of the parent corporation
as well as the subsidiary will be confined to those arising in their respective business. The courts may in
the exercise of judicial discretion step in to prevent the abuses of separate entity privilege and pierce the
veil of corporate entity.
We find, however, that the ruling in Koppel finds no application in the case at bar. In said case, this Court
disregarded the separate existence of the parent and the subsidiary on the ground that the latter was
formed merely for the purpose of evading the payment of higher taxes. In the case at bar, respondents fail
to show any cogent reason why the separate entities of the PNB and PNB-IFL should be disregarded.
While there exists no definite test of general application in determining when a subsidiary may be treated
as a mere instrumentality of the parent corporation, some factors have been identified that will justify the
application of the treatment of the doctrine of the piercing of the corporate veil. The case of Garrett vs.
Southern Railway Co.14 is enlightening. The case involved a suit against the Southern Railway Company.
Plaintiff was employed by Lenoir Car Works and alleged that he sustained injuries while working for Lenoir.
He, however, filed a suit against Southern Railway Company on the ground that Southern had acquired the
entire capital stock of Lenoir Car Works, hence, the latter corporation was but a mere instrumentality of
the former. The Tennessee Supreme Court stated that as a general rule the stock ownership alone by one
corporation of the stock of another does not thereby render the dominant corporation liable for the torts of
the subsidiary unless the separate corporate existence of the subsidiary is a mere sham, or unless the
control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation.
Said Court then outlined the circumstances which may be useful in the determination of whether the
subsidiary is but a mere instrumentality of the parent-corporation:
The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to
catalogue the infinite variations of fact that can arise but there are certain common circumstances
which are important and which, if present in the proper combination, are controlling.
These are as follows:
(a) The parent corporation owns all or most of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes
its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.
(g) The subsidiary has substantially no business except with the parent corporation or no assets
except those conveyed to or by the parent corporation.

(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary but take their orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not observed.
The Tennessee Supreme Court thus ruled:
In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most of the
capital stock of Lenoir by Southern, and possibly subscription to the capital stock of Lenoir. . . The
complaint must be dismissed.
Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate veil is an equitable
doctrine developed to address situations where the separate corporate personality of a corporation is
abused or used for wrongful purposes. The doctrine applies when the corporate fiction is used to defeat
public convenience, justify wrong, protect fraud or defend crime, or when it is made as a shield to confuse
the legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs are so conducted as to make it merely
an instrumentality, agency, conduit or adjunct of another corporation. 15
In Concept Builders, Inc. v. NLRC,16 we have laid the test in determining the applicability of the doctrine of
piercing the veil of corporate fiction, to wit:
1. Control, not mere majority or complete control, but complete domination, not only of finances but
of policy and business practice in respect to the transaction attacked so that the corporate entity as
to this transaction had at the time no separate mind, will or existence of its own.
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and, unjust act in contravention of
plaintiffs legal rights; and,
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.
The absence of any one of these elements prevents "piercing the corporate veil." In applying the
"instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's relationship to the operation. 17
Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no showing of the
indicative factors that the former corporation is a mere instrumentality of the latter are present. Neither is
there a demonstration that any of the evils sought to be prevented by the doctrine of piercing the
corporate veil exists. Inescapably, therefore, the doctrine of piercing the corporate veil based on the alter
ego or instrumentality doctrine finds no application in the case at bar.
In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal
relationship involved in this case since the petitioner was not sued because it is the parent company of
PNB-IFL. Rather, the petitioner was sued because it acted as an attorney-in-fact of PNB-IFL in initiating the
foreclosure proceedings. A suit against an agent cannot without compelling reasons be considered a suit
against the principal. Under the Rules of Court, every action must be prosecuted or defended in the name
of the real party-in-interest, unless otherwise authorized by law or these Rules. 18 In mandatory terms, the
Rules require that "parties-in-interest without whom no final determination can be had, an action shall be
joined either as plaintiffs or defendants."19 In the case at bar, the injunction suit is directed only against the
agent, not the principal.

Anent the issuance of the preliminary injunction, the same must be lifted as it is a mere provisional remedy
but adjunct to the main suit.20 A writ of preliminary injunction is an ancillary or preventive remedy that may
only be resorted to by a litigant to protect or preserve his rights or interests and for no other purpose
during the pendency of the principal action. The dismissal of the principal action thus results in the denial
of the prayer for the issuance of the writ. Further, there is no showing that respondents are entitled to the
issuance of the writ. Section 3, Rule 58, of the 1997 Rules of Civil Procedure provides:
SECTION 3. Grounds for issuance of preliminary injunction. A preliminary injunction may be
granted when it is established:
(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief
consists in restraining the commission or continuance of the act or acts complained of, or in
requiring the performance of an act or acts, either for a limited period or perpetually,
(b) That the commission, continuance or non-performance of the acts or acts complained of during
the litigation would probably work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is
procuring or suffering to be done, some act or acts probably in violation of the rights of the
applicant respecting the subject of the action or proceeding, and tending to render the judgment
ineffectual.
Thus, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard compensation. 21 Respondents do not deny
their indebtedness. Their properties are by their own choice encumbered by real estate mortgages. Upon
the non-payment of the loans, which were secured by the mortgages sought to be foreclosed, the
mortgaged properties are properly subject to a foreclosure sale. Moreover, respondents questioned the
alleged void stipulations in the contract only when petitioner initiated the foreclosure proceedings. Clearly,
respondents have failed to prove that they have a right protected and that the acts against which the writ
is to be directed are violative of said right.22 The Court is not unmindful of the findings of both the trial
court and the appellate court that there may be serious grounds to nullify the provisions of the loan
agreement. However, as earlier discussed, respondents committed the mistake of filing the case against
the wrong party, thus, they must suffer the consequences of their error.
All told, respondents do not have a cause of action against the petitioner as the latter is not privy to the
contract the provisions of which respondents seek to declare void. Accordingly, the case before the
Regional Trial Court must be dismissed and the preliminary injunction issued in connection therewith, must
be lifted.
IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed decision of the Court of
Appeals is hereby REVERSED. The Orders dated June 30, 1999 and October 4, 1999 of the Regional Trial
Court of Makati, Branch 147 in Civil Case No. 99-1037 are hereby ANNULLED and SET ASIDE and the
complaint in said case DISMISSED.
SO ORDERED.
Puno, Pardo and Santiago, JJ ., concur.
Davide, Jr., C .J ., on official leave.

PANTRANCO EMPLOYEES ASSOCIATION (PEAPTGWO) and PANTRANCO RETRENCHED


EMPLOYEES ASSOCIATION (PANREA),

G.R. No. 170689

Petitioners,

- versus -

NATIONAL LABOR RELATIONS COMMISSION


(NLRC), PANTRANCO NORTH EXPRESS, INC.
(PNEI), PHILIPPINE NATIONAL BANK (PNB),
PHILIPPINE NATIONAL BANK-MANAGEMENT
AND DEVELOPMENT CORPORATION (PNBMADECOR), and MEGA PRIME REALTY AND
HOLDINGS CORPORATION (MEGA PRIME),
Respondents.
x-----------------------------x
PHILIPPINE NATIONAL BANK,
Petitioner,

- versus -

PANTRANCO EMPLOYEES ASSOCIATION, INC.


(PEA-PTGWO), PANTRANCO RETRENCHED
EMPLOYEES ASSOCIATION (PANREA) AND
PANTRANCO ASSOCIATION OF CONCERNED
EMPLOYEES (PACE), ET AL., PHILIPPINE
NATIONAL BANK-MANAGEMENT
DEVELOPMENT CORPORATION (PNBMADECOR), and MEGA PRIME REALTY
HOLDINGS, INC.,

G.R. No. 170705

Respondents.

Present:

YNARES-SANTIAGO, J.,
Chairperson,
CARPIO,*
CHICO-NAZARIO,

NACHURA, and
PERALTA, JJ.

Promulgated:

March 17, 2009


x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

Before us are two consolidated petitions assailing the Court of Appeals (CA) Decision [1] dated June 3, 2005
and its Resolution[2] dated December 7, 2005 in CA-G.R. SP No. 80599.

In G.R. No. 170689, the Pantranco Employees Association (PEA) and Pantranco Retrenched
Employees Association (PANREA) pray that the CA decision be set aside and a new one be entered,
declaring the Philippine National Bank (PNB) and PNB Management and Development Corporation (PNBMadecor) jointly and solidarily liable for the P722,727,150.22 National Labor Relations Commission (NLRC)
judgment in favor of the Pantranco North Express, Inc. (PNEI) employees; [3] while in G.R. No. 170705, PNB
prays that the auction sale of the Pantranco properties be declared null and void. [4]

The facts of the case, as found by the CA, [5] and established in Republic of the Phils. v. NLRC, [6] Pantranco
North Express, Inc. v. NLRC,[7] and PNB MADECOR v. Uy,[8] follow:

The Gonzales family owned two corporations, namely, the PNEI and Macris Realty Corporation (Macris).
PNEI provided transportation services to the public, and had its bus terminal at the corner of Quezon and
Roosevelt Avenues in Quezon City. The terminal stood on four valuable pieces of real estate (known as
Pantranco properties) registered under the name of Macris. [9] The Gonzales family later incurred huge
financial losses despite attempts of rehabilitation and loan infusion. In March 1975, their creditors took
over the management of PNEI and Macris. By 1978, full ownership was transferred to one of their creditors,
the National Investment Development Corporation (NIDC), a subsidiary of the PNB.

Macris was later renamed as the National Realty Development Corporation (Naredeco) and eventually
merged with the National Warehousing Corporation (Nawaco) to form the new PNB subsidiary, the PNBMadecor.
In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a company owned by Gregorio
Araneta III. In 1986, PNEI was among the several companies placed under sequestration by the Presidential
Commission on Good Government (PCGG) shortly after the historic events in EDSA. In January 1988, PCGG
lifted the sequestration order to pave the way for the sale of PNEI back to the private sector through the
Asset Privatization Trust (APT). APT thus took over the management of PNEI.

In 1992, PNEI applied with the Securities and Exchange Commission (SEC) for suspension of
payments. A management committee was thereafter created which recommended to the SEC the sale of
the company through privatization. As a cost-saving measure, the committee likewise suggested the
retrenchment of several PNEI employees. Eventually, PNEI ceased its operation. Along with the cessation of
business came the various labor claims commenced by the former employees of PNEI where the latter
obtained favorable decisions.

On July 5, 2002, the Labor Arbiter issued the Sixth Alias Writ of Execution [10] commanding the NLRC
Sheriffs to levy on the assets of PNEI in order to satisfy theP722,727,150.22 due its former employees, as
full and final satisfaction of the judgment awards in the labor cases. The sheriffs were likewise instructed to
proceed against PNB, PNB-Madecor and Mega Prime. [11] In implementing the writ, the sheriffs levied upon
the four valuable pieces of real estate located at the corner of Quezon and Roosevelt Avenues, on which
the former Pantranco Bus Terminal stood. These properties were covered by Transfer Certificate of Title
(TCT) Nos. 87881-87884, registered under the name of PNB-Madecor. [12]Subsequently, Notice of Sale of the
foregoing real properties was published in the newspaper and the sale was set on July 31, 2002. Having
been notified of the auction sale, motions to quash the writ were separately filed by PNB-Madecor and
Mega Prime, and PNB. They likewise filed their Third-Party Claims. [13] PNB-Madecor anchored its motion on
its right as the registered owner of the Pantranco properties, and Mega Prime as the successor-in-interest.
For its part, PNB sought the nullification of the writ on the ground that it was not a party to the labor case.
[14]
In
its
Third-Party
Claim,
PNB
alleged
that
PNBMadecor was indebted to the former and that the Pantranco properties
would answer for such debt. As such, the scheduled auction sale of the aforesaid properties was not legally
in order.[15]

On September 10, 2002, the Labor Arbiter declared that the subject Pantranco properties were owned by
PNB-Madecor. It being a corporation with a distinct and separate personality, its assets could not answer
for the liabilities of PNEI. Considering, however, that PNB-Madecor executed a promissory note in favor of
PNEI for P7,884,000.00, the writ of execution to the extent of the said amount was concerned was
considered valid.[16]

PNBs third-party claim to nullify the writ on the ground that it has an interest in the Pantranco properties
being a creditor of PNB-Madecor, on the other hand, was denied because it only had an inchoate interest in
the properties.[17]

The dispositive portion of the Labor Arbiters September 10, 2002 Resolution is quoted hereunder:

WHEREFORE, the Third Party Claim of PNB Madecor and/or Mega Prime Holdings, Inc. is
hereby GRANTED and concomitantly the levies made by the sheriffs of the NLRC on the
properties of PNB Madecor should be as it (sic) is hereby LIFTED subject to the payment by
PNB Madecor to the complainants the amount of P7,884,000.00.

The Motion to Quash and Third Party Claim of PNB is hereby DENIED.

The Motion to Quash of PNB Madecor and Mega Prime Holdings, Inc. is hereby PARTIALLY
GRANTED insofar as the amount of the writ exceeds P7,884,000.00.

The Motion for Recomputation and Examination of Judgment Awards is hereby DENIED for
want of merit.

The Motion to Expunge from the Records claimants/complainants Opposition dated August 3,
2002 is hereby DENIED for lack of merit.

SO ORDERED.[18]

On appeal to the NLRC, the same was denied and the Labor Arbiters disposition was affirmed.
[19]
Specifically, the NLRC concluded as follows:

(1)
PNB-Madecor and Mega Prime contended that it would be impossible for
them to comply with the requirement of the labor arbiter to pay to the PNEI employees the
amount of P7.8 million as a condition to the lifting of the levy on the properties, since the
credit was already garnished by Gerardo Uy and other creditors of PNEI. The NLRC found no
evidence that Uy had satisfied his judgment from the promissory note, and opined that even
if the credit was in custodia legis, the claim of the PNEI employees should enjoy preference
under the Labor Code.

(2)
The PNEI employees contested the finding that PNB-Madecor was
indebted to the PNEI for only P7.8 million without considering the accrual of interest. But the
NLRC said that there was no evidence that demand was made as a basis for reckoning
interest.

(3)
The PNEI employees further argued that the labor arbiter may not
properly conclude from a decision of Judge Demetrio Macapagal Jr. of the RTC of Quezon City
that PNB-Madecor was the owner of the properties as his decision was reconsidered by the
next presiding judge, nor from a decision of the Supreme Court that PNEI was a mere lessee
of the properties, the fact being that the transfer of the properties to PNB-Madecor was done
to avoid satisfaction of the claims of the employees with the NLRC and that as a result of a
civil case filed by Mega Prime, the subsequent sale of the properties by PNB to Mega Prime
was rescinded. The NLRC pointed out that while the Macapagal decision was set aside by
Judge Bruselas and hence, his findings could not be invoked by the labor arbiter, the titles of
PNB-Madecor are conclusive and there is no evidence that PNEI had ever been an owner. The
Supreme Court had observed in its decision that PNEI owed back rentals of P8.7 million to
PNB-Madecor.

(4)
The PNEI employees faulted the labor arbiter for not finding that PNEI,
PNB, PNB-Madecor and Mega Prime were all jointly and severally liable for their claims. The
NLRC underscored the fact that PNEI and Macris were subsidiaries of NIDC and had passed
through and were under the Asset Privatization Trust (APT) when the labor claims
accrued. The labor arbiter was correct in not granting PNBs third-party claim because at the
time the causes of action accrued, the PNEI was managed by a management committee
appointed by the PNB as the new owner of PNRI (sic) and Macris through a deed of
assignment or transfer of ownership. The NLRC says at length that the same is not true with
PNB-Madecor which is now the registered owner of the properties. [20]

The parties separate motions for reconsideration were likewise denied. [21] Thereafter, the matter was
elevated to the CA by PANREA, PEA-PTGWO and the Pantranco Association of Concerned Employees. The
latter group, however, later withdrew its petition. The former employees petition was docketed as CA-G.R.
SP No. 80599.

PNB-Madecor and Mega Prime likewise filed their separate petition before the CA which was docketed as
CA-G.R. SP No. 80737, but the same was dismissed.[22]

In view of the P7,884,000.00 debt of PNB-Madecor to PNEI, on June 23, 2004, an auction sale was
conducted over the Pantranco properties to satisfy the claim of the PNEI employees, wherein CPAR Realty
was adjudged as the highest bidder.[23]
On June 3, 2005, the CA rendered the assailed decision affirming the NLRC resolutions.

The appellate court pointed out that PNB, PNB-Madecor and Mega Prime are corporations with personalities
separate and distinct from PNEI. As such, there being no cogent reason to pierce the veil of corporate
fiction, the separate personalities of the above corporations should be maintained. The CA added that the
Pantranco properties were never owned by PNEI; rather, their titles were registered under the name of
PNB-Madecor. If PNB and PNB-Madecor could not answer for the liabilities of PNEI, with more reason should
Mega Prime not be held liable being a mere successor-in-interest of PNB-Madecor.

Unsatisfied, PEA-PTGWO and PANREA filed their motion for reconsideration; [24] while PNB filed its Partial
Motion for Reconsideration.[25] PNB pointed out that PNB-Madecor was made to answer for P7,884,000.00
to the PNEI employees by virtue of the promissory note it (PNB-Madecor) earlier executed in favor of
PNEI. PNB, however, questioned the June 23, 2004 auction sale as the P7.8 million debt had already been
satisfied pursuant to this Courts decision in PNB MADECOR v. Uy.[26]

Both motions were denied by the appellate court. [27]

In two separate petitions, PNB and the former PNEI employees come up to this Court assailing the CA
decision and resolution. The former PNEI employees raise the lone error, thus:

The Honorable Court of Appeals palpably departed from the established rules and
jurisprudence in ruling that private respondents Pantranco North Express, Inc. (PNEI),
Philippine National Bank (PNB), Philippine National Bank Management and Development
Corporation (PNB-MADECOR), Mega Prime Realty and Holdings, Inc. (Mega Prime) are not
jointly and severally answerable to theP722,727,150.22 Million NLRC money judgment
awards in favor of the 4,000 individual members of the Petitioners. [28]

They claim that PNB, through PNB-Madecor, directly benefited from the operation of PNEI and had
complete control over the funds of PNEI. Hence, they are solidarily answerable with PNEI for the unpaid
money claims of the employees.[29] Citing A.C. Ransom Labor Union-CCLU v. NLRC,[30] the employees insist
that where the employer corporation ceases to exist and is no longer able to satisfy the judgment awards
in favor of its employees, the owner of the employer corporation should be made jointly and severally
liable.[31] They added that malice or bad faith need not be proven to make the owners liable.

On the other hand, PNB anchors its petition on this sole assignment of error, viz.:

THE AUCTION SALE OF THE PROPERTY COVERED BY TCT NO. 87884 INTENDED TO PARTIALLY
SATISFY THE CLAIMS OF FORMER WORKERS OF PNEI IN THE AMOUNT OFP7,884,000.00 (THE
AMOUNT OF PNB-MADECORS PROMISSORY NOTE IN FAVOR OF PNEI) IS NOT
IN ORDER AS THE SAID PROPERTY IS NOT OWNED BY PNEI. FURTHER, THE SAID PROMISSORY
NOTE HAD ALREADY BEEN GARNISHED IN FAVOR OF GERARDO C. UY WHICH LED TO THREE
(3) PROPERTIES UNDER THE NAME OF PNB-MADECOR, NAMELY TCT NOS. 87881, 87882 AND

87883, BEING LEVIED AND SOLD ON EXECUTION IN THE PNB-MADECOR VS. UY CASE (363
SCRA 128 [2001]) AND GERARDO C. UY VS. PNEI (CIVIL CASE NO. 95-72685, RTC MANILA,
BRANCH 38).[32]

PNB insists that the Pantranco properties could no longer be levied upon because the promissory note for
which the Labor Arbiter held PNB-Madecor liable to PNEI, and in turn to the latters former employees, had
already been satisfied in favor of Gerardo C. Uy. It added that the properties were in fact awarded to the
highest bidder. Besides, says PNB, the subject properties were not owned by PNEI, hence, the execution
sale thereof was not validly effected. [33]

Both petitions must fail.

G.R. No. 170689

Stripped of the non-essentials, the sole issue for resolution raised by the former PNEI employees is
whether they can attach the properties (specifically the Pantranco properties) of PNB, PNB-Madecor and
Mega Prime to satisfy their unpaid labor claims against PNEI.

We answer in the negative.

First, the subject property is not owned by the judgment debtor, that is, PNEI. Nowhere in the records was
it shown that PNEI owned the Pantranco properties. Petitioners, in fact, never alleged in any of their
pleadings the fact of such ownership. What was established, instead, in PNB MADECOR v. Uy[34] and PNB v.
Mega Prime Realty and Holdings Corporation/Mega Prime Realty and Holdings Corporation v. PNB [35] was
that the properties were owned by Macris, the predecessor of PNB-Madecor. Hence, they cannot be
pursued against by the creditors of PNEI.

We would like to stress the settled rule that the power of the court in executing judgments extends
only to properties unquestionably belonging to the judgment debtor alone. [36]To be sure, one mans goods
shall not be sold for another mans debts. [37] A sheriff is not authorized to attach or levy on property not
belonging to the judgment debtor, and even incurs liability if he wrongfully levies upon the property of a
third person.[38]

Second, PNB, PNB-Madecor and Mega Prime are corporations with personalities separate and distinct from
that of PNEI. PNB is sought to be held liable because it acquired PNEI through NIDC at the time when PNEI
was suffering financial reverses. PNB-Madecor is being made to answer for petitioners labor claims as the
owner of the subject Pantranco properties and as a subsidiary of PNB. Mega Prime is also included for
having acquired PNBs shares over PNB-Madecor.
The general rule is that a corporation has a personality separate and distinct from those of its
stockholders and other corporations to which it may be connected. [39] This is a fiction created by law for
convenience and to prevent injustice.[40] Obviously, PNB, PNB-Madecor, Mega Prime, and PNEI are
corporations with their own personalities. The separate personalities of the first three corporations had
been recognized by this Court in PNB v. Mega Prime Realty and Holdings Corporation/Mega Prime Realty
and Holdings Corporation v. PNB [41] where we stated that PNB was only a stockholder of PNB-Madecor
which later sold its shares to Mega Prime; and that PNB-Madecor was the owner of the Pantranco

properties. Moreover, these corporations are registered as separate entities and, absent any valid reason,
we maintain their separate identities and we cannot treat them as one.

Neither can we merge the personality of PNEI with PNB simply because the latter acquired the
former. Settled is the rule that where one corporation sells or otherwise transfers all its assets to another
corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the
transferor.[42]

Lastly, while we recognize that there are peculiar circumstances or valid grounds that may exist to
warrant the piercing of the corporate veil, [43] none applies in the present case whether between PNB and
PNEI; or PNB and PNB-Madecor.

Under the doctrine of piercing the veil of corporate fiction, the court looks at the corporation as a
mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding
the separate juridical personality of the corporation unifying the group. [44] Another formulation of this
doctrine is that when two business enterprises are owned, conducted and controlled by the same parties,
both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction
that two corporations are distinct entities and treat them as identical or as one and the same. [45]

Whether the separate personality of the corporation should be pierced hinges on obtaining facts
appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with caution,
albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in
the interest of justice. After all, the concept of corporate entity was not meant to promote unfair
objectives.[46]

As between PNB and PNEI, petitioners want us to disregard their separate personalities, and insist
that because the company, PNEI, has already ceased operations and there is no other way by which the
judgment in favor of the employees can be satisfied, corporate officers can be held jointly and severally
liable with the company. Petitioners rely on the pronouncement of this Court in A.C. Ransom Labor UnionCCLU v. NLRC[47] and subsequent cases.[48]

This reliance fails to persuade. We find the aforesaid decisions inapplicable to the instant case.

For one, in the said cases, the persons made liable after the companys cessation of operations were
the officers and agents of the corporation. The rationale is that, since the corporation is an artificial person,
it must have an officer who can be presumed to be the employer, being the person acting in the interest of
the employer. The corporation, only in the technical sense, is the employer. [49] In the instant case, what is
being made liable is another corporation (PNB) which acquired the debtor corporation (PNEI).

Moreover, in the recent cases Carag v. National Labor Relations Commission [50] and McLeod v.
National Labor Relations Commission,[51] the Court explained the doctrine laid down in AC Ransom relative
to the personal liability of the officers and agents of the employer for the debts of the latter. In AC
Ransom, the Court imputed liability to the officers of the corporation on the strength of the definition of an
employer in Article 212(c) (now Article 212[e]) of the Labor Code. Under the said
provision, employer includes any person acting in the interest of an employer, directly or indirectly, but
does not include any labor organization or any of its officers or agents except when acting as employer. It
was clarified in Caragand McLeod that Article 212(e) of the Labor Code, by itself, does not make a
corporate officer personally liable for the debts of the corporation. It added that the governing law on

personal liability of directors or officers for debts of the corporation is still Section 31 [52] of the Corporation
Code.

More importantly, as aptly observed by this Court in AC Ransom, it appears that Ransom, foreseeing the
possibility or probability of payment of backwages to its employees, organizedRosario to replace Ransom,
with the latter to be eventually phased out if the strikers win their case. The execution could not be
implemented against Ransom because of the disposition posthaste of its leviable assets evidently in order
to evade its just and due obligations. [53] Hence, the Court sustained the piercing of the corporate veil and
made the officers of Ransom personally liable for the debts of the latter.

Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the corporate
veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate
fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate
entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a
corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation. [54] In the absence of malice, bad faith,
or a specific provision of law making a corporate officer liable, such corporate officer cannot be made
personally liable for corporate liabilities.[55]

Applying the foregoing doctrine to the instant case, we quote with approval the CA disposition in
this wise:

It would not be enough, then, for the petitioners in this case, the PNEI employees, to
rest on their laurels with evidence that PNB was the owner of PNEI. Apart from proving
ownership, it is necessary to show facts that will justify us to pierce the veil of corporate
fiction and hold PNB liable for the debts of PNEI. The burden undoubtedly falls on the
petitioners to prove their affirmative allegations. In line with the basic jurisprudential
principles we have explored, they must show that PNB was using PNEI as a mere adjunct or
instrumentality or has exploited or misused the corporate privilege of PNEI.

We do not see how the burden has been met. Lacking proof of a nexus apart from
mere ownership, the petitioners have not provided us with the legal basis to reach the
assets of corporations separate and distinct from PNEI.[56]

Assuming, for the sake of argument, that PNB may be held liable for the debts of PNEI, petitioners still
cannot proceed against the Pantranco properties, the same being owned by PNB-Madecor, notwithstanding
the fact that PNB-Madecor was a subsidiary of PNB. The general rule remains that PNB-Madecor has a
personality separate and distinct from PNB. The mere fact that a corporation owns all of the stocks of
another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to
perform legitimate functions, a subsidiarys separate existence shall be respected, and the liability of the
parent corporation as well as the subsidiary will be confined to those arising in their respective businesses.
[57]

In PNB v. Ritratto Group, Inc.,[58] we outlined the circumstances which are useful in the
determination of whether a subsidiary is but a mere instrumentality of the parent-corporation, to wit:

1.

The parent corporation owns all or most of the capital stock of the subsidiary;

2.

The parent and subsidiary corporations have common directors or officers;

3.

The parent corporation finances the subsidiary;

4.
5.

The parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation;
The subsidiary has grossly inadequate capital;

6.

The parent corporation pays the salaries and other expenses or losses of the
subsidiary;

7.

The subsidiary has substantially no business except with the parent corporation
or no assets except those conveyed to or by the parent corporation;

8.

In the papers of the parent corporation or in the statements of its officers, the
subsidiary is described as a department or division of the parent corporation, or its
business or financial responsibility is referred to as the parent corporations own;

9.
10.
11.

The parent corporation uses the property of the subsidiary as its own;
The directors or executives of the subsidiary do not act independently in the
interest of the subsidiary, but take their orders from the parent corporation;
The formal legal requirements of the subsidiary are not observed.

None of the foregoing circumstances is present in the instant case. Thus, piercing of PNB-Madecors
corporate veil is not warranted. Being a mere successor-in-interest of PNB-Madecor, with more reason
should no liability attach to Mega Prime.

G.R. No. 170705


In its petition before this Court, PNB seeks the annulment of the June 23, 2004 execution sale of the
Pantranco properties on the ground that the judgment debtor (PNEI) never owned said lots. It likewise
contends that the levy and the eventual sale on execution of the subject properties was null and void as
the promissory note on which PNB-Madecor was made liable had already been satisfied.

It has been repeatedly stated that the Pantranco properties which were the subject of execution sale were
owned by Macris and later, the PNB-Madecor. They were never owned by PNEI or PNB. Following our earlier
discussion on the separate personalities of the different corporations involved in the instant case, the only
entity which has the right and interest to question the execution sale and the eventual right to annul the
same, if any, is PNB-Madecor or its successor-in-interest. Settled is the rule that proceedings in court must
be instituted by the real party in interest.
A real party in interest is the party who stands to be benefited or injured by the judgment in the
suit, or the party entitled to the avails of the suit. [59] Interest within the meaning of the rule means material
interest, an interest in issue and to be affected by the decree, as distinguished from mere interest in the
question involved, or a mere incidental interest. [60] The interest of the party must also be personal and not
one based on a desire to vindicate the constitutional right of some third and unrelated party. [61] Real
interest, on the other hand, means a present substantial interest, as distinguished from a mere expectancy
or a future, contingent, subordinate, or consequential interest. [62]

Specifically, in proceedings to set aside an execution sale, the real party in interest is the person
who has an interest either in the property sold or the proceeds thereof. Conversely, one who is not
interested or is not injured by the execution sale cannot question its validity. [63]

In justifying its claim against the Pantranco properties, PNB alleges that Mega Prime, the buyer of its entire
stockholdings in PNB-Madecor was indebted to it (PNB). Considering that said indebtedness remains
unpaid, PNB insists that it has an interest over PNB-Madecor and Mega Primes assets.

Again, the contention is bereft of merit. While PNB has an apparent interest in Mega Primes assets being
the creditor of the latter for a substantial amount, its interest remains inchoate and has not yet ripened
into a present substantial interest, which would give it the standing to maintain an action involving the
subject properties. As aptly observed by the Labor Arbiter, PNB only has an inchoate right to the properties
of Mega Prime in case the latter would not be able to pay its indebtedness. This is especially true in the
instant case, as the debt being claimed by PNB is secured by the accessory contract of pledge of the entire
stockholdings of Mega Prime to PNB-Madecor.[64]

The Court further notes that the Pantranco properties (or a portion thereof ) were sold on execution to
satisfy the unpaid obligation of PNB-Madecor to PNEI. PNB-Madecor was thus made liable to the former
PNEI employees as the judgment debtor of PNEI. It has long been established in PNB-Madecor v. Uy and
other similar cases that PNB-Madecor had an unpaid obligation to PNEI amounting to more or less P7
million which could be validly pursued by the creditors of the latter. Again, this strengthens the proper
parties right to question the validity of the execution sale, definitely not PNB.

Besides, the issue of whether PNB has a substantial interest over the Pantranco properties has already
been laid to rest by the Labor Arbiter.[65] It is noteworthy that in its Resolution dated September 10, 2002,
the Labor Arbiter denied PNBs Third-Party Claim primarily because PNB only has an inchoate right over the
Pantranco properties.[66] Such conclusion was later affirmed by the NLRC in its Resolution dated June 30,
2003.[67] Notwithstanding said conclusion, PNB did not elevate the matter to the CA via a petition for
review. Hence it is presumed to be satisfied with the adjudication therein. [68] That decision of the NLRC has
become final as against PNB and can no longer be reviewed, much less reversed, by this Court. [69] This is in
accord with the doctrine that a party who has not appealed cannot obtain from the appellate court any
affirmative relief other than the ones granted in the appealed decision. [70]

WHEREFORE, premises considered, the petitions are hereby DENIED for lack of merit.

SO ORDERED.